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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
or
2019
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____                    
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
(State or Other Jurisdiction of
Incorporation or Organization)
23-2530374
(I.R.S. Employer
Identification No.)
77 East King Street, P. O. Box 250,
Shippensburg, Pennsylvania
(Address of Principal Executive Offices)
17257
(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 ClassTrading symbol(s)Name of Each Exchange on Which Registered
Common Stock, No Par Valueno par valueThe ORRFNASDAQ CapitalStock Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x
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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232,405232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “large accelerated filer” and “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer¨Accelerated filerx
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
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
Securities registered pursuant to Section 12(b) of the Act:    No  x
The aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the common stock was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter, was approximately $142.4$238.3 million. For purposes of this calculation, the term “affiliate” refers to all directors and executive officers of the registrant, and all persons beneficially owning more than 5% of the registrant’s common stock.
Number of shares outstanding of the registrant’sRegistrant’s common stock as of February 28, 2017: 8,337,956.2020: 11,256,603.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 20172020 Annual Meeting of Shareholders are incorporated by reference in Part III of this Form 10-K.




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ORRSTOWN FINANCIAL SERVICES, INC.
FORM 10-K
INDEX
 
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Glossary of Defined Terms
The following terms may be used throughout this Report, including the consolidated financial statements and related notes.
TermDefinition
ALLAllowance for loan losses
AFSAvailable for sale
AOCIAccumulated other comprehensive income (loss)
ASCAccounting Standards Codification
ASUAccounting Standards Update
BankOrrstown Bank, the commercial banking subsidiary of Orrstown Financial Services, Inc.
BHC ActBank Holding Company Act of 1965
CDICore deposit intangible
CET1Common Equity Tier 1
CMOCollateralized mortgage obligation
CompanyOrrstown Financial Services, Inc. and subsidiaries (interchangeable with "Orrstown” below)
CFPBConsumer Financial Protection Bureau
CRACommunity Reinvestment Act
Dodd-Frank ActDodd-Frank Wall Street Reform and Consumer Protection Act
EPSEarnings per common share
ERMEnterprise risk management
Exchange ActSecurities Exchange Act of 1934, as amended
FASBFinancial Accounting Standards Board
FDIAFederal Deposit Insurance Act
FDICFederal Deposit Insurance Corporation
FHCFinancial holding company
FHLBFederal Home Loan Bank
FRBBoard of Governors of the Federal Reserve System
GAAPAccounting principles generally accepted in the United States of America
GLB ActGramm-Leach-Bliley Act
GSEUnited States government-sponsored enterprise
HamiltonHamilton Bancorp, Inc., and its wholly-owned banking subsidiary, Hamilton Bank (acquired May 1, 2019)
IRCInternal Revenue Code of 1986, as amended
LHFSLoans held for sale
MBSMortgage-backed securities
MercersburgMercersburg Financial Corporation and its wholly-owned banking subsidiary, First Community Bank of Mercersburg (acquired October 1, 2018)
MPF ProgramMortgage Partnership Finance Program
MSRMortgage servicing right
NIMNet interest margin
OCIOther comprehensive income (loss)
OFAOrrstown Financial Advisors, a division of the Bank that provides investment and brokerage services
OREOOther real estate owned (foreclosed real estate)
OrrstownOrrstown Financial Services, Inc. and subsidiaries
OTTIOther-than-temporary impairment
Parent CompanyOrrstown Financial Services, Inc., the parent company of Orrstown Bank and Wheatland Advisors, Inc.
2011 Plan2011 Orrstown Financial Services, Inc. Stock Incentive Plan
PCI loansPurchased credit impaired loans
Repurchase AgreementsSecurities sold under agreements to repurchase
SECSecurities and Exchange Commission
Securities ActSecurities Act of 1933, as amended
TDRTroubled debt restructuring
U.S.United States of America
WheatlandWheatland Advisors, Inc., the Registered Investment Advisor subsidiary of Orrstown Financial Services, Inc.
Unless the context otherwise requires, the terms “Orrstown,” “we,” “us,” “our,” and “Company” refer to Orrstown Financial Services, Inc. and its subsidiaries.

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PART I



Unless the context otherwise requires, the terms "Orrstown," "we," "us," "our," and "the Company," refer to Orrstown Financial Services, Inc., and its subsidiaries.

Caution About Forward-Looking Statements:


FromCertain statements appearing herein, which are not historical in nature, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, we may make other written and oral communications, from time to time, Orrstown hasthat contain such statements. 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,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “project,” “forecast,” “goal,” “target,” “would” and “outlook,” or the negative variations of those words or other comparable words of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about the Company's industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company's control. 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 be able to continue to make writtensuccessfully execute on our strategic growth plan into Dauphin, Lancaster, York and Berks counties, Pennsylvania, and the greater Baltimore market in Maryland, with newer markets continuing to be receptive to our community banking model; to take advantage of market disruption; to experience sustained growth in loans and deposits or oral forward-looking statements regardingmaintain the momentum experienced to date from these actions; and to realize cost savings from our outlookbranch consolidation efforts. Factors which could cause the actual results of the Company's operations to differ materially from expectations include, but are not limited to: 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 earnings, revenues,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; volatilities in the securities markets; deteriorating economic conditions; expenses capitalassociated with pending litigation and liquidity levels and ratios, asset levels, asset quality, financial positionlegal proceedings; and other matters regarding or affecting Orrstownrisks and its future business and operations or the impactuncertainties. The foregoing list of legal, regulatory or supervisory matters on our business operations or performance. This Annual Report on Form 10-K also includes forward-looking statements. With respectfactors is not exhaustive.

For a description of factors that we believe could cause actual results to alldiffer materially from such forward-looking statements, you should review our Risk Factors discussion in Item 1A, our Critical Accounting Policies and Cautionary Statement About Forward-Looking Statements sectionssection included in Item 7, and Note 19,22, Contingencies, in the Notes To Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. We encourage readers of this report to understand forward-looking statements to be strategic objectives rather than absolute targets of future performance. Forward-looking statements speakIf one or more events related to these or other risks or uncertainties materialize, or if the Company's underlying assumptions prove to be incorrect, actual results may differ materially from what the Company anticipates. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date they are made. We doon which it is made, and the Company does not intendundertake any obligation to publicly update publiclyor review any forward-looking statementsstatement, whether as a result of new information, future developments or otherwise. New risks and uncertainties arise from time to reflect circumstancestime, and it is not possible for the Company to predict those events or events that occur afterhow they may affect it. In addition, the dateCompany cannot assess the impact of each factor on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements, expressed or implied, included in this Annual report on Form 10-K are made.expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that the Company or persons acting on the Company's behalf may issue.

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ITEM 1 – BUSINESS
Orrstown Financial Services, Inc. (the “Parent Company”), a Pennsylvania corporation, is the holding company for its wholly-owned subsidiaries Orrstown Bank (the “Bank”) and Wheatland Advisors, Inc. ("Wheatland"). The Company’s principal executive offices are located at 77 East King Street, Shippensburg, Pennsylvania, 17257, with additional executive and administrative offices at 4750 Lindle Road, Harrisburg, Pennsylvania. The Parent Company was organized on November 17, 1987, for the purpose of acquiring the Bank and such other banks and bank-related activities as are permitted by law and desirable. The Company provides banking and bank-related services through 25 branches located in South Centralsouth central Pennsylvania, principally in Berks, Cumberland, Dauphin, Franklin, Lancaster, Perry and PerryYork Counties, Pennsylvania, and in Anne Arundel, Baltimore, Howard and Washington County,Counties, Maryland, as well as Baltimore City, Maryland. Wheatland was acquired in December 2016 and provides services as a registered investment advisor through its office in Lancaster County, Pennsylvania.
The Company files periodic reports with the Securities and Exchange Commission (the “SEC”)SEC in the form of quarterly reports on Form 10-Q, annual reports on Form 10-K, annual proxy statements and current reports on Form 8-K for any significant events that may arise during the year. Copies of these reports, and any amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), may be obtained free of charge through the SEC’s internetInternet site at www.sec.gov or by accessing the Company’s website at www.orrstown.com as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Information on our website shall not be considered a part of this Annual Report on Form 10-K.
Recent Merger and Acquisition Activity
On October 1, 2018, Orrstown expanded its presence in Franklin County, Pennsylvania, with the completion of its acquisition of Mercersburg Financial Corporation and the merger of its banking subsidiary, First Community Bank of Mercersburg, with and into Orrstown Bank.
On May 1, 2019, Orrstown expanded its presence into the greater Baltimore, Maryland, market with the completion of its acquisition of Hamilton Bancorp, Inc., and the merger of its banking subsidiary, Hamilton Bank, with and into Orrstown Bank.
Business
The Bank was originally organized in 1919 as a state-chartered bank. On March 8, 1988, in a bank holding company reorganization transaction, the Parent Company acquired 100% ownership of the Bank.
The Parent Company’s primary activity consists of owning and supervising its subsidiaries, the Bank and Wheatland. Day-to-day management is conducted by its officers, who are also Bank officers. The Parent Company has historically derived most of its income through dividends from the Bank. At December 31, 2016,2019, the Company had total assets of $1,414,504,000,$2.4 billion, total deposits of $1.9 billion and total shareholders’ equity of $134,859,000 and total deposits of $1,152,452,000.$223.2 million.
The Parent Company has no employees. Its eight12 officers are employees of the Bank. On December 31, 2016,2019, the Bank and Wheatland combined had 311439 full-time and 1621 part-time employees.
The Bank is engaged in the commercial banking and trust business as authorized by the Pennsylvania Banking Code of 1965. This involves accepting demand, time and savings deposits, and granting loans. The Bank grantsholds commercial, residential, consumer and agribusiness loans primarily in its market areas of Cumberland, Dauphin, Franklin, Lancasterin south central Pennsylvania, in the greater Baltimore region, and Perry Counties in Pennsylvania, Washington County, Maryland, and in contiguous counties. The concentrations of credit by type of loan are set forthincluded in Note 4, Loans and Allowance for Loan Losses, to the Consolidated Financial Statements under Part II, Item 8,

"Financial "Financial Statements and Supplementary Data." The Bank maintains a diversified loan portfolio and evaluates each customer’s credit worthinessclient’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon the extension of credit, is based on management’s credit evaluation of the customerclient pursuant to collateral standards established in the Bank’s credit policies and procedures.
Wheatland was acquired to supplementsupplements the Bank's trust and wealth management group and is anticipated to provide opportunities for future growth in these areas.

Lending

Federal bank regulatory agencies have adopted uniform regulations prescribing standards for extensions of credit that are secured by liens or interests in real estate or made for the purpose of financing permanent improvements to real estate. Under these regulations, all insured depository institutions, such as the Bank, must adopt and maintain written policies establishing appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification
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standards, prudent underwriting standards (including loan-to-value limits) that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements. The real estate lending policies must reflect consideration of the federal bank regulatory agencies’ Interagency Guidelines for Real Estate Lending Policies.

All secured loans are supported with appraisals or evaluations of collateral. Business equipment and machinery, inventories, accounts receivable, and farm equipment are considered appropriate security, provided theyborrowers meet acceptable standards for liquidity and marketability. Loans secured by real estate generally do not exceed 90% of the appraised value of the property. Loan to collateral values are monitored as part of the loan review process, and appraisals are updated as deemed appropriate under the circumstances.

Commercial Lending
A majority of the Company’s loan assets are loans for business purposes. Approximately 62% of the loan portfolio is comprised of commercial loans.
The Bank makes commercial real estate, equipment, construction, working capital and other commercial purpose loans as required by the broad range of borrowers acrosscommercial customers throughout the Bank’s various markets.The Bank has significant market share in south central Pennsylvania and has been expanding its presence geographically in recent years. Currently, growth markets include the Harrisburg region, Lancaster County and Maryland markets. The Bank's commercial lending is focused in these geographic regions or with borrowers headquartered in these geographic regions.

The Bank’s credit policy dictates the underwriting requirements for the various types of commercial loans the Bank would extendmakes available to borrowers. The policy covers such requirements as debt coverage ratios, advance raterates against different forms of collateral, loan-to-value ratios (“LTV”) and maximum term.

A majority of the Company’s loan assets are loans for business purposes. At December 31, 2019, approximately 63% of the loan portfolio was comprised of commercial loans.

Consumer Lending

The Bank provides home equity loans, home equity lines of credit and other consumer loans primarily through its branch network and customerclient call center. A large majority of the consumer loans are secured by either a first or second lien position on the borrower’s primary residential real estate. The Bank requires a LTVloan-to-value ratio of no greater than 90% of the value of the real estate being taken as collateral. The Bank’s underwriting standards typically require that a borrower’s debtBank also, at times, purchases consumer loans to income ratio generally cannot exceed 43%.help diversify credit risk in our loan portfolio.

Residential Lending

The Bank provides residential mortgages throughout its various markets referred from retail branches and through a network of mortgage loan officers. A majority of the residential mortgages originated are sold to secondary market investors, primarily Wells Fargo and Fannie Mae and the Federal Home Loan Bank of Pittsburgh.Mae. All mortgages, regardless of being sold or held in the Bank’s portfolio, are generally underwritten to secondary market industry standards for prime mortgages. The Bank generally requires a LTVloan-to-value ratio of no greater than 80% of the value of the real estate being taken as collateral, without the borrower obtaining private mortgage insurance.

Loan Review

The BankCompany has a loan review policy and program which is designed to identify and mitigatemonitor risk in the lending function. The Enterprise Risk Management (“ERM”)ERM Committee, comprised of executive officers and loan department personnel, is charged with the oversight of overall credit quality and risk exposure of the Bank’sCompany's loan portfolio. This includes the monitoring of the lending activities of all BankCompany 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. TheA loan review program provides the BankCompany with an independent review of the Bank’scommercial 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 negative credit event.

Internal loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $500,000,$500 thousand, which includes confirmation of risk rating by an independent credit officer. Credit Administration also reviews loans in excess of $1,000,000.$1.0 million. In addition, all commercial relationships greater than $250,000$500 thousand rated Substandard, Doubtfulsubstandard, doubtful or Lossloss are reviewed quarterly and corresponding risk ratings are reaffirmed by the Bank'sCompany's Problem Loan Committee, with subsequent reporting to the Management ERM Committee.Committee and the Board of Directors.

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The Bank outsources its independent loan review to a third-party provider, which monitors and evaluates loan customersclients on a quarterly basis utilizing risk-rating criteria established in the credit policy in order to identify deteriorating trends and detect conditions which might indicate potential problem loans. The results of the third-party loan review firm reports the results of the loan reviewsare reported quarterly to the Management and Board ERM CommitteeCommittees for approval.review. The loan ratings provide the basis for evaluating the adequacy of the allowanceALL.

Deposit Products

The Bank offers deposit products to retail, commercial, non-profit and government clients through its retail branch network. Product offerings for loan losses.retail clients include checking accounts, money market, savings and certificates of deposit. The Company offers numerous products and treasury management solutions for commercial clients, including account analysis for demand deposit accounts, certificates of deposit, sweep accounts, money market accounts and other treasury services such as merchant banking, foreign exchange, remote deposit capture, lockbox and others. The Bank further provides various deposit solutions for government agencies and non-profits, such as demand deposit accounts, sweeps and certificates of deposit.

Investment Services

Through its trust department, the Bank renders services as trustee, executor, administrator, guardian, managing agent, custodian, investment advisor, and other fiduciary activities authorized by law under the trade name “OrrstownOrrstown Financial Advisors ("OFA").”Advisors. OFA offers retail brokerage services through a third-party broker/dealer arrangement with Cetera Advisor Networks LLC. Wheatland also offers investment advisor services as a Registered Investment Advisor.registered investment advisor. At December 31, 2016,2019, assets under management by OFA and Wheatland totaled $1,174,143,000.$1.6 billion.

Competition
The Bank’s principal market area consists of south central Pennsylvania, the greater Baltimore region, and Washington County, Maryland. The Bank serves a substantial number of depositors in this market area and its contiguous counties.
We compete with other banks and less heavily regulated financial services companies such as credit unions and finance and trust companies, as well as mortgage banking companies, mutual funds, investment advisors, and brokerage firms, both within and outside of our primary market areas. Financial technology companies, or FinTechs, are also providing nontraditional, but increasingly strong, competition for our borrowers, depositors, and other clients.

We compete for loans primarily on the basis of a combination of value and service by building client relationships as a result of addressing our clients’ banking needs, demonstrating expertise, and providing convenience to our clients.

We compete for deposits similarly on the basis of a combination of value and service and by providing convenience through a banking network of branches and ATMs within our markets and our website at www.orrstown.com.
We implement strategic initiatives focused on expanding our core businesses and explore, on an ongoing basis, acquisition, divestiture, and joint venture opportunities to the extent permitted by our regulators. We analyze each of our products and businesses in the context of shareholder return, client demands, competitive advantages, industry dynamics, and growth potential. We believe our market area will support growth in assets and deposits in the future, which we expect to contribute to our ability to maintain or grow profitability.

Regulation and Supervision
The Parent Company is a bank holding company registered with the Board of Governors of the Federal Reserve System (the “FRB”)FRB and has elected status as a "financialfinancial holding company" (an "FHC"). As a registered bank holding company and FHC, the Company is subject to regulation under the Bank Holding Company Act of 1956 (the “BHC Act”) and to inspection, examination, and supervision by the Federal Reserve Bank of Philadelphia (the “Federal Reserve Bank”).
company. The Bank is a Pennsylvania-chartered commercial bank and a member of the FRB. Wheatland is a registered investment advisor.

Regulatory Environment

The operations of the Bank arebanking industry is highly regulated. Orrstown is subject to supervision, regulation, and examination by various federal and state regulators, including the FRB, SEC, CFPB, FDIC, and various state regulatory agencies. The statutory and regulatory framework that governs us is generally intended to protect depositors and clients, the FDIC's Deposit Insurance Fund, the U.S. banking and financial system, and financial markets as a whole by ensuring the safety and soundness of Bank Holding Companies ("BHCs") and banks. Bank regulators regularly examine the operations of BHCs and banks. Regulators have broad supervisory and enforcement authority over BHCs and banks, including the power to impose nonpublic supervisory agreements, issue cease and desist orders, impose fines and other civil and criminal penalties, terminate deposit insurance, and appoint a conservator or receiver.

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Engaging in unsafe or unsound practices or failing to comply with applicable laws, regulations, and supervisory agreements could subject Orrstown, its subsidiaries, and their respective officers, directors, and institution-affiliated parties to the remedies described above, and other sanctions. In addition, the FDIC may terminate a bank’s deposit insurance upon a finding that the bank’s financial condition is unsafe or unsound or that the bank has engaged in unsafe or unsound practices or has violated an applicable rule, regulation, order, or condition enacted or imposed by the bank’s regulatory agency.

Banking statutes, regulations, and policies are continually under review by Congress, state legislatures, and federal and state regulatory agencies. In addition to laws and regulations, state and federal bank regulatory agencies may issue policy statements, interpretive letters, and similar written guidance applicable to banks chartered under Pennsylvania law,Orrstown. Any change in statutes, regulations, or regulatory policies applicable to FRB member banks andus, including changes in their interpretation or implementation, could have a material effect on our business or organization.

In May 2018, the Economic Growth Act was signed into law. Among other regulatory changes, the Economic Growth Act amended various sections of the Dodd-Frank Act, including section 165 of the Dodd-Frank Act, which was revised to banks whose deposits are insured byraise the asset thresholds for determining the application of enhanced prudential standards for BHCs. Under the Economic Growth Act, BHCs with consolidated assets below $100.0 billion were immediately exempted from all of the enhanced prudential standards, except risk committee requirements, which now apply to publicly-traded BHCs with $50.0 billion or more of consolidated assets.

In October 2019, the Federal Deposit Insurance Corporation (the “FDIC”). The Bank’s operationsReserve adopted the EPS Tailoring Rule pursuant to the Economic Growth Act, which adjusted the thresholds at which certain enhanced prudential standards apply to U.S. BHCs with $100.0 billion or more in total consolidated assets. Also in October 2019, the Federal Reserve and FDIC adopted the Capital and Liquidity Tailoring Rule, which similarly adjusted the thresholds at which certain other capital and liquidity standards apply to U.S. BHCs and banks with $100.0 billion or more in total consolidated assets.

We are also subject to regulationsthe disclosure and regulatory requirements of the Pennsylvania DepartmentSecurities Act of Banking and Securities (the “PDB”), the FRB1933, as amended, and the FDIC.Securities Exchange Act of 1934, as amended, both as administered by the SEC, as well as the rules of Nasdaq that apply to companies with securities listed on the Nasdaq Capital Market. Wheatland is subject to periodic examination by the SEC.

Several of the more significant regulatory provisions applicable to bank holding companies and banks to which the CompanyOrrstown and the Bank are subject are discussed below, along with certain regulatory matters concerning the CompanyOrrstown and the Bank. To the extent that the following information describes statutory or regulatory provisions, such information is qualified in its entirety by reference to the particular statutes or regulations. Any change in applicable law or regulation may have a material effect on the business and prospects of the Company and the Bank.
Financial and Bank Holding Company Activities
As an FHC, we are permitted to engage, directly or through subsidiaries, in a wide variety of activities that are financial in nature or are incidental or complementary to a financial activity, in addition to all of the activities otherwise allowed to us.
As an FHC, the CompanyOrrstown is generally subject to the same regulation as other bank holding companies, including the reporting, examination, supervision and consolidated capital requirements of the FRB. To preserve our FHC status, we must remain well-capitalized and well-managed and ensure that the Bank remains well-capitalized and well-managed for regulatory purposes and earns “satisfactory” or better ratings on itsour periodic Community Reinvestment Act (“CRA”) examinations. An FHC ceasing to meet these standards is subject to a variety of restrictions, depending on the circumstances.
If wethe Parent Company or the Bank are either not well-capitalized or not well-managed, wethe Parent Company or the Bank must promptly notify the FRB. Until compliance is restored, the FRB has broad discretion to impose appropriate limitations on thean FHC’s activities. If compliance is not restored within 180 days, the FRB may ultimately require the FHC to divest its depository institutions or in the alternative, to discontinue or divest any activities that are permitted only to non-FHC bank holding companies.
If the FRB determines that an FHC or its subsidiaries do not satisfy the CRA requirements, the potential restrictions are different. In that case, until all the subsidiary institutions are restored to at least “satisfactory” CRA rating status, the FHC may not engage, directly or through a subsidiary, in any of the additional activities permissible under the BHC Act nor make additional acquisitions of companies engaged in the additional activities. However, completed acquisitions and additional activities and affiliations previously begun are left undisturbed, as the BHC Act does not require divestiture for this type of situation.


Federal Financial Regulatory Reform
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The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted in 2010, substantially increased regulatory oversight and enforcement and imposed additional costs and risks on the operations
Table of financial holding companies and banks.Contents
The Dodd-Frank Act materially changed the regulation of financial institutions and the financial services industry and created a framework for regulatory reform. The Dodd-Frank Act and the regulations thereunder, some of which are still being drafted and implemented,include provisions affecting large and small financial institutions alike, including several provisions that affect the regulation of community banks and bank holding companies.
The Dodd-Frank Act, among other things, imposed new capital requirements on bank holding companies; changed the base for FDIC insurance assessments to a bank’s average consolidated total assets minus average tangible equity, rather than upon its deposit base; permanently raised the current standard deposit insurance limit to $250,000; and expanded the FDIC’s authority to raise insurance premiums. The legislation also called for the FDIC to raise its ratio of reserves to deposits from 1.15% to 1.35% for deposit insurance purposes by September 30, 2020 and to “offset the effect” of increased assessments on insured depository institutions with assets of less than $10 billion.
The Dodd-Frank Act also included provisions that affect corporate governance and executive compensation at all publicly-traded companies and allows financial institutions to pay interest on business checking accounts. The legislation also restricts proprietary trading by banking organizations, places restrictions on the owning or sponsoring of hedge and private equity funds, and regulates the derivatives activities of banks and their affiliates. The Dodd-Frank Act established the Financial Stability Oversight Council to identify threats to the financial stability of the U.S., promote market discipline, and respond to emerging threats to the stability of the U.S. financial system.
The Dodd-Frank Act also established the Consumer Financial Protection Bureau (the "CFPB") as an independent entity funded by FRB. The CFPB has broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards. The CFPB’s rules contain provisions on mortgage-related matters such as steering incentives, and determinations as to a borrower’s ability to repay, loan servicing, and prepayment penalties. The CFPB has primary examination and enforcement authority over banks with over $10 billion in assets as to consumer financial products.
One of the announced goals of the CFPB is to bring greater consumer protection to the mortgage servicing market. The CFPB has defined a “qualified mortgage” for purposes of the Dodd-Frank Act, and set standards for mortgage lenders to determine whether a consumer has the ability to repay the mortgage. It has also issued regulations affording safe harbor legal protections for lenders making qualified loans that are not “higher priced.” The CFPB's regulations contain new mortgage servicing rules applicable to the Bank, which took effect in 2014. Changes affect notices to be given to consumers as to delinquency, foreclosure alternatives, modification applications, interest rate adjustments and options for avoiding “force-placed” insurance. Servicers are prohibited from processing foreclosures when a loan modification is pending, and must wait until a loan is more than 120 days delinquent before initiating a foreclosure action.
The servicer must provide direct and ongoing access to its personnel, and provide prompt review of any loss mitigation application. Servicers must maintain accurate and accessible mortgage records for the life of a loan and until one year after the loan is paid off or transferred.
The Bank presently services 5,000 or fewer mortgage loans which it owns or originated, so it is considered a “Small Servicer” and is exempt from certain parts of the mortgage servicing rules. The mortgage servicing requirements applicable to the Bank’s servicing operations under the new mortgage servicing rules are: adjustable rate mortgage interest rate adjustment notices; prompt payment crediting and payoff statements; limits on force-placed insurance; responses to written information requests and complaints of errors; and loss mitigation with regard to the first notice or filing for a foreclosure and no foreclosure proceedings if a borrower is performing pursuant to the terms of a loss mitigation agreement.

Federal Deposit Insurance

The Bank’sFDIC's Deposit Insurance Fund provides insurance coverage for certain deposits, are insuredup to applicable limits by the FDIC. Thea standard maximum deposit insurance amount of $250,000 per depositor and is $250,000 underfunded through assessments on insured depository institutions, based on the Dodd-Frank Act.
risk each institution poses to the Deposit Insurance Fund. The FDIC, absent extraordinary circumstances, is requiredBank accepts client deposits that are insured by the Dodd-Frank Act to return the insurance reserve ratio to a 1.35% ratio no later than September 30, 2020. Once the fund reaches 1.15%, banks larger than $10 billion in assets will be required to assume the burden of bringing the fund to 1.35%.
On June 30, 2016, the Federal Deposit Insurance Fund reached 1.15% of insured deposits. As required byand, therefore, must pay insurance premiums. The FDIC may increase the Dodd-Frank Act, the FDIC changed the way it calculates the FDICBank’s insurance premiums upon reaching that threshold. Prior to July 1, 2016, premiums were based on an insured institution's ranking in onevarious factors, including the FDIC’s assessment of four risk categories based on their examination ratings and capital ratios. Within its risk category, the institution was assigned an initial base assessment rate which was then adjusted toprofile.

reflect its level of brokered deposits, secured liabilities and unsecured debt. After July 1, 2016, institutions are assigned a base rate based on their examination ratings which is then adjusted based on their leverage ratio, net income before taxes to total assets ratio, nonperforming loans and leases to gross assets ratio, other real estate owned to gross assets ratio, loan mix index, and one-year asset growth rate. The result is then further adjusted to reflect its level of unsecured debt issued, the level of unsecured depository institution debt it owns, and the level of brokered deposits (excluding reciprocal deposits) it has issued above regulatory minimums.
If the FDIC is appointed conservator or receiver of a bank upon the bank’s insolvency or the occurrence of other events, the FDIC may sell some, part or all of a bank’s assets and liabilities to another bank or repudiate or disaffirm most types of contracts to which the bank was a party if the FDIC believes such contract iscontracts are burdensome. In resolving the estate of a failed bank, the FDIC as receiver will first satisfy its own administrative expenses, and the claims of holders of U.S. deposit liabilities also have priority over those of other general unsecured creditors.

Liability for Banking Subsidiaries
Under the Dodd-Frank Act and applicable FRB policy, a bank holding company such as the Parent Company
Orrstown is expectedrequired to actserve as a source of financial and managerial strength to each of its subsidiary banksthe Bank and, under appropriate conditions, to commit resources to their support.support the Bank. This support may be required by the Federal Reserve at times when we might otherwise determine not to provide it or when doing so is not otherwise in the interests of Orrstown or our shareholders or creditors. The Federal Reserve may require a BHC to make capital injections into a troubled subsidiary bank holding companyand may not havecharge the BHC with engaging in unsafe and unsound practices if the BHC fails to commit resources to such a subsidiary bank or if it undertakes actions that the Federal Reserve believes might jeopardize the BHC’s ability to commit resources to such subsidiary bank.

Under these requirements, Orrstown may in the future be required to provide it. Similarly, underfinancial assistance to the cross-guarantee provisionsBank should it experience financial distress. Capital loans by Orrstown to the Bank would be subordinate in right of payment to deposits and certain other debts of the Federal Deposit Insurance Act (the “FDIA”),Bank. In the FDIC can holdevent of Orrstown's bankruptcy, any FDIC-insured depository institution liable for any loss suffered or anticipatedcommitment by Orrstown to a federal bank regulatory agency to maintain the capital of the Bank would be assumed by the FDIC in connection with the “default” of a commonly controlled FDIC-insured depository institution; or any assistance provided by the FDICbankruptcy trustee and entitled to a commonly controlled FDIC-insured depository institution “in dangerpriority of default.”payment.

Pennsylvania Banking Law

The Pennsylvania Banking Code (“Banking Code”) contains detailed provisions governing the organization, location of offices, rights and responsibilities of directors, officers, and employees, as well as corporate powers, savings and investment operations and other aspects of the Bank and its affairs. The Pennsylvania Banking Code delegates extensive rule-making power and administrative discretion to the PDBPennsylvania Department of Banking so that the supervision and regulation of state chartered banks may be flexible and readily responsive to changes in economic conditions and in savings and lending practices.

The FDIA, however, prohibits state chartered banks from making new investments, loans, or becoming involved in activities as principal and equity investments which are not permitted for national banks unless the FDIC determines the activity or investment does not pose a significant risk of loss to the Deposit Insurance Fund;Fund, and the bank meets all applicable capital requirements. Accordingly, the additional operating authority provided to the Bank by the Pennsylvania Banking Code is significantly restricted by the FDIA.

Dividend Restrictions

The Parent Company’s funding for cashCompany is a legal entity separate and distinct from its banking and non-banking subsidiaries. Since our consolidated net income consists largely of net income of Orrstown's subsidiaries, our ability to make capital distributions, to its shareholders is derived from a variety of sources, including cashpaying dividends and temporary investments. One of the principal sources of those funds has historically been dividends received from the Bank. Various federal and state laws limit the amountrepurchasing shares, depends upon our receipt of dividends from these subsidiaries. Under federal law, there are various limitations on the extent to which the Bank can declare and pay dividends to the Parent Company, withoutincluding those related to regulatory approval. In addition, federal bankcapital requirements, general regulatory agencies have authorityoversight to prohibit the Bank from engaging in anprevent unsafe or unsound practice in conducting its business. Thepractices, and federal banking law requirements concerning the payment of dividends depending uponout of net profits, surplus, and available earnings. Certain contractual restrictions also may limit the financial condition of the bank in question, could be deemed to constitute an unsafe or unsound practice. The ability of the Bank to pay dividends to the Parent Company. No assurances can be given that the Bank will, in any circumstances, pay dividends to the futureParent Company.

Orrstown's ability to declare and pay dividends to our shareholders is similarly limited by federal banking law and Federal Reserve regulations and policy. The Bank must maintain the applicable CET1 Capital Conservation Buffer to avoid becoming subject to restrictions on capital distributions, including dividends. As of January 1, 2019, the fully phased in Capital Conservation Buffer was 2.5%.

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Federal Reserve policy provides that a BHC should not pay dividends unless (1) the BHC’s net income over the last four quarters (net of dividends paid) is sufficient to fully fund the dividends, (2) the prospective rate of earnings retention appears consistent with the capital needs, asset quality, and overall financial condition of the BHC and its subsidiaries, and (3) the BHC will continue to meet minimum required capital adequacy ratios. Accordingly, a BHC should not pay cash dividends that can only be funded in ways that weaken the BHC’s financial health, such as by borrowing. The policy also provides that a BHC should inform the Federal Reserve reasonably in advance of declaring or paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in a material adverse change to the BHC’s capital structure. BHCs also are required to consult with the Federal Reserve before increasing dividends or redeeming or repurchasing capital instruments. Additionally, the Federal Reserve could prohibit or limit the payment of dividends by a BHC if it determines that payment of the dividend would constitute an unsafe or unsound practice.

Transactions between a Bank and its Affiliates

Federal banking laws and regulations impose qualitative standards and quantitative limitations upon certain transactions between a bank and its affiliates, including between a bank and its holding company and companies that the BHC may be influenceddeemed to control for these purposes. Transactions covered by bankthese provisions must be on arm’s-length terms and cannot exceed certain amounts which are determined with reference to the bank’s regulatory policiescapital. Moreover, if the transaction is a loan or other extension of credit, it must be secured by collateral in an amount and capital guidelines.quality expressly prescribed by statute, and if the affiliate is unable to pledge sufficient collateral, the BHC may be required to provide it. The Dodd-Frank Act expanded the coverage and scope of these regulations, including by applying them to the credit exposure arising under derivative transactions, repurchase and reverse repurchase agreements, and securities borrowing and lending transactions. Federal banking laws also place similar restrictions on loans and other extensions of credit by FDIC-insured banks, such as the Bank, and their subsidiaries to their directors, executive officers, and principal shareholders.

Regulatory Capital Requirements
Information concerning the compliance of the Company and the BankCompliance with respect to capital requirements is incorporated by reference from Note 13,16, Shareholders' Equity and Regulatory Capital, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data," and from the Capital Adequacy and Regulatory Matters section of Item 7, “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations.”

The Bank is subject to certain risk-based capital and leverage ratio requirements under the U.S. Basel III Capital Rules
Effective January 1, 2015, the Company and the Bank became subject to new capital rules (the "Basel III Capital Rules"), which substantially revised risk-based capital requirements. Theadopted by the Federal Reserve. These rules implement the Basel III Capital Rules revisedinternational regulatory capital standards in the definitions and the components of regulatory capital,U.S., as well as addressing other issues affectingcertain provisions of the numeratorDodd-Frank Act. These quantitative calculations are minimums, and the Federal Reserve may determine that a banking organization, based on its size, complexity, or risk profile, must maintain a higher level of capital in banking institutions’ regulatoryorder to operate in a safe and sound manner. In May 2018, the Federal Reserve raised the asset-sized reporting threshold for a BHC to $3.0 billion and a company with consolidated assets under the revised limit is not subject to the FRB consolidated capital rules. A company with consolidated assets under the revised limits may continue to file reports that include capital amounts and ratios. Orrstown has elected to continue to file those reports.


