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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2022~~March 31, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-34292

ORRSTOWN FINANCIAL SERVICES, INC.

(Exact Name of Registrant as Specified in its Charter)

Pennsylvania

23-2530374

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

77 East King Street

P. O. Box 250

Shippensburg

Pennsylvania

17257

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s Telephone Number, Including Area Code:

(717)

532-6114

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, no par value

ORRF

Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

☒

Non-accelerated filer

Smaller reporting company

☒

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.). Yes ☐ No x

Number of shares outstanding of the registrant’s Common Stock as of ~~November 7, 2022: 10,677,554.~~May 5, 2023: 10,658,066.

Table of Contents

ORRSTOWN FINANCIAL SERVICES, INC.

INDEX


		Page
Part I – FINANCIAL INFORMATION

	Glossary	3

Item 1.	Financial Statements	4

	Consolidated Balance Sheets (Unaudited)	4

	Consolidated Statements of ~~(Loss)~~ Income (Unaudited)	5

	Consolidated Statements of Comprehensive Income (Loss) ~~Income~~ (Unaudited)	7

	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)	8

	Consolidated Statements of Cash Flows (Unaudited)	109

	Notes to Consolidated Financial Statements (Unaudited)	1211

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4549

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6871

Item 4.	Controls and Procedures	7072

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	7174

Item 1A.	Risk Factors	7174

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7174

Item 3.	Defaults upon Senior Securities	7174

Item 4.	Mine Safety Disclosures	7174

Item 5.	Other Information	7174

Item 6.	Exhibits	7275

SIGNATURES		7376

Table of Contents

Glossary of Defined Terms

The following terms may be used throughout this Report, including the unaudited condensed consolidated financial statements and related notes.


Term			Definition

ACL			Allowance for credit losses
ALL			Allowance for loan losses
AFS			~~Available for sale~~Available-for-sale
AOCI			Accumulated other comprehensive income (loss)
ASC			Accounting Standards Codification
ASU			Accounting Standards Update
Bank			Orrstown Bank, the commercial banking subsidiary of Orrstown Financial Services, Inc.
CDI			Core deposit intangible
CECL			Current expected credit losses

CMO			Collateralized mortgage obligation


EITC			Educational Improvement Tax Credit Program

ERM			Enterprise ~~risk management~~Risk Management
Exchange Act			Securities Exchange Act of 1934, as amended
FASB			Financial Accounting Standards Board
FDIC			Federal Deposit Insurance Corporation
FDM			Financial difficulty modification
FHLB			Federal Home Loan Bank
FRB			Board of Governors of the Federal Reserve System
GAAP			Accounting principles generally accepted in the United States of America
GDP			Gross Domestic Deposit
GSE			U.S. government-sponsored enterprise

IEL			Individually evaluated loan
IRC			Internal Revenue Code of 1986, as amended
LHFS			Loans held for sale
LIBOR			London Interbank Offered Rate
MBS			Mortgage-backed securities

MSR			Mortgage servicing right

OCI			Other comprehensive income

OREO			Other real estate owned

OTTI			Other-than-temporary impairment

2011 Plan			2011 Orrstown Financial Services, Inc. Incentive Stock Plan
PCD loans			Purchased credit deteriorated loans
PCI loans			Purchased credit impaired loans
PACE			Property Assessed Clean Energy loans
PPP			Paycheck Protection Program


ReRemic			Re-securitization of Real Estate Mortgage Investment Conduits
ROU			Right of use (leases)
SBA			U.S. Small Business Administration
SEC			Securities and Exchange Commission
Securities Act			Securities Act of 1933, as amended
SOFR			Secured Overnight Financing Rate
TDR			Troubled debt restructuring
Unless the context otherwise requires, the terms “Orrstown,” “we,” “us,” “our,” and “Company” refer to Orrstown Financial Services, Inc. and its subsidiaries.

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC.


(Dollars in thousands, except per share amounts)	(Dollars in thousands, except per share amounts)	September 30, 2022		December 31, 2021		(Dollars in thousands, except per share amounts)	March 31, 2023		December 31, 2022
Assets	Assets					Assets
Cash and due from banks	Cash and due from banks	$	34,481	$	21,217	Cash and due from banks	$	27,612	$	28,477
Interest-bearing deposits with banks	Interest-bearing deposits with banks	32,446		187,493		Interest-bearing deposits with banks	70,711		32,346

Cash and cash equivalents	Cash and cash equivalents	66,927		208,710		Cash and cash equivalents	98,323		60,823
Restricted investments in bank stocks	Restricted investments in bank stocks	6,469		7,252		Restricted investments in bank stocks	12,869		10,642
Securities available for sale (amortized cost of $558,057 and $466,806 at September 30, 2022 and December 31, 2021, respectively)		503,596		472,438
Securities available for sale (amortized cost of $561,008 and $563,278 at March 31, 2023 and December 31, 2022, respectively)						Securities available for sale (amortized cost of $561,008 and $563,278 at March 31, 2023 and December 31, 2022, respectively)	520,232		513,728
Loans held for sale, at fair value	Loans held for sale, at fair value	10,175		8,868		Loans held for sale, at fair value	7,341		10,880
Loans	Loans	2,087,927		1,979,986		Loans	2,207,501		2,151,232
Less: Allowance for loan losses		(24,709)		(21,180)
Less: Allowance for credit losses						Less: Allowance for credit losses	(28,364)		(25,178)
Net loans	Net loans	2,063,218		1,958,806		Net loans	2,179,137		2,126,054
Premises and equipment, net	Premises and equipment, net	31,457		34,045		Premises and equipment, net	29,106		29,328
Cash surrender value of life insurance	Cash surrender value of life insurance	71,332		70,217		Cash surrender value of life insurance	72,179		71,760
Goodwill	Goodwill	18,724		18,724		Goodwill	18,724		18,724
Other intangible assets, net	Other intangible assets, net	3,338		4,183		Other intangible assets, net	2,828		3,078
Accrued interest receivable	Accrued interest receivable	9,212		8,234		Accrued interest receivable	10,911		11,027
Deferred tax assets, net	Deferred tax assets, net	26,875		11,648		Deferred tax assets, net	21,335		24,031
Other assets	Other assets	40,769		31,440		Other assets	38,563		42,333
Total assets	Total assets	$	2,852,092	$	2,834,565	Total assets	$	3,011,548	$	2,922,408
Liabilities	Liabilities					Liabilities
Deposits:	Deposits:					Deposits:
Noninterest-bearing	Noninterest-bearing	$	562,024	$	553,238	Noninterest-bearing	$	488,630	$	494,131
Interest-bearing	Interest-bearing	1,943,829		1,911,691		Interest-bearing	1,999,479		1,950,807
Deposits held for assumption in connection with sale of bank branch						Deposits held for assumption in connection with sale of bank branch	27,517		31,307
Total deposits	Total deposits	2,505,853		2,464,929		Total deposits	2,515,626		2,476,246
Securities sold under agreements to repurchase		21,065		23,301
Securities sold under agreements to repurchase and federal funds purchased						Securities sold under agreements to repurchase and federal funds purchased	13,989		17,251
FHLB advances and other borrowings	FHLB advances and other borrowings	1,567		1,896		FHLB advances and other borrowings	162,326		106,139
Subordinated notes	Subordinated notes	32,010		31,963		Subordinated notes	32,042		32,026
Other liabilities	Other liabilities	74,219		40,820		Other liabilities	47,404		61,850
Total liabilities	Total liabilities	2,634,714		2,562,909		Total liabilities	2,771,387		2,693,512

Commitments and contingencies	Commitments and contingencies					Commitments and contingencies

Shareholders’ Equity	Shareholders’ Equity					Shareholders’ Equity
Preferred stock, $1.25 par value per share; 500,000 shares authorized; no shares issued or outstanding	Preferred stock, $1.25 par value per share; 500,000 shares authorized; no shares issued or outstanding	—		—		Preferred stock, $1.25 par value per share; 500,000 shares authorized; no shares issued or outstanding	—		—
Common stock, no par value—$0.05205 stated value per share 50,000,000 shares authorized; 11,236,558 shares issued and 10,686,064 outstanding at September 30, 2022; 11,258,167 shares issued and 11,183,050 outstanding at December 31, 2021		585		586
Common stock, no par value—$0.05205 stated value per share 50,000,000 shares authorized; 11,222,732 shares issued and 10,691,907 outstanding at March 31, 2023; 11,229,242 shares issued and 10,671,413 outstanding at December 31, 2022						Common stock, no par value—$0.05205 stated value per share 50,000,000 shares authorized; 11,222,732 shares issued and 10,691,907 outstanding at March 31, 2023; 11,229,242 shares issued and 10,671,413 outstanding at December 31, 2022	584		584
Additional paid - in capital	Additional paid - in capital	188,730		189,689		Additional paid - in capital	187,572		189,264
Retained earnings	Retained earnings	84,867		78,700		Retained earnings	97,519		92,473
Accumulated other comprehensive (loss) income		(43,468)		4,449
Treasury stock—550,494 and 75,117 shares, at cost at September 30, 2022 and December 31, 2021, respectively		(13,336)		(1,768)
Accumulated other comprehensive loss						Accumulated other comprehensive loss	(32,825)		(39,913)
Treasury stock—530,825 and 557,829 shares, at cost at March 31, 2023 and December 31, 2022, respectively						Treasury stock—530,825 and 557,829 shares, at cost at March 31, 2023 and December 31, 2022, respectively	(12,689)		(13,512)
Total shareholders’ equity	Total shareholders’ equity	217,378		271,656		Total shareholders’ equity	240,161		228,896
Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity	$	2,852,092	$	2,834,565	Total liabilities and shareholders’ equity	$	3,011,548	$	2,922,408

The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

Table of Contents

Condensed Consolidated Statements of ~~(Loss)~~ Income (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC.


		Three Months Ended				Nine Months Ended					Three Months Ended
(Dollars in thousands, except per share amounts)	(Dollars in thousands, except per share amounts)	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021		(Dollars in thousands, except per share amounts)		March 31, 2023		March 31, 2022
Interest income	Interest income									Interest income
Loans	Loans	$	23,152	$	19,890	$	66,548	$	62,724	Loans		$	28,744	$	21,369
Investment securities - taxable	Investment securities - taxable	2,907		1,514		6,462		5,007		Investment securities - taxable		4,370		1,598
Investment securities - tax-exempt	Investment securities - tax-exempt	1,160		652		3,013		1,790		Investment securities - tax-exempt		865		722
Short-term investments	Short-term investments	200		135		536		255		Short-term investments		298		101
Total interest income	Total interest income	27,419		22,191		76,559		69,776		Total interest income		34,277		23,790
Interest expense	Interest expense									Interest expense
Deposits	Deposits	1,372		937		2,758		3,410		Deposits		6,202		685
Securities sold under agreements to repurchase		10		8		24		25
Securities sold under agreements to repurchase and federal funds purchased										Securities sold under agreements to repurchase and federal funds purchased		25		7
FHLB advances and other borrowings	FHLB advances and other borrowings	78		123		121		458		FHLB advances and other borrowings		1,252		22
Subordinated notes	Subordinated notes	504		503		1,510		1,507		Subordinated notes		504		503
Total interest expense	Total interest expense	1,964		1,571		4,413		5,400		Total interest expense		7,983		1,217
Net interest income	Net interest income	25,455		20,620		72,146		64,376		Net interest income		26,294		22,573
Provision for loan losses		1,500		365		3,575		(10)
Net interest income after provision for loan losses		23,955		20,255		68,571		64,386
Provision for credit losses										Provision for credit losses		729		300
Net interest income after provision for credit losses										Net interest income after provision for credit losses		25,565		22,273
Noninterest income	Noninterest income									Noninterest income
Service charges on deposit accounts	Service charges on deposit accounts	977		796		2,861		2,231		Service charges on deposit accounts		962		920
Interchange income	Interchange income	1,014		1,030		3,059		3,049		Interchange income		965		981
Other service charges and fees		239		197		622		527
Other service charges, commissions and fees										Other service charges, commissions and fees		195		153
Swap fee income	Swap fee income	197		67		1,935		135		Swap fee income		—		953
Trust and investment management income	Trust and investment management income	2,006		1,930		5,852		5,862		Trust and investment management income		1,888		1,941
Brokerage income	Brokerage income	947		987		2,864		2,708		Brokerage income		859		928
Mortgage banking activities	Mortgage banking activities	(1,014)		1,333		205		4,684		Mortgage banking activities		478		721

Income from life insurance	Income from life insurance	583		569		1,742		1,690		Income from life insurance		590		566
Investment securities (losses) gains		(14)		479		(163)		635
Investment securities losses										Investment securities losses		(8)		(146)
Other income	Other income	1,123		263		1,749		338		Other income		149		457
Total noninterest income	Total noninterest income	6,058		7,651		20,726		21,859		Total noninterest income		6,078		7,474
Noninterest expenses	Noninterest expenses									Noninterest expenses
Salaries and employee benefits	Salaries and employee benefits	12,705		11,498		35,354		31,907		Salaries and employee benefits		12,196		11,337
Occupancy	Occupancy	1,166		1,154		3,586		3,492		Occupancy		1,106		1,288
Furniture and equipment	Furniture and equipment	1,214		1,220		3,784		3,800		Furniture and equipment		1,227		1,279
Data processing	Data processing	1,192		990		3,410		3,041		Data processing		1,217		1,053

Automated teller and interchange fees	Automated teller and interchange fees	329		294		952		862		Automated teller and interchange fees		298		305
Advertising and bank promotions	Advertising and bank promotions	278		735		1,514		1,434		Advertising and bank promotions		405		355
FDIC insurance	FDIC insurance	294		218		767		570		FDIC insurance		504		283

Professional services	Professional services	887		562		2,417		1,862		Professional services		734		808
Directors' compensation	Directors' compensation	213		155		674		624		Directors' compensation		247		231

Taxes other than income	Taxes other than income	488		16		1,160		929		Taxes other than income		457		564
Intangible asset amortization	Intangible asset amortization	272		314		845		972		Intangible asset amortization		250		292

Provision for legal settlement		13,000		—		13,000		—
Restructuring expenses		3,155		—		3,155		—

Other operating expenses	Other operating expenses	1,219		1,879		3,952		4,358		Other operating expenses		1,614		1,569
Total noninterest expenses	Total noninterest expenses	36,412		19,035		74,570		53,851		Total noninterest expenses		20,255		19,364
(Loss) income before income tax (benefit) expense		(6,399)		8,871		14,727		32,394
Income tax (benefit) expense		(1,571)		1,679		2,316		6,219
Net (loss) income		$	(4,828)	$	7,192	$	12,411	$	26,175
Income before income tax expense										Income before income tax expense		11,388		10,383
Income tax expense										Income tax expense		2,232		2,015
Net income										Net income		$	9,156	$	8,368

Table of Contents


		Three Months Ended				Nine Months Ended					Three Months Ended
		September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021				March 31, 2023		March 31, 2022
Per share information:	Per share information:									Per share information:
Basic (loss) earnings per share		$	(0.47)	$	0.66	$	1.17	$	2.38
Diluted (loss) earnings per share		(0.47)		0.65		1.16		2.36
Basic earnings per share										Basic earnings per share		$	0.88	$	0.77
Diluted earnings per share										Diluted earnings per share		0.87		0.76
Dividends paid per share	Dividends paid per share	0.19		0.19		0.57		0.55		Dividends paid per share		0.20		0.19

The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

Table of Contents

Condensed Consolidated Statements of Comprehensive Income (Loss) ~~Income~~ (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC.

Three Months Ended Nine Months Ended
(Dollars in thousands) September 30,
2022 September 30,
2021 September 30,
2022 September 30,
2021
Net (loss) income $ (4,828) $ 7,192 $ 12,411 $ 26,175
Other comprehensive (loss) income, net of tax:
Unrealized (losses) gains on securities available for sale arising during the period (17,297) (2,346) (60,256) 2,335
Reclassification adjustment for losses (gains) realized in net income 14 (479) 163 (635)
Net unrealized (losses) gains on securities available for sale (17,283) (2,825) (60,093) 1,700
Tax effect 3,629 593 12,620 (357)
Total other comprehensive (loss) gain, net of tax and reclassification adjustments on securities available for sale (13,654) (2,232) (47,473) 1,343
Unrealized (losses) gains on interest rate swaps used in cash flow hedges (562) (183) (562) 473
Reclassification adjustment for losses realized in net income — 581 — 757
Net unrealized (losses) gains on interest rate swaps used in cash flow hedges (562) 398 (562) 1,230
Tax effect 118 (83) 118 (258)
Total other comprehensive (losses) gains, net of tax and reclassification adjustments on interest rate swaps used in cash flow hedges (444) 315 (444) 972
Total other comprehensive (loss) gain, net of tax and reclassification adjustments (14,098) (1,917) (47,917) 2,315
Total comprehensive (loss) income $ (18,926) $ 5,275 $ (35,506) $ 28,490


	Three Months Ended
(Dollars in thousands)		March 31, 2023		March 31, 2022
Net income		$	9,156	$	8,368
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities available for sale arising during the period		8,766		(24,353)
Reclassification adjustment for losses realized in net income		8		146
Net unrealized gains (losses) on securities available for sale		8,774		(24,207)
Tax effect		(1,930)		5,084
Total other comprehensive income (loss), net of tax and reclassification adjustments on securities available for sale		6,844		(19,123)
Unrealized gains on interest rate swaps used in cash flow hedges		319		—
Reclassification adjustment for losses realized in net income		—		—
Net unrealized gains on interest rate swaps used in cash flow hedges		319		—
Tax effect		(75)		—
Total other comprehensive income, net of tax and reclassification adjustments on interest rate swaps used in cash flow hedges		244		—
Total other comprehensive income (loss), net of tax and reclassification adjustments		7,088		(19,123)
Total comprehensive income (loss)		$	16,244	$	(10,755)

The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

Table of Contents

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC.
Three Months Ended September 30, 2022
(Dollars in thousands, except per share amounts) Common
Stock Additional
Paid-In
Capital Retained
Earnings Accumulated
Other
Comprehensive
Loss Treasury
Stock Total
Shareholders’
Equity
Balance, June 30, 2022 $ 585 $ 188,178 $ 91,723 $ (29,370) $ (13,589) $ 237,527
Net loss — — (4,828) — — (4,828)
Total other comprehensive loss, net of taxes — — — (14,098) — (14,098)
Cash dividends ($0.19 per share) — — (2,028) — — (2,028)
Share-based compensation plans:
0 net common shares issued and 10,385 net treasury shares issued, including compensation expense totaling $741 — 552 — — 253 805
Balance, September 30, 2022 $ 585 $ 188,730 $ 84,867 $ (43,468) $ (13,336) $ 217,378
Nine Months Ended September 30, 2022
(Dollars in thousands, except per share amounts) Common
Stock Additional
Paid-In
Capital Retained
Earnings Accumulated Other Comprehensive Income (Loss) Treasury
Stock Total
Shareholders’
Equity
Balance, January 1, 2022 $ 586 $ 189,689 $ 78,700 $ 4,449 $ (1,768) $ 271,656
Net income — — 12,411 — — 12,411
Total other comprehensive loss, net of taxes — — — (47,917) — (47,917)
Cash dividends ($0.57 per share) — — (6,244) — — (6,244)
Share-based compensation plans:
21,609 net common shares acquired and 475,377 net treasury shares acquired, including compensation expense totaling $1,608 (1) (959) — — (11,568) (12,528)
Balance, September 30, 2022 $ 585 $ 188,730 $ 84,867 $ (43,468) $ (13,336) $ 217,378











































	Three Months Ended March 31, 2023
(Dollars in thousands, except per share amounts)	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive (Loss) Income		Treasury Stock		Total Shareholders’ Equity
Balance, January 1, 2023	$	584	$	189,264	$	92,473	$	(39,913)	$	(13,512)	$	228,896
Cumulative effect of change in accounting principle - CECL (Note 3)	—		—		(1,984)		—		—		(1,984)
Net income	—		—		9,156		—		—		9,156

Total other comprehensive income, net of taxes	—		—		—		7,088		—		7,088
Cash dividends ($0.20 per share)	—		—		(2,126)		—		—		(2,126)

Share-based compensation plans:
6,510 net common shares acquired and 27,004 net treasury shares issued, including compensation expense totaling $619	—		(1,692)		—		—		823		(869)

Balance, March 31, 2023	$	584	$	187,572	$	97,519	$	(32,825)	$	(12,689)	$	240,161

~~The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.~~

~~Table of Contents~~


		Three Months Ended September 30, 2021
(Dollars in thousands, except per share amounts)		Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Shareholders’ Equity

Balance, July 1, 2021		$	586	$	188,772	$	69,052	$	7,578	$	(50)	$	265,938
Net income		—		—		7,192		—		—		7,192

Total other comprehensive loss, net of taxes		—		—		—		(1,917)		—		(1,917)
Cash dividends ($0.19 per share)		—		—		(2,122)		—		—		(2,122)

Share-based compensation plans:
16,593 net common shares acquired and 41,106 net treasury shares acquired, including compensation expense totaling $483		—		396		—		—		(918)		(522)

Balance, September 30, 2021		$	586	$	189,168	$	74,122	$	5,661	$	(968)	$	268,569

		Nine Months Ended September 30, 2021													Three Months Ended March 31, 2022
(Dollars in thousands, except per share amounts)	(Dollars in thousands, except per share amounts)	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income		Treasury Stock		Total Shareholders’ Equity		(Dollars in thousands, except per share amounts)	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Shareholders’ Equity
Balance, January 1, 2021		$	586	$	189,066	$	54,099	$	3,346	$	(848)	$	246,249
Balance, January 1, 2022														Balance, January 1, 2022	$	586	$	189,689	$	78,700	$	4,449	$	(1,768)	$	271,656
Net income	Net income	—		—		26,175		—		—		26,175		Net income	—		—		8,368		—		—		8,368

Total other comprehensive income, net of taxes		—		—		—		2,315		—		2,315
Cash dividends ($0.55 per share)		—		—		(6,152)		—		—		(6,152)
Total other comprehensive loss, net of taxes														Total other comprehensive loss, net of taxes	—		—		—		(19,123)		—		(19,123)
Cash dividends ($0.19 per share)														Cash dividends ($0.19 per share)	—		—		(2,125)		—		—		(2,125)

Share-based compensation plans:	Share-based compensation plans:													Share-based compensation plans:
8,129 net common shares acquired and 11,864 net treasury shares issued, including compensation expense totaling $1,428		—		102		—		—		(120)		(18)
10,622 net common shares acquired and 93,438 net treasury shares acquired, including compensation expense totaling $338														10,622 net common shares acquired and 93,438 net treasury shares acquired, including compensation expense totaling $338	(1)		(1,656)		—		—		(2,315)		(3,972)

Balance, September 30, 2021		$	586	$	189,168	$	74,122	$	5,661	$	(968)	$	268,569
Balance, March 31, 2022														Balance, March 31, 2022	$	585	$	188,033	$	84,943	$	(14,674)	$	(4,083)	$	254,804

The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

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Condensed Consolidated Statements of Cash Flows (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC.


		Nine Months Ended					Three Months Ended
(Dollars in thousands)	(Dollars in thousands)	September 30, 2022		September 30, 2021		(Dollars in thousands)	March 31, 2023		March 31, 2022
Cash flows from operating activities	Cash flows from operating activities					Cash flows from operating activities
Net income	Net income	$	12,411	$	26,175	Net income	$	9,156	$	8,368
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Net premium amortization (discount accretion)		1,319		(690)
Net premium amortization						Net premium amortization	442		68
Depreciation and amortization expense	Depreciation and amortization expense	3,536		4,014		Depreciation and amortization expense	1,063		1,210

Provision for loan losses		3,575		(10)
Provision for credit losses						Provision for credit losses	729		300
Share-based compensation	Share-based compensation	1,608		1,428		Share-based compensation	619		338
Gains on sales of loans originated for sale	Gains on sales of loans originated for sale	(1,305)		(4,253)		Gains on sales of loans originated for sale	(60)		(641)
Fair value adjustments on loans held for sale	Fair value adjustments on loans held for sale	1,405		273		Fair value adjustments on loans held for sale	(325)		322
Mortgage loans originated for sale	Mortgage loans originated for sale	(72,247)		(150,652)		Mortgage loans originated for sale	(5,302)		(32,903)
Proceeds from sales of loans originated for sale	Proceeds from sales of loans originated for sale	67,554		159,425		Proceeds from sales of loans originated for sale	9,223		32,749
Gains on sale of portfolio loans	Gains on sale of portfolio loans	(306)		—		Gains on sale of portfolio loans	—		(271)

Writedown of OREO and premises held for sale		1,297		—
Net loss on disposal of premises and equipment		483		—

Net (gain) loss on disposal of premises and equipment						Net (gain) loss on disposal of premises and equipment	(11)		12
Deferred income tax benefit	Deferred income tax benefit	(2,489)		(267)		Deferred income tax benefit	1,251		1,638
Investment securities losses (gains)		163		(635)
Provision for legal settlement		13,000		—
Investment securities losses						Investment securities losses	8		146

Return on investments in limited partnerships	Return on investments in limited partnerships	(964)		—		Return on investments in limited partnerships	(12)		—
Loss on derivative terminations		—		514
Net unrealized losses (gains) on derivatives						Net unrealized losses (gains) on derivatives	279		(285)

Income from life insurance	Income from life insurance	(1,742)		(1,690)		Income from life insurance	(590)		(566)
(Increase) decrease in accrued interest receivable		(978)		912
Increase (decrease) in other liabilities		20,271		(221)
Decrease (increase) in accrued interest receivable and other assets						Decrease (increase) in accrued interest receivable and other assets	1,294		(2,797)
Decrease in accrued interest payable and other liabilities						Decrease in accrued interest payable and other liabilities	(12,522)		(1,734)
Other, net	Other, net	(8,833)		(4,108)		Other, net	172		688
Net cash provided by operating activities	Net cash provided by operating activities	37,758		30,215		Net cash provided by operating activities	5,414		6,642
Cash flows from investing activities	Cash flows from investing activities					Cash flows from investing activities
Proceeds from sales of AFS securities	Proceeds from sales of AFS securities	3,075		149,038		Proceeds from sales of AFS securities	—		3,075
Maturities, repayments and calls of AFS securities	Maturities, repayments and calls of AFS securities	42,442		30,525		Maturities, repayments and calls of AFS securities	11,132		9,536
Purchases of AFS securities	Purchases of AFS securities	(139,580)		(156,912)		Purchases of AFS securities	(9,532)		(94,903)

Net redemptions of restricted investments in bank stocks		783		3,512
Net (purchases) redemptions of restricted investments in bank stocks						Net (purchases) redemptions of restricted investments in bank stocks	(2,227)		461
Net distributions from investments in limited partnerships	Net distributions from investments in limited partnerships	1,410		—		Net distributions from investments in limited partnerships	321		1,146
Net (increase) decrease in loans	Net (increase) decrease in loans	(109,424)		41,504		Net (increase) decrease in loans	(56,061)		52
Proceeds from sales of portfolio loans	Proceeds from sales of portfolio loans	4,443		—		Proceeds from sales of portfolio loans	—		3,913

Purchases of bank premises and equipment	Purchases of bank premises and equipment	(805)		(891)		Purchases of bank premises and equipment	(248)		(235)

Proceeds from disposal of premises and equipment						Proceeds from disposal of premises and equipment	12		—

Death benefit proceeds from life insurance contracts		142		—

Net cash (used in) provided by investing activities		(197,514)		66,776
Net cash used in investing activities						Net cash used in investing activities	(56,603)		(76,955)
Cash flows from financing activities	Cash flows from financing activities					Cash flows from financing activities
Net increase in deposits	Net increase in deposits	40,917		145,203		Net increase in deposits	39,377		81,060
Net increase in borrowings with original maturities less than 90 days	Net increase in borrowings with original maturities less than 90 days	(2,236)		8,129		Net increase in borrowings with original maturities less than 90 days	13,038		1,323
Proceeds from FHLB advances with original maturities greater than 90 days						Proceeds from FHLB advances with original maturities greater than 90 days	40,000		—
Payments on FHLB advances with original maturities greater than 90 days						Payments on FHLB advances with original maturities greater than 90 days	(113)		(108)

Payments on FHLB advances and other borrowings		(329)		(56,042)
Settlement of terminated derivatives		—		(525)

Dividends paid	Dividends paid	(6,244)		(6,152)		Dividends paid	(2,126)		(2,125)

Acquisition of treasury stock	Acquisition of treasury stock	(14,056)		(1,069)		Acquisition of treasury stock	(1,175)		(4,166)
Shares repurchased as treasury stock for employee taxes associated with restricted stock vesting	Shares repurchased as treasury stock for employee taxes associated with restricted stock vesting	(262)		(514)		Shares repurchased as treasury stock for employee taxes associated with restricted stock vesting	(378)		(232)
Proceeds from issuance of employee stock purchase plan shares	Proceeds from issuance of employee stock purchase plan shares	183		136		Proceeds from issuance of employee stock purchase plan shares	66		89

Net cash provided by financing activities	Net cash provided by financing activities	17,973		89,166		Net cash provided by financing activities	88,689		75,841
Net (decrease) increase in cash and cash equivalents		(141,783)		186,157
Net increase in cash and cash equivalents						Net increase in cash and cash equivalents	37,500		5,528
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	208,710		125,258		Cash and cash equivalents at beginning of period	60,823		208,710
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	66,927	$	311,415	Cash and cash equivalents at end of period	$	98,323	$	214,238

109

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		Nine Months Ended					Three Months Ended
		September 30, 2022		September 30, 2021			March 31, 2023		March 31, 2022
Supplemental disclosures of cash flow information:	Supplemental disclosures of cash flow information:					Supplemental disclosures of cash flow information:
Cash paid during the period for:	Cash paid during the period for:					Cash paid during the period for:
Interest	Interest	$	3,917	$	5,007	Interest	$	7,046	$	710
Income taxes		3,400		4,100

Supplemental schedule of noncash activities:	Supplemental schedule of noncash activities:					Supplemental schedule of noncash activities:
Loans transferred from LHFS to portfolio loans	Loans transferred from LHFS to portfolio loans	1,510		—		Loans transferred from LHFS to portfolio loans	—		1,510

Premise and equipment transferred to held for sale		2,844		—
Lease liabilities arising from obtaining ROU assets		94		1,392
OREO acquired in settlement of loans						OREO acquired in settlement of loans	85		—

The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

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Notes to Condensed Consolidated Financial Statements (Unaudited)

(All dollar amounts presented in the tables, except per share amounts, are in thousands)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

See the Glossary of Defined Terms at the beginning of this Report for terms used throughout the unaudited condensed consolidated financial statements and related notes of this Form 10-Q.

Nature of Operations – Orrstown Financial Services, Inc. is a financial holding company that operates Orrstown Bank, a commercial bank providing banking and financial advisory services in Berks, Cumberland, Dauphin, Franklin, Lancaster, Perry and York Counties, Pennsylvania, and in Anne Arundel, Baltimore, Howard and Washington Counties, Maryland. The Company operates in the community banking segment and engages in lending activities, including commercial, residential, commercial mortgages, construction, municipal, and various forms of consumer lending, and deposit services, including checking, savings, time, and money market deposits. The Company’s lending area also includes adjacent counties in Pennsylvania and Maryland, as well as Loudon County, Virginia and Berkeley, Jefferson and Morgan Counties, West Virginia. The Company also provides fiduciary services, investment advisory, insurance and brokerage services. The Company and the Bank are subject to regulation by certain federal and state agencies and undergo periodic examinations by such regulatory authorities.

Basis of Presentation – The accompanying unaudited condensed consolidated financial statements include the accounts of Orrstown Financial Services, Inc. and its wholly owned subsidiary, the Bank. The Company has prepared these unaudited condensed consolidated financial statements in accordance with GAAP for interim financial information, SEC rules that permit reduced disclosure for interim periods, and Article 10 of Regulation S-X. In the opinion of management, all adjustments (all of which are of a normal recurring nature) that are necessary for a fair statement are reflected in the unaudited condensed consolidated financial statements. There have been no material changes to the Company's significant accounting policies for the three months ended March 31, 2023, except for the adoption of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces our ALL policy under the incurred loss model, and adoption of ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which replaces our TDR accounting model policy, which are both discussed below in Recently Adopted Accounting Standards. The December 31, ~~2021~~2022 consolidated balance sheet information contained in this Quarterly Report on Form 10-Q was derived from the Company's ~~2021~~2022 audited consolidated financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. Operating results for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2022.~~2023. All significant intercompany transactions and accounts have been eliminated. Certain reclassifications have been made to the prior period amounts to conform with current period classifications. These reclassifications did not have a material impact on the Company's consolidated financial condition, results of operations or statement of consolidated cash flows.

The Company's management has evaluated all activity of the Company and concluded that subsequent events are properly reflected in the Company's unaudited condensed consolidated financial statements and notes as required by GAAP.

To prepare financial statements in conformity with ~~GAAP,~~accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

Derivatives - FASB ASC 815, Derivatives and Hedging (“ASC ~~815”~~815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows,

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or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.

The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. The Company's objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements. To

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accomplish this objective, the Company uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the agreements without exchange of the underlying notional amount.

Changes to the fair value of derivatives designated and that qualify as cash flow hedges are recorded in AOCI and are subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The Company discontinues cash flow hedge accounting if it is probable the forecasted hedged transactions will not occur in the initially identified time period due to circumstances, such as the impact of the COVID-19 pandemic. Upon discontinuance, the associated gains and losses deferred in AOCI are reclassified immediately into earnings and subsequent changes in the fair value of the cash flow hedge are recognized in earnings. At ~~September 30,~~March 31, 2023 and December 31, 2022, the Company had two interest rate derivatives designated as hedging instruments with a total notional value of $100.0 ~~million compared to no interest rate derivatives designated as a hedging instrument at December 31, 2021.~~million.

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps and interest rate caps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps and interest rate caps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company had interest rate swaps not designated as hedges with a total notional value of ~~$206.4~~$269.9 million and ~~$75.8~~$268.8 million, respectively.

The Company also may enter into risk participation agreements with a financial institution counterparty for an interest rate derivative contract related to a loan in which the Company may be a participant or the agent bank. The risk participation agreement provides credit protection to the agent bank should the borrower fail to perform on its interest rate derivative contracts with the agent bank. The Company manages its credit risk on risk participation agreements by monitoring the creditworthiness of the borrower, which follows the same credit review process as derivative instruments entered into directly with the borrower. The notional amount of a risk participation agreement reflects the Company's pro-rata share of the derivative instrument, consistent with its share of the related participated loan. Changes in the fair value of the risk participation agreement are recognized directly into earnings. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company had a risk participation with sold protection with a notional value of ~~$15.9~~$29.2 million ~~for both periods,~~and $29.0 million, respectively, and a risk participation with purchased protection with a notional value of ~~$5.0~~$4.9 million ~~and zero~~ at ~~September 30, 2022~~both March 31, 2023 and December 31, ~~2021, respectively.~~2022.

As a part of its normal residential mortgage operations, the Company will enter into an interest rate lock commitment with a potential borrower. The Company may enter into a corresponding commitment with an investor to sell that loan at a specific price shortly after origination. In accordance with FASB ASC 820, adjustments are recorded through earnings to account for the net change in fair value of these held for sale loans. The fair value of held for sale loans can vary based on the interest rate locked with the customer and the current market interest rate at the balance sheet date. At March 31, 2023 and December 31, 2022, the Company had interest rate lock commitments with a notional value of $2.0 million and $1.4 million, respectively, and forward sale loan commitments with a notional value of $1.1 million and $3.5 million, respectively.

Leases - The Company evaluates its contracts at inception to determine if an arrangement either is a lease or contains one. Operating lease ROU assets are included in other assets and operating lease liabilities in accrued interest payable and other liabilities in the unaudited condensed consolidated balance sheets. The Company had no finance leases at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.

ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent an obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company's leases do not provide an implicit rate, so the Company's incremental borrowing rate is used, which approximates its fully collateralized borrowing rate, based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate is reevaluated upon lease modification. The operating lease ROU asset also includes any initial direct costs and prepaid

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lease payments made less any lease incentives. In calculating the present value of lease payments, the Company may include options to extend the lease when it is reasonably certain that it will exercise that option.

In accordance with ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), the Company keeps leases with an initial term of 12 months or less off of the balance sheet. The Company recognizes these lease payments in the unaudited condensed consolidated statements of income on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components and has elected the practical expedient to account for them as a single lease component.

The Company's operating leases relate primarily to bank branches and office space. The difference between the lease asset and lease liabilities primarily consists of deferred rent liabilities reclassified upon adoption to reduce the measurement of the lease assets. The standard does not materially impact the Company's unaudited condensed consolidated statements of income.

Recently Adopted Accounting Standards

13Allowance for Credit Losses

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~~Recent Accounting Pronouncements~~ -In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("("ASU 2016-13")). On January 1, 2023, the Company adopted ASU 2016-13, the current expected credit losses accounting standard commonly referred to as "CECL," which replaces the incurred loss model with the lifetime expected loss model. The ~~amendments in this update require~~CECL methodology requires an organization to measure all expected credit losses over the contractual term for financial assets measured at amortized cost, including loan receivables and held-to-maturity securities, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. ~~Financial institutions~~The CECL methodology also applies to off-balance sheet credit exposures not accounted for as insurance (e.g., loan commitments, standby letters of credit, financial guarantees and other ~~organizations will use forward-looking information~~similar instruments), net investments in leases recognized by a lessor in accordance with ASC Topic 842 on leases and AFS debt securities.

To implement the new standard, the Company established a cross-discipline governance structure, which included a dedicated working group and a CECL Committee consisting of members from different functions including Finance, Credit, Risk and Lending, who provided implementation oversight and reviewed policy elections, key assumptions, processes, and model results. The working group was responsible for the implementation process that included developing the loan segmentation, data sourcing and validation, loss driver inputs, qualitative factors, parallel model runs, scenario testing and back testing.

The Company utilized a third-party vendor to ~~better inform their~~assist in the implementation process of its new model to calculate credit ~~loss estimates. Many~~losses over the estimated life of the ~~loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue~~applicable financial assets. The Company elected to use ~~judgment~~the discounted cash flow (“DCF”) methodology for the quantitative analysis for the majority of its loan segments, which applies the probability of default and loss given default factors to ~~determine which~~future cash flows, and then adjusts to the net present value to derive the required reserve. Reasonable and supportable macroeconomic conditions include unemployment and GDP. Model assumptions include the discount rate, prepayments and curtailments. The development and validation of credit models also included determining the length of the reasonable and supportable forecast and regression period and utilizing national peer group historical loss ~~estimation~~rates. For the consumer loan segments, the remaining life methodology was selected as a practical expedient and based on the risk characteristics. The implementation also included review of model runs and certain assumptions, documentation of policies, procedures and controls, and engagement of another third-party consultant for model validation.

The Company adopted ASU 2016-13 using the modified retrospective method ~~is appropriate~~ for ~~their circumstances. Additionally, the amendments in this update amend the accounting for credit losses on AFS debt securities and purchased~~all financial assets ~~with~~measured at amortized cost and off-balance sheet credit ~~deterioration. For certain public companies, this update was effective~~exposures. The adoption of the new CECL standard resulted in a cumulative-effect adjustment that increased the ACL for ~~interim~~loans by $2.4 million and ~~annual~~increased the off-balance sheet credit exposures reserve by $100 thousand. Retained earnings, net of deferred taxes, decreased by $2.0 million, and deferred tax assets increased by $559 thousand. Results for reporting periods beginning after ~~December 15, 2019. The implementation deadline of~~January 1, 2023 are presented under ASU 2016-13 ~~was extended for smaller reporting and other companies until~~while prior period amounts continue to be reported in accordance with the ~~fiscal year and interim periods beginning after December 15, 2022. The Company will implement ASU 2016-13 effective January 1, 2023.~~incurred loss model under the previously applicable GAAP.