Under the U.S. Basel III capital ratios. They also addressed assetrules, Orrstown's and the Bank’s assets, exposures, and certain off-balance sheet items are subject to risk weights and other matters affectingused to determine the denominator in banking institutions’ regulatoryrisk-weighted assets. These risk-weighted assets are used to calculate the following minimum capital ratios for Orrstown and replaced the existing general risk-weighting approach.Bank:
The Basel III
• CET1 Risk-Based Capital Rules introduced a new capital measure called “Common Equity Tier 1” (“CET1”) and a related regulatory capitalRatio, equal to the ratio of CET1 capital to risk-weighted assets; increased the minimum requirements forassets. CET1 capital primarily includes common shareholders’ equity subject to certain regulatory adjustments and deductions, including goodwill, intangible assets, certain deferred tax assets, and AOCI.

Tier 1 Risk-Based Capital ratio as well asRatio, equal to the minimum levels to be considered well capitalized under prompt corrective action; and introduced the “capital conservation buffer,” designed to absorb losses during periods of economic stress. Institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer are subject to constraints on dividends, equity repurchases and discretionary bonuses to executive officers based on the amount of the shortfall. When fully phased-in on January 1, 2019, the capital standards applicable to the Company and the Bank will include an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios inclusive of the capital conservation buffer of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets. Tier 1 capital is primarily comprised of CET1 capital, perpetual preferred stock, and certain qualifying capital instruments.

• Total Risk-Based Capital Ratio, equal to the ratio of total capital, including CET1 capital, Tier 1 capital, and Tier 2 capital, to risk-weighted assets. Tier 2 capital primarily includes qualifying subordinated debt and qualifying ALL.

• Tier 1 Leverage Ratio, equal to the ratio of Tier 1 capital to quarterly average assets (net of at least 8.5%,goodwill, certain other intangible assets, and (iii) Totalcertain other deductions).

Failure to be well-capitalized or to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our operations or
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financial condition. Failure to be well-capitalized or to meet minimum capital requirements could also result in restrictions on the Bank’s ability to pay dividends or otherwise distribute capital or to receive regulatory approval of applications.

In addition to meeting the minimum capital requirements, under the U.S. Basel III capital rules, the Bank must also maintain the required Capital Conservation Buffer to avoid becoming subject to restrictions on capital distributions and certain discretionary bonus payments to management. The Capital Conservation Buffer is calculated as a ratio of CET1 capital to risk-weighted assets, of at least 10.5%
and it effectively increases the required minimum risk-based capital ratios. The Basel III Capital Rules provide forConservation Buffer requirement was phased in over a number of deductions from and adjustments to CET1. These include, for example, the requirementthree-year period that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized from net operating loss carrybacks and significant investments in unconsolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories, in the aggregate, exceed 15% of CET1.
Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive income ("AOCI") items are not excluded from regulatory capital, including unrealized gains or losses on certain securities available for sale; however, certain banking organizations were able to make a one-time permanent election with the first filing of reports under the Basel III Capital Rules to continue to exclude these items. The Company and Bank made this one-time permanent election, with the result that most AOCI items will be excluded from regulatory capital.
Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and are being phased in over a 4-year2016. The phase-in period (beginning at 40%ended on January 1, 20152019, and an additional 20% per year thereafter untilthe Capital Conservation Buffer was at its fully phased-in level of 2.5% throughout 2019. The Tier 1 Leverage Ratio is not impacted by the Capital Conservation Buffer, and a banking institution may be considered well-capitalized while remaining out of compliance with the Capital Conservation Buffer.

Orrstown has the ability to provide additional capital to the Bank to maintain the Bank’s risk-based capital ratios at January 1, 2018).levels which would be considered well-capitalized.
The Basel III
At December 31, 2019, Orrstown's and the Bank’s regulatory capital ratios were above the well-capitalized standards and met the Capital Rules prescribeConservation Buffer on a standardized approach for risk weightings that expands the risk-weighting categories to a larger and more risk-sensitive number of categories than previously used, depending on the naturefully phased-in basis.

Bank Acquisitions by Orrstown

BHCs must obtain prior approval of the assets. These categories generally range from 0%, for U.S. government and agencyFederal Reserve in connection with any acquisition that results in the BHC owning or controlling 5% or more of any class of voting securities to 600%, forof a bank or another BHC.

Acquisitions of Ownership of Orrstown

Acquisitions of Orrstown's voting stock above certain equity exposures, and result in higher risk weights for a variety of asset categories.
Other Federal Laws and Regulations
The Company’s operationsthresholds are subject to additionalprior regulatory notice or approval under federal banking laws, including the BHC Act and regulations applicable to financial institutions, including, without limitation:
Privacy provisionsthe Change in Bank Control Act of 1978. Under the Gramm-Leach-BlileyChange in Bank Control Act, (the "GLB Act") and related regulations, which require us to maintain privacy policies intended to safeguard customer financial information, to disclose the policies to our customers and to allow customers to “opt out” of having their financial service providers disclose their confidential financial information to non-affiliated third parties, subject to certain exceptions;
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
Consumer protection rules for the sale of insurance products by depository institutions, adopted pursuantperson or entity generally must provide prior notice to the Federal Reserve before acquiring the power to vote 10% or more of our outstanding common stock. Investors should be aware of these requirements of thewhen acquiring shares in our stock.

Data Privacy

Federal and state law contains extensive consumer privacy protection provisions. The GLB Act; and the
USA PATRIOT Act which requires financial institutions to takeperiodically disclose their privacy policies and practices relating to sharing such information and enables retail clients to opt out of our ability to share information with unaffiliated third parties under certain actionscircumstances. Other federal and state laws and regulations impact our ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact clients with marketing offers. These security and privacy policies and procedures for the protection of personal and confidential information are in effect across all businesses and geographic locations as applicable. Federal law also makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain client information of a financial nature by fraudulent or deceptive means. Data privacy and data protection are areas of increasing federal and state legislative focus.

Like other lenders, the Bank uses credit bureau data in its underwriting activities. Use of such data is regulated under the Fair Credit Reporting Act, which also regulates reporting information to credit bureaus, prescreening individuals for credit offers, sharing of information between affiliates, and using affiliate data for marketing purposes. Similar state laws may impose additional requirements on us.

Cybersecurity

The GLB Act requires financial institutions to implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of client records and information.

The Cybersecurity Information Sharing Act is intended to improve cybersecurity in the U.S. by enhanced sharing of information about security threats among the U.S. government and private sector entities, including financial institutions. The Cybersecurity Information Sharing Act also authorizes companies to monitor their own systems notwithstanding any other provision of law and allows companies to carry out defensive measures on their own systems from cyber attacks. The law includes liability protections for companies that share cyber threat information with third parties so long as such sharing activity is conducted in accordance with Cybersecurity Information Sharing Act.

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In October 2016, the federal bank regulatory agencies issued an Advanced Notice of Proposed Rulemaking regarding enhanced cyber risk management standards which would apply to a wide range of large financial institutions and their third-party service providers. The proposed rules would expand existing cybersecurity regulations and guidance to focus on cyber risk governance and management, management of internal and external dependencies, and incident response, cyber resilience, and situational awareness. In addition, the proposal contemplates more stringent standards for institutions with systems that are critical to the financial sector. The Federal Reserve announced in May 2019 that it would revisit the Advanced Notice of Proposed Rulemaking in the future.

Community Reinvestment Act

The CRA is intended to encourage banks to help prevent,meet the credit needs of their service areas, including low- and moderate-income neighborhoods, consistent with safe and soundness practices. The relevant federal bank regulatory agency, the FRB in the Bank’s case, examines each bank and assigns it a public CRA rating. A bank’s record of fair lending compliance is part of the resulting CRA examination report.

The CRA requires the relevant federal bank regulatory agency to consider a bank’s CRA assessment when considering the bank’s application to conduct certain mergers or acquisitions or to open or relocate a branch office. The Federal Reserve also must consider the CRA record of each subsidiary bank of a BHC in connection with any acquisition or merger application filed by the BHC. An unsatisfactory CRA record could substantially delay or result in the denial of an approval or application by Orrstown or the Bank. The Bank received a CRA rating of “Satisfactory” in its most recent examination.

Leaders of the federal banking agencies recently have indicated their support for modernizing the CRA regulatory framework to address changing delivery systems and consumer preferences, and, in December 2019, the Office of the Comptroller of the Currency and FDIC issued a joint proposed rule that would amend the CRA regulatory framework. It is too early to tell whether and to what extent any changes will be made to applicable CRA requirements.

Anti-Money Laundering

The Bank Secrecy Act and the PATRIOT Act contain anti-money laundering and financial transparency provisions intended to detect and prosecute internationalprevent the use of the U.S. financial system for money laundering and terrorist financing activities. The Bank Secrecy Act, as amended by the financingPATRIOT Act, requires depository institutions and their holding companies to undertake activities including maintaining an anti-money laundering program, verifying the identity of terrorism.clients, verifying the identity of certain beneficial owners for legal entity clients, monitoring for and reporting suspicious transactions, reporting on cash transactions exceeding specified thresholds, and responding to requests for information by regulatory authorities and law enforcement agencies. The Bank is subject to the Bank Secrecy Act and, therefore, is required to provide its employees with anti-money laundering training, designate an anti-money laundering compliance officer, and undergo an annual, independent audit to assess the effectiveness of its anti-money laundering program. The Bank has implemented policies, procedures, and internal controls that are designed to comply with these anti-money laundering requirements. Bank regulators are focusing their examinations on anti-money laundering compliance, and we will continue to monitor and augment, where necessary, our anti-money laundering compliance programs. The federal banking agencies are required, when reviewing bank and BHC acquisition or merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicant.


Office of Foreign Assets Control Regulation

The Office of Foreign Assets Control is responsible for administering economic sanctions that affect transactions with designated foreign countries, nationals, and others, as defined by various Executive Orders and in various legislation. Office of Foreign Assets Control-administered sanctions take many different forms. For example, sanctions may include: (1) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on U.S. persons engaging in financial transactions relating to, making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (2) a blocking of assets in which the government or “specially designated nationals” of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction, including property in the possession or control of U.S. persons. The Office of Foreign Assets Control also publishes lists of persons, organizations, and countries suspected of aiding, harboring, or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. Blocked assets, for example property and bank deposits, cannot be paid out, withdrawn, set off, or transferred in any manner without a license from the Office of Foreign Assets Control. Failure to comply with these sanctions could have serious legal and reputational consequences.




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Transaction Account Reserves

Federal Reserve rules require depository institutions to maintain reserves against their transaction accounts, primarily NOW and regular checking accounts. For 2020, the first $16.9 million of covered balances are exempt from the reserve requirement, aggregate balances between $16.9 million and $127.5 million are subject to a 3% reserve requirement, and aggregate balances above $127.5 million are subject to a 10% reserve requirement. These reserve requirements are subject to annual adjustment by the Federal Reserve. The Bank was in compliance with these requirements as of December 31, 2019.

Consumer Protection Regulation and Supervision

We are subject to supervision and regulation by the CFPB with respect to federal consumer protection laws. We are also subject to certain state consumer protection laws, and under the Dodd-Frank Act, state attorneys general and other state officials are empowered to enforce certain federal consumer protection laws and regulations. State authorities have increased their focus on and enforcement of consumer protection rules. These federal and state consumer protection laws apply to a broad range of our activities and to various aspects of our business and include laws relating to interest rates, fair lending, disclosures of credit terms and estimated transaction costs to consumer borrowers, debt collection practices, the use of and the provision of information to consumer reporting agencies, and the prohibition of unfair, deceptive, or abusive acts or practices in connection with the offer, sale, or provision of consumer financial products and services.

The CFPB has promulgated many mortgage-related final rules since it was established under the Dodd-Frank Act, including rules related to the ability to repay and qualified mortgage standards, mortgage servicing standards, loan originator compensation standards, high-cost mortgage requirements, Home Mortgage Disclosure Act requirements, and appraisal and escrow standards for higher priced mortgages. The mortgage-related final rules issued by the CFPB have materially restructured the origination, servicing, and securitization of residential mortgages in the U.S. These rules have impacted, and will continue to impact, the business practices of mortgage lenders, including the Bank.

Future Legislation and Regulation
Changes in federal laws and regulations, as well as laws and regulations in states where the Parent Company, and the Bank, and Wheatland do business, can affect the operating environment of the Company and the BankOrrstown in substantial ways. We cannot predict whether those changes in laws and regulations will occur, and, if they occur, the ultimate effect they would have upon the financial condition or results of operations of the Company.
NASDAQ
Nasdaq Capital Market
The Company’s common stock is listed on The NASDAQthe Nasdaq Capital Market under the trading symbol “ORRF” and is subject to NASDAQ’sNasdaq’s rules for listed companies.


CompetitionAvailable Information
The Bank’s principal market area consists of Berks County, Cumberland County, Dauphin County, Franklin County, Lancaster County, and Perry County, Pennsylvania, and Washington County, Maryland. The Bank serves a substantial number of depositors in this market area and contiguous counties, with the greatest concentration in Chambersburg, Shippensburg, and Carlisle, Pennsylvania and the surrounding areas.
We are subject to robust competitionthe informational requirements of the Exchange Act and, in our market areas. Like other depository institutions, we compete with less heavily regulated entities such as credit unions, brokerage firms, money market funds, consumer finance and credit card companies, and with other commercial banks, many of which are larger than the Bank. The principal methods of competing effectively in the financial services industry include improving customer service through the quality and range of services provided, improving efficiencies and pricing services competitively. The Bank is competitiveaccordance with the financial institutions in its service areasExchange Act, we file annual, quarterly, and current reports, proxy statements, and other information with respect to interest rates paid on timethe SEC. The SEC maintains an Internet web site that contains reports, proxy statements, and savings deposits, service charges on deposit accountsother information about issuers, like us, who file electronically with the SEC. The address of the site is www.sec.gov. The reports and interest rates charged on loans.
We continue to implement strategic initiatives focused on expanding our core businesses and to explore, on an ongoing basis, acquisition, divestiture, and joint venture opportunitiesother information, including any related amendments, filed by us with, or furnished by us to, the extent permittedSEC are also available free of charge at our Internet web site as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The address of the site is www.orrstown.com. Except as specifically incorporated by our regulators. We analyze eachreference into this Annual Report on Form 10-K, information on those web sites is not part of our products and businesses in the context of shareholder return, customer demands, competitive advantages, industry dynamics, and growth potential. We believe our market area will support growth in assets and deposits in the future, which we expect to contribute to our ability to maintain or grow profitability.this report.


ITEM 1A – RISK FACTORS
Set forth below areAn investment in our common stock is subject to risks inherent in our business. The material risks and uncertainties that could materiallymanagement believes affect us are described below. Before making an investment decision, you should carefully consider the risks and adversely affect Orrstown's resultsuncertainties described below together with all of operations, financial condition, liquidity and cash flows.the other information included or incorporated by reference in this report. The risks set forthand uncertainties described below are not the only ones facing us. Additional risks we face. Ourand uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This report is qualified in its entirety by these risk factors.

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If any of the following risks actually occur, our business, financial condition and results of operations could also be affected by other factors not presently knownmaterially and adversely affected. If this were to ushappen, the market price of our common stock could decline significantly, and you could lose all or factors that we currently do not consider to be material.part of your investment.


Risks Related to Credit
If our allowance for loan losses is not sufficient to cover actual losses, our earnings would decrease.
There is no precise method of predicting loan losses. The required level of reserves, and the related provision for loan losses, can fluctuate from year to year, based on charge-offs and/or recoveries, loan volume, credit administration practices, and local and national economic conditions, among other factors. In 2016, we recorded a provision for loan losses of $250,000 compared with a negative provision of $630,000 in 2015. The Company recorded net charge-offs of $1,043,000 in 2016 compared with net charge-offs of $576,000 in 2015. Risk elements, including nonperforming loans, troubled debt restructurings still accruing, loans greater than 90 days past due still accruing, and other real estate owned totaled $8,319,000 at December 31, 2016 compared with $18,084,000 at December 31, 2015. The allowance for loan losses,ALL, which is a reserve established through a provision for loan losses charged to expense, represents management’s best estimate of probable incurred losses within the existing portfolio of loans. The level of the allowance reflects management’s evaluation of, among other factors, the status of specific impaired loans, trends in historical loss experience, delinquency, credit concentrations and economic conditions within our market area. The determination of the appropriate level of the allowance for loan lossesALL inherently involves a high degree of subjectivity and judgment and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require us to increase our allowance for loan losses.

ALL.
In addition, bank regulatory agencies periodically review our allowance for loan lossesALL and may require us to increase the provision for loan losses or to recognize further loan charge-offs, based on judgments that differ from those of, or information not available to, management. If loan charge-offs in future periods exceed the allowance for loan losses,ALL, there would be a need to record additional provisions to increase our allowance for loan losses.ALL. Furthermore, growth in the loan portfolio would generally lead to an increase in the provision for loan losses. Generally, increases in our allowance for loan lossesALL will result in a decrease in net income and stockholders’ equity, and may have a material adverse effect on theour financial condition of the Company,and results of operations and cash flows.operations.
The allowance for loan losses was 1.45% of total loans and 160% of nonaccrual and restructured loans still accruing at December 31, 2016, compared with 1.74% of total loans and 78% of nonaccrual and restructured loans still accruing at December 31, 2015. In addition, at December 31, 2016, the top 25 lending relationships individually had commitments of $56,928,000, and an aggregate total outstanding loan balance of $198,094,000, or 29% of the loan portfolio.
The deterioration of one or more of these loansour significant lending relationships could result in a significant increase in the nonperforming loans and the provisions for loan losses, which would negatively impact our results of operations.

Further, as a "smaller reporting company" as defined by the FASB, we have elected to delay implementation of ASU 2016-13, Measurement of Credit Losses on Financial Instruments, under the three year delay permitted by the FASB in 2019. For a more complete description of the potential impact ASU 2016-13 may have on our financial statements and ALL, please refer to the "Changes in our accounting policies or in accounting standards could materially affect how we report our financial results and condition" risk factor below and Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data" appearing elsewhere in this Form 10-K.

Commercial real estate lending may expose us to a greater risk of loss and impact our earnings and profitability.

Our business strategy involvesincludes making loans secured by commercial real estate. These types of loans generally have higher risk-adjusted returns and shorter maturities than other loans. Loans secured by commercial real estate properties are generally for larger amounts and may involve a greater degree of risk than other loans. Payments on loans secured by these properties are often dependent on the income produced by the underlying properties which, in turn, depends on the successful operation and management of the properties. Accordingly, repayment of these loans is subject to conditions in the real estate market or the local economy. In challenging economic conditions, these loans represent higher risk and could result in an increase in our total net charge-offs, requiring us to increase our allowance for loan losses,ALL, which could have a material adverse effect on our financial condition or results of operations. While we seek to minimize these risks in a variety of ways, there can be no assurance that these measures will protect against credit-related losses.
Commercial and industrial loans comprise 10% of our loan portfolio.
The credit risk related to these types ofcommercial and industrial loans is greater than the risk related to residential loans.
 Our commercial and industrial loan portfolio grew by $14.8 million, or approximately 20%, during the year ended December 31, 2016 to $88.5 million.
 Commercial and industrial loans generally carry larger loan balances and involve a greater degree of risk of nonpayment or late payment than home equity loans or residential mortgage loans.
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 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. We attempt to mitigate this risk through our underwriting standards, including evaluating the credit worthinesscreditworthiness of the borrower
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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.
Our commercial and industrial lending operations are located primarily in South Central Pennsylvania and in Washington County, Maryland.c Our borrowers’ ability to repay these loans depends largely on economic conditions in these and surrounding areas. A deterioration in the economic conditions in these market areas could materially adversely affect our operations and increase loan delinquencies, increase problem assets and foreclosures, increase claims and lawsuits, decrease the demand for our products and services and decrease the value of collateral securing loans.
Risks Related to Interest Rates and Investments
Changes in interest rates could adversely impact the Company’s financial condition and results of operations.
Our operations are subject to risks and uncertainties surrounding our exposure to changes in the interest rate environment. Operating income, net income and liquidity depend to a great extent on our net interest margin, i.e., the difference between the interest yields we receive on interest-earning assets, such as loans and securities, and the interest rates we pay on interest-bearing liabilities, such as deposits and borrowings. These rates are highly sensitive to many factors beyond our control, including competition, general economic conditions, and monetary and fiscal policies of various governmental and regulatory authorities, including the FRB. If the rate of interest we pay on our interest-bearing liabilities increases more than the rate of

interest we receive on our interest-earning assets, our net interest income, and therefore our earnings and liquidity could be materially adversely affected. Our earnings and liquidity could also be materially adversely affected if the rates on interest-earning assets fall more quickly than those on our interest-bearing liabilities.
Changes in interest rates also can affect our ability to originate loans; the ability of borrowers to repay adjustable or variable rate loans; our ability to obtain and retain deposits in competition with other available investment alternatives; and the value of interest-earning assets, which would negatively impact stockholders’ equity, and the ability to realize gains from the sale of such assets. Based on our interest rate sensitivity analyses, an increase in the general level of interest rates will negatively affect the market value of the investment portfolio because of the relatively longhigher duration of certain securities included in the investment portfolio.
Our subordinated notes, issued in December 2018, have a 6.0% fixed interest rate through December 2023, after which the interest rate will convert to a variable rate of the London Interbank Offered Rate (“LIBOR”) plus 3.16% through maturity in December 2028. Depending on our financial condition at the time of the rate changing from fixed to variable, an increase in the interest rate on our subordinated debt could have a material adverse effect on our liquidity and results of operations.

The expected discontinuance of LIBOR presents risks to the financial instruments originated, issued or held by us that use LIBOR as a reference rate.

LIBOR is used as a reference rate for many of our transactions, which means it is the base on which relevant interest rates are determined. Transactions include those in which we lend and borrow money and issue, purchase and sell securities. LIBOR is the subject of recent national and international regulatory guidance and proposals for reform. The United Kingdom Financial Conduct Authority, which regulates the process for setting LIBOR, announced in July 2017 that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021.

While there are ongoing efforts to establish an alternative reference rate to LIBOR, such as the Secured Overnight Financing Rate or SOFR, as of the date of this report, no such rate has been accepted or is considered ready to be widely implemented.

If another rate does not achieve wide acceptance as the alternative to LIBOR, there likely will be disruption to all of the markets relying on the availability of a broadly accepted reference rate. Even if another reference rate ultimately replaces LIBOR, risks will remain for us with respect to outstanding loans, or other instruments using LIBOR. Those risks arise in connection with transitioning those instruments to a new reference rate and the corresponding value transfer that may occur in connection with that transition. Risks related to transitioning instruments to a new reference rate or to how LIBOR is calculated and its availability include impacts on the yield on loans or securities held by us and amounts paid on securities we have issued. The value of loans, securities, or borrowings tied to LIBOR and the trading market for LIBOR-based securities could also be impacted upon its discontinuance or if it is limited.

Further, it is possible that LIBOR quotes will become unavailable prior to 2021 if a sufficient number of banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate would be accelerated and magnified. These risks may also be increased due to the shorter time frame for preparing for the transition.

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Risks Related to Competition and to Our Business Strategy
Difficult economic and market conditions havecan adversely affectedaffect the financial services industry and may continue to materially and adversely affect the Company.
Our operations are sensitive to general business and economic conditions in the United States.U.S. If the growth of the United StatesU.S. economy slows, or if the economy worsens or enters into a recession, our growth and profitability could be constrained. In addition, economic conditions in foreign countries can affect the stability of global financial markets, which could impact the U.S. economy and financial markets. Weak economic conditions are characterized by deflation, fluctuations in debt and equity capital markets, including a lack of liquidity and/or depressed prices in the secondary market for mortgage loans, increased delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate price declines and lower home sales and commercial activity. All of these factors are detrimental to our business. Our business is significantly affected by monetary and related policies of the U.S. federal government, its agencies and government-sponsored entities. Changes in any of these policies could have a material adverse effect on our business, financial position, results of operations and cash flows.
In particular, we may face the following risks in connection with volatility in the economic environment:
Loan delinquencies could increase;
Problem assets and foreclosures could increase;
Demand for our products and services could decline; and
Collateral for loans made by us, especially real estate, could decline in value, reducing a customer’sclient borrowing power, and reducing the value of the assets and collateral associated with our loans.
Because our business is concentrated in South Centralsouth central Pennsylvania, in the greater Baltimore region, and Washington County, Maryland, our financial performance could be materially adversely affected by economic conditions and real estate values in these market areas.
Our operations and the properties securing our loans are primarily located in South Centralsouth central Pennsylvania, in the greater Baltimore region, and in Washington County, Maryland. Our operating results depend largely on economic conditions and real estate valuations in these and surrounding areas. A deterioration in the economic conditions in these market areas could materially adversely affect our operations and increase loan delinquencies, increase problem assets and foreclosures, increase claims and lawsuits, decrease the demand for our products and services and decrease the value of collateral securing loans, especially real estate, in turn reducing customers’clients’ borrowing power, the value of assets associated with nonperforming loans and collateral coverage.
Competition from other banks and financial institutions in originating loans, attracting deposits and providing other financial services may adversely affect our profitability and liquidity.
We experience substantial competition in originating loans, both commercial and consumer loans in our market area. This competition comes principally from other banks, savings institutions, credit unions, mortgage banking companies and other lenders. Some of our competitors enjoy advantages, including greater financial resources, and higher lending limits, a wider geographic presence, more accessible branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs. This competition could reduce our net income and liquidity by decreasing the number and size of loans that we originate and the interest rates we are able to charge on these loans.
As we expand our on-line lending capabilities, we will face competition, particularly in residential mortgage lending, from non-bank lenders (financial institutions that only make loans and do not offer deposit accounts such as a savings account or checking account) and financial technology companies (thatthat use new technology and innovation with available resources in order to compete in the marketplace of traditional financial institutions and intermediaries in the delivery of financial services).services. This competition could similarly reduce our net income and liquidity.

In attracting business and consumer deposits, we face substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Some of our competitors enjoy advantages, including more aggressiveexpansive marketing campaigns, better brand recognition and more branch locations. These competitors may offer higher interest rates than we do, which could decrease the deposits that we attract or require us to increase our rates to retain existing deposits or attract new deposits. Increased deposit competition could materially adversely affect our ability to generate the funds necessary for lending operations. As a result, we may need to seek other sources of funds that may be more expensive to obtain and could increase our cost of funds.
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The Company’s business strategy includes the continuation of moderate growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.
Loans grew $101,678,000, or 13.0% from $781,713,000 at December 31, 2015, to $883,391,000 at December 31, 2016, due to organic growth through increases in consumer, commercial and commercial real estate loans. Over the long term, we expect to continue to experience organic growth in loans and total assets, the level of our deposits and the scale of our operations. Achieving our growth targets requires us to successfully execute our business strategies, which includes continuing to grow our loan portfolio. Our ability to successfully grow will also depend on the continued availability of loan opportunities that meet underwriting standards. In addition, our asset quality metrics have improved sufficiently that we may consider the acquisition of other financial institutions and branches within or outside of our market area to the extent permitted by our regulators. The success of any such acquisition will depend on a number of factors, including our ability to integrate the acquired institutions or branches into the current operations of the Company; our ability to limit the outflow of deposits held by customersclients of the acquired institution or branch locations; our ability to control the incremental increase in noninterest expense arising from any acquisition; and our ability to retain and integrate the appropriate personnel of the acquired institution or branches. We believe we have the resources and internal systems in place to successfully achieve and manage our future growth. If we do not manage our growth effectively, we may not be able to achieve our business plan goals and our business and prospects could be harmed.
The Company may be adversely affected by technological advances.
Technological advances impact our business. The banking industry undergoes technological change with frequent introductions of new technology-driven products and services. In addition to improving customerclient services, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success may depend, in part, on our ability to address the needs of our current and prospective customersclients by using technology to provide products and services that will satisfy demands for convenience, as well as to create additional efficiencies in operations.

The Company may not be able to attract and retain skilled people.
The Company’s success depends, in large part, on our ability to attract and retain skilled people. We have, at times, experienced turnover among our senior officers.
Competition for the best people in most activities engaged in by us can be intense, and we may not be able to attract and hire sufficiently skilled people to fill open and newly created positions or to retain current or future employees. An inability to attract and retain individuals with the necessary skills to fill open positions, or the unexpected loss of services of one or more of our key personnel, could have a material adverse impact on our business due to the loss of their skills, knowledge of our markets, years of industry experience or the difficulty of promptly finding qualified replacement personnel.
An interruption
We believe that our continued growth and future success will depend in large part on the skills of our management team and our ability to motivate and retain these individuals and other key personnel. The loss of service of one or breachmore of our executive officers or key personnel could reduce our ability to successfully implement our long-term business strategy, our business could suffer, and the value of our stock could be materially adversely affected. Leadership changes will occur from time to time, and we cannot predict whether significant resignations will occur or whether we will be able to recruit additional qualified personnel. We believe our management team possesses valuable knowledge about the banking industry and that their knowledge and relationships could be very difficult to replicate. Our success also depends on the experience of our branch managers and lending officers and on their relationships with the clients and communities they serve. The loss of these key personnel could negatively impact our banking operations. The loss of key personnel, or the inability to recruit and retain qualified personnel in security with respect to our information systems, or our outsourced service providers,the future, could adversely impact the Company’s reputation and have an adverse impacteffect on our business, financial condition, or resultsoperating results.

We face security risks, including denial of operations.service attacks, hacking, social engineering attacks targeting our colleagues and clients, malware intrusion or data corruption attempts, and identity theft that could result in the disclosure of confidential information, adversely affect our business or reputation, and create significant legal and financial exposure.
InformationOur computer systems and network infrastructure and those of third parties, on which we are criticalhighly dependent, are subject to security risks and could be susceptible to cyber attacks, such as denial of service attacks, hacking, terrorist activities, or identity theft. Our business relies on the secure processing, transmission, storage, and retrieval of confidential, proprietary, and other information in our business. We use various technologicalcomputer and data management systems to manage our customer relationships, general ledger, securities investments, deposits and loans. We rely on software, communication, and information exchange on a variety of computing platforms and networks, and overin the Internet. computer and data management systems and networks of third parties. In addition, to access our network, products, and services, our clients and other third parties may use personal mobile devices or computing devices that are outside of our network environment and are subject to their own cybersecurity risks.

We, our clients, regulators, and other third parties, including other financial services institutions and companies engaged in data processing, have established policiesbeen subject to, and proceduresare likely to preventcontinue to be the target of, cyber attacks. These cyber attacks include computer viruses, malicious or limitdestructive code, phishing attacks, denial of service or information, ransomware, improper access by employees or vendors, attacks on personal email of employees, ransom demands to not expose security vulnerabilities in our systems or the effectsystems of system failures, business interruptions andthird parties or other security breaches butthat could result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of confidential, proprietary, and other information of ours, our employees, our clients,
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or of third parties, damage our systems or otherwise materially disrupt our or our clients’ or other third parties’ network access or business operations. As cyber threats continue to evolve, we cannotmay be certain that allrequired to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities or incidents. Despite efforts to ensure the integrity of our systems and implement controls, processes, policies, and other protective measures, we may not be able to anticipate all security breaches, nor may we be able to implement sufficient preventive measures against such security breaches, which may result in material losses or consequences for us.

Cybersecurity risks for banking organizations have significantly increased in recent years in part because of the proliferation of new technologies, and the use of the internet and telecommunications technologies to conduct financial transactions. For example, cybersecurity risks may increase in the future as we continue to increase our mobile-payment and other internet-based product offerings and expand our internal usage of web-based products and applications. In addition, cybersecurity risks have significantly increased in recent years in part due to the increased sophistication and activities of organized crime affiliates, terrorist organizations, hostile foreign governments, disgruntled employees or vendors, activists, and other external parties, including those involved in corporate espionage. Even the most advanced internal control environment may be vulnerable to compromise. Due to increasing geopolitical tensions, nation state cyber attacks and ransomware are entirely free from vulnerabilityboth increasing in sophistication and prevalence. Targeted social engineering and email attacks (i.e. “spear phishing” attacks) are becoming more sophisticated and are extremely difficult to prevent. In such an attack, an attacker will attempt to fraudulently induce colleagues, clients, or other users of our systems to disclose sensitive information in order to gain access to its data or that of its clients. Persistent attackers may succeed in penetrating defenses given enough resources, time, and motive. The techniques used by cyber criminals change frequently, may not be recognized until launched, and may not be recognized until well after a breach has occurred. The speed at which new vulnerabilities are discovered and exploited often before security patches are published continues to rise. The risk of a security breach caused by a cyber attack at a vendor or by unauthorized vendor access has also increased in recent years. Additionally, the existence of cyber attacks or security breaches at third-party vendors with access to our data may not be disclosed to us in a timely manner.

We also face indirect technology, cybersecurity, and operational risks relating to the clients and other third parties with whom we do business or upon whom we rely to facilitate or enable our business activities, including, for example, financial counterparties, regulators, and providers of critical infrastructure such as internet access and electrical power. As a result of increasing consolidation, interdependence, and complexity of financial entities and technology systems, a technology failure, cyber attack, or other technological difficultiesinformation or failures. In addition, any compromisesecurity breach that significantly degrades, deletes, or compromises the systems or data of our systems could deter customers from using our products and services. Although we rely on security systems to provide security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from security breaches.
We rely on the services of a variety of vendors to meet our data processing and communication needs. If these third-party providers encounter difficulties,one or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

If information security is breached or other technology difficulties or failures occur, information may be lost or misappropriated, services and operations may be interrupted and we could be exposed to claims from customers. Any of these resultsmore financial entities could have a material adverseimpact on counterparties or other market participants, including us. This consolidation, interconnectivity, and complexity increases the risk of operational failure, on both individual and industry-wide bases, as disparate systems need to be integrated, often on an accelerated basis. Any third-party technology failure, cyber attack, or other information or security breach, termination, or constraint could, among other things, adversely affect our ability to effect transactions, service our clients, manage our exposure to risk, or expand our business.

Cyber attacks or other information or security breaches, whether directed at us or third parties, may result in a material loss or have material consequences. Furthermore, the public perception that a cyber attack on our financial condition,systems has been successful, whether or not this perception is correct, may damage our reputation with clients and third parties with whom we do business. Hacking of personal information and identity theft risks, in particular, could cause serious reputational harm. A successful penetration or circumvention of system security could cause us serious negative consequences, including our loss of clients and business opportunities, costs associated with maintaining business relationships after an attack or breach; significant business disruption to our operations and business, misappropriation, exposure, or destruction of our confidential information, intellectual property, funds, and/or those of our clients; or damage to our or our clients’ and/or third parties’ computers or systems, and could result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in our security measures, reputational damage, reimbursement or other compensatory costs, additional compliance costs, and could adversely impact our results of operations, liquidity and financial condition. In addition, we may not have adequate insurance coverage to compensate for losses from a cybersecurity event.

Cybersecurity and data privacy are areas of heightened legislative and regulatory focus.