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~~ASU No. 2019-10,~~
~~Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates~~ ~~("ASU 2019-10"), extended the implementation deadline of ASU 2016-13 for smaller reporting and other companies until the fiscal year and interim periods beginning after December 15, 2022.~~

The ~~Company meets the requirements to be considered a smaller reporting company under SEC Regulation S-K and SEC Rule 405, and will adopt ASU 2016-13 effective January 1, 2023. The Company is evaluating~~following table illustrates the impact of the adoption of ~~ASU 2016-13,~~CECL, and ~~is working with a third-party vendor solution to assist with~~ the ~~application of ASU 2016-13 and finalizing~~transition away from the incurred loss ~~estimation models to be used. Once management finalizes which methods will be utilized, another third party vendor will perform a model validation prior to adoption.~~method, on January 1, 2023. The ~~Company expects to recognize a one-time cumulative-effect adjustment~~impact to the ACL is presented at the loan segment level:


	January 1, 2023
	Reserves under Incurred Loss Model		Reserves under CECL Model		Impact of CECL Adoption
Financial Assets:
Commercial loans:
Commercial real estate	$	13,558	$	16,415	$	2,857
Acquisition and development	3,214		3,000		(214)
Commercial and industrial	4,505		5,433		928
Municipal	24		193		169
Consumer loans:
Residential mortgage	3,444		2,323		(1,121)
Installment and other	188		237		49
Unallocated reserve	245		—		(245)
Allowance for credit losses on loans	$	25,178	$	27,601	$	2,423
Liabilities:
Allowance for credit losses on off-balance sheet credit exposures	$	1,633	$	1,733	$	100

Allowance for Credit Losses on Loans

The allowance for credit losses represents the amount that, in management's judgment, appropriately reflects credit losses inherent in the loan portfolio at the balance sheet date. Loans deemed to be uncollectible are charged against the ACL on loans, and subsequent recoveries, if any, are credited to the ACL on loans when received. Changes to the ACL are recorded through the provision for credit losses on loans in the consolidated statement of income.

The ACL is maintained at a level considered appropriate to absorb credit losses over the expected life of the loan. The ACL for expected credit losses is determined based on a quantitative assessment of two categories of loans: collectively evaluated loans and individually evaluated loans. In addition, the ACL also includes a qualitative component which adjusts the CECL model results for risk factors that are not considered within the CECL model, but are relevant in assessing the expected credit losses within the loan classes.

The ACL on loans is measured on a collective basis when similar risk characteristics exist within the Company's loan segments between commercial and consumer. For purposes of estimating the Company’s ACL, management generally evaluates collectively evaluated loans by federal call code in order to group loans with similar risk characteristics. Each of these loan segments are broken down into multiple loan classes, which are characterized by loan type, collateral type, risk attributions and the manner in which management monitors the performance of the borrower. The risks associated with lending activities differ and are subject to the impact of change in interest rates, market conditions and the impact on the collateral securing the loans, and general economic conditions. The commercial loan segment includes commercial real estate, acquisition and development, commercial and industrial and municipal loan classes. The consumer loan segment includes residential mortgage, installment and other consumer loans.

Loans collectively evaluated includes loans on accrual status, except for loans previously restructured that do not share similar risk characteristics, which the ACL is measured using a lifetime expected loss rate model that considers historical loss performance and past events in addition to forecasts of future economic conditions. The Company elected to use the DCF methodology for the quantitative analysis for the majority of its loan segments, which applies the probability of default, using a loss driver model and loss given default factors to future cash flows, and then adjusts to the net present value to derive the required reserve. The probability of default estimates are derived through the application of reasonable and supportable economic forecasts to the regression models, which incorporates the Company's and peer loss-rate data, unemployment rate and GDP. The reasonable and supportable forecasts of the selected economic metrics are then input into the regression model to calculate an expected default rate. The expected default rates are then applied to expected loan balances estimated through the consideration of contractual repayment terms and expected prepayments. The prepayment and curtailment assumptions adjust the contractual terms of the loan to arrive at the expected cash flows. The development and validation of credit models also included determining the length of the reasonable and supportable forecast and regression period and utilizing national peer group historical loss rates. Management selected the national unemployment rate and GDP as the drivers of the quantitative

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portion of collectively evaluated reserves on loan classes reliant upon the DCF methodology, primarily as a result of high correlation coefficients identified in regression modeling. For the consumer loan segment, the quantitative reserve was calculated using the remaining life methodology where the average historical bank-specific and peer loss rates are applied to expected loan balances over an estimated remaining life of loans. The estimated remaining life is calculated using historical bank-specific loan attrition data.

Loans that do not share similar risk characteristics are evaluated on an individual basis, and are excluded from the collective evaluation for the ACL. Loans identified to be individually evaluated under CECL include loans on nonaccrual status and may include accruing loans that do not share similar risk characteristics to other accruing loans collectively evaluated. A specific reserve analysis is applied to the individually evaluated loans, which considers collateral value, an observable market price or the present value of expected future cash flows. A specific reserve may be assigned if the measured value of the loan using one of the before mentioned methods is less than the current carrying value of the loans.

A loan is considered collateral-dependent when the Company determines foreclosure is probable or the borrower is experiencing financial difficulty and the Company expects repayment to be provided substantially through the operation or sale of the collateral. Collateral could be in the form of real estate, equipment or business assets. An ACL may result for a collateral-dependent loan if the fair value of the underlying collateral, as of the reporting date, adjusted for expected costs to repair or sell, was less than the amortized cost basis of the loan. If repayment of the loan is instead dependent only on the operation, rather than the sale of the collateral, the measure of the ACL does not incorporate estimated costs to sell. For loans analyzed on the basis of projected future principal and interest cash flows, the Company will discount the expected cash flows at the effective interest rate of the loan, and an ACL would result if the present value of expected cash flows was less than the amortized cost basis of the loan.

Based on management's analysis, adjustments may be applied for additional factors impacting the risk of loss in the loan portfolio beyond the quantitatively calculated reserve on collectively evaluated loans. As the quantitative reserve calculation incorporates historical conditions, management may consider an additional or reduced reserve is warranted through qualitative risk factors based on current and expected conditions. These qualitative risk factors considered by management are comparable to legacy factors prior to the adoption of ~~the new standard. While the Company anticipates the allowance for~~CECL and include significant or unexpected changes in:

•Lending policies, procedures, underwriting standards and recovery practices;

•Nature and volume of loans;

•Concentrations of credit;

•Collateral valuation trends;

•Delinquency trends;

•Experience, ability and depth of management and lending staff;

•Quality of loan ~~losses will increase under its current assumptions, it expects the impact of adopting ASU 2016-13 will be influenced by the composition, characteristics~~review system; and ~~quality of its loan and investment securities portfolios, as well as general economic~~

•Economic conditions and ~~forecasts at~~other external factors.

For PCD loans, the nonaccrual status is determined in the same manner as for other loans. Prior to the adoption of CECL, these PCD loans were classified as PCI loans and accounted for under ASC Subtopic 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"). In accordance with the CECL standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the adoption date. As permitted by CECL, the Company elected to account for its PCD loans under ASC 310-20, Receivables - Nonrefundable Fees and Other Assets ("ASC 310-20"). These loans are initially recorded at fair value, and include credit and interest rate marks associated with acquisition accounting adjustments. Purchase premiums or discounts are subsequently amortized as an adjustment to yield over the estimated contractual lives of the loans. Under ASC 310-20, the acquired loans are analyzed on an individual asset level, and no longer maintained in pools and accounted for as units of accounts, which would permit treating each pool as a single asset. The impact of this election resulted in loans reported as nonaccrual and individually evaluated for credit expected losses under the CECL methodology.

For off-balance sheet credit exposures, the Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk from the contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL on off-balance sheet credit exposures includes consideration of the utilization rates expected on the loan commitments, and estimates the expected credit losses for the undrawn commitments by the loan

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segments. The ACL on off-balance sheet credit exposures is recorded in other ~~provisions~~liabilities on the consolidated balance sheets and is adjusted through the provision for credit losses in the consolidated statements of income.

In March 2022, the FASB issued ASU ~~2019-10~~No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). ASU 2022-02 eliminates the TDR accounting model, and requires that the Company evaluate, based on the accounting for loan modifications, whether the borrower is experiencing financial difficulty and the modification results in a more-than-insignificant direct change in the contractual cash flows and represents a new loan or a continuation of an existing loan, which the Company refers to these loans as "financial difficulty modifications" or "FDMs." This change required all loan modifications to be accounted for under the general loan modification guidance in ASC 310-20, Receivables – Nonrefundable Fees and Other Costs, and subject entities to new disclosure requirements on loan modifications to borrowers experiencing financial difficulty. Upon adoption of CECL, the TDRs were evaluated and included in the CECL loan segment pools if the loans shared similar risk characteristics to other loans in the pool or remained with loans individually evaluated for which the ACL was measured using the collateral-dependent or discounted cash flow method. On January 1, 2023, the Company adopted ASU 2022-02 on a modified retrospective basis, which did not ~~applicable~~have a material impact on the consolidated financial statements.

A comprehensive analysis of the ACL is performed by the Company on a quarterly basis. Management evaluates the adequacy of the ACL utilizing a defined methodology to determine if it properly addresses the current and expected risks in the loan portfolio, which considers the performance of borrowers and specific evaluation of individually evaluated loans including historical loss experiences, trends in delinquencies, nonperforming loans and other risk assets, and the qualitative factors. Risk factors are continuously reviewed and adjusted, as needed, by management when conditions support a change. Management believes its approach properly addresses relevant accounting and bank regulatory guidance for loans both collectively and individually evaluated. The results of the comprehensive analysis, including recommended changes, are governed by the Company's Reserve Adequacy Committee, whose members were also a part of the Company's CECL Committee.

See Note 3, Loans and Allowance for Credit Losses, to the ~~Company.~~unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information," for a description of the Company’s loan classes and differing levels of associated credit risk.

Allowance for Credit Losses on AFS Securities

Prior to implementation of CECL, unrealized losses on AFS debt securities caused by a credit event would require the direct write-down of the AFS security through the other-than-temporary impairment approach; however, the new standard requires credit losses to be presented as an ACL. The Company is still required to conduct an impairment evaluation on AFS securities to determine whether the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security before recovery. If these situations apply, the guidance continues to require the Company to reduce the security's amortized cost basis down to its fair value through earnings. The Company also evaluates the unrealized losses on AFS securities to determine if a security's decline in fair value below its amortized cost basis is due to credit factors. The evaluation is based upon factors such as the creditworthiness of the underlying borrowers, performance of the underlying collateral, if applicable, and the level of credit support in the security structure. Management also evaluates other factors and circumstances that may be indicative of a decline in the fair value of the security due to a credit factor. This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost and near-term prospects of the issuer. If this assessment indicates that a credit loss exists, the present value of the expected cash flows of the security is compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost, an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis under the CECL standard, and declines due to non-credit factors are recorded in AOCI, net of taxes. If a credit loss is recognized in earnings, subsequent improvements to the expectation of collectability will be recognized through the ACL. If the fair value of the security increases above its amortized cost, the unrealized gain will be recorded in AOCI, net of taxes, on the unaudited condensed consolidated statements of financial condition. Accrued interest receivable on AFS securities is excluded from the estimate of credit losses. The Company did not record a cumulative-effect adjustment related to its AFS securities upon adoption of CECL on January 1, 2023.

See Note 2, Investment Securities, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information," for a description of the Company’s investment securities and impairment evaluation.

Recent Accounting Pronouncements

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). ASU 2020-04 contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The optional expedients apply

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consistently to all contracts or transactions within the scope of this topic, while the optional expedients for hedging relationships can be elected on an individual basis. The Company has ~~formed~~ a cross-functional working group ~~to lead~~that is leading the transition from LIBOR to a planned adoption of an alternate index. The Company currently plans to replace LIBOR with the 30-Day Average SOFR or Term SOFR in its loan agreements. The Company implemented fallback language for loans with maturities after 2021. The Company expects to adopt the LIBOR transition relief allowed under this standard, and ~~is currently evaluating the potential~~does not expect a significant impact ~~of this guidance~~ on its financial statements.

~~In March 2022, the FASB issued~~ ~~ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”).~~ ASU 2022-02 eliminates the troubled debt restructuring accounting model. This change will require all loan modifications to be accounted for under the general loan modification guidance in Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs, and subject entities to new disclosure requirements on loan modifications to borrowers experiencing financial difficulty. For entities that have adopted Topic 326, ASU 2022-02 is effective for periods beginning after December 15, 2022. For entities adopting Topic 326 in periods after December 15, 2022, ASU 2022-02 is effective when the company adopts Topic 326. The Company will implement ASU 2022-02 effective January 1, 2023, and is evaluating the impact.

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NOTE 2. INVESTMENT SECURITIES

At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, all investment securities were classified as AFS. The following table summarizes amortized cost, ~~and~~ fair value and ACL of investment securities, and the corresponding amounts of gross unrealized gains and losses recognized in AOCI, and the allowance for credit losses at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value
September 30, 2022
March 31, 2023										March 31, 2023
U.S. Treasury securities	U.S. Treasury securities	$	20,074	$	—	$	2,959	$	17,115	U.S. Treasury securities	$	20,067	$	—	$	2,374	$	—	$	17,693

U.S. Government Agencies										U.S. Government Agencies	4,754		218		—		—		4,972

States and political subdivisions	States and political subdivisions	254,603		125		34,692		220,036		States and political subdivisions	225,309		36		21,743		—		203,602
GSE residential MBSs	GSE residential MBSs	64,258		—		5,055		59,203		GSE residential MBSs	63,314		—		3,943		—		59,371
GSE commercial MBSs										GSE commercial MBSs	5,289		448		—		—		5,737
GSE residential CMOs	GSE residential CMOs	70,964		—		6,814		64,150		GSE residential CMOs	73,975		9		5,880		—		68,104

Non-agency CMOs	Non-agency CMOs	31,346		—		2,374		28,972		Non-agency CMOs	45,154		213		4,476		—		40,891

Asset-backed	Asset-backed	116,427		—		2,692		113,735		Asset-backed	122,776		194		3,478		—		119,492
Other	Other	385		—		—		385		Other	370		—		—		—		370
Totals	Totals	$	558,057	$	125	$	54,586	$	503,596	Totals	$	561,008	$	1,118	$	41,894	$	—	$	520,232
December 31, 2021
December 31, 2022										December 31, 2022
U.S. Treasury securities	U.S. Treasury securities	$	20,084	$	—	$	382	$	19,702	U.S. Treasury securities	$	20,070	$	—	$	2,779	n/a		$	17,291

U.S. Government Agencies										U.S. Government Agencies	4,907		228		—		n/a		5,135

States and political subdivisions	States and political subdivisions	185,437		8,606		673		193,370		States and political subdivisions	225,825		19		28,430		n/a		197,414
GSE residential MBSs	GSE residential MBSs	41,260		44		578		40,726		GSE residential MBSs	63,778		—		4,376		n/a		59,402

GSE residential CMOs	GSE residential CMOs	66,430		436		944		65,922		GSE residential CMOs	75,446		—		7,068		n/a		68,378

Non-agency CMOs	Non-agency CMOs	30,676		—		978		29,698		Non-agency CMOs	42,298		243		2,783		n/a		39,758

Asset-backed	Asset-backed	122,520		401		300		122,621		Asset-backed	130,577		—		4,604		n/a		125,973
Other	Other	399		—		—		399		Other	377		—		—		n/a		377
Totals	Totals	$	466,806	$	9,487	$	3,855	$	472,438	Totals	$	563,278	$	490	$	50,040	n/a		$	513,728

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The following table summarizes investment securities with unrealized losses, for which an ACL has not been recorded at ~~September 30, 2022~~March 31, 2023 and cumulative OTTI expense was not recognized at December 31, ~~2021,~~2022, aggregated by major investment security type and the length of time in a continuous unrealized loss position.


		Less Than 12 Months					12 Months or More					Total						Less Than 12 Months					12 Months or More					Total
		# of Securities	Fair Value		Unrealized Losses		# of Securities	Fair Value		Unrealized Losses		# of Securities	Fair Value		Unrealized Losses			# of Securities	Fair Value		Unrealized Losses		# of Securities	Fair Value		Unrealized Losses		# of Securities	Fair Value		Unrealized Losses
September 30, 2022
March 31, 2023																	March 31, 2023
U.S. Treasury securities	U.S. Treasury securities	—	$	—	$	—	3	$	17,115	$	2,959	3	$	17,115	$	2,959	U.S. Treasury securities	—	$	—	$	—	3	$	17,693	$	2,374	3	$	17,693	$	2,374

States and political subdivisions	States and political subdivisions	54	180,836		27,459		8	23,384		7,233		62	204,220		34,692		States and political subdivisions	10	25,901		883		33	174,145		20,860		43	200,046		21,743
GSE residential MBSs	GSE residential MBSs	8	37,055		1,919		7	22,148		3,136		15	59,203		5,055		GSE residential MBSs	—	—		—		15	59,371		3,943		15	59,371		3,943
GSE residential CMOs	GSE residential CMOs	9	31,506		2,633		7	32,644		4,181		16	64,150		6,814		GSE residential CMOs	2	10,157		118		13	57,218		5,762		15	67,375		5,880
Non-agency CMOs	Non-agency CMOs	3	20,101		871		2	8,871		1,503		5	28,972		2,374		Non-agency CMOs	4	25,164		2,347		2	8,050		2,129		6	33,214		4,476

Asset-backed	Asset-backed	14	85,529		2,081		3	28,206		611		17	113,735		2,692		Asset-backed	4	9,534		114		15	93,701		3,364		19	103,235		3,478
Totals	Totals	88	$	355,027	$	34,963	30	$	132,368	$	19,623	118	$	487,395	$	54,586	Totals	20	$	70,756	$	3,462	81	$	410,178	$	38,432	101	$	480,934	$	41,894
December 31, 2021
December 31, 2022																	December 31, 2022
U.S. Treasury securities	U.S. Treasury securities	3	$	19,702	$	382	—	$	—	$	—	3	$	19,702	$	382	U.S. Treasury securities	—	$	—	$	—	3	$	17,291	$	2,779	3	$	17,291	$	2,779

States and political subdivisions	States and political subdivisions	12	45,522		673		—	—		—		12	45,522		673		States and political subdivisions	29	135,579		13,809		17	60,102		14,621		46	195,681		28,430
GSE residential MBSs	GSE residential MBSs	9	37,899		578		—	—		—		9	37,899		578		GSE residential MBSs	5	26,100		925		10	33,302		3,451		15	59,402		4,376
GSE residential CMOs	GSE residential CMOs	7	41,163		944		—	—		—		7	41,163		944		GSE residential CMOs	8	28,732		1,884		9	39,646		5,184		17	68,378		7,068
Non-agency CMOs	Non-agency CMOs	3	24,661		978		—	—		—		3	24,661		978		Non-agency CMOs	4	26,555		1,135		2	8,639		1,648		6	35,194		2,783

Asset-backed	Asset-backed	3	21,245		138		3	34,180		162		6	55,425		300		Asset-backed	17	78,873		2,432		5	47,100		2,172		22	125,973		4,604
Totals	Totals	37	$	190,192	$	3,693	3	$	34,180	$	162	40	$	224,372	$	3,855	Totals	63	$	295,839	$	20,185	46	$	206,080	$	29,855	109	$	501,919	$	50,040

The Company ~~determines~~is required to conduct an impairment evaluation on AFS securities to determine whether the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security before recovery. If these situations apply, the guidance requires the Company to reduce the security's amortized cost basis down to its fair value through earnings. The Company also evaluates the unrealized losses ~~are temporary~~on AFS securities to determine if a security's decline in ~~nature in accordance with FASB ASC 320-10,~~ ~~Investments - Overall, (“FASB ASC 320-10”) and FASB ASC 325-40,~~ ~~Investments – Beneficial Interests in Securitized Financial Assets, when applicable.~~fair value below its amortized cost basis is due to credit factors. The evaluation is based upon factors such as the creditworthiness of the underlying borrowers, performance of the underlying collateral, if applicable, and the level of credit support in the security structure.

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Management also evaluates other factors and circumstances that may be indicative of ~~an OTTI condition.~~a decline in the fair value of the security due to a credit factor. This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost and near-term prospects of the issuer.

~~FASB ASC 320-10 requires~~ If this assessment indicates that a credit loss exists, the ~~Company to assess if an OTTI exists by considering whether~~present value of the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security before recovery. If either of these situations applies, the guidance requires the Company to record an OTTI charge to earnings on debt securities for the difference between the amortized cost basisexpected cash flows of the security ~~and~~is compared to the ~~fair value of the security. If neither of these situations applies, the Company is required to assess whether it is expected to recover the entire~~ amortized cost basis of the security. If the Company is not expected to recover the entire amortized cost basis of the security, the guidance requires the Company to bifurcate the identified OTTI into a credit loss component and a component representing loss related to other factors. A discount rate is applied which equals the effective yield of the security. The difference between the present value of the expected flows and the amortized book value is considered a credit loss, which would be recorded through earnings as an OTTI charge. When a market price is not readily available, the market value of the security is determined using the same expected cash flows; the discount rate is a rate the Company determines from the open market and other sources as appropriate for the security. The difference between the market value and the present value of cash flows expected to be collected is less than the amortized cost, an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis under the CECL standard, and declines due to non-credit factors are recorded in AOCI, net of taxes. If a credit loss is recognized in earnings, subsequent improvements to the expectation of collectability will be recognized through the ACL. If the fair value of the security increases above its amortized cost, the unrealized gain will be recorded in AOCI, net of taxes, on the ~~unaudited condensed~~ consolidated statements of financial condition. Prior to implementation of the CECL standard, unrealized losses caused by a credit event would require the direct write-down of the AFS security through the other-than-temporary impairment approach.

The Company did not record an ACL on the AFS securities at March 31, 2023 or upon implementation of CECL on January 1, 2023. As of both periods, the Company considers the unrealized losses on the AFS securities to be related to fluctuations in market conditions, primarily interest rates, and not reflective of deterioration in credit. In addition, the Company maintains that it has the intent and ability to hold these AFS securities until the amortized cost is recovered and it is more likely than not that any of AFS securities in an unrealized loss position would not be required to be sold. At March 31, 2023 and December 31, 2022, unrealized losses were higher due to market uncertainty resulting from inflation and rising interest rates from the time of the security purchase.

U.S. Treasury Securities. The unrealized losses presented in the table above have been caused by an increase in rates from the time these securities were purchased. Management considers the full faith and credit of the U.S. government in determining whether ~~a security is OTTI. Because the~~declines in fair value are due to credit factors. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be ~~maturity,~~maturity. In addition, the unrealized losses are not credit related. Therefore, the Company ~~does not consider~~has concluded that the unrealized losses for these securities ~~to be OTTI~~do not require an ACL at ~~September 30, 2022 or December~~March 31, ~~2021.~~2023.

States and Political Subdivisions. The unrealized losses presented in the table above have been caused by a widening of spreads and/or a rise in interest rates from the time these securities were purchased. Management considers the investment

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rating, the state of the issuer of the security and other credit support in determining whether ~~the security is OTTI. Because the~~declines in fair value are due to credit factors. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be ~~maturity,~~maturity. In addition, the unrealized losses are not credit related. Therefore, the Company ~~does not consider~~has concluded that the unrealized losses for these securities ~~to be OTTI~~do not require an ACL at ~~September 30, 2022 or December~~March 31, ~~2021.~~2023.

GSE Residential CMOs and GSE Residential MBS. The unrealized losses presented in the table above have been caused by a widening of spreads and a rise in interest rates from the time these securities were purchased. The contractual terms of these securities do not permit the issuer to settle the securities at a price less than its par value basis. ~~Because the~~The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be ~~maturity,~~maturity. In addition, the unrealized losses are not credit related. Therefore, the Company ~~does not consider~~has concluded that the unrealized losses for these securities ~~to be OTTI~~do not require an ACL at ~~September 30, 2022 or December~~March 31, ~~2021.~~2023.

Non-Agency CMOs. The unrealized losses presented in the table above were caused by a widening of spreads and a rise in interest rates from the time the securities were purchased. Management considers the investment rating and other credit support in determining whether ~~a security is OTTI. Because the~~declines in fair value are due to credit factors. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be ~~maturity,~~maturity. In addition, the unrealized losses are not credit related. Therefore, the Company ~~does not consider~~has concluded that the unrealized losses for these securities ~~to be OTTI~~do not require an ACL at ~~September 30, 2022 or December~~March 31, ~~2021.~~2023.

Asset-backed. The unrealized losses presented in the table above were caused by a widening of spreads and a rise in the interest rates from the time the securities were purchased. Management considers the investment rating and other credit support in determining whether ~~a security is OTTI. Because the~~declines in fair value are due to credit factors. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be ~~maturity,~~maturity. In addition, the unrealized losses are not credit related. Therefore, the Company ~~does not consider~~has concluded that the unrealized losses for these securities ~~to be OTTI~~do not require an ACL at ~~September 30, 2022 or December~~March 31, ~~2021.~~2023.

The following table summarizes amortized cost and fair value of investment securities by contractual maturity at ~~September 30, 2022.~~March 31, 2023. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay

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obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.


		Amortized Cost		Fair Value			Amortized Cost		Fair Value
Due in one year or less	Due in one year or less	$	249	$	249	Due in one year or less	$	249	$	249
Due after one year through five years	Due after one year through five years	8,440		8,065		Due after one year through five years	21,464		19,415
Due after five years through ten years	Due after five years through ten years	85,918		75,831		Due after five years through ten years	68,052		61,125
Due after ten years	Due after ten years	180,455		153,391		Due after ten years	160,735		145,848
CMOs and MBSs	CMOs and MBSs	166,568		152,325		CMOs and MBSs	187,732		174,103
Asset-backed	Asset-backed	116,427		113,735		Asset-backed	122,776		119,492
Totals	Totals	$	558,057	$	503,596	Totals	$	561,008	$	520,232

The following table summarizes proceeds from sales of investment securities and gross gains and gross losses for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2022		2021		2022		2021				2023		2022
Proceeds from sale of investment securities	Proceeds from sale of investment securities	$	—	$	73,319	$	3,075	$	149,038	Proceeds from sale of investment securities		$	—	$	3,075
Gross gains	Gross gains	—		482		25		1,844		Gross gains		—		25
Gross losses	Gross losses	14		3		17		1,209		Gross losses		8		—

During the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, the Company recorded net investment security losses of ~~$14 thousand and net investment security gains of~~ $8 thousand ~~respectively,~~from mark-to-market losses on an equity security, compared to net gains of ~~$479 thousand and $635~~$25 thousand for the three ~~and nine~~ months ended ~~September 30, 2021, respectively. A non-agency CMO was called, which resulted in a loss of $171 thousand for the nine months ended September 30,~~March 31, 2022. During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, the Company did not sell any investment securities compared to a partial sale of one security with a principal balance of $3.1 million ~~of one security~~that was sold for proceeds of $3.1 million compared to 18 securities with a principal balance of $148.4 million that were sold for proceeds of $149.0 million during the nine months ended September 30, 2021. There were four investment securities with a principal balance of $72.8 million sold for proceeds of $73.3 million during the three months ended ~~September 30, 2021, compared to none during~~March 31, 2022 for a gross gain of $22 thousand. The Company recorded a loss of $171 thousand on a call of a non-agency CMO for the three months ended ~~September 30,~~March 31, 2022. Investment securities with a fair value of ~~$404.1~~$428.9 million and ~~$295.6~~$396.8 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, were pledged to secure public funds and for other purposes as required or permitted by law.

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NOTE 3. LOANS AND ALLOWANCE FOR ~~LOAN~~CREDIT LOSSES

~~Consistent with ASU 2010-20,~~ ~~Disclosures about the Credit Quality of Financing Receivables and the Allowance for Loan Losses,~~ ~~the~~The Company’s loan portfolio is grouped into segments which are further broken down into classes to allow management to monitor the performance by the borrower and to monitor the yield on the portfolio.

The risks associated with lending activities differ among the various loan classes and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions. All of these factors may adversely impact both the borrower’s ability to repay its loans and the value of its associated collateral.

The Company has various types of commercial real estate loans, which have differing levels of credit risk. Owner occupied commercial real estate loans are generally dependent upon the successful operation of the borrower’s business, with the cash flows generated from the business being the primary source of repayment of the loan. If the business suffers a downturn in sales or profitability, the borrower’s ability to repay the loan could be in jeopardy.

Non-owner occupied and multi-family commercial real estate loans and non-owner occupied residential loans present a different credit risk to the Company than owner occupied commercial real estate loans, as the repayment of the loan is dependent upon the borrower’s ability to generate a sufficient level of occupancy to produce rental income that exceeds debt service requirements and operating expenses. Lower occupancy or lease rates may result in a reduction in cash flows, which hinders the ability of the borrower to meet debt service requirements, and may result in lower collateral values. The Company generally recognizes that greater risk is inherent in these credit relationships compared to owner occupied loans mentioned above.

Acquisition and development loans consist of 1-4 family residential construction and commercial and land development loans. The risk of loss on these loans is largely dependent on the Company’s ability to assess the property’s value at the completion of the project, which should exceed the property’s construction costs. During the construction phase, a number of factors could potentially negatively impact the collateral value, including cost overruns, delays in completing the project,

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competition, and real estate market conditions, which may change based on the supply of similar properties in the area. In the event the collateral value at the completion of the project is not sufficient to cover the outstanding loan balance, the Company must rely upon other repayment sources, if any, including the guarantors of the project or other collateral securing the loan.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted. The CARES Act established the SBA PPP. The SBA PPP is intended to provide economic relief to small businesses nationwide adversely impacted under the COVID-19 Emergency Declaration issued on March 13, 2020. The SBA PPP, which began on April 3, 2020, provided small businesses with funds to cover up to 24 weeks of payroll costs and other expenses, including benefits. It also provides for forgiveness of up to the full principal amount of qualifying loans. In total, the Bank closed and funded almost 6,500 loans for a total gross loan amount of $699.4 million through December 31, 2021.

Commercial and industrial loans include advances to local and regional businesses for general commercial purposes and include permanent and short-term working capital, machinery and equipment financing, and may be either in the form of lines of credit or term loans. Although commercial and industrial loans may be unsecured to our highest-rated borrowers, the majority of these loans are secured by the borrower’s accounts receivable, inventory and machinery and equipment. In a significant number of these loans, the collateral also includes the business real estate or the business owner’s personal real estate or assets. Commercial and industrial loans present credit exposure to the Company, as they are more susceptible to risk of loss during a downturn in the economy as borrowers may have greater difficulty in meeting their debt service requirements and the value of the collateral may decline. The Company attempts to mitigate this risk through its underwriting standards, including evaluating the creditworthiness of the borrower and, to the extent available, credit ratings on the business. Additionally, monitoring of the loans through annual renewals and meetings with the borrowers are typical. However, these procedures cannot eliminate the risk of loss associated with commercial and industrial lending. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, commercial and industrial loans include ~~$17.0~~$10.8 million and ~~$189.9~~$13.8 million, respectively, ~~of loans,~~ net of deferred fees and costs, originated through the SBA PPP. At ~~September 30, 2022,~~March 31, 2023, the Bank has ~~$347~~$181 thousand of net deferred SBA PPP fees remaining to be recognized through net interest income over the remaining life of the loans. The timing of the recognition of these fees is dependent upon the loan forgiveness process established by the SBA. As these loans are 100% guaranteed by the SBA, there is no associated ~~ALL~~ACL at ~~September 30, 2022.~~March 31, 2023.

Municipal loans consist of extensions of credit to municipalities and school districts within the Company’s market area. These loans generally present a lower risk than commercial and industrial loans, as they are generally secured by the municipality’s full taxing authority, by revenue obligations, or by its ability to raise assessments on its clients for a specific utility.

The Company originates loans to its retail clients, including fixed-rate and adjustable first lien mortgage loans, with the underlying 1-4 family owner occupied residential property securing the loan. The Company’s risk exposure is minimized in these types of loans through the evaluation of the creditworthiness of the borrower, including credit scores and debt-to-income ratios, and underwriting standards, which limit the loan-to-value ratio to generally no more than 80% upon loan origination, unless the borrower obtains private mortgage insurance.

Home equity loans, including term loans and lines of credit, present a slightly higher risk to the Company than 1-4 family first liens, as these loans can be first or second liens on 1-4 family owner occupied residential property, but can have loan-to-value ratios of no greater than 85% of the value of the real estate taken as collateral. The creditworthiness of the borrower is also considered, including credit scores and debt-to-income ratios.

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Installment and other loans’ credit risk is mitigated through prudent underwriting standards, including evaluation of the creditworthiness of the borrower through credit scores and debt-to-income ratios and, if secured, the collateral value of the assets. These loans can be unsecured or secured by assets the value of which may depreciate quickly or may fluctuate, and may present a greater risk to the Company than 1-4 family residential loans.

~~Table~~The Company adopted the new current expected credit loss accounting guidance, CECL, and all related amendments as of ~~Contents~~

January 1, 2023. Certain prior period credit quality disclosures related to impaired loans and individually and collectively evaluated loans were superseded with the current CECL guidance and have not been included below as of March 31, 2023.

The following table presents the loan portfolio by segment and class, excluding residential ~~mortgage~~ LHFS, at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Commercial real estate:	Commercial real estate:					Commercial real estate:
Owner occupied	Owner occupied	$	313,125	$	238,668	Owner occupied	$	339,371	$	315,770
Non-owner occupied	Non-owner occupied	573,605		551,783		Non-owner occupied	603,396		608,043
Multi-family	Multi-family	114,561		93,255		Multi-family	144,053		138,832
Non-owner occupied residential	Non-owner occupied residential	105,267		106,112		Non-owner occupied residential	106,390		104,604
Acquisition and development:	Acquisition and development:					Acquisition and development:
1-4 family residential construction	1-4 family residential construction	20,810		12,279		1-4 family residential construction	20,941		25,068
Commercial and land development	Commercial and land development	148,512		93,925		Commercial and land development	174,556		158,308
Commercial and industrial (1)	Commercial and industrial (1)	378,574		485,728		Commercial and industrial (1)	380,683		357,774
Municipal	Municipal	12,683		14,989		Municipal	11,329		12,173
Residential mortgage:	Residential mortgage:					Residential mortgage:
First lien	First lien	220,970		198,831		First lien	227,031		229,849
Home equity - term	Home equity - term	5,869		6,081		Home equity - term	5,371		5,505
Home equity - lines of credit	Home equity - lines of credit	180,267		160,705		Home equity - lines of credit	183,340		183,241
Installment and other loans	Installment and other loans	13,684		17,630		Installment and other loans	11,040		12,065
Total loans	Total loans	$	2,087,927	$	1,979,986	Total loans	$	2,207,501	$	2,151,232

(1) This balance includes ~~$17.0~~$10.8 million and ~~$189.9~~$13.8 million of SBA PPP loans, net of deferred fees and costs, at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

In order to monitor ongoing risk associated with its loan portfolio and specific loans within the segments, management uses an internal grading system. The first several rating categories, representing the lowest risk to the Bank, are combined and given a “Pass” rating. Management generally follows regulatory definitions in assigning criticized ratings to loans, including "Special Mention," "Substandard," "Doubtful" or "Loss." The Special Mention category includes loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Bank's position at some future date. These assets pose elevated risk, but their weakness does not yet justify a more severe, or classified rating. Substandard loans are classified as they have a well-defined weakness, or weaknesses that jeopardize liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Substandard loans include loans that management ~~has determined not~~may determine to be ~~impaired,~~either individually evaluated, referred to as ~~well~~"Substandard - Individually Evaluated Loan," or collectively evaluated, referred to as ~~loans considered to be impaired.~~"Substandard Non-Individually Evaluated Loan." A Doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as Loss is deferred. Loss loans are considered uncollectible, as the borrowers are often in bankruptcy, have suspended debt repayments, or have ceased business operations. Once a loan is classified as Loss, there is little prospect of collecting the loan’s principal or interest and it is charged-off.

The Company has a loan review policy and program, which is designed to identify and monitor risk in the lending function. The Management ERM Committee, comprised of executive officers, senior officers and loan department personnel, is charged with the oversight of overall credit quality and risk exposure of the Company's loan portfolio. This includes the monitoring of the lending activities of all Company personnel with respect to underwriting and processing new loans and the timely follow-up and corrective action for loans showing signs of deterioration in quality. A loan review program provides the Company with an independent review of the commercial loan portfolio on an ongoing basis. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as extended delinquencies, bankruptcy, repossession or death of the borrower occurs, which heightens awareness as to a possible credit event.

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Internal loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $1.0 million, which includes confirmation of risk rating by an independent credit officer. In addition, all commercial relationships greater than $500 thousand rated Substandard, Doubtful or Loss are reviewed quarterly and corresponding risk ratings are reaffirmed by the Company's Problem Loan Committee, with subsequent reporting to the Management ERM Committee and the Board of Directors.

The following table presents the amortized cost basis of the loan portfolio, by year of origination, loan class, and credit quality, as of March 31, 2023. For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan and payment activity, which residential mortgage and installment and other consumer loans are presented below based on payment performance: performing or nonperforming.


	Term Loans Amortized Cost Basis by Origination Year
As of March 31, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Basis		Revolving Loans Converted to Term		Total
Commercial Real Estate:
Owner-occupied:
Risk rating
Pass	$	25,068	$	107,533	$	69,946	$	29,509	$	22,314	$	74,607	$	2,420	$	—	$	331,397
Special mention	—		—		—		—		—		2,560		—		—		2,560
Substandard - Non-IEL	—		—		—		—		—		2,257		468		—		2,725
Substandard - IEL	—		—		—		—		—		2,635		54		—		2,689
Total owner-occupied loans	$	25,068	$	107,533	$	69,946	$	29,509	$	22,314	$	82,059	$	2,942	$	—	$	339,371
Current period gross charge offs - owner-occupied	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Non-owner occupied:
Risk rating
Pass	$	13,063	$	94,461	$	194,367	$	85,305	$	66,223	$	143,337	$	631	$	877	$	598,264
Special mention	—		—		—		—		—		2,206		400		—		2,606
Substandard - Non-IEL	—		—		—		2,170		—		80		—		—		2,250
Substandard - IEL	—		—		—		—		—		276		—		—		276
Total non-owner occupied loans	$	13,063	$	94,461	$	194,367	$	87,475	$	66,223	$	145,899	$	1,031	$	877	$	603,396
Current period gross charge offs - non-owner occupied	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Multi-family:
Risk rating
Pass	$	—	$	54,897	$	9,008	$	12,888	$	7,971	$	51,500	$	129	$	—	$	136,393
Special mention	—		—		—		—		—		7,660		—		—		7,660
Substandard - Non-IEL	—		—		—		—		—		—		—		—		—
Substandard - IEL	—		—		—		—		—		—		—		—		—
Total multi-family loans	$	—	$	54,897	$	9,008	$	12,888	$	7,971	$	59,160	$	129	$	—	$	144,053
Current period gross charge offs - multi-family	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Non-owner occupied residential:
Risk rating
Pass	$	3,207	$	27,191	$	19,814	$	10,893	$	7,067	$	35,158	$	1,572	$	—	$	104,902
Special mention	—		—		—		—		—		841		—		—		841
Substandard - Non-IEL	—		—		—		—		—		405		—		—		405
Substandard - IEL	—		—		—		—		—		242		—		—		242
Total non-owner occupied residential loans	$	3,207	$	27,191	$	19,814	$	10,893	$	7,067	$	36,646	$	1,572	$	—	$	106,390
Current period gross charge offs - non-owner occupied residential	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

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	Term Loans Amortized Cost Basis by Origination Year
As of March 31, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Basis		Revolving Loans Converted to Term		Total
Acquisition and development:
1-4 family residential construction:
Risk rating
Pass	$	1,552	$	18,437	$	952	$	—	$	—	$	—	$	—	$	—	$	20,941
Special mention	—		—		—		—		—		—		—		—		—
Substandard - Non-IEL	—		—		—		—		—		—		—		—		—
Substandard - IEL	—		—		—		—		—		—		—		—		—
Total 1-4 family residential construction loans	$	1,552	$	18,437	$	952	$	—	$	—	$	—	$	—	$	—	$	20,941
Current period gross charge offs - 1-4 family residential construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial and land development:
Risk rating
Pass	$	8,025	$	50,417	$	81,878	$	12,018	$	122	$	3,043	$	525	$	2,925	$	158,953
Special mention	—		—		—		—		—		452		—		—		452
Substandard - Non-IEL	—		—		—		—		—		—		—		—		—
Substandard - IEL	—		—		—		15,151		—		—		—		—		15,151
Total commercial and land development loans	$	8,025	$	50,417	$	81,878	$	27,169	$	122	$	3,495	$	525	$	2,925	$	174,556
Current period gross charge offs - commercial and land development	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial and Industrial:
Risk rating
Pass	$	20,837	$	84,057	$	94,073	$	25,903	$	12,835	$	24,290	$	89,790	$	3,839	$	355,624
Special mention	—		306		374		6,615		1,534		913		8,349		—		18,091
Substandard - Non-IEL	114		176		1,196		87		373		1,068		3,911		—		6,925
Substandard - IEL	—		—		—		10		—		33		—		—		43
Total commercial and industrial loans	$	20,951	$	84,539	$	95,643	$	32,615	$	14,742	$	26,304	$	102,050	$	3,839	$	380,683
Current period gross charge offs - commercial and industrial	$	—	$	—	$	—	$	84	$	—	$	2	$	—	$	—	$	86
Municipal:
Risk rating
Pass	$	—	$	18	$	3,643	$	59	$	—	$	7,609	$	—	$	—	$	11,329
Total municipal loans	$	—	$	18	$	3,643	$	59	$	—	$	7,609	$	—	$	—	$	11,329
Current period gross charge offs - municipal	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential mortgage:
First lien:
Payment performance
Performing	$	4,153	$	60,524	$	35,265	$	8,632	$	7,955	$	107,521	$	—	$	650	$	224,700
Nonperforming	—		—		—		—		126		2,205		—		—		2,331
Total first lien loans	$	4,153	$	60,524	$	35,265	$	8,632	$	8,081	$	109,726	$	—	$	650	$	227,031
Current period gross charge offs - first lien	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

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	Term Loans Amortized Cost Basis by Origination Year
As of March 31, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Basis		Revolving Loans Converted to Term		Total
Home equity - term:
Payment performance
Performing	$	159	$	806	$	151	$	502	$	131	$	3,618	$	—	$	—	$	5,367
Nonperforming	—		—		—		—		—		4		—		—		4
Total home equity - term loans	$	159	$	806	$	151	$	502	$	131	$	3,622	$	—	$	—	$	5,371
Current period gross charge offs - home equity - term	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Home equity - lines of credit:
Payment performance
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	112,345	$	70,333	$	182,678
Nonperforming	—		—		—		—		—		—		643		19		662
Total residential real estate - home equity - lines of credit loans	$	—	$	—	$	—	$	—	$	—	$	—	$	112,988	$	70,352	$	183,340
Current period gross charge offs - home equity - lines of credit	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Installment and other loans:
Payment performance
Performing	$	197	$	561	$	448	$	192	$	1,266	$	2,433	$	5,919	$	—	$	11,016
Nonperforming	—		—		—		—		22		2		—		—		24
Total Installment and other loans	$	197	$	561	$	448	$	192	$	1,288	$	2,435	$	5,919	$	—	$	11,040
Current period gross charge offs - installment and other	$	31	$	24	$	—	$	—	$	1	$	—	$	—	$	—	$	56

The information presented in the table above is not required for periods prior to the adoption of CECL. The following table summarizes the Company’s loan portfolio ratings based on its internal risk rating system at ~~September 30, 2022 and~~ December 31, ~~2021:~~
Pass Special Mention Non-Impaired Substandard Impaired - Substandard Doubtful PCI Loans Total
September 30, 2022
Commercial real estate:
Owner occupied $ 302,001 $ 3,392 $ 2,649 $ 2,849 $ — $ 2,234 $ 313,125
Non-owner occupied 566,996 3,931 2,388 — — 290 573,605
Multi-family 106,306 8,010 245 — — — 114,561
Non-owner occupied residential 102,136 1,979 493 90 — 569 105,267
Acquisition and development:
1-4 family residential construction 20,810 — — — — — 20,810
Commercial and land development 132,621 15,891 — — — — 148,512
Commercial and industrial 349,319 20,891 6,236 45 — 2,083 378,574
Municipal 12,683 — — — — — 12,683
Residential mortgage:
First lien 213,812 — 223 2,593 — 4,342 220,970
Home equity - term 5,849 — — 5 — 15 5,869
Home equity - lines of credit 179,850 — 45 372 — — 180,267
Installment and other loans 13,639 — — 38 — 7 13,684
$ 2,006,022 $ 54,094 $ 12,279 $ 5,992 $ — $ 9,540 $ 2,087,927
December 31, 2021
Commercial real estate:
Owner occupied $ 219,250 $ 7,239 $ 6,087 $ 3,763 $ — $ 2,329 $ 238,668
Non-owner occupied 528,010 23,297 166 — — 310 551,783
Multi-family 84,414 8,238 603 — — — 93,255
Non-owner occupied residential 102,588 1,065 1,153 122 — 1,184 106,112
Acquisition and development:
1-4 family residential construction 12,279 — — — — — 12,279
Commercial and land development 92,049 1,385 491 — — — 93,925
Commercial and industrial 470,579 7,917 4,720 250 — 2,262 485,728
Municipal 14,989 — — — — — 14,989
Residential mortgage:
First lien 191,386 — 225 2,635 — 4,585 198,831
Home equity - term 6,058 — — 7 — 16 6,081
Home equity - lines of credit 160,203 20 46 436 — — 160,705
Installment and other loans 17,584 — — 40 — 6 17,630
$ 1,899,389 $ 49,161 $ 13,491 $ 7,253 $ — $ 10,692 $ 1,979,986
2022, which presents the most comparable required information for the prior period. Prior to the adoption of CECL, PCD loans were classified as PCI loans and accounted for under ASC 310-30. In accordance with the CECL standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the adoption date. At March 31, 2023, the amortized cost of the PCD loans was $9.4 million.

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	Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		PCI Loans		Total


















December 31, 2022
Commercial real estate:
Owner occupied	$	305,159	$	2,109	$	3,532	$	2,767	$	—	$	2,203	$	315,770
Non-owner occupied	601,244		4,243		2,273		—		—		283		608,043
Multi-family	130,851		7,739		242		—		—		—		138,832
Non-owner occupied residential	102,674		810		482		81		—		557		104,604
Acquisition and development:
1-4 family residential construction	25,068		—		—		—		—		—		25,068
Commercial and land development	142,424		458		—		15,426		—		—		158,308
Commercial and industrial	331,103		17,579		7,013		31		—		2,048		357,774
Municipal	12,173		—		—		—		—		—		12,173
Residential mortgage:
First lien	222,849		—		215		2,520		—		4,265		229,849
Home equity - term	5,485		—		—		5		—		15		5,505
Home equity - lines of credit	182,801		—		45		395		—		—		183,241
Installment and other loans	12,017		—		—		40		—		8		12,065
	$	2,073,848	$	32,938	$	13,802	$	21,265	$	—	$	9,379	$	2,151,232

For commercial real estate, acquisition and development, ~~and~~ commercial and industrial ~~loans,~~and municipal segments, a loan is ~~considered impaired~~evaluated individually when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by

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management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not ~~classified as impaired.~~individually evaluated. Generally, loans that are more than 90 days past due ~~are deemed impaired.~~will be individually evaluated for a specific reserve. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed to determine if the loan should be placed on nonaccrual status. Nonaccrual loans ~~in the commercial and commercial real estate portfolios and any TDRs~~ are, by definition, deemed to be ~~impaired. Impairment~~individually evaluated under CECL. A specific reserve allocation for individually evaluated loans is measured on a loan-by-loan basis for commercial ~~construction~~ and ~~restructured~~construction loans by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. For loans that are ~~deemed to be impaired~~experiencing financial difficulty for extended periods of time, periodic updates on fair values are obtained, which may include updated appraisals. Updated fair values are incorporated into the ~~impairment~~ analysis in the next reporting period.

Loan charge-offs, which may include partial charge-offs, are taken on an ~~impaired~~individually evaluated loan that is collateral dependent if the ~~loan’s~~ carrying balance of the loan exceeds ~~its collateral’s~~the appraised value of the collateral, the loan has been placed on nonaccrual status or identified as uncollectible, and it is deemed to be a confirmed loss. Typically, ~~impaired~~ loans with a charge-off or partial charge-off will continue to be considered impaired, unless the note is split into two, and management expects the performing note to continue to perform and is adequately secured. The second, or non-performing note, would be charged-off.individually evaluated. Generally, an ~~impaired~~individually evaluated loan with a partial charge-off may continue to have ~~an impairment~~a specific reserve on it after the partial charge-off, if factors warrant.

At ~~September 30, 2022~~March 31, 2023, the Company’s individually evaluated loans were measured based on the estimated fair value of the collateral securing the loan, except for purchased auto loans on nonaccrual status and accruing loans accounted for as TDRs prior to the adoption of ASU 2022-02. At December 31, ~~2021,~~2022, except for TDRs, ~~all of~~ the ~~Company’s loan impairments~~Company's individually evaluated loans were measured based on the estimated fair value of the collateral securing the loan. ByPrior to the adoption of ASU 2022-02, by definition, TDRs ~~are~~were considered ~~impaired. All TDR~~impaired and the related impairment analyses ~~are~~were initially based on discounted cash ~~flows for those loans.~~flows. For real estate loans, collateral generally consists of commercial or residential real estate, but in the case of commercial and industrial loans, it could also consist of accounts receivable, inventory, equipment or other business assets. Commercial and industrial loans may also have real estate collateral.

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Updated appraisals are generally required every 18 months for classified commercial loans, secured by commercial real estate, in excess of $250 thousand. The “as is" value provided in the appraisal is often used as the fair value of the collateral in determining impairment, unless circumstances, such as subsequent improvements, approvals, or other circumstances, dictate that another value than that provided by the appraiser is more appropriate.

Generally, ~~impaired~~ commercial loans secured by real estate ~~other than performing TDRs,~~that are evaluated individually are measured at fair value using certified real estate appraisals that had been completed within the last 18 months. Appraised values are discounted for estimated costs to sell the property and other selling considerations to arrive at the property’s fair value. In those situations in which it is determined an updated appraisal is not required for loans individually evaluated for ~~impairment,~~credit expected losses, fair values are based on either an existing appraisal or a discounted cash flow analysis as determined by management. The approaches are discussed below:

•Existing appraisal – if the existing appraisal provides a strong loan-to-value ratio (generally 70% or lower) and, after consideration of market conditions and knowledge of the property and area, it is determined by the Credit Administration staff that there has not been a significant deterioration in the collateral value, the existing certified appraised value may be used. Discounts to the appraised value, as deemed appropriate for selling costs, are factored into the fair value.

•Discounted cash flows – in limited cases, discounted cash flows may be used on projects in which the collateral is liquidated to reduce the borrowings outstanding, and is used to validate collateral values derived from other approaches.

Collateral on ~~certain impaired~~ loans evaluated individually is not limited to real estate, and may consist of accounts receivable, inventory, equipment or other business assets. Estimated fair values are determined based on borrowers’ financial statements, inventory ledgers, accounts receivable aging or appraisals from individuals with knowledge in the business. Stated balances are generally discounted for the age of the financial information or the quality of the assets. In determining fair value, liquidation discounts are applied to this collateral based on existing loan evaluation policies.

The Company distinguishes substandard loans onfor both ~~an impaired~~loans individually and ~~non-impaired basis,~~collectively evaluated, as it places less emphasis on a loan’s classification, and increased reliance on whether the loan was performing in accordance with the contractual terms. A substandard classification does not automatically meet the definition of ~~impaired.~~an individually evaluated loan. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual extensions of credit classified as substandard. As a result, the Company’s methodology includes an evaluation of certain accruing commercial real estate, acquisition and development, ~~and~~ commercial and industrial and municipal loans rated substandard to be collectively evaluated for ~~impairment.~~credit expected losses. Although the Company believes

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these loans meet the definition of substandard, they are generally performing and management has concluded that it is likely the Company will be able to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement.

Larger groups of smaller balance homogeneous loans are collectively evaluated for ~~impairment.~~credit expected losses. Generally, the Company does not separately identify individual ~~consumer~~residential mortgage and ~~residential~~installment and other consumer loans for ~~impairment~~ disclosures, unless such loans are the subject of a ~~restructuring~~modified agreement due to financial difficulties of the borrower.

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The following table presents the amortized cost basis of nonaccrual loans, according to loan class, with and without reserves on individually evaluated loans as of March 31, 2023, as compared to nonaccrual loans at December 31, 2022. The Company did not recognize interest income on nonaccrual loans during the three months ended March 31, 2023.


	March 31, 2023								December 31, 2022
	Nonaccrual loans with a related ACL		Nonaccrual loans with no related ACL		Total nonaccrual loans		Loans Past Due 90+ Accruing		Total nonaccrual loans
Commercial real estate:
Owner-occupied	$	—	$	2,689	$	2,689	$	—	$	2,767
Non-owner occupied	—		276		276		—		—

Non-owner occupied residential	—		243		243		—		81
Acquisition and development:

Commercial and land development	—		15,151		15,151		—		15,426
Commercial and industrial	—		43		43		—		31

Residential mortgage:
First lien	—		2,155		2,155		28		1,838
Home equity – term	—		4		4		—		5
Home equity – lines of credit	—		661		661		—		395
Installment and other loans	—		24		24		—		40
Total	$	—	$	21,246	$	21,246	$	28	$	20,583

A loan is considered to be collateral-dependent when the borrower is experiencing financial difficulty and the repayment is expected to be provided substantially through the operation or sale of collateral. At March 31, 2023, substantively all individually evaluated loans were collateral-dependent and consisted primarily of commercial real estate, acquisition and development and residential mortgage loans, which were primarily secured by commercial or residential real estate. All of the Company’s collateral-dependent loans had appraised collateral values which exceeded the amortized cost basis of the related loan as of March 31, 2023. The following table presents the amortized cost basis of collateral-dependent loans by class as of March 31, 2023:


	Type of Collateral
	Business Assets		Commercial Real Estate		Equipment		Land		Residential Real Estate		Other		Total
Commercial real estate:
Owner occupied	$	—	$	2,689	$	—	$	—	$	—	$	—	$	2,689
Non-owner occupied	—		276		—		—		—		—		276


Acquisition and development:

Commercial and land development	—		15,151		—		—		—		—		15,151
Commercial and industrial	34		—		11		—		—		—		45

Residential mortgage:
First lien	—		—		—		—		2,310		—		2,310
Home equity - term	—		—		—		—		4		—		4
Home equity - lines of credit	—		—		—		—		661		—		661
Installment and other loans	—		—		—		—		—		1		1
Total	$	34	$	18,116	$	11	$	—	$	2,975	$	1	$	21,137

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The information presented above in the nonaccrual loan table and the collateral-dependent table are not required for periods prior to the adoption of CECL. The following table, which excludes accruing PCI loans, presents the most comparable required information for the prior period, which summarizes impaired loans by segment and class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required at ~~September 30, 2022 and~~ December 31, ~~2021.~~2022. The recorded investment in loans excludes accrued interest ~~receivable due to insignificance.~~receivable. Related allowances established generally pertain to those loans in which loan forbearance agreements were in the process of being negotiated or updated appraisals were pending, and any partial charge-off will be recorded when final information is received.

Impaired Loans with a Specific Allowance Impaired Loans with No Specific Allowance
Recorded Investment (Book Balance) Unpaid Principal Balance (Legal Balance) Related Allowance Recorded Investment (Book Balance) Unpaid Principal Balance (Legal Balance)
September 30, 2022
Commercial real estate:
Owner-occupied $ — $ — $ — $ 2,849 $ 3,840
Non-owner occupied residential — — — 90 211
Commercial and industrial — — — 45 306
Residential mortgage:
First lien 233 233 28 2,360 3,181
Home equity—term — — — 5 8
Home equity—lines of credit — — — 372 609
Installment and other loans — — — 38 38
$ 233 $ 233 $ 28 $ 5,759 $ 8,193
December 31, 2021
Commercial real estate:
Owner-occupied $ — $ — $ — $ 3,763 $ 4,902
Non-owner occupied residential — — — 122 259
Commercial and industrial — — — 250 547
Residential mortgage:
First lien 341 341 28 2,294 3,337
Home equity—term — — — 7 10
Home equity—lines of credit — — — 436 653
Installment and other loans — — — 40 40
$ 341 $ 341 $ 28 $ 6,912 $ 9,748

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	Impaired Loans with a Specific Allowance						Impaired Loans with No Specific Allowance
	Recorded Investment (Book Balance)		Unpaid Principal Balance (Legal Balance)		Related Allowance		Recorded Investment (Book Balance)		Unpaid Principal Balance (Legal Balance)
















December 31, 2022
Commercial real estate:
Owner-occupied	$	—	$	—	$	—	$	2,767	$	3,799


Non-owner occupied residential	—		—		—		81		207
Acquisition and development:

Commercial and land development	—		—		—		15,426		15,426
Commercial and industrial	—		—		—		31		112
Residential mortgage:
First lien	178		178		28		2,342		3,126
Home equity—term	—		—		—		5		8
Home equity—lines of credit	—		—		—		395		684
Installment and other loans	—		—		—		40		40
	$	178	$	178	$	28	$	21,087	$	23,402

The following table, which excludes accruing PCI loans, presents the most comparable required information for the prior period and summarizes the average recorded investment in impaired loans and related recognized interest income for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2022:


	March 31, 2022
	Average Impaired Balance		Interest Income Recognized
















Three Months Ended March 31,
Commercial real estate:
Owner occupied	$	3,422	$	—


Non-owner occupied residential	107		—



Commercial and industrial	218		—
Residential mortgage:
First lien	2,406		7
Home equity - term	7		—
Home equity - lines of credit	432		—
Installment and other loans	45		—
	$	6,637	$	7

On January 1, 2023, the Company adopted ASU 2022-02 on a modified retrospective basis. ASU 2022-02 eliminates the TDR accounting model, and ~~2021:~~

2022 2021
Average
Impaired
Balance Interest
Income
Recognized Average
Impaired
Balance Interest
Income
Recognized
Three Months Ended September 30,
Commercial real estate:
Owner-occupied $ 2,881 $ — $ 4,179 $ —
Non-owner occupied residential 93 — 232 —
Commercial and industrial 51 — 3,073 —
Residential mortgage:
First lien 2,390 10 2,541 11
Home equity – term 5 — 10 —
Home equity - lines of credit 382 — 463 —
Installment and other loans 43 — 24 —
$ 5,845 $ 10 $ 10,522 $ 11
Nine Months Ended September 30,
Commercial real estate:
Owner occupied $ 3,126 $ — $ 3,848 $ 1
Multi-family — — 7 —
Non-owner occupied residential 100 — 252 —
Acquisition and development:
Commercial and land development — — 246 —
Commercial and industrial 132 — 3,046 —
Residential mortgage:
First lien 2,370 25 2,575 32
Home equity - term 6 — 12 —
Home equity - lines of credit 407 — 547 —
Installment and other loans 45 — 17 —
$ 6,186 $ 25 $ 10,550 $ 33

~~The following table presents impaired loans~~requires that ~~are~~the Company evaluate, based on the accounting for loan modifications, whether the borrower is experiencing financial difficulty and the modification results in a more-than-insignificant direct change in the contractual cash flows and represents a new loan or a continuation of an existing loan. This change required all loan modifications to be accounted for under the general loan modification guidance in ASC 310-20, Receivables – Nonrefundable Fees and Other Costs, and subject entities to new disclosure requirements on loan modifications to borrowers experiencing financial difficulty. Upon adoption of CECL, the TDRs ~~with~~were evaluated and included in the ~~recorded investment at September 30, 2022 and December 31, 2021:~~

September 30, 2022 December 31, 2021
Number of
Contracts Recorded
Investment Number of
Contracts Recorded
Investment
Accruing:
Residential mortgage:
First lien 8 $ 689 8 $ 804
Nonaccruing:
Residential mortgage:
First lien 4 219 5 285
Installment and other loans 1 3 — —
5 222 5 285
13 $ 911 13 $ 1,089

CECL loan segment pools if the

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~~There were no new TDRs~~loans shared similar risk characteristics to other loans in the pool or remained with individually evaluated loans for which the ACL was measured using the collateral-dependent or discounted cash flow method.

The Company may modify loans to borrowers experiencing financial difficulty by providing principal forgiveness, term extension, interest rate reduction or an other-than-insignificant payment delay. When principal forgiveness is provided, the amount of forgiveness is charged off against the ACL. The Company may also provide multiple types of modifications on an individual loan. For three months ended ~~September 30, 2022. For~~March 31, 2023, the ~~nine months ended September 30, 2022, there were two new TDRs, both on non-accrual status, totaling $3 thousand. There were no new TDRs~~Company did not extend any modifications to borrowers experiencing financial difficulty that had a more-than-insignificant direct change in ~~2021. One~~the contractual cash flows of the ~~two new~~loan.

The following table presents the most comparable required information for the prior period for impaired loans that were TDRs, ~~during 2022 was paid off in full during~~with the ~~three months ended September 30, 2022.~~recorded investment at December 31, 2022:


	December 31, 2022
		Number of Contracts	Recorded Investment
Accruing:





Residential mortgage:
First lien		8	$	682


Nonaccruing:





Residential mortgage:
First lien		4	212
Installment and other loans		1	2
		5	214
		13	$	896

Management further monitors the performance and credit quality of the loan portfolio by analyzing the length of time a portfolio is past due by aggregating loans based on its delinquencies. The following table presents the classes of the loan portfolio summarized by aging categories ~~of performing loans and nonaccrual loans~~ at ~~September 30, 2022 and December~~March 31, ~~2021:~~2023:


				Days Past Due													30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Loans Not Past Due		Total Loans
		Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans
September 30, 2022
March 31, 2023																March 31, 2023
Commercial real estate:	Commercial real estate:															Commercial real estate:
Owner occupied	Owner occupied	$	307,819	$	223	$	—	$	—	$	223	$	2,849	$	310,891	Owner occupied	$	277	$	—	$	112	$	389	$	338,982	$	339,371
Non-owner occupied	Non-owner occupied	573,233		82		—		—		82		—		573,315		Non-owner occupied	—		—		—		—		603,396		603,396
Multi-family	Multi-family	114,561		—		—		—		—		—		114,561		Multi-family	—		—		—		—		144,053		144,053
Non-owner occupied residential	Non-owner occupied residential	104,502		106		—		—		106		90		104,698		Non-owner occupied residential	104		—		61		165		106,225		106,390
Acquisition and development:	Acquisition and development:															Acquisition and development:
1-4 family residential construction	1-4 family residential construction	20,810		—		—		—		—		—		20,810		1-4 family residential construction	—		—		—		—		20,941		20,941
Commercial and land development	Commercial and land development	148,512		—		—		—		—		—		148,512		Commercial and land development	—		—		—		—		174,556		174,556
Commercial and industrial	Commercial and industrial	376,166		11		269		—		280		45		376,491		Commercial and industrial	198		153		—		351		380,332		380,683
Municipal	Municipal	12,683		—		—		—		—		—		12,683		Municipal	—		—		—		—		11,329		11,329
Residential mortgage:	Residential mortgage:															Residential mortgage:
First lien	First lien	213,733		746		219		26		991		1,904		216,628		First lien	3,884		933		453		5,270		221,761		227,031
Home equity - term	Home equity - term	5,849		—		—		—		—		5		5,854		Home equity - term	7		—		—		7		5,364		5,371
Home equity - lines of credit	Home equity - lines of credit	179,365		107		423		—		530		372		180,267		Home equity - lines of credit	2,116		188		32		2,336		181,004		183,340
Installment and other loans	Installment and other loans	13,521		105		13		—		118		38		13,677		Installment and other loans	57		—		5		62		10,978		11,040
Subtotal		2,070,754		1,380		924		26		2,330		5,303		2,078,387
Loans acquired with credit deterioration:
Commercial real estate:
Owner occupied		2,234		—		—		—		—		—		2,234
Non-owner occupied		290		—		—		—		—		—		290

Non-owner occupied residential		458		—		—		111		111		—		569
																	$	6,643	$	1,274	$	663	$	8,580	$	2,198,921	$	2,207,501

Commercial and industrial		2,083		—		—		—		—		—		2,083

Residential mortgage:
First lien		4,130		8		109		95		212		—		4,342
Home equity - term		15		—		—		—		—		—		15

Installment and other loans		7		—		—		—		—		—		7
Subtotal		9,217		8		109		206		323		—		9,540
		$	2,079,971	$	1,388	$	1,033	$	232	$	2,653	$	5,303	$	2,087,927

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Days Past Due
Current 30-59 60-89 90+
(still accruing) Total
Past Due Non-
Accrual Total
Loans
December 31, 2021
Commercial real estate:
Owner occupied $ 231,371 $ 314 $ — $ 891 $ 1,205 $ 3,763 $ 236,339
Non-owner occupied 551,473 — — — — — 551,473
Multi-family 93,255 — — — — — 93,255
Non-owner occupied residential 104,645 161 — — 161 122 104,928
Acquisition and development:
1-4 family residential construction 12,279 — — — — — 12,279
Commercial and land development 93,793 132 — — 132 — 93,925
Commercial and industrial 483,088 128 — — 128 250 483,466
Municipal 14,989 — — — — — 14,989
Residential mortgage:
First lien 189,043 2,995 281 96 3,372 1,831 194,246
Home equity - term 6,042 16 — — 16 7 6,065
Home equity - lines of credit 159,628 641 — — 641 436 160,705
Installment and other loans 17,467 109 8 — 117 40 17,624
Subtotal 1,957,073 4,496 289 987 5,772 6,449 1,969,294
Loans acquired with credit deterioration:
Commercial real estate:
Owner occupied 2,329 — — — — — 2,329
Non-owner occupied 310 — — — — — 310
Non-owner occupied residential 479 — 587 118 705 — 1,184
Commercial and industrial 2,262 — — — — — 2,262
Residential mortgage:
First lien 3,937 387 166 95 648 — 4,585
Home equity - term 15 — — 1 1 — 16
Installment and other loans 6 — — — — — 6
Subtotal 9,338 387 753 214 1,354 — 10,692
$ 1,966,411 $ 4,883 $ 1,042 $ 1,201 $ 7,126 $ 6,449 $ 1,979,986
The following table presents the most comparable required information for the prior period, which includes the classes of the loan portfolio summarized by aging categories of performing loans and nonaccrual loans at December 31, 2022:


			Days Past Due
	Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans
December 31, 2022
Commercial real estate:
Owner-occupied	$	310,769	$	31	$	—	$	—	$	31	$	2,767	$	313,567
Non-owner occupied	607,760		—		—		—		—		—		607,760
Multi-family	138,832		—		—		—		—		—		138,832
Non-owner occupied residential	103,782		184		—		—		184		81		104,047
Acquisition and development:
1-4 family residential construction	24,622		446		—		—		446		—		25,068
Commercial and land development	142,613		269		—		—		269		15,426		158,308
Commercial and industrial	355,179		464		52		—		516		31		355,726
Municipal	12,173		—		—		—		—		—		12,173
Residential mortgage:
First lien	219,715		3,485		414		132		4,031		1,838		225,584
Home equity – term	5,485		—		—		—		—		5		5,490
Home equity – lines of credit	181,350		1,395		101		—		1,496		395		183,241
Installment and other loans	11,953		64		—		—		64		40		12,057
Subtotal	2,114,233		6,338		567		132		7,037		20,583		2,141,853
Loans acquired with credit deterioration:
Commercial real estate:
Owner-occupied	2,203		—		—		—		—		—		2,203
Non-owner occupied	283		—		—		—		—		—		283

Non-owner occupied residential	452		—		—		105		105		—		557



Commercial and industrial	2,048		—		—		—		—		—		2,048

Residential mortgage:
First lien	3,657		327		79		202		608		—		4,265
Home equity – term	15		—		—		—		—		—		15

Installment and other loans	8		—		—		—		—		—		8
Subtotal	8,666		327		79		307		713		—		9,379
	$	2,122,899	$	6,665	$	646	$	439	$	7,750	$	20,583	$	2,151,232

As disclosed in Note 1, on January 1, 2023 the Company implemented CECL and increased the ACL, previously the ALL, with a cumulative-effect adjustment to the ACL for loans of $2.4 million. The ~~Company maintains its ALL at a level management believes adequate for probable incurred credit losses. The ALL~~Company’s ACL is ~~established and maintained through a~~calculated quarterly, with any adjustment recorded to the provision for credit losses in the consolidated statement of income. Management calculates the quantitative portion of collectively evaluated loans for all loan ~~losses charged to earnings. On a quarterly basis, management assesses~~categories, with the ~~adequacy~~exception of the ~~ALL utilizing a defined methodology, which considers specific credit evaluation~~consumer loan segment, using DCF methodology. For purposes of impaired loans as discussed above, historical loan loss experience, and qualitative factors. Management believes its approach properly addresses relevant accounting guidance for loans individually identified as impaired and for loanscalculating the quantitative portion of collectively evaluated reserves on the consumer loan segment, the remaining life methodology is utilized. For purposes of estimating the Company’s ACL, management generally evaluates collectively evaluated loans by federal call code in order to group loans with similar risk characteristics.

Loans that do not share similar risk characteristics are evaluated on an individual loan basis, and are excluded from the collective evaluation for ~~impairment,~~the ACL. Loans identified to be individually evaluated under CECL include loans on nonaccrual status and may include accruing loans that do not share similar risk characteristics to other ~~bank regulatory guidance.~~

In connection with its quarterly evaluation of the adequacy of the ALL, management reviews its methodology to determine if it properly addresses the current risk in the loan portfolio. For each loan class, general allowances based on quantitative factors, principally historical loss trends, are provided foraccruing loans that are collectively evaluated ~~for impairment. An~~on a loan pool basis. A specific reserve analysis may be applied to the individually evaluated loans, which considers collateral value, an observable market price or the present value of expected future cash flows. A specific reserve is assigned if the measured value of the loan using one of the before mentioned methods is less than the current carrying value of the loan.

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~~adjustment to historical loss factors~~Based on management's analysis, adjustments may be ~~incorporated~~applied for ~~delinquency~~additional factors impacting the risk of loss in the loan portfolio beyond the quantitatively calculated reserve calculated on collectively evaluated loans. As the quantitative reserve calculation incorporates historical conditions, management may consider an additional or reduced reserve is warranted through qualitative risk factors based on current and ~~other potential~~expected conditions. These qualitative risk ~~not elsewhere defined within the ALL methodology.~~

~~In addition~~factors considered by management are comparable to ~~this quantitative analysis, adjustments~~legacy factors prior to the ~~ALL requirements are allocated on loans collectively evaluated for impairment based on additional qualitative factors, including:~~adoption of CECL and include significant or unexpected changes in:

Nature and Volume of Loans – including loan growth in the current and subsequent quarters based on the Company’s targeted growth and strategic plan, coupled with the types of loans booked based on risk management and credit culture; the number of exceptions to loan policy; and supervisory loan to value exceptions.

Concentrations of Credit and Changes within Credit Concentrations – including the composition of the Company’s overall portfolio makeup and management's evaluation related to concentration risk management and the inherent risk associated with the concentrations identified.

Lending Policies and Procedures, Underwriting Standards and Recovery Practices – including changes to credit policies and procedures, underwriting standards and perceived impact on anticipated losses; trends in the number of exceptions to loan policy; supervisory loan to value exceptions; and administration of loan recovery practices.

Delinquency Trends – including delinquency percentages noted in the portfolio relative to economic conditions; severity of the delinquencies; and whether the ratios are trending upwards or downwards.

~~Classified Loans~~Collateral Valuation Trends – including ~~internal loan ratings of the portfolio; severity of the ratings; whether the loan segment’s ratings show a more favorable or less favorable trend; and~~ underlying market conditions and impact on the collateral values securing the loans.

Experience, Ability and Depth of Management/Lending staff – including the level of experience of senior and middle management and the lending staff; turnover of the staff; and instances of repeat criticisms.

Quality of Loan Review System – including the level of experience of the loan review staff; in-house versus outsourced provider of review; turnover of the staff; and instances of repeat ~~criticisms.~~criticisms from independent testing, which includes the evaluation of internal loan ratings of the portfolio.

~~National and Local~~ Economic Conditions – including trends in the international, national, regional and local conditions that monitor the interest rate environment, inflationary pressures, the consumer price index, ~~unemployment rates,~~ the housing price index, housing statistics, ~~compared to the prior year,~~and bankruptcy ~~rates,~~rates.

Other External Factors - including regulatory and legal environment risks and competition.

All factors noted above were established upon adoption of CECL and were deemed appropriate at ~~September 30, 2022.~~March 31, 2023. For the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, these factors were unchanged ~~except for a reduction in the~~ ~~National and Local Economic Conditions~~ ~~factor during the first quarter~~from levels at adoption of 2022. This factor had been increased previously for economic concerns in the commercial real estate portfolio associated with the COVID-19 pandemic. The additional allocation was removed at March 31, 2022 as these concerns had subsided.CECL.

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The following table presents the activity in the ACL, including the impact of adopting CECL, for the three months ended March 31, 2023 and the activity in the ALL for the three ~~and nine~~ months ended ~~September 30, 2022 and 2021:~~March 31, 2022:
Commercial Consumer
Commercial
Real Estate Acquisition
and
Development Commercial
and
Industrial Municipal Total Residential
Mortgage Installment
and Other Total Unallocated Total
Three Months Ended
September 30, 2022
Balance, beginning of period $ 12,294 $ 3,024 $ 4,471 $ 26 $ 19,815 $ 3,004 $ 223 $ 3,227 $ 237 $ 23,279
Provision for loan losses 551 342 296 (1) 1,188 309 (5) 304 8 1,500
Charge-offs — — (87) — (87) — (24) (24) — (111)
Recoveries — 1 32 — 33 2 6 8 — 41
Balance, end of period $ 12,845 $ 3,367 $ 4,712 $ 25 $ 20,949 $ 3,315 $ 200 $ 3,515 $ 245 $ 24,709
September 30, 2021
Balance, beginning of period $ 11,315 $ 1,243 $ 3,495 $ 29 $ 16,082 $ 2,863 $ 227 $ 3,090 $ 209 $ 19,381
Provision for loan losses (179) 290 386 (2) 495 (147) 18 (129) (1) 365
Charge-offs (89) — (55) — (144) — (20) (20) — (164)
Recoveries 305 8 60 — 373 5 5 10 — 383
Balance, end of period $ 11,352 $ 1,541 $ 3,886 $ 27 $ 16,806 $ 2,721 $ 230 $ 2,951 $ 208 $ 19,965
Nine Months Ended
September 30, 2022
Balance, beginning of period $ 12,037 $ 2,062 $ 3,814 $ 30 $ 17,943 $ 2,785 $ 215 $ 3,000 $ 237 $ 21,180
Provision for loan losses 776 1,295 980 (5) 3,046 508 13 521 8 3,575
Charge-offs — — (202) — (202) (10) (42) (52) — (254)
Recoveries 32 10 120 — 162 32 14 46 — 208
Balance, end of period $ 12,845 $ 3,367 $ 4,712 $ 25 $ 20,949 $ 3,315 $ 200 $ 3,515 $ 245 $ 24,709
September 30, 2021
Balance, beginning of period $ 11,151 $ 1,114 $ 3,942 $ 40 $ 16,247 $ 3,362 $ 324 $ 3,686 $ 218 $ 20,151
Provision for loan losses 133 418 109 (13) 647 (578) (69) (647) (10) (10)
Charge-offs (270) — (621) — (891) (92) (49) (141) — (1,032)
Recoveries 338 9 456 — 803 29 24 53 — 856
Balance, end of period $ 11,352 $ 1,541 $ 3,886 $ 27 $ 16,806 $ 2,721 $ 230 $ 2,951 $ 208 $ 19,965


	Commercial										Consumer
	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total
















Three Months Ended
March 31, 2023
Beginning balance, prior to adoption of CECL	$	13,558	$	3,214	$	4,505	$	24	$	21,301	$	3,444	$	188	$	3,632	$	245	$	25,178
Impact of adopting CECL	2,857		(214)		928		169		3,740		(1,121)		49		(1,072)		(245)		2,423
Provision for credit losses	262		215		412		(16)		873		(140)		(4)		(144)		—		729
Charge-offs	—		—		(86)		—		(86)		—		(56)		(56)		—		(142)
Recoveries	20		2		28		—		50		95		31		126		—		176
Balance, end of period	$	16,697	$	3,217	$	5,787	$	177	$	25,878	$	2,278	$	208	$	2,486	$	—	$	28,364
March 31, 2022
Balance, beginning of period	$	12,037	$	2,062	$	3,814	$	30	$	17,943	$	2,785	$	215	$	3,000	$	237	$	21,180

Provision for loan losses	(523)		258		500		(1)		234		72		(6)		66		—		300
Charge-offs	—		—		(61)		—		(61)		(10)		(13)		(23)		—		(84)
Recoveries	32		1		48		—		81		26		5		31		—		112
Balance, end of period	$	11,546	$	2,321	$	4,301	$	29	$	18,197	$	2,873	$	201	$	3,074	$	237	$	21,508

~~Table~~The information presented in the table below is not required for periods subsequent to the adoption of ~~Contents~~

CECL. The following table summarizes the ~~ending loan balance~~ALL allocation for loans individually and collectively evaluated for impairment ~~based upon~~by loan segment ~~as well as the related ALL loss allocation for each~~ at ~~September 30, 2022 and~~ December 31, ~~2021.~~2022. Accruing PCI loans are excluded from loans individually evaluated for impairment.
Commercial Consumer
Commercial
Real Estate Acquisition
and
Development Commercial
and
Industrial Municipal Total Residential
Mortgage Installment
and Other Total Unallocated Total
September 30, 2022
Loans allocated by:
Individually evaluated for impairment $ 2,939 $ — $ 45 $ — $ 2,984 $ 2,970 $ 38 $ 3,008 $ — $ 5,992
Collectively evaluated for impairment 1,103,619 169,322 378,529 12,683 1,664,153 404,136 13,646 417,782 — 2,081,935
$ 1,106,558 $ 169,322 $ 378,574 $ 12,683 $ 1,667,137 $ 407,106 $ 13,684 $ 420,790 $ — $ 2,087,927
ALL allocated by:
Individually evaluated for impairment $ — $ — $ — $ — $ — $ 28 $ — $ 28 $ — $ 28
Collectively evaluated for impairment 12,845 3,367 4,712 25 20,949 3,287 200 3,487 245 24,681
$ 12,845 $ 3,367 $ 4,712 $ 25 $ 20,949 $ 3,315 $ 200 $ 3,515 $ 245 $ 24,709
December 31, 2021
Loans allocated by:
Individually evaluated for impairment $ 3,885 $ — $ 250 $ — $ 4,135 $ 3,078 $ 40 $ 3,118 $ — $ 7,253
Collectively evaluated for impairment 985,933 106,204 485,478 14,989 1,592,604 362,539 17,590 380,129 — 1,972,733
$ 989,818 $ 106,204 $ 485,728 $ 14,989 $ 1,596,739 $ 365,617 $ 17,630 $ 383,247 $ — $ 1,979,986
ALL allocated by:
Individually evaluated for impairment $ — $ — $ — $ — $ — $ 28 $ — $ 28 $ — $ 28
Collectively evaluated for impairment 12,037 2,062 3,814 30 17,943 2,757 215 2,972 237 21,152
$ 12,037 $ 2,062 $ 3,814 $ 30 $ 17,943 $ 2,785 $ 215 $ 3,000 $ 237 $ 21,180

~~The following table provides activity for the accretable yield on purchased impaired loans for the three and nine months ended September 30, 2022 and 2021, respectively:~~
Three Months Ended Nine Months Ended
September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
Accretable yield, beginning of period $ 2,420 $ 3,016 $ 2,661 $ 3,438
Accretion of income (171) (203) (761) (878)
Reclassifications from nonaccretable difference due to improvement in expected cash flows 23 11 368 128
Other changes, net 248 (12) 252 124
Accretable yield, end of period $ 2,520 $ 2,812 $ 2,520 $ 2,812


	Commercial										Consumer
	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total











December 31, 2022
Loans allocated by:
Individually evaluated for impairment	$	2,848	$	15,426	$	31	$	—	$	18,305	$	2,920	$	40	$	2,960	$	—	$	21,265
Collectively evaluated for impairment	1,164,401		167,950		357,743		12,173		1,702,267		415,675		12,025		427,700		—		2,129,967
	$	1,167,249	$	183,376	$	357,774	$	12,173	$	1,720,572	$	418,595	$	12,065	$	430,660	$	—	$	2,151,232
ALL allocated by:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	28	$	—	$	28	$	—	$	28
Collectively evaluated for impairment	13,558		3,214		4,505		24		21,301		3,416		188		3,604		245		25,150
	$	13,558	$	3,214	$	4,505	$	24	$	21,301	$	3,444	$	188	$	3,632	$	245	$	25,178

NOTE 4. LEASES

A lease provides the lessee the right to control the use of an identified asset for a period of time in exchange for consideration. The Company has primarily entered into operating leases for branches and office space. Most of the Company's leases contain renewal options, which the Company is reasonably certain to exercise. Including renewal options, the Company's

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leases range from ~~five~~5 to 3130 years. Operating lease right-of-use assets and lease liabilities are included in other assets and accrued interest and other liabilities on the Company's unaudited condensed consolidated balance sheets.