As cybersecurity and data privacy risks for banking organizations and the broader financial system have significantly increased in recent years, cybersecurity and data privacy issues have become the subject of increasing legislative and regulatory focus. The federal bank regulatory agencies have proposed regulations that would enhance cyber risk management standards, which would apply to a wide range of large financial institutions and their third-party service providers and would focus on cyber risk governance and management, management of internal and external dependencies, and incident response, cyber resilience, and situational awareness. Several states have also proposed or liquidity.adopted cybersecurity legislation and regulations, which require, among other things, notification to affected individuals when there has been a security breach of their personal data.

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We receive, maintain, and store non-public personal information of our clients and counterparties, including, but not limited to, personally identifiable information and personal financial information. The sharing, use, disclosure, and protection of these types of information are governed by federal and state law. Both personally identifiable information and personal financial information are increasingly subject to legislation and regulation, the intent of which is to protect the privacy of personal information and personal financial information that is collected and handled.

We may become subject to new legislation or regulation concerning cybersecurity or the privacy of personally identifiable information and personal financial information or of any other information we may store or maintain. We could be adversely affected if new legislation or regulations are adopted or if existing legislation or regulations are modified such that we are required to alter our systems or require changes to our business practices or privacy policies. If cybersecurity, data privacy, data protection, data transfer, or data retention laws are implemented, interpreted, or applied in a manner inconsistent with our current practices, we may be subject to fines, litigation, or regulatory enforcement actions or ordered to change our business practices, policies, or systems in a manner that adversely impacts our operating results.

We could be adversely affected by a failure in our internal controls.
A failure
We rely on our employees to design, manage, and operate our systems and controls to assure that we properly enter into, record and manage processes, transactions and other relationships with clients, suppliers and other parties with whom we do business. In some cases, we rely on employees of third parties to perform these tasks. We also depend on employees and the systems and controls for which they are responsible to assure that we identify and mitigate the risks that are inherent in our internalrelationships and activities. These concerns are increased when we change processes or procedures, introduce new products or services, or implement new technologies, as we may fail to adequately identify or manage operational risks resulting from such changes.

As a result of our necessary reliance on employees, whether ours or those of third parties, to perform these tasks and manage resulting risks, we are subject to human vulnerabilities. These range from innocent human error to misconduct or malfeasance, potentially leading to operational breakdowns or other failures. Our controls may not be adequate to prevent problems resulting from human involvement in our business, including risks associated with the design, operation and monitoring of automated systems.

Errors by our employees or others responsible for systems and controls on which we depend and any resulting failures of those systems and controls could have aresult in significant negative impact not onlyharm to us. This could include client remediation costs, regulatory fines or penalties, litigation or enforcement actions, or limitations on our earnings, butbusiness activities. We could also on the perception that customers, regulatorssuffer damage to our reputation, impacting our ability to attract and investors may have of us. retain clients and employees.

We continue to devote a significant amount of effort and resources to continuallyconstantly strengthening our controls and ensuring compliance with complex accounting standards and banking regulations. However, these efforts may not be effective in preventing a breach in or failure of our controls.

Negative public opinion could damage our reputation and adversely affect our earnings.

Reputational risk, or the risk to the Company's earnings and capital from negative public opinion, is inherent in our business. Negative public opinion can result from the actual or perceived manner in which we conduct our business activities, including banking operations and trust and investment operations, our management of actual or potential conflicts of interest and ethical issues, and our protection of confidential client information. Negative public opinion can adversely affect the Company's ability to keep and attract customersclients and can expose the Company to litigation and regulatory action. Although we take steps to minimize reputation risk in the way we conduct our business activities and deal with our customers,clients, communities and vendors, these steps may not be effective.

We may become subject to claims and litigation pertaining to fiduciary responsibility.

We provide fiduciary services through OFA and Wheatland. From time to time, clients may make claims and take legal action with regard to the performance of our fiduciary responsibilities. Whether such claims and legal actions are founded or unfounded, if such claims or legal actions are not resolved in a manner favorable to us, the claims or related actions may result in significant financial expense and liability to us and/or adversely affect our reputation in the marketplace, as well as adversely impact client demand for our products and services. Any financial liability or reputation damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.


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Acts of terrorism, natural disasters, global climate change, pandemics and global conflicts may have a negative impact on our business and operations.

Acts of terrorism, natural disasters, global climate change, pandemics, global conflicts or other similar events could have a negative impact on our business and operations. While we have in place business continuity plans, such events could still damage our facilities, disrupt or delay the normal operations of our business (including communications and technology), result in harm to or cause travel limitations on our employees, and have a similar impact on our clients, suppliers, third-party vendors and counterparties. These events also could impact us negatively to the extent that they result in reduced capital markets activity, lower asset price levels, or disruptions in general economic activity in the U.S. or abroad, or in financial market settlement functions. In addition, these or similar events may impact economic growth negatively, which could have an adverse effect on our business and operations, and may have other adverse effects on us in ways that we are unable to predict.

Risks Related to Mergers and Acquisitions

On October 1, 2018, we completed the acquisition of Mercersburg, and on May 1, 2019, we completed the acquisition of Hamilton Bancorp, Inc.

Growing by acquisition involves risks.

We intend to pursue a growth plan consistent with our business strategy, including growth by acquisition, as well as leveraging our existing branch network and adding new branch locations in current and future markets we choose to serve.

Our ability to manage growth successfully will depend on our ability to attract qualified personnel and maintain cost controls and asset quality while attracting additional loans and deposits on favorable terms, as well as on factors beyond our control, such as economic conditions and competition. If we grow too quickly and are not able to attract qualified personnel, control costs and maintain asset quality, this continued rapid growth could materially adversely affect our financial performance.

Goodwill incurred in acquisitions may negatively affect our financial condition.
To the extent that merger consideration, consisting of cash and shares of our common stock, exceeds the fair value of the net assets acquired, including identifiable intangibles, that amount will be reported as goodwill by us. In accordance with current accounting guidance, goodwill will not be amortized but will be evaluated for impairment annually or more frequently if events or circumstances warrant. A failure to realize expected benefits of the mergers could adversely impact the carrying value of the goodwill recognized in the mergers and, in turn, negatively affect our financial results.
We may be unable to successfully integrate the operations of acquired entities over time. 
Acquisitions involve the integration with Orrstown of companies that previously operated independently. The difficulties of combining the operations of the acquired companies with Orrstown include: 
integrating personnel with diverse business backgrounds; 
integrating departments, systems, operating procedures and information technologies; 
combining different corporate cultures; 
retaining existing clients and attracting new clients; and 
retaining key employees.  
The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of the combined company and the loss of key personnel. The diversion of management’s attention and any delays or difficulties encountered in connection with the merger and the integration process could have a material adverse effect on the business and results of operations of the combined company. 
The success of acquisitions depends, in part, on our ability to realize the anticipated benefits and cost savings from combining the businesses acquired with Orrstown. If we are unable to successfully execute on integration, the anticipated earnings and cost savings to be derived from acquisitions may not be realized fully or may take longer to realize than expected. In addition, as with regard to any acquisition, a significant change in interest rates or economic conditions or decline in asset valuations may also cause us not to realize expected benefits and result in the acquisitions not meeting expectations.


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The market price of our common stock after acquisitions may be affected by factors different from those affecting our shares currently. 
The businesses of the Company and acquired entities may differ and, accordingly, the results of operations of the combined company and the market price of the shares of common stock of the combined company may be affected by factors different from those currently affecting the independent results of operations and market prices of common stock of each separate entity. The market value of our common stock fluctuates based upon various factors, including changes in our business, operations or prospects, market assessments of the merger, regulatory considerations, market and economic considerations, and other factors. Further, the market price of our common stock after an acquisition may be affected by factors different from those currently affecting our common stock.
Additionally, future business acquisitions may result in the issuance and payment of additional shares of stock, which would dilute current shareholders’ ownership interests, and may involve the payment of a premium over book and market values. Therefore, dilution of our tangible book value and net income per common share could occur in connection with any future transaction.

Risks Related to Regulatory Compliance and Legal Matters
Governmental regulation and regulatory actions against us may impair our operations or restrict our growth.
The Company is subject to regulation and supervision under federal and state laws and regulations. The requirements and limitations imposed by such laws and regulations limit the manner in which we conduct our business, undertake new investments and activities and obtain financing. These regulations are designed primarily for the promotion of the safety and soundness of financial institutions and the protection of the deposit insurance funds and consumers, and not to benefit our shareholders.

Applicable laws and regulations impose capital adequacy requirements and restrict our ability to repurchase stock or to receive dividends from our subsidiaries. Our ability to service our obligations and pay dividends to shareholders is largely dependent on the receipt of dividends from our subsidiaries, primarily the Bank. The Federal Reserve requires a BHC to act as a source of financial and managerial strength for its subsidiary banks. The Federal Reserve could require us to commit resources to the Bank when doing so is not otherwise in the interests of our shareholders or creditors.

We are subject to supervision and examination by numerous governmental bodies. The results of these supervisory or examination activities could result in limitations on our ability to engage in new activities or expand geographically. These activities also could result in significant fines, penalties, or required corrective actions, some of which could be expensive and difficult to implement. As we expand our product and service offerings into additional states, there could be an increase in state regulation affecting our operations. Different approaches to regulation by different jurisdictions could increase our compliance costs or risks of non-compliance.

Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation in the future, none of which is within our control. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied or enforced. The Company cannot predict the substance or impact of pending or future legislation, regulation or the application thereof.

Compliance with such current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner. Bank regulations can hinder our ability to compete with financial services companies that are not regulated in the same manner or are subject to less regulation.
The Dodd-Frank Act may affect the Company’s financial condition, results of operations, liquidity A failure to comply, or to have adequate policies and stock price.
The Dodd-Frank Act includes provisions affecting large and small financial institutions, including several provisions that affect how community banks and bank holding companies will be regulated in the future. Among other things, these provisions relax rules regarding interstate branching; allow financial institutions to pay interest on business checking accounts; change the scope of federal deposit insurance coverage; and impose new capital requirements on bank holding companies. Many of the requirements called for in the Dodd-Frank Act will be implemented over time and will be subject to implementation regulations developed over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on our operations is not certain.
The Dodd-Frank Act created the CFPB which has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets are examined by their applicable bank regulators.
The Company may be required to invest significant management attention and resources to evaluate and make any changes necessaryprocedures designed to comply, with new statutoryregulatory requirements and expectations could expose us to damages, fines and regulatory penalties and other regulatory or enforcement actions or consequences, such as limitations on activities otherwise permissible for us or additional requirements under the Dodd-Frank Act. Failure to complyfor engaging in new activities, and could also injure our reputation with the new requirements may negatively impact our results of operationsclients and financial condition. While the Company cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could be materially adverse to our investors.others with whom we do business.


Increases in FDIC insurance premiums may have a material adverse effect on our results of operations.
Market developments significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. As the fund continues to recover, the Company may be required to pay significantly higher premiums or additional special assessments or taxes that could adversely affect earnings.
We are generally unable to control the amount of premiums that are required to be paid for FDIC insurance. If there are additional bank or financial institution failures, the Company may be required to pay evensignificantly higher FDIC premiums than the levels currently imposed.imposed or additional special assessments or taxes that could adversely affect earnings. Any future increases or required prepayments in FDIC insurance premiums may materially adversely affect the results of operations.

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Legislative, regulatory and legal developments involving income and other taxes could materially adversely affect the Company’s results of operations and cash flows.


The Company is subject to U.S. federal and U.S. state income, payroll, property, sales and use, and other types of taxes including the Pennsylvania Bank Shares Tax. Significant judgment is required in determining the Company's provisions for income taxes. Changes in tax rates, enactments of new tax laws, revisions of tax regulations, and claims or litigation with taxing authorities could result in substantially higher taxes, and therefore, could have a significant adverse effect on the Company's results of operations, financial condition and liquidity. Increases in the assessment rate for the Pennsylvania Bank Shares Tax, which is calculated on the outstanding equity of the Bank, may also materially adversely affect results of operations. At December 31, 2016, the Company had a net deferred tax asset totaling $16.3 million. Any U.S. tax reform that lowers corporate tax rates could have a significant one-time, non-cash adverse effect on results of operations as the Company's net deferred tax asset would be impacted, resulting in an increase in tax expense. We are unable to predict if, or when, any changes or proposals could be enacted.


The Company is required to use judgment in applying accounting policies and different estimates and assumptions in the application of these policies could result in a decrease in capital and/or other material changes to the reports of financial condition and results of operations.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, accounting for income taxes and the ability to recognize deferred tax assets, andALL, the fair value of certain financial instruments, particularly securities.securities, and goodwill and purchase accounting associated with acquisitions. While we have identified those accounting policies that we consider critical and have procedures in place to facilitate the associated judgments, different assumptions in the application of these policies could have a material adverse effect on our financial condition and results of operations.
Changes in our accounting policies or in accounting standards could impactmaterially affect how we report our financial results and condition.
From time to time, the Company's financial condition and results of operations.
The Financial Accounting Standards Board (the "FASB"), theFASB, SEC and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of the Company’sour consolidated financial statements. These changes including the use of an expected loss impairment methodology in the determination of the allowance for loan losses which will be effective for the Company beginning January 1, 2020, can be hardoperationally complex to predictimplement and can materially impact how the Company recordswe record and reports itsreport our financial condition and results of operations.

For example, in June 2016, the FASB issued Accounting Standards Update 2016-13, Measurement of Credit Losses on Financial Instruments, that will, upon adoption, substantially change the accounting for credit losses on loans and other financial assets held by banks, financial institutions and other organizations. The update replaces existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost. Upon adoption of ASU 2016-13, companies must recognize credit losses on these assets equal to management’s estimate of credit losses over the full remaining expected life. Companies must consider all relevant information when estimating expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts.

The changes were effective for most publicly-held companies on January 1, 2020. However, in July 2019, the FASB approved permitting “smaller reporting companies”, such as Orrstown, up to an additional 3 years to adopt ASU 2016-13. We elected not to adopt ASU 2016-13 on January 1, 2020, and have not yet determined if we will adopt its provisions prior to the extended implementation date of January 1, 2023.

In some cases,December 2018, the Federal Reserve, OCC and FDIC released a final rule to revise their regulatory capital rules, in part to address the upcoming change to the treatment of credit expense and allowances under ASC 2016-13. The final rule provides an optional three year phase-in period for the day-one adverse regulatory capital effects upon adopting the standard. The impact of this final rule on the Company could be requiredwill depend on whether we elect to apply new or revised guidance retrospectively, which may resultphase in the revisionimpact of prior financial statements by material amounts.ASU 2016-13 over a three year period. The implementationstandard is likely to have a negative impact, potentially materially, to the ALL and our capital position at adoption. When we adopt ASU 2016-13, we will also determine whether we will elect the phase-in provisions for regulatory capital. It is possible that our ongoing reported earnings and lending activity will be negatively impacted in periods following adoption of new or revised guidance could result in material adverse effects to our reported regulatory capital.ASU 2016-13.

The short-term and long-term impact of the changing regulatory capital requirements and new capital rules is uncertain.uncertain.

The Basel III Capital Rules which became effective forhave targeted higher levels of base capital, certain capital buffers, and a migration toward common equity as the Company and Bank on January 1, 2015, established a new comprehensive capital framework for U.S. banking organizations, including community banks. The Basel III Capital Rules substantially revised the risk-based capital requirements applicable to bank holding companies and depository institutions. The Basel III Capital Rules define the componentskey source of capital and address other issues affecting the numerator in banking institutions’ regulatory capital, ratios, address risk weightsas domestic and other issues affecting the denominator in banking institutions’international bank regulatory capital ratios.
agencies have sought to require financial institutions, including depository institutions, to maintain generally higher levels of capital. The application of more stringent capital requirements to the Company and the Bank could, among other things, result in lower returns on invested capital, result in the need for additional capital, and result in regulatory actions if we were to be unable to comply with such requirements.requirements, including limitations on our ability to make distributions, including paying out dividends or buying back shares. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructuringrestructure our business models, and/or increasingincrease our holdings of liquid assets. Implementation
21

Noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations could cause us material financial loss.
The Bank Secrecy Act and the PATRIOT Act contain anti-money laundering and financial transparency provisions intended to asset risk weightingsdetect and prevent the use of the U.S. financial system for risk-based capital calculations, items includedmoney laundering and terrorist financing activities. The Bank Secrecy Act, as amended by the PATRIOT Act, requires depository institutions and their holding companies to undertake activities including maintaining an anti-money laundering program, verifying the identity of clients, monitoring for and reporting suspicious transactions, reporting on cash transactions exceeding specified thresholds, and responding to requests for information by regulatory authorities and law enforcement agencies. FinCEN, a unit of the Treasury Department that administers the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the federal bank regulatory agencies, as well as the U.S. Department of Justice, Drug Enforcement Administration, and IRS.

There is also increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. If our policies, procedures, and systems are deemed deficient or deductedthe policies, procedures, and systems of the financial institutions that we have already acquired or may acquire in calculatingthe future are deficient, we would be subject to liability, including fines and regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy and could limitactions such as restrictions on our ability to make distributions,pay dividends and the necessity to obtain regulatory approvals to proceed with certain planned business activities, including paying out dividends or buying back shares.acquisition plans, which would negatively impact our business, financial condition, and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.


Pending litigation and legal proceedings and the impact of any finding of liability or damages could adversely impact the Company and its financial condition and results of operations.

As more fully described in Note 19,22, Contingencies, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statement and Supplementary Data," of this Annual Report on Form 10-K, the allegations of Southeastern Pennsylvania Transportation Authority's ("SEPTA") proposed second amended complaint disclosed the existence of a confidential, non-public, fact-finding inquiry regarding the Company being conducted by the SEC. On September 27, 2016, the Company entered into a settlement agreement with the SEC resolving the investigation of accounting and related matters at the Company for the periods ended June 30, 2010 to December 31, 2011. As part of the settlement agreement, the Company agreed to pay a civil money penalty of $1 million. In the most recent actions on the case, on January 31, 2017, the Court entered a Case Management Order establishing the schedule for the litigation. The Case Management Order, among other things, sets the deadlines for the completion of discovery, the filing of motions and various pre-trial conferences. The trial is scheduled for the month of October 2018.
The Company believes that the allegations of SEPTA's secondthe Southeastern Pennsylvania Transportation Authority's third amended complaint are without merit and it intends to vigorously defend itself against those claims. It is not possible at this time to estimate reasonably possible losses, if any,or even a range of reasonably possible losses, in connection with the litigation. However, thereThere can be no assurances, however, that the Company will not incur any losses associated with this litigation or that any losses that are incurred will not be material.

Indemnification costs associated with litigation and legal proceedings could adversely impact the Company and its financial condition and results of operations.
We are generally required, to the extent permitted by Pennsylvania law, to indemnify our current and former directors and officers who are named as defendants in lawsuits. We also have certain contractual indemnification obligations to third parties regarding litigation. Generally, insurance coverage is not available for such indemnification costs we could incur to third parties. Current or future litigation could result in indemnification expenses that could have a materially adverse impact on our financial condition and results of operations.
Risks Related to Liquidity
The Parent Company is a holding company dependent for liquidity on payments from its bank subsidiary, which is subject to restrictions.
The Parent Company is a holding company and depends on dividends, distributions and other payments from the Bank to fund dividend payments and stock repurchases, if permitted, and to fund all payments on obligations. The Bank is subject to laws that restrict dividend payments or authorize regulatory bodies to blockprohibit or reduce the flow of funds from it to us. In addition, our right to participate in a distribution of assets upon the Bank’s liquidation or reorganization is subject to the prior claims of the Bank’s creditors.creditors, including its depositors.
The soundness of other financial institutions could adversely affect the Company.
Our ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have historically led to market-wide liquidity problems, losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions. We could experience increases in deposits and assets as a result of other banks’ difficulties or failure, which would increase the capital we needare required to maintain to support such growth.
22

Risks Related to Owning our Stock
If the Company wants, to, or is compelled, to raise additional capital in the future, that capital may not be available when it is needed andor on terms favorable to current shareholders.
Federal banking regulators require us and our banking subsidiary to maintain adequate levels of capital to support our operations. These capital levels are determined and dictated by law, regulation and banking regulatory agencies. In addition, capital levels are also determined by our management and board of directors based on capital levels that they believe are necessary to support our business operations. At December 31, 2016,2019, all four capital ratios for us and our banking subsidiary were above regulatory minimum levels to be deemed “well capitalized” under current bank regulatory guidelines. To be “well capitalized,” banking companiesbanks generally must maintain a tier 1 leverage ratio of at least 5.0%, CET1 capital ratio of 6.5%, Tier 1 risk-based capital ratio of at least 8.0%, and a total risk-based capital ratio of at least 10.0%. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).
The Company’s ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside of our control, and on our financial performance. Accordingly, we cannot provide assurance of our ability to raise additional capital on terms and time frames acceptable to us or to raise additional capital at all. Additionally, the inability to raise capital in sufficient amounts may adversely affect our operations, financial condition and results of operations. Our ability to borrow could also be impaired by factors that are nonspecific to us, such as severe disruption of the financial markets or negative news and expectations about the prospects for the financial services industry as a whole. If we raise capital through the issuance of additional shares of our common stock or other securities, we would likely dilute the ownership interests of current investors by diluting earnings per share of our common stock and potentially dilute book value per share, depending on the issuance price. The price at which we issue additional shares of stock could be less than the current market price of our common

stock and, thus, could dilute the per share book value and earnings per share of our common stock. Furthermore, a capital raise through the issuance of additional shares may have an adverse impact on our stock price.

The market price of our common stock has beenis subject to volatility.

The market price of the Company’s common stock has been subject to fluctuations in response to numerous factors, many of which are beyond our control. These factors include actual or anticipated variations in our operational results and cash flows, changes in financial estimates by securities analysts, trading volume, large purchases or sales of our common stock, market conditions within the banking industry, the general state of the securities markets and the market for stocks of financial institutions, as well as general economic conditions.

A reduction in our credit rating could adversely affect our access to capital and could increase our cost of funds.

A credit rating agency regularly evaluates Orrstown and the Bank, and credit ratings are based on a number of factors, including our financial strength and ability to generate earnings, as well as factors not entirely within our control, including conditions affecting the financial services industry, the economy, and changes in rating methodologies. There can be no assurance that we will maintain our current credit ratings. A downgrade of the credit ratings of Orrstown or the Bank could adversely affect our access to liquidity and capital, and could significantly increase our cost of funds, trigger additional collateral or funding requirements, and decrease the number of investors and counterparties willing to lend to us or purchase our securities. This could affect our growth, profitability, and financial condition, including liquidity.

The Parent Company's primary source of income is dividends received from its bank subsidiary.

The Parent Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders. The Company also has repurchased shares of its common stock. The Company’s primary source of income is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid from the Bank to the Company without prior approval of regulatory agencies. Restrictions on the Bank’s ability to dividend funds to the Company are included in Note 14, Restrictions on Dividends, Loans16, Shareholders' Equity and Advances,Regulatory Capital, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data."
ITEM 1B – UNRESOLVED STAFF COMMENTS
None.


23

ITEM 2 – PROPERTIES
Our principal executive offices are located at 77 East King Street, Shippensburg, Pennsylvania, with additional executive and administrative offices at 4750 Lindle Road, Harrisburg, Pennsylvania. These facilities are owned by the Bank, which also maintains its principal and additional executive and administrative offices at those locations.


We own or lease other premises for use in conducting our business activities, including bank branches, an operations center, and offices in Berks, Cumberland, Dauphin, Franklin, Lancaster, Perry, and PerryYork Counties, Pennsylvania and Anne Arundel, Baltimore, Howard, and Washington County,Counties, Maryland, as well as Baltimore City, Maryland. We believe that the properties currently owned and leased are adequate for present levels of operation. We are constantly evaluating the best and most efficient mix of branch locations to service our customersclients due to evolving trends in our industry and increased engagement through digital channels.


In October 2019, we announced the consolidation of five Pennsylvania branches in Franklin and Perry Counties, that average less than $20.0 million in deposits per location, into other, larger Orrstown Bank branches, as well as the sale of an operations center facility. We expect that these efforts will improve the profitability of the remaining branch locations and eliminate close to 50,000 square feet of excess back office space. The branch consolidations were completed in January 2020, and the sale of the operations center facility is anticipated to be completed in the second quarter of 2020.

ITEM 3 – LEGAL PROCEEDINGS
Information regarding legal proceedings is included in Note 19,22, Contingencies, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statement and Supplementary Data."
On March 5, 2019, Paul Parshall, a purported individual stockholder of Hamilton, filed, on behalf of himself and all of Hamilton’s stockholders other than the named defendants and their affiliates (the “Purported Class”), a derivative and putative class action complaint in the Circuit Court for Baltimore City, Maryland, captioned Paul Parshall v. Carol Coughlin et. al., naming each Hamilton director, Orrstown, and Hamilton as defendants (the “Action”). The Action alleges, among other things, that Hamilton’s directors breached their fiduciary duties to the Purported Class in connection with the merger, and that the Proxy Statement/Prospectus omitted certain material information regarding the merger. Orrstown is alleged to have aided and abetted the Hamilton directors’ alleged breaches of their fiduciary duties. The Action seeks, among other remedies, to enjoin the merger or, in the event the merger is completed, rescission of the merger or rescissory damages; unspecified damages; and costs of the lawsuit, including attorneys’ and experts’ fees. Orrstown believes that the lawsuit is without merit as there are substantial legal and factual defenses to the claims asserted and intends to vigorously defend the lawsuit. It is not possible at this time to estimate reasonably possible losses, or even a range of reasonably possible losses, in connection with the litigation.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.

24

PART II
ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock began tradingis traded on the NASDAQ Capital Market under the symbol “ORRF” on April 28, 2009, and continues to be listed there.“ORRF.” At the close of business on February 28, 2017,2020, there were approximately 2,8002,984 shareholders of record.
The following table sets forth, for the fiscal periods indicated, the highBoard declared cash dividends of $0.60 and low sales prices of our$0.51 per common stock for the two most recent fiscal years. Trading prices are based on published financial sources.
 2016 2015
 Market Price 
Quarterly
Dividend
 Market Price 
Quarterly
Dividend
 High Low High Low 
            
First quarter$18.11
 $16.60
 $0.08
 $17.50
 $16.31
 $0.00
Second quarter19.95
 17.05
 0.09
 18.00
 16.02
 0.07
Third quarter23.73
 17.59
 0.09
 18.00
 15.10
 0.07
Fourth quarter23.75
 18.05
 0.09
 18.45
 16.24
 0.08
     $0.35
     $0.22
Dividends were discontinued from October 2011 through April 2015 while the Company was subjectshare in 2019 and 2018, respectively. Our management is currently committed to an order of the Federal Reserve. On April 21, 2015, the Company resumed its declaration of a quarterly dividend. Since then, the Board normally reviews the dividend and the dividend rate on a quarterly basis. There iscontinuing to pay regular cash dividends; however, there can be no assurance as to future dividends because they dependare dependent on our future earnings, capital requirements and financial conditions and other factors deemed relevant by the Board of Directors.condition. Restrictions on the payment of dividends are discussed in Note 14, Restrictions on Dividends, Loans16, Shareholders' Equity and Advances,Regulatory Capital, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data." On January 25, 2017,21, 2020, the Board declared a cash dividend of $0.10$0.17 per common share, which was paid on February 17, 2017.10, 2020, to shareholders of record as of February 3, 2020.

Securities Authorized for Issuance under Equity Compensation Plans

Information regarding the Company's equity compensation plans is included in Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Issuer Purchases of Equity Securities
In September 2015, the Board of Directors of the Company authorized a share repurchase program under which the Company may repurchase up to 5% 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 Securities Exchange Act of 1934, as amended. 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 the share repurchase program may be discontinued at any time.
No shares were repurchased from October 1, 20162019 to December 31, 2016. At2019. As of December 31, 2016,2019, 82,725 shares had been repurchased under the program at a total cost of $1,438,000,$1.4 million, or $17.38 per share. Theshare and the maximum number of shares that may yet be purchased under the plan is 333,275 shares at December 31, 2016.shares.


25

PERFORMANCE GRAPH
The followingperformance graph shows a five-year comparison ofbelow compares the cumulative total shareholder return on the Company’sour common stock as compared with other indexes: the SNL index of banks with assets between $1$1.0 billion and $5$5.0 billion, the S&P 500 Index, and the NASDAQ Composite index. The graph assumes an investment of $100 on December 31, 2014 and reinvestment of dividends on the date of payment without commissions. Shareholder returns on the Company’sour common stock are based uponon trades on the NASDAQ Stock Market. The shareholder returns shown in theperformance graph arerepresents past performance and should not necessarily indicativebe considered to be an indication of future performance.
 

wk-20191231_g1.jpg

 Period Ending
Index12/31/11 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16
Orrstown Financial Services, Inc.100.00
 116.85
 198.18
 206.06
 219.00
 280.21
SNL Bank $1B-$5B100.00
 123.31
 179.31
 187.48
 209.86
 301.92
S&P 500100.00
 116.00
 153.57
 174.60
 177.01
 198.18
NASDAQ Composite100.00
 117.45
 164.57
 188.84
 201.98
 219.89

 Period Ending
Index12/31/1412/31/1512/31/1612/31/1712/31/1812/31/19
Orrstown Financial Services, Inc.100.00  106.28  135.98  156.03  114.89  146.90  
SNL Bank $1B-$5B Index100.00  111.94  161.04  171.69  150.42  182.85  
S&P 500 Index100.00  101.38  113.51  138.29  132.23  173.86  
NASDAQ Composite Index100.00  106.96  116.45  150.96  146.67  200.49  
Source : SNL Financial, an offering of S&P Global Market Intelligence © 20172020
In accordance with the rules of the SEC, this section captioned “Performance Graph” shall not be incorporated by reference into any of our future filings made under the Exchange Act or the Securities Act of 1933, as amended (the “Securities Act”).Act. The Performance Graph and its accompanying table are not deemed to be soliciting material or to be filed under the Exchange Act or the Securities Act.
Recent Sales of Unregistered Securities
The Company has not sold any equity securities within the past three years which were not registered under the Securities Act.