The Company uses its incremental borrowing rate to determine the present value of the lease payments, as the rate implicit in the Company's leases is not readily determinable. Lease agreements that contain non-lease components are generally accounted for as a single lease component, while variable costs, such as common area maintenance expenses and property taxes, are expensed as incurred.

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The following table summarizes the Company's operating leases at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


		September 30, 2022			December 31, 2021				March 31, 2023			December 31, 2022
Operating lease ROU assets	Operating lease ROU assets	$	9,474		$	10,515		Operating lease ROU assets	$	9,065		$	9,270
Operating lease ROU liabilities	Operating lease ROU liabilities	10,134			11,119			Operating lease ROU liabilities	9,794			9,976
Weighted-average remaining lease term (in years)	Weighted-average remaining lease term (in years)	14.4			14.6			Weighted-average remaining lease term (in years)	14.2			14.3
Weighted-average discount rate	Weighted-average discount rate	4.1		%	4.1		%	Weighted-average discount rate	4.1		%	4.1		%

The following table presents information related to the Company's operating leases for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:


		Three Months Ended				Nine Months Ended					Three Months Ended
		September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021				March 31, 2023		March 31, 2022
Cash paid for operating lease liabilities	Cash paid for operating lease liabilities	$	300	$	331	$	889	$	947	Cash paid for operating lease liabilities		$	284	$	294
Operating lease expense	Operating lease expense	347		388		1,090		1,179		Operating lease expense		309		394

The following table presents expected future maturities of the Company's lease liabilities as of ~~September 30, 2022:~~March 31, 2023:


Remainder of 2022		$	260
2023	2023	1,153		2023	$	870
2024	2024	1,179		2024	1,179
2025	2025	1,201		2025	1,201
2026	2026	1,233		2026	1,233
2027				2027	1,267
Thereafter	Thereafter	9,455		Thereafter	8,187
		14,481			13,937
Less: imputed interest	Less: imputed interest	4,347		Less: imputed interest	4,143
Total lease liabilities	Total lease liabilities	$	10,134	Total lease liabilities	$	9,794

NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS

At ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ goodwill was $18.7 million. No impairment charges were recorded in the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~September 30, 2021.~~March 31, 2022.

Goodwill is not amortized but is reviewed for potential impairment on at least an annual basis, with testing between annual tests if an event occurs or circumstances change that could potentially reduce the fair value of a reporting unit.

The Company conducted its last annual goodwill impairment test as of November 30, ~~2021~~2022 using generally accepted valuation methods. As a result of that impairment test, no goodwill impairment was identified. ~~No changes occurred~~During the three months ended March 31, 2023, the market was impacted by the economic uncertainty resulting from recent banking industry events, which caused the Company's stock price and market capitalization to decline. The Company performed a qualitative assessment which indicated that ~~would impact~~it was more likely than not that the ~~results of that analysis through September 30, 2022.~~fair value exceeded its carrying value, resulting in no impairment charge for the three months ended March 31, 2023. Management will continue to evaluate the economic conditions for any potential applicable changes.

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The following table presents changes in and components of other intangible assets for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Beginning of period $ 3,610 $ 4,800 $ 4,183 $ 5,458
Amortization expense (272) (314) (845) (972)
Balance, end of period $ 3,338 $ 4,486 $ 3,338 $ 4,486

2022. No impairment charges were recorded inon other intangible assets during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~September 30, 2021.~~March 31, 2022.


	Three Months Ended March 31,
		2023		2022
Beginning of period		$	3,078	$	4,183



Amortization expense		(250)		(292)

Balance, end of period		$	2,828	$	3,891

The following table presents the components of other identifiable intangible assets at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:
September 30, 2022 December 31, 2021
Gross Amount Accumulated
Amortization Gross Amount Accumulated
Amortization
Amortized intangible assets:
Core deposit intangibles $ 8,390 $ 5,052 $ 8,390 $ 4,208
Other customer relationship intangibles 25 25 25 24
Total $ 8,415 $ 5,077 $ 8,415 $ 4,232


	March 31, 2023				December 31, 2022
	Gross Amount		Accumulated Amortization		Gross Amount		Accumulated Amortization
Amortized intangible assets:
Core deposit intangibles	$	8,390	$	5,562	$	8,390	$	5,312
Other customer relationship intangibles	—		—		25		25

Total	$	8,390	$	5,562	$	8,415	$	5,337

The following table presents future estimated aggregate amortization expense for other identifiable intangible assets ~~remaining~~ at ~~September 30, 2022:~~March 31, 2023:


Remainder of 2022		$	260
2023	2023	935		2023	$	685
2024	2024	766		2024	766
2025	2025	596		2025	596
2026	2026	427		2026	427
2027				2027	258
Thereafter	Thereafter	354		Thereafter	96
		$	3,338		$	2,828

NOTE 6. SHARE-BASED COMPENSATION PLANS

The Company maintains share-based compensation plans under the shareholder-approved 2011 Plan. The purpose of the share-based compensation plans is to provide officers, employees, and non-employee members of the Board of Directors of the Company with additional incentive to further the success of the Company. At the Company's 2022 Annual Meeting of Shareholders held on April 26, 2022, the Company's shareholders approved an amendment to the 2011 Plan increasing the number of shares available for issuance under the 2011 Plan by 400,000. At September 30, 2022,March 31, 2023, 1,281,920 shares of the common stock of the Company were reserved, of which ~~530,211~~413,800 shares are available to be issued.

The 2011 Plan incentive awards may consist of grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, deferred stock units and performance shares. All employees and members of the Board of Directors of the Company and its subsidiaries are eligible to participate in the 2011 Plan. The 2011 Plan allows for the Compensation Committee of the Board of Directors to determine the type of incentive to be awarded, its term, manner of exercise, vesting and restrictions on shares. Generally, awards are nonqualified under the IRC, unless the awards are deemed to be incentive awards to employees at the Compensation Committee’s discretion.

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The following table presents a summary of nonvested restricted shares activity for the ~~nine~~three months ended ~~September 30, 2022:~~March 31, 2023:


		Shares	Weighted Average Grant Date Fair Value			Shares	Weighted Average Grant Date Fair Value
Nonvested shares, beginning of year	Nonvested shares, beginning of year	274,697	$	20.05	Nonvested shares, beginning of year	284,909	$	22.35
Granted	Granted	144,849	24.95		Granted	138,001	23.92
Forfeited	Forfeited	(26,290)	21.40		Forfeited	(14,774)	21.68
Vested	Vested	(79,681)	19.74		Vested	(85,321)	22.10
Nonvested shares, at period end	Nonvested shares, at period end	313,575	$	22.28	Nonvested shares, at period end	322,815	$	23.11

The following table presents restricted share compensation expense, with tax benefit information, and fair value of shares vested, for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2022		2021		2022		2021				2023		2022
Restricted share award expense	Restricted share award expense	$	602	$	468	$	1,461	$	1,380	Restricted share award expense		$	616	$	330
Restricted share award tax benefit	Restricted share award tax benefit	126		98		307		316		Restricted share award tax benefit		129		69
Fair value of shares vested	Fair value of shares vested	71		—		1,935		1,539		Fair value of shares vested		2,037		1,324

The unrecognized compensation expense related to the share awards totaled ~~$3.7~~$5.2 million at ~~September 30, 2022~~March 31, 2023 and ~~$2.3~~$4.6 million at December 31, ~~2021.~~2022. The unrecognized compensation expense at ~~September 30, 2022~~March 31, 2023 is expected to be recognized over a weighted-average period of ~~1.9~~2.3 years.

The Company maintains an employee stock purchase plan to provide ~~its~~ employees of the Company with an opportunity to purchase Company common stock. Eligible employees may purchase shares in an amount that does not exceed the lesser of the IRS limit of $25,000 or 10% of their annual salary at the lower of 95% of the fair market value of the shares on the semi-annual offering date, or related purchase date. The purchases occur in March and September of each year. The Company reserved 350,000 shares of its common stock to be issued under the employee stock purchase ~~plan, of which 143,373~~plan. At March 31, 2023, 142,592 shares were available to be ~~issued at September 30, 2022.~~issued.

The following table presents information for the employee stock purchase plan for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:


		Three months ended September 30,				Nine months ended September 30,					Three months ended March 31,
		2022		2021		2022		2021				2023		2022
Shares purchased	Shares purchased	4,154		3,271		8,107		8,755		Shares purchased		3,003		3,953
Weighted average price of shares purchased	Weighted average price of shares purchased	$	22.60	$	19.16	$	22.53	$	15.58	Weighted average price of shares purchased		$	21.85	$	22.46
Compensation expense recognized	Compensation expense recognized	13		15		21		48		Compensation expense recognized		3		8

The Company issues new shares or treasury shares, depending on market conditions, in its share-based compensation plans.

NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. ~~Derivative~~The Company's derivative financial instruments ~~may be~~are used as risk management tools by the Company to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investment securities and borrowings and are not used for trading or speculative purposes.

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate swaps and interest rate caps

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as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company, however, discontinues cash flow hedge accounting if it is probable the forecasted hedged transactions will not occur in the initially identified time period due to ~~circumstances, such as the impact of~~

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~~the COVID-19 pandemic.~~circumstances. Upon discontinuance, the associated gains and losses deferred in AOCI are reclassified immediately into earnings and subsequent changes in the fair value of the cash flow hedge are recognized in earnings. ~~During the three~~At March 31, 2023 and ~~nine months ended September 30,~~December 31, 2022, the Company ~~entered into~~had two interest rate swaps designated as hedging instruments with a total notional value of $100.0 million for the purpose of hedging the variable cash flows of selected AFS securities or loans. The Company ~~had no~~did not enter into any new interest rate swaps ~~designated~~designed as a hedging ~~instrument at December~~instruments during the three months ended March 31, ~~2021.~~2023.

The Company enters into interest rate swaps agreements that allow its commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. In addition, the Company may enter into interest rate caps that allow its commercial loan customers to gain protection against significant interest rate increases and provide a limited on the variable interest rate. The Company then enters into a corresponding swap or cap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps and interest rate caps with both the customers and third parties are not designated as hedges and are marked through earnings. At ~~September 30, 2022,~~March 31, 2023, the Company had 2125 customer and 2125 corresponding third-party broker interest rate derivatives not designated as a hedging instrument with an aggregate notional amount of ~~$206.4 million. The Company had $75.8~~$269.9 million, compared to $268.8 million in notional amount of such derivative instruments at December 31, ~~2021.~~2022. The Company entered into ~~four~~zero new interest rate swaps or interest rate caps with its commercial loan customers and recognized swap fee income of ~~$197 thousand~~zero during the three months ended ~~September 30, 2022~~March 31, 2023 compared to ~~one~~two new interest rate ~~swap~~swaps that resulted in swap fee income of ~~$67~~$953 thousand during the three months ended ~~September 30, 2021. During the nine months ended September 30,~~March 31, 2022, ~~and 2021, the Company recognized swap fee income of $1.9 million from nine new interest rate swaps and $135 thousand from two new interest rate swaps, respectively,~~ which are included in noninterest income in the unaudited condensed consolidated statements of income.

At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company had cash collateral of ~~$5.8~~$3.5 million and ~~$260 thousand~~$5.4 million with the third parties for certain of these derivatives, respectively. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company ~~was holding~~received cash collateral of ~~$9.8~~$5.9 million and ~~$490 thousand~~$8.5 million from ~~the third parties~~a counterparty for ~~certain of~~ these derivatives, respectively.

The Company also may enter into risk participation agreements with a financial institution counterparty for an interest rate derivative contract related to a loan in which the Company may be a participant or the agent bank. The risk participation agreement provides credit protection to the agent bank should the borrower fail to perform on its interest rate derivative contracts with the agent bank. The Company manages its credit risk on the risk participation agreement by monitoring the creditworthiness of the borrower, which ~~follows~~is based on the same credit review process as though the Company had entered into the derivative instruments ~~entered into~~ directly with the borrower. The notional amount of such risk participation agreement reflects the Company’s pro-rata share of the derivative instrument, consistent with its share of the related participated loan. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Company had a risk participation agreements with sold protection with a notional value of ~~$15.9~~$29.2 million ~~for both periods,~~ and $29.0 million, respectively. In addition the Company had a risk participation with purchased protection with a notional value of ~~$5.0~~$4.9 million ~~and zero~~ at ~~September 30, 2022~~both March 31, 2023 and December 31, ~~2021, respectively. For the three and nine months ended September 30, 2021, the~~2022. The Company ~~received an upfront fee of zero and $53 thousand, respectively, upon entry~~did not enter into ~~the~~any risk participation ~~agreement with sold protection, which is included in noninterest income in the unaudited condensed consolidated statements of income. There was no upfront fee on the new risk participation~~agreements during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 or 2022.

As a part of its normal residential mortgage operations, the Company will enter into an interest rate lock commitment with a potential borrower. The Company may enter into a corresponding commitment with an investor to sell that loan at a specific price shortly after origination. In accordance with FASB ASC 820, adjustments are recorded through earnings to account for the net change in fair value of these transactions for the held for sale loans. The fair value of held for sale loans can vary based on the interest rate locked with the customer and the current market interest rate at the balance sheet date.

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The following table summarizes the fair value of the Company's derivative instruments at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


		September 30, 2022					December 31, 2021						March 31, 2023					December 31, 2022
		Notional Amount		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair Value			Notional Amount		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments:	Derivatives designated as hedging instruments:											Derivatives designated as hedging instruments:

Interest rate swaps - balance sheet hedge	Interest rate swaps - balance sheet hedge	$	100,000	Other liabilities	$	(562)	$	—		$	—	Interest rate swaps - balance sheet hedge	$	100,000	Other liabilities	$	(654)	$	100,000	Other liabilities	$	(973)
Total derivatives designated as hedging instruments	Total derivatives designated as hedging instruments				$	(562)				$	—	Total derivatives designated as hedging instruments				$	(654)				$	(973)

Derivatives not designated as hedging instruments:	Derivatives not designated as hedging instruments:											Derivatives not designated as hedging instruments:
Interest rate swaps	Interest rate swaps	$	103,206	Other assets	$	10,987	$	37,915	Other assets	$	764	Interest rate swaps	$	128,963	Other assets	$	8,570	$	128,385	Other assets	$	10,437
Interest rate swaps	Interest rate swaps	103,206		Other liabilities	(10,672)		37,915		Other liabilities	(758)		Interest rate swaps	128,963		Other liabilities	(8,553)		128,385		Other liabilities	(10,262)
Risk participation - sold credit protection		15,855		Other liabilities	—		15,855		Other liabilities	(2)
Risk participation - purchased credit protection		4,966		Other assets	17		—		Not applicable	—
Purchased Options – Rate Cap												Purchased Options – Rate Cap	5,977		Other assets	19		6,000		Other assets	29
Written Options – Rate Cap												Written Options – Rate Cap	5,977		Other liabilities	(19)		6,000		Other liabilities	(29)
Risk participations - sold credit protection												Risk participations - sold credit protection	29,158		Other liabilities	(83)		29,019		Other liabilities	(69)
Risk participations - purchased credit protection												Risk participations - purchased credit protection	4,916		Other assets	19		4,941		Other assets	16
Interest rate lock commitments with customers	Interest rate lock commitments with customers	3,516		Other assets	88		16,604		Other assets	353		Interest rate lock commitments with customers	2,044		Other assets	57		1,356		Other assets	35
Forward sale commitments	Forward sale commitments	1,997		Other assets	73		8,665		Other assets	52		Forward sale commitments	1,053		Other assets	8		3,483		Other assets	140
Total derivatives not designated as hedging instruments	Total derivatives not designated as hedging instruments				$	493				$	409	Total derivatives not designated as hedging instruments				$	18				$	297

The following tables summarize the effect of the Company's derivative financial instruments on OCI and net income for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:


		Amount of Loss Recognized in OCI on Derivative				Amount of (Loss) Gain Recognized in OCI on Derivative					Amount of Gain Recognized in OCI on Derivative
		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021				2023		2022
Derivatives in cash flow hedging relationships:	Derivatives in cash flow hedging relationships:									Derivatives in cash flow hedging relationships:
Interest rate products	Interest rate products	$	(562)	$	(183)	$	(562)	$	473	Interest rate products		$	319	$	—
Total	Total	$	(562)	$	(183)	$	(562)	$	473	Total		$	319	$	—


		Amount of Loss Reclassified from AOCI into Income				Amount of Loss Reclassified from AOCI into Income				Location of Loss Recognized from AOCI into Income		Amount of Loss Reclassified from AOCI into Income			Location of Loss Recognized from AOCI into Income
		Three Months Ended September 30,				Nine Months Ended September 30,						Three Months Ended March 31,
		2022		2021		2022		2021					2023		2022
Derivatives in cash flow hedging relationships:	Derivatives in cash flow hedging relationships:										Derivatives in cash flow hedging relationships:
Interest rate products	Interest rate products	$	—	$	(581)	$	—	$	(757)	Interest Income (1) / Interest Expense (2)	Interest rate products		$	—	$	—	Interest income
Total	Total	$	—	$	(581)	$	—	$	(757)		Total		$	—	$	—

~~(1)~~ ~~For interest rate swaps designated as cash flow hedges entered into during the~~ ~~three and nine~~ ~~months ended~~ ~~September 30, 2022, the amount of loss reclassified from AOCI~~ ~~will be recorded to other income in the~~ ~~unaudited condensed consolidated statements of income~~.

~~(2)~~ ~~During the~~ ~~three and nine~~ months ended September 30, 2021, the Company terminated its interest rate swap designated as a hedging instrument with a notional value of $50.0 million. The Company recorded a $514 thousand loss in other operating expenses in the unaudited condensed consolidated statements of income.


	Amount of (Loss) Gain Recognized in Income			Location of Gain (Loss) Recognized in Income
	Three Months Ended March 31,
		2023		2022
Derivatives not designated as hedging instruments:
Interest rate products		$	(159)	$	37	Other operating expenses
Risk participation agreements		(10)		2		Other operating expenses
Interest rate lock commitments with customers		22		(53)		Mortgage banking activities
Forward sale commitments		(132)		300		Mortgage banking activities
Total		$	(279)	$	286

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Amount of (Loss) Gain Recognized in Income Amount of Gain (Loss) Recognized in Income Location of Gain (Loss) Recognized in Income
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
Derivatives not designated as hedging instruments:
Interest rate products $ 179 $ 8 $ 309 $ 44 Other operating expenses
Risk participation agreements (11) 1 19 (3) Other operating expenses
Interest rate lock commitments with customers (99) 89 (265) (128) Mortgage banking activities
Forward sale commitments (610) 1 21 84 Mortgage banking activities
Total $ (540) $ 99 $ 84 $ (3)

The following table is a summary of components for interest rate swaps designated as ~~cash flow hedges~~hedging instruments at ~~September 30, 2022.~~March 31, 2023 and December 31, 2022. At ~~September 30,~~March 31, 2023 and December 31, 2022, the Company had two interest rate derivatives designated as ~~cash flow~~ hedges instruments with a total notional value of $100.0 million.


	~~September 30, 2022~~
~~Weighted average pay rate~~	~~2.86~~	%
~~Weighted average receive rate~~	~~3.81~~	%
~~Weighted average maturity in years~~	~~1.5~~


	March 31, 2023		December 31, 2022
Weighted average pay rate	4.56	%	3.81	%
Weighted average receive rate	3.81	%	3.81	%
Weighted average maturity in years	1.0		1.2

NOTE 8. SHORT-TERM BORROWINGS

The Company has short-term borrowing capability from the FHLB, federal funds purchased and the FRB discount window. The following table summarizes these short-term borrowings at March 31, 2023 and December 31, 2022:


	March 31, 2023			December 31, 2022
Balance at year-end	$	120,984		$	104,684
Weighted average interest rate at year-end	5.12		%	4.45		%
Average balance during the year	$	83,919		$	13,846
Average interest rate during the year	4.94		%	3.97		%
Maximum month-end balance during the year	$	120,984		$	104,684

NOTE 9. LONG-TERM DEBT

The following table presents components of the Company’s long-term debt at March 31, 2023 and December 31, 2022:


	Amount				Weighted Average Rate
	March 31, 2023		December 31, 2022		March 31, 2023		December 31, 2022
FHLB fixed rate advances maturing:
2025	$	15,000	$	—	4.57	%	—	%
2028	25,000		—		3.98	%	—	%

	40,000		—		4.20	%	—	%
Total FHLB amortizing advance requiring monthly principal and interest payments, maturing:
2025	$	1,341	$	1,455	4.74	%	4.74	%


Total FHLB Advances	$	41,341	$	1,455	4.22	%	4.74	%

The Bank is a member of the FHLB of Pittsburgh and has access to the FHLB program of overnight and term advances. Under terms of a blanket collateral agreement for advances, lines and letters of credit from the FHLB, collateral for all outstanding advances, lines and letters of credit consisted of 1-4 family mortgage loans and other real estate secured loans totaling $1.1 billion at March 31, 2023. The Bank had additional availability of $903.5 million at the FHLB on March 31, 2023 based on its qualifying collateral, net of short-term borrowings and long-term debt detailed above, deposit letters of credit totaling $1.0 million and non-deposit letters of credit totaling $440 thousand at March 31, 2023.

At March 31, 2023 and December 31, 2022, the Company had availability under FHLB lines totaling $53.2 million and $45.3 million, respectively.

The Bank has available unsecured lines of credit, with interest based on the daily Federal Funds rate, with two correspondent banks totaling $30.0 million, at March 31, 2023 and December 31, 2022. There were no borrowings under these lines of credit at March 31, 2023and December 31, 2022.

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NOTE 8.10. SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Under the Basel Committee on Banking Supervision's capital guidelines for U.S. Banks ("Basel III rules"), an entity must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The Company and the Bank have elected not to include net unrealized gains or losses included in AOCI in computing regulatory capital.

On January 1, 2023, the Company adopted ASU No. 2016-13, which replaced the existing incurred loss model for recognizing credit losses with an expected loss model referred to as the CECL model, and resulted in a reduction to opening retained earnings, net of income tax, and an increase to the allowance for credit losses for loans of approximately $2.4 million and allowance for credit losses for off-balance sheet exposures of $100 thousand, which combined totals $2.5 million. The federal bank regulatory agencies issued a rule, which provided for the option to elect a three-year transition provision of the day-one impact of the CECL model beginning with regulatory capital at March 31, 2023. The Company elected the transition relief and application of the three-year phase in option.

The consolidated asset limit on small bank holding companies is $3.0 billion and a company with assets under that limit is not subject to the FRB consolidated capital rules, but may file reports that include capital amounts and ratios. The Company has elected to file those ~~reports.~~reports prior to exceeding the asset threshold.

Management believes that the Company and the Bank met all capital adequacy requirements to which they are subject at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.

Prompt corrective action regulations provide five classifications: ~~well capitalized,~~well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At ~~September 30, 2022,~~March 31, 2023, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's classification.

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The following table presents capital amounts and ratios at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:

Actual For Capital Adequacy Purposes
(includes applicable capital conservation buffer) To Be Well
Capitalized Under
Prompt Corrective Action Provisions
Amount Ratio Amount Ratio Amount Ratio
September 30, 2022
Total risk-based capital:
Orrstown Financial Services, Inc. $ 295,961 12.7 % $ 243,886 10.5 % n/a n/a
Orrstown Bank 298,755 12.9 % 243,078 10.5 % $ 231,503 10.0 %
Tier 1 risk-based capital:
Orrstown Financial Services, Inc. 237,609 10.2 % 197,431 8.5 % n/a n/a
Orrstown Bank 272,413 11.8 % 196,777 8.5 % 185,202 8.0 %
Tier 1 common equity risk-based capital:
Orrstown Financial Services, Inc. 237,609 10.2 % 162,591 7.0 % n/a n/a
Orrstown Bank 272,413 11.8 % 162,052 7.0 % 150,477 6.5 %
Tier 1 leverage capital:
Orrstown Financial Services, Inc. 237,609 8.4 % 113,077 4.0 % n/a n/a
Orrstown Bank 272,413 9.6 % 113,105 4.0 % 141,381 5.0 %
December 31, 2021
Total risk-based capital:
Orrstown Financial Services, Inc. $ 297,823 15.0 % $ 208,617 10.5 % n/a n/a
Orrstown Bank 278,780 14.0 % 208,550 10.5 % $ 198,619 10.0 %
Tier 1 risk-based capital:
Orrstown Financial Services, Inc. 243,075 12.2 % 168,880 8.5 % n/a n/a
Orrstown Bank 255,995 12.9 % 168,826 8.5 % 158,895 8.0 %
Tier 1 common equity risk-based capital:
Orrstown Financial Services, Inc. 243,075 12.2 % 139,078 7.0 % n/a n/a
Orrstown Bank 255,995 12.9 % 139,033 7.0 % 129,102 6.5 %
Tier 1 leverage capital:
Orrstown Financial Services, Inc. 243,075 8.5 % 114,384 4.0 % n/a n/a
Orrstown Bank 255,995 8.9 % 114,470 4.0 % 143,087 5.0 %


	Actual				For Capital Adequacy Purposes (includes applicable capital conservation buffer)				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2023
Total risk-based capital:
Orrstown Financial Services, Inc.	$	312,080	12.8	%	$	255,101	10.5	%	n/a		n/a
Orrstown Bank	300,391		12.4	%	255,021		10.5	%	$	242,878	10.0	%
Tier 1 risk-based capital:
Orrstown Financial Services, Inc.	251,849		10.4	%	206,511		8.5	%	n/a		n/a
Orrstown Bank	272,202		11.2	%	206,446		8.5	%	194,302		8.0	%
Tier 1 common equity risk-based capital:
Orrstown Financial Services, Inc.	251,849		10.4	%	170,068		7.0	%	n/a		n/a
Orrstown Bank	272,202		11.2	%	170,014		7.0	%	157,870		6.5	%
Tier 1 leverage capital:
Orrstown Financial Services, Inc.	251,849		8.5	%	118,281		4.0	%	n/a		n/a
Orrstown Bank	272,202		9.2	%	118,141		4.0	%	147,676		5.0	%
December 31, 2022
Total risk-based capital:
Orrstown Financial Services, Inc.	$	304,589	12.7	%	$	250,939	10.5	%	n/a		n/a
Orrstown Bank	292,933		12.3	%	250,566		10.5	%	$	238,634	10.0	%
Tier 1 risk-based capital:
Orrstown Financial Services, Inc.	245,752		10.3	%	203,141		8.5	%	n/a		n/a
Orrstown Bank	266,122		11.2	%	202,839		8.5	%	190,907		8.0	%
Tier 1 common equity risk-based capital:
Orrstown Financial Services, Inc.	245,752		10.3	%	167,293		7.0	%	n/a		n/a
Orrstown Bank	266,122		11.2	%	167,044		7.0	%	155,112		6.5	%
Tier 1 leverage capital:
Orrstown Financial Services, Inc.	245,752		8.5	%	116,325		4.0	%	n/a		n/a
Orrstown Bank	266,122		9.2	%	116,219		4.0	%	145,273		5.0	%

The Company maintains a stockholder dividend reinvestment and stock purchase plan. Under the plan, shareholders may purchase additional shares of the Company’s common stock at the prevailing market prices with reinvested dividends and voluntary cash payments. The Company reserved 1,045,000 shares of its common stock to be issued under the dividend reinvestment and stock purchase plan. At March 31, 2023, approximately 665,000 shares were available to be issued under the plan.

In September 2015, the Board of Directors of the Company authorized a share repurchase program ~~under~~pursuant to which the Company ~~may~~could repurchase up to 5%416,000 shares of the Company's outstanding shares of common stock, ~~or approximately 416,000 shares,~~ in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Exchange ~~Act.~~Act, as amended. On April 19, 2021, the Board of Directors authorized the additional ~~future~~ repurchase of up to 562,000 shares of its outstanding common ~~stock.~~stock for a total of 978,000 shares. When and if appropriate, repurchases may be made in the open market or privately negotiated transactions, depending on market conditions, regulatory requirements and other corporate considerations, as determined by management. Share repurchases may not occur and may be discontinued at any time. For the three months ended March 31, 2023, the Company repurchased 54,262 shares of its common stock at an average price of $21.65 per share. At ~~September 30, 2022, 824,798~~March 31, 2023, 873,203 shares had been repurchased at a total cost of ~~$18.8~~$19.8 million, or ~~$22.79~~$22.71 per share. Common stock available for future repurchase totals ~~153,202~~104,797 shares, or 1%, of the Company's outstanding common stock at ~~September 30, 2022.~~

~~On October 17, 2022, the Board of Directors declared a cash dividend of $0.19 per common share, which will be paid on November 7, 2022 to shareholders of record at October~~March 31, ~~2022.~~2023.

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On April 25, 2023, the Board of Directors declared a cash dividend of $0.20 per common share, which will be paid on May 16, 2023 to shareholders of record at May 9, 2023.

NOTE ~~9. (LOSS)~~11. EARNINGS PER SHARE

The following table presents ~~(loss)~~ earnings per share for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022:


	Three Months Ended March 31,
(shares presented in the table are in thousands)		2023		2022
Net income		$	9,156	$	8,368
Weighted average shares outstanding - basic		10,385		10,860
Dilutive effect of share-based compensation		111		147
Weighted average shares outstanding - diluted		10,496		11,007
Per share information:
Basic earnings per share		$	0.88	$	0.77
Diluted earnings per share		0.87		0.76

For the three months ended March 31, 2023 and 2022, ~~and 2021:~~

Three Months Ended September 30, Nine Months Ended September 30,
(shares presented in the table are in thousands) 2022 2021 2022 2021
Net (loss) income $ (4,828) $ 7,192 $ 12,411 $ 26,175
Weighted average shares outstanding - basic 10,369 10,979 10,611 10,976
Dilutive effect of share-based compensation — 143 147 127
Weighted average shares outstanding - diluted 10,369 11,122 10,758 11,103
Per share information:
Basic (loss) earnings per share $ (0.47) $ 0.66 $ 1.17 $ 2.38
Diluted (loss) earnings per share (0.47) 0.65 1.16 2.36

~~Average~~there were average outstanding restricted award shares totaling ~~1,000~~5,513 and ~~zero for the three months ended September 30, 2022 and 2021,~~112,223, respectively, ~~and 39,219 and zero for the nine months ended September 30, 2022 and 2021, respectively, were~~ excluded from the computation of earnings per share because the effect was ~~antidilutive.~~antidilutive, as the exercise price exceeded the average market price. The dilutive effect of share-based compensation in each period above relates principally to restricted stock awards.

NOTE ~~10.~~12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its clients. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the unaudited condensed consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The following table presents these contractual, or notional, ~~amounts:~~amounts at March 31, 2023 and December 31, 2022.


		Contractual or Notional Amount					Contractual or Notional Amount
		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Commitments to fund:	Commitments to fund:					Commitments to fund:
Home equity lines of credit	Home equity lines of credit	$	292,369	$	261,580	Home equity lines of credit	$	306,391	$	296,213
1-4 family residential construction loans	1-4 family residential construction loans	66,101		40,348		1-4 family residential construction loans	41,464		49,538
Commercial real estate, construction and land development loans	Commercial real estate, construction and land development loans	162,947		124,488		Commercial real estate, construction and land development loans	153,237		156,560
Commercial, industrial and other loans	Commercial, industrial and other loans	301,154		378,996		Commercial, industrial and other loans	351,798		338,286
Standby letters of credit	Standby letters of credit	24,407		19,724		Standby letters of credit	24,109		23,229

Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each client’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the client. Collateral varies but may include accounts receivable, inventory, equipment, residential real estate, and income-producing commercial properties.

Standby letters of credit and financial guarantees written are conditional commitments issued by the Company to guarantee the performance of a client to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to clients. The Company holds collateral supporting those commitments when deemed necessary by management. The

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liability at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 for guarantees under standby letters of credit issued was not considered to be material.

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The Company maintains a reserve on its off-balance sheet credit exposures, which totaled approximately $1.7 million and $1.6 million at March 31, 2023 and December 31, 2022, respectively, and is recorded in other liabilities on the unaudited condensed consolidated balance sheets. On January 1, 2023, the Company adopted CECL and recorded a day-one adjustment, which increased the allowance for credit losses for off-balance sheet credit exposures by $100 thousand. The reserve is based on management's estimate of expected losses in its off-balance sheet credit exposures. The reserve specific to unfunded loan commitments is determined by applying utilization assumptions based on historical experience and applying the expected loss rates by loan class. Following adoption of CECL, the change in the reserve for off-balance sheet credit exposures is recorded as a provision or reduction to expense through the provision for credit losses in the consolidated statements of income. The Company did not record expense or a reduction to provision for credit losses for the three months ended March 31, 2023. Prior to January 1, 2023, the Company maintained the reserve based on historical loss experience of the related loan class and utilization assumptions, for off-balance sheet credit exposures that currently are not ~~funded,~~funded. For the three months ended March 31, 2022, the Company recorded provision expense of $28 thousand to other non-interest expense in ~~other liabilities on~~ the unaudited condensed consolidated ~~balance sheets. This~~statements of income associated with its reserve ~~totaled approximately $1.6 million at both September 30, 2022 and December 31, 2021.~~for off-balance sheet credit exposures.

NOTE ~~11.~~13. FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are:

Level 1 – quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date.

Level 2 – significant other observable inputs other than Level 1 prices such as prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – at least one significant unobservable input that reflects a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The Company used the following methods and significant assumptions to estimate fair value for instruments measured on a recurring basis:

Where quoted prices are available in an active market, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, investment securities are classified within Level 2 and fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flow. Level 2 investment securities include U.S. agency securities, MBS, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy. The Company’s investment securities are classified as ~~available for sale.~~available-for-sale.

The fair values of interest rate swaps and risk participation derivatives are determined using models that incorporate readily observable market data into a market standard methodology. This methodology nets the discounted future cash receipts and the discounted expected cash payments. The discounted variable cash receipts and payments are based on expectations of

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future interest rates derived from observable market interest rate curves. In addition, fair value is adjusted for the effect of nonperformance risk by incorporating credit valuation adjustments for the Company and its counterparties. These assets and liabilities are classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.

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The following table summarizes assets and liabilities measured at fair value on a recurring basis at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


		Level 1		Level 2		Level 3		Total Fair Value Measurements			Level 1		Level 2		Level 3		Total Fair Value Measurements
September 30, 2022
March 31, 2023										March 31, 2023
Financial Assets	Financial Assets									Financial Assets
Investment securities:	Investment securities:									Investment securities:
U.S. Treasury securities	U.S. Treasury securities	$	17,115	$	—	$	—	$	17,115	U.S. Treasury securities	$	17,693	$	—	$	—	$	17,693
U.S. Government Agencies										U.S. Government Agencies	—		4,972		—		4,972

States and political subdivisions										States and political subdivisions	—		197,509		6,093		203,602
GSE residential MBSs										GSE residential MBSs	—		59,371		—		59,371
GSE commercial MBSs										GSE commercial MBSs	—		5,737		—		5,737
GSE residential CMOs										GSE residential CMOs	—		68,104		—		68,104

Non-agency CMOs										Non-agency CMOs	—		18,794		22,097		40,891

Asset-backed										Asset-backed	—		119,492		—		119,492
Other										Other	370		—		—		370
Loans held for sale										Loans held for sale	—		7,341		—		7,341
Derivatives										Derivatives	—		8,608		57		8,665

Totals										Totals	$	18,063	$	489,928	$	28,247	$	536,238
Financial Liabilities										Financial Liabilities
Derivatives										Derivatives	$	—	$	9,309	$	—	$	9,309

December 31, 2022										December 31, 2022
Financial Assets										Financial Assets
Investment securities:										Investment securities:
U.S. Treasury securities										U.S. Treasury securities	$	17,291	$	—	$	—	$	17,291
U.S. Government Agencies										U.S. Government Agencies	—		5,135		—		5,135

States and political subdivisions	States and political subdivisions	—		214,207		5,829		220,036		States and political subdivisions	—		191,488		5,926		197,414
GSE residential MBSs	GSE residential MBSs	—		59,203		—		59,203		GSE residential MBSs	—		59,402		—		59,402
GSE residential CMOs	GSE residential CMOs	—		64,150		—		64,150		GSE residential CMOs	—		68,378		—		68,378
Non-agency CMOs	Non-agency CMOs	—		28,972		—		28,972		Non-agency CMOs	—		18,491		21,267		39,758

Asset-backed	Asset-backed	—		113,735		—		113,735		Asset-backed	—		125,973		—		125,973
Other	Other	385		—		—		385		Other	377		—		—		377
Loans held for sale	Loans held for sale	—		10,175		—		10,175		Loans held for sale	—		10,880		—		10,880
Derivatives	Derivatives	—		11,004		88		11,092		Derivatives	—		10,482		35		10,517

Totals	Totals	$	17,500	$	501,446	$	5,917	$	524,863	Totals	$	17,668	$	490,229	$	27,228	$	535,125
Financial Liabilities	Financial Liabilities									Financial Liabilities
Derivatives	Derivatives	$	—	$	11,234	$	—	$	11,234	Derivatives	$	—	$	11,333	$	—	$	11,333

December 31, 2021
Financial Assets
Investment securities:
U.S. Treasury securities		$	19,702	$	—	$	—	$	19,702

States and political subdivisions		—		183,171		10,199		193,370
GSE residential MBSs		—		40,726		—		40,726
GSE residential CMOs		—		65,922		—		65,922
Non-agency CMOs		—		16,750		12,948		29,698

Asset-backed		—		122,621		—		122,621
Other		399		—		—		399
Loans held for sale		—		8,868		—		8,868
Derivatives		—		764		353		1,117

Totals		$	20,101	$	438,822	$	23,500	$	482,423
Financial Liabilities
Derivatives		$	—	$	760	$	—	$	760

The Company had one municipal bond and three CMOs measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at ~~September 30,~~both March 31, 2023 and December 31, 2022 ~~and~~compared to one municipal bond and one ~~non-agency~~ CMO ~~measured~~ at ~~fair value on a recurring basis using significant unobservable inputs (Level 3) at December~~March 31, ~~2021. During the nine months ended September 30, 2022, the non-agency CMO security was called by the issuer.~~2022. The Level 3 valuation is based on a non-executable broker quote, which is considered a significant unobservable input. Such quotes are updated as available and may remain constant for a period of time for certain broker-quoted securities that do not move with the market or that are not interest rate sensitive as a result of their structure or overall attributes.

The Company’s residential mortgage LHFS are recorded at fair value utilizing Level 2 measurements. This fair value measurement is determined based upon third party quotes obtained on similar loans. For ~~LHFS,~~loans held-for-sale, for which the fair

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value option has been elected, the aggregate fair value declined below the aggregate principal balance by $867 thousand and $1.2 million as of ~~September 30, 2022,~~March 31, 2023, and ~~exceeded the aggregate principal balance by $150 thousand as of~~ December 31, ~~2021.~~2022, respectively.

The determination of the fair value of interest rate lock commitments on residential mortgages is based on agreed upon pricing with the respective investor on each loan and includes a pull through percentage. The pull through percentage represents an estimate of loans in the pipeline to be delivered to an investor versus the total loans committed for delivery. Significant

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changes in this input could result in a significantly higher or lower fair value measurement. As the pull through percentage is a significant unobservable input, this is deemed a Level 3 valuation input. The average pull through percentage, which is based upon historical experience, was ~~91%~~92% as of ~~September 30, 2022.~~March 31, 2023. An increase or decrease of 5% in the pull through assumption would result in a positive or negative change of $1$4 thousand in the fair value of interest rate lock commitments at ~~September 30, 2022.~~March 31, 2023.

The following provides details of the Level 3 fair value measurement activity for the periods ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:

Investment securities:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021				2023		2022
Balance, beginning of period	Balance, beginning of period	$	6,255	$	24,925	$	23,147	$	31,503	Balance, beginning of period		$	27,193	$	23,147

Unrealized (losses) gains included in OCI		(422)		(964)		(2,002)		467

Net (premium amortization) discount accretion		(4)		—		62		—
Unrealized gains (losses) included in OCI										Unrealized gains (losses) included in OCI		220		(1,360)
Purchases										Purchases		871		—
Net discount accretion										Net discount accretion		13		71
Principal payments and other	Principal payments and other	—		(487)		—		(4,951)		Principal payments and other		(107)		—
Sales	Sales	—		—		(3,053)		(3,545)		Sales		—		(3,053)
Calls		—		—		(12,154)		—

OTTI	OTTI	—		—		(171)		—		OTTI		—		(171)
Balance, end of period	Balance, end of period	$	5,829	$	23,474	$	5,829	$	23,474	Balance, end of period		$	28,190	$	18,634

Interest rate lock commitments on residential mortgages:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended March 31,
		2022		2021		2022		2021				2023		2022
Balance, beginning of period	Balance, beginning of period	$	186	$	456	$	353	$	673	Balance, beginning of period		$	35	$	353

Total (losses) gains included in earnings		(98)		90		(265)		(127)
Total gains (losses) included in earnings										Total gains (losses) included in earnings		22		(53)

Balance, end of period	Balance, end of period	$	88	$	546	$	88	$	546	Balance, end of period		$	57	$	300

Certain financial assets are measured at fair value on a nonrecurring basis. Adjustments to the fair value of these assets usually results from the application of lower of cost or market accounting or write-downs of individual assets. The Company used the following methods and significant assumptions to estimate fair value for these financial assets.

~~Impaired~~Individually Evaluated Loans

~~Loans~~Upon adoption of CECL, loans individually evaluated for credit expected losses included nonaccrual loans and other loans that do not share similar risk characteristics to loans in the CECL loan pools, which have been classified as Level 3. Individually evaluated loans with an allocation to the ACL are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for credit losses on the unaudited condensed consolidated statements of income. Prior to the adoption of CECL and ASU No. 2022-02, which eliminated the TDR accounting model, loans were designated as impaired when, in the judgment of management and based on current information and events, it is probable that all amounts due, according to the contractual terms of the loan agreement, will not be collected.

The measurement of loss associated with ~~impaired~~ loans evaluated individually for all loan classes ~~can be~~was based on either the observable market price of the loan, the fair value of the collateral, or discounted cash ~~flows using the rate of return implicit in the original loan for TDRs.~~flows. For collateral-dependent loans, fair value iswas measured based on the value of the collateral securing the loan, less estimated costs to sell. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The value of the real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction, or if management adjusts the appraisal value, then the fair value is considered Level 3.

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The value of business equipment is based upon an outside appraisal, if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3). Impaired loans with an allocation to the ALL are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the unaudited condensed consolidated statements of income.

~~Any changes~~Changes in the fair value of ~~impaired~~individually evaluated loans still held and considered in the determination of the provision for credit losses were ~~not material~~$225 thousand and $(40) thousand for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021.~~

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respectively.

Foreclosed Real Estate

OREO property acquired through foreclosure is initially recorded at the fair value of the property at the transfer date less estimated selling cost. Subsequently, OREO is carried at the lower of its carrying value or the fair value less estimated selling cost. Fair value is usually determined based upon an independent third-party appraisal of the property or occasionally upon a recent sales offer. Subsequent declines in the fair value are recorded through a valuation allowance with a charge to the consolidated statement of income. An increase in the fair value of the property may be recognized up to the cost basis of the OREO. The Company had $85 thousand in OREO balances at March 31, 2023 for which there were no adjustments to the fair value. The Company had no OREO ~~balances~~ at ~~both September 30, 2022 and~~ December 31, ~~2021.~~2022.

Mortgage Servicing Rights

~~The MSR~~MSRs are evaluated for impairment by comparing the carrying value to the fair value, which is ~~estimated to be equal to its carrying value, unless~~determined through a discounted cash flow valuation. To the ~~quarterly valuation model calculates~~extent the ~~present value~~amortized cost of the MSRs exceeds their estimated ~~net servicing income~~fair values, a valuation allowance is ~~less than its carrying value, in which case an impairment charge is taken.~~established for such impairment. Fair value adjustments on the ~~MSR~~MSRs only ~~occur~~occurs if there is ~~impairment.~~an impairment charge. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021, an~~2022, the MSR impairment reserve ofwas zero ~~and $79 thousand, respectively, existed on the MSR portfolio.~~for both periods. For the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ impairment valuation allowance reversals of zero and ~~$43~~$32 thousand were included, respectively, in mortgage banking activities on the unaudited condensed consolidated statements of income. For the nine months ended September 30, 2022 and 2021, impairment valuation allowance reversals of $79 thousand and $695 thousand, respectively, were included in mortgage banking activities on the unaudited condensed consolidated statements of income. The ~~reversals~~reversal in the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 ~~and 2021 were~~was due to increases in market rates, which increased the MSR fair value.

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The following table summarizes assets measured at fair value on a nonrecurring basis at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:
Level 1 Level 2 Level 3 Total
Fair Value
Measurements
September 30, 2022
Impaired Loans
Commercial real estate:
Owner occupied $ — $ — $ 126 $ 126
Non-owner occupied residential — — 15 15
Residential mortgage:
First lien — — 372 372
Home equity - lines of credit — — 59 59
Total impaired loans $ — $ — $ 572 $ 572
Mortgage servicing rights $ — $ — $ — $ —
December 31, 2021
Impaired Loans
Commercial real estate:
Owner occupied $ — $ — $ 751 $ 751
Non-owner occupied residential — — 24 24
Residential mortgage:
First lien — — 545 545
Home equity - lines of credit — — 72 72
Total impaired loans $ — $ — $ 1,392 $ 1,392
Mortgage servicing rights $ — $ — $ 322 $ 322

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	Level 1		Level 2		Level 3		Total Fair Value Measurements
March 31, 2023
Individually Evaluated Loans
Commercial real estate:
Owner occupied	$	—	$	—	$	112	$	112


Non-owner occupied residential	—		—		53		53



Commercial and industrial	—		—		15		15
Residential mortgage:
First lien	—		—		287		287

Home equity - lines of credit	—		—		80		80

Total individually evaluated loans	$	—	$	—	$	547	$	547






Mortgage servicing rights	$	—	$	—	$	—	$	—

December 31, 2022
Impaired Loans
Commercial real estate:
Owner occupied	$	—	$	—	$	116	$	116


Non-owner occupied residential	—		—		9		9




Residential mortgage:
First lien	—		—		309		309

Home equity - lines of credit	—		—		86		86

Total impaired loans	$	—	$	—	$	520	$	520






Mortgage servicing rights	$	—	$	—	$	—	$	—

The following table presents additional qualitative information about assets measured on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
Fair Value
Estimate Valuation
Techniques Unobservable Input Range
September 30, 2022
Impaired loans $ 572 Appraisal of collateral Management adjustments on appraisals for property type and recent activity 10% - 25% discount
- Management adjustments for liquidation expenses 6.08% - 17.93% discount
December 31, 2021
Impaired loans $ 1,392 Appraisal of collateral Management adjustments on appraisals for property type and recent activity 10% - 25% discount
- Management adjustments for liquidation expenses 6.08% - 17.93% discount
Mortgage servicing rights $ 322 Discounted cash flows Weighted average CPR 12.60%
- Weighted average discount rate 9.03%

Fair Value
Estimate

Valuation
Techniques

Unobservable Input

Range

March 31, 2023

Individually evaluated loans

547

Appraisal of collateral

Management adjustments on appraisals for property type and recent activity

10% - 25% discount

- Management adjustments for liquidation expenses

6.08% - 19.74% discount

December 31, 2022

Impaired loans

520

Appraisal of collateral

Management adjustments on appraisals for property type and recent activity

10% - 25% discount

- Management adjustments for liquidation expenses

6.08% - 17.93% discount

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Fair values of financial instruments

GAAP requires disclosure of the fair value of financial assets and liabilities, including those that are not measured and reported at fair value on a recurring or nonrecurring basis. The following table presents carrying amounts and estimated fair values of the financial assets and liabilities at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:
Carrying
Amount Fair Value Level 1 Level 2 Level 3
September 30, 2022
Financial Assets
Cash and due from banks $ 34,481 $ 34,481 $ 34,481 $ — $ —
Interest-bearing deposits with banks 32,446 32,446 32,446 — —
Restricted investments in bank stock 6,469 n/a n/a n/a n/a
Investment securities 503,596 503,596 17,500 480,267 5,829
Loans held for sale 10,175 10,175 — 10,175 —
Loans, net of allowance for loan losses 2,063,218 1,912,225 — — 1,912,225
Derivatives 11,092 11,092 — 11,004 88
Accrued interest receivable 9,212 9,212 — 3,781 5,431
Financial Liabilities
Deposits 2,505,853 2,502,308 — 2,502,308 —
Securities sold under agreements to repurchase 21,065 21,065 — 21,065 —
FHLB advances and other borrowings 1,567 1,576 — 1,576 —
Subordinated notes 32,010 31,969 — 31,969 —
Derivatives 11,234 11,234 — 11,234 —
Accrued interest payable 650 650 — 650 —
Off-balance sheet instruments — — — — —
December 31, 2021
Financial Assets
Cash and due from banks $ 21,217 $ 21,217 $ 21,217 $ — $ —
Interest-bearing deposits with banks 187,493 187,493 187,493 — —
Restricted investments in bank stock 7,252 n/a n/a n/a n/a
Investment securities 472,438 472,438 20,101 429,190 23,147
Loans held for sale 8,868 8,868 — 8,868 —
Loans, net of allowance for loan losses 1,958,806 1,946,365 — — 1,946,365
Derivatives 1,117 1,117 — 764 353
Accrued interest receivable 8,234 8,235 — 2,203 6,032
Financial Liabilities
Deposits 2,464,929 2,466,191 — 2,466,191 —
Securities sold under agreements to repurchase 23,301 23,301 — 23,301 —
FHLB advances and other borrowings 1,896 2,035 — 2,035 —
Subordinated notes 31,963 31,815 — 31,815 —
Derivatives 760 760 — 760 —
Accrued interest payable 154 154 — 154 —
Off-balance sheet instruments — — — — —


	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
March 31, 2023
Financial Assets
Cash and due from banks	$	27,612	$	27,612	$	27,612	$	—	$	—
Interest-bearing deposits with banks	70,711		70,711		70,711		—		—

Restricted investments in bank stock	12,869		n/a		n/a		n/a		n/a
Investment securities	520,232		520,232		18,063		473,979		28,190
Loans held for sale	7,341		7,341		—		7,341		—
Loans, net of allowance for credit losses	2,179,137		2,048,188		—		—		2,048,188

Derivatives	8,665		8,665		—		8,608		57
Accrued interest receivable	10,911		10,911		—		4,055		6,856

Financial Liabilities
Deposits	2,488,109		2,483,440		—		2,483,440		—
Deposits held for assumption in connection with sale of bank branches	27,517		25,866		—		25,866		—
Securities sold under agreements to repurchase and federal funds purchased	13,989		13,989		—		13,989		—
FHLB advances and other borrowings	162,326		162,312		—		162,312		—
Subordinated notes	32,042		31,060		—		31,060		—
Derivatives	9,309		9,309		—		9,309		—
Accrued interest payable	1,394		1,394		—		1,394		—
Off-balance sheet instruments	—		—		—		—		—

December 31, 2022
Financial Assets
Cash and due from banks	$	28,477	$	28,477	$	28,477	$	—	$	—
Interest-bearing deposits with banks	32,346		32,346		32,346		—		—

Restricted investments in bank stock	10,642		n/a		n/a		n/a		n/a
Investment securities	513,728		513,728		17,668		468,867		27,193
Loans held for sale	10,880		10,880		—		10,880		—
Loans, net of allowance for loan losses	2,126,054		1,991,164		—		—		1,991,164

Derivatives	10,517		10,517		—		10,482		35
Accrued interest receivable	11,027		11,027		—		4,441		6,586

Financial Liabilities
Deposits	2,444,939		2,440,660		—		2,440,660		—
Deposits held for assumption in connection with sale of bank branches	31,307		29,429		—		29,429		—
Securities sold under agreements to repurchase	17,251		17,251		—		17,251		—
FHLB advances and other borrowings	106,139		106,141		—		106,141		—
Subordinated notes	32,026		31,321		—		31,321		—
Derivatives	11,333		11,333		—		11,333		—
Accrued interest payable	457		457		—		457		—
Off-balance sheet instruments	—		—		—		—		—

In accordance with the Company's adoption of ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, the methods utilized to measure the fair value of financial instruments at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 represent an approximation of exit price; however, an actual exit price may differ. For deposits held for assumption in connection with the sale of bank branches, the Company announced on December 23, 2022 that it had entered into a Purchase and Assumption Agreement providing for the sale of a branch and associated deposit liabilities at an agreed upon premium of 6.0% of the financial deposit balance transferred.

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NOTE ~~12.~~14. CONTINGENCIES

The nature of the Company’s business generates a certain amount of litigation involving matters arising out of the ordinary course of business. Except as described below, in the opinion of management, there are no legal proceedings that might have a material effect on the results of operations, liquidity, or the financial position of the Company at this time.

On May 25, 2012, ~~SEPTA~~the Southeastern Pennsylvania Transportation Authority (“SEPTA”) filed a putative class action complaint in the U.S. District Court for the Middle District of Pennsylvania against the Company, the Bank and nine independent current and former directors and three current and former officers (collectively, the “Orrstown Defendants”). The complaint alleged, among other things, that (i) in connection with the Company’s Registration Statement on Form S-3 dated February 23, 2010 and its Prospectus Supplement dated March 23, 2010, and (ii) during the purported class period of ~~March 24, 2010 through October 27, 2011,~~ the Company issued materially false and misleading statements regarding the Company’s lending practices and financial results, including misleading statements concerning the stringent nature of the Bank’s credit practices and underwriting standards, the quality of its loan portfolio, and the ~~intended use of the proceeds from the Company’s March 2010 public offering of common stock.~~Bank. The complaint asserted claims under Sections 11, 12(a) and 15 of the Securities Act, Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, and sought class certification, unspecified money damages, interest, costs, fees and equitable or injunctive relief. Under the Private Securities Litigation Reform Act of 1995, the Court appointed SEPTA Lead Plaintiff on August 20, 2012.

On March 4, 2013, SEPTA filed an amended complaint. The amended complaint expanded the list of defendants in the action to include the Company’s former independent registered public accounting firm ~~Smith Elliott Kearns & Company, LLC (“SEK”),~~ and the underwriters of the Company’s March 2010 public offering of common stock. In addition, among other things, the amended complaint extended the purported Exchange Act class period from March 15, 2010 through April 5, 2012.

On June 22, 2015, the Court dismissed without prejudice SEPTA’s amended complaint against all defendants, finding that SEPTA failed to state a claim under either the Securities Act, or the Exchange Act. On February 8, 2016, the Court granted SEPTA’s motion for leave to amend again and SEPTA filed its second amended complaint that same day.

On December 7, 2016, the Court issued an Order and Memorandum granting in part and denying in part defendants’ motions to dismiss SEPTA’s second amended complaint. The Court granted the motions to dismiss the Securities Act claims against all defendants, and granted the motions to dismiss the Exchange Act Section 10(b) and Rule 10b-5 claims against all defendants except Orrstown Financial Services, Inc., Orrstown Bank, Thomas R. Quinn, Jr., Bradley S. Everly, and Jeffrey W. Embly. The Court also denied the motions to dismiss the Exchange Act Section 20(a) claims against Quinn, Everly, and Embly.

~~On August 9, 2018, SEPTA filed a motion to compel the production~~After years of Confidential Supervisory Information ("CSI") of non-parties the FRB and the Pennsylvania Department of Banking and Securities, in the possession of Orrstown Bank and third parties. On August 30, 2018, the FRB filed an unopposed motion to intervene in the Action for the purpose of opposing SEPTA’s motion to compel. On February 12, 2019, the Court denied SEPTA’s motion to compel the production of CSIlitigation, on ~~the ground that SEPTA had failed to exhaust its administrative remedies.~~

On April 11, 2019, SEPTA filed a motion for leave to file a third amended complaint. The third amended complaint sought to reassert the Securities Act claims that the Court dismissed as to all defendants on December 7, 2016, when the Court granted in part and denied in part defendants’ motions to dismiss SEPTA’s second amended complaint. The third amended complaint also sought to reassert the Exchange Act claims against those defendants that the Court dismissed from the case on December 7, 2016.

On June 13, 2019, the Orrstown Defendants filed a motion for protective order to stay discovery pending resolution of SEPTA’s motion for leave to file a third amended complaint. On July 17, 2019, the Court entered an Order partially granting the Orrstown Defendants' motion for protective order, ruling that all deposition discovery in the case was stayed pending a decision on SEPTA’s motion for leave to file a third amended complaint. Party and non-party document discovery in the case has largely been completed.

On February 14, 2020, the Court issued an Order and Memorandum granting SEPTA’s motion for leave to file a third amended complaint. The third amended complaint is now the operative complaint. It reinstates the Orrstown Defendants, as well as SEK and the underwriter defendants, previously dismissed from the case on December 7, 2016. The third amended complaint also revives the previously dismissed Securities Act claim against the Orrstown Defendants, SEK, and the underwriter defendants. Defendants filed their motions to dismiss the third amended complaint on April 24, 2020. SEPTA’s opposition was filed on July 8, 2020, and Orrstown’s reply brief was filed on August 12, 2020.

On August 18, 2022, the Court issued an Order and Memorandum granting in part and denying in part the defendants’ motions to dismiss SEPTA’s third amended complaint. The Court granted in part and denied in part the motion to dismiss the

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Securities Act claims against the Orrstown Defendants; granted in part and denied in part the motion to dismiss the Securities Act claims against the underwriter defendants; granted the motion to dismiss the Exchange Act Section 10(b) and Rule 10b-5 claims against defendants Zullinger, Shoemaker, Snoke and Coy; granted in part and denied in part the motion to dismiss the Exchange Act Section 10(b) and Rule 10b-5 claims against Orrstown Financial Services, Inc., Orrstown Bank, Quinn, Everly and Embly; and denied the motion to dismiss the Securities Act and Exchange Act Section 10(b) and Rule 10b-5 claims against SEK. Also on August 18, 2022, the Court issued an Order and Memorandum granting SEPTA’s renewed motion to compel the production of CSI. The CSI was produced by the Orrstown Defendants on September 8, 2022.

On November 7, 2022, the Company, in order to avoid the cost, risks and distraction of continued litigation, entered into a Memorandum of Understanding (the “MOU”) to settle and resolve the lawsuit. The MOU ~~memorializes~~memorialized the parties’ agreement to execute and submit a formal, binding settlement agreement for the Court’s approval, setting forth all of the material terms of the settlement reached by the plaintiffs and defendants. ~~The settlement provides~~On December 7, 2022, the Company entered into a Stipulation and Agreement of Settlement (the “Stipulation”) providing for a payment to the plaintiffs of $15.0 million, to which the Company ~~has~~ agreed to contribute and has funded $13.0 ~~million. The settlement agreement will include~~million in escrow, a mutual release of ~~all~~ claims against all parties, and a stipulation that the lawsuit will be dismissed with prejudice. The ~~MOU~~Stipulation does not include any admission of wrongdoing by any party. The Stipulation provides that the defendants have the option to terminate the settlement if class members who in the aggregate purchased more than a certain number of shares of the Company’s common stock during the class period, timely and validly exclude themselves from the class.

The Stipulation was filed with the Court on December 8, 2022. On February 1, 2023, the Court issued an order which, among other things, preliminarily approved the Stipulation. The Stipulation is subject to final Court approval.

On March 25, 2022, a customer of the Bank filed a putative class action complaint against the Bank in the Court of Common Pleas of Cumberland County, Pennsylvania, in a case captioned Alleman, on behalf of himself and all others similarly situated, v. Orrstown ~~Bank~~.Bank. The complaint alleges, among other things, that the Bank breached its account agreements by charging certain overdraft fees. The complaint seeks a refund of all allegedly improper fees, damages in an amount to be proven at trial, attorneys’ fees and costs, and an injunction against the Bank’s allegedly improper overdraft practices. This lawsuit is similar to lawsuits recently filed against other financial institutions pertaining to overdraft fee disclosures. The Company filed a preliminary objection to the complaint on May 16, 2022. The plaintiff filed a brief in opposition to the Company's preliminary objection on June 16, 2022, and the Company filed its reply brief on June 30, 2022. The Bank believes that the allegations and claims against the Bank are without merit.

~~NOTE 13. SUBSEQUENT EVENTS~~

~~The Company evaluated subsequent events in accordance with ASC Topic 855 and determined that the following qualifies as a recognized Type 1 subsequent event.~~

On November 7, 2022, the Company entered into the MOU to settle and resolve the previously disclosed shareholder class action lawsuit. The MOU memorializes the parties’ agreement to execute and submit a formal, binding settlement agreement for the Court’s approval, setting forth all of the material terms of the settlement reached by the plaintiffs and defendants. The settlement provides for a payment to the plaintiffs of $15.0 million, to which the Company has agreed to contribute $13.0 million. The settlement agreement will include a mutual release of all claims against all parties, and the lawsuit will be dismissed with prejudice. The MOU does not include any admission of wrongdoing by any party. As a result of the agreed upon settlement, the Company recorded a $13.0 million provision for legal settlement, a corresponding liability, and related tax effects in its unaudited condensed consolidated financial statements as of September 30, 2022. See Note 12, Contingencies, for additional information.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended to assist readers in understanding the consolidated financial condition and results of operations of Orrstown and should be read in conjunction with the preceding unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q, as well as with the audited consolidated financial statements and notes thereto for the year ended December 31, ~~2021,~~2022, included in our Annual Report on Form 10-K. Throughout this discussion, the yield on earning assets is stated on a fully taxable-equivalent basis and balances represent average daily balances unless otherwise stated.

Overview

The Company, headquartered in Shippensburg, Pennsylvania, is a one-bank holding company that has elected status as a financial holding company. The consolidated financial information presented herein reflects the Company and its wholly-owned subsidiary, the Bank. At ~~September 30, 2022,~~March 31, 2023, the Company had total assets of ~~$2.9~~$3.0 billion, total liabilities of ~~$2.6~~$2.8 billion and total shareholders’ equity of ~~$217.4~~$240.2 million.

For the three and nine months ended September 30, 2022, the Company had a net loss of $4.8 million and net income of $12.4 million, respectively. As discussed in the notes to the unaudited condensed consolidated financial statements above, during the fourth quarter of 2022, the Company agreed to settle a litigation matter, which resulted in a provision for legal settlement ("legal settlement") of $13.0 million, before the tax effect, recorded in the third quarter of 2022. In addition, during the third quarter of 2022, the Company announced strategic initiatives designed to drive long-term growth and improve operating efficiencies through planned branch closures and staffing model adjustments, which resulted in pre-tax non-interest expenses ("restructuring charge") of $3.2 million. Excluding the legal settlement and the restructuring charge, net income for the three and nine months ended September 30, 2022 totaled $7.9 million and $25.2 million, respectively. For the three months ended September 30, 2022, diluted loss per share totaled $0.47. For the nine months ended September 30, 2022, diluted earnings per share totaled $1.16. Excluding the legal settlement and restructuring charge, diluted earnings per share totaled $0.75 and $2.34 for the three and nine months ended September 30, 2022, respectively.

Cautionary Note About Forward-Looking Statements

Certain statements appearing herein, which are not historical in nature, are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, we may make other written and oral communications, from time to time, that contain such statements. Such forward-looking statements reflect the current views of the Company's management with respect to, among other things, future events and the Company's financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “will,” “expect,” “estimate,” “anticipate” or similar terms, or the negative variations of those words or other comparable words of a future or forward-looking nature. Forward-looking statements are statements that include projections, predictions, expectations, estimates or beliefs about events or results or otherwise are not statements of historical facts, many of which, by their nature, are inherently uncertain and beyond the Company's control, and include, but are not limited to, statements related to new business development, new loan opportunities, growth in the balance sheet and fee-based revenue lines of business, merger and acquisition activity, cost savings initiatives, reducing risk assets, and mitigating losses in the future. Accordingly, the Company cautions you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements and there can be no assurances that the Company will achieve the desired level of new business development and new loans, growth in the balance sheet and fee-based revenue lines of business, successful merger and acquisition activity and cost savings initiatives, continue to reduce risk assets or mitigate losses in the future. ~~In addition to risks and uncertainties related to the COVID-19 pandemic (including those related to variants) and resulting governmental and societal responses, factors~~Factors that could cause actual results to differ from those expressed or implied by the forward-looking statements include, but are not limited to, the following: the failure to ~~reach an agreement acceptable to all parties to settle and resolve the shareholder class action; the failure to~~ obtain final court approval of the proposed ~~settlement; the number of plaintiffs who opt-out~~settlement of the ~~proposed settlement;~~shareholder class action; whether the proposed settlement is appealed; ineffectiveness of the Company’s strategic growth plan due to changes in current or future market conditions; the effects of competition and how it may impact our community banking model, including industry consolidation and development of competing financial products and services; the integration of the Company's strategic acquisitions; the inability to fully achieve expected savings, efficiencies or synergies from mergers and acquisitions, or taking longer than estimated for such savings, efficiencies and synergies to be realized; changes in laws and regulations; interest rate movements; changes in credit quality; inability to raise capital, if necessary, under favorable conditions; volatility in the securities markets; the demand for our products and services; deteriorating economic conditions; geopolitical tensions; changes in litigation matters, including the failure to obtain Court approval of proposed settlements, the number of plaintiffs who opt-out of proposed settlements and whether a proposed settlement is appealed; operational risks including, but not

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limited to, cybersecurity incidents, fraud, natural disasters and future pandemics; expenses associated with pending litigation and legal proceedings; ~~the failure~~a continuation of the ~~SBA~~recent disruption in the banking industry and responsive measures to honor its guarantee of loans issued under the SBA PPP; the timing of the repayment of SBA PPP loans and the impact it has on fee recognition; our ability to convert new relationships gained through the SBA PPP efforts to full banking relationships;manage it; and other risks and uncertainties, including those detailed in our Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, and our Quarterly Reports on Form 10-Q under the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other filings made with the SEC. The statements are valid only as of the date hereof and we disclaim any obligation to update this information.

Economic Climate, Inflation and Interest Rates

Preliminary real GDP for the ~~third~~first quarter of ~~2022~~2023 reflected an annualized increase of ~~2.6%~~1.1%, which is a decline from 2.6% from the fourth quarter of 2022, but an improvement from the ~~declines of~~ 1.6% ~~and 0.6%~~annualized decline during the first ~~and second quarters of 2022, respectively. The annualized growth for the third~~ quarter of ~~2021 was 2.3%.~~2022. The ~~increase~~first quarter of 2023 reflected increases in consumer spending, nonresidential fixed investments, exports and government spending due to non-defense spending and compensation, The decrease in real GDP from the ~~third~~fourth quarter of 2022 was ~~the result of increases in exports, due primarily to petroleum, nondurable goods, and travel, government spending,~~ due to ~~defense spending,~~a

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downturn in private inventory investments, which included manufacturing and ~~consumer spending; however,~~utilities, and slowdown in nonresidential fixed investment. Fluctuations in real GDP in recent periods, due to inflation, supply chain challenges and geopolitical tensions, continues to ~~be hampered by decreases~~create uncertainty in ~~residential fixed investments and private inventory caused by lower new single-family construction and retail trade.~~ the current economic environment.

The personal consumption expenditures ("PCE") price index increased to 4.2% in the ~~third~~first quarter of ~~2022,~~2023, compared to an increase of ~~7.3%~~3.7% for the final estimate in the ~~second~~fourth quarter of 2022. Excluding food and energy prices, the PCE price index increased ~~4.5%~~4.9% in the ~~third~~first quarter of ~~2022~~2023 compared to ~~4.7%~~4.4% in the ~~second~~fourth quarter of 2022.

The national unemployment rate ~~slightly decreased by 0.1% to~~remained unchanged at 3.5% in ~~September 2022~~March 2023 compared to December 2022, but did modestly improve from 3.6% in ~~June 2022, down from 4.8% in September 2021.~~March 2022. Within the Company's geographic footprint, the unemployment rate has decreased in Pennsylvania ~~by 1.9%~~ from ~~6.7%~~4.4% at ~~August 2021~~March 2022 to ~~4.8%~~4.2% at ~~August 2022,~~March 2023, and decreased in Maryland ~~by 1.4%~~ from ~~5.8%~~3.2% at ~~August 2021~~March 2022 to ~~4.4%~~2.7% in ~~August 2022.~~March 2023. These decreases in unemployment rates are consistent to the counties in which the Company operates branches and other corporate offices. There continued to be notable job gains in healthcare, leisure and hospitality, professional and business services and government during the ~~third~~first quarter of 2022. Although there was a strong economic recovery in 2021 from the pandemic, the fluctuations in real GDP during 2022 are indicative of inflation, supply chain challenges, geopolitical tensions and labor shortages.2023.

At ~~September 30, 2022,~~March 31, 2023, the 10-year Treasury bond ~~reached~~rate was 3.48%. Although it has declined by 35 basis points from 3.83%~~, an increase of 0.85% from 2.98%~~ at ~~June 30,~~December 31, 2022, as it ~~continued to rise~~remains elevated due to inflationary pressures. The 10-year Treasury bond rate was 2.34% at March 31, 2022. In an attempt to combat the impact of inflation, the rising consumer price index, supply chain disruptions, the state of the labor market and geopolitical tensions, the Federal Reserve Open Markets Committee ("FOMC") approved increases to the Fed Funds rate ~~of:~~

•25totaling 500 basis points onsince March ~~17, 2022;~~

•~~50 basis points on May 5, 2022;~~

•~~75 basis points on June 16, 2022;~~

•~~75 basis points on July 27, 2022;~~

•~~75 basis points on September 21, 2022; and~~

•~~75 basis points on November 2, 2022.~~2022 through the date of this report.

The majority of the assets and liabilities of a financial institution are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an impact on the Company, particularly with respect to the growth of total assets and noninterest expenses, which tend to rise during periods of general inflation. Risks also exist due to supply and demand imbalances, employment shortages, the interest rate environment, and geopolitical tensions. It is reasonably foreseeable that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including expected credit losses on loans and the fair value of financial instruments that are carried at fair value.

Recent Banking Industry Developments

Beginning in March 2023, the banking industry experienced disruption from the failures of multiple large U.S. banking institutions each due to unique circumstances related to risk management of liquidity, interest, and capital and associated stress on deposits and unrealized losses on investment securities. These events have led to a decline of confidence in the banking industry and overall economic uncertainty, which will likely increase regulatory oversight and policymaking and also increase competition and pricing on deposits. Although the Company was not materially impacted by these events during the three months ended March 31, 2023, the Company has continued to assess its funding sources and analyze its liquidity position, interest rate sensitivity and capital adequacy while also monitoring the ongoing events and volatility in the banking industry.

Critical Accounting Estimates

The Company’s accounting and reporting policies are in accordance with GAAP and follow accounting and reporting guidelines prescribed by bank regulatory authorities and general practices within the financial services industry in which it operates. Our financial position and results of operations are affected by management's application of accounting policies, including estimates, and assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the balance sheet date and through the date the financial statements are filed with the SEC. Different assumptions in the application of these policies could result in material changes in the consolidated financial position and/or consolidated results of operations and related disclosures. The more critical accounting estimates include accounting for credit losses and valuation methodologies.

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Accordingly, these critical accounting estimates are discussed in detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. Significant accounting policies and any changes in accounting principles and effects of new accounting pronouncements are discussed in Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data," in our Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. Additional disclosures regarding the effects of new accounting pronouncements, ASU 2016-13 and ASU 2022-02, are included in this report in Note 1, Summary of Significant Accounting Policies, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information."

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RESULTS OF OPERATIONS

Three months ended ~~September 30, 2022~~March 31, 2023 compared with three months ended ~~September 30, 2021~~March 31, 2022

Summary

Net ~~loss~~income totaled ~~$4.8~~$9.2 million for the three months ended ~~September 30, 2022~~March 31, 2023 compared ~~with net income of $7.2~~to $8.4 million for the same period in ~~2021.~~2022. Diluted ~~loss~~earnings per share for the three months ended ~~September 30, 2022~~March 31, 2023 totaled ~~$0.47~~$0.87 compared to ~~diluted earnings per share of $0.65~~$0.76 for the three months ended ~~September 30, 2021.~~ March 31, 2022.

Net interest income ~~positively influenced results of operations, and~~ totaled ~~$25.5~~$26.3 million for the three months ended ~~September 30, 2022~~March 31, 2023 compared to ~~$20.6~~$22.6 million for the three months ended ~~September 30, 2021. Noninterest income totaled approximately $6.1 million and $7.7 million for the three months ended September 30,~~March 31, 2022, and 2021, respectively. Noninterest expenses totaled $36.4 million for the three months ended September 30, 2022 compared to $19.0 million for the three months ended September 30, 2021. Excluding the legal settlement and the restructuring charge, for the three months ended September 30, 2022, net income totaled $7.9 million and diluted earnings per share totaled $0.75. See “Supplemental Reporting of Non-GAAP Measures.”

The comparison of operating results for 2022 with 2021 reflects the impact of the legal settlement and restructuring charge, increases in the provision for loan losses, salaries and employee benefits expense and costs of funds and a decrease in mortgage banking income, partially offset by the net interest income benefit fromreflecting the deployment of cash into higher yielding commercial loans and investment securities ~~as well as~~and the impact of rising interest ~~rates.~~rates on interest-earning asset yields, partially offset by the impact of an increase in cost of funds and an increase in interest-bearing liabilities. Interest income recognized on SBA PPP loans totaled $81 thousand for the three months ended March 31, 2023 compared to $3.5 million for the three months ended March 31, 2022.

The Bank continues to experience relatively low levels of net charge-offs and non-performing loans despite growing economic uncertainty. The provision for credit losses on loans totaled $729 thousand and $300 thousand for the three months ended March 31, 2023 and 2022, respectively. During the first quarter of 2023, the Company adopted the new accounting standard for CECL, which resulted in the change from the incurred loss model based on historical loss experience to the expected loss model, and reflects the expected credit losses over the expected life of financial assets and commitments. During the first quarter of 2022, the Company adjusted the National and Local Economic Conditions qualitative factor that reduced the provision by $726 thousand. This factor had been increased previously for economic concerns in the commercial real estate portfolio associated with the COVID-19 pandemic. The additional allocation was removed during the first quarter of 2022 as these concerns had subsided.

Noninterest income totaled $6.1 million and $7.5 million for the three months ended March 31, 2023 and 2022, respectively. The decrease of $1.4 million was primarily due to decreases in swap fee income of $953 thousand, gains on the sales of SBA-guaranteed loans of $271 thousand and mortgage banking activities of $243 thousand.

Noninterest expenses totaled $20.3 million for the three months ended March 31, 2023 compared to $19.4 million for the three months ended March 31, 2022. The increase of $891 thousand is primarily due to an increase in salaries and employee benefits expense of $859 thousand caused by the filling of several vacancies and higher healthcare costs.

Net Interest Income

Net interest income increased by $3.7 million from $22.6 million for the three months ended March 31, 2022 to $26.3 million for the three months ended March 31, 2023. Interest income on loans increased by $7.3 million, from $21.4 million to $28.7 million, and interest income on investment securities increased by $2.9 million, from $2.3 million to $5.2 million, compared to the same period in the prior year. Total interest expense increased by $6.8 million from $1.2 million for the three months ended March 31, 2022 to $8.0 million for the three months ended March 31, 2023. Interest expense on deposits increased by $5.5 million from $0.7 million for the three months ended March 31, 2022 to $6.2 million for the three months ended March 31, 2023, and interest expense on borrowings increased by $1.3 million from $0.5 million from three months ended March 31, 2022 to $1.8 million for the three months ended March 31, 2023.

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~~Net Interest Income~~

Net interest income increased by $4.9 million from $20.6 million to $25.5 million from the three months ended September 30, 2021 to the three months ended September 30, 2022. Interest income on loans increased by $3.3 million, from $19.9 million to $23.2 million, and interest income on investment securities increased by $1.9 million, from $2.2 million to $4.1 million, for the three months ended September 30, 2022 compared to the same period in the prior year. Total interest expense increased from $1.6 million for the three months ended September 30, 2021 to $2.0 million for the three months ended September 30, 2022.

The following table presents net interest income, net interest spread and net interest margin for the three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ on a taxable-equivalent basis:

Three Months Ended September 30, 2022 Three Months Ended September 30, 2021
Average
Balance Taxable-
Equivalent
Interest Taxable-
Equivalent
Rate Average
Balance Taxable-
Equivalent
Interest Taxable-
Equivalent
Rate
Assets
Federal funds sold & interest-bearing bank balances $ 38,068 $ 200 2.08 % $ 347,242 $ 135 0.15 %
Investment securities (1)
528,988 4,377 3.31 464,417 2,339 2.00
Loans (1)(2)(3)
2,051,707 23,219 4.49 1,919,926 19,945 4.12
Total interest-earning assets 2,618,763 27,796 4.22 2,731,585 22,419 3.26
Other assets 196,277 195,089
Total $ 2,815,040 $ 2,926,674
Liabilities and Shareholders’ Equity
Interest-bearing demand deposits $ 1,379,082 912 0.26 $ 1,411,243 286 0.08
Savings deposits 237,462 90 0.15 209,112 53 0.10
Time deposits 265,015 370 0.55 349,215 598 0.68
Total interest-bearing deposits 1,881,559 1,372 0.29 1,969,570 937 0.19
Securities sold under agreements to repurchase 23,480 10 0.18 23,578 8 0.13
FHLB advances and other borrowings 10,394 78 3.02 45,071 123 1.09
Subordinated notes 32,000 504 6.29 31,938 503 6.29
Total interest-bearing liabilities 1,947,433 1,964 0.40 2,070,157 1,571 0.30
Noninterest-bearing demand deposits 575,777 548,923
Other 49,964 38,409
Total liabilities 2,573,174 2,657,489
Shareholders’ equity 241,866 269,185
Total $ 2,815,040 $ 2,926,674
Taxable-equivalent net interest income /net interest spread 25,832 3.82 % 20,848 2.96 %
Taxable-equivalent net interest margin 3.92 % 3.03 %
Taxable-equivalent adjustment (377) (228)
Net interest income $ 25,455 $ 20,620


	Three Months Ended March 31, 2023						Three Months Ended March 31, 2022
	Average Balance		Taxable- Equivalent Interest		Taxable- Equivalent Rate		Average Balance		Taxable- Equivalent Interest		Taxable- Equivalent Rate
Assets
Federal funds sold & interest-bearing bank balances	$	29,599	$	298	4.08	%	$	199,788	$	101	0.20	%


Investment securities (1)	525,685		5,465		4.18		472,195		2,512		2.13


Loans (1)(2)(3)	2,180,224		28,844		5.36		1,974,804		21,429		4.39
Total interest-earning assets	2,735,508		34,607		5.12		2,646,787		24,042		3.67


Other assets	197,620						184,300

Total	$	2,933,128					$	2,831,087
Liabilities and Shareholders’ Equity
Interest-bearing demand deposits	$	1,503,421	4,862		1.31		$	1,398,182	256		0.07
Savings deposits	219,408		133		0.25		227,676		57		0.10
Time deposits	275,880		1,207		1.78		298,618		372		0.51
Total interest-bearing deposits	1,998,709		6,202		1.26		1,924,476		685		0.14
Securities sold under agreements to repurchase and federal funds purchased	13,868		25		0.72		23,530		7		0.12
FHLB Advances and other borrowings	106,434		1,252		4.77		1,850		22		4.74
Subordinated notes	32,033		504		6.29		31,969		503		6.29
Total interest-bearing liabilities	2,151,044		7,983		1.50		1,981,825		1,217		0.25
Noninterest-bearing demand deposits	495,562						540,139
Other liabilities	52,630						40,919
Total liabilities	2,699,236						2,562,883
Shareholders’ equity	233,892						268,204
Total	$	2,933,128					$	2,831,087
Taxable-equivalent net interest income /net interest spread			26,624		3.62	%			22,825		3.42	%
Taxable-equivalent net interest margin					3.94	%					3.49	%
Taxable-equivalent adjustment			(330)						(252)
Net interest income			$	26,294					$	22,573


NOTES TO ANALYSIS OF NET INTEREST INCOME:
(1)			Yields and interest income on tax-exempt assets have been computed on a taxable-equivalent basis assuming a 21% tax rate.
(2)			Average balances include nonaccrual loans.
(3)			Interest income on loans includes prepayment and late fees, where applicable.