26

ITEM 6 – SELECTED FINANCIAL DATA
 At or For The Year Ended December 31,
20192018201720162015
Summary of Operations
Interest income$92,994  $65,667  $51,453  $42,276  $39,013  
Interest expense23,699  13,511  7,644  5,417  4,301  
Net interest income69,295  52,156  43,809  36,859  34,712  
Provision for loan losses900  800  1,000  250  (603) 
Net interest income after provision for loan losses68,395  51,356  42,809  36,609  35,315  
Investment securities gains4,749  1,006  1,190  1,420  1,924  
Noninterest income23,792  20,018  18,759  18,005  16,876  
Noninterest expenses77,302  57,935  50,330  48,140  44,607  
Income before income tax expense19,634  14,445  12,428  7,894  9,508  
Income tax expense2,710  1,640  4,338  1,266  1,634  
Net income$16,924  $12,805  $8,090  $6,628  $7,874  
Per Share Information
Basic earning per share$1.63  $1.53  $1.00  $0.82  $0.97  
Diluted earnings per share1.61  1.50  0.98  0.81  0.97  
Dividends paid per share0.60  0.51  0.42  0.35  0.22  
Book value per share19.93  18.39  17.34  16.28  16.08  
Weighted average shares outstanding – basic10,362  8,360  8,070  8,059  8,106  
Weighted average shares outstanding – diluted10,514  8,537  8,226  8,145  8,142  
Stock Price Statistics
Close$22.62  $18.21  $25.25  $22.40  $17.84  
High23.48  27.05  26.95  23.75  18.45  
Low17.30  18.10  19.05  16.60  15.10  
Price earnings ratio at close13.9  11.9  25.3  27.3  18.4  
Diluted price earnings ratio at close14.0  12.1  25.8  27.7  18.4  
Price to book at close1.1  1.0  1.5  1.4  1.1  
Year-End Information
Total assets$2,383,274  $1,934,388  $1,558,849  $1,414,504  $1,292,816  
Loans1,644,330  1,247,657  1,010,012  883,391  781,713  
Total investment securities506,570  476,686  425,305  408,124  402,844  
Deposits – noninterest-bearing249,450  204,843  162,343  150,747  131,390  
Deposits – interest-bearing1,626,072  1,353,913  1,057,172  1,001,705  900,777  
Total deposits1,875,522  1,558,756  1,219,515  1,152,452  1,032,167  
Repurchase agreements8,269  9,069  43,576  35,864  29,156  
Borrowed money241,514  170,309  133,815  76,163  84,495  
Total shareholders’ equity223,249  173,433  144,765  134,859  133,061  
Assets under management – market value1,613,223  1,330,595  1,370,950  1,174,143  966,362  
Financial Ratios
Average equity / average assets9.26 %8.75 %9.49 %10.41 %10.66 %
Return on average equity8.21 %8.56 %5.73 %4.80 %5.99 %
Return on average assets0.76 %0.75 %0.54 %0.50 %0.64 %

27

 Year Ended December 31,
(Dollars in thousands except per share data)2016 2015 2014 2013 2012
Summary of Operations         
Interest and dividend income$41,962
 $38,635
 $38,183
 $37,098
 $45,436
Interest expense5,417
 4,301
 4,159
 5,011
 7,548
Net interest income36,545
 34,334
 34,024
 32,087
 37,888
Provision for loan losses250
 (603) (3,900) (3,150) 48,300
Net interest income after provision for loan losses36,295
 34,937
 37,924
 35,237
 (10,412)
Investment securities gains1,420
 1,924
 1,935
 332
 4,824
Noninterest income18,319
 17,254
 16,919
 17,476
 18,438
Noninterest expenses48,140
 44,607
 43,768
 43,247
 43,349
Income (loss) before income tax expense (benefit)7,894
 9,508
 13,010
 9,798
 (30,499)
Income tax expense (benefit)1,266
 1,634
 (16,132) (206) 7,955
Net income (loss)$6,628
 $7,874
 $29,142
 $10,004
 $(38,454)
Per Share Information         
Basic earning per share$0.82
 $0.97
 $3.59
 $1.24
 $(4.77)
Diluted earnings per share0.81
 0.97
 3.59
 1.24
 (4.77)
Dividends per share0.35
 0.22
 0.00
 0.00
 0.00
Book value at December 3116.28
 16.08
 15.40
 11.28
 10.85
Weighted average shares outstanding – basic8,059,412
 8,106,438
 8,110,344
 8,093,306
 8,066,148
Weighted average shares outstanding – diluted8,145,456
 8,141,600
 8,116,054
 8,093,306
 8,066,148
Stock Price Statistics         
Close$22.40
 $17.84
 $17.00
 $16.35
 $9.64
High23.75
 18.45
 17.50
 18.00
 11.29
Low16.60
 15.10
 15.33
 9.49
 7.45
Price earnings ratio at close27.3
 18.4
 4.7
 13.2
 (2.0)
Diluted price earnings ratio at close27.7
 18.4
 4.7
 13.2
 (2.0)
Price to book at close1.4
 1.1
 1.1
 1.4
 0.9
Year-End Data         
Total assets$1,414,504
 $1,292,816
 $1,190,443
 $1,177,812
 $1,232,668
Loans883,391
 781,713
 704,946
 671,037
 703,739
Total investment securities408,124
 402,844
 384,549
 416,864
 311,774
Deposits – noninterest-bearing150,747
 131,390
 116,302
 116,371
 121,090
Deposits – interest-bearing1,001,705
 900,777
 833,402
 884,019
 963,949
Total deposits1,152,452
 1,032,167
 949,704
 1,000,390
 1,085,039
Repurchase agreements35,864
 29,156
 21,742
 9,032
 9,650
Borrowed money76,163
 84,495
 79,812
 66,077
 37,470
Total shareholders’ equity134,859
 133,061
 127,265
 91,439
 87,694
Assets under management – market value1,174,143
 966,362
 1,017,013
 1,085,216
 992,378
Financial Ratios         
Average equity / average assets10.41% 10.66% 8.63% 7.45% 8.07 %
Return on average equity4.80% 5.99% 28.78% 11.30% (35.22)%
Return on average assets0.50% 0.64% 2.48% 0.84% (2.84)%


ITEM 7 – 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 our Consolidated Financial Statements and notes thereto included in this Annual Report on Form 10-K. Certain prior period amounts presented in this discussion and analysis have been reclassified to conform to current period classifications.
Overview
The results of our operations are highly dependent on economic conditions and market interest rates. To stimulate economic activity and stabilize the financial markets, the FRB has maintained historically low market interest rates since 2009. Market conditions have improved during this period as the unemployment rate declined, and consumer confidence, GDP and average home prices have all risen. While economic conditions have improved domestically, under-employment and wage growth remain a worry amidst the backdrop of low inflation in the United States and abroad. Recent upticks in labor force participation alongside wage growth are being closely monitored by the markets for signs of sustained or expected inflation. The FRB announced a quarter point increase to short-term rates in December 2015 followed by another quarter point increase in December 2016. The resulting strength of the dollar coupled with falling oil prices has led to the continued speculation as to how likely and quickly that the FRB may further raise short-term interest rates.
The Company'sOur profitability for the years ended December 31, 2016, 20152019, 2018 and 20142017 was also influenced by itsour continued organic growth and ongoing expansion into targeted markets, maintained improvement inthe acquisitions of Mercersburg and Hamilton, and a continued focus on maintaining strong asset quality from prior years and, for 2014, the reversal of a deferred tax asset valuation allowance resulting in an income tax benefit of $16,204,000 recorded for that year.quality. These and other matters are discussed more fully below.
Critical Accounting PoliciesEstimates
The Company's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP")GAAP, and follow general practices within the financial services industry. Application of these principles involves complex judgments and estimates by management that have a material impact on the carrying value of certain assets and liabilities. The judgments and estimates that we used are based on historical experiences and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and estimates that we have made, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of our operations.
The most significant accounting policies followed by the Company are presented in Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data." TheseIn applying those accounting policies, along with the disclosures presentedCompany's management is required to exercise judgment in determining many of the other consolidated financial statement notes, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods,methodologies, assumptions and estimates underlying those amounts, the Company has identified the adequacyto be utilized. Certain of the allowance for loan losses and accounting for income taxes as critical accounting policies.estimates are more dependent on such judgment and, in some cases, may contribute to volatility in our reported financial performance should the assumptions and estimates used change over time due to changes in circumstances. Some of the more significant areas in which the Company's management applies critical assumptions and estimates include the following.
Accounting for credit losses — The loan portfolio is the largest asset on the Company's consolidated balance sheets. The allowance for loan losses represents the amount that, in management’s estimate of probable incurredjudgment, appropriately reflects credit losses inherent in the loan portfolio at the balance sheet date. DeterminingA provision for credit losses is recorded to adjust the amountlevel of the allowance forALL as deemed necessary by management. In estimating losses inherent in the loan portfolio, assumptions and lease losses is considered a complex accounting estimate because it requires significant judgment and the use of estimates relatedare applied to the amountmeasure amounts and timing of expected future cash flows, on impaired loans, estimated losses on pools of homogeneous loans based on historicalcollateral values and other factors used to determine the borrowers’ abilities to repay obligations. Historical loss experience, and consideration of currenttrends are also considered, as are economic conditions, industry trends, portfolio trends and conditions, allborrower-specific financial data. Loans acquired at a discount, that is, in part, attributable to credit quality, are initially recorded at fair value with no carry-over of which may be susceptiblean acquired entity’s previously established ALL. Cash flows expected at acquisition, in excess of estimated fair value, are recognized as interest income over the remaining lives of the loans. Subsequent decreases in the expected principal cash flows require the Company to significant change. The loan portfolioevaluate the need for additions to the ALL. Subsequent improvements in expected cash flows result, first, in the recovery of any applicable ALL and, then, in the recognition of additional interest income over the remaining lives of the loans. Changes in the circumstances considered when determining management’s estimates and assumptions, could result in changes to those estimates and assumptions, and also representsin adjustment of the largest asset onALL, or, in the consolidated balance sheets.case of loans acquired at a discount, increases in interest income in future periods.
The Company recognizes deferred tax
Valuation methodologies — Management applies various valuation methodologies to assets and liabilities which often involve a significant degree of judgment, particularly when liquid markets do not exist for the futureparticular items being valued. Quoted market prices are referred to when estimating fair values for certain assets, such as most investment securities. However, for those items for which an observable liquid market does not exist, management utilizes significant estimates and assumptions to value such items. Examples of these items include loans, deposits, borrowings, goodwill, core deposit and other intangible assets, other assets and liabilities obtained or assumed in business combinations, and capitalized servicing assets. These valuations require the use of various assumptions, including, among others, discount rates, rates of return on assets, repayment rates, cash flows, default rates, costs of servicing and liquidation values. The use of different assumptions could produce significantly different results, which could have material positive or negative effects on our results of operations, financial condition or disclosures of fair value information. In addition to valuation, we must assess whether there are any declines in value below the carrying value of assets that should be considered other than temporary differencesor otherwise require an adjustment in carrying value and tax credits. Enacted tax rates are applied to cumulative temporary differences based on expected taxable incomerecognition of a loss in the periods in which the deferred tax asset or liability is anticipated to be realized. Future tax rate changes could occur that would require the recognitionconsolidated statements of income or expense in the statement of income in the period in which they are enacted. The Company records deferred taxincome. Examples include investment securities, loan servicing rights, goodwill and core deposit and other intangible assets, to the extent the Company believes these assets will more likely than not be realized, utilizing a valuation allowance if all or a portion of the deferred tax assets is not so considered to be realized. In making this determination, the Company considers all available evidence, including future reversals of existing deferred tax liabilities, projected future taxable income, feasible and prudent tax planning strategies and recent financial operating results. In the event the Company was to determine that it would be able to realize deferred tax assets in the future in excess of their net recorded amount, an adjustment to the valuation allowance would be made that would impact income tax expense. Management may need to modify its judgment in this regard,among others.

from one period to another, should a material change occur in the business environment, tax legislation, or in any other business factor that could impair the Company’s ability to benefit from the asset in the future.
Readers of theour consolidated financial statements should be aware that the estimates and assumptions used in the Company’sour current financial statements may need to be updated in future financial presentations for changes in circumstances, business or economic conditions, in order to fairly represent the condition of the Company at that time.
28

Economic Climate, Inflation and Interest Rates
Preliminary annual real GDP growth for 2019 was 2.3%. The pace of U.S. economy continues its modest expansion following oneeconomic growth weakened somewhat in 2019 versus 2018 and inflation pressures declined. In response, the Federal Reserve reduced the Fed Funds rate three times in 2019 to the rate of its longest1.75%. Early in 2020, a novel coronavirus emerged and most severe economic recessionsspread, first in history.China and more recently, around the globe. The modest strengthfast spread of the expansion has resulted in strong competition for quality lending opportunities, which together with a relatively flat yield curve, has pressured net interest marginvirus and the abilityfear that has occurred has created a high level of uncertainty about the near and intermediate future economic outlook. Because of this uncertainty, markets are pricing in a wide range of potential outcomes by buying sovereign government bonds, especially U.S. Treasuries, and selling stocks. In reaction to leverage our overhead expenses.the increase in uncertainty, the Federal Reserve took the step of cutting the Fed Funds rates by 50 basis points between regularly scheduled meetings. Despite this action by the Federal Reserve, the outlook remains uncertain at this time.

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 growth of total assets and on noninterest expenses, which tend to rise during periods of general inflation. Inflationary pressures over the last three years have beenremain modest and the outlook forthere is great uncertainty about when, or if, inflation remains so for the foreseeable future.will increase and pressure interest rates to move higher.

As the Company’s balance sheet consists primarily of financial instruments, interest income and interest expense isare greatly influenced by the level of interest rates and the slope of the interest rateyield curve. During the three years presented in this financial statement review, interest rates have remained near all-time lows. In December 2015, the FRB raised short term interest rates by 25 basis points, the first increase in rates in ten years, followed by an additional 25 basis point increase in December 2016. Because of this low level of interest rates, we have notThe Company has been able to lower the rate we paygrow its net interest income by $17.1 million from 2018 to 2019, through a combination of organic growth and merger acquisitions. Competition for interest-bearing non-maturityquality lending opportunities and deposits remains intense, which, together with a flattening yield curve, will continue to the same extent that has been experienced in the rates we have been ablechallenge our ability to earn on our interest-earning assets. As a result,grow our net interest margin was flat in 2016.and to leverage our overhead expenses.
Management believes that the Company is positioned to withstand challenging economic conditions that may arise because of the steps it has taken to improve its capital, liquidity position, and asset quality.
Results of Operations
Summary
ForEarnings in 2019 reflected continuing increased interest income from expanding loan and investment portfolios, partially offset by the years ended December 31, 2016, 2015impact of decreasing interest rates and 2014,an overall increase in interest expense. In addition, the comparability of operating results for 2019 with 2018 has been impacted by the Mercersburg and Hamilton acquisitions, which were completed on October 1, 2018 and May 1, 2019, respectively. Mercersburg added loans and deposits totaling $141.1 million and $160.4 million, respectively, and Hamilton added loans and deposits totaling $347.4 million and $388.2 million, respectively.
The Company recorded net income of $6,628,000, $7,874,000$16.9 million, $12.8 million and $29,142,000.$8.1 million for 2019, 2018 and 2017, respectively. Diluted earnings per share were $0.81, $0.97totaled $1.61, $1.50 and $3.59$0.98 for the years 2016, 20152019, 2018 and 2014.2017.
Each year had eventsNet interest income totaled $69.3 million, $52.2 million and circumstances that affect the comparability$43.8 million for 2019, 2018 and 2017, respectively, principally reflecting our expanded geographic footprint, as well as organic growth in loans from an expanded sales force as we continued to take advantage of results, including the impact that assetmarket opportunities. As previously noted, interest rates increased throughout 2017 and 2018 and decreased throughout 2019, contributing to fluctuations in yields on loans and investments, and, to a lesser extent, costs of interest-bearing liabilities.
Asset quality had on the resultstrends continue to exhibit low levels of our operations. In 2014, continuing improvements were noted in asset quality due to success in remediationcharge-offs and workout efforts. It was determined that nonon-performing loans. The provision for loan losses was needed for 2014 or 2015,totaled $900 thousand, $800 thousand and that a recovery of amounts previously provided for or charged-off would be recognized. This resulted$1.0 million in a negative provision of $603,0002019, 2018 and $3,900,000 for 2015 and 2014. In contrast, a $250,000 provision for loan losses was recorded for 2016, reflecting management's ongoing analysis of an adequate allowance for loan losses and continued growth in the loan portfolio.2017, respectively.
Noninterest expenses totaled $48,140,000, $44,607,000$77.3 million, $57.9 million and $43,768,000$50.3 million for the years 2016, 20152019, 2018 and 2014.2017, respectively. The changes in certain components of noninterest expenses between years reflect the three periods are reflective of the Company'sMercersburg and Hamilton acquisitions, and our continued focus on investing in additional talent and technologylocations to better serve the needs of our customersclients, particularly in Lancaster and efforts to develop new relationships by taking advantage of market opportunities created by consolidation of other banks.Dauphin Counties, Pennsylvania, and in Maryland. Salaries and employee benefits expense increased $2.4 million from $23,658,000 for 20142017 to $24,056,0002018 and $26,370,000 for 2015$7.0 million from 2018 to 2019. Occupancy and 2016. Data processingfurniture and fixture costs increased $923 thousand from $1,866,0002017 to 2018 and $1.9 million from 2018 to 2019 as new and acquired branch locations were brought on line. In 2019, we incurred $9.0 million in pretax merger related and branch consolidation expenses, with $3.2 million incurred in 2018 for 2014 to $2,026,000 and $2,378,000pretax expense for 2015 and 2016. And advertising and bank promotion expense increased from $1,195,000 for 2014 to $1,564,000 and $1,717,000 for 2015 and 2016.merger related activity.
For the years ended December 31, 2016 and 2015 net income included incomeIncome tax expense of $1,266,000totaled $2.7 million, $1.6 million and $1,634,000,$4.3 million for 2019, 2018 and 2017, or an effective tax rate of 16.0%13.8%, 11.4% and 17.2%, whereas34.9% respectively. In 2017, we remeasured our net deferred tax asset due to the enactment of the Tax Act in December 2017. The Tax Act lowered our statutory tax rate from 34% to 21% effective January 1, 2018. Remeasurement of our net deferred tax asset at the lower rate resulted in an expense of $2.6 million, which is included in income tax benefitexpense for the year ended December 31, 2014 totaled $16,132,000 due to the reversal2017.
29

Net Interest Income
Net interest income which is the difference between interest income and fees on interest-earning assets and interest expense on interest-bearing liabilities, is the primary component of the Company'sOrrstown's revenue. Interest-earning assets include loans, securities and federal funds sold. Interest-bearing liabilities include deposits and borrowed funds. To compare the tax-

exempt yields to taxable yields, amounts are adjusted to pretax equivalents based on a 34% federal corporate tax rate for 2016 and 35% for 2015 and 2014, reflective of the change in our estimated incremental tax rate.
Net interest income is affected by changes in interest rates, volumes of interest-earning assets and interest-bearing liabilities, and the composition of those assets and liabilities. The “net“Net interest spread” and “net interest margin” are two common statistics related to changes in net interest income. The netNet interest spread represents the difference between the yields earned on interest-earning assets and the rates paid for interest-bearing liabilities. The netNet interest margin is defined as the ratio of net interest income to average earning assets.asset balances. Through the use of noninterest-bearing demand deposits and shareholders' equity, the net interest margin exceeds the net interest spread, as these funding sources are noninterest-bearing.

The Federal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Our loan portfolio is affected by changes in the prime interest rate. During 2017, the prime rate increased 25 basis points in each of March, June and December to end the year at 4.50%. In 2018, the prime rate continued to rise with 25 point increases in each of March, June, September and December, ending the year at 5.50%. And in 2019, 25 basis point reductions occurred in August, September and October and the prime rate ended the year at 4.75%.

Core deposits are deposits that are stable, lower cost and generally reprice more slowly than other deposits when interest rates change. Core deposits are typically funds of local clients who also have a borrowing or other relationship with the Bank. We are primarily funded by core deposits, with noninterest-bearing demand deposits historically being a significant source of funds. This lower-cost funding base is expected to have a positive impact on our net interest income and net interest margin in a rising interest rate environment. 
Net interest income totaled $69.3 million, $52.2 million and $43.8 million in 2019, 2018 and 2017, respectively. The following “Analysis of Net Interest Income” table presents net interest income, on a tax equivalent basis, net interest spread and net interest margin on a taxable-equivalent basis for 2019, 2018 and 2017. Taxable-equivalent adjustments are the years 2016, 2015result of increasing income from tax-free loans and 2014. The following “Changes in Taxable Equivalent Net Interest Income” table analyzesinvestments by an amount equal to the changes in net interesttaxes that would be paid if the income were fully taxable based on a 21% federal corporate tax rate for the same periods broken down by their rate2019 and volume components.2018 and 34% for 2017, reflecting our statutory tax rates for those years.



30

ANALYSIS OF NET INTEREST INCOME
201920182017
2016 2015 2014
Average
Balance
Taxable-
Equivalent
Interest
Taxable-
Equivalent
Rate
Average
Balance
Taxable-
Equivalent
Interest
Taxable-
Equivalent
Rate
Average
Balance
Taxable-
Equivalent
Interest
Taxable-
Equivalent
Rate
(Dollars in thousands)
Average
Balance
 
Tax
Equivalent
Interest
 
Tax
Equivalent
Rate
 
Average
Balance
 
Tax
Equivalent
Interest
 
Tax
Equivalent
Rate
 
Average
Balance
 
Tax
Equivalent
Interest
 
Tax
Equivalent
Rate
Assets                 Assets
Federal funds sold and interest-bearing bank balances$31,452
 $208
 0.66% $18,901
 $81
 0.43% $14,137
 $35
 0.25%Federal funds sold and interest-bearing bank balances$58,100  $1,339  2.30 %$16,442  $327  1.99 %$15,487  $218  1.41 %
Taxable securities303,124
 6,012
 1.98
 348,613
 6,697
 1.92
 399,014
 8,051
 2.02
Taxable securities435,839  14,530  3.33  359,852  10,858  3.02  326,900  7,478  2.29  
Tax-exempt securities57,231
 2,767
 4.83
 33,055
 1,629
 4.93
 14,058
 848
 6.03
Tax-exempt securities (1)
Tax-exempt securities (1)
63,443  2,600  4.10  119,665  4,873  4.07  93,683  4,748  5.07  
Total securities360,355
 8,779
 2.44
 381,668
 8,326
 2.18
 413,072
 8,899
 2.15
Total securities499,282  17,130  3.43  479,517  15,731  3.28  420,583  12,226  2.91  
Taxable loans774,984
 32,036
 4.13
 687,079
 28,787
 4.19
 620,701
 27,368
 4.41%
Tax-exempt loans58,281
 2,848
 4.89
 59,600
 3,094
 5.19
 63,177
 3,351
 5.30
Taxable loans (2)(3)
Taxable loans (2)(3)
1,432,951  73,201  5.11  1,053,308  49,151  4.67  893,555  39,006  4.37  
Tax-exempt loans (1)(2)(3)
Tax-exempt loans (1)(2)(3)
59,864  2,367  3.95  47,318  1,875  3.96  50,797  2,450  4.82  
Total loans833,265
 34,884
 4.19
 746,679
 31,881
 4.27
 683,878
 30,719
 4.49
Total loans1,492,815  75,568  5.06  1,100,626  51,026  4.64  944,352  41,456  4.39  
Total interest-earning assets1,225,072
 43,871
 3.58
 1,147,248
 40,288
 3.51
 1,111,087
 39,653
 3.57
Total interest-earning assets2,050,197  94,037  4.59  1,596,585  67,084  4.20  1,380,422  53,900  3.90  
Cash and due from banks20,803
     19,155
     14,161
    Cash and due from banks25,046  18,951  20,391  
Bank premises and equipment31,413
     24,386
     25,921
    Bank premises and equipment40,982  35,399  35,055  
Other assets61,391
     56,894
     41,499
    Other assets123,362  72,960  65,293  
Allowance for loan losses(13,529)     (14,134)     (19,268)    Allowance for loan losses(14,466) (13,298) (12,738) 
Total$1,325,150
     $1,233,549
     $1,173,400
    Total$2,225,121  $1,710,597  $1,488,423  
Liabilities and Shareholders’ Equity                 Liabilities and Shareholders’ Equity
Interest-bearing demand deposits$565,524
 1,195
 0.21
 $500,474
 908
 0.18
 $491,046
 823
 0.17
Interest-bearing demand deposits$920,025  8,253  0.90  $767,863  4,968  0.65  $648,174  2,148  0.33  
Savings deposits90,272
 144
 0.16
 85,068
 136
 0.16
 83,941
 135
 0.16
Savings deposits138,761  261  0.19  102,189  159  0.16  94,815  150  0.16  
Time deposits289,574
 3,472
 1.20
 263,414
 2,562
 0.97
 292,149
 2,720
 0.93
Time deposits (4)
Time deposits (4)
549,937  10,796  1.96  324,118  5,102  1.57  292,616  3,836  1.31  
Short-term borrowings56,387
 187
 0.33
 85,262
 295
 0.35
 51,922
 148
 0.29
Short-term borrowings32,001  623  1.95  81,172  1,577  1.94  97,814  784  0.80  
Long-term debt24,335
 419
 1.72
 22,522
 400
 1.78
 17,773
 333
 1.87
Long-term debt80,636  1,779  2.21  83,640  1,632  1.95  36,336  726  2.00  
Subordinated notesSubordinated notes31,842  1,987  6.24  1,139  73  6.41  —  —  —  
Total interest-bearing liabilities1,026,092
 5,417
 0.53
 956,740
 4,301
 0.45
 936,831
 4,159
 0.44
Total interest-bearing liabilities1,753,202  23,699  1.35  1,360,121  13,511  0.99  1,169,755  7,644  0.65  
Demand deposits147,473
     134,040
     123,224
    
Noninterest-bearing demand depositsNoninterest-bearing demand deposits234,354  183,387  161,917  
Other13,612
     11,316
     12,095
    Other31,544  17,427  15,450  
Total Liabilities1,187,177
     1,102,096
     1,072,150
    Total Liabilities2,019,100  1,560,935  1,347,122  
Shareholders’ Equity137,973
     131,453
     101,250
    Shareholders’ Equity206,021  149,662  141,301  
Total$1,325,150
     $1,233,549
     $1,173,400
    Total$2,225,121  $1,710,597  $1,488,423  
Net interest income/net interest spread  38,454
 3.05%   35,987
 3.06%   35,494
 3.13%
Net interest margin    3.14%     3.14%     3.20%
Tax equivalent adjustment  (1,909)     (1,653)     (1,470)  
Net interest income - as reported  $36,545
     $34,334
     $34,024
  
Taxable-equivalent net interest income / net interest spreadTaxable-equivalent net interest income / net interest spread70,338  3.24 %53,573  3.21 %46,256  3.25 %
Taxable-equivalent net interest marginTaxable-equivalent net interest margin3.43 %3.36 %3.35 %
Taxable-equivalent adjustmentTaxable-equivalent adjustment(1,043) (1,417) (2,447) 
Net interest incomeNet interest income$69,295  $52,156  $43,809  
Ratio of average interest-earning assets to average interest-bearing liabilitiesRatio of average interest-earning assets to average interest-bearing liabilities117 %117 %118 %
Note:NOTES TO ANALYSIS OF NET INTEREST INCOME:
 (1)Yields and interest income on tax-exempt assets have been adjusted tocomputed on a tax equivalenttaxable-equivalent basis usingassuming a marginal federal
income21% tax rate ofin 2019 and 2018, and 34% in 2016 and 35% in 2015 and 2014.2017. For yield comparisoncalculation purposes, nonaccruing loans are
included in the average loan balance.
 (2)Average balances include nonaccrual loans.
 (3)Interest income on loans includes prepayment and late fees. Where applicable, prior periods have been conformed to include these fees.
 (4)In 2019, expenses associated with the early redemption of brokered time deposits totaled $215 thousand and increased the cost of funds by 3 basis points.


CHANGES IN NET INTEREST INCOME - TAX EQUIVALENT BASIS


31

 2016 Versus 2015 Increase (Decrease)
Due to Change in
 2015 Versus 2014 Increase (Decrease)
Due to Change in
(Dollars in thousands)
Average
Volume
 
Average
Rate
 Total 
Average
Volume
 
Average
Rate
 Total
Interest Income           
Federal funds sold & interest-bearing deposits$54
 $73
 $127
 $12
 $34
 $46
Taxable securities(874) 189
 (685) (1,017) (337) (1,354)
Tax-exempt securities1,191
 (53) 1,138
 1,146
 (365) 781
Taxable loans3,683
 (434) 3,249
 2,927
 (1,508) 1,419
Tax-exempt loans(68) (178) (246) (190) (67) (257)
Total interest income3,986
 (403) 3,583
 2,878
 (2,243) 635
Interest Expense           
Interest-bearing demand deposits118
 169
 287
 16
 69
 85
Savings deposits8
 0
 8
 2
 (1) 1
Time deposits254
 656
 910
 (268) 110
 (158)
Short-term borrowings(100) (8) (108) 95
 52
 147
Long-term debt32
 (13) 19
 89
 (22) 67
Total interest expense312
 804
 1,116
 (66) 208
 142
Net Interest Income$3,674
 $(1,207) $2,467
 $2,944
 $(2,451) $493
The following table presents changes in net interest income on a taxable-equivalent basis for 2019, 2018 and 2017 by rate and volume components.


 2019 Versus 2018 Increase (Decrease)
Due to Change in
2018 Versus 2017 Increase (Decrease)
Due to Change in
Average
Volume
Average
Rate
Total
Average
Volume
Average
Rate
Total
Interest Income
Federal funds sold and interest-bearing bank balances$828  $184  $1,012  $13  $96  $109  
Taxable securities2,292  1,380  3,672  754  2,626  3,380  
Tax-exempt securities(2,289) 16  (2,273) 1,317  (1,192) 125  
Taxable loans17,715  6,335  24,050  6,974  3,171  10,145  
Tax-exempt loans497  (5) 492  (168) (407) (575) 
Total interest income19,043  7,910  26,953  8,890  4,294  13,184  
Interest Expense
Interest-bearing demand deposits984  2,301  3,285  397  2,423  2,820  
Savings deposits57  45  102  12  (3)  
Time deposits3,555  2,139  5,694  413  853  1,266  
Short-term borrowings(955)  (954) (133) 926  793  
Long-term debt(59) 206  147  945  (39) 906  
Subordinated notes1,968  (54) 1,914  73  —  73  
Total interest expense5,550  4,638  10,188  1,707  4,160  5,867  
Taxable-Equivalent Net Interest Income$13,493  $3,272  $16,765  $7,183  $134  $7,317  

Note:The change attributed to volume is calculated by taking the average change in average balance times the prior year's
average rate and the remainder is attributable to rate.
20162019 versus 20152018
For 2016,In 2019, net interest income measuredincreased $17.1 million, or 32.9%, compared with 2018. Net interest income for 2019 on a tax equivalenttaxable-equivalent basis increased $2,467,000,$16.8 million, or 6.9%31.3%, to $38,454,000 from $35,987,000 for 2015. Overall, thecompared with 2018. The Company’s net interest spread decreased 1increased three basis pointpoints to 3.05%3.24% for 20162019 compared with 2015. Despite higher average balances in loans during 2016 compared with 2015 and a 25 basis point increase in the prime lending rate between the years, a flattening yield curve as the market reacted to slowing economic growth negatively impacted the2018. Taxable-equivalent yields on loans and caused funding costs to increase. Payments on and maturities of existing loans were reinvested at lower rates due to competitive market conditions. An increase in securities yields helped increase the average yield earned on interest-earning assets for 2016 compared with 2015 and helped maintaincosts of interest-bearing liabilities both increased from 2018 to 2019, reflecting increased average balances from organic growth and acquisitions, partially offset by changes in the net interest margin atrate environment between years. Other factors impacting the same 3.14% ascomparison of taxable-equivalent yields between 2018 and 2019 include the effect of purchase accounting related to the Mercersburg and Hamilton acquisitions and the timing of our adjustments to rates paid on interest-bearing deposits in 2015. The Company sold its portfolio of U.S. Government Sponsored Enterprises ("GSE") commercial collateralized mortgage obligations ("CMOs") in February 2016 and it took longerresponse to deploy the funds into new loans than originally anticipated. The average rate increased as the Company was able to invest a large portion of the additional funds at rates above the FRB's target for the Fed Funds rate.market demand.

Interest income on a tax equivalenttaxable-equivalent basis on loans increased $24.5 million, or 48.1%, from $31,881,000 for 20152018 to $34,884,000 for 2016, an increase of $3,003,000.2019. The increase in interest income on loans was primarily a result ofresulted from an increase in both average loan volume offset partially by a decrease inand yield, which decreased eightwith average loans increasing $392.2 million, or 35.6%, and yield increasing 42 basis points from 4.27% for 20154.64% in 2018 to 4.19% for 2016. Average loans increased5.06% in 2019. The Company's geographic expansion and sales efforts with additional loan officers continued to $833,265,000 for 2016, compared with $746,679,000 for 2015, and was the result of successful sales effortsdrive loan growth in 2019 across most loan classes. Favorable market conditions and the addition of several seasoned loan officersIncreases in prime lending rates in 2018 contributed to loan growth. However,an increased yield in the first half of 2019, but were partially offset by rate decreases in the second half. In addition, the middle of the yield curve inverted for much of 2019, which lowered the rate on new loans added were generally at lower ratesmore than the existing portfolio.rate on new deposits, which pressured net interest margin. Accretion of purchase accounting adjustments in connection with the acquisitions increased 2019 interest income by $3.8 million compared with $335 thousand in 2018.
Interest income earned on a tax equivalenttaxable-equivalent basis on securities increased $453,000 for 2016$1.4 million, or 8.9%, from 2018 to 2019, with both average volume and totaled $8,779,000 compared with $8,326,000 for 2015. The average balance ofyield increasing. Average securities decreasedincreased $19.8 million, or 4.1%, and the taxable-equivalent yield increased from $381,668,000 for 20153.28% in 2018 to $360,355,000 for 2016, with funds obtained from maturing and prepaying securities used to fund a portion of the Company's loan growth.3.43% in 2019. Contributing to the overall increase in interest income on securities was athe purchase of higher compositionyielding, longer maturity, tax-free state and political subdivisions investments in the third quarter of tax free2018, that were subsequently sold in the third quarter of 2019. This was partially offset by declines in the yield of floating rate securities, andwhich fell as the higher tax-equivalent yields associated with them.Federal Reserve reduced short-term rates by 75 basis points in the second half of 2019.

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Interest expense on deposits and borrowings for 2016 totaled $5,417,000, an increase of $1,116,000increased $10.2 million from $4,301,000 for 2015,2018 to 2019, as the average balance of interest-bearing liabilities increased 7.25% from $956,740,000 for 2015 to $1,026,092,000 for

2016. In addition, our cost of funds on interest-bearing liabilities increased to 0.53% for 2016 from 0.45% for 2015.$393.1 million, or 28.9%. Interest expense on timeinterest-bearing deposits increased for 2016declined less than the decline in market rates due to $3,472,000, from $2,562,000 for 2015.competitive factors in the marketplace.

Our ability to attract new deposits in all categories, but in particular interest-bearing demand deposits, resulted in an increase in average interest-bearing deposits. The Company has been able to gather both noninterest-bearing and interest-bearing deposit relationships from enhanced cash management offerings as it increases its commercial relationshipsdeposits totaling $152.2 million, or 19.8% in 2019, of which contributed toapproximately $51.0 million was acquired in the increase in average interest-bearing and noninterest-bearing deposits. TheHamilton acquisition. Interest expense for these deposits increased $3.3 million, with the cost of interest-bearing liabilities is influenced by changesfunds increasing from 0.65% in short-term interest rates. We also paid a higher rate on certain intermediate-term brokered deposits2018 to help protect earnings from a rising rate environment and incurred $108,000 of accelerated interest expense on the call of brokered certificates of deposits0.90% in 2016.
2019. The increase was driven by increasing market rates throughout 2018, followed by falling short-term rates once the Fed began to ease in the second half of 2019. As noted, yields on interest-bearing deposits enabled us to decrease our use of short-term borrowings, which generally have higher interestdid not fall as much as market rates associated with them. The average balance of short-term borrowings decreased $28,875,000 for 2016 to $56,387,000. The average rate paid on short-term borrowings for 2016 was 0.33%, a decrease of 2 basis points from that paid in 2015. The decrease in average balances and rates paid resulted in a decrease in interest expense on short-term borrowings from $295,000 for 2015 to $187,000 for 2016. We added to our long-term borrowings during 2016, for an average balance of $24,335,000 for 2016 compared with $22,522,000 for 2015, and an increase in expense of $19,000, from $400,000 for 2015 to $419,000 for 2016.
2015 versus 2014
For 2015, net interest income measured on a tax equivalent basis increased $493,000, or 1.4%, to $35,987,000 from $35,494,000 for 2014. The primary reason for the increase in net interest income was higher average balances in loans during 2015 as compared with 2014. However, net interest margin compressed from 3.20% for 2014 to 3.14% for 2015, due to the effects of the flattening yield curve throughout 2015 that negatively impacted the yields on interest-earning assets, and caused funding costs to increase.
Interest income on a tax equivalent basis on loans increased from $30,719,000 for 2014 to $31,881,000 for 2015, an increase of $1,162,000. The increase in interest income on loans was primarily a result of an increase in average loan volume, offset partially by a decrease in yield. The average loans balance increased to $746,679,000 for 2015, compared with $683,878,000 for 2014, and was the result of successful sales efforts across all loan classes. The average yield on the loan portfolio decreased 22 basis points from 4.49% for 2014 to 4.27% for 2015, which partially offset the income generated from higher average loan balances. During 2015, competition for loans remained strong, which resulted in competitive pricing in order to grow loan balances. Additionally, the proceeds from loan repayments were invested in new loans, generally at lower rates than those loans in which repayments were received.
Interest income earned on a tax equivalent basis on securities decreased in 2015 and totaled $8,326,000 a decrease of $573,000 compared with the $8,899,000 for 2014. The average balance of securities has decreased from $413,072,000 for December 31, 2014 to $381,668,000 for 2015, with funds obtained from the maturing and prepaying securities used to fund a portion of the Company's loan growth, which resulted in a decline in the average balance of securities available for sale from 2014 to 2015. Partially offsetting the decrease in interest income on securities that resulted from lower average balances, was an increase in rates earned on securities, which increased from an average tax equivalent yield of 2.15% in 2014 to 2.18% in 2015.factors. As a result, of a greater composition of tax-exempt securities in the total securities portfolio, the overall yield increased slightly, as tax-exempt securities continued to provide attractive yields.
Interest expense on deposits and borrowings for 2015interest was $4,301,000, an increase of $142,000, from $4,159,000 for 2014. The average balance of interest-bearing liabilities increased 2.13% from $936,831,000 for 2014 to $956,740,000 for 2015. In addition, the Company’s cost of fundspaid at higher rates on interest-bearing liabilities increased to 0.45% for 2015 from 0.44% for 2014. Interest expense on time deposits decreased for 2015 to $2,562,000, from $2,720,000 for 2014, due to a decrease in average balances. During the first six months of 2015, the Company was allowing its time deposits to run off which contributed greatly to the decline in average time deposits in comparison to 2014, as there were cheaper funding alternatives available. As opportunities to deploy funds2019 than in 2018.
We also decreased our average short-term borrowings in 2019 in favor of brokered deposits at more favorable returnsattractive rates in early 2019. In late 2018, we issued $32.5 million in aggregate principal amount of subordinated notes, the proceeds of which were designated for the risk taken became available, the Company increased its time deposits resulting in an increase in the average rates paidcash portion of merger and acquisition activity and for time deposits from 0.93% for 2014 to 0.97% in 2015. The Company replaced short term borrowings with callable brokered time deposits to fund loan and securities growth during the last six months of 2015. The Company made this choice because the call option gave the Company the flexibility to reduce its cost of funds if interest rates fall while protecting its net interest margin if rates should rise.
In addition, the increased use of short-term borrowings for temporary funding sources, and additional long-term borrowings, whichgeneral corporate purposes. Borrowings generally have higher interest rates associated with them also resultedthan interest-bearing deposits. Interest expense on all borrowings increased $1.1 million in the increase in the cost of funds. The2019, with average balance ofbalances decreasing $49.2 million for short-term borrowings increased $33,340,000 during 2015 to $85,262,000.while long-term borrowings also decreased $3.0 million. The average rate paid on short-term borrowings increased from 1.94% in 2018 to 1.95% in 2019 and the average rate paid on long-term borrowings increased from 1.95% in 2018 to 2.21% in 2019.
2018 versus 2017
In 2018, net interest income increased $8.0 million, or 18.4%, compared with 2017. Net interest income for 2015 was 0.35%2018 on a taxable-equivalent basis increased $7.0 million, or 15.2%, compared with 2017. The Company’s net interest spread decreased six basis point to 3.16% for 2018 compared with 2017. Taxable-equivalent yields on interest-earning assets and costs of interest-bearing liabilities both increased from 2017 to 2018, reflecting the increased interest rate environment between years. Other factors impacting the comparison of taxable-equivalent yields between 2017 and 2018 included the effect of purchase accounting related to the Mercersburg acquisition; the Company's gradual increase in rates paid on interest-bearing deposits in response to market demand; and the change in our statutory tax rate.
Interest income on a taxable-equivalent basis on loans increased $9.2 million, or 22.4%, from 2017 to 2018. The increase resulted from an increase of 6in both average loan volume and yield, with average loans increasing $156.3 million, or 16.5%, and yield increasing 22 basis points from that paid4.34% in 2014.2017 to 4.56% in 2018. The Company's geographic expansion and sales efforts with additional loan officers continued to drive loan growth in 2018 across most loan classes. Increases in prime lending rates during the year contributed to the increased yield, but a flattened yield curve partially offset the benefit of the rate increases. Accretion of purchase accounting adjustments in connection with the Mercersburg acquisition increased 2018 interest income by $335 thousand.
Interest income earned on a taxable-equivalent basis on securities increased $3.5 million, or 28.7%, from 2017 to 2018, with both average volume and yield increasing. Average securities increased $58.9 million, or 14.0%, and yield increased from 2.91% in 2017 to 3.28% in 2018. Contributing to the increase in averageinterest income on securities was the higher rate environment in 2018 and strategic moves within the portfolio as the interest rate environment changed.