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Net interest income on a taxable-equivalent basis increased by ~~$5.0~~$3.8 million to ~~$25.8~~$26.6 million for the three months ended ~~September 30, 2022~~March 31, 2023 from ~~$20.8~~$22.8 million for the three months ended ~~September 30, 2021.~~March 31, 2022. The Company's net interest spread increased by 8620 basis points to ~~3.82%~~3.62% for the three months ended ~~September 30, 2022~~March 31, 2023 compared to ~~2.96%~~3.42% for the three months ended ~~September 30, 2021.~~March 31, 2022.

Taxable-equivalent net interest margin increased 89by 45 basis points to ~~3.92%~~3.94% for the three months ended ~~September 30, 2022~~March 31, 2023 from ~~3.03%~~3.49% for the three months ended ~~September 30, 2021.~~March 31, 2022. The taxable-equivalent yield on interest-earning assets increased 96by 145 basis points from 3.67% for the three months ended ~~September 30, 2021~~March 31, 2022 to 5.12% for the three months ended ~~September 30, 2022~~March 31, 2023 reflecting the benefit of both the deployment of cash into higher yielding loans and investment securities ~~as well as~~and the impact of rising interest rates on ~~the loan and investment securities portfolios, which~~these interest-earning assets. This was partially offset by the increase of 10125 basis points in the cost of interest-bearing liabilities from the three months ended September 30, 2021 to the three months ended September 30, 2022. The cost of interest-bearing liabilities increased 10 basis points from the three months ended September 30, 2021 to the three months ended September 30, 2022 reflecting an increase to deposit ratesbetween these same periods due to ~~the rising rate environment, partially offset by the runoff in higher cost time deposit balances and the repayment of overnight borrowings during the third quarter of 2021. Average loans~~ increased ~~by $131.8 million to $2.1 billion during the three months ended September 30, 2022~~funding costs from $1.9 billion for the three months ended September 30, 2021, as commercial and home equity loan growth in three months ended September 30, 2022 was partially offset by the impact of SBA PPP loan forgiveness. Average investment securities increased by $64.6 million from $464.4 million for the three months ended September 30, 2021 to $529.0 million for the same period in 2022 due to investment purchases. Average interest-bearing liabilities declined by $122.7 million to $1.9 billion for the 2022 period from $2.1 billion for the 2021 period due primarily to a decrease in average balances in time deposits and overnight borrowings.

The yield on loans increased by 37 basis points to 4.49% for the three months ended September 30, 2022 compared to 4.12% for the three months ended September 30, 2021. Taxable-equivalent interest income earned on loans increased by $3.3 million year-over-year primarily due to an increase in the average balances of commercial loans excluding SBA PPP loans, and the impact of the rising interest rate environment. The increase in interest income from loan growth, excluding SBA PPP loans, was partially offset by a decrease in interest income from SBA PPP loans due to reduced fee income as a lower amount of SBA PPP loans were forgiven during the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

SBA PPP loans, net of deferred fees and costs, averaged $25.0 million during the three months ended September 30, 2022 compared to $303.2 million during the three months ended September 30, 2021. This decrease was due to the forgiveness of SBA PPP loans since September 30, 2021. The average balance of commercial loans, excluding SBA PPP loans, increased by $385.9 million from $1.2 billion during the three months ended September 30, 2021 to $1.6 billion during the three months ended September 30, 2022. Average home equity loans increased by $24.7 million from $155.0 million for the three months ended September 30, 2021 to $179.7 million for the three months ended September 30, 2022. Average installment and other consumer loans decreased by $11.2 million from $36.6 million for the three months ended September 30, 2021 to $25.4 million for the three months ended September 30, 2022. Average residential mortgage loans increased by $10.6 million from $203.0 million during the three months ended September 30, 2021 to $213.6 million during the three months ended September 30, 2022 due to jumbo and adjustable-rate mortgage production.

For the three months ended September 30, 2022, interest income on loans included $523 thousand of interest and net deferred fee income associated with the SBA PPP loans compared to $3.4 million of such interest and fee income for the three months ended September 30, 2021. Accretion of purchase accounting adjustments included in interest income was $157 thousand and $296 thousand for the three months ended September 30, 2022 and 2021, respectively. The three months ended September 30, 2022 and 2021 included $64 thousand and $154 thousand, respectively, of accelerated accretion related to the payoff of acquired loans.

Interest income on investment securities on a tax-equivalent basis increased by $2.1 million to $4.4 million for the three months ended September 30, 2022 from $2.3 million for the three months ended September 30, 2021, with the taxable equivalent yield increasing from 2.00% for the three months ended September 30, 2021 to 3.31% for the three months ended September 30, 2022. This 131 basis point increase reflects the higher interest rate environment in 2022 and investment purchases at higher yields.

Average balance of federal funds sold and interest-bearing bank balances decreased by $309.1 million from $347.2 million for the three months ended September 30, 2021 to $38.1 million for the same period in 2022, due primarily to the deployment of cash into loans and investment securities. The related interest income increased by $65 thousand to $200 thousand for the three months ended September 30, 2022 from $135 thousand for the three months ended September 30, 2021. This increase was caused by the increase in the interest rate at the FRB as a result of multiple Fed Funds rate increases by the FOMC during 2022.

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Interest expense on interest-bearing liabilities increased by $393 thousand year-over-year due to the increase in the cost of interest-bearing liabilities by 10 basis points from 0.30% for the three months ended September 30, 2021 to 0.40% for the three months ended September 30, 2022. This increase is due to deposit rate increases made in 2022, partially offset by the impact of a decrease in the average balance of interest-bearing deposits of $88.0 million that resulted from continued runoff of certificates of deposit and the repayment of overnight borrowings in the third quarter of 2021.

~~Provision for Loan Losses~~

The Company recorded a provision for loan losses of $1.5 million for the three months ended September 30, 2022 compared to $365 thousand for the same period in 2021. In calculating the provision for loan losses, both quantitative and qualitative factors, including the Company's historical net charge-off data and economic and market conditions, were considered. For the three months ended September 30, 2022 and 2021, the provision for loan losses was driven primarily by loan growth; however, the increase in the provision for loan losses for the three months ended September 30, 2021 attributable to loan growth was partially offset by the release of a portion of the Company's COVID-19 related reserve of $991 thousand. Net charge-offs in the three months ended September 30, 2022 totaled $70 thousand, compared to net recoveries of $219 thousand in the comparable prior year period. Nonaccrual loans were 0.25% of gross loans at September 30, 2022, compared with 0.47% of gross loans at September 30, 2021. Nonaccrual loans decreased by $3.8 million from $9.1 million at September 30, 2021 to $5.3 million at September 30, 2022 and classified loans decreased by $9.2 million from $26.9 million at September 30, 2021 to $19.6 million at September 30, 2022. In addition, special mention loans decreased by $16.7 million from $70.8 million at September 30, 2021 to $54.1 million at September 30, 2022, primarily due to risk rating upgrades. The decrease in non-accrual loans includes the payoff of one loan of $2.6 million, loans returning to accrual status of $721 thousand, and charge-offs of $101 thousand, partially offset by loans transferred to non-accrual status of $881 thousand. The remaining decrease in non-accrual loans is due to paydowns. The decrease in criticized and classified loans reflects upgrades to commercial loan ratings, including loans that were previously downgraded due to the impact of the COVID-19 pandemic.

~~Additional information is included in the "Credit Risk Management" section herein.~~

~~Noninterest Income~~

~~The following table compares noninterest income for the three months ended September 30, 2022 and 2021:~~
Three Months Ended September 30, $ Change % Change
2022 2021 2022-2021 2022-2021
Service charges on deposit accounts $ 977 $ 796 $ 181 22.7 %
Interchange income 1,014 1,030 (16) (1.6) %
Other service charges and fees 239 197 42 21.3 %
Swap fee income 197 67 130 194.0 %
Trust and investment management income 2,006 1,930 76 3.9 %
Brokerage income 947 987 (40) (4.1) %
Mortgage banking activities (1,014) 1,333 (2,347) (176.1) %
Income from life insurance 583 569 14 2.5 %
Other income 1,123 263 860 327.0 %
Investment securities (losses) gains (14) 479 (493) (102.9) %
Total noninterest income $ 6,058 $ 7,651 $ (1,593) (20.8) %

~~The following factors contributed to the more significant changes in noninterest income between the three months ended September 30, 2022 and 2021:~~

•Service charges on deposit accounts increased by $181 thousand due to higher customer transaction activity as the economy continued to recover from the COVID-19 pandemic and changes to the deposit fee structure that took effect in April 2022.

•~~Swap fee income increased by $130 thousand. The timing and volume of these fees are dependent on client needs and loan size.~~

•Mortgage banking income decreased by $2.3 million due to a significant decline in the fair value of the held-for-sale mortgages caused by current market conditions, including the rapidly rising interest rates and lower housing inventory. The difficult mortgage market has also slowed residential mortgage loan production, thereby causing

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corresponding reductions in the residential mortgage loan pipeline and secondary market sales during the three months ended September 30, 2022. Mortgage loans sold totaled $12.7 million in the third quarter of 2022 compared with $48.0 million in the third quarter of 2021.

•Other income increased by $860 thousand due primarily to distributions of $964 thousand from investments in non-housing limited partnerships partially offset by the decrease of $128 thousand in the tax credits recognized from the Bank's investment in solar renewable energy partnerships in the third quarter of 2022 compared to the third quarter of 2021.

•~~Investment securities gains decreased by $493 thousand due primarily to $482 thousand in gains recorded from the sales of $72.8 million of asset-backed securities during the third quarter of 2021.~~

•~~Other line items within noninterest income showed fluctuations between 2022 and 2021 attributable to normal business operations.~~

~~Noninterest Expenses~~

~~The following table compares noninterest expenses for the three months ended September 30, 2022 and 2021:~~
Three Months Ended September 30, $ Change % Change
2022 2021 2022-2021 2022-2021
Salaries and employee benefits $ 12,705 $ 11,498 $ 1,207 10.5 %
Occupancy 1,166 1,154 12 1.0 %
Furniture and equipment 1,214 1,220 (6) (0.5) %
Data processing 1,192 990 202 20.4 %
Automated teller machine and interchange fees 329 294 35 11.9 %
Advertising and bank promotions 278 735 (457) (62.2) %
FDIC insurance 294 218 76 34.9 %
Professional services 887 562 325 57.8 %
Directors' compensation 213 155 58 37.4 %
Taxes other than income 488 16 472 2950.0 %
Intangible asset amortization 272 314 (42) (13.4) %
Provision for legal settlement 13,000 — 13,000 100.0 %
Restructuring expenses 3,155 — 3,155 100.0 %
Other operating expenses 1,219 1,879 (660) (35.1) %
Total noninterest expenses $ 36,412 $ 19,035 $ 17,377 91.3 %

~~The following factors contributed to the more significant changes in noninterest expenses between the three months ended September 30, 2022 and 2021:~~

•Salaries and employee benefits expense increased by $1.2 million due primarily to additions to staff that filled vacancies, merit-based and incentive compensation increases and higher employee benefit costs.

•~~Data processing increased by $202 thousand due primarily to an increase in core system costs and investments in technology.~~

•~~Advertising and bank promotions expense decreased by $457 thousand due primarily to the timing difference of $500 thousand in contributions to Pennsylvania ("PA") EITC during 2022 and 2021.~~

•FDIC expense increased by $76 thousand due to an increase in the assessment rate driven by commercial loan growth and a lower deduction in the FDIC assessment rate calculation from SBA PPP loans due to forgiveness.

•Professional services expense increased by $325 thousand due to an increase in compliance and technology consulting services resulting from the need to supplement these services due to vacancies in staff and higher legal expenses partially associated with outstanding litigation.

•~~Directors' compensation expense increased by $58 thousand due primarily to the addition of a new director~~competitive pressures and an increase in ~~the stock price on issued restricted stock awards.~~

•~~Taxes other than income increased by $472 thousand due to the timing difference of $450 thousand of eligible tax credits associated with the contributions made to the PA EITC during 2022 and 2021.~~

•~~During the fourth quarter of 2022, the Company agreed to settle a litigation matter, which resulted in a provision for legal settlement of $13.0 million recorded in the third quarter of 2022.~~

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•During the third quarter of 2022, the Company announced that five branch locations would be closing and staffing model adjustments would be made to drive long-term growth and improve operating efficiencies in 2023 and forward. As a result of these initiatives, the Company recorded a pre-tax restructuring charge of $3.2 million, which consisted of building and fixed asset write-offs of $1.9 million and early retirement/severance costs of $1.3 million.

•Other operating expenses decreased by $660 thousand due to a loss of $514 thousand from the termination of an interest rate swap designated as a cash flow hedge recorded in the three months ended September 30, 2021. Also, the fair value of derivatives increased by $160 thousand from the three months ended September 30, 2021 to the three months ended September 30, 2022.

•~~Other line items within noninterest expenses showed fluctuations between 2022 and 2021 attributable to normal business operations.~~

~~Income Tax (Benefit) Expense~~

Income tax benefit totaled $1.6 million, an effective tax rate of 24.6%, for the three months ended September 30, 2022 compared with income tax expense of $1.7 million, an effective tax rate of 18.9%, for the three months ended September 30, 2021. Excluding the impact of the legal settlement, the effective tax rate was 17.6% for the three months ended September 30, 2022. The Company’s effective tax rate is less than the 21% federal statutory rate, principally due to tax-exempt income, which includes interest income on tax-exempt loans and investment securities and income from life insurance policies, federal income tax credits, and the impact of non-tax deductible expenses. The decrease in the effective tax rate from the three months ended September 30, 2021 to the three months ended September 30, 2022 was due primarily to an increase in projected income from tax-exempt investment securities and loans for the 2022 fiscal year compared to the prior year.

~~Nine months ended September 30, 2022 compared with nine months ended September 30, 2021~~

~~Summary~~

Net income totaled $12.4 million for the nine months ended September 30, 2022 compared with net income of $26.2 million for the same period in 2021. Diluted earnings per share for the nine months ended September 30, 2022 totaled $1.16, compared with $2.36 for the nine months ended September 30, 2021. Net interest income positively influenced results of operations, and totaled $72.1 million for the nine months ended September 30, 2022, compared to $64.4 million for the nine months ended September 30, 2021. Noninterest income totaled $20.7 million and $21.9 million for the nine months ended September 30, 2022 and 2021, respectively. Noninterest expenses totaled $74.6 million for the nine months ended September 30, 2022 compared to $53.9 million for the nine months ended September 30, 2021.

The comparison of operating results for 2022 with 2021 reflects the impact in 2022 of the litigation matter and the restructuring charge, increases in the provision for loan losses, and salaries and employee benefits expense and a decrease in mortgage banking income, partially offset by the net interest income benefit from the deployment of cash in higher yielding commercial loans and investment securities, as well as rising interest rates, and increases in other non-interest fees. Excluding the impact from the legal settlement and the restructuring charge, for the nine months ended September 30, 2022, net income totaled $25.2 million and diluted earnings per share totaled $2.34. See “Supplemental Reporting of Non-GAAP Measures.”cost borrowings.

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~~Net Interest Income~~

Net interest income increased by $7.7 million from $64.4 million for the nine months ended September 30, 2021 to $72.1 million for the nine months ended September 30, 2022. Total interest expense decreased from $5.4 million for the nine months ended September 30, 2021 to $4.4 million for the nine months ended September 30, 2022. Interest income onAverage loans increased by ~~$3.8 million, from $62.7~~$205.4 million to ~~$66.5 million, and interest income on investment securities increased by $2.7 million, from $6.8 million to $9.5 million,~~$2.2 billion for the three months ended March 31, 2023 compared to ~~the same period in the prior year. Interest expense on deposits decreased by $652 thousand from $3.4 million~~$2.0 billion for the ~~nine~~three months ended ~~September 30, 2021 to $2.8 million for the nine months ended September 30,~~March 31, 2022.

The ~~following table presents net interest income, net interest spread and net interest margin for the nine months ended September 30, 2022 and 2021 on a taxable-equivalent basis:~~
Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021
Average
Balance Taxable-
Equivalent
Interest Taxable-
Equivalent
Rate Average
Balance Taxable-
Equivalent
Interest Taxable-
Equivalent
Rate
Assets
Federal funds sold & interest-bearing bank balances $ 122,509 $ 536 0.59 % $ 261,697 $ 255 0.13 %
Investment securities (1)
508,582 10,276 2.70 456,919 7,272 2.13
Loans (1)(2)(3)
2,011,881 66,738 4.43 1,988,834 62,895 4.23
Total interest-earning assets 2,642,972 77,550 3.92 2,707,450 70,422 3.48
Other assets 191,090 188,924
Total $ 2,834,062 $ 2,896,374
Liabilities and Shareholders’ Equity
Interest-bearing demand deposits $ 1,399,035 1,470 0.14 $ 1,380,241 1,014 0.10
Savings deposits 234,054 209 0.12 197,792 149 0.10
Time deposits 279,557 1,079 0.52 376,142 2,247 0.80
Total interest-bearing deposits 1,912,646 2,758 0.19 1,954,175 3,410 0.23
Securities sold under agreements to repurchase 23,685 24 0.14 22,490 25 0.15
FHLB Advances and other borrowings 4,693 121 3.44 53,608 458 1.14
Subordinated notes 31,985 1,510 6.29 31,924 1,507 6.29
Total interest-bearing liabilities 1,973,009 4,413 0.30 2,062,197 5,400 0.35
Noninterest-bearing demand deposits 562,826 537,247
Other 46,058 37,413
Total liabilities 2,581,893 2,636,857
Shareholders’ equity 252,169 259,517
Total $ 2,834,062 $ 2,896,374
Taxable-equivalent net interest income /net interest spread 73,137 3.62 % 65,022 3.13 %
Taxable-equivalent net interest margin 3.70 % 3.21 %
Taxable-equivalent adjustment (991) (646)
Net interest income $ 72,146 $ 64,376


~~NOTES TO ANALYSIS OF NET INTEREST INCOME:~~
~~(1)~~			~~Yields and interest income on tax-exempt assets have been computed on a taxable-equivalent basis assuming a 21% tax rate.~~
~~(2)~~			~~Average balances include nonaccrual loans.~~
~~(3)~~			~~Interest income on loans includes prepayment and late fees, where applicable.~~

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Net interest income on a taxable-equivalent basis increased by $8.1 million to $73.1 million for the nine months ended September 30, 2022 from $65.0 million for the nine months ended September 30, 2021. The Company's net interest spread increased by 49 basis points to 3.62% for the nine months ended September 30, 2022 compared to 3.13% for the nine months ended September 30, 2021.

Taxable-equivalent net interest margin increased by 49 basis points to 3.70% for the nine months ended September 30, 2022 from 3.21% for the nine months ended September 30, 2021. The taxable-equivalent yield on interest-earning assets increased by 44 basis points from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 reflecting the deployment of cash into higher yielding loans and investment securities, as well as the impact of rising interest rates on the loan and investment securities portfolios. The decrease in the cost of interest-bearing liabilities of five basis points from the nine months ended September 30, 2021 to the nine months ended September 30, 2022 also contributed to the increase in ~~the tax-equivalent net interest margin, which reflected the runoff of higher cost time deposit balances and the repayment of overnight borrowings in the third quarter of 2021. Average~~average loans ~~remained approximately $2.0 billion, during both the nine months ended September 30, 2022 and 2021, as commercial and home equity~~was due to loan growth, ~~for the nine months ended September 30, 2022 was~~partially offset ~~primarily~~ by the impact of SBA PPP loan ~~forgiveness.~~forgiveness activity. Average investment securities increased by ~~$51.7~~$53.5 million from ~~$456.9~~$472.2 million for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 to ~~$508.6~~$525.7 million for the same period in ~~2022~~2023 primarily due to investment ~~purchases.~~purchases, partially offset by paydowns. Average interest-bearing liabilities ~~declined~~increased by ~~$89.2~~$169.2 million to $2.2 billion for the three months ended March 31, 2023 from $2.0 billion for the three months ended March 31, 2022. The competition for deposits increased in the latter part of 2022 ~~period from $2.1 billion for~~and into the ~~2021 period due~~first quarter of 2023 with clients utilizing their funds at a higher frequency and additional liquidity needed to ~~decreased~~meet the credit demands of clients, which resulted in an increase in average ~~balances in time deposits and overnight~~ borrowings.

The yield on loans increased by 2097 basis points to ~~4.43%~~5.36% for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 compared to ~~4.23%~~4.39% for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. Taxable-equivalent interest income earned on loans increased by ~~$3.8~~$7.4 million year-over-year due to an increase in the average balance of commercial loans, excluding SBA PPP loan forgiveness activity, home equity loans and residential mortgages and from the impact of the rising interest rate environment. The increase in interest income from loan growth and higher rates was partially offset by the decrease of $3.4 million in interest income from SBA PPP ~~loans. This decrease is~~loans due to ~~reduced fee income as~~ a lower amount of SBA PPP loans ~~were~~being forgiven during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 compared to the ~~nine~~same period in 2022.

The average balance of commercial loans, excluding SBA PPP loan forgiveness activity, increased by $296.0 million from $1.4 billion for the three months ended ~~September 30, 2021.~~

March 31, 2022 to $1.7 billion for the three months ended March 31, 2023. SBA PPP loans, net of deferred fees and costs, averaged ~~$83.8~~$155.3 million ~~during~~for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 compared to ~~$412.2~~$12.5 million ~~during~~for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2023. This decrease was due to ~~the~~ forgiveness of SBA PPP loans since September 30, 2021. The average balance of commercial loans, excluding SBA PPP loans, increased by $361.2 million from $1.2 billion in the nine months ended September 30, 2021 to $1.5 billion during the nine months ended September 30, 2022.loans. Average home equity loans increased by ~~$16.9~~$22.5 million from ~~$155.0~~$164.4 million for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 to ~~$171.9~~$186.9 million for the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023. Average residential mortgage loans increased by $37.6 million from $195.7 million during the three months ended March 31, 2022 to $233.3 million during the three months ended March 31, 2023 due to jumbo and adjustable-rate mortgage production. Average installment and other consumer loans decreased by ~~$14.2~~$7.9 million from ~~$41.4~~$29.3 million for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 to ~~$27.2~~$21.4 million for the ~~nine~~three months ended September 30, 2022. Average residential mortgage loans decreased by $12.5 million from $216.9 million during the nine months ended September 30, 2021 to $204.4 million during the nine months ended September 30, 2022 due to significant refinancing activity in late 2021.March 31, 2023.

For the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, interest income on loans includes ~~$5.9 million~~$81 thousand of interest and net deferred fee income associated with SBA PPP loans compared to ~~$13.0~~$3.5 million of such interest and fee income for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. Prepayment income on commercial loans decreased by $311 thousand from $382 thousand for the three months ended March 31, 2022 to $71 thousand for the three months ended March 31, 2023. Accretion of purchase accounting adjustments included in interest income was ~~$966~~$239 thousand and ~~$1.4 million~~$381 thousand for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. The ~~nine~~decrease in accretion was partially due to a decline in accelerated accretion from acquired loan payoffs or significant payments. The three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ included ~~$647~~$102 thousand and ~~$919~~$260 thousand, respectively, of accelerated accretion related to the payoff of acquired loans.

Interest income on investment securities on a tax-equivalent basis increased by $3.0 million to ~~$10.3~~$5.5 million for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 from ~~$7.3~~$2.5 million for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022, with the taxable equivalent yield increasing from 2.13% for the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 to ~~2.70%~~4.18% for the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023. The 57205 basis point increase reflected the higher interest rate environment insince March 2022 and investment security purchases at higher yields. In addition, the average balance of investment securities for the three months ended March 31, 2023 was impacted by purchases of $181.5 million, partially offset by principal payments of $36.6 million and sales of $31.3 million during 2022. In the first quarter of 2023, there were principal payments of $11.1 million, partially offset by $9.5 million in purchases. There were no investment security sales during the first quarter of 2023.

The average balance of federal funds sold and interest-bearing bank balances decreased by ~~$139.2~~$170.2 million from ~~$261.7~~$199.8 million for the ~~nine~~three months ended ~~September 30, 2021,~~March 31, 2022 to ~~$122.5~~$29.6 million for the same period in ~~2022~~2023 due primarily to the deployment of cash into loans and investment securities. ~~The~~However, the related interest income on a tax-equivalent basis increased by ~~$281~~$197 thousand to ~~$536~~$298 thousand for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023 from ~~$255~~$101 thousand for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. This increase was ~~caused by~~ the ~~increase in the interest rate at the FRB as a~~ result of multiple ~~Fed~~Federal Funds rate increases by the FOMC ~~during~~since March 2022.

Interest expense on interest-bearing liabilities ~~decreased~~increased by ~~$1.0~~$6.8 million year-over-year ~~reflecting a decrease~~due to the increase in the cost of interest-bearing liabilities by 125 basis points from 0.25% for the three months ended March 31, 2022 to 1.50% for the three months ended March 31, 2023 as funding costs increased from competitive pressures and an increase in higher cost borrowings. In addition, the average balance of interest-bearing deposits increased by $74.2 million to $2.0 billion for the three months ended March 31, 2023 from $1.9 billion for the three months ended March 31, 2022. Average interest-bearing demand deposits increased by $105.2 million as clients sought higher-yielding products during the rising interest rate environment. This was partially offset by a decrease in average time deposits of ~~$41.5~~$22.7 million due to maturities during most of 2022 despite an increase in time deposits from higher rate promotional offerings and increases in interest rates.

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Interest expense on borrowings increased by $1.3 million to $1.8 million for the three months ended March 31, 2023 from $0.5 million for the three months ended March 31, 2022 as the cost of funds increased by 53 basis points to 4.72% for the three months ended March 31, 2023 from 4.19% for the three months ended March 31, 2022. Average borrowings increased by $95.0 million from $57.3 million for the three months ended March 31, 2022 to $152.3 million for the three months ended March 31, 2023 as the Bank opted to borrow funds to provide additional liquidity to meet the credit needs of its clients.

Provision for Credit Losses

The Company recorded a provision for credit losses of $729 thousand for the three months ended March 31, 2023 compared to $300 thousand for the same period in 2022. On January 1, 2023, the Company adopted the new accounting standard, referred to as CECL, which transitioned from the incurred loss model based on historical loss experience and economic and market conditions to the expected loss model. The CECL standard reflects expected credit losses over the expected life of the financial assets and commitments, primarily based on the DCF methodology for the majority of the loan segments, which applies the probability of default and loss given default factors to ~~continued runoff~~future cash flows, and adjusts to the net present value to derive the required reserve. Macroeconomic conditions are incorporated into the model for unemployment and gross domestic product, in addition to model assumptions for discount rate and prepayment and curtailment speeds.

For the three months ended March 31, 2023, the provision for credit losses in loans was driven by the increase in commercial loans. In addition, the provision for credit losses is impacted by the overall increase in expected loss rates under CECL. The ACL to total loan ratio increased from 1.09% at March 31, 2022 to 1.28% at March 31, 2023. The provision expense recorded in the three months ended March 31, 2022 was due to commercial loan growth, offset by an adjustment to the National and Local Economic Conditions qualitative factor that reduced the provision expense by $726 thousand. This factor had been increased previously for economic concerns in the commercial real estate portfolio associated with the COVID-19 pandemic. The additional allocation was removed during the first quarter of ~~higher yielding certificates~~2022 as these concerns had subsided.

Net recoveries for the three months ended March 31, 2023 totaled $34 thousand, compared to net recoveries of $28 thousand for the three months ended March 31, 2022. Nonaccrual loans were 0.96% of gross loans at March 31, 2023, compared with 0.28% of gross loans at March 31, 2022. Nonaccrual loans increased by $15.8 million from March 31, 2022 to March 31, 2023 primarily due to one commercial construction loan with a current outstanding balance of $15.2 million being downgraded to substandard and placed on non-accrual status. The loan is not past due at March 31, 2023; however, management determined that it was appropriate to place the loan on non-accrual status due to other relevant factors. At this time, management determined that the value of the underlying collateral is sufficient to cover any potential losses on this loan. Management does not believe that this credit is indicative of overall stress in the loan portfolio.

Additional information is included in the "Credit Risk Management" section herein.

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deposit. The cost of interest-bearing liabilities declined by five basis points from 0.35% for the nine months ended September 30, 2021 to 0.30% for the nine months ended September 30, 2022 due to the timing of deposit rate decreases in 2021 and increases in 2022 combined with the continued runoff of higher yielding certificates of deposits and the repayment and maturities of overnight borrowings in the third quarter of 2021.

~~Provision for Loan Losses~~

The Company recorded a provision for loan losses of $3.6 million for the nine months ended September 30, 2022 compared to a negative provision for loan losses of $10 thousand for the same period in 2021. In calculating the provision for loan losses, both quantitative and qualitative factors, including the Company's historical charge-off data and economic and market conditions, were considered. For the nine months ended September 30, 2022, the provision for loan losses was driven primarily by an increase in commercial loans. The negative provision for loan losses recorded in the nine months ended September 30, 2021 was due to the release of a portion of the Company's remaining COVID-19 related reserve of $2.7 million. Net charge-offs in the nine months ended September 30, 2022 totaled $46 thousand, compared to net charge-offs of $176 thousand in the comparable prior year period. Nonaccrual loans were 0.25% of gross loans at September 30, 2022, compared with 0.47% of gross loans at September 30, 2021. Nonaccrual loans decreased by $3.8 million from September 30, 2021 to September 30, 2022 and classified loans decreased by $9.2 million to $19.6 million from September 30, 2021 to September 30, 2022. In addition, loans with a special mention risk rating decreased by $16.7 million from $70.8 million at September 30, 2021 to $54.1 million at September 30, 2022 due to risk rating upgrades. The decrease in non-accrual loans includes the payoff of one loan of $2.6 million, loans returning to accrual status of $721 thousand, and charge-offs of $101 thousand, partially offset by loans transferred to non-accrual status of $881 thousand. The remaining decrease in non-accrual loans is due to paydowns. The decrease in criticized and classified loans reflects upgrades to commercial loan ratings, including loans that were previously downgraded due to the impact of the COVID-19 pandemic.

~~Additional information is included in the "Credit Risk Management" section herein.~~

Noninterest Income

The following table compares noninterest income for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022:


	Three Months Ended March 31,				$ Change		% Change
	2023		2022		2023-2022		2023-2022
Service charges on deposit accounts	$	962	$	920	$	42	5	%
Interchange income	965		981		(16)		(2)	%
Other service charges, commissions and fees	195		153		42		27	%
Swap fee income	—		953		(953)		(100)	%
Trust and investment management income	1,888		1,941		(53)		(3)	%
Brokerage income	859		928		(69)		(7)	%
Mortgage banking activities	478		721		(243)		(34)	%

Income from life insurance	590		566		24		4	%
Other income	149		457		(308)		(67)	%
Investment securities losses	(8)		(146)		138		95	%
Total noninterest income	$	6,078	$	7,474	$	(1,396)	(19)	%

Noninterest income decreased by $1.4 million from $7.5 million for the three months ended March 31, 2022 ~~and 2021:~~
Nine Months Ended September 30, $ Change % Change
2022 2021 2022-2021 2022-2021
Service charges on deposit accounts $ 2,861 $ 2,231 $ 630 28 %
Interchange income 3,059 3,049 10 — %
Other service charges and fees 622 527 95 18 %
Swap fee income 1,935 135 1,800 1,333 %
Trust and investment management income 5,852 5,862 (10) — %
Brokerage income 2,864 2,708 156 6 %
Mortgage banking activities 205 4,684 (4,479) (96) %
Income from life insurance 1,742 1,690 52 3 %
Other income 1,749 338 1,411 417 %
Investment securities (losses) gains (163) 635 (798) (126) %
Total noninterest income $ 20,726 $ 21,859 $ (1,133) (5) %

to $6.1 million for three months ended March 31, 2023. The following were significant factors ~~contributed to the more significant changes~~ in ~~noninterest income between the nine months ended September 30, 2022 and 2021:~~

•Service charges on deposit accounts increased by $630 thousand due to higher customer transaction activity as the economy continued to recover from the COVID-19 pandemic and changes to the deposit fee structure that took effect in April 2022.this decrease:

•Swap fee income ~~increased by $1.8 million due to increased client interest in locking in interest rates on commercial loans in~~decreased $953 thousand during the ~~rising~~three months ended March 31, 2023 as no new interest rate ~~environment.~~swaps or caps were executed with clients. Swap fee income will fluctuate based on market conditions and client demand.

•Mortgage banking income decreased by ~~$4.5 million~~$243 thousand due primarily to a ~~significant~~ decline in ~~the fair value~~gains on sale of held-for-sale mortgages caused by ~~current~~ market conditions, ~~including~~which included rapidly rising interest rates and lower housing ~~inventory.~~inventory compared to the prior year. The difficult mortgage market ~~also slowed~~has caused a slowdown in residential mortgage loan production and a shift from conventional fixed-rate mortgages to adjustable-rate products, thereby causing corresponding reductions in the residential mortgage loan pipeline and secondary market sales ~~during the nine months ended September 30, 2022 compared to the same period in 2021.~~year-over-year. Mortgage loans sold totaled ~~$67.6~~$9.6 million in the first quarter of 2023 compared to $31.9 million in the first quarter of 2022. In addition, the Company recorded an MSR valuation reserve reversal of $32 thousand in the three months ended March 31, 2022. Since the second quarter of 2022, there has been no MSR valuation reserve.

•Other income decreased by $308 thousand due primarily to gains on the sales of two SBA loans totaling $271 thousand.

•Investment securities losses decreased by $138 thousand due primarily to a loss of $171 thousand during the first quarter of 2022 recorded on one non-agency CMO security called at a price below par. The loss during the first quarter of 2022 was partially offset by a gain of $22 thousand from the sale of one security with a principal balance of $3.1 million. The Company did not sell any investment securities during the first quarter of 2023.

•Other line items within noninterest income showed fluctuations attributable to normal business operations.

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in the first nine months of 2022 compared with $157.1 million in the first nine months of 2021. In addition, the Company recorded an MSR valuation reserve reversal of $79 thousand in the nine months ended September 30, 2022 compared to an MSR valuation reserve reversal of $695 thousand in the nine months ended September 30, 2021. Significant market interest rate reductions in 2021, which were caused by the COVID-19 pandemic resulted in decreases in the MSR fair values. Rate increases in 2022 offset this impact.

•Other income increased by $1.4 million due primarily to distributions of $964 thousand from investments in non-housing limited partnerships and gains on the sales of two SBA loans totaling $306 thousand.

•During the nine months ended September 30, 2022, the Company recorded net investment securities losses of $163 thousand due to a loss of $171 thousand on one non-agency CMO security that was called by the issuer in the second quarter of 2022. The loss was partially offset by a gain of $8 thousand from the sale of $3.1 million in principal balance of one security. During the nine months ended September 30, 2021, the Company sold 18 securities with a principal balance of $148.4 million for a gain of $609 thousand.

•~~Other line items within noninterest income showed fluctuations between 2022 and 2021 attributable to normal business operations.~~

Noninterest Expenses

The following table compares noninterest expenses for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022:


	Three Months Ended March 31,				$ Change		% Change
	2023		2022		2023-2022		2023-2022
Salaries and employee benefits	$	12,196	$	11,337	$	859	7.6	%
Occupancy	1,106		1,288		(182)		(14.1)	%
Furniture and equipment	1,227		1,279		(52)		(4.1)	%
Data processing	1,217		1,053		164		15.6	%

Automated teller machine and interchange fees	298		305		(7)		(2.3)	%
Advertising and bank promotions	405		355		50		14.1	%
FDIC insurance	504		283		221		78.1	%

Professional services	734		808		(74)		(9.2)	%
Directors' compensation	247		231		16		6.9	%


Taxes other than income	457		564		(107)		(19.0)	%
Intangible asset amortization	250		292		(42)		(14.4)	%




Other operating expenses	1,614		1,569		45		2.9	%
Total noninterest expenses	$	20,255	$	19,364	$	891	4.6	%

Noninterest expense increased by $891 thousand from $19.4 million for the three months ended March 31, 2022 ~~and 2021:~~
Nine Months Ended September 30, $ Change % Change
2022 2021 2022-2021 2022-2021
Salaries and employee benefits $ 35,354 $ 31,907 $ 3,447 10.8 %
Occupancy 3,586 3,492 94 2.7 %
Furniture and equipment 3,784 3,800 (16) (0.4) %
Data processing 3,410 3,041 369 12.1 %
Automated teller machine and interchange fees 952 862 90 10.4 %
Advertising and bank promotions 1,514 1,434 80 5.6 %
FDIC insurance 767 570 197 34.6 %
Professional services 2,417 1,862 555 29.8 %
Directors' compensation 674 624 50 8.0 %
Taxes other than income 1,160 929 231 24.9 %
Intangible asset amortization 845 972 (127) (13.1) %
Provision for legal settlement 13,000 — 13,000 100.0 %
Restructuring expenses 3,155 — 3,155 100.0 %
Other operating expenses 3,952 4,358 (406) (9.3) %
Total noninterest expenses $ 74,570 $ 53,851 $ 20,719 38.5 %

to $20.3 million for three months ended March 31, 2023. The following were significant factors ~~contributed to the more significant changes~~ in ~~noninterest expenses between the nine months ended September 30, 2022 and 2021:~~this increase:

•Salaries and employee benefits expense increased by ~~$3.4 million~~$859 thousand due primarily to ~~the~~staff additions ~~to staff~~ that filled vacancies ~~merit-based and incentive compensation increases~~ and higher employee benefit ~~costs, including healthcare expenses.~~costs.

•Occupancy expenses decreased by $182 thousand due partially to operating efficiencies from branch closures.

•Data processing increased by ~~$369~~$164 thousand due primarily to an increase in core system costs and investments in ~~technology.~~new technology as the Company focuses on the evolving needs of its clients.

•FDIC insurance expense increased by ~~$197~~$221 thousand due to ~~an increase~~increases in the assessment rate ~~driven~~caused by an annualized two-basis point increase assessed by the FDIC to increase its deposit insurance fund and asset and commercial loan ~~growth and a lower deduction in the FDIC assessment rate calculation from SBA PPP loans due to forgiveness.~~

•Professional services increased by $555 thousand due to an increase in compliance and technology consulting services resulting from the need to supplement these services due to vacancies in staff and higher legal expenses partially due to outstanding litigation.growth.

•Taxes other than income ~~increased~~decreased by ~~$231~~$107 thousand due to ~~an increase year-over year~~a decrease in the Pennsylvania Bank Shares Tax expense, aswhich was driven by a decrease in the Bank's total equity balance ~~grew between~~from the ~~annual assessments measured at January 1st.~~

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•increase in unrealized losses on investment securities and one-time transactions for a provision for legal settlement and restructuring expenses. During the ~~fourth quarter~~second half of 2022, the Company agreed to settle a litigation matter ~~which resulted~~resulting in a provision for legal settlement of $13.0 million, ~~recorded in~~before the ~~third quarter of 2022.~~

•~~During the third quarter of 2022,~~tax effect, and the Company announced that five branch locations in Pennsylvania would be closing and staffing model adjustments would be made to drive long-term growth and improve operating efficiencies, ~~in 2023 and forward. As a result of these initiatives,~~for which the Company recorded a pre-tax restructuring charge of $3.2 ~~million, which consisted of building and fixed asset write-offs of $1.9 million and early retirement/severance costs of $1.3~~ million.

•Other operating expenses ~~decreased~~increased by ~~$406~~$45 thousand due to ~~a loss of $514 thousand~~an increase in expense from ~~the termination of an interest rate derivative~~mark-to-market losses on derivatives not designated as ~~a cash flow hedge recorded in the nine months ended September 30, 2021 and the fair value~~hedging instruments of ~~derivatives increased by $287~~$207 thousand ~~between the nine months ended September 30, 2022 and 2021. These decreases were~~partially offset by ~~an increase~~decreases in loan-related costs of $110 thousand and the reserve for unfunded commitments of ~~$196~~$28 thousand, due to reversals in 2021 following a review of historical loss and line utilization experience. In addition, there was an increase of $151 thousand in employee related costs, which includes travel, meals and seminars as employees returned to a normal operating environment post COVID-19.respectively.

•Other line items within noninterest expenses showed fluctuations ~~between 2022 and 2021~~ attributable to normal business operations.

Income Tax Expense

Income tax expense totaled ~~$2.3~~$2.2 million, an effective tax rate of ~~15.7%~~19.6%, for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 compared with ~~$6.2~~$2.0 million and an effective tax rate of ~~19.2%,~~19.4% for the ~~nine~~three months ended ~~September 30, 2021. Excluding the impact of the provision for legal settlement, the effective tax rate was 18.2% for the nine months ended September 30,~~March 31, 2022. The Company’s effective tax rate is less than the 21% federal statutory rate ~~principally~~ due to ~~lower pre-tax income and the impact of~~ tax-exempt income, ~~which includes~~including interest ~~income~~earned on tax-exempt loans and investment securities and income from life insurance policies, ~~federal income~~as well as tax ~~credits, and the impact of non-tax deductible expenses.~~credits. The ~~decrease~~increase in the effective tax rate from the ~~nine~~three months ended ~~September 30, 2021~~March 31, 2022 to the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 was primarily due to an increase in projected taxable income ~~from tax-exempt investment securities and loans~~ for the ~~2022~~2023 fiscal year compared to the prior ~~year.~~year, which was impacted by a portion of interest expense disallowed as a deduction against earnings under the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA").

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FINANCIAL CONDITION

Management devotes substantial time to overseeing the investment of funds in loans and investment securities, the costs of funds and the formulation of policies directed toward the profitability and management of the risks associated with these investments.

Investment Securities

The Company utilizes investment securities to manage interest rate risk, enhance income through interest and dividend income, provide liquidity and ~~provide collateral for~~collateralize certain deposits and borrowings.

The Company has established investment policies and an asset management policy to assist in administering its investment portfolio. Decisions to purchase or sell these securities are based on economic conditions and management’s strategy to respond to changes in interest rates, liquidity, pledges to secure deposits and repurchase agreements and other factors while trying to maximize return on the investments. The Company may segregate its investment portfolio into three categories: “securities available-for-sale,” “trading securities” and “securities held-to-maturity.”

On January 1, 2023, the Company adopted the new CECL standard in accordance with ASU 2016-13, which changed the accounting framework by replacing the other-than-temporary impairment assessment with the recognition of an allowance for credit losses. At ~~September 30,~~March 31, 2023 and December 31, 2022, management has classified the entire investment securities portfolio as AFS, which is accounted for at current market value with non-credit losses and gains reported in OCI, net of income taxes, and declines due to credit factors recorded in earnings through an ACL on the AFS securities.

The Company's investment securities portfolio includes debt investments that are subject to varying degrees of credit and market risks, which arise from general market conditions, and factors impacting specific industries, as well as news that may impact specific issues. Management monitors its debt securities, using various indicators in determining whether unrealized losses on debt securities are credit related and require an ACL. These indicators include the amount of time the security has been in an unrealized loss position, the cause and extent of the unrealized loss, and the credit quality of the issuer and underlying assets. In addition, management assesses whether it is likely we will have to sell the security prior to recovery, or if we expect to be able to hold the security until the price recovers. The Company determined that the declines in market value were due to increases in interest rates and market movements, and not due to credit factors. The Company does not intend to sell these securities with unrealized losses and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be maturity. Therefore, the Company has concluded that the unrealized losses for the AFS securities do not require an ACL at March 31, 2023. Under the prior OTTI framework, the Company did not record any cumulative OTTI expense as of December 31, 2022.

At March 31, 2023, AFS securities totaled ~~$503.6~~$520.2 million, an increase of ~~$31.2~~$6.5 million, from ~~$472.4~~$513.7 million at December 31, ~~2021.~~2022. During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, the Company purchased ~~$73.7 million of municipal securities, $41.2~~$5.3 million of agency MBS and CMO, ~~and $16.7~~$3.3 million of non-agency CMO and ~~sold $3.1~~$1.0 million ~~of a municipal security for a gain of $22 thousand. During~~in asset-backed securities. The Company did not sell any investment securities during the first quarter of 2022, the Company recorded a loss of $171 thousand on one $14.7 million par value non-agency CMO, which was called by the issuer in the second quarter of 2022. There was no OTTI recorded during the third quarter of 2022.2023. The balance of investment securities included net unrealized losses of ~~$54.5~~$40.8 million at ~~September 30, 2022~~March 31, 2023 compared to net unrealized ~~gains~~losses of ~~$5.6~~$49.6 million at December 31, ~~2021.~~2022. This change of $8.8 million was primarily due to further inversion of the yield curve during the first quarter of 2023. The overall duration of the Company's investment securities portfolio is 4.8 years at March 31, 2023. The Company has sufficient access to liquidity such that management does not believe it would be necessary to sell any of its investment securities at a loss to offset any unexpected deposit outflows. Management believes the structure of the Bank's investment portfolio is appropriately aligned with the rest of the balance sheet to protect against significant ~~market interest rate increases in 2022.~~and unexpected charges against earnings and capital.

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The following table summarizes the credit ratings and collateral associated with the Company's investment portfolio, excluding equity securities, at ~~September 30, 2022:~~March 31, 2023:


Sector	Sector	Portfolio Mix		Amortized Book Value		Fair Value		Credit Enhancement		AAA		AA		A		BBB		NR		Collateral Type	Sector	Portfolio Mix		Amortized Book Value		Fair Value		Credit Enhancement		AAA		AA		A		BBB		NR		Collateral / Guarantee Type
Unsecured ABS	Unsecured ABS	1	%	$	5,230	$	4,731	28	%	—	%	—	%	—	%	—	%	100	%	Unsecured Consumer Debt	Unsecured ABS	1	%	$	4,610	$	4,055	33	%	—	%	—	%	—	%	—	%	100	%	Unsecured Consumer Debt
Student Loan ABS	Student Loan ABS	1		7,284		7,079		26		—		—		—		—		100		Seasoned Student Loans	Student Loan ABS	1		6,542		6,309		27		—		—		—		—		100		Seasoned Student Loans
Federal Family Education Loan ABS	Federal Family Education Loan ABS	18		99,582		97,456		8		87		13		—		—		—		Federal Family Education Loan (1)	Federal Family Education Loan ABS	19		108,157		105,437		8		89		11		—		—		—		Federal Family Education Loan (1)
PACE Loan ABS	PACE Loan ABS	—		2,777		2,542		6		100		—		—		—		—		PACE Loans	PACE Loan ABS	—		2,633		2,402		6		100		—		—		—		—		PACE Loans
Non-Agency CMBS	Non-Agency CMBS	2		10,047		10,045		18		—		—		—		—		100		Bridge to HUD Non-Agency CMBS	Non-Agency CMBS	4		24,299		24,390		19		—		—		—		—		100
Non-Agency RMBS	Non-Agency RMBS	3		17,012		15,116		13		100		—		—		—		—		Reverse Mortgages (2)	Non-Agency RMBS	3		16,862		13,050		14		100		—		—		—		—		Reverse Mortgages (2)
Municipal - General Obligation	Municipal - General Obligation	22		122,576		107,870				5		90		5		—		—			Municipal - General Obligation	19		104,797		95,481				4		90		6		—		—
Municipal - Revenue	Municipal - Revenue	24		132,026		112,166				—		83		12		—		5			Municipal - Revenue	22		120,511		108,121				—		82		12		—		6
SBA ReRemic	SBA ReRemic	1		5,840		5,737				—		100		—		—		—		SBA Guarantee (3)	SBA ReRemic	1		4,827		4,741				—		100		—		—		—		SBA Guarantee (3)
Small Business Administration																					Small Business Administration	2		10,043		10,708				—		100		—		—		—		SBA Guarantee (3)
Agency MBS	Agency MBS	24		135,223		123,353				—		100		—		—		—		Residential Mortgages (3)	Agency MBS	24		137,290		127,475				—		100		—		—		—		Residential Mortgages (3)
U.S. Treasury securities	U.S. Treasury securities	4		20,074		17,115				—		100		—		—		—			U.S. Treasury securities	4		20,067		17,693				—		100		—		—		—		U.S. Government Guarantee (3)
Bank CDs	Bank CDs	—		249		249				—		—		—		—		100		FDIC Insured CD	Bank CDs	—		249		249				—		—		—		—		100		FDIC-Insured CD
		100	%	$	557,920	$	503,459			20	%	71	%	4	%	—	%	5	%			100	%	$	560,887	$	520,111			21	%	67	%	4	%	—	%	8	%

(1) Minimum of 18% guaranteed by U.S. government
(2) Reverse mortgages fund over time; credit enhancement is estimated based on prior experience
(3) 75% guaranteed by U.S. government agencies
(1) Minimum of 97% guaranteed by U.S. government																					(1) Minimum of 97% guaranteed by U.S. government
(2) Non-agency reverse mortgages with current structural credit enhancements																					(2) Non-agency reverse mortgages with current structural credit enhancements
(3) Guaranteed by U.S. government or U.S. government agencies																					(3) Guaranteed by U.S. government or U.S. government agencies

Note : Ratings in table are the lowest of the six rating agencies (Standard & Poor's, Moody's, Fitch, Morningstar, DBRS and Kroll Bond Rating Agency). Standard & Poor's rates U.S. government obligations at AA+
Note : Ratings in table are the lowest of the six rating agencies (Standard & Poor's, Moody's, Fitch, Morningstar, DBRS and Kroll Bond Rating Agency). Standard & Poor's rates U.S. government obligations at AA+.																					Note : Ratings in table are the lowest of the six rating agencies (Standard & Poor's, Moody's, Fitch, Morningstar, DBRS and Kroll Bond Rating Agency). Standard & Poor's rates U.S. government obligations at AA+.

Loan Portfolio

The Company offers a variety of products to meet the credit needs of its borrowers, principally commercial real estate loans, commercial and industrial loans, retail loans secured by residential properties, and, to a lesser extent, installment loans. No loans are extended to non-domestic borrowers or governments.

The risks associated with lending activities differ among loan segments and classes and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans and general economic conditions. Any of these factors may adversely impact a borrower’s ability to repay loans, and also impact the associated collateral. ~~See~~A further discussion on the Company's loan segments and classes and related risks and the Company's implementation of the new accounting standards for expected credit losses, referred to as CECL, and financial difficulty modifications are included in Note 1, Summary of Significant Accounting Policies, and Note 3, Loans and Allowance for ~~Loan~~Credit Losses, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial ~~Information,~~Information." ~~for a description of the Company’s loan classes and differing levels of associated credit risk.~~

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The following table presents the loan portfolio, excluding residential LHFS, by segment and class at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


		September 30, 2022		December 31, 2021			March 31, 2023		December 31, 2022
Commercial real estate:	Commercial real estate:					Commercial real estate:
Owner occupied	Owner occupied	$	313,125	$	238,668	Owner occupied	$	339,371	$	315,770
Non-owner occupied	Non-owner occupied	573,605		551,783		Non-owner occupied	603,396		608,043
Multi-family	Multi-family	114,561		93,255		Multi-family	144,053		138,832
Non-owner occupied residential	Non-owner occupied residential	105,267		106,112		Non-owner occupied residential	106,390		104,604
Acquisition and development:	Acquisition and development:					Acquisition and development:
1-4 family residential construction	1-4 family residential construction	20,810		12,279		1-4 family residential construction	20,941		25,068
Commercial and land development	Commercial and land development	148,512		93,925		Commercial and land development	174,556		158,308
Commercial and industrial (1)	Commercial and industrial (1)	378,574		485,728		Commercial and industrial (1)	380,683		357,774
Municipal	Municipal	12,683		14,989		Municipal	11,329		12,173
Residential mortgage:	Residential mortgage:					Residential mortgage:
First lien	First lien	220,970		198,831		First lien	227,031		229,849
Home equity - term	Home equity - term	5,869		6,081		Home equity - term	5,371		5,505
Home equity - lines of credit	Home equity - lines of credit	180,267		160,705		Home equity - lines of credit	183,340		183,241
Installment and other loans	Installment and other loans	13,684		17,630		Installment and other loans	11,040		12,065
		$	2,087,927	$	1,979,986		$	2,207,501	$	2,151,232

Total loans increased by ~~$107.9~~$56.3 million from December 31, ~~2021~~2022 to ~~September 30, 2022.~~March 31, 2023. This increase is due to growth in commercial loans ~~excluding SBA PPP loans,~~ of ~~$243.3 million, home equity lines of credit of $19.6 million and first lien residential mortgages of $22.1~~$63.2 million, partially offset by a decrease in first lien residential mortgages held in portfolio of ~~$172.9~~$2.8 million and a decrease of $3.0 million in SBA PPP loans due to loan forgiveness during the ~~nine~~three months ended ~~September 30, 2022. Overall loan growth, excluding SBA PPP loans, was 16% for the nine months ended September 30, 2022.~~March 31, 2023.

Asset Quality

Risk Elements

The Company’s loan portfolio is subject to varying degrees of credit risk. Credit risk is managed through the Company's underwriting standards, on-going credit reviews, and monitoring of asset quality measures. Additionally, loan portfolio diversification, which limits exposure to a single industry or borrower, and collateral requirements also mitigate the Company's risk of credit loss.

The loan portfolio consists principally of loans to borrowers in south central Pennsylvania and the greater Baltimore, Maryland region. As the majority of loans are concentrated in these geographic regions, a substantial portion of the borrowers' ability to honor their obligations may be affected by the level of economic activity in the market areas.

Nonperforming assets include nonaccrual loans and foreclosed real estate. In addition, ~~restructured loans still accruing~~loan modifications to borrowers experiencing financial difficulty and loans past due 90 days or more and still accruing are also deemed to be risk assets. For all loan classes, the accrual of interest income generally ceases when principal or interest is past due 90 days or more and collateral is inadequate to cover principal and interest or immediately if, in the opinion of management, full collection is unlikely. Interest will continue to accrue on loans past due 90 days or more if the collateral is adequate to cover principal and interest, and the loan is in the process of collection. Interest accrued, but not collected, as of the date of placement on nonaccrual status, is generally reversed and charged against interest income, unless fully collateralized. Subsequent payments received are either applied to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectability of principal. Loans are returned to accrual status, for all loan classes, when all the principal and interest amounts contractually due are brought current, the loans have performed in accordance with the contractual terms of the note for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is reasonably assured. Past due status is based on contract terms of the loan.

~~Loans,~~Prior to the adoption of ASU 2022-02, loans, the terms of which are modified, ~~are~~were classified as TDRs if a concession was granted for legal or economic reasons related to a borrower’s financial difficulties. Concessions granted under a TDR typically ~~involve~~involved a temporary deferral of scheduled loan payments, an extension of a loan’s stated maturity date, temporary reduction in interest rates, or below market rates. If a modification occurred while the loan is on accruing status, it would continue to accrue interest under the modified terms. Nonaccrual TDRs were restored to accrual status if scheduled principal

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rates. If a modification occurs while the loan is on accruing status, it will continue to accrue interest under the modified terms. Nonaccrual TDRs are restored to accrual status if scheduled principal and interest payments, under the modified terms, ~~are~~were current for six months after modification, and the borrower continues to demonstrate its ability to meet the modified terms. TDRs ~~are~~were evaluated individually for impairment if they have been restructured during the most recent calendar year, or if they are not performing according to their modified terms.

ASU 2022-02 eliminates the TDR accounting model, and requires that the Company evaluate, based on the accounting for loan modifications, whether the borrower is experiencing financial difficulty and the modification results in a more-than-insignificant direct change in the contractual cash flows and represents a new loan or a continuation of an existing loan, which the Company refers to these loans as "financial difficulty modifications" or "FDMs."

The following table presents the Company’s ~~total nonperforming~~risk elements and ~~other risk~~relevant asset quality ratios at March 31, 2023 and December 31, 2022. Accruing loans meeting the criteria for FDMs are reported cumulatively on a prospective basis from the adoption of ASU 2022-02.


	March 31, 2023			December 31, 2022
Nonaccrual loans	$	21,246		$	20,583
OREO	85			—
Total nonperforming assets	21,331			20,583
FDMs still accruing / TDRs still accruing	—			682
Loans past due 90 days or more and still accruing (1)	28			439
Total nonperforming and other risk assets ("total risk assets")	$	21,359		$	21,704
Loans 30-89 days past due and still accruing	$	6,555		$	7,311
Asset quality ratios:
Total nonperforming loans to total loans	0.96		%	0.96		%
Total nonperforming assets to total assets	0.71		%	0.70		%
Total nonperforming assets to total loans and OREO	0.97		%	0.96		%
Total risk assets to total loans and OREO	0.97		%	1.01		%
Total risk assets to total assets	0.71		%	0.74		%
ACL to total loans	1.28		%	1.17		%
ACL to nonperforming loans	133.50		%	122.32		%
ACL to nonperforming loans and FDMs still accruing / TDRs still accruing	133.50		%	118.40		%
Net (recoveries) charge-offs to total average loans (2)	(0.01)		%	0.01		%

(1) Includes zero and $307 thousand of PCI loans at March 31, 2023 and December 31, 2022, respectively in accordance with ASU 310-30. Upon adoption of the CECL standard, PCD loans were evaluated and reported on an individual loan level under ASU 310-20, Nonrefundable Fees and Other Assets.

(2) Annualized

Nonperforming assets ~~including the aggregate balances of~~include nonaccrual loans ~~restructured loans~~and foreclosed real estate. Risk assets, which include nonperforming assets, FDMs still accruing and loans past due 90 days or more and ~~OREO as~~still accruing, totaled $21.4 million at March 31, 2023, a decrease of ~~September 30, 2022 and December 31, 2021. Loans 30-89 days past due and relevant asset quality ratios as of September 30, 2022 and December 31, 2021 are also presented.~~
September 30,
2022 December 31,
2021
Nonaccrual loans $ 5,303 $ 6,449
OREO — —
Total nonperforming assets 5,303 6,449
Restructured loans still accruing 689 804
Loans past due 90 days or more and still accruing 232 1,201
Total nonperforming and other risk assets (total risk assets) $ 6,224 $ 8,454
Loans 30-89 days past due and still accruing $ 2,421 $ 5,925
Asset quality ratios:
Total nonperforming loans to total loans 0.25 % 0.33 %
Total nonperforming assets to total assets 0.19 % 0.23 %
Total nonperforming assets to total loans and OREO 0.25 % 0.33 %
Total risk assets to total loans and OREO 0.30 % 0.43 %
Total risk assets to total assets 0.22 % 0.30 %
ALL to total loans 1.18 % 1.07 %
ALL to nonperforming loans 465.94 % 328.42 %
ALL to nonperforming loans and restructured loans still accruing 412.37 % 292.02 %

~~Total nonperforming and other~~ ~~risk assets decreased by $2.2 million~~,$345 thousand, or ~~26%~~2%, from December 31, ~~2021 to September 30, 2022. Non-accrual loans decreased by $1.1 million from December 31, 2021 to September 30,~~ 2022 due ~~primarily~~partially to ~~$721 thousand of~~the change in accounting for TDRs and PCD loans ~~returning to accrual status and payment activity of $972 thousand, partially offset~~under CECL. Nonaccrual loans increased by ~~additions in loans classified as non-accrual loans of $583 thousand. Loans past due 90 days and still accruing decreased by $969~~$748 thousand from December 31, ~~2021~~2022 to ~~September 30, 2022~~March 31, 2023 due primarily to additions of $1.5 million, inclusive of $931 thousand transferred to non-accrual due to the ~~collection on a loan guaranteed by the SBA during the first quarter~~treatment of ~~2022.~~

~~The following table presents detail of impaired loans, excluding accruing PCI~~PCD loans at ~~September 30, 2022~~the individual asset level under CECL, partially offset by payments of $678 thousand, partial charge-offs of $85 thousand and loans returned to accrual status of $96 thousand. For the three months ended March 31, 2023, the Company did not have loans meeting the FDM criteria under ASU 2022-02. OREO increased by $85 thousand from December 31, ~~2021:~~
September 30, 2022 December 31, 2021
Nonaccrual
Loans Restructured
Loans Still
Accruing Total Nonaccrual
Loans Restructured
Loans Still
Accruing Total
Commercial real estate:
Owner occupied $ 2,849 $ — $ 2,849 $ 3,763 $ — $ 3,763
Non-owner occupied residential 90 — 90 122 — 122
Commercial and industrial 45 — 45 250 — 250
Residential mortgage:
First lien 1,904 689 2,593 1,831 804 2,635
Home equity - term 5 — 5 7 — 7
Home equity - lines of credit 372 — 372 436 — 436
Installment and other loans 38 — 38 40 — 40
$ 5,303 $ 689 $ 5,992 $ 6,449 $ 804 $ 7,253
2022 to March 31, 2023 due to one owner-occupied commercial real estate property, which was acquired through foreclosure in satisfaction of the outstanding loan balance.

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The following table presents the amortized cost basis of nonaccrual loans, according to loan class, with and without reserves on individually evaluated loans at March 31, 2023, as compared to nonaccrual loans at December 31, 2022. There was no specific reserve on the nonaccrual loans and no significant changes in the collateral securing these loans at both March 31, 2023 and December 31, 2022.


	March 31, 2023								December 31, 2022
	Nonaccrual loans with a related ACL		Nonaccrual loans with no related ACL		Total nonaccrual loans		Loans Past Due 90+ Accruing		Total nonaccrual
Commercial real estate:
Owner-occupied	$	—	$	2,689	$	2,689	$	—	$	2,767
Non-owner occupied	—		276		276		—		—
Multi-family	—		—		—		—		—
Non-owner occupied residential	—		243		243		—		81
Acquisition and development:
1-4 family residential construction	—		—		—		—		—
Commercial and land development	—		15,151		15,151		—		15,426
Commercial and industrial	—		43		43		—		31
Municipal	—		—		—		—		—
Residential mortgage:
First lien	—		2,155		2,155		28		1,838
Home equity – term	—		4		4		—		5
Home equity – lines of credit	—		661		661		—		395
Installment and other loans	—		24		24		—		40
Total	$	—	$	21,246	$	21,246	$	28	$	20,583

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The information presented above in the nonaccrual loan table and the collateral-dependent table are not required for periods prior to the adoption of CECL. The following table, which excludes accruing PCI loans, presents the most comparable required information for the prior period, which summarizes impaired loans by segment and class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required at December 31, 2022. The recorded investment in loans excludes accrued interest receivable. Related allowances established generally pertain to those loans in which loan forbearance agreements were in the process of being negotiated or updated appraisals were pending, and any partial charge-off will be recorded when final information is received.


	December 31, 2022
		Nonaccrual Loans		Restructured Loans Still Accruing		Total
Commercial real estate:
Owner occupied		$	2,767	$	—	$	2,767


Non-owner occupied residential		81		—		81
Acquisition and development:

Commercial and land development		15,426		—		15,426
Commercial and industrial		31		—		31
Residential mortgage:
First lien		1,838		682		2,520
Home equity - term		5		—		5
Home equity - lines of credit		395		—		395
Installment and other loans		40		—		40
		$	20,583	$	682	$	21,265

The following table presents our exposure to relationships ~~with an impaired balance, which excludes accruing PCI loans,~~that are individually evaluated for impairment and the partial charge-offs taken to date and specific reserves established on those relationships at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021. Of~~2022. Accruing PCI loans are excluded loans individually evaluated for impairment at December 31, 2022. Prior to the ~~relationships deemed~~adoption of CECL, acquired loans that met the criteria for impairment or nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the client is contractually delinquent if the Company expects to fully collect the new carrying value (i.e., fair value) of the loans. As such, the Company may no longer consider the loan to be ~~impaired at September 30, 2022, one had a recorded balance~~nonperforming in ~~excess~~accordance with guidance in ASU 310-30. Upon adoption of ~~$1.0 million,~~CECL, the Company elected to account for its PCD loans under ASC 310-20, which required that acquired loans be analyzed on an individual asset level. The impact of this election resulted in loans reported as nonaccrual and ~~56 relationships, which represents 50% of total impaired loans, had recorded balances of less than $250 thousand.~~individually evaluated for credit expected losses under the CECL methodology.
# of
Relationships Recorded
Investment Partial
Charge-offs
to Date Specific
Reserves
September 30, 2022
Relationships greater than $1,000,000 1 $ 2,406 $ — $ —
Relationships greater than $500,000 but less than $1,000,000 — — — —
Relationships greater than $250,000 but less than $500,000 2 577 — —
Relationships less than $250,000 56 3,009 280 28
59 $ 5,992 $ 280 $ 28
December 31, 2021
Relationships greater than $1,000,000 1 $ 2,535 $ — $ —
Relationships greater than $500,000 but less than $1,000,000 1 602 17 —
Relationships greater than $250,000 but less than $500,000 2 601 — —
Relationships less than $250,000 63 3,515 303 28
67 $ 7,253 $ 320 $ 28


	# of Relationships	Individually Evaluated Loans		Partial Charge-offs to Date		Specific Reserves
March 31, 2023
Relationships greater than $1,000,000	2	$	17,442	$	—	$	—
Relationships greater than $500,000 but less than $1,000,000	—	—		—		—
Relationships greater than $250,000 but less than $500,000	1	276		—		—
Relationships less than $250,000	71	3,705		545		28
	74	$	21,423	$	545	$	28
December 31, 2022
Relationships greater than $1,000,000	2	$	17,774	$	—	$	—
Relationships greater than $500,000 but less than $1,000,000	—	—		—		—
Relationships greater than $250,000 but less than $500,000	1	260		—		—
Relationships less than $250,000	60	3,231		320		28
	63	$	21,265	$	320	$	28

The Company takes partial charge-offs on collateral-dependent loans when carrying value exceeds estimated fair value, as determined by the most recent appraisal adjusted for current (within the quarter) conditions, less costs to dispose. Impairment reserves remain in place if updated appraisals are pending, and represent management’s estimate of potential loss.

Internal loan reviews are completed annually on all commercial relationships, secured by commercial real estate, with a committed loan balance in excess of $1.0 million, which includes confirmation of risk rating by an independent credit officer.

Table of Contents

In addition, all commercial relationships greater than $500 thousand rated Substandard, Doubtful or Loss are reviewed and corresponding risk ratings are reaffirmed by the Bank's Problem Loan Committee, with subsequent reporting to the Management ERM Committee.

In its individual evaluated loan ~~impairment~~ analysis, the Company determines the extent of any full or partial charge-offs that may be required, or any reserves that may be needed. The determination of the Company’s charge-offs or impairment reserve include an evaluation of the outstanding loan balance and the related collateral securing the credit. Through a combination of collateral securing the loans and partial charge-offs taken to date, the Company believes that it has adequately provided for the potential losses that it may incur on these relationships at ~~September 30, 2022.~~March 31, 2023. However, over time, additional information may result in increased reserve allocations or, alternatively, it may be deemed that the reserve allocations exceed those that are needed.

In an effort to assist clients which were negatively impacted by the COVID-19 pandemic, the Bank offered various mitigation options, including a loan payment deferral program. Under this program, most commercial deferrals were for a 90-day period, while most consumer deferrals were for a 180-day period. As of September 30, 2022, the Company had a loan deferral under this program for a consumer client with a total loan balance of $214 thousand as of September 30, 2022. As of December 31, 2021, the Company had a consumer loan under this deferral program of $56 thousand for which the deferral period subsequently expired in 2022. In accordance with the revised Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus issued on April 7, 2020, these deferrals are exempt from TDR status as they meet the specified requirements.

~~The following table summarizes COVID-19 related modifications, including deferrals and forbearances:~~

Loan Type Amount of Loans Percent of Non-PPP Loans
September 30, 2022 December 31, 2021 September 30, 2022 December 31, 2021
Consumer loans $ 214 $ 56 — % — %
Total loans $ 214 $ 56 — % — %

~~Table of Contents~~

Credit Risk Management

Allowance for ~~Loan~~Credit Losses

The Company maintains the ~~ALL~~ACL at a level deemed adequate by management for ~~probable incurred~~expected credit losses. As disclosed in Note 1 and Note 3, on January 1, 2023 the Company implemented CECL and increased the ACL, previously the ALL, with a cumulative-effect adjustment to the ACL of $2.4 million. In addition, the Company recorded a cumulative-effect adjustment to the ACL for off-balance sheet exposures of $100 thousand. The ~~ALL~~Company’s ACL is ~~established and maintained through a~~calculated quarterly, with any adjustment recorded to the provision for ~~loan~~credit losses ~~which~~in the consolidated statement of income. A comprehensive analysis of the ACL is ~~charged to earnings. On~~performed by the Company on a quarterly ~~basis, management assesses~~basis. Management evaluates the adequacy of the ~~ALL using~~ACL utilizing a defined methodology to determine if it properly addresses the current and expected risks in the loan portfolio, which considers the performance of borrowers and specific ~~credit~~ evaluation of ~~impaired~~individually evaluated loans including historical loss ~~experience~~experiences, trends in delinquencies, nonperforming loans and other risk assets, and the qualitative factors. Risk factors are continuously reviewed and adjusted, as needed, by management when conditions support a change. Management believes its approach properly addresses ~~the requirements for loans individually identified as impaired, loans collectively evaluated for impairment,~~relevant accounting and ~~other~~ bank regulatory guidance ~~in its assessment.~~for loans both collectively and individually evaluated. The results of the comprehensive analysis, including recommended changes, are governed by the Company's Reserve Adequacy Committee, whose members were also a part of the Company's CECL Committee.

The ~~ALL~~ACL is evaluated based on a review of the collectability of loans in light of historical experience; the nature and volume of the loan portfolio; adverse situations that may affect a borrower’s ability to repay; estimated value of any underlying collateral; and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A description of the methodology for establishing the allowance and provision for ~~loan~~credit losses and related procedures in establishing the appropriate level of reserve is included in Note 1, Summary of Significant Accounting Policies, and Note 3, Loans and Allowance for ~~Loan~~Credit Losses, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information."

~~Table of Contents~~

The following table ~~summarizes~~presents the ~~Company’s internal risk ratings at September 30, 2022~~amortized cost basis of the loan portfolio, by year of origination, loan class, and ~~December~~credit quality, as of March 31, ~~2021:~~
Pass Special
Mention Non-Impaired
Substandard Impaired -
Substandard Doubtful PCI Loans Total
September 30, 2022
Commercial real estate:
Owner occupied $ 302,001 $ 3,392 $ 2,649 $ 2,849 $ — $ 2,234 $ 313,125
Non-owner occupied 566,996 3,931 2,388 — — 290 573,605
Multi-family 106,306 8,010 245 — — — 114,561
Non-owner occupied residential 102,136 1,979 493 90 — 569 105,267
Acquisition and development:
1-4 family residential construction 20,810 — — — — — 20,810
Commercial and land development 132,621 15,891 — — — — 148,512
Commercial and industrial 349,319 20,891 6,236 45 — 2,083 378,574
Municipal 12,683 — — — — — 12,683
Residential mortgage:
First lien 213,812 — 223 2,593 — 4,342 220,970
Home equity - term 5,849 — — 5 — 15 5,869
Home equity - lines of credit 179,850 — 45 372 — — 180,267
Installment and other loans 13,639 — — 38 — 7 13,684
$ 2,006,022 $ 54,094 $ 12,279 $ 5,992 $ — $ 9,540 $ 2,087,927
December 31, 2021
Commercial real estate:
Owner occupied $ 219,250 $ 7,239 $ 6,087 $ 3,763 $ — $ 2,329 $ 238,668
Non-owner occupied 528,010 23,297 166 — — 310 551,783
Multi-family 84,414 8,238 603 — — — 93,255
Non-owner occupied residential 102,588 1,065 1,153 122 — 1,184 106,112
Acquisition and development:
1-4 family residential construction 12,279 — — — — — 12,279
Commercial and land development 92,049 1,385 491 — — — 93,925
Commercial and industrial 470,579 7,917 4,720 250 — 2,262 485,728
Municipal 14,989 — — — — — 14,989
Residential mortgage:
First lien 191,386 — 225 2,635 — 4,585 198,831
Home equity - term 6,058 — — 7 — 16 6,081
Home equity - lines of credit 160,203 20 46 436 — — 160,705
Installment and other loans 17,584 — — 40 — 6 17,630
$ 1,899,389 $ 49,161 $ 13,491 $ 7,253 $ — $ 10,692 $ 1,979,986

~~Potential problem~~2023. For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan and payment activity, which residential mortgage and installment and other consumer loans are ~~defined as~~presented below based on payment performance: performing loans which have characteristics that cause management concern over the ability of the borrower to perform under present loan repayment terms and which may result in the reporting of these loans as nonperforming loans in the future. Generally, management feels that Substandard loans that are currently performing and notor nonperforming.


	Term Loans Amortized Cost Basis by Origination Year
As of March 31, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Basis		Revolving Loans Converted to Term		Total
Commercial Real Estate:
Owner-occupied:
Risk rating
Pass	$	25,068	$	107,533	$	69,946	$	29,509	$	22,314	$	74,607	$	2,420	$	—	$	331,397
Special mention	—		—		—		—		—		2,560		—		—		2,560
Substandard - Non-IEL	—		—		—		—		—		2,257		468		—		2,725
Substandard - IEL	—		—		—		—		—		2,635		54		—		2,689
Total owner-occupied loans	$	25,068	$	107,533	$	69,946	$	29,509	$	22,314	$	82,059	$	2,942	$	—	$	339,371
Current period gross charge offs - owner-occupied	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Table of Contents

~~considered impaired result~~


	Term Loans Amortized Cost Basis by Origination Year
As of March 31, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Basis		Revolving Loans Converted to Term		Total
Non-owner occupied:
Risk rating
Pass	$	13,063	$	94,461	$	194,367	$	85,305	$	66,223	$	143,337	$	631	$	877	$	598,264
Special mention	—		—		—		—		—		2,206		400		—		2,606
Substandard - Non-IEL	—		—		—		2,170		—		80		—		—		2,250
Substandard - IEL	—		—		—		—		—		276		—		—		276
Total non-owner occupied loans	$	13,063	$	94,461	$	194,367	$	87,475	$	66,223	$	145,899	$	1,031	$	877	$	603,396
Current period gross charge offs - non-owner occupied	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Multi-family:
Risk rating
Pass	$	—	$	54,897	$	9,008	$	12,888	$	7,971	$	51,500	$	129	$	—	$	136,393
Special mention	—		—		—		—		—		7,660		—		—		7,660
Substandard - Non-IEL	—		—		—		—		—		—		—		—		—
Substandard - IEL	—		—		—		—		—		—		—		—		—
Total multi-family loans	$	—	$	54,897	$	9,008	$	12,888	$	7,971	$	59,160	$	129	$	—	$	144,053
Current period gross charge offs - multi-family	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Non-owner occupied residential:
Risk rating
Pass	$	3,207	$	27,191	$	19,814	$	10,893	$	7,067	$	35,158	$	1,572	$	—	$	104,902
Special mention	—		—		—		—		—		841		—		—		841
Substandard - Non-IEL	—		—		—		—		—		405		—		—		405
Substandard - IEL	—		—		—		—		—		242		—		—		242
Total non-owner occupied residential loans	$	3,207	$	27,191	$	19,814	$	10,893	$	7,067	$	36,646	$	1,572	$	—	$	106,390
Current period gross charge offs - non-owner occupied residential	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Acquisition and development:
1-4 family residential construction:
Risk rating
Pass	$	1,552	$	18,437	$	952	$	—	$	—	$	—	$	—	$	—	$	20,941
Special mention	—		—		—		—		—		—		—		—		—
Substandard - Non-IEL	—		—		—		—		—		—		—		—		—
Substandard - IEL	—		—		—		—		—		—		—		—		—
Total 1-4 family residential construction loans	$	1,552	$	18,437	$	952	$	—	$	—	$	—	$	—	$	—	$	20,941
Current period gross charge offs - 1-4 family residential construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial and land development:
Risk rating
Pass	$	8,025	$	50,417	$	81,878	$	12,018	$	122	$	3,043	$	525	$	2,925	$	158,953
Special mention	—		—		—		—		—		452		—		—		452
Substandard - Non-IEL	—		—		—		—		—		—		—		—		—
Substandard - IEL	—		—		—		15,151		—		—		—		—		15,151
Total commercial and land development loans	$	8,025	$	50,417	$	81,878	$	27,169	$	122	$	3,495	$	525	$	2,925	$	174,556
Current period gross charge offs - commercial and land development	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Table of Contents


	Term Loans Amortized Cost Basis by Origination Year
As of March 31, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Basis		Revolving Loans Converted to Term		Total
Commercial and Industrial:
Risk rating
Pass	$	20,837	$	84,057	$	94,073	$	25,903	$	12,835	$	24,290	$	89,790	$	3,839	$	355,624
Special mention	—		306		374		6,615		1,534		913		8,349		—		18,091
Substandard - Non-IEL	114		176		1,196		87		373		1,068		3,911		—		6,925
Substandard - IEL	—		—		—		10		—		33		—		—		43
Total commercial and industrial loans	$	20,951	$	84,539	$	95,643	$	32,615	$	14,742	$	26,304	$	102,050	$	3,839	$	380,683
Current period gross charge offs - commercial and industrial	$	—	$	—	$	—	$	84	$	—	$	2	$	—	$	—	$	86
Municipal:
Risk rating
Pass	$	—	$	18	$	3,643	$	59	$	—	$	7,609	$	—	$	—	$	11,329
Total municipal loans	$	—	$	18	$	3,643	$	59	$	—	$	7,609	$	—	$	—	$	11,329
Current period gross charge offs - municipal	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential mortgage:
First lien:
Payment performance
Performing	$	4,153	$	60,524	$	35,265	$	8,632	$	7,955	$	107,521	$	—	$	650	$	224,700
Nonperforming	—		—		—		—		126		2,205		—		—		2,331
Total first lien loans	$	4,153	$	60,524	$	35,265	$	8,632	$	8,081	$	109,726	$	—	$	650	$	227,031
Current period gross charge offs - first lien	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Home equity - term:
Payment performance
Performing	$	159	$	806	$	151	$	502	$	131	$	3,618	$	—	$	—	$	5,367
Nonperforming	—		—		—		—		—		4		—		—		4
Total home equity - term loans	$	159	$	806	$	151	$	502	$	131	$	3,622	$	—	$	—	$	5,371
Current period gross charge offs - home equity - term	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Home equity - lines of credit:
Payment performance
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	112,345	$	70,333	$	182,678
Nonperforming	—		—		—		—		—		—		643		19		662
Total residential real estate - home equity - lines of credit loans	$	—	$	—	$	—	$	—	$	—	$	—	$	112,988	$	70,352	$	183,340
Current period gross charge offs - home equity - lines of credit	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Installment and other loans:
Payment performance
Performing	$	197	$	561	$	448	$	192	$	1,266	$	2,433	$	5,919	$	—	$	11,016
Nonperforming	—		—		—		—		22		2		—		—		24
Total Installment and other loans	$	197	$	561	$	448	$	192	$	1,288	$	2,435	$	5,919	$	—	$	11,040
Current period gross charge offs - installment and other	$	31	$	24	$	—	$	—	$	1	$	—	$	—	$	—	$	56

The information presented in ~~some doubt as~~the table above is not required for periods prior to the ~~borrower’s ability~~adoption of CECL. The following table summarizes the Company’s loan portfolio ratings based on its internal risk rating system at December 31, 2022, which presents the most comparable required information for the prior period. Prior to ~~continue to perform~~the adoption of CECL, PCD loans were classified as PCI loans and accounted for under ASC 310-30. In accordance with the ~~terms~~CECL standard, management did not

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reassess whether PCI assets met the criteria of PCD assets as of the ~~loan, and represent potential problem loans. Non-impaired Substandard~~adoption date. At March 31, 2023, the amortized cost of the PCD loans ~~totaled $12.3 million at September 30, 2022.~~was $9.4 million.


	Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		PCI Loans		Total

















December 31, 2022
Commercial real estate:
Owner occupied	$	305,159	$	2,109	$	3,532	$	2,767	$	—	$	2,203	$	315,770
Non-owner occupied	601,244		4,243		2,273		—		—		283		608,043
Multi-family	130,851		7,739		242		—		—		—		138,832
Non-owner occupied residential	102,674		810		482		81		—		557		104,604
Acquisition and development:
1-4 family residential construction	25,068		—		—		—		—		—		25,068
Commercial and land development	142,424		458		—		15,426		—		—		158,308
Commercial and industrial	331,103		17,579		7,013		31		—		2,048		357,774
Municipal	12,173		—		—		—		—		—		12,173
Residential mortgage:
First lien	222,849		—		215		2,520		—		4,265		229,849
Home equity - term	5,485		—		—		5		—		15		5,505
Home equity - lines of credit	182,801		—		45		395		—		—		183,241
Installment and other loans	12,017		—		—		40		—		8		12,065
	$	2,073,848	$	32,938	$	13,802	$	21,265	$	—	$	9,379	$	2,151,232

~~Additionally, the~~The Special Mention classification is intended to be a temporary classification reflective of loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Company’s position at some future date. Special Mention loans represent an elevated risk, but their weakness does not yet justify a more severe, or classified, rating. These loans require inquiry by lenders on the cause of the potential weakness and, once analyzed, the loan classification may be downgraded to Substandard or, alternatively, could be upgraded to Pass. Special Mention loans ~~increased~~decreased by ~~$4.9~~$728 thousand from $32.9 million f~~rom~~at December 31, ~~2021~~2022 to ~~September 30, 2022 primarily~~$32.2 million at March 31, 2023 due to ~~downgrades~~sustained payment performance for ~~one borrower within Acquisition and Development and the other borrower within the Commercial and Industrial~~multiple loans in various loan categories. These risk rating downgrades were partially offset by continued improvements in economic conditions resulting in upgrades to other commercial loans, including those that were previously downgraded due to the impact of the COVID-19 pandemic.