Interest expense on deposits and borrowings increased $5.8 million from 2017 to 2018, as the average balance of interest-bearing liabilities increased $190.4 million, or 16.3%.
balancesOur ability to attract and rates paidacquire new deposits in all categories, but in particular interest-bearing demand deposits, resulted in an increase in average interest-bearing deposits totaling $119.7 million, or 18.5%, in 2018. Interest expense for these deposits increased $2.8 million, with the cost of funds increasing from 0.33% in 2017 to 0.64% in 2018. Generally, the Company increased rates paid on interest-bearing deposits in 2018 in response to market conditions, but at a slower pace than yields earned on interest-earning assets.
We also increased our short-term and long-term borrowings in 2018 to partially fund loan and investment portfolio growth. In late 2018, we issued $32.5 million in aggregate principal amount of subordinated notes, the proceeds of which were designated for the cash portion of merger and acquisition activity and for general corporate purposes. Borrowings generally have higher interest rates associated with them than interest-bearing deposits. Interest expense on all borrowings increased $1.8 million in 2018, with average balances decreasing $16.6 million for short-term borrowings while long-term borrowings increased $47.3 million as the Company responded to the changing interest rate environment. The average rate paid on short-term borrowings increased from $148,000 for 20140.80% in 2017 to $295,0001.94% in 2015. Additionally,2018 and the Company added to itsaverage rate paid on long-term borrowings resultingdecreased from 2.00% in a higher average balance2017 to 1.95% in 2018.

33

Table of $22,522,000 for the year ended December 31, 2015 compared with $17,773,000 in 2014, and was the primary reason for the increase in expense of $67,000, from $333,000 for 2014 to $400,000 for 2015.Contents
The Company’s net interest spread of 3.06% decreased 7 basis points for 2015 as compared with 2014. Net interest margin for 2015 was 3.14%, a 6 basis point decrease from 3.20% for 2014, and is reflective of a flattening yield curve.
Provision for Loan Losses
The Company recorded a provision for loan losses of $250,000 for 2016,$900 thousand, $800 thousand and a negative$1.0 million in 2019, 2018, and 2017, respectively. In calculating the provision for loan losses, or a reversal of amounts previously provided, of $603,000both quantitative and $3,900,000 for 2015 and 2014. The provision for loan losses of $250,000 in 2016 reflects a growing loan portfolio and other qualitative factors. The negative provision in 2015 isfactors, including the result of a recovery on a loan with prior charge-offs totaling this amount. The negative provision recorded in 2014 was the result of several factors, including:Company's favorable recoveries of loan amounts previously charged-off; successful resolution of a loan in workout with a smaller charge-off than the reserve established for it; and significant improvement in asset quality metrics. Favorablehistorical charge-off data combined with relativelyand stable economic and market conditions, were considered in the determination of the adequacy of the ALL. Net charge-offs and loan growth resulted in the determination that a negative provision could be recordedexpense was required in 20152019, 2018 and 2014 despite net charge-offs for the periods, as allowance for loan losses coverage metrics remained strong.2017.
See further discussion in the “Asset Quality” and “Credit Risk Management” sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.


Noninterest Income
The following provides information regardingtable compares noninterest income changes over the past three years.for 2019, 2018 and 2017.
 
201920182017$ Change% Change
(Dollars in thousands)2016 2015 2014 % Change
2016-2015 2015-2014
2019201820172019-20182018-20172019-20182018-2017
         
Service charges on deposit accounts$5,445
 $5,226
 $5,415
 4.2 % (3.5)%Service charges on deposit accounts$3,404  $3,233  $3,057  $171  $176  5.3 %5.8 %
Interchange incomeInterchange income3,281  2,821  2,618  460  203  16.3 %7.8 %
Other service charges, commissions and fees994
 1,223
 1,033
 (18.7)% 18.4 %Other service charges, commissions and fees805  907  570  (102) 337  (11.2)%59.1 %
Loan swap referral feesLoan swap referral fees1,197  —  —  1,197  —  — %— %
Trust and investment management income5,091
 4,598
 4,687
 10.7 % (1.9)%Trust and investment management income7,255  6,576  6,400  679  176  10.3 %2.8 %
Brokerage income1,933
 2,025
 2,150
 (4.5)% (5.8)%Brokerage income2,426  2,035  1,896  391  139  19.2 %7.3 %
Mortgage banking activities3,412
 2,747
 2,207
 24.2 % 24.5 %Mortgage banking activities3,049  2,663  2,919  386  (256) 14.5 %(8.8)%
Earnings on life insurance1,099
 1,025
 950
 7.2 % 7.9 %
Other income (loss)345
 410
 477
 (15.9)% (14.0)%
Income from life insuranceIncome from life insurance2,044  1,463  1,109  581  354  39.7 %31.9 %
Other incomeOther income331  320  190  11  130  3.4 %68.4 %
Subtotal before securities gains18,319
 17,254
 16,919
 6.2 % 2.0 %Subtotal before securities gains23,792  20,018  18,759  3,774  1,259  18.9 %6.7 %
Investment securities gains1,420
 1,924
 1,935
 (26.2)% (0.6)%Investment securities gains4,749  1,006  1,190  3,743  (184) 372.1 %(15.5)%
Total noninterest income$19,739
 $19,178
 $18,854
 2.9 % 1.7 %Total noninterest income$28,541  $21,024  $19,949  $7,517  $1,075  35.8 %5.4 %
20162019 versus 20152018
Noninterest income increased $561,000$7.5 million from 2018 to $19,739,0002019. We continue to focus on growth in relationship fee-based revenue for 2016, compared with $19,178,000 for 2015. Thecommercial and retail clients. In addition to the impact of the Mercersburg and Hamilton acquisitions, the following were significant factors contributed toin that net increase.
Service charges on deposit accounts increased $219,000 for 2016 compared with 2015, due principally to revenues generatedand interchange on debit card income reflected an overall increase in our clients' activity and card usage from new cash management product offeringsour organic growth as well as the expanded client base from the acquisitions. These stable sources of fee revenue should grow over time as we add retail and higher interchange fees associated with increased usage by our customerscommercial clients.
OtherGains on SBA loan sales, which are included in other service charges, commissions and fees, decreased $229,000approximately $300 thousand from 2018 to 2019.
We began offering interest rate hedging products through a third party in comparing 2016 with 2015. In 2015, these revenues were favorably impactedthe second half of 2019, whereby we receive a fee at loan closing; this is primarily used by gains on salecommercial real estate borrowers. With our market expansion efforts and building of Small Business Administration and U.S. Department of Agriculture loans.our experienced relationship manager team, we added this product to better serve our clients. This fee revenue will fluctuate from quarter to quarter, but we continue to see client demand to fix loan interest rates in the current rate environment.
Trust, investment management and brokerage income increased $401,000 for 2016 compared with 2015. Trust and brokerage income includedreflected increased revenue from generally improved market conditions, additional advisors and increased estate fees partially offsetin 2019. We continue to look to build this business over the coming years and have recently begun efforts to offer wealth management products in our acquired Baltimore market area.
The increase in mortgage banking activities reflects the increase in loans sold from $93.1 million in 2018 to $106.7 million in 2019. With interest rates currently at low levels and recent market expansion efforts, we see opportunities to increase our market share with existing clients by lower brokerage income. The additionincreasing our focus on branch referrals and local market outreach efforts.
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Income from life insurance included death benefit proceeds in both 2019 and 2018, with the increase between years principally attributable to life insurance assets obtained through acquisitions.
Wheatland as an investment manager had a modest impact on 2016 revenues as that acquisition occurred in December 2016.
Mortgage banking revenue increased $665,000 from 2015 to 2016. Favorable interest rate conditions have supported increased new home purchasesIn both 2019 and refinancing activity resulting in the increase.
Other income decreased $65,000 in comparing 2016 to 2015, reflecting, in part, decreased gains on sales of other real estate owned as well as changes due to customary business activities.
Security gains totaled $1,420,000 for 2016, a $504,000 decrease compared with $1,924,000 for 2015. For both years,2018, asset/liability management strategies and interest rate conditions resulted in net gains on sales of securities, as market conditions presented opportunities to accelerate earnings on securities through gains,improve responsiveness of the portfolio to interest rate conditions, while also meeting theconsidering funding requirements of current and anticipated lending activity.
20152018 versus 20142017
Noninterest income increased $1.1 million from 2017 to $19,178,000 for 2015, as compared with $18,854,000 for 2014, an increase2018. In addition to the impact of 1.7%. Thethe Mercersburg acquisition, the following were significant factors contributed toin that net increase.
Service charges on deposit accounts decreased $189,000continued to increase in comparing 20152018 as a result of new product offerings and increased activity associated with 2014, continuing a declining trend noted in 2014. The Company has experienced a decline in overdraft charges as consumers have greater awareness of their available balances given new technology, and are less likely to incur charges.deposit growth.
Other service charges, commissions and fees increased $190,000 from 2014 to 2015. In 2015, the Company's revenues were favorably impacted by $205,000in 2018 included additional gains on the gain on sale of Small Business Administration (SBA)SBA loan sales and U.S. Department of Agriculture (USDA) loans, with no similar gainsan increase in 2014.loan transaction fees.
Trust department and brokerage income decreased $214,000 for 2015 compared with 2014. Unfavorable market conditions,increased more modestly in which declines2018 than in 2017, reflecting a reduction in fee income in the stock market were experienced, negatively impacted revenues.latter part of 2018 as financial markets declined.
MortgageThe decrease in mortgage banking revenue for 2015activities reflects a combination of overall decreased refinance activity as interest rates increased $540,000and a shortage of available housing inventory during the year.
Income from 2014life insurance increased principally due to 2015. Favorable real estatedeath benefit proceeds.
In both 2018 and interest rate market conditions led to the increase, as the Company was able to enhance its new home purchase mortgage revenues, and relied less on mortgage loan refinancings.
Other income decreased $67,000 for 2015 compared with 2014. A principal contributor was $234,000 in gains on sales of other real estate owned for 2015, compared with $299,000 in such gains for 2014.
Security gains totaled $1,924,000 for 2015, which was relatively comparable to $1,935,000 in 2014. For both years,2017, asset/liability management strategies and interest rate conditions resulted in net gains on sales of securities, as market conditions presented opportunities to realize earnings on securities through gains,improve responsiveness of the portfolio to interest rate conditions, while also considering funding the cash requirements of anticipated lending activity.


Noninterest Expenses
The following provides information regardingtable compares noninterest expenses over the past three years.for 2019, 2018 and 2017.
    $ Change% Change
2019201820172019-20182018-20172019-20182018-2017
Salaries and employee benefits$39,495  $32,524  $30,145  $6,971  $2,379  21.4 %7.9 %
Occupancy4,325  3,084  2,806  1,241  278  40.2 %9.9 %
Furniture and equipment4,723  4,079  3,434  644  645  15.8 %18.8 %
Data processing3,599  2,674  2,271  925  403  34.6 %17.7 %
Automated teller machine and interchange fees1,015  806  767  209  39  25.9 %5.1 %
Advertising and bank promotions1,967  1,592  1,600  375  (8) 23.6 %(0.5)%
FDIC insurance367  681  606  (314) 75  (46.1)%12.4 %
Legal fees585  413  802  172  (389) 41.6 %(48.5)%
Other professional services2,369  1,434  1,571  935  (137) 65.2 %(8.7)%
Directors' compensation1,003  984  996  19  (12) 1.9 %(1.2)%
Taxes other than income1,018  1,012  866   146  0.6 %16.9 %
Intangible asset amortization1,570  286  102  1,284  184  449.0 %180.4 %
Merger related and branch consolidation expenses8,964  3,197  —  5,767  3,197  180.4 %— %
Insurance claim receivable write off615  —  —  615  —  — %— %
Other operating expenses5,687  5,169  4,364  518  805  10.0 %18.4 %
Total noninterest expenses$77,302  $57,935  $50,330  $19,367  $7,605  33.4 %15.1 %

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Table of Contents
       % Change
(Dollars in thousands)2016 2015 2014 2016-2015 2015-2014
          
Salaries and employee benefits$26,370
 $24,056
 $23,658
 9.6 % 1.7 %
Occupancy2,491
 2,221
 2,251
 12.2 % (1.3)%
Furniture and equipment3,335
 3,061
 3,328
 9.0 % (8.0)%
Data processing2,378
 2,026
 1,866
 17.4 % 8.6 %
Telephone and communication740
 692
 569
 6.9 % 21.6 %
Automated teller machine and interchange fees748
 798
 865
 (6.3)% (7.7)%
Advertising and bank promotions1,717
 1,564
 1,195
 9.8 % 30.9 %
FDIC insurance775
 859
 1,621
 (9.8)% (47.0)%
Legal850
 1,440
 705
 (41.0)% 104.3 %
Other professional services1,332
 1,262
 1,580
 5.5 % (20.1)%
Directors' compensation969
 737
 624
 31.5 % 18.1 %
Collection and problem loan238
 447
 729
 (46.8)% (38.7)%
Real estate owned239
 162
 300
 47.5 % (46.0)%
Taxes other than income767
 916
 562
 (16.3)% 63.0 %
Regulatory settlement1,000
 0
 0
 100.0 % 0.0 %
Other operating expenses4,191
 4,366
 3,915
 (4.0)% 11.5 %
Total noninterest expenses$48,140
 $44,607
 $43,768
 7.9 % 1.9 %
2019 versus 2018

2016 versus 2015
Noninterest expenses totaled $48,140,000 for 2016 compared with $44,607,000 for 2015, an increaseincreased $19.4 million from 2018 to 2019. In addition to the impact of $3,533,000. Thethe Mercersburg and Hamilton acquisitions, the following were significant factors contributed toin that net increase.
SalariesThe salaries and employee benefits totaled $26,370,000 for 2016, compared with $24,056,000 in 2015, an increase of $2,314,000. The increase reflectsincludes the impact in 2019 of addingadditional employees, including new customer-facingclient-facing employees in new branches in targeted expansion markets targeted for expansionand others that were hired throughout 2018 and 2019, as well as additional new relationship managers. Higher costs in 2019 also include annual merit increases. Other drivers wereand incentive compensation increases in 2019, increased stock compensation expense from additional medical expense incurred for new employees and increased claim activity, increased expense associated with supplemental executive compensation and compensation related to share-based awards granted in 2016.2019, and higher medical costs for claims activity and the expanded workforce.
Consistent with our growth strategy in which new facilities were acquired in Berks, Cumberland, DauphinOccupancy and Lancaster counties, we have experienced increases in occupancy, furniture and equipment expenses which totaledin 2019 reflect a combined $5,826,000full period of expense for 2016 comparedour expanded presence in Lancaster County, Pennsylvania, with $5,282,000 for 2015, an increasetwo branch banking locations added in the third and fourth quarters of $544,000, or 10.3%.2018 and two in the first quarter of 2019.
DataIncreases in data processing charges increased $352,000 in comparing 2016 with 2015. Telephone and communication charges similarly increased $48,000. Thereflect volume increases reflect our volume and physical growth and costs associated with more sophisticated product and service offerings.
Advertising and bank promotion increased $153,000 from 2015 to 2016, principally due to $100,000promotions expense includes additional costs incurred in 2019 for the celebration of incremental Educational Improvement Tax Credit (“EITC”) contributions (a component of Pennsylvania tax credits) made in 2016 and increased expenditures related to brandthe Bank's 100th anniversary year, as well as marketing and expansion in new markets.associated with the acquisitions.
FDIC insurance decreased $84,000 from 2015 to 2016. The Company benefited from a lower assessment rate as the FDIC reached its 1.15% of insured funds target on June 20, 2016.
Legal fees decreased $590,000 in comparing 2016 with 2015, as the Company had higher than normal legal expenses in 2015 as it attended to legal matters, including outstanding litigation against the Company and an investigation with the SEC which beganexpense reflects credits received in the second half of 2019 under the FDIC's regulations to provide credits, when the reserve ratio reaches 1.38%, to banks with consolidated assets below $10 billion. We expect FDIC insurance expense to increase after remaining credits are used to partially offset first quarter 2020 expense.
Intangible asset amortization increased due to the core deposit intangibles recorded in the acquisitions.
Merger related costs incurred in 2019 totaled $8.0 million and represented principally data processing contract termination costs, employee contract termination costs and legal and consulting fees for the Hamilton acquisition and system conversion expenses for both the Mercersburg and Hamilton acquisitions. In the fourth quarter of 2015 and concluded2019, we recorded $988 thousand in the third quarter of 2016.

Although certain legal matters are ongoing, the legal expenses associated with themthe announced consolidation of five branches into other, larger Bank branches, which was completed in 2016 have been less thanJanuary 2020. The expenses principally represented owned real estate write downs, lease termination costs, severance benefits for impacted employees and other branch exit related expenses.
The insurance claim receivable write off relates to an expense recorded in 2019 to write off an insurance claim receivable from a 2018 cyber security incident. In 2019, we received reimbursement totaling $59 thousand for the levelswrite off. In February 2020, we received an additional $486 thousand reimbursement in 2015.
Directors' compensation increased $232,000 from 2015 to 2016. The increase includes fees associated with two new directors added to the Board of Directors in 2016 and increased expense in 2016 for share-based compensation. In 2015, share-based compensation was only in effect for seven monthsa final settlement of the year.matter.
Collection and problem loan expense decreased $209,000 from 2015 to 2016 as a result of a lower level of classified loans that are being worked out by the Company. Partially offsetting this expense benefit is an increase in real estate owned expense of $77,000 from 2015 to 2016.
Taxes, other than income, decreased $149,000 from 2015 to 2016. A significant portion of the decrease relates to incremental EITC credits for qualifying contributions made in 2016 versus 2015 and which largely offsets the related increase in advertising and bank promotions noted above.
The Company incurred and paid a civil money penalty of $1,000,000 to the SEC in 2016 to settle administrative proceedings against the Company.
Other line items within noninterest expenses are generally attributable to normal fluctuations in the ordinary course of business.

2018 versus 2017
Noninterest expenses increased $7.6 million from 2017 to 2018. In addition to the impact of the Mercersburg acquisition, the following were significant factors to that net increase.
The salaries and employee benefits increase includes the impact in 2018 of additional employees, including new client-facing employees in new branches in targeted expansion markets and others that were hired throughout 2017 and 2018. Higher costs in 2018 also include annual merit increases awarded in 2018 and incentive compensation increases, additional share-based awards granted in 2017, net of the benefit of forfeitures, and increased medical costs for the expanded workforce. Medical costs in 2018 benefited from reduced claim activity from that experienced in 2017.
Occupancy and furniture and equipment expenses reflect modest changes from 2015a full period of expense for new facilities opened in 2017 and 2018, principally in Lancaster County, Pennsylvania.
The Company incurred certain indemnification costs totaling $645 thousand, which are included in legal fees, to 2016several professional service providers in 2017 in connection with previously disclosed outstanding litigation. Indemnification costs incurred in 2018 were not material. Additional costs may be incurred as the litigation progresses.
Intangible asset amortization increased due to the core deposit intangible recorded in the Mercersburg acquisition.
Merger related costs were principally for investment banking and legal and consulting fees for the Mercersburg acquisition.
36

Table of Contents
Other line items within noninterest expenses are generally attributable to normal fluctuations in the conduct of business.


2015 versus 2014
Noninterest expenses totaled $44,607,000 for 2015 compared with $43,768,000 for 2014, an increase of $839,000, or 1.9%. The following factors contributed to the net increase in noninterest expenses.
Salaries and employee benefits increased $398,000 in comparing 2015 with 2014. The 2015 results were impacted by merit increases to employees, incentive compensation including incremental share-based compensation expense of $449,000, and severance costs that totaled approximately $446,000 that were recognized during 2015.
Furniture and equipment expense decreased $267,000 from 2014 to 2015. The decrease was due principally to lower depreciation charges and the absence of any losses on disposal of equipment, which totaled $41,000 for 2014.
Data processing charges increased $160,000 and telephone and communication charges increased $123,000 from 2014 to 2015. The annual increases are reflective of overall higher volumes and costs associated with more sophisticated product and service offerings.
Advertising and bank promotion increased $369,000 in comparing 2015 with 2014 and reflects the timing and advertising associated with the opening of our new full service branch in Lancaster, increased promotion of several of our products and general brand awareness.
FDIC insurance expenses decreased $762,000 from 2014 to 2015.The decrease was the result of a lower assessment rate as the Company’s risk profile improved.
Legal fees increased $735,000 from 2014 to 2015, primarily as a result of costs associated with certain legal matters, including outstanding litigation against the Company and an ongoing confidential investigation being conducted by the SEC as well as general corporate matters. It is anticipated that legal fees will continue to be at elevated levels until the litigation and the confidential investigation are completed.
Other professional services, which includes accounting and consulting, decreased $318,000 in comparing 2015 with 2014. The decrease is principally the result of less reliance on outside consulting firms, as some work previously handled by consultants was assumed by employees.
Directors' compensation increased $113,000 from 2014 to 2015. The increase was primarily attributed to share-based compensation awarded to the directors in May 2015, with a one year vesting period, which resulted in seven months of expense in 2015 with no similar charge in 2014.
Collection and problem loan expense decreased $282,000 from 2014 to 2015. Similarly, real estate owned expenses decreased $138,000 in comparing 2015 with 2014. The declines in collection and problem loan and real estate owned expenses reflect improvement in the level of classified assets between the two periods.

Taxes, other than income, increased $354,000 from 2014 to 2015 as Pennsylvania’s Bank Shares tax, which is based on shareholders’ equity at the beginning of the year, increased due to the combination of 2014’s earnings and an increase in other comprehensive income.
Other operating expenses increased $451,000 from 2014 to 2015. In 2015, incremental charges of $384,000 were incurred associated with the Company's investment in low-income housing projects compared with $150,000 in 2014, an increase of $234,000 or 156.0%. The prior year's results were positively impacted by favorable operating results of the partnerships, which resulted in less expense in 2014.
Income Taxes
Income tax expense totaled $1,266,000$2.7 million, $1.6 million and $1,634,000$4.3 million for 20162019, 2018 and 2015, compared with an income tax benefit of $16,132,000 for 2014. The income tax benefit for 2014 reflects the reversal of a valuation allowance on the Company's net deferred tax asset.
In 2012, based upon our evaluation of both positive and negative evidence, including projected future taxable income, tax planning strategies and recent financial operating results, a $20,235,000 full valuation on the net deferred tax assets was established. Specifically, it was determined that negative evidence, which included recent cumulative history of operating losses, deterioration in asset quality and resulting impact on profitability, and that we had exhausted our carryback availability, outweighed positive evidence. This position was reviewed quarterly and at December 31, 2014, management concluded that, based on the Company’s profitable operations over the prior nine quarters, improvements in asset quality, strengthened capital position, reduced regulatory risk, and improvement in economic conditions, a full valuation allowance was no longer necessary. The full amount was reversed at December 31, 2014, and resulted in a net income tax benefit for 2014 of $16,132,000. Management considered projected future taxable income, length of time needed for carryforwards to reverse, available tax planning strategies, and other factors in making its assessment that it was more likely than not the deferred tax assets would be realized.
The Company recorded income tax expense totaling $1,266,000 for 2016 and $1,634,000 for 2015. A meaningful comparison between years is the effective tax rate, a measurement of income tax expense as a percentage of pretax income.2017, respectively. The effective tax rate for 2016 totaled 16.0%2019 was 13.8% compared with 17.2%11.4% for 2015. These2018 and 34.9% for 2017. Generally, our effective rates aretax rate is lower than the federal statutory tax rate principally due to nontaxable interest income earned on tax-free loans and securities and earnings on the cash surrender value ofincome from life insurance policies, offset partially by nondeductible expenses. Effective January 1, 2016,In 2019, our effective tax rate increased principally due to increased profitability, offset partially by benefits realized from a $185 thousand expense reduction related to a favorable tax law clarification on the Company changedtreatment of life insurance assets of an acquired entity, as well as a $334 thousand expense reduction related to an increase in deferred state income taxes due to a state tax rate change resulting from the Hamilton acquisition. In 2017, our higher effective tax rate was principally impacted by the tax expense incurred due to enacted tax reform. We were required to remeasure our net deferred tax asset and incurred a tax expense of $2.6 million, which was included in income tax expense for the year ended December 31, 2017.
Our statutory federal tax rate from 35% towas 21% in 2019 and 2018 and 34% to reflect its assessment that it will not be in the higher tax bracket. As a result, income tax expense for 2016 increased $185,000 due to the application of the new rate to existing deferred balances. A reconciliation of the federal statutory rate to the effective tax rate for 2016, 2015 and 2014 is included in2017. Note 7,8, Income Taxes, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data.Data," includes a reconciliation of our federal statutory tax rate to our effective tax rate, which is a meaningful comparison between years and measures income tax expense as a percentage of pretax income.

Financial Condition
Management devotes substantial time to overseeing the investment of funds in loans and securities and the formulation of policies directed toward the profitability and minimizationmanagement of riskthe risks associated with suchthese investments.
Securities Available for Sale
The Company utilizes securities available for sale as a tool to manage interest rate risk, to enhance income through interest and dividend income, to provide liquidity and to provide collateral for certain deposits and borrowings.
The Company hasWe have established investment policies and an asset management policy to assist in administering itsour 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 Agreementsrepurchase agreements and other factors while trying to maximize return on the investments. Under GAAP, the CompanyWe may segregate itsour investment portfolio into three categories: “securities held to maturity,” “trading securities” and “securities available for sale.” ManagementAt December 31, 2019, management has classified the entire securities portfolio as available for sale. Securities available for sale, arewhich is accounted for at their current market value with unrealized gains and losses on such securities excluded from earnings and reported as ain OCI, net amount in other comprehensive income.of income taxes.
The Company’sOur securities available for sale includeportfolio includes debt and equity instrumentsinvestments that are subject to varying degrees of credit and market risk. This risk arisesrisks, which arise from general market conditions, and factors impacting specific industries, as well as news that may impact specific issues. Management continuously monitors its debt securities, including updates of credit ratings,

monitoring market, industry and segment news, as well as volatility in market prices. The Company usesusing various indicators in determining whether a debt security is other-than-temporarily impaired, including the extentamount of time the security has been in an unrealized loss position, and the extent of the unrealized loss. In addition, management assesses whether it is likely the Companywe will have to sell the security prior to recovery, or if it iswe are able to hold the security until the price recovers. For those debt securities in which management concludes the security is other-than-temporarily impaired, it recognizes the credit component of an other-than-temporaryOTTI impairment in earnings and the remaining portion in other comprehensive income.OCI. Given the strong asset quality of theour debt security portfolio, management haswe did not had to take an other-than-temporary impairment chargerecord any OTTI expense in 2016, 20152019, 2018 or 2014.2017.
For equity securities, when the Company has decided to sell an impaired available for sale security and does not expect the fair value
37

Table of the security to fully recover before the expected time of sale, the security is deemed other-than-temporarily impaired in the period in which the decision to sell is made. The Company recognizes an impairment loss when the impairment is deemed other-than-temporary even if a decision to sell has not been made. The Company recorded no other-than-temporary impairment expense on equity securities for the years ended December 31, 2016, 2015 and 2014.Contents
The following table summarizes the fair value of securities available for sale at December 31.31, 2019, 2018 and 2017.
 
201920182017
States and political subdivisions$87,863  $145,004  $159,458  
GSE residential mortgage-backed securities—  —  49,530  
GSE residential CMOs68,154  108,064  111,119  
Non-agency CMOs17,087  —  —  
Private label residential CMOs—  143  1,003  
Private label commercial CMOs86,629  75,045  7,653  
Asset-backed and other230,653  137,588  86,545  
Total debt securities$490,386  $465,844  $415,308  
(Dollars in thousands)2016 2015 2014
      
U.S. Government Agencies$39,592
 $47,227
 $23,958
States and political subdivisions164,282
 125,961
 52,401
GSE residential mortgage-backed securities116,944
 132,349
 175,596
GSE residential CMOs69,383
 15,843
 58,705
GSE commercial CMOs4,856
 63,770
 65,472
Private label CMOs5,006
 8,901
 0
Total debt securities400,063
 394,051
 376,132
Equity securities91
 73
 67
Totals$400,154
 $394,124
 $376,199
The securities available for saleWe modestly increased our investment portfolio increased $6,030,000, or 1.5%, from $394,124,000 at December 31, 2015 to $400,154,000 at December 31, 2016. The overall increase in the securities portfolio during 2016 was consistent2019, with the Company's intention to increase the size of the balance sheet to enhance interest income.
While the year-end balance increased, the average balance of securities declinedincreasing from $381,668,000$479.5 million for the year ended December 31, 20152018 to $360,355,000$499.3 million for the year ended December 31, 2016. As2019.

In late 2018, we increased our holdings of longer maturity state and political subdivisions in anticipation of falling interest rates. In 2019, interest rates fell and the attractiveness of tax-free state and political subdivisions declined. In response, we reduced our holdings of longer maturity tax-free state and political subdivisions at a result of interest rate market conditions, the Company liquidated its GSEgain. We replaced these securities with additional asset-backed and private label commercial CMOs portfolio duringthat were either floating rate or had shorter average lives than the first quarter of 2016 at a net gain of $1,420,000. The proceeds from the sale were used to fund loan growth, reduce short-term borrowingsstate and maintain liquidity for the first half of 2016. In the third quarter of 2016, the Company elected to reduce liquiditypolitical subdivision investments.
Asset-backed securities and enhance interest income through the purchase of securities, primarily GSE residential CMOs.
Management anticipates the loan portfolio will grow in 2017 and repayments from mortgage-backed securities and/or CMOs will be used to partially meet this loan demand, as these instruments provide monthly cash flows that may be reinvestedused, in part, to meet anticipated loan demand in 2020, as management anticipates the loan portfolio. The yields available on state and political subdivision securities were attractive late in 2016, and this factored into our consideration to increase holdings in state and political subdivisions, while decreasing our investment in GSE residential mortgage-backed securities. The Company also invested in private label CMOs in the fourth quarter of 2015 as they too provided attractive yields, and mayportfolio will continue to represent a larger portiongrow.
38

Table of the securities available for sale portfolio going forward.Contents


The following table shows the maturities of investment securities at book value at December 31, 2016,2019, and weighted average yields of such securities. Yields are shown on a tax equivalent basis, assuming a 34%21% federal income tax rate.
 
Within 1
year
After 1 year
but within 5
years
After 5 years
but within
10 years
After 10
years
Total
(Dollars in thousands)
Within 1
year
 
After 1 year
but within 5
years
 
After 5 years
but within
10 years
 
After 10
years
 Total
U. S. Government Agencies         
Book value$0
 $0
 $900
 $38,669
 $39,569
Yield0.00% 0.00% 1.97% 2.53% 2.52%
Average maturity (years)0.0
 0.0
 6.7
 21.9
 21.6
States and political subdivisions         States and political subdivisions
Book value15
 7,157
 71,305
 85,200
 163,677
Book value$230  $—  $26,346  $57,031  $83,607  
Yield7.46% 2.82% 3.32% 4.68% 4.01%Yield2.00 %— %3.16 %4.11 %3.80 %
Average maturity (years)0.9
 4.3
 7.5
 17.8
 12.7
Average maturity (years)0.48.516.714.0
GSE residential mortgage-backed securities         
Book value0
 0
 5,040
 110,982
 116,022
Yield0.00% 0.00% 1.70% 2.07% 2.06%
Average maturity (years)0.0
 0.0
 9.7
 46.4
 44.8
GSE residential CMOs         GSE residential CMOs
Book value0
 0
 0
 72,411
 72,411
Book value$—  $—  $—  $67,928  $67,928  
Yield0.00% 0.00% 0.00% 1.88% 1.88%Yield— %— %— %2.82 %2.82 %
Average maturity (years)0.0
 0.0
 0.0
 13.7
 13.7
Average maturity (years)23.823.8
GSE commercial CMOs         
Non-agency CMOsNon-agency CMOs
Book value0
 0
 5,148
 0
 5,148
Book value$—  $—  $—  $17,210  $17,210  
Yield0.00% 0.00% 2.40% 0.00% 2.40%Yield— %— %— %3.22 %3.22 %
Average maturity (years)0.0
 0.0
 8.7
 0.0
 8.7
Average maturity (years)29.929.9
Private label CMOs         
Private label commercial CMOsPrivate label commercial CMOs
Book valueBook value$—  $—  $3,950  $82,754  $86,704  
YieldYield— %— %2.51 %3.03 %3.00 %
Average maturity (years)Average maturity (years)5.517.516.9
Asset-backed and otherAsset-backed and other
Book value0
 0
 0
 5,042
 5,042
Book value$—  $—  $9,874  $225,670  $235,544  
Yield0.00% 0.00% 0.00% 1.95% 1.95%Yield— %— %4.18 %2.67 %2.73 %
Average maturity (years)0.0
 0.0
 0.0
 19.6
 19.6
Average maturity (years)5.822.321.6
Total         Total
Book value$15
 $7,157
 $82,393
 $312,304
 $401,869
Book value$230  $—  $40,170  $450,593  $490,993  
Yield7.46% 2.82% 3.15% 2.79% 2.87%Yield2.00 %— %3.35 %2.96 %2.99 %
Average maturity (years)0.9
 4.3
 7.7
 27.5
 23.1
Average maturity (years)0.47.521.220.1
The average maturity is based on the contractual terms of the debt or mortgage-backed securities, and does not factor intoin required repayments or anticipated prepayments that may exist.prepayments. At December 31, 2016,2019, the weighted average estimated life of theis 3.4 years for mortgage-backed and CMO securities, is approximately 3.8and 6.9 years for asset-backed securities, based on current interest rates and anticipated prepayment speeds.
Loan Portfolio
The Company offers a variety of products to meet the credit needs of ourits borrowers, principally commercial real estate loans, commercial and industrial loans, and retail loans consisting of loans secured by residential properties, and to a lesser extent, installment loans. No loans are extended to non-domestic borrowers or governments.
Generally, we are permitted under applicable law to make loans to single borrowers (including certain related persons and entities) in aggregate amounts of up to 15% of the sum of total capital and the allowance for loan losses.ALL. The Company’s legal lending limit to one borrower was approximately $19,200,000$34.0 million at December 31, 2016.2019. No borrower had an outstanding exposure exceeding the limit at year-end.
The risks associated with lending activities differ among 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. Any of these factors may

adversely impact thea borrower’s ability to repay loans, and also impact the associated collateral. A further discussion on the classes of loans the Company makes and related risks is included in Note 1, Summary of Significant Accounting Policies, and Note 4, Loans and Allowance for Loan Losses, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data."
39

Table of Contents
The following table presents the loan portfolio, excluding loans held for sale, broken outresidential LHFS, by segments and classes at December 31.
 
20192018201720162015
Commercial real estate:
Owner-occupied$170,884  $129,650  $116,811  $112,295  $103,578  
Non-owner occupied361,050  252,794  244,491  206,358  145,401  
Multi-family106,893  78,933  53,634  47,681  35,109  
Non-owner occupied residential120,038  100,367  77,980  62,533  54,175  
Acquisition and development:
1-4 family residential construction15,865  7,385  11,730  4,663  9,364  
Commercial and land development41,538  42,051  19,251  26,085  41,339  
Commercial and industrial214,554  160,964  115,663  88,465  73,625  
Municipal47,057  50,982  42,065  53,741  57,511  
Residential mortgage:
First lien336,372  235,296  162,509  139,851  126,022  
Home equity – term14,030  12,208  11,784  14,248  17,337  
Home equity – lines of credit165,314  143,616  132,192  120,353  110,731  
Installment and other loans50,735  33,411  21,902  7,118  7,521  
Total loans (1)
$1,644,330  $1,247,657  $1,010,012  $883,391  $781,713  
(Dollars in thousands)December 31, 2016 December 31, 2015 December 31, 2014 December 31, 2013 December 31, 2012
Commercial real estate:         
Owner-occupied$112,295
 $103,578
 $100,859
 $111,290
 $144,290
Non-owner occupied206,358
 145,401
 144,301
 135,953
 120,930
Multi-family47,681
 35,109
 27,531
 22,882
 21,745
Non-owner occupied residential62,533
 54,175
 49,315
 55,272
 66,381
Acquisition and development:         
1-4 family residential construction4,663
 9,364
 5,924
 3,338
 2,850
Commercial and land development26,085
 41,339
 24,237
 19,440
 30,375
Commercial and industrial88,465
 73,625
 48,995
 33,446
 39,340
Municipal53,741
 57,511
 61,191
 60,996
 68,018
Residential mortgage:         
First lien139,851
 126,022
 126,491
 124,728
 108,601
Home equity – term14,248
 17,337
 20,845
 20,131
 14,747
Home equity – lines of credit120,353
 110,731
 89,366
 77,377
 79,448
Installment and other loans7,118
 7,521
 5,891
 6,184
 7,014
 $883,391
 $781,713
 $704,946
 $671,037
 $703,739
(1) Includes $395.9 million and $135.0 million of acquired loans as of December 31, 2019 and 2018, respectively.
The loan portfolio at December 31, 2019 increased $396.7 million, or 31.8%, from December 31, 2018, with approximately 75% of the increase attributable to loans acquired in the Hamilton transaction. The Mercersburg acquisition in 2018 and Hamilton acquisition in 2019 increased the loan portfolio, principally in the residential mortgage - first lien and commercial real estate - owner and non-owner occupied classes. The Company's organic growth has occurred in both core and newer markets, such as Lancaster County, Pennsylvania, principally in commercial real estate; and in commercial and industrial loans and installment and other loans as we focused on increasing diversification in the portfolio. The growth in installment and other loans in 2017 through 2019 was principally attributable to purchased automobile financing loans at higher returns than comparable cash flows in the investment portfolio.

Competition for new business opportunities remains strong, which may temper loan growth in future quarters.
In addition to monitoring our loan portfolio by loan class as noted above, we also monitor concentrations by industry.segment. The Bank’s lending policy defines an industry concentration as onereports segment concentrations that exceeds 25%20% of the Bank’s total risk-based capital ("RBC"). The following industries meetsegments met this criteria at December 31, 2016:2019.

Balance% of Total Loans% of Total RBC
Office space$147,945  9.0%  63.8%  
Strip retail shopping centers51,119  3.1%  22.1%  
Multi-family commercial real estate111,227  6.8%  48.0%  

40

(Dollars in thousands)Balance % of Total Loans % of Total RBC
      
Office space$93,883 10.6% 74.3%
Strip retail shopping centers39,775 4.5% 31.5%
The loan portfolio at December 31, 2016Table of $883,391,000 increased $101,678,000, or 13.0%, from $781,713,000 at December 31, 2015. In 2016, loan growth was experienced in many loan segments, demonstrating continued organic growth from our sales and marketing efforts. The largest increase was in commercial real estate, which grew by $90,604,000 as we continued to capitalize on market disruption caused by mergers of larger institutions in our market, aided by increased sales efforts and additional relationship managers, and expansion into our newer markets in Dauphin and Lancaster counties, Pennsylvania.Contents
Growth was also experienced in first lien and equity lines of credit classes in our residential mortgage portfolio segment, which totaled $274,452,000 at December 31, 2016, an 8.0% increase over $254,090,000 at December 31, 2015. Overall growth was achieved for reasons similar to the commercial real estate class, with a continuing growth focus in equity lines of credit as this residential mortgage product provides attractive yields and shorter durations than first lien residential mortgages.
Competition for new business opportunities remains strong, which may temper loan growth in future quarters. However, we have hired and anticipate hiring additional lenders in order to capitalize on disruptions that have been caused by the acquisition of some of our competitors in the markets served by larger institutions.

The following table presents expected maturities of certain loan classes by fixed-ratefixed rate or adjustable rate categories at December 31, 2016.2019. 
Due In 
Due In  
One Year
or Less
One
Year Through
Five Years
After Five
Years
Total
(Dollars in thousands)
One Year
or Less
 
One
Year Through
Five Years
 
After Five
Years
 Total
Acquisition and development:       Acquisition and development:
1-4 family residential construction       1-4 family residential construction
Fixed rate$103
 $0
 $3,445
 $3,548
Fixed rate$1,098  $—  $6,305  $7,403  
Adjustable and floating rate452
 0
 663
 1,115
Adjustable and floating rate4,684  —  3,778  8,462  
555
 0
 4,108
 4,663
5,782  —  10,083  15,865  
Commercial and land development       Commercial and land development
Fixed rate1,396
 608
 8,275
 10,279
Fixed rate64  8,243  7,559  15,866  
Adjustable and floating rate1,522
 1,674
 12,610
 15,806
Adjustable and floating rate1,697  1,930  22,045  25,672  
2,918
 2,282
 20,885
 26,085
1,761  10,173  29,604  41,538  
Commercial and industrial       Commercial and industrial
Fixed rate353
 16,557
 15,865
 32,775
Fixed rate2,581  66,550  36,589  105,720  
Adjustable and floating rate33,434
 6,975
 15,281
 55,690
Adjustable and floating rate57,866  18,125  32,843  108,834  
33,787
 23,532
 31,146
 88,465
60,447  84,675  69,432  214,554  
$37,260
 $25,814
 $56,139
 $119,213
$67,990  $94,848  $109,119  $271,957  
The final maturity is used in the determination of maturity of acquisition and development loans that convert from construction to permanent status. Variable rate loans shown above include semi-fixed loans that contractually will adjust with prime or LIBOR after the interest lock period, which may be up to 10 years. At December 31, 2016, there were approximately $18,955,000 of such loans.2019, these semi-fixed loans totaled $31.4 million.
Asset Quality
Risk Elements
The Company’s loan portfolios areportfolio is subject to varying degrees of credit risk. Credit risk is mitigatedmanaged through our 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 our risk of credit loss.

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The following table presents the Company’s loan portfolio is principally to borrowers in South Central Pennsylvaniarisk elements and Washington County, Maryland. As the majorityrelevant asset quality ratios at December 31.
20192018201720162015
Nonaccrual loans (1)
$10,657  $5,165  $9,843  $7,043  $16,557  
OREO197  130  961  346  710  
Total nonperforming assets10,854  5,295  10,804  7,389  17,267  
Restructured loans still accruing979  1,132  1,183  930  793  
Loans past due 90 days or more and still accruing (2)
2,232  57  —  —  24  
Total nonperforming and other risk assets$14,065  $6,484  $11,987  $8,319  $18,084  
Loans 30-89 days past due$17,527  $5,186  $5,277  $1,218  $2,532  
Asset quality ratios:
Total nonperforming loans to total loans0.65 %0.41 %0.97 %0.80 %2.12 %
Total nonperforming assets to total assets0.46 %0.27 %0.69 %0.52 %1.34 %
Total nonperforming assets to total loans and OREO0.66 %0.42 %1.07 %0.84 %2.21 %
Total risk assets to total loans and OREO0.86 %0.52 %1.19 %0.94 %2.31 %
Total risk assets to total assets0.59 %0.34 %0.77 %0.59 %1.40 %
Allowance for loan losses to total loans0.89 %1.12 %1.27 %1.45 %1.74 %
Allowance for loan losses to nonperforming loans137.52 %271.33 %130.00 %181.39 %81.95 %
Allowance for loan losses to nonperforming loans and restructured loans still accruing125.95 %222.55 %116.05 %160.23 %78.20 %
(1) Includes $5.3 million of purchased credit impaired loans are concentrated in this geographic region, a substantial portionat December 31, 2019.
(2)Includes $2.1 million of the debtor’s ability to honor obligations may be affected by the levelpurchased credit impaired loans at December 31, 2019.
The following table provides detail of economic activity in the market area.impaired loans at December 31, 2019 and 2018.
 20192018
Nonaccrual
Loans
Restructured
Loans Still
Accruing
Total
Nonaccrual
Loans
Restructured
Loans Still
Accruing
Total
Commercial real estate:
Owner occupied$5,842  $30  $5,872  $1,841  $39  $1,880  
Multi-family345  —  345  131  —  131  
Non-owner occupied residential235  —  235  309  —  309  
Commercial and industrial1,763  —  1,763  286  —  286  
Residential mortgage:
First lien1,659  931  2,590  1,808  1,069  2,877  
Home equity – term13  —  13  16  —  16  
Home equity – lines of credit715  18  733  774  24  798  
Installment and other loans85  —  85  —  —  —  
$10,657  $979  $11,636  $5,165  $1,132  $6,297  
Nonperforming assets include nonaccrual loans and foreclosed real estate. In addition, restructured loans still accruing 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, at 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. For all loan classes, loans are returned to accrual status 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 for which terms are modified are classified as troubled debt restructurings ("TDRs") if, in connection with the modification, a concession was granted, for legal or economic reasons, related to a debtor’s financial difficulties. Concessions granted under a TDR typically involve 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 given the risk of the transaction. If a modification occurs while the loan is on accruing status, it will continue to accrue interest under the modified terms. Nonaccrual TDRs may be restored to accrual status if scheduled principal and interest payments, under the modified terms, are current for six months

after modification, and the borrower continues to demonstrate the ability to meet the modified terms. TDRs are 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.
The following table presents the Company’s risk elements, including information concerning the aggregate balances of nonaccrual, restructured loans still accruing; loans past due 90 days or more; and foreclosed real estate at December 31. Relevant asset quality ratios are also presented.
(Dollars in thousands)2016 2015 2014 2013 2012
          
Nonaccrual loans (cash basis)$7,043
 $16,557
 $14,432
 $19,347
 $17,943
Other real estate owned (OREO)346
 710
 932
 987
 1,876
Total nonperforming assets7,389
 17,267
 15,364
 20,334
 19,819
Restructured loans still accruing930
 793
 1,100
 5,988
 3,092
Loans past due 90 days or more and still accruing0
 24
 0
 0
 0
Total nonperforming and other risk assets$8,319
 $18,084
 $16,464
 $26,322
 $22,911
          
Loans 30-89 days past due$1,218
 $2,532
 $1,612
 $3,963
 $3,578
Ratio of:         
Total nonperforming loans to loans0.80% 2.12% 2.05% 2.88% 2.55%
Total nonperforming assets to assets0.52% 1.34% 1.29% 1.73% 1.61%
Total nonperforming assets to total loans and OREO0.84% 2.21% 2.18% 3.03% 2.81%
Total risk assets to total loans and OREO0.94% 2.31% 2.33% 3.92% 3.25%
Total risk assets to total assets0.59% 1.40% 1.38% 2.23% 1.86%
Allowance for loan losses to total loans1.45% 1.74% 2.09% 3.12% 3.29%
Allowance for loan losses to nonperforming loans181.39% 81.95% 102.18% 108.36% 129.11%
Allowance for loan losses to nonperforming loans and restructured loans still accruing160.23% 78.20% 94.95% 82.75% 110.13%
The following table provides a further breakdown of impaired loans at December 31, 2016 and 2015.
 2016 2015
(Dollars in thousands)
Nonaccrual
Loans
 
Restructured
Loans Still
Accruing
 Total 
Nonaccrual
Loans
 
Restructured
Loans Still
Accruing
 Total
Commercial real estate:           
Owner occupied$1,070
 $0
 $1,070
 $2,109
 $0
 $2,109
Non-owner occupied736
 0
 736
 7,856
 0
 7,856
Multi-family199
 0
 199
 233
 0
 233
Non-owner occupied residential452
 0
 452
 895
 0
 895
Acquisition and development           
Commercial and land development1
 0
 1
 5
 0
 5
Commercial and industrial595
 0
 595
 734
 0
 734
Residential mortgage:           
First lien3,396
 896
 4,292
 4,015
 793
 4,808
Home equity – term93
 34
 127
 103
 0
 103
Home equity – lines of credit495
 0
 495
 590
 0
 590
Installment and other loans6
 0
 6
 17
 0
 17
 $7,043
 $930
 $7,973
 $16,557
 $793
 $17,350


Risk assets, which incorporateinclude nonperforming assets and restructured and loans past due 90 days or more and still accruing, totaled $14.1 million at December 31, 2016 totaled $8,319,000, a decrease2019, an increase of $9,765,000,$7.6 million or 54.0%116.9%, from $18,084,000$6.5 million at December 31, 2015. Efforts by the Company to work through risk assets in order to reduce the risk of future credit losses in the portfolio resulted in a decline in the number of risk assets.2018. Nonaccrual loans totaled $7,043,000$10.7 million at December 31, 2016, a decrease2019, an increase of $9,514,000$5.5 million from December 31, 2018. One commercial loan, downgraded to nonaccrual status in the fourth quarter of 2019 was the principal driver of the net increase. The change in nonaccrual loan amounts also impacted other asset quality ratios detailed above. The net reduction of risk assets and nonaccrual loans from December 31, 2015 to December 31, 2016 was due principally to the sale of a loan with a carrying balance of $5,946,000$5.9 million to a third party. Cash proceeds totaled $5,100,000$5.1 million with the $846,000$846 thousand difference recorded as a charge-off to the allowance for loan losses.ALL in 2016.
The allowance for loan lossesALL totaled $12,775,000$14.7 million at December 31, 2016,2019, a $793,000 decrease$641 thousand increase from $13,568,000$14.0 million at December 31, 2015,2018, resulting from net charge-offschargeoffs of $1,043,000$259 thousand and a provision for loan losses of $250,000$900 thousand for 2016. While the allowance for loan losses2019. The ALL is lower as a percentage of the total loan portfolio at December 31, 20162019 than in prior years, nonperformingreflecting purchase accounting adjustments for impaired loans decreased during 2016 due to continued successful loan workout efforts, contributing substantially to the changes in ratios noted aboveacquired from December 31, 2015 to December 31, 2016.
Mercersburg and Hamilton. Management believes theits coverage ratios are
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adequate for the risk profile of the loan portfolio given ongoing monitoring of the portfolio and theits quantitative and qualitative analysis performed at December 31, 2016. The Company continues to work through its nonaccrual loans and other risk elements in an attempt to reduce the levels of these under-performing assets and, to the extent possible, recover amounts previously charged-off.2019. As new information is learned about borrowers or updated appraisals on real estate with lower fair values are obtained, the Company may continue to experience additionalan increase in impaired loans.
For the years ended December 31, 2016, 2015,2019, 2018, and 20142017, recoveries of $679,000, $926,000$606 thousand, $882 thousand and $1,423,000 have been$287 thousand, respectively, were credited to the allowance for loan losses.ALL. These recoveries on previously charged-off relationships are the result of successful loan monitoring and workout solutions. Although recoveriesRecoveries are difficult to predict, and any additional recoveries that the Company receives will be used to replenish the allowance for loan losses.ALL. Recoveries favorably impact historical charge-off factors, which contributesand contribute to changes in the quantitative and qualitative factors used in our allowance adequacy analysis. In 2015 and 2014, negative provisions for loan losses were recorded. However, as charge-offs stabilize and the loan portfolio continues to grow, future provisions for loan losses may result and be charged to operations in subsequent periods.result.
At December 31, 2016, the Company had 79 lending relationships with loans that were considered impaired, and were included in the impaired loan balance of $7,973,000, compared with 84 lending relationships with an impaired loan balance of $17,350,000 at December 31, 2015. Of the relationships deemed to be impaired at December 31, 2016, none had an outstanding book balance in excess of $1,000,000 and 75, or 94.9%, had recorded balances less than $250,000. 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.
The following table presents exposure to relationships with an impaired loan balance, partial charge-offs taken to date and specific reserves established on the relationships at December 31, 20162019 and 2015.2018.
 
(Dollars in thousands)
# of
Relationships
 
Recorded
Investment
 
Partial
Charge-offs
to Date
 
Specific
Reserves
December 31, 2016       
Relationships greater than $1,000,0000
 $0
 $0
 $0
Relationships greater than $500,000 but less than $1,000,0002
 1,327
 620
 0
Relationships greater than $250,000 but less than $500,0002
 640
 120
 0
Relationships less than $250,00075
 6,006
 1,184
 43
 79
 $7,973
 $1,924
 $43
December 31, 2015       
Relationships greater than $1,000,0001
 $6,542
 $0
 $0
Relationships greater than $500,000 but less than $1,000,0002
 1,578
 475
 164
Relationships greater than $250,000 but less than $500,0007
 2,659
 188
 0
Relationships less than $250,00074
 6,571
 1,294
 125
 84
 $17,350
 $1,957
 $289


# of
Relationships
Recorded
Investment
Partial
Charge-offs
to Date
Specific
Reserves
December 31, 2019
Relationships greater than $1 million $5,218  $—  $—  
Relationships greater than $500 thousand but less than $1 million 1,516  17  —  
Relationships greater than $250 thousand but less than $500 thousand 980  —  —  
Relationships less than $250 thousand68  3,922  781  36  
75  $11,636  $798  $36  
December 31, 2018
Relationships greater than $500 thousand but less than $1 million $810  $17  $—  
Relationships greater than $250 thousand but less than $500 thousand 673  —  —  
Relationships less than $250 thousand64  4,814  873  38  
67  $6,297  $890  $38  
Internal loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $500,000,$500 thousand, which includes confirmation of risk rating by an independent credit officer. Credit Administration also reviews loans in excess of $1,000,000.$1.0 million. In addition, all relationships greater than $250,000$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.Committee and the Board of Directors.
In its individual 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 December 31, 2016.2019. However, over time, additional information may become known that could result in increased reserve allocations or, alternatively, it may be deemed that the reserve allocations exceed those that are needed.
The Company’s foreclosed real estate balance consisted of $346,000one commercial property totaling $180 thousand and one residential property totaling $17 thousand at December 31, 2016 consisted of 1 commercial property totaling $77,000, and 7 residential properties totaling $269,000. All properties have carrying values less than $150,000 and are carried at the lower of cost or fair value, less costs to dispose.
At December 31, 2016, the2019. The Company believes the value of foreclosed assetsreal estate represents theirits fair values,value, but if the real estate market declines,values decline, additional charges may be needed. During 2016,2019, no expense was recorded for writedown of other real estate owned properties totaled $43,000.properties.
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Credit Risk Management
Allowance for Loan Losses
The Company maintains the allowance for loan lossesALL at a level deemed adequate by management for probable incurred credit losses. The allowanceALL is established and maintained through a provision for loan losses which is charged to earnings. Quarterly,On a quarterly basis, management assesses the adequacy of the allowance for loan lossesALL utilizing a defined methodology which considers specific credit evaluation of impaired loans, past loanhistorical loss historical experience and qualitative factors. Management addresses the requirements for loans individually identified as impaired, loans collectively evaluated for impairment, and other bank regulatory guidance in its assessment.
The allowance for loan lossesALL is evaluated based on 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 losses and related procedures in establishing the appropriate level of reserve is included in Note 4, Loans and Allowance for Loan Losses, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data."


The following table summarizes the Company’s internal risk ratings at December 31.31, 2019 and 2018.
 
Pass
Special
Mention
Non-Impaired
Substandard
Impaired -
Substandard
DoubtfulPCI LoansTotal
December 31, 2019
Commercial real estate:
Owner-occupied$151,161  $4,513  $3,163  $5,872  $—  $6,175  $170,884  
Non-owner occupied342,753  17,152  —  —  —  1,145  361,050  
Multi-family100,361  4,822  682  345  —  683  106,893  
Non-owner occupied residential111,697  4,534  1,115  235  —  2,457  120,038  
Acquisition and development:
1-4 family residential construction15,865  —  —  —  —  —  15,865  
Commercial and land development39,939  206  1,393  —  —  —  41,538  
Commercial and industrial198,951  1,133  8,899  1,763  —  3,808  214,554  
Municipal42,649  4,408  —  —  —  —  47,057  
Residential mortgage:
First lien323,040  978  —  2,590  —  9,764  336,372  
Home equity – term13,774  74  149  13  —  20  14,030  
Home equity – lines of credit164,469  74  38  733  —  —  165,314  
Installment and other loans50,497  —  —  85  —  153  50,735  
$1,555,156  $37,894  $15,439  $11,636  $—  $24,205  $1,644,330  
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Pass
Special
Mention
Non-Impaired
Substandard
Impaired -
Substandard
DoubtfulPCI LoansTotal
(Dollars in thousands)Pass 
Special
Mention
 
Non-Impaired
Substandard
 
Impaired -
Substandard
 Doubtful Total
December 31, 2016           
December 31, 2018December 31, 2018
Commercial real estate:           Commercial real estate:
Owner-occupied$103,652
 $5,422
 $2,151
 $1,070
 $0
 $112,295
Owner-occupied$121,903  $3,024  $987  $1,880  $—  $1,856  $129,650  
Non-owner occupied190,726
 4,791
 10,105
 736
 0
 206,358
Non-owner occupied242,136  10,008  —  —  —  650  252,794  
Multi-family42,473
 4,222
 787
 199
 0
 47,681
Multi-family71,482  5,886  717  131  —  717  78,933  
Non-owner occupied residential59,982
 949
 1,150
 452
 0
 62,533
Non-owner occupied residential97,590  736  1,197  309  —  535  100,367  
Acquisition and development:           Acquisition and development:
1-4 family residential construction4,560
 103
 0
 0
 0
 4,663
1-4 family residential construction7,385  —  —  —  —  —  7,385  
Commercial and land development25,435
 10
 639
 1
 0
 26,085
Commercial and land development41,251  25  583  —  —  192  42,051  
Commercial and industrial87,588
 251
 32
 594
 0
 88,465
Commercial and industrial150,286  2,278  2,940  286  —  5,174  160,964  
Municipal53,741
 0
 0
 0
 0
 53,741
Municipal50,982  —  —  —  —  —  50,982  
Residential mortgage:           Residential mortgage:
First lien135,558
 0
 0
 4,293
 0
 139,851
First lien229,971  —  —  2,877  —  2,448  235,296  
Home equity – term14,155
 0
 0
 93
 0
 14,248
Home equity – term12,170  —  —  16  —  22  12,208  
Home equity – lines of credit119,681
 82
 61
 529
 0
 120,353
Home equity – lines of credit142,638  165  15  798  —  —  143,616  
Installment and other loans7,112
 0
 0
 6
 0
 7,118
Installment and other loans33,229  15   —  —  166  33,411  
$844,663
 $15,830
 $14,925
 $7,973
 $0
 $883,391
$1,201,023  $22,137  $6,440  $6,297  $—  $11,760  $1,247,657  
December 31, 2015           
Commercial real estate:           
Owner-occupied$96,715
 $1,124
 $3,630
 $2,109
 $0
 $103,578
Non-owner occupied125,043
 12,394
 108
 7,856
 0
 145,401
Multi-family31,957
 1,779
 1,140
 233
 0
 35,109
Non-owner occupied residential50,601
 1,305
 1,374
 895
 0
 54,175
Acquisition and development:           
1-4 family residential construction9,364
 0
 0
 0
 0
 9,364
Commercial and land development40,181
 219
 934
 5
 0
 41,339
Commercial and industrial70,967
 1,380
 544
 734
 0
 73,625
Municipal57,511
 0
 0
 0
 0
 57,511
Residential mortgage:           
First lien121,214
 0
 0
 4,808
 0
 126,022
Home equity – term17,234
 0
 0
 103
 0
 17,337
Home equity – lines of credit109,731
 230
 180
 590
 0
 110,731
Installment and other loans7,504
 0
 0
 17
 0
 7,521
$738,022
 $18,431
 $7,910
 $17,350
 $0
 $781,713
Potential problem
Non-Impaired Substandard loans are defined as 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, or impaired, loans in the future. Generally, management feels that “Substandard”substandard loans that are currently performing and not considered impaired 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 $15.4 million at December 31, 2019.
Additionally, the “Special Mention”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 Mentionmention loans represent an elevated risk, but their weakness does not yet justify a more severe, or classified, rating. These loans require follow-upinquiry by lenders on the cause of the potential weakness and, once resolved,analyzed, the loan classification may be downgraded to Substandard or, alternatively, could be upgraded to “Pass.”Pass.



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The following tables summarize the average recorded investment in impaired loans and interest income recognized, on a cash basis, and interest income earned but not recognized for years ended December 31.31, 2019, 2018, 2017, 2016 and 2015.
Average
Impaired
Balance
Interest
Income
Recognized
Interest
Earned
But Not
Recognized
December 31, 2019
Commercial real estate:
Owner-occupied$2,455  $ $387  
Non-owner occupied46  —  —  
Multi-family152  —  24  
Non-owner occupied residential217  —  21  
Acquisition and development:
Commercial and land development21  —  —  
Commercial and industrial683  —  130  
Residential mortgage:
First lien2,582  50  91  
Home equity – term13  —   
Home equity – lines of credit750   64  
Installment and other loans13  —   
$6,932  $54  $720  
December 31, 2018
Commercial real estate:
Owner-occupied$1,495  $ $156  
Non-owner occupied1,842  —  236  
Multi-family148  —  20  
Non-owner occupied residential346  —  36  
Acquisition and development:
1-4 family residential construction181  —  —  
Commercial and land development —   
Commercial and industrial322  —  29  
Residential mortgage:
First lien3,234  59  130  
Home equity – term19  —   
Home equity – lines of credit657   52  
Installment and other loans —   
$8,249  $63  $667  

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Average
Impaired
Balance
Interest
Income
Recognized
Interest
Earned
But Not
Recognized
(Dollars in thousands)
Average
Impaired
Balance
 
Interest
Income
Recognized
 
Interest
Earned
But Not
Recognized
December 31, 2017December 31, 2017
Commercial real estate:Commercial real estate:
Owner-occupiedOwner-occupied$1,000  $ $114  
Non-owner occupiedNon-owner occupied392  —  10  
Multi-familyMulti-family182  —  19  
Non-owner occupied residentialNon-owner occupied residential418  —  35  
Acquisition and development:Acquisition and development:
1-4 family residential construction1-4 family residential construction154  —   
Commercial and industrialCommercial and industrial413  —  25  
Residential mortgage:Residential mortgage:
First lienFirst lien4,012  58  136  
Home equity – termHome equity – term61  —   
Home equity – lines of creditHome equity – lines of credit488   26  
Installment and other loansInstallment and other loans10  —   
$7,130  $66  $376  
December 31, 2016     December 31, 2016
Commercial real estate:     Commercial real estate:
Owner-occupied$1,758
 $0
 $124
Owner-occupied$1,758  $—  $124  
Non-owner occupied6,831
 0
 326
Non-owner occupied6,831  —  326  
Multi-family216
 0
 17
Multi-family216  —  17  
Non-owner occupied residential645
 0
 35
Non-owner occupied residential645  —  35  
Acquisition and development:     Acquisition and development:
Commercial and land development3
 0
 1
Commercial and land development —   
Commercial and industrial575
 0
 25
Commercial and industrial575  —  25  
Residential mortgage:     Residential mortgage:
First lien4,525
 33
 175
First lien4,525  33  175  
Home equity – term98
 0
 6
Home equity – term98  —   
Home equity – lines of credit455
 0
 19
Home equity – lines of credit455  —  19  
Installment and other loans12
 0
 3
Installment and other loans12  —   
$15,118
 $33
 $731
$15,118  $33  $731  
December 31, 2015     December 31, 2015
Commercial real estate:     Commercial real estate:
Owner-occupied$2,613
 $0
 $177
Owner-occupied$2,613  $—  $177  
Non-owner occupied3,470
 0
 256
Non-owner occupied3,470  —  256  
Multi-family402
 0
 15
Multi-family402  —  15  
Non-owner occupied residential1,020
 0
 56
Non-owner occupied residential1,020  —  56  
Acquisition and development:     Acquisition and development:
Commercial and land development266
 137
 2
Commercial and land development266  137   
Commercial and industrial1,208
 0
 28
Commercial and industrial1,208  —  28  
Residential mortgage:     Residential mortgage:
First lien4,644
 37
 167
First lien4,644  37  167  
Home equity – term130
 0
 3
Home equity – term130  —   
Home equity – lines of credit571
 0
 29
Home equity – lines of credit571  —  29  
Installment and other loans22
 0
 3
Installment and other loans22  —   
$14,346
 $174
 $736
$14,346  $174  $736  
December 31, 2014     
Commercial real estate:     
Owner-occupied$3,740
 $20
 $179
Non-owner occupied6,711
 143
 156
Multi-family274
 2
 6
Non-owner occupied residential2,095
 13
 62
Acquisition and development:     
Commercial and land development1,250
 34
 59
Commercial and industrial1,700
 5
 19
Residential mortgage:     
First lien4,226
 53
 196
Home equity – term85
 0
 5
Home equity – lines of credit111
 3
 25
Installment and other loans9
 1
 1
$20,201
 $274
 $708


47

Table of Contents
(Dollars in thousands)
Average
Impaired
Balance
 
Interest
Income
Recognized
 
Interest
Earned
But Not
Recognized
December 31, 2013     
Commercial real estate:     
Owner-occupied$3,528
 $147
 $192
Non-owner occupied4,307
 145
 44
Multi-family135
 16
 6
Non-owner occupied residential4,799
 77
 180
Acquisition and development:     
1-4 family residential construction481
 0
 0
Commercial and land development3,009
 49
 127
Commercial and industrial1,780
 45
 46
Residential mortgage:     
First lien2,697
 140
 103
Home equity – term59
 8
 2
Home equity – lines of credit305
 6
 2
Installment and other loans1
 0
 0
 $21,101
 $633
 $702
December 31, 2012     
Commercial real estate:     
Owner-occupied$8,374
 $20
 $131
Non-owner occupied14,372
 69
 260
Multi-family3,940
 0
 10
Non-owner occupied residential20,284
 61
 288
Acquisition and development:     
1-4 family residential construction1,542
 26
 16
Commercial and land development12,652
 252
 168
Commercial and industrial2,691
 43
 55
Residential mortgage:     
First lien2,700
 61
 73
Home equity – term156
 2
 4
Home equity – lines of credit467
 15
 5
Installment and other loans8
 0
 0
 $67,186
 $549
 $1,010










The following table summarizes activity in the allowanceALL for loan losses for the years ended December 31.31, 2019, 2018, 2017, 2016 and 2015.
 CommercialConsumer  
Commercial
Real Estate
Acquisition
and
Development
Commercial
and
Industrial
MunicipalTotal
Residential
Mortgage
Installment
and Other
TotalUnallocatedTotal
December 31, 2019
Balance, beginning of year$6,876  $817  $1,656  $98  $9,447  $3,753  $244  $3,997  $570  $14,014  
Provision for loan losses515  139  841   1,497  (347) 180  (167) (430) 900  
Charge-offs(25) —  (299) —  (324) (386) (155) (541) —  (865) 
Recoveries268   158  —  429  127  50  177  —  606  
Balance, end of year$7,634  $959  $2,356  $100  $11,049  $3,147  $319  $3,466  $140  $14,655  
December 31, 2018
Balance, beginning of year$6,763  $417  $1,446  $84  $8,710  $3,400  $211  $3,611  $475  $12,796  
Provision for loan losses(442) 396  209  14  177  363  165  528  95  800  
Charge-offs(17) (7) —  —  (24) (148) (292) (440) —  (464) 
Recoveries572  11   —  584  138  160  298  —  882  
Balance, end of year$6,876  $817  $1,656  $98  $9,447  $3,753  $244  $3,997  $570  $14,014  
December 31, 2017
Balance, beginning of year$7,530  $580  $1,074  $54  $9,238  $2,979  $144  $3,123  $414  $12,775  
Provision for loan losses38  (167) 333  30  234  531  174  705  61  1,000  
Charge-offs(835) —  (85) —  (920) (180) (166) (346) —  (1,266) 
Recoveries30   124  —  158  70  59  129  —  287  
Balance, end of year$6,763  $417  $1,446  $84  $8,710  $3,400  $211  $3,611  $475  $12,796  
December 31, 2016
Balance, beginning of year$7,883  $850  $1,012  $58  $9,803  $2,870  $121  $2,991  $774  $13,568  
Provision for loan losses107  (270) 129  (4) (38) 532  116  648  (360) 250  
Charge-offs(872) —  (79) —  (951) (577) (194) (771) —  (1,722) 
Recoveries412  —  12  —  424  154  101  255  —  679  
Balance, end of year$7,530  $580  $1,074  $54  $9,238  $2,979  $144  $3,123  $414  $12,775  
December 31, 2015
Balance, beginning of year$9,462  $697  $806  $183  $11,148  $2,262  $119  $2,381  $1,218  $14,747  
Provision for loan losses(1,020) (440) 249  (125) (1,336) 1,122  55  1,177  (444) (603) 
Charge-offs(711) (22) (115) —  (848) (592) (62) (654) —  (1,502) 
Recoveries152  615  72  —  839  78   87  —  926  
Balance, end of year$7,883  $850  $1,012  $58  $9,803  $2,870  $121  $2,991  $774  $13,568  
 Commercial Consumer    
(Dollars in thousands)
Commercial
Real Estate
 
Acquisition
and
Development
 
Commercial
and
Industrial
 Municipal Total 
Residential
Mortgage
 
Installment
and Other
 Total Unallocated Total
December 31, 2016                   
Balance, beginning of year$7,883
 $850
 $1,012
 $58
 $9,803
 $2,870
 $121
 $2,991
 $774
 $13,568
Provision for loan losses107
 (270) 129
 (4) (38) 532
 116
 648
 (360) 250
Charge-offs(872) 0
 (79) 0
 (951) (577) (194) (771) 0
 (1,722)
Recoveries412
 0
 12
 0
 424
 154
 101
 255
 0
 679
Balance, end of year$7,530
 $580
 $1,074
 $54
 $9,238
 $2,979
 $144
 $3,123
 $414
 $12,775
December 31, 2015                   
Balance, beginning of year$9,462
 $697
 $806
 $183
 $11,148
 $2,262
 $119
 $2,381
 $1,218
 $14,747
Provision for loan losses(1,020) (440) 249
 (125) (1,336) 1,122
 55
 1,177
 (444) (603)
Charge-offs(711) (22) (115) 0
 (848) (592) (62) (654) 0
 (1,502)
Recoveries152
 615
 72
 0
 839
 78
 9
 87
 0
 926
Balance, end of year$7,883
 $850
 $1,012
 $58
 $9,803
 $2,870
 $121
 $2,991
 $774
 $13,568
December 31, 2014                   
Balance, beginning of year$13,215
 $670
 $864
 $244
 $14,993
 $3,780
 $124
 $3,904
 $2,068
 $20,965
Provision for loan losses(1,674) 92
 (554) (61) (2,197) (960) 107
 (853) (850) (3,900)
Charge-offs(2,637) (70) (270) 0
 (2,977) (587) (177) (764) 0
 (3,741)
Recoveries558
 5
 766
 0
 1,329
 29
 65
 94
 0
 1,423
Balance, end of year$9,462
 $697
 $806
 $183
 $11,148
 $2,262
 $119
 $2,381
 $1,218
 $14,747
December 31, 2013                   
Balance, beginning of year$13,719
 $3,502
 $1,635
 $223
 $19,079
 $2,275
 $85
 $2,360
 $1,727
 $23,166
Provision for loan losses4,109
 (6,087) (3,478) 21
 (5,435) 1,845
 99
 1,944
 341
 (3,150)
Charge-offs(4,767) (193) (132) 0
 (5,092) (491) (144) (635) 0
 (5,727)
Recoveries154
 3,448
 2,839
 0
 6,441
 151
 84
 235
 0
 6,676
Balance, end of year$13,215
 $670
 $864
 $244
 $14,993
 $3,780
 $124
 $3,904
 $2,068
 $20,965
December 31, 2012                   
Balance, beginning of year$29,559
 $9,708
 $1,085
 $789
 $41,141
 $933
 $75
 $1,008
 $1,566
 $43,715
Provision for loan losses34,681
 9,408
 1,879
 (566) 45,402
 2,602
 135
 2,737
 161
 48,300
Charge-offs(53,492) (17,721) (1,624) 0
 (72,837) (1,279) (143) (1,422) 0
 (74,259)
Recoveries2,971
 2,107
 295
 0
 5,373
 19
 18
 37
 0
 5,410
Balance, end of year$13,719
 $3,502
 $1,635
 $223
 $19,079
 $2,275
 $85
 $2,360
 $1,727
 $23,166


The following table summarizes asset quality ratios for years ended December 31.31, 2019, 2018, 2017, 2016 and 2015.
 2016 2015 2014 2013 2012
          
Ratio of net charge-offs (recoveries) to average loans outstanding0.13% 0.08 % 0.34 % (0.14)% 8.01%
Provision for loan losses to net charge-offs (recoveries)23.97% (104.69)% (168.25)% 331.93 % 70.15%
Ratio of reserve to gross loans outstanding at December 311.45% 1.74 % 2.09 % 3.12 % 3.29%
The Company experienced significant deterioration in asset quality in 2011 due to trends in the national and local economies, as well as declines in real estate values in the Company’s market area. In 2012, subsequent to high levels of nonperforming assets and restructured loans recorded in 2011, the Company continued to actively identify and monitor nonperforming assets, as evidenced by the provision expense shown and ratio of net charge-offs to average loans outstanding for that year. The Company continued to focus on working through its risk assets and, based on favorable trends in net charge-offs and improving asset quality ratios, was able to reduce the allowance for loan losses over the following years to $12,775,000 at December 31, 2016. The significant variations in net charge-offs for the years presented, with a high of $68,849,000 for 2012 to a low of $949,000 in net recoveries for the year ended December 31, 2013 resulted in the variances in the ratios presented.
20192018201720162015
Ratio of net charge-offs (recoveries) to average loans outstanding0.02 %(0.04)%0.10 %0.13 %0.08 %
Provision for loan losses to net charge-offs (recoveries)347.49 %(191.39)%102.15 %23.97 %(104.69)%
Ratio of ALL to total loans outstanding at December 310.89 %1.12 %1.27 %1.45 %1.74 %
The Company recorded a provision for loan losses expense of $250,000$900 thousand, $800 thousand, $1.0 million, and $250 thousand for 2019, 2018, 2017, and 2016, negative provisions, or reversals of amounts previously provided, of $603,000, $3,900,000respectively, and $3,150,000 for 2015, 2014 and 2013, and expense of $48,300,000 for 2012. For each of the years in which a negative provision of $603 thousand for loan losses was recorded, it2015. The negative provision in 2015 was due to recovery of loans with prior charge-offs, allowing for the recovery.charge-offs. In addition, in certain cases, loans were successfully worked out with smaller charge-offs than the reserve established on them. For 2013 through 2016,The Company has benefited from organic loan
48

Table of Contents
portfolio growth and favorable historical charge-off data combined with relatively stable economic and market conditions resultedover the periods presented above. This was a principal factor in the conclusionmanagement's determination that a negative or modest provision could be recorded despite net charge-offs recorded. Further,recorded in 2015 and 2016. In 2017, management determined that a provision expense that offset net charge-offs for the year would maintain an adequate ALL, principally due to a charge-off in connection with one commercial credit downgraded to nonaccrual status during the year. In 2018 and 2019, our continued organic loan portfolio growth was a key factor in the quantitative and qualitative considerations used by management in the determination of the provision expense required to maintain an adequate allowance for loan losses did not need to be replenished for impaired loans or forlosses. These variations in net charge-offs (recoveries) and provision expense (recovery) resulted in the loan growth experienced duringfluctuations in the periods.ratios presented in the tables above.
See further discussion in the “Provision for Loan Losses” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following table shows the allocation of the allowance for loan lossesALL by loan class, as well as the percent of each loan class in relation to the total loan balance at December 31.31, 2019, 2018, 2017, 2016 and 2015.
 
 20192018201720162015
 Amount
% of
Loan
Type to
Total
Loans
Amount
% of
Loan
Type to
Total
Loans
Amount
% of
Loan
Type to
Total
Loans
Amount
% of
Loan
Type to
Total
Loans
Amount
% of
Loan
Type to
Total
Loans
Commercial real estate:
Owner-occupied$1,539  10 %$1,491  10 %$1,488  12 %$1,591  13 %$1,998  13 %
Non-owner occupied3,965  22 %3,683  20 %4,059  24 %4,380  23 %4,033  19 %
Multi-family974  %792  %444  %604  %709  %
Non-owner occupied residential1,156  %910  %772  %955  %1,143  %
Acquisition and development:
1-4 family residential construction239  %104  %169  %102  %236  %
Commercial and land development720  %713  %248  %478  %614  %
Commercial and industrial2,356  13 %1,656  13 %1,446  12 %1,074  10 %1,012  10 %
Municipal100  %98  %84  %54  %58  %
Residential mortgage:
First lien1,635  20 %2,002  19 %1,855  16 %1,624  16 %1,667  16 %
Home equity - term59  %109  %119  %151  %184  %
Home equity - lines of credit1,453  10 %1,642  12 %1,426  13 %1,204  14 %1,019  14 %
Installment and other loans319  %244  %211  %144  %121  %
Unallocated140  570  475  414  774  
$14,655  100 %$14,014  100 %$12,796  100 %$12,775  100 %$13,568  100 %
49

 2016 2015 2014 2013 2012
 Amount 
% of
Loan
Type to
Total
Loans
 Amount 
% of
Loan
Type to
Total
Loans
 Amount 
% of
Loan
Type to
Total
Loans
 Amount 
% of
Loan
Type to
Total
Loans
 Amount 
% of
Loan
Type to
Total
Loans
Commercial real estate:                   
Owner-occupied$1,591
 13% $1,998
 13% $2,059
 14% $3,583
 17% $2,504
 21%
Non-owner occupied4,380
 23% 4,033
 19% 4,887
 20% 6,024
 20% 5,022
 17%
Multi-family604
 5% 709
 5% 1,231
 4% 1,699
 3% 2,944
 3%
Non-owner occupied residential955
 7% 1,143
 7% 1,285
 7% 1,909
 8% 3,249
 9%
Acquisition and development:                   
1-4 family residential construction102
 1% 236
 1% 222
 1% 196
 0% 198
 %
Commercial and land development478
 3% 614
 5% 475
 3% 474
 3% 3,304
 4%
Commercial and industrial1,074
 10% 1,012
 10% 806
 7% 864
 5% 1,635
 6%
Municipal54
 6% 58
 7% 183
 9% 244
 9% 223
 10%
Residential mortgage:                   
First lien1,624
 16% 1,667
 16% 1,295
 18% 1,682
 19% 957
 16%
Home equity - term151
 1% 184
 2% 206
 3% 465
 3% 252
 2%
Home equity - lines of credit1,204
 14% 1,019
 14% 761
 13% 1,633
 12% 1,066
 11%
Installment and other loans144
 1% 121
 1% 119
 1% 124
 1% 85
 1%
Unallocated414
   774
   1,218
   2,068
   1,727
  
 $12,775
 100% $13,568
 100% $14,747
 100% $20,965
 100% $23,166
 100%
Table of Contents

The following table summarizes the ending loan balance individually or collectively evaluated for impairment by loan class and the allowance for loan lossALL allocation for each at December 31.31, 2019 and 2018.
 CommercialConsumer  
Commercial
Real Estate
Acquisition
and
Development
Commercial
and
Industrial
MunicipalTotal
Residential
Mortgage
Installment
and Other
TotalUnallocatedTotal
December 31, 2019
Loans allocated by:
Individually evaluated for impairment$6,452  $—  $1,763  $—  $8,215  $3,336  $85  $3,421  $—  $11,636  
Collectively evaluated for impairment752,413  57,403  212,791  47,057  1,069,664  512,380  50,650  563,030  —  1,632,694  
$758,865  $57,403  $214,554  $47,057  $1,077,879  $515,716  $50,735  $566,451  $—  $1,644,330  
Allowance for loan losses allocated by:
Individually evaluated for impairment$—  $—  $—  $—  $—  $36  $—  $36  $—  $36  
Collectively evaluated for impairment7,634  959  2,356  100  11,049  3,111  319  3,430  140  14,619  
$7,634  $959  $2,356  $100  $11,049  $3,147  $319  $3,466  $140  $14,655  
December 31, 2018
Loans allocated by:
Individually evaluated for impairment$2,320  $—  $286  $—  $2,606  $3,691  $—  $3,691  $—  $6,297  
Collectively evaluated for impairment559,424  49,436  160,678  50,982  820,520  387,429  33,411  420,840  —  1,241,360  
$561,744  $49,436  $160,964  $50,982  $823,126  $391,120  $33,411  $424,531  $—  $1,247,657  
Allowance for loan losses allocated by:
Individually evaluated for impairment$—  $—  $—  $—  $—  $38  $—  $38  $—  $38  
Collectively evaluated for impairment6,876  817  1,656  98  9,447  3,715  244  3,959  570  13,976  
$6,876  $817  $1,656  $98  $9,447  $3,753  $244  $3,997  $570  $14,014  
 Commercial Consumer    
(Dollars in thousands)
Commercial
Real Estate
 
Acquisition
and
Development
 
Commercial
and
Industrial
 Municipal Total 
Residential
Mortgage
 
Installment
and Other
 Total Unallocated Total
December 31, 2016                   
Loans allocated by:                   
Individually evaluated for impairment$2,457
 $1
 $594
 $0
 $3,052
 $4,915
 $6
 $4,921
 $0
 $7,973
Collectively evaluated for impairment426,410
 30,747
 87,871
 53,741
 598,769
 269,537
 7,112
 276,649
 0
 875,418
 $428,867
 $30,748
 $88,465
 $53,741
 $601,821
 $274,452
 $7,118
 $281,570
 $0
 $883,391
Allowance for loan losses allocated by:                   
Individually evaluated for impairment$0
 $0
 $0
 $0
 $0
 $43
 $0
 $43
 $0
 $43
Collectively evaluated for impairment7,530
 580
 1,074
 54
 9,238
 2,936
 144
 3,080
 414
 12,732
 $7,530
 $580
 $1,074
 $54
 $9,238
 $2,979
 $144
 $3,123
 $414
 $12,775
December 31, 2015                   
Loans allocated by:                   
Individually evaluated for impairment$11,093
 $5
 $734
 $0
 $11,832
 $5,501
 $17
 $5,518
 $0
 $17,350
Collectively evaluated for impairment327,170
 50,698
 72,891
 57,511
 508,270
 248,589
 7,504
 256,093
 0
 764,363
 $338,263
 $50,703
 $73,625
 $57,511
 $520,102
 $254,090
 $7,521
 $261,611
 $0
 $781,713
Allowance for loan losses allocated by:                   
Individually evaluated for impairment$0
 $0
 $0
 $0
 $0
 $281
 $8
 $289
 $0
 $289
Collectively evaluated for impairment7,883
 850
 1,012
 58
 9,803
 2,589
 113
 2,702
 774
 13,279
 $7,883
 $850
 $1,012
 $58
 $9,803
 $2,870
 $121
 $2,991
 $774
 $13,568
The allowance for loan losses allocations presented above represents the reserve allocations on loan balances outstanding at December 31. In addition to the reserve allocations on impaired loans noted above, 2317 loans, with aggregate outstanding principal balances of $3,750,000,$3.4 million, have had cumulative partial charge-offs to the allowance for loan lossesALL totaling $1,924,000.$798 thousand. As updated appraisals were received on collateral-dependent loans, partial charge-offs were taken to the extent the loans’ principal balance exceeded their fair value.
Management believes the allocation of the allowance for loan lossesALL between the various loan classes adequately reflects the probable incurred credit losses in each portfolio and is based on the methodology outlined in Note 4, Loans and Allowance for Loan Losses, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data." Management re-evaluates and makes certain enhancements to its methodology used to establish a reserve 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 allowance for loan lossesALL methodology improve the accuracy of quantifying probable incurred credit losses inherent in the portfolio. Management charges actual loan losses to the reserve and bases the provision for loan losses on its overall analysis.
The largest component of the reserveALL for the years presented has been allocated to the commercial real estate segment, particularly the non-owner occupied loan classes. The higher allocations in these loans classes as compared with the other loan classes is consistent with the inherent risk associated with these loans, as well as generally higher levels of impaired and criticized loans for the periods presented. Since December 31, 2011, thereThere has generally been a dollar decrease in the reservesALL allocated to the commercial real estate portfolio, as the level of classified assets has declined, and historical loss rates have improved as a result of improving economic and market conditions.
The unallocated portion of the allowance for loan lossesALL reflects estimated inherent losses within the portfolio that have not been detected. This reserve results due todetected, as well as the risk of error in the specific and general reserve allocation, other potential exposure in 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 allowance decreased from $774,000$570 thousand at December 31, 20152018 to $414,000$140 thousand at December 31, 20162019 and represents 3.2%1.0% of the allowance for loan losses at December 31,

2016, compared with 5.7%ALL at December 31, 2015.2019, compared with 4.1% at December 31, 2018. Changes in qualitative factors of certain loan categories were made during 2019 to reflect limited credit losses since loan underwriting improvements were made subsequent to 2012. The Company monitors the unallocated portion of the allowance for loan losses,ALL, and by
50

policy, has determined it cannotshould not exceed 15%6% of the total reserve. Future negative provisions for loan 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. As asset quality has continued to improve the last several years, management has determined that it has reduced the risk of loss associated with the portfolio, as evidenced by lower classified loans and sustainable improvements in delinquencies. Management concluded that a lower unallocated reserve was acceptable, both in dollars and as a percent of the total allowance for loan losses.
Management believes the Company’s allowance for loan lossesALL is adequate based on information currently available. Future adjustments to the reserveALL 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
Total deposits grew $316.8 million, or 20.3%, from $1.6 billion at December 31, 2018 to $1.9 billion at December 31, 2019. In 2019, we acquired $388.2 million in deposits from Hamilton. At December 31, 2019, those acquired accounts totaled approximately $332.0 million. During 2019, we reduced brokered deposits by $110.6 million and reduced subscription service CDs by $21.9 million. Organic growth totaled approximately $147.7 million in 2019.

The following table presents average deposits for years ended December 31, 2019, 2018, and 2017.
201920182017
Demand deposits$234,354  $183,387  $161,917  
Interest-bearing demand deposits920,025  767,863  648,174  
Savings deposits138,761  102,189  94,815  
Time deposits549,937  324,118  292,616  
Total deposits$1,843,077  $1,377,557  $1,197,522  
Average total deposits were $1,092,843,000 for 2016, an increase of 11.2%increased $465.5 million, or 33.8%, or $109,847,000, from 2015.2018 to 2019. Interest-bearing demand deposit account balances averaged $565,524,000 forwere the year ended December 31, 2016, an increaseprincipal driver, increasing $152.2 million, or 19.8%. Average time deposits less than $250 thousand grew from $287.9 million in 2018 to $483.9 million in 2019 and average time deposits in excess of 13.0%$250 thousand increased from the average balance of $500,474,000$36.3 million in 2015, despite a decrease2018 to $66.0 million in average brokered money market accounts of $24,077,000. The2019.
In addition to deposits from acquisitions, the Company has been able to gathergarner organic growth in both noninterest-bearinginterest-bearing and interest-bearingnoninterest-bearing deposit relationships from enhanced cash management offerings as it increases itwe continued to develop commercial relationships and growsrelationships. We also continued to grow core funding deposits through marketing campaigns and improvement in theour product delivery of our products with investments in technology. In addition, the Company hastechnology and increased sales efforts. We have also been able to increase its interest-free funds as it expands itswe expanded our commercial and industrial loan portfolio.
Average time deposits totaled $289,574,000 in 2016, an increase of 9.9%, or $26,160,000, compared with the average balance of $263,414,000 in 2015.
In 2016,2019, the Company used deposit growth principally to fund loan growth in addition to proceeds from investment sales and paydowns. In comparison, in 2015 the Company chose to fund loan growth through sales and paydowns of securities available for sale andgrowth. An additional short-term borrowings, rather than maintain balances in time deposits. Average retail time deposits less than $100,000 remained relatively steady at approximately $83,000,000 from 2015 to 2016 and average institutional time deposits in excess of $100,000 decreased from $84,894,000 for 2015 to $80,462,000 for 2016. The Company chose to continue to not pay increased interest rates on these deposit types, but rather use alternate funding sources to meet loan demand. One funding source the Company used wasuses is brokered deposits, which averaged $72,282,000 for 2016 compared with $68,069,000 for the fourth quarter of 2015, when their use began. At December 31, 2016, brokered time deposits totaled $85,994,000 compared with $80,905,000$16.1 million at December 31, 2015.2019 compared with $126.6 million at December 31, 2018, and averaged $100.8 million for 2019 compared with $112.3 million for 2018. Given interest rate conditions and asset/liability strategies, we borrowed additional funds from FHLB of Pittsburgh to replace called brokered deposits in the Company elected to extend its maturity on deposits, principally through increasing its brokered time deposits, which have options that enable the Company to pay them off early. Although brokered time deposits increased modestly, the Company reduced its position in brokered money market accounts.second half of 2019.
Management continually evaluates its utilization of brokered deposits, and considerstaking into consideration the interest rate curve and regulatory views on non-core funding sources, and balances this funding source with its funding needs based on growth initiatives. The Company anticipates that as loan growth increases, it will be able to generate core deposit funding by offering competitive rates.
The average amounts of deposits are summarized below for the years ended December 31:
(Dollars in thousands)2016 2015 2014
      
Demand deposits$147,473
 $134,040
 $123,224
Interest-bearing demand deposits565,524
 500,474
 491,046
Savings deposits90,272
 85,068
 83,941
Time deposits289,574
 263,414
 292,149
Total deposits$1,092,843
 $982,996
 $990,360

The following is a breakdown oftable presents maturities of time deposits of $100,000$250,000 or more at December 31, 2016.2019.
Total
Three months or less$18,738 
Over three months through six months12,734 
Over six months through one year19,204 
Over one year18,402 
Total$69,078 
51

(Dollars in thousands)Total
  
Three months or less$24,946
Over three months through six months22,245
Over six months through one year33,949
Over one year23,323
Total$104,463
Borrowings
In addition to deposit products, the Company uses short-term borrowing sources to meet liquidity needs and for temporary funding of growth in the loan portfolio.funding. Sources of short-term borrowings include the Federal Home Loan BankFHLB of Pittsburgh, federal funds purchased, and to a lesser extent, the FRB discount window. Short-term borrowings also include securities sold under agreements to repurchase with deposit customers,clients, in which a customerclient sweeps a portion of itsa deposit balance into a Repurchase Agreement,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 Federal Home Loan BankFHLB fixed and amortizing advances to fund its balance sheet with original maturities greater than one year. The Company continues to evaluateevaluates its funding needs, interest rate movements, the cost of options, and the availability of attractive structures in its evaluation as towhen considering the timing and extent of when it enters into long-term borrowings.
In December 2018, we issued unsecured subordinated notes payable totaling $32.5 million, the proceeds of which were designated for general corporate use, including funding of cash consideration for mergers and acquisitions.
For additional information about borrowings, refer to Note 11,13, Short-Term Borrowings, Note 14, Long-Term Debt, and Note 12, Long-Term Debt15, Subordinated Notes, to the Consolidated Financial Statements appearing in Part II, Item 8, "Financial Statements and Supplementary Data."
Shareholders' Equity
TotalIn 2019, total shareholders’ equity increased $1,798,000,$49.8 million, or 1.4%, during 2016.28.7%. The primary components ofprincipal factor in the change were net income of $6,628,000 and $1,063,000 fromincrease was the issuance of 1,765,704 shares of common stock, related to share-based compensation. Partially offsetting these increases were dividendsvalued at $36.6 million, in the Hamilton acquisition. Net income increased equity by $16.9 million. AOCI benefited by $2.5 million from a change in unrealized gains and losses during the year. Dividends paid to shareholders of $2,898,000, a decrease in the fair value of available for sale securities, net of taxes, of $2,364,000, and a $631,000 reduction due to the repurchase of common stock.decreased equity by $6.1 million.
On January 19, 2016, the Company filed a shelf registration statement on Form S-3 with the SEC, covering up to an aggregate of $100,000,000 of securities, through the sale of common stock, preferred stock, warrants, debt securities, and units. To date, the Company has not issued any securities under this shelf registration statement.
OnIn September, 14, 2015, the Board of Directors of the Company authorized a stock repurchase program which is more fully described in Item 5 under Issuer Purchases of Equity Securities. The maximum number of shares that may yet be purchased under the plan is 333,275 shares at December 31, 2016.2019.

The following table includes additional information for shareholders’ equity for the years ended December 31.31, 2019, 2018, and 2017.
201920182017
(Dollars in thousands)2016 2015 2014
     
Average shareholders’ equity$137,973
 $131,453
 $101,250
Average shareholders’ equity$206,021  $149,662  $141,301  
Net income6,628
 7,874
 29,142
Net income16,924  12,805  8,090  
Cash dividends paid2,898
 1,822
 0
Cash dividends paid6,150  4,375  3,488  
Equity to asset ratio9.53% 10.29% 10.69%
Average equity to average assets ratioAverage equity to average assets ratio9.26 %8.75 %9.49 %
Dividend payout ratio42.68% 22.68% 0.00%Dividend payout ratio36.81 %33.33 %42.00 %
Return on average equity4.80% 5.99% 28.78%Return on average equity8.21 %8.56 %5.73 %
Capital Adequacy and Regulatory Matters
TheCapital management of capital in a regulated financial services industry must properly balance return on equity to its stockholdersshareholders 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 historically been developed to provide attractive rates of returns to its shareholders, while maintaining a “well capitalized” position of regulatory strength.
AsEffective with the third quarter of 2018, the FRB raised the consolidated asset limit on small bank holding companies from $1 billion to $3 billion, and a result of recent regulatory requirements pursuantcompany with assets under the revised limits is not subject to the Dodd-Frank Act and Basel III Capital Rules as described in Item 1 - BusinessFRB consolidated capital rules. A company with consolidated assets under the topic Basel III Capital Rules, therevised limit may continue to file reports that include capital amounts and ratios. The Company and the Bank are subjecthas elected to increasingly stringent regulatory capital requirements. Significant provisions of the Basel III Capital Rules that impact the Company's and the Bank's capital calculations include: 
Restricting the amount of deferred tax assets that can be included in CET1 capital with assets relatingcontinue to net operating loss and credit carry forwards being excluded, and a 10% - 15% limitation on deferred tax assets arising from temporary differences that cannot be realized through net operating loss carry backs. At December 31, 2016 and 2015, $7,976,000 and $7,838,000 of the Company's deferred tax asset related to operating loss and tax credit carryforwards was deducted from our calculation of CET1.
Applying a 150% risk weight for certain high volatility commercial real estate acquisition, development and construction loans;
Assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are 90 days past due or in nonaccrual status; and
Providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable.
The allowance for credit losses, including the allowance for loan losses and reserve for off-balance sheet credit commitments, is included as Tier 2 capital to the extent it does not exceed 1.25% of risk weighted assets. The amount that exceeds 1.25% of risk weighted assets, is disallowed as Tier 2 capital, but also reduces the Company’s risk weighted assets. At December 31, 2016 and 2015, $1,559,000 and $3,303,000 of the allowance for credit losses was excluded from our calculation of Tier 2 capital. The lower disallowed amount in 2016 was the result of the lower balance in the allowance for loan losses, and higher balance of risk-weighted assets.file those reports.
Management believes at December 31, 2016 and December 31, 2015, the Company and the Bank met all capital adequacy requirements to which they are subject.subject at December 31, 2019 and December 31, 2018. At December 31, 2016,2019, the Bank was considered well capitalized under applicable banking regulations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific guidelines that involve quantitative measures
52

Table of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Although applicable to the Bank, prompt corrective action provisions are not applicable to bank holding companies, including financial holding companies.Contents
The Company and Bank's capital ratios at December 31, 2016 have declined since December 31, 2015, despite an increase in consolidated capital, due primarily to the consolidated risk-weighted assets increasing from $850,974,000 at December 31, 2015 to $955,253,000 at December 31, 2016 for the Company and from $850,343,000 at December 31, 2015 to $954,533,000 at December 31, 2016 for the Bank. The increase in risk-weighted assets is principally due to the growth experienced in the loan portfolio.

The following table presentsTables presenting the Company’s and the Bank’s capital amounts and ratios at December 31, 20162019 and 2015.2018 are included in Note 16 Shareholders' Equity and Regulatory Capital, to the Consolidated Financial Statements appearing in Part II, Item 8, "Financial Statements and Supplementary Data."
 Actual 
For Capital Adequacy Purposes
(includes capital conservation buffer)
 
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
(Dollars in thousands)Amount Ratio Amount Ratio Amount Ratio
December 31, 2016           
Total capital to risk weighted assets           
Consolidated$139,033
 14.6% $82,391
 8.625% n/a
 n/a
Bank126,408
 13.2% 82,328
 8.625% $95,453
 10.0%
Tier 1 capital to risk weighted assets           
Consolidated127,033
 13.3% 63,286
 6.625% n/a
 n/a
Bank114,417
 12.0% 63,238
 6.625% 76,363
 8.0%
CET1 to risk weighted assets           
Consolidated127,033
 13.3% 48,957
 5.125% n/a
 n/a
Bank114,417
 12.0% 48,920
 5.125% 62,045
 6.5%
Tier 1 capital to average assets           
Consolidated127,033
 9.3% 54,453
 4.0% n/a
 n/a
Bank114,417
 8.4% 54,500
 4.0% 68,126
 5.0%
December 31, 2015           
Total capital to risk weighted assets           
Consolidated$134,562
 15.8% $68,078
 8.0% n/a
 n/a
Bank118,671
 14.0% 68,027
 8.0% $85,034
 10.0%
Tier 1 capital to risk weighted assets           
Consolidated123,825
 14.6% 51,058
 6.0% n/a
 n/a
Bank107,942
 12.7% 51,021
 6.0% 68,027
 8.0%
CET1 to risk weighted assets           
Consolidated123,825
 14.6% 38,294
 4.5% n/a
 n/a
Bank107,942
 12.7% 38,265
 4.5% 55,272
 6.5%
Tier 1 capital to average assets           
Consolidated123,825
 9.8% 50,684
 4.0% n/a
 n/a
Bank107,942
 8.5% 50,695
 4.0% 63,368
 5.0%
Tier 1 and total capital increases reflected the Hamilton acquisition and results of operations for 2019. Risk-weighted assets increased from $1.3 billion at December 31, 2018 to $1.7 billion at December 31, 2019 for the Company and from $1.3 billion at December 31, 2018 to $1.7 billion at December 31, 2019 for the Bank, reflecting the Hamilton acquisition and growth in the loan and investment portfolios.
The Company routinely evaluates its capital levels in light of its risk profile to assess its capital needs. In addition to the minimum capital ratio requirement and minimum capital ratio to be well capitalized presented above,in the Company and the Banktables in Note 16, we must maintain a capital conservation buffer as noted in Item 1 - Business under the topic Basel III Capital Rules. At December 31, 2016,2019, the Company's and the Bank's capital conservation buffer, based on the most restrictive capital ratio, was 6.55%5.3% and 5.24%5.4%, which is above the phase in requirementsrequirement of 0.625% for2.50% at December 31, 2016.2019.
Liquidity and Rate Sensitivity
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 customersclients who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Our 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 Federal Home Loan BankFHLB of Pittsburgh. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
We regularly adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities and the objectives of our asset/liability management policy.

At December 31, 2016, we had $297,442,000 in2019, outstanding loan commitments outstanding,totaled $477.2 million, which included $51,650,000$38.8 million in undisbursed loans, $126,811,000$205.5 million in unused home equity lines of credit, $111,884,000$222.3 million in commercial lines of credit, and $7,097,000$10.6 million in standby letters of credit. Time deposits due within one year ofafter December 31, 20162019 totaled $135,649,000,$375.8 million, or 46%72% of time deposits. The large percentage of time deposits that mature within one year reflects customers’ hesitancyclients’ preference not to invest their funds for long periods in the current interest rate environment. If these maturing deposits do not remain with us, we will be required to seek other sources of funds, including other time deposits and lines of credit. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on time deposits outstanding at December 31, 2016.2019. We believe, however, based on past experience that a significant portion of our time deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.we offer.
Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At December 31, 2016,2019, cash and cash equivalents totaled $30,273,000, which increased from $28,340,000$56.5 million, compared with $88.8 million at December 31, 2015.2018. Securities classified as available for sale, net of pledging requirements, which provide additional sources of liquidity, and totaled $82,872,000$331.7 million at December 31, 2016. In addition,2019. Also at December 31, 2016,2019, we had the ability to borrow up to a total of approximately $428,899,000$836.7 million from the Federal Home Loan BankFHLB of Pittsburgh, (the "FHLB"), of which we had $76,163,000$296.0 million in advances and letters of credit were outstanding. The Company’s ability to borrow from the FHLB is dependent on having sufficient qualifying collateral, which generally consistingconsists of mortgage loans. In addition, the Company has up to $35,000,000we had $35.0 million in available unsecured lines of credit with other banks.banks at December 31, 2019.
The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders.shareholders and interest on its borrowings. The Company also has repurchased shares of its common stock. The Company’s primary source of income is dividends received from the Bank. Restrictions on the Bank’s ability to dividend funds to the Company are included in Note 14, Restrictions on Dividends, Loans16, Shareholders' Equity and Advances,Regulatory Capital, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data."
Interest Rate Sensitivity. Interest rate sensitivity management requires the maintenance of an appropriate balance between interest sensitive assets and liabilities. Management, through its asset/liability management process, attempts to manage the level of repricing and maturity mismatch so that fluctuations in net interest income are maintained within policy limits in current and expected market conditions. For further discussion, see Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk."
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Table of Contents
Contractual Obligations
The Company enters into contractual obligations in the normal course of business to fund loan growth, for asset/liability management purposes, to meet required capital needs and for other corporate purposes. The following table presents significant fixed and determinable contractual obligations of principal by payment date at December 31, 2016.2019. Further discussion of the nature of each obligation is included in the referenced Note to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data" referenced in the following table.
 
 Payments Due 
  Payments Due  
Note
Reference
Less than 1
year
2-3 years4-5 years
More than
5 years
Total
(Dollars in thousands)
Note
Reference
 
Less than 1
year
 2-3 years 4-5 years 
More than
5 years
 Total
          
Time deposits10 $135,649
 $97,397
 $61,799
 $1,922
 $296,767
Time deposits11  $375,795  $116,580  $24,375  $2,818  $519,568  
Short-term borrowings11 87,864
 0
 0
 0
 87,864
Short-term borrowings13  154,869  —  —  —  154,869  
Long-term debt12 20,348
 747
 1,172
 1,896
 24,163
Long-term debt14  40,751  20,862  946  508  63,067  
Subordinated notesSubordinated notes15  —  —  —  32,500  32,500  
Operating lease obligations6 587
 887
 613
 539
 2,626
Operating lease obligations 1,279  1,874  1,486  10,549  15,188  
Total $244,448
 $99,031
 $63,584
 $4,357
 $411,420
Total$572,694  $139,316  $26,807  $46,375  $785,192  
The contractual obligations table above does not include the off-balance sheet commitments to extend credit that are detailed in the following section. These commitments generally have fixed expiration dates and many will expire without being drawn upon, therefore the total commitment does not necessarily represent future cash requirements and is excluded from the contractual obligations tabletable.
Off-Balance Sheet Arrangements
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.clients. These financial instruments include commitments to extend credit and to a lesser extent,standby letters of credit.

The following table details significant commitments at December 31, 2016.2019.
(Dollars in thousands)
Contract or Notional
Amount
Commitments to fund: 
Revolving, open-ended home equity loans$126,811
1-4 family residential construction loans7,820
Commercial real estate, construction and land development loans43,830
Commercial, industrial and other loans111,884
Standby letters of credit7,097
Contract or Notional
Amount
Commitments to fund:
Home equity lines of credit$205,502 
1-4 family residential construction loans19,812 
Commercial real estate, construction and land development loans19,018 
Commercial, industrial and other loans222,288 
Standby letters of credit10,588 
A discussion of the nature, business purpose, and guarantees that result from the Company’s off-balance sheet arrangements is included in Note 16,18, Financial Instruments with Off-Balance Sheet Risk, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data."
Recently Adopted and Recently Issued Accounting Standards
Information on recentlyRecently adopted and recently issued accounting standards isare included in Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data."
Caution About Forward-Looking StatementsSupplemental Reporting of Non-GAAP Measures
This report contains statements that are considered “forward-looking statements” as defined in the Private Securities Litigation Reform ActAs a result of 1995. In addition,prior acquisitions, the Company may make other writtenhad intangible assets consisting of goodwill and oral communications, from time to time, that contain such statements. Forward-looking statements, including statements that include projections, predictions, expectations or beliefs as to industry trends, future expectationscore deposit and other matters that do not relate strictlyintangible assets totaling $27.1 million and $16.5 million at December 31, 2019 and 2018, respectively.
Management believes providing certain “non-GAAP” information will assist investors in their understanding of the effect of acquisition activity on reported results, particularly to historical facts, are based on certain assumptions by management, and are often identified by words or phrases such as "may," "anticipate," "believe," "expect," "estimate," "intend," "seek," "plan," "objective," "trend," "goal." and other similar terms. Forward-looking statements are subject to various assumptions, risks, and uncertainties, which change over time, and speak only at the date they are made.
In addition to factors mentioned elsewhere in this Annual Report on Form 10-K or previously disclosed in our SEC reports (accessible on the SEC’s website at www.sec.gov or on our website at www.orrstown.com), the following factors, among others, could cause actual results to differ materially from forward-looking statements and future results could differ materially from historical performance:
If our allowance for loan losses is not sufficient to cover actual losses, our earnings would decrease.
Commercial real estate lending may expose us to a greater risk of loss and impact our earnings and profitability.
Commercial and industrial loans comprise 10% of our loan portfolio. The credit riskovercome comparability issues related to these typesthe influence of loans is greater than the risk related to residential loans.intangibles (principally goodwill) created in acquisitions.
Changes inTangible book value per share and net interest rates could adversely impact the Company’s financial condition and results of operations.
Difficult economic and market conditions have adversely affected the financial services industry and may continue to materially and adversely affect the Company.
Because our business is concentrated in South Central Pennsylvania and Washington County, Maryland, our financial performance could be materially adversely affected by economic conditions and real estate values in these market areas.
Competition from other banks and financial institutions in originating loans, attracting deposits and providing other financial services may adversely affect our profitability and liquidity.
The Company’s business strategy includes the continuation of moderate growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.
The Company may be adversely affected by technological advances.
The Company may not be able to attract and retain skilled people.

An interruption or breach in security with respect to our information systems, or our outsourced service providers, could adversely impact the Company’s reputation and have an adverse impact on our financial condition or results of operations.
We could be adversely affected by failure in our internal controls.
Negative public opinion could damage our reputation and adversely affect our earnings.
Governmental regulation and regulatory actions against us may impair our operations or restrict our growth.
The Dodd-Frank Act may affect the Company’s financial condition, results of operations, liquidity and stock price.
Increases in FDIC insurance premiums may have a material adverse effect on our results of operations.
Legislative, regulatory and legal developments involving income and other taxes could materially adversely affect the Company’s results of operations and cash flows.
The Company is required to use judgment in applying accounting policies and different estimates and assumptions in the application of these policies could result in a decrease in capital and/or other material changes to the reports of financial condition and results of operations.
Changes in accounting standards could impact the Company's financial condition and results of operations.
The short-term and long-term impact of the changing regulatory capital requirements and new capital rules is uncertain.
Pending litigation and legal proceedings andmargin excluding the impact of any finding of liability or damages could adversely impactpurchase accounting, as used by the Company in this supplemental reporting, are not GAAP measures. While we believe this information is a useful supplement to
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the GAAP based measures presented in Item 6, Selected Financial Data and itsSection 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, 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 andas 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 of operations.will be unaffected by similar adjustments to be determined in accordance with GAAP.
The Parent Company is a holding company dependent for liquidity on payments fromfollowing table presents the computation of each non-GAAP based measure shown together with its bank subsidiary, which is subject to restrictions.most directly comparable GAAP based measure.
The soundness of other financial institutions could adversely affect the Company.
201920182017
Tangible book value per common share
Shareholders' equity$223,249  $173,433  $144,765  
Less: Goodwill19,925  12,592  719  
Other intangible assets7,180  3,910  356  
Related tax effect(1,508) (804) (21) 
Tangible common equity (non-GAAP)$197,652  $157,735  $143,711  
Common shares outstanding11,200  9,430  8,347  
Book value per share (most directly comparable GAAP based measure)$19.93  $18.39  $17.34  
Intangible assets per share2.28  1.66  0.12  
Tangible book value per share )non-GAAP)$17.65  $16.73  $17.22  
If the Company wants to, or is compelled to, raise additional capital in the future, that capital may not be available when it is needed and on terms favorable to current shareholders.
The market price of our common stock has been subject to volatility.
201920182017
Taxable-Equivalent Net Interest Margin (excluding the effect of purchase accounting)
Taxable-equivalent net interest income/margin, as reported$70,338  3.43 %$53,573  3.36 %$46,256  3.35 %
Effect of purchase accounting:
LoansIncome(3,758) (0.30)%(335) (0.04)%—  — %
Time depositsExpenses83  0.02 %(10) — %—  — %
Purchase accounting effect on taxable-equivalent income/ margin(3,840) (0.21)%(325) (0.01)%—  — %
Taxable-equivalent net interest income/margin (excluding the effect of purchase accounting) (non-GAAP)$66,497  3.22 %$53,248  3.33 %$46,256  3.35 %
The Parent Company's primary source of income is dividends received from its bank subsidiary.
Other risks and uncertainties.

ITEM 7A – 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. For domestic banks, includingIn the Company, the majoritybanking industry, a major risk exposure is changing interest rates. The primary objective of marketmonitoring our interest rate sensitivity, or risk, is related 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. Federal Reserve Board monetary control efforts, the effects of deregulation, economic uncertainty and legislative changes have been significant factors affecting the task of managing interest rate risk. Interest rate sensitivity management requires the maintenance of an appropriate balance between reward,positions in the form of net interest margin, and risk as measured by the amount of earnings and value at risk.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 security andloan contractual interest rate changes.
Management attempts
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We attempt to manage the level of repricing and maturity mismatch through itsour asset/liability management process so that fluctuations in net interest income isare 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 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 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. At present, we do not use hedging instruments for risk management, but we do evaluate them and may use them in the future.

The asset/liability committee operates under management policies, approved by the Board of Directors, which define guidelines and limits on the level of risk.
The Company usesWe 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 the Company’sour interest rate risk exposure. These modeling techniques involveanalyses require numerous assumptions including, but not limited to, changes in balance sheet mix, prepayment rates on loans and estimates that inherently cannot be measured with complete precision. Key assumptions in the analyses include maturitysecurities, cash flows and repricing characteristics of assetsall financial instruments, changes in volumes and liabilities, prepayments on amortizing assets, non-maturity deposit sensitivity, and loanpricing, future shapes of the yield curve, relationship of market interest rates to each other (basis risk), credit spread and deposit pricing. These assumptionssensitivity. Assumptions are inherently uncertainbased on management’s best estimates but may not accurately reflect actual results under certain changes in interest rate 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 the Company’sour interest rate risk position over time.

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.
Earnings at Risk
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’sour short-term interest rate risk. The analysis assumes recent trends in new loan and deposit volumes will continue while the amount of investment securities remains constant. Additional assumptions are applied to modify volumes and pricing under the various rate scenarios. These include prepayment assumptions on mortgage assets, sensitivity of non-maturity deposit rates, and other factors deemed significant.
The simulation analysis results are presented in the Earnings at Risk table below. At December 31, 2016,2019, these results indicate the Company would expect net interest income to decreasebe better positioned, over the next twelve12 months, by 3.3%, assumingin a downward shock in marketmoderately declining rate environment than it would be if interest rates of 1.00%, and to decrease by 2.5% assuming an upward shock of 2.00%. A decrease in interest rates of 1.00% would create an environment in which deposit rates could not practically decline further.
The simulation analysis results atincreased. At December 31, 2015 exhibited slightly less sensitivity to rising interest rates and similar sensitivity2018, the results indicated we would be better positioned in a decliningmoderately increasing rate environment.environment than if rates decreased moderately or increased more substantially.
Value at Risk
Net present value analysis provides information on the risk inherent in the balance sheet that might not be taken into account in the simulation analysis due to the short time horizon used in that analysis. The net present value of the balance sheet is defined asincorporates the discounted present value of expected asset cash flows minus the discounted present value of the 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.
The net present value analysis results are presented in the Value at Risk table below. At December 31, 2016,2019, similar to at December 31, 2018, these results indicate that the net present valueCompany would decrease 1.0% assumingbe better positioned in a downward shock in marketrising interest rate environment than it would be if interest rates of 1.00% and decrease 2.9% assuming an upward shock of 2.00%.decreased.
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Earnings at RiskEarnings at Risk Value at RiskEarnings at RiskValue at Risk
 % Change in Net Interest Income   % Change in Market Value% Change in Net Interest Income% Change in Market Value
Change in Market Interest RatesChange in Market Interest Rates December 31, 2016 December 31, 2015 Change in Market Interest Rates December 31, 2016 December 31, 2015Change in Market Interest RatesDecember 31, 2019December 31, 2018Change in Market Interest RatesDecember 31, 2019December 31, 2018
          
(100) (3.3%) (1.4%) (100) (1.0%) 1.8%
(100)(100) (0.5)%(2.1)%(100) (21.7)%(14.1)%
100
 (1.5%) (1.2%) 100
 (1.5%) 0.5%100  (1.3)%(0.6)%100  10.9 %6.1 %
200
 (2.5%) (1.8%) 200
 (2.9%) 0.0%200  (3.8)%(2.2)%200  15.1 %7.1 %
The change in market interest rates included in the tables above are within the tolerances set by the Company's policies. Further discussion related to the quantitative and qualitative disclosures about market risk is included under the heading of Liquidity and Rate Sensitivity in Item 7, of Management's Discussion and Analysis of Financial Condition and Results of Operations.



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ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SUMMARY OF QUARTERLY FINANCIAL DATA
The following table presents unaudited quarterly results of operations for the years ended December 31, are as follows:31.
 
 2019
Quarter Ended
2018
Quarter Ended
DecemberSeptemberJuneMarchDecemberSeptemberJuneMarch
Interest income$24,028  $24,836  $24,472  $19,658  $19,152  $16,276  $15,843  $14,396  
Interest expense6,087  6,757  5,957  4,898  4,402  3,536  2,982  2,591  
Net interest income17,941  18,079  18,515  14,760  14,750  12,740  12,861  11,805  
Provision for loan losses—  300  200  400  200  200  200  200  
Net interest income after provision for loan losses17,941  17,779  18,315  14,360  14,550  12,540  12,661  11,605  
Investment securities gains18  2,328  2,064  339  115  29  46  816  
Other noninterest income7,012  6,274  5,710  4,796  4,900  5,413  4,940  4,765  
Merger related and branch consolidation expenses988  471  6,860  645  2,724  319  154  —  
Other noninterest expenses18,721  17,669  16,432  15,516  15,559  13,003  13,107  13,069  
Income before income tax expense5,262  8,241  2,797  3,334  1,282  4,660  4,386  4,117  
Income tax expense1,028  1,340  110  232  130  644  374  492  
Net income$4,234  $6,901  $2,687  $3,102  $1,152  $4,016  $4,012  $3,625  
Per share information:
Basic earnings per share (a)
$0.39  $0.63  $0.26  $0.34  $0.13  $0.50  $0.50  $0.45  
Diluted earnings per share (a)
$0.38  $0.62  $0.26  $0.33  $0.12  $0.49  $0.48  $0.44  
Dividends paid per share$0.15  $0.15  $0.15  $0.15  $0.13  $0.13  $0.13  $0.12  
  (a) Sum of the quarters may not equal the total year due to rounding.

58

 2016
Quarter Ended (a)
 2015
Quarter Ended (a)
(Dollars in thousands, except per
share data)
December September June March December September June March
                
Interest and dividend income$11,075
 $10,654
 $10,272
 $9,961
 $9,954
 $9,885
 $9,568
 $9,228
Interest expense1,365
 1,420
 1,321
 1,311
 1,246
 1,172
 970
 913
Net interest income9,710
 9,234
 8,951
 8,650
 8,708
 8,713
 8,598
 8,315
Provision for loan losses0
 250
 0
 0
 0
 (603) 0
 0
Net interest income after provision for loan losses9,710
 8,984
 8,951
 8,650
 8,708
 9,316
 8,598
 8,315
Investment securities gains0
 0
 0
 1,420
 13
 29
 353
 1,529
Noninterest income4,969
 4,568
 4,537
 4,245
 4,083
 4,802
 4,530
 3,839
Noninterest expenses12,476
 11,985
 12,558
 11,121
 11,219
 11,224
 11,658
 10,506
Income before income tax expense (benefit)2,203
 1,567
 930
 3,194
 1,585
 2,923
 1,823
 3,177
Income tax expense (benefit)275
 125
 252
 614
 136
 462
 321
 715
Net income$1,928
 $1,442
 $678
 $2,580
 $1,449
 $2,461
 $1,502
 $2,462
                
Per share information:               
Basic earnings per share$0.24
 $0.18
 $0.08
 $0.32
 $0.18
 $0.30
 $0.19
 $0.30
Diluted earnings per share0.24
 0.18
 0.08
 0.32
 0.18
 0.30
 0.18
 0.30
Dividends per share0.09
 0.09
 0.09
 0.08
 0.08
 0.07
 0.07
 0.00
  (a) Sum of the quarters may not equal the total year due to rounding.        
Table of Contents

Index to Financial Statements and Supplementary Data
 
Page



59

Management’s Report on Internal Control Over Financial Reporting
The management of Orrstown Financial Services, Inc., together with its consolidated subsidiaries (the "Company"), has the responsibility for establishing and maintaining an adequate internal control structure and procedures for financial reporting. Management maintains a comprehensive system of internal control to provide reasonable assurance of the proper authorization of transactions, the safeguarding of assets and the reliability of the financial records. The system of internal control provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees. The Company maintains an internal auditing program, under the supervision of the Audit Committee of the Board of Directors, which independently assesses the effectiveness of the system of internal control and recommends possible improvements.

Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of its internal control over financial reporting at December 31, 2016,2019, using the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As permitted, management excluded from its evaluation of effectiveness of internal control over financial reporting the Hamilton Bancorp, Inc. acquisition made on May 1, 2019, which is described in Note 2, Mergers and Acquisitions, to the Consolidated Financial Statements. Based upon this evaluation, management has concluded that, at December 31, 2016,2019, the Company’s internal control over financial reporting is effective based on the criteria established in Internal Control-Integrated Framework (2013).
Crowe Horwath LLP has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016,2019, as stated in their report dated March 13, 2017.16, 2020.
 
/s/ Thomas R. Quinn, Jr./s/ Thomas R. Brugger
Thomas R. Quinn, Jr.Thomas R. Brugger
President and Chief Executive OfficerExecutive Vice President and Chief Financial Officer
/s/ Thomas R. Quinn, Jr./s/ David P. BoyleGary A. Manley
Thomas R. Quinn, Jr.David P. BoyleGary A. Manley
President and Chief Executive OfficerMarch 16, 2020ExecutiveSenior Vice President and Chief FinancialPrincipal Accounting Officer
March 13, 2017





60


wk-20191231_g2.jpg




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






Shareholders and Board of Directors
of Orrstown Financial Services, Inc.
Shippensburg, Pennsylvania



Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Orrstown Financial Services, Inc. ("Company"(the "Company") as of December 31, 20162019 and 2015 and2018, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity,, and cash flows for each of the years in the three-year period ended December 31, 2016.2019, and the related notes (collectively referred to as the "financial statements"). We also have audited Orrstown Financial Services, Inc.’sthe Company’s internal control over financial reporting as of December 31, 2016,2019, based on criteria established in the 2013 Internal Control - Integrated FrameworkFramework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Orrstown Financial Services, Inc.’s

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.


Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on thesethe Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.


We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. As permitted, the Company has excluded the operations of Hamilton Bancorp, Inc. and its wholly-owned subsidiary, Hamilton Bank acquired during 2019, which is described in Note 2 of the consolidated financial statements, from the scope of management’s report on internal control over financial reporting. As such, it has also been excluded from the scope of our audit of internal control
61

over financial reporting. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.


Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.


Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Orrstown Financial Services, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Orrstown Financial Services, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control - Integrated Framework issued by the COSO.





/s/ Crowe Horwath LLP


Cleveland, OhioWe have served as the Company's auditor since 2014.

Washington, D.C.
March 13, 201716, 2020



62

Consolidated Balance Sheets
ORRSTOWN FINANCIAL SERVICES, INC.
December 31,
December 31,
(Dollars in thousands, except per share data)2016 2015
(Dollars in thousands, except per share amounts)(Dollars in thousands, except per share amounts)20192018
Assets   Assets
Cash and due from banks$16,072
 $11,412
Cash and due from banks$25,969  $26,156  
Interest-bearing deposits with banks14,201
 16,928
Interest-bearing deposits with banks30,493  45,664  
Federal funds soldFederal funds sold—  16,995  
Cash and cash equivalents30,273
 28,340
Cash and cash equivalents56,462  88,815  
Restricted investments in bank stocks7,970
 8,720
Restricted investments in bank stocks16,184  10,842  
Securities available for sale400,154
 394,124
Loans held for sale2,768
 5,917
Securities available for sale (amortized cost of $490,993 and $469,607 at December 31, 2019 and 2018, respectively)Securities available for sale (amortized cost of $490,993 and $469,607 at December 31, 2019 and 2018, respectively)490,386  465,844  
Loans held for sale, at fair valueLoans held for sale, at fair value9,364  —  
Loans held for sale, at costLoans held for sale, at cost—  3,340  
Loans883,391
 781,713
Loans1,644,330  1,247,657  
Less: Allowance for loan losses(12,775) (13,568)Less: Allowance for loan losses(14,655) (14,014) 
Net loans870,616
 768,145
Net loans1,629,675  1,233,643  
Premises and equipment, net34,871
 23,960
Premises and equipment, net37,524  38,201  
Cash surrender value of life insurance32,102
 31,224
Cash surrender value of life insurance63,613  41,327  
GoodwillGoodwill19,925  12,592  
Other intangible assets, netOther intangible assets, net7,180  3,910  
Accrued interest receivable4,672
 3,845
Accrued interest receivable6,040  5,927  
Other assets31,078
 28,541
Other assets46,921  29,947  
Total assets$1,414,504
 $1,292,816
Total assets$2,383,274  $1,934,388  
Liabilities   Liabilities
Deposits:   Deposits:
Noninterest-bearing$150,747
 $131,390
Noninterest-bearing$249,450  $204,843  
Interest-bearing1,001,705
 900,777
Interest-bearing1,626,072  1,353,913  
Total deposits1,152,452
 1,032,167
Total deposits1,875,522  1,558,756  
Short-term borrowings87,864
 89,156
Short-term borrowings154,869  64,069  
Long-term debt24,163
 24,495
Long-term debt63,067  83,450  
Accrued interest and other liabilities15,166
 13,937
Subordinated notesSubordinated notes31,847  31,859  
Other liabilitiesOther liabilities34,720  22,821  
Total liabilities1,279,645
 1,159,755
Total liabilities2,160,025  1,760,955  
Commitments and contingenciesCommitments and contingencies
Shareholders’ Equity   Shareholders’ Equity
Preferred stock, $1.25 par value per share; 500,000 shares authorized; no shares issued or outstanding0
 0
Common stock, no par value—$0.05205 stated value per share 50,000,000 shares authorized; 8,343,435 and 8,320,479 shares issued; 8,285,733 and 8,272,591 shares outstanding437
 435
Preferred stock, $1.25 par value per share; 500,000 shares authorized; 0 shares issued or outstandingPreferred stock, $1.25 par value per share; 500,000 shares authorized; 0 shares issued or outstanding—  —  
Common stock, no par value—$0.05205 stated value per share 50,000,000 shares authorized; 11,220,604 shares issued and 11,199,874 outstanding at December 31, 2019; 9,439,255 shares issued and 9,430,224 outstanding at December 31, 2018Common stock, no par value—$0.05205 stated value per share 50,000,000 shares authorized; 11,220,604 shares issued and 11,199,874 outstanding at December 31, 2019; 9,439,255 shares issued and 9,430,224 outstanding at December 31, 2018584  491  
Additional paid—in capital124,935
 124,317
Additional paid—in capital188,365  151,678  
Retained earnings11,669
 7,939
Retained earnings35,246  24,472  
Accumulated other comprehensive income (loss)(1,165) 1,199
Treasury stock—common, 57,702 and 47,888 shares, at cost(1,017) (829)
Accumulated other comprehensive lossAccumulated other comprehensive loss(480) (2,972) 
Treasury stock— 20,730 and 9,031 shares, at cost, at December 31, 2019 and 2018, respectivelyTreasury stock— 20,730 and 9,031 shares, at cost, at December 31, 2019 and 2018, respectively(466) (236) 
Total shareholders’ equity134,859
 133,061
Total shareholders’ equity223,249  173,433  
Total liabilities and shareholders’ equity$1,414,504
 $1,292,816
Total liabilities and shareholders’ equity$2,383,274  $1,934,388  
The Notes to Consolidated Financial Statements are an integral part of these statements.


63

Table of Contents
Consolidated Statements of Income
ORRSTOWN FINANCIAL SERVICES, INC.
Years Ended Years Ended December 31,
Years Ended December 31,
(Dollars in thousands, except per share data)2016 2015 2014
Interest and dividend income     
Interest and fees on loans$33,916
 $30,798
 $29,546
Interest and dividends on investment securities     
Taxable6,012
 6,697
 8,052
Tax-exempt1,826
 1,059
 550
(Dollars in thousands, except per share amounts)(Dollars in thousands, except per share amounts)201920182017
Interest incomeInterest income
LoansLoans$75,071  $50,632  $40,623  
Investment securities - taxableInvestment securities - taxable14,530  10,858  7,478  
Investment securities - tax-exemptInvestment securities - tax-exempt2,054  3,850  3,134  
Short term investments208
 81
 35
Short term investments1,339  327  218  
Total interest and dividend income41,962
 38,635
 38,183
Total interest incomeTotal interest income92,994  65,667  51,453  
Interest expense     Interest expense
Interest on deposits4,811
 3,606
 3,678
Interest on short-term borrowings187
 295
 148
Interest on long-term debt419
 400
 333
DepositsDeposits19,310  10,229  6,134  
Short-term borrowingsShort-term borrowings623  1,577  784  
Long-term debtLong-term debt1,779  1,632  726  
Subordinated notesSubordinated notes1,987  73  —  
Total interest expense5,417
 4,301
 4,159
Total interest expense23,699  13,511  7,644  
Net interest income36,545
 34,334
 34,024
Net interest income69,295  52,156  43,809  
Provision for loan losses250
 (603) (3,900)Provision for loan losses900  800  1,000  
Net interest income after provision for loan losses36,295
 34,937
 37,924
Net interest income after provision for loan losses68,395  51,356  42,809  
Noninterest income     Noninterest income
Service charges on deposit accounts5,445
 5,226
 5,415
Service charges on deposit accounts3,404  3,233  3,057  
Interchange incomeInterchange income3,281  2,821  2,618  
Other service charges, commissions and fees994
 1,223
 1,033
Other service charges, commissions and fees805  907  570  
Loan swap referral feesLoan swap referral fees1,197  —  —  
Trust and investment management income5,091
 4,598
 4,687
Trust and investment management income7,255  6,576  6,400  
Brokerage income1,933
 2,025
 2,150
Brokerage income2,426  2,035  1,896  
Mortgage banking activities3,412
 2,747
 2,207
Mortgage banking activities3,049  2,663  2,919  
Earnings on life insurance1,099
 1,025
 950
Income from life insuranceIncome from life insurance2,044  1,463  1,109  
Other income345
 410
 477
Other income331  320  190  
Investment securities gains1,420
 1,924
 1,935
Investment securities gains4,749  1,006  1,190  
Total noninterest income19,739
 19,178
 18,854
Total noninterest income28,541  21,024  19,949  
Noninterest expenses     Noninterest expenses
Salaries and employee benefits26,370
 24,056
 23,658
Salaries and employee benefits39,495  32,524  30,145  
Occupancy2,491
 2,221
 2,251
Occupancy4,325  3,084  2,806  
Furniture and equipment3,335
 3,061
 3,328
Furniture and equipment4,723  4,079  3,434  
Data processing2,378
 2,026
 1,866
Data processing3,599  2,674  2,271  
Telephone and communication740
 692
 569
Automated teller and interchange fees748
 798
 865
Automated teller and interchange fees1,015  806  767  
Advertising and bank promotions1,717
 1,564
 1,195
Advertising and bank promotions1,967  1,592  1,600  
FDIC insurance775
 859
 1,621
FDIC insurance367  681  606  
Legal fees850
 1,440
 705
Legal fees585  413  802  
Other professional services1,332
 1,262
 1,580
Other professional services2,369  1,434  1,571  
Directors' compensation969
 737
 624
Directors' compensation1,003  984  996  
Collection and problem loan238
 447
 729
Real estate owned239
 162
 300
Taxes other than income767
 916
 562
Taxes other than income1,018  1,012  866  
Regulatory settlement1,000
 0
 0
Intangible asset amortizationIntangible asset amortization1,570  286  102  
Merger related and branch consolidation expensesMerger related and branch consolidation expenses8,964  3,197  —  
Insurance claim receivable write offInsurance claim receivable write off615  —  —  
Other operating expenses4,191
 4,366
 3,915
Other operating expenses5,687  5,169  4,364  
Total noninterest expenses48,140
 44,607
 43,768
Total noninterest expenses77,302  57,935  50,330  
Income before income tax expense (benefit)7,894
 9,508
 13,010
Income tax expense (benefit)1,266
 1,634
 (16,132)
Income before income tax expenseIncome before income tax expense19,634  14,445  12,428  
Income tax expenseIncome tax expense2,710  1,640  4,338  
Net income$6,628
 $7,874
 $29,142
Net income$16,924  $12,805  $8,090  
     
Per share information:     Per share information:
Basic earnings per share$0.82
 $0.97
 $3.59
Basic earnings per share$1.63  $1.53  $1.00  
Diluted earnings per share0.81
 0.97
 3.59
Diluted earnings per share1.61  1.50  0.98  
Dividends per share0.35
 0.22
 0.00
Dividends paid per shareDividends paid per share0.60  0.51  0.42  
The Notes to Consolidated Financial Statements are an integral part of these statements.

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Table of Contents
Consolidated Statements of Comprehensive Income
ORRSTOWN FINANCIAL SERVICES, INC.
 
Years Ended December 31,Years Ended December 31,
(Dollars in thousands)2016 2015 2014(Dollars in thousands)201920182017
     
Net income$6,628
 $7,874
 $29,142
Net income$16,924  $12,805  $8,090  
Other comprehensive income (loss), net of tax:     Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities available for sale arising during the period(2,190) 1,345
 11,764
Unrealized holding gains (losses) on securities available for sale arising during the period7,905  (6,359) 6,557  
Reclassification adjustment for gains realized in net income(1,420) (1,924) (1,935)Reclassification adjustment for gains realized in net income(4,749) (1,006) (1,190) 
Net unrealized gains (losses)(3,610) (579) 9,829
Net unrealized gains (losses)3,156  (7,365) 5,367  
Tax effect1,246
 202
 (3,440)Tax effect(664) 1,548  (1,586) 
Total other comprehensive income (loss), net of tax and reclassification adjustments(2,364) (377) 6,389
Total other comprehensive income (loss), net of tax and reclassification adjustments2,492  (5,817) 3,781  
Total comprehensive income$4,264
 $7,497
 $35,531
Total comprehensive income$19,416  $6,988  $11,871  
The Notes to Consolidated Financial Statements are an integral part of these statements.



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Table of Contents
Consolidated Statements of Changes in Shareholders’ Equity
ORRSTOWN FINANCIAL SERVICES, INC.
 
 Years Ended December 31, 2016, 2015, and 2014
(Dollars in thousands, except per share data)
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Total
Shareholders’
Equity
            
Balance, January 1, 2014$422
 $123,105
 $(27,255) $(4,813) $(20) $91,439
Net income0
 0
 29,142
 0
 0
 29,142
Total other comprehensive income, net of taxes0
 0
 0
 6,389
 0
 6,389
Share-based compensation plans:           
Issuance of stock (157,207 shares), including compensation expense of $1908
 286
 0
 0
 0
 294
Issuance of stock through dividend reinvestment plan (73 shares)0
 1
 0
 0
 0
 1
Balance, December 31, 2014430
 123,392
 1,887
 1,576
 (20) 127,265
Net income0
 0
 7,874
 0
 0
 7,874
Total other comprehensive loss, net of taxes0
 0
 0
 (377) 0
 (377)
Cash dividends ($0.22 per share)0
 0
 (1,822) 0
 0
 (1,822)
Share-based compensation plans:           
Issuance of stock (50,686 shares), including compensation expense of $7405
 835
 0
 0
 0
 840
Issuance of stock through dividend reinvestment plan (5,239 shares)0
 90
 0
 0
 0
 90
Acquisition of treasury stock (47,077 shares)0
 0
 0
 0
 (809) (809)
Balance, December 31, 2015435
 124,317
 7,939
 1,199
 (829) 133,061
Net income0
 0
 6,628
 0
 0
 6,628
Total other comprehensive loss, net of taxes0
 0
 0
 (2,364) 0
 (2,364)
Cash dividends ($0.35 per share)0
 0
 (2,898) 0
 0
 (2,898)
Share-based compensation plans:           
Issuance of stock (22,956 common shares and 25,834 treasury shares), including compensation expense of $9582
 618
 0
 0
 443
 1,063
Acquisition of treasury stock (35,648 shares)0
 0
 0
 0
 (631) (631)
Balance, December 31, 2016$437
 $124,935
 $11,669
 $(1,165) $(1,017) $134,859
 Years Ended December 31, 2019, 2018, and 2017
(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, 2017$437  $124,935  $11,669  $(1,165) $(1,017) $134,859  
Net income—  —  8,090  —  —  8,090  
Reclassification of disproportionate tax effects from accumulated other comprehensive income (loss) to retained earnings—  —  (229) 229  —  —  
Total other comprehensive income, net of taxes—  —  —  3,781  —  3,781  
Cash dividends ($0.42 per share)—  —  (3,488) —  —  (3,488) 
Share-based compensation plans:
4,421 net common shares issued and 56,885 net treasury shares issued, including compensation expense totaling $1,386(2) 523  —  —  1,002  1,523  
Balance, December 31, 2017435  125,458  16,042  2,845  (15) 144,765  
Net income—  —  12,805  —  —  12,805  
Total other comprehensive loss, net of taxes—  —  —  (5,817) —  (5,817) 
Cash dividends ($0.51 per share)—  —  (4,375) —  —  (4,375) 
Issuance of stock (1,052,635 common shares) to acquire Mercersburg Financial Corporation55  24,998  —  —  —  25,053  
Share-based compensation plans:
38,764 net common shares issued and 8,214 net treasury shares acquired, including compensation expense totaling $1,493 1,222  —  —  (221) 1,002  
Balance, December 31, 2018491  151,678  24,472  (2,972) (236) 173,433  
Net income—  —  16,924  —  —  16,924  
Total other comprehensive income, net of taxes—  —  —  2,492  —  2,492  
Cash dividends ($0.60 per share)—  —  (6,150) —  —  (6,150) 
Issuance of stock (1,765,704 common shares) to acquire Hamilton Bancorp, Inc.92  36,530  —  —  —  36,622  
Share-based compensation plans:
15,645 net common shares issued and 11,699 net treasury shares acquired, including compensation expense totaling $1,586 157  —  —  (230) (72) 
Balance, December 31, 2019$584  $188,365  $35,246  $(480) $(466) $223,249  
The Notes to Consolidated Financial Statements are an integral part of these statements.

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Table of Contents
Consolidated Statements of Cash Flows
ORRSTOWN FINANCIAL SERVICES, INC.
 Years Ended Years Ended December 31,
(Dollars in thousands)201920182017
Cash flows from operating activities
Net income$16,924  $12,805  $8,090  
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium amortization (discount accretion)(2,547) 1,406  4,034  
Depreciation and amortization expense5,547  3,642  3,265  
Provision for loan losses900  800  1,000  
Share-based compensation1,586  1,493  1,386  
Gain on sales of loans originated for sale(2,613) (2,144) (2,447) 
Mortgage loans originated for sale(112,568) (90,305) (104,512) 
Proceeds from sales of loans originated for sale108,885  94,727  103,131  
Gain on sale of portfolio loans—  (291) (32) 
Net gain on disposal of OREO(156) (108) (18) 
Writedown of OREO—  24   
Net loss (gain) on disposal of premises and equipment139  12  (18) 
Deferred income taxes1,776  543  3,078  
Investment securities gains(4,749) (1,006) (1,190) 
Income from life insurance(2,044) (1,463) (1,109) 
Increase in accrued interest receivable1,248  (879) (376) 
Increase in accrued interest payable and other liabilities(5,291) 2,696  2,012  
Other, net2,053  535  52  
Net cash provided by operating activities9,090  22,487  16,350  
Cash flows from investing activities
Proceeds from sales of AFS securities199,928  156,364  162,320  
Maturities, repayments and calls of AFS securities33,265  18,373  28,768  
Purchases of AFS securities(190,530) (226,014) (203,719) 
Net cash and cash equivalents received from acquisitions29,442  12,407  —  
Net purchases of restricted investments in bank stocks(2,684) (592) (2,027) 
Net increase in loans(46,157) (99,828) (130,791) 
Proceeds from sales of portfolio loans—  3,589  2,195  
Purchases of bank premises and equipment(2,911) (4,791) (2,653) 
Proceeds from disposal of OREO