~~The following table summarizes activity~~classes. There was no significant change in the ~~ALL for the three and nine months ended September 30, 2022 and 2021:~~
Commercial Consumer
Commercial
Real Estate Acquisition
and
Development Commercial
and
Industrial Municipal Total Residential
Mortgage Installment
and Other Total Unallocated Total
Three Months Ended
September 30, 2022
Balance, beginning of period $ 12,294 $ 3,024 $ 4,471 $ 26 $ 19,815 $ 3,004 $ 223 $ 3,227 $ 237 $ 23,279
Provision for loan losses 551 342 296 (1) 1,188 309 (5) 304 8 1,500
Charge-offs — — (87) — (87) — (24) (24) — (111)
Recoveries — 1 32 — 33 2 6 8 — 41
Balance, end of period $ 12,845 $ 3,367 $ 4,712 $ 25 $ 20,949 $ 3,315 $ 200 $ 3,515 $ 245 $ 24,709
September 30, 2021
Balance, beginning of period $ 11,315 $ 1,243 $ 3,495 $ 29 $ 16,082 $ 2,863 $ 227 $ 3,090 $ 209 $ 19,381
Provision for loan losses (179) 290 386 (2) 495 (147) 18 (129) (1) 365
Charge-offs (89) — (55) — (144) — (20) (20) — (164)
Recoveries 305 8 60 — 373 5 5 10 — 383
Balance, end of period $ 11,352 $ 1,541 $ 3,886 $ 27 $ 16,806 $ 2,721 $ 230 $ 2,951 $ 208 $ 19,965
Nine Months Ended
September 30, 2022
Balance, beginning of period $ 12,037 $ 2,062 $ 3,814 $ 30 $ 17,943 $ 2,785 $ 215 $ 3,000 $ 237 $ 21,180
Provision for loan losses 776 1,295 980 (5) 3,046 508 13 521 8 3,575
Charge-offs — — (202) — (202) (10) (42) (52) — (254)
Recoveries 32 10 120 — 162 32 14 46 — 208
Balance, end of period $ 12,845 $ 3,367 $ 4,712 $ 25 $ 20,949 $ 3,315 $ 200 $ 3,515 $ 245 $ 24,709
September 30, 2021
Balance, beginning of period $ 11,151 $ 1,114 $ 3,942 $ 40 $ 16,247 $ 3,362 $ 324 $ 3,686 $ 218 $ 20,151
Provision for loan losses 133 418 109 (13) 647 (578) (69) (647) (10) (10)
Charge-offs (270) — (621) — (891) (92) (49) (141) — (1,032)
Recoveries 338 9 456 — 803 29 24 53 — 856
Balance, end of period $ 11,352 $ 1,541 $ 3,886 $ 27 $ 16,806 $ 2,721 $ 230 $ 2,951 $ 208 $ 19,965

~~The ALL totaled $24.7 million at September 30, 2022, an increase of $3.5 million~~Impaired-Substandard category from December 31, ~~2021, resulting from a provision for loan losses of $3.6 million, which was inclusive of net charge-offs of $46 thousand during the nine months ended September 30, 2022. At September 30,~~ 2022 ~~the ALL as a percentage of the total loan portfolio was 1.18% compared~~ to 1.03% at September 30, 2021. The ALL increased in the nine months ended September 30, 2022 primarily as a result of commercial loan growth. Despite generally favorable delinquency and nonperforming loan data, the impact of current economic conditions may result in the need for additional provisions for loan losses in future quarters.March 31, 2023.

Classified loans totaled ~~$19.6~~$34.0 million at ~~September 30, 2022,~~March 31, 2023, or ~~0.9%~~1.5% of total loans outstanding, reflecting a decrease from ~~$23.1~~$35.1 million, or ~~1.2%~~1.6% of loans outstanding, at December 31, ~~2021. The asset quality ratios, including~~2022.

Non-impaired substandard loans are performing loans, which have characteristics that cause management concern over the ~~nonperforming loans and risk assets metrics, previously noted are indicative~~ability of the ~~continued benefit~~borrower to perform under present loan repayment terms and which may result in the ~~Company has received from favorable~~reporting of these loans as nonperforming, or individually evaluated, loans in the future. Generally, management feels that substandard loans that are currently performing and not considered individually evaluated result in some doubt as to the borrower’s ability to continue to perform under the terms of the loan, and represent potential problem loans. Non-impaired Substandard loans totaled $12.6 million at March 31, 2023, a decrease of $1.2 million compared to $13.8 million at December 31, 2022 due primarily to one owner-occupied commercial real estate loan, which was upgraded to Pass rated.

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~~historical charge-off statistics and generally stable economic and market conditions for the last few years, even while the commercial loan portfolio has been growing.~~

The following table ~~summarizes~~presents the ~~ending~~activity in the ACL, including the impact of adopting CECL, for the three months ended March 31, 2023 and the activity in the ALL for the three months ended March 31, 2022:


	Commercial										Consumer
	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total















Three Months Ended
March 31, 2023
Balance, beginning of period prior to adopting CECL	$	13,558	$	3,214	$	4,505	$	24	$	21,301	$	3,444	$	188	$	3,632	$	245	$	25,178
Impact of adopting CECL	2,857		(214)		928		169		3,740		(1,121)		49		(1,072)		(245)		2,423
Provision for credit losses	262		215		412		(16)		873		(140)		(4)		(144)		—		729
Charge-offs	—		—		(86)		—		(86)		—		(56)		(56)		—		(142)
Recoveries	20		2		28		—		50		95		31		126		—		176
Balance, end of period	$	16,697	$	3,217	$	5,787	$	177	$	25,878	$	2,278	$	208	$	2,486	$	—	$	28,364
March 31, 2022
Balance, beginning of period	$	12,037	$	2,062	$	3,814	$	30	$	17,943	$	2,785	$	215	$	3,000	$	237	$	21,180

Provision for loan losses	(523)		258		500		(1)		234		72		(6)		66		—		300
Charge-offs	—		—		(61)		—		(61)		(10)		(13)		(23)		—		(84)
Recoveries	32		1		48		—		81		26		5		31		—		112
Balance, end of period	$	11,546	$	2,321	$	4,301	$	29	$	18,197	$	2,873	$	201	$	3,074	$	237	$	21,508

The ACL totaled $28.4 million at March 31, 2023, an increase of $3.2 million from December 31, 2022, resulting from a cumulative-effect adjustment from the adoption of CECL of $2.4 million and the provision for credit losses of $729 thousand for the three months ended March 31, 2023, which was inclusive of net recoveries of $34 thousand during the three months ended March 31, 2023. At March 31, 2023, the ACL as a percentage of the total loan ~~balances individually or collectively evaluated for impairment~~portfolio was 1.28% compared to 1.09% at March 31, 2022. The ACL increased in the three months ended March 31, 2023 primarily as a result of the impact of implementing CECL, which requires the transition from an incurred loss model based on historical loss experience to an expected credit loss model based on the life of the loan. For the three months ended March 31, 2023, the provision for credit losses was driven by the increase in commercial loans and the increase in the loss reserve rates under the CECL methodology. The provision expense recorded in the three months ended March 31, 2022 was due to commercial loan ~~type,~~growth, offset by an adjustment to the National and Local Economic Conditions qualitative factor that reduced the provision expense by $726 thousand. This factor had been increased previously for economic concerns in the commercial real estate portfolio associated with the COVID-19 pandemic. The additional allocation was removed during the first quarter of 2022 as ~~well as the ALL allocation for each, at September 30, 2022 and December 31, 2021, including PCI loans:~~
Commercial Consumer
Commercial
Real Estate Acquisition
and
Development Commercial
and
Industrial Municipal Total Residential
Mortgage Installment
and Other Total Unallocated Total
September 30, 2022
Loans allocated by:
Individually evaluated for impairment $ 2,939 $ — $ 45 $ — $ 2,984 $ 2,970 $ 38 $ 3,008 $ — $ 5,992
Collectively evaluated for impairment 1,103,619 169,322 378,529 12,683 1,664,153 404,136 13,646 417,782 — 2,081,935
$ 1,106,558 $ 169,322 $ 378,574 $ 12,683 $ 1,667,137 $ 407,106 $ 13,684 $ 420,790 $ — $ 2,087,927
ALL allocated by:
Individually evaluated for impairment $ — $ — $ — $ — $ — $ 28 $ — $ 28 $ — $ 28
Collectively evaluated for impairment 12,845 3,367 4,712 25 20,949 3,287 200 3,487 245 24,681
$ 12,845 $ 3,367 $ 4,712 $ 25 $ 20,949 $ 3,315 $ 200 $ 3,515 $ 245 $ 24,709
December 31, 2021
Loans allocated by:
Individually evaluated for impairment $ 3,885 $ — $ 250 $ — $ 4,135 $ 3,078 $ 40 $ 3,118 $ — $ 7,253
Collectively evaluated for impairment 985,933 106,204 485,478 14,989 1,592,604 362,539 17,590 380,129 — 1,972,733
$ 989,818 $ 106,204 $ 485,728 $ 14,989 $ 1,596,739 $ 365,617 $ 17,630 $ 383,247 $ — $ 1,979,986
ALL allocated by:
Individually evaluated for impairment $ — $ — $ — $ — $ — $ 28 $ — $ 28 $ — $ 28
Collectively evaluated for impairment 12,037 2,062 3,814 30 17,943 2,757 215 2,972 237 21,152
$ 12,037 $ 2,062 $ 3,814 $ 30 $ 17,943 $ 2,785 $ 215 $ 3,000 $ 237 $ 21,180

these concerns had subsided.

In addition to the specific reserve allocations on ~~impaired~~individually evaluated loans noted previously, ~~eight~~12 loans, with aggregate outstanding principal balances of ~~$367~~$399 thousand, have had cumulative partial charge-offs to the ~~ALL~~ACL totaling ~~$280~~$545 thousand at ~~September 30, 2022.~~March 31, 2023. As updated appraisals are received on collateral-dependent loans, partial charge-offs are taken to the extent the loans’ principal balance exceeds their fair value.

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The information presented in the table below is not required for periods subsequent to the adoption of CECL. The following table summarizes the ALL allocation for loans individually and collectively evaluated for impairment by loan segment at December 31, 2022. Accruing PCI loans are excluded from loans individually evaluated for impairment.


	Commercial										Consumer
	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total











December 31, 2022
Loans allocated by:
Individually evaluated for impairment	$	2,848	$	15,426	$	31	$	—	$	18,305	$	2,920	$	40	$	2,960	$	—	$	21,265
Collectively evaluated for impairment	1,164,401		167,950		357,743		12,173		1,702,267		415,675		12,025		427,700		—		2,129,967
	$	1,167,249	$	183,376	$	357,774	$	12,173	$	1,720,572	$	418,595	$	12,065	$	430,660	$	—	$	2,151,232
ALL allocated by:
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	28	$	—	$	28	$	—	$	28
Collectively evaluated for impairment	13,558		3,214		4,505		24		21,301		3,416		188		3,604		245		25,150
	$	13,558	$	3,214	$	4,505	$	24	$	21,301	$	3,444	$	188	$	3,632	$	245	$	25,178

Management believes the allocation of the ~~ALL~~ACL among the various loan classes adequately reflects the ~~probable incurred~~life expected credit losses in each ~~portfolio~~loan class and is based on the methodology outlined in Note 1, Summary of Significant Accounting Policies, and Note 3, Loans and Allowance for ~~Loan~~Credit Losses, to the Consolidated Financial Statements under Part I, Item 1, "Financial Information." Management re-evaluates and makes enhancements to its reserve methodology to better reflect the risks inherent in the different segments of the portfolio, particularly in light of increased charge-offs, with noticeable differences between the different loan classes. Management believes these enhancements to the ~~ALL~~ACL methodology improve the accuracy of quantifying ~~probable incurred~~the expected credit losses inherent in the portfolio. Management charges actual loan losses to the reserve and bases the provision for ~~loan~~credit losses on its overall analysis.

The ~~unallocated portion~~recoveries on previously charged-off relationships are the result of successful loan monitoring and workout solutions. Recoveries are difficult to predict, and any additional recoveries that the ~~ALL reflects estimated inherent losses within~~Company receives will be used to replenish the ~~portfolio that have not been detected, as well as the risk of error~~ACL. Recoveries favorably impact historical charge-off factors, and contribute to changes in the ~~specific and general reserve allocation, other potential exposure~~loss factors used in our allowance adequacy analysis. However, as the loan portfolio variances in management’s assessment of national and local economic conditions and other factors management believes appropriate at the time. The unallocated portion of the ALL was 1.0% and 1.1% of the ALL balance at September 30, 2022 and December 31, 2021, respectively. The Company monitors the unallocated portion of the ALL and, by policy, has determined it should not

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~~exceed 3% of the total reserve. Future negative~~continues to grow, future provisions for ~~loan~~credit losses may ~~result if the unallocated portion was to increase, and management determined the reserves were not required for the anticipated risk in the portfolio.~~result.

Management believes the Company’s ~~ALL~~ACL is adequate based on currently available information. Future adjustments to the ~~ALL~~ACL and enhancements to the methodology may be necessary due to changes in economic conditions, regulatory guidance, or management’s assumptions as to future delinquencies or loss rates.

Deposits

Deposits grew by ~~$40.9~~$39.4 million, or 2%, remaining at ~~approximately~~ $2.5 billion at both ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~

~~Noninterest-bearing~~2022. In the first quarter of 2023, time deposits increased by ~~$8.8~~$51.6 million, or 2%21%, ~~to $562.0~~money market deposits increased by $4.1 million, ~~from December 31, 2021 to September 30, 2022. Interest-bearing~~or 1%, and interest-bearing demand deposits ~~totaled $1.9 billion at September 30, 2022, an increase of $32.1~~increased by $2.8 million, or less than 1%. These increases were partially offset by a decrease in savings accounts of $11.7 million, or 5%, and a decrease in noninterest-bearing demand deposits of $7.4 million, or 1%. The increase in time deposits was attributable to promotional offerings of up to 18-month terms. During the three months ended March 31, 2023, the Company purchased $10.0 million in brokered money market deposits. The decline in the savings and noninterest-bearing deposit categories was primarily the result of clients seeking higher-yielding products. During the first quarter of 2023, the Bank was successful at retaining many of those deposits and driving inflows from new clients as well. At March 31, 2023, deposits that are uninsured and not collateralized totaled $474.2 million, or 19%, of total deposits.

During the ~~$1.9 billion~~fourth quarter of 2022, the Bank announced that it had entered into a Purchase and Assumption Agreement providing for the sale of its Path Valley branch and associated deposit liabilities. At March 31, 2023, deposits of approximately $27.5 million are expected to be conveyed in the branch sale. They are reported at cost as deposits held for assumption in connection with the sale of a bank branch within total deposits in the unaudited condensed consolidated balance sheets and are comprised of $21.5 million in interest-bearing deposits and $6.0 million in non-interest bearing deposits. At December 31, 2022, deposits of approximately $31.3 million were expected to be conveyed in the branch sale, are reported within total deposits at cost and were comprised of $23.5 million in interest-bearing deposits and $7.8 million in non-interest bearing

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deposits. As of the date of this report, total deposits of approximately $21.0 million were expected to be conveyed in the branch sale. The transaction is expected to close in the second quarter of 2023.

Borrowings

In addition to deposits, the Company uses borrowing sources to meet liquidity needs and for temporary funding. Sources of short-term borrowings include the FHLB of Pittsburgh, federal funds purchased and the FRB discount window. Short-term borrowings also may include securities sold under agreements to repurchase with deposit clients, in which a client sweeps a portion of a deposit balance into a repurchase agreement, which is a secured borrowing with a pool of securities pledged against the balance.

The Company also utilizes long-term debt, consisting principally of FHLB fixed and amortizing advances, to fund its balance sheet with original maturities greater than one year. The Company evaluates its funding needs, interest rate movements, the cost of options and the availability of attractive structures when considering the timing and extent of when it enters into long-term borrowings.

FHLB advances and other borrowings increased by $56.2 million to $162.3 million at March 31, 2023 compared to $106.1 million at December 31, ~~2021, despite a decrease~~2022. The increase in ~~time deposits, due to maturities, of $48.1 million, or 16%.~~

~~Deposit growth in~~borrowings during the first ~~nine months~~quarter of ~~2022 was principally due~~2023 includes long-term fixed-rate advances from the FHLB totaling $40 million. With the continued strength in loan fundings and increased competition for deposits, the Bank elected to ~~seasonality from public fund clients~~replace some of its overnight borrowings with lower cost term advances. The Bank tested its various sources of funding during the first quarter of 2023 to ensure accessibility.

See Note 8, Short-Term Borrowings, and ~~retail deposit generation.~~Note 9, Long-Term Borrowings, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information," for a description and terms of the Company’s borrowings and access to alternative sources of liquidity.

Shareholders' Equity, Capital Adequacy and Regulatory Matters

Capital management in a regulated financial services industry must properly balance return on equity to its shareholders while maintaining sufficient levels of capital and related risk-based regulatory capital ratios to satisfy statutory regulatory requirements. The Company’s capital management strategies have been developed to provide attractive rates of returns to its shareholders, while maintaining a ~~“well capitalized”~~“well-capitalized” position of regulatory strength.

Shareholders’ equity totaled ~~$217.4~~$240.2 million at ~~September 30, 2022, a decrease~~March 31, 2023, an increase of ~~$54.3~~$11.3 million, or ~~20%~~5%, from ~~$271.7~~$228.9 million at December 31, ~~2021.~~2022. The ~~decrease~~increase was primarily attributable to net income of $9.2 million and other comprehensive ~~losses~~income of $47.9 million due to an increase in unrealized losses on AFS securities and interest rate swaps designated as cash flow hedges, caused by a substantial increase in market interest rates, as well as dividends paid of $6.2 million and shared-based compensation costs of $12.5$7.1 million, partially offset by dividends paid of $2.1 million for the three months ended March 31, 2023 and the cumulative-effect adjustment from the adoption of CECL that decreased retained earnings by $2.0 million. Other comprehensive income increased due to after-tax declines of $6.8 million and $244 thousand in net ~~income~~unrealized losses on investment securities and cash flow hedges, respectively, primarily caused by further inversion of ~~$12.4 million.~~the yield curve during the first quarter of 2023.

For the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, total comprehensive ~~losses~~income totaled ~~$35.5~~$16.2 million, ~~a decrease~~an increase of ~~$64.0~~$27.0 million, from total comprehensive ~~income~~losses of ~~$28.5~~$10.8 million for the same period in ~~2021. This decrease was primarily due~~2022. Other comprehensive income, net of taxes, increased by $25.9 million to ~~an increase in unrealized~~$6.8 million for the three months ended March 31, 2023 compared to other comprehensive losses, ~~on AFS securities,~~ net of taxes, of ~~$48.8~~$19.1 million ~~and a decrease in net income of $13.8 million, due partially to~~for the provision for legal settlement of $13.0 million and a restructuring charge of $3.2 million, compared to the same period in 2021. The unrealized losses included in the unaudited consolidated statements of comprehensive (loss) income are the result of the significant increase in market interest rates.three months ended March 31, 2022.

At ~~September 30, 2022,~~March 31, 2023, book value per common share was ~~$20.34~~$22.46 per share compared to ~~$24.29~~$21.45 per share at December 31, ~~2021.~~2022. Tangible book value per share also ~~decreased~~increased from ~~$22.32~~$19.47 per share at December 31, ~~2021~~2022 to ~~$18.34~~$20.50 per share at ~~September 30, 2022. These decreases are primarily~~March 31, 2023, as a result of the ~~decrease~~increase in shareholders' ~~equity.~~equity driven by net income and other comprehensive income during the first quarter of 2023. See “Supplemental Reporting of Non-GAAP Measures.”

The Company routinely evaluates its capital levels in light of its risk profile to assess its capital needs. The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. The consolidated asset limit on small bank holding companies is $3.0 billion and a company with assets under that limit is not subject to the FRB consolidated capital rules, but may file reports that include capital amounts and ratios. The Company has elected to file those reports.

At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Bank was considered well-capitalized under applicable banking regulations. The decrease of 1.1% in Total Risk-Based Capital from 14.0% at December 31, 2021 to 12.9% at September 30, 2022 was due primarily to an increase in risk-weighted assets from the deployment of cash into commercial loans and an increase in deferred tax assets resulting from the increase in unrealized losses on AFS securities and interest rate swaps designated as cash flow hedges. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Prompt corrective action provisions are not applicable to bank holding companies, including financial holding companies.

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Note 8,10, Shareholders' Equity and Regulatory Capital, to the Notes to Unaudited Condensed Consolidated Financial Statements under Part I, Item 1, "Financial Information," includes a table presenting capital amounts and ratios for the Company and the Bank at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.

In addition to the minimum capital ratio requirement and minimum capital ratio to be ~~well capitalized~~well-capitalized presented in the referenced table in Note 8,10, the Bank must maintain a capital conservation buffer as more fully described in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, Item 1 - Business, under the topic Basel III Capital Rules. At ~~September 30, 2022,~~March 31, 2023, the Bank's capital conservation buffer, based on the most restrictive Total Capital to risk weighted assets capital ratio, was ~~4.9%~~4.4%, which is greater than the 2.5% requirement.

Liquidity

The primary function of asset/liability management is to ensure adequate liquidity and manage the Company’s sensitivity to changing interest rates. Liquidity management involves the ability to meet the cash flow requirements of clients who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. The Company's primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities, the sale of mortgage loans and borrowings from the FHLB of Pittsburgh. While maturities and scheduled amortization of loans and investment securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. ~~The Company's maximum borrowing capacity from the FHLB is $987.9 million at September 30, 2022.~~

The Company regularly adjusts its investments in liquid assets based upon ~~our~~its assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and investment securities and the objectives of ~~our~~its asset/liability management policy. The Company's most liquid assets are cash and cash equivalents. The level of these assets depend on the Company's operating, financing, lending and investing activities during any given period. At March 31, 2023, cash and cash equivalents totaled $98.3 million, compared with $60.8 million at December 31, 2022, which the increase reflects the increases in deposits and borrowings of $39.4 million and $56.2 million, respectively, offset primarily by the deployment of cash into higher yielding loans of $56.3 million. Unencumbered investment securities totaled ~~$99.5~~$91.2 million at ~~September 30, 2022.~~March 31, 2023. At ~~September 30, 2022,~~March 31, 2023, the Company had ~~$19.1~~$18.4 million of investment securities pledged at the FRB Discount Window, with no associated borrowings outstanding. The Company's maximum borrowing capacity from the FHLB of Pittsburgh is $1.1 billion at March 31, 2023. In addition, the Company had $30.0 million in available unsecured lines of credit with other banks at March 31, 2023. The Bank tested its various sources of funding during the first quarter of 2023 to ensure accessibility.

See Note 8, Short-Term Borrowings, and Note 9, Long-Term Borrowings, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information," for a description and terms of the Company’s borrowings and access to alternative sources of liquidity.

Supplemental Reporting of Non-GAAP Measures

As a result of acquisitions, the Company had intangible assets consisting of goodwill and core deposit and other intangible assets totaling ~~$22.1~~$21.6 million and ~~$22.9~~$21.8 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. Additionally, the Company incurred, before taxes, $3.2 million and $13.0 million in restructuring charges and provision for legal settlement, respectively, during the three and nine months ended September 30, 2022.

Management believes providing certain “non-GAAP” financial information will assist investors in their understanding of the effect on recent financial results from non-recurring charges.

Tangible book value per share, ~~and the impact of the legal settlement and restructuring charge on net income and diluted earnings per share,~~ as used by the Company in this supplemental reporting presentation, ~~are~~is determined by methods other than in accordance with GAAP. While we believe this information is a useful supplement to GAAP-based measures presented in this Form 10-Q, readers are cautioned that this non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for financial measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of our results and financial condition as reported under GAAP, nor are such measures necessarily comparable to non-GAAP performance measures that may be presented by other companies. This supplemental presentation should not be construed as an inference that our future results will be unaffected by similar adjustments to be determined in accordance with GAAP. The ~~decrease~~increase in tangible book value per share (non-GAAP) from December 31, ~~2021~~2022 to ~~September 30, 2022~~March 31, 2023 is primarily due to net income of $9.2 million and an increase in other comprehensive ~~losses,~~income, net of taxes, of ~~$47.9~~$7.1 million due to ~~higher~~lower unrealized losses on AFS securities and interest rate swaps designated as ~~cash flow hedges and share repurchases.~~hedging instruments caused by inversion of the yield curve.

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The following table presents the computation of each non-GAAP based measure shown together with its most directly comparable GAAP based measure.
(dollars and shares in thousands) September 30, 2022 December 31, 2021
Tangible Book Value per Common Share
Shareholders' equity $ 217,378 $ 271,656
Less: Goodwill 18,724 18,724
Other intangible assets 3,338 4,183
Related tax effect (701) (878)
Tangible common equity (non-GAAP) $ 196,017 $ 249,627
Common shares outstanding 10,686 11,183
Book value per share (most directly comparable GAAP based measure) $ 20.34 $ 24.29
Intangible assets per share 2.00 1.97
Tangible book value per share (non-GAAP) $ 18.34 $ 22.32


(dollars and shares in thousands)	March 31, 2023		December 31, 2022
Tangible Book Value per Common Share
Shareholders' equity (most directly comparable GAAP-based measure)	$	240,161	$	228,896
Less: Goodwill	18,724		18,724
Other intangible assets	2,828		3,078
Related tax effect	(594)		(646)
Tangible common equity (non-GAAP)	$	219,203	$	207,740

Common shares outstanding	10,692		10,671

Book value per share (most directly comparable GAAP based measure)	$	22.46	$	21.45
Intangible assets per share	1.96		1.98
Tangible book value per share (non-GAAP)	$	20.50	$	19.47

Adjusted Net Income and Adjusted Diluted Earnings Per Share September 30, 2022
(dollars and shares in thousands) Three Months Ended Nine Months Ended
Net (loss) income (most directly comparable GAAP based measure) $ (4,828) $ 12,411
Plus: Restructuring charges 3,155 3,155
Plus: Provision for legal settlement 13,000 13,000
Less: Related tax effect (3,393) (3,393)
Adjusted net income (non-GAAP) $ 7,934 $ 25,173
Weighted average shares - diluted (most directly comparable GAAP-based measure) 10,369 10,758
Diluted (losses) earnings per share (most directly comparable GAAP-based measure) (0.47) 1.16
Weighted average shares - diluted (non-GAAP) 10,529 10,758
Diluted earnings per share, adjusted (non-GAAP) 0.75 2.34

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk comprises exposure to interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks. In the banking industry, a major risk exposure is changing interest rates. The primary objective of monitoring our interest rate sensitivity, or risk, is to provide management the tools necessary to manage the balance sheet to minimize adverse changes in net interest income as a result of changes in the direction and level of interest rates. FRB monetary control efforts, economic uncertainty and legislative changes have been significant factors affecting the task of managing interest rate sensitivity positions in recent years.

Interest Rate Risk

Interest rate risk is the exposure to fluctuations in the Company’s future earnings (earnings at risk) and value (value at risk) resulting from changes in interest rates. This exposure results from differences between the amounts of interest-earning assets and interest-bearing liabilities that reprice within a specified time period as a result of scheduled maturities, scheduled and unscheduled repayments, the propensity of borrowers and depositors to react to changes in their economic interests, and loan contractual interest rate changes.

We attempt to manage the level of repricing and maturity mismatch through our asset/liability management process so that fluctuations in net interest income are maintained within policy limits across a range of market conditions, while satisfying liquidity and capital requirements. Management recognizes that a certain amount of interest rate risk is inherent, appropriate and necessary to ensure the Company’s profitability. Thus, the goal of interest rate risk management is to evaluate the amount of

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reward for taking risk and adjusting both the size and composition of the balance sheet relative to the level of reward available for taking risk.

Management endeavors to control the exposure to changes in interest rates by understanding, reviewing and making decisions based on its risk position. The Company primarily uses its securities portfolio, FHLB advances, interest rate swaps and brokered deposits to manage its interest rate risk position. Additionally, pricing, promotion and product development activities are directed in an effort to emphasize the loan and deposit term or repricing characteristics that best meet current interest rate risk objectives.

We use simulation analysis to assess earnings at risk and net present value analysis to assess value at risk. These methods allow management to regularly monitor both the direction and magnitude of our interest rate risk exposure. These analyses require numerous assumptions including, but not limited to, changes in balance sheet mix, prepayment rates on loans and securities, cash flows and repricing of all financial instruments, changes in volumes and pricing, future shapes of the yield curve, relationship of market interest rates to each other (basis risk), credit spread and deposit sensitivity. Assumptions are based on management’s best estimates but may not accurately reflect actual results under certain changes in interest ~~rate~~rates due to the timing, magnitude and frequency of rate changes and changes in market conditions and management strategies, among other factors. However, the analyses are useful in quantifying risk and providing a relative gauge of our interest rate risk position over time.

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Our asset/liability committee operates under management policies, approved by the Board of Directors, which define guidelines and limits on the level of risk. The committee meets regularly and reviews our interest rate risk position and monitors various liquidity ratios to ensure a satisfactory liquidity position. By utilizing our analyses, we can determine changes that may need to be made to the asset and liability mixes to mitigate the change in net interest income under various interest rate scenarios. Management continually evaluates the condition of the economy, the pattern of market interest rates and other economic data to inform the committee on the selection of investment securities. Regulatory authorities also monitor our interest rate risk position along with other liquidity ratios.

Net Interest Income Sensitivity

Simulation analysis evaluates the effect of upward and downward changes in market interest rates on future net interest income. The analysis involves changing the interest rates used in determining net interest income over the next twelve months. The resulting percentage change in net interest income in various rate scenarios is an indication of the Company's short-term interest rate risk. The analysis assumes recent pricing trends in new loan and deposit volumes will continue while balances remain constant. Additional assumptions are applied to modify pricing under the various rate scenarios.

The simulation analysis results are presented in the ~~Net Interest Income~~ table below. ~~At September 30, 2022 and~~The increase in net interest income in the rising interest rate scenario at March 31, 2023 compared to December 31, ~~2021, the results indicated the Company could experience interest income pressure as interest rates continue to rise. This~~2022 is due to an increase in floating rate assets in the ~~assumption that~~first quarter of 2023. Results in the falling interest rate scenario show the potential for a decrease in net interest income as a result of long-term fixed rate funding added to the balance sheet in the first quarter of 2023. While the Company remains minimally asset sensitive, interest-bearing liabilities ~~will begin~~have begun repricing faster than interest-earning ~~assets. The~~assets and, if they reprice faster ~~liability repricing combined with the composition of the balance sheet between fixed- and floating-rate assets has led to the Company becoming more liability sensitive as~~than modeled, there could be pressure on net interest ~~rates continue to rise.~~income. As such, ~~if certain model assumptions occur,~~ further increases in interest rates inon a flat balance sheet scenario could negatively impact the Company's net interest income.

Economic Value

Net present value analysis provides information on the risk inherent in the balance sheet that might not be considered in the simulation analysis due to the short time horizon used in that analysis. The net present value of the balance sheet incorporates the discounted present value of expected asset cash flows minus the discounted present value of expected liability cash flows. The analysis involves changing the interest rates used in determining the expected cash flows and in discounting the cash flows. The resulting percentage change in net present value in various rate scenarios is an indication of the longer term repricing risk and options embedded in the balance sheet.

~~Table of Contents~~

The results at ~~September 30,~~March 31, 2023 and December 31, 2022 reflect the impact of the FOMC's interest rate increases ~~to date.~~in effect at the end of each period. As the federal funds rate increases further, the increase in asset yields is countered by the model's acceleration in the cost of liabilities as compared to a slower realized pace so far in this rate cycle. To improve the comparability across periods, the Company strives to follow best practices related to the assumption setting and maintains the size and mix of the period end balance sheet; thus, the results do not reflect actions management may take through the normal course of business that would impact results.
Net Interest Income Economic Value
% Change in Net Interest Income % Change in Market Value
Change in Market Interest Rates (basis points) September 30, 2022 December 31, 2021 Change in Market Interest Rates (basis points) September 30, 2022 December 31, 2021
(100) (3.4) % (1.4) % (100) (11.5) % (43.8) %
100 (1.4) % 3.7 % 100 3.7 % 25.8 %
200 (3.9) % 6.7 % 200 4.6 % 41.2 %


Net Interest Income					Economic Value
	% Change in Net Interest Income					% Change in Market Value
Change in Market Interest Rates (basis points)	March 31, 2023		December 31, 2022		Change in Market Interest Rates (basis points)	March 31, 2023		December 31, 2022
(200)	(0.7)	%	4.7	%	(200)	(36.0)	%	(27.7)	%
(100)	0.7	%	4.8	%	(100)	(13.0)	%	(9.3)	%
100	0.5	%	(2.6)	%	100	8.0	%	3.8	%
200	0.1	%	(6.1)	%	200	11.0	%	4.0	%

Item 4. Controls and Procedures

Based on the evaluation required by Exchange Act Rules 13a-15(b) and 15d-15(b), the Company's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of its disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), at ~~September 30, 2022.~~March 31, 2023. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at ~~September 30, 2022.~~ March 31, 2023.

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There ~~have been~~were no significant changes inmade to the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or that are reasonably likely to ~~materially~~ affect, ~~the Company's~~our internal control over financial reporting during the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023.

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PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Information regarding legal proceedings is included in Note ~~12,~~14, Contingencies, to the Consolidated Financial Statements under Part I, Item 1, "Financial Statements" and incorporated herein by reference.

Item 1A – Risk Factors

There have been no material changes from the risk factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2021, and our Quarterly Report on Form 10-Q for the periods ended March 31, 2022 and June 30,~~ 2022.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

(a) (b) (c) (d)
Period Total number of shares (or units) purchased Average price paid per share (or unit) Total number of shares (or units) purchased as part of publicly announced plans or programs Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
July 1, 2022 to July 31, 2022 — $ — — 154,371
August 1, 2022 to August 31, 2022 1,169 26.14 1,169 153,202
September 1, 2022 to September 30, 2022 — — — 153,202
Total 1,169 $ 26.14 1,169


	(a)	(b)		(c)	(d)
Period	Total number of shares (or units) purchased	Average price paid per share (or unit)		Total number of shares (or units) purchased as part of publicly announced plans or programs	Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
January 1, 2023 to January 31, 2023	9,036	$	23.02	9,036	150,023
February 1, 2023 to February 28, 2023	2,305	22.90		2,305	147,718
March 1, 2023 to March 31, 2023	42,921	21.30		42,921	104,797
Total	54,262	$	21.65	54,262

In September 2015, the Board of Directors of the Company authorized a share repurchase program ~~under~~pursuant to which the Company may repurchase up to 5%416,000 shares of the Company's outstanding shares of common stock, ~~or approximately 416,000 shares,~~ in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Exchange ~~Act.~~Act, as amended. On April 19, 2021, the Board of Directors authorized the additional future repurchase of up to 562,000 shares of its outstanding common ~~stock.~~stock for a total of 978,000 shares. When and if appropriate, repurchases may be made in open market or privately negotiated transactions, depending on market conditions, regulatory requirements and other corporate considerations, as determined by management. Share repurchases may not occur and may be discontinued at any time. For the three months ended ~~September 30, 2022,~~March 31, 2023, the Company repurchased ~~1,169~~54,262 shares of its common stock at an average price of ~~$26.14~~$21.65 per share. At ~~September 30, 2022, 824,798~~March 31, 2023, 873,203 shares had been repurchased under the program at a total cost of ~~$18.8~~$19.8 million, or ~~$22.79~~$22.71 per share. Common stock available for future repurchase totals approximately ~~153,202~~104,797 shares, or 1% of the Company's outstanding common stock at ~~September 30, 2022.~~

March 31, 2023.

Item 3 – Defaults Upon Senior Securities

Not applicable.

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 – Other Information

None.

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Item 6 – Exhibits


3.1						Articles of Incorporation as amended, incorporated by reference to Exhibit 3.1 of the Registrant’s Report on Form 8-K filed on January 29, 2010.

3.2						By-laws as amended, incorporated by reference to Exhibit 3.2 to the Registrant’s Report on Form 8-K filed June 2, 2021 .

4.1						Specimen Common Stock Certificate, incorporated by reference to the Registrant’s Registration Statement on Form S-3 filed February 8, 2010 (File No. 333-164780).

31.1						Rule 13a – 14(a)/15d-14(a) Certification (Principal Executive Officer)

31.2						Rule 13a – 14(a)/15d-14(a) Certifications (Principal Financial Officer)

32.1						Section 1350 Certifications (Principal Executive Officer)

32.2						Section 1350 Certifications (Principal Financial Officer)

101.LAB						XBRL Taxonomy Extension Label Linkbase

101.PRE						XBRL Taxonomy Extension Presentation Linkbase

101.INS						XBRL Instance Document

101.SCH						XBRL Taxonomy Extension Schema

101.CAL						XBRL Taxonomy Extension Calculation Linkbase

101.DEF						XBRL Taxonomy Extension Definition Linkbase

104						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

All other exhibits for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			/s/ Thomas R. Quinn, Jr.
			Thomas R. Quinn, Jr.
			President and Chief Executive Officer
			(Principal Executive Officer)

			/s/ Neelesh Kalani
			Neelesh Kalani
			Executive Vice President and Chief Financial Officer
			(Principal Financial Officer)

			Date: ~~November~~May 9, ~~2022~~2023

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	Three Months Ended September 30, 2022
(Dollars in thousands, except per share amounts)	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total Shareholders’ Equity


















Balance, June 30, 2022	$	585	$	188,178	$	91,723	$	(29,370)	$	(13,589)	$	237,527
Net loss	—		—		(4,828)		—		—		(4,828)

Total other comprehensive loss, net of taxes	—		—		—		(14,098)		—		(14,098)
Cash dividends ($0.19 per share)	—		—		(2,028)		—		—		(2,028)

Share-based compensation plans:
0 net common shares issued and 10,385 net treasury shares issued, including compensation expense totaling $741	—		552		—		—		253		805

Balance, September 30, 2022	$	585	$	188,730	$	84,867	$	(43,468)	$	(13,336)	$	217,378











	Nine Months Ended September 30, 2022
(Dollars in thousands, except per share amounts)	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Shareholders’ Equity
Balance, January 1, 2022	$	586	$	189,689	$	78,700	$	4,449	$	(1,768)	$	271,656
Net income	—		—		12,411		—		—		12,411

Total other comprehensive loss, net of taxes	—		—		—		(47,917)		—		(47,917)
Cash dividends ($0.57 per share)	—		—		(6,244)		—		—		(6,244)

Share-based compensation plans:
21,609 net common shares acquired and 475,377 net treasury shares acquired, including compensation expense totaling $1,608	(1)		(959)		—		—		(11,568)		(12,528)

Balance, September 30, 2022	$	585	$	188,730	$	84,867	$	(43,468)	$	(13,336)	$	217,378


	Amount of (Loss) Gain Recognized in Income				Amount of Gain (Loss) Recognized in Income				Location of Gain (Loss) Recognized in Income
	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Derivatives not designated as hedging instruments:
Interest rate products	$	179	$	8	$	309	$	44	Other operating expenses
Risk participation agreements	(11)		1		19		(3)		Other operating expenses
Interest rate lock commitments with customers	(99)		89		(265)		(128)		Mortgage banking activities
Forward sale commitments	(610)		1		21		84		Mortgage banking activities
Total	$	(540)	$	99	$	84	$	(3)


Loan Type	Amount of Loans				Percent of Non-PPP Loans
	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021

Consumer loans	$	214	$	56	—	%	—	%
Total loans	$	214	$	56	—	%	—	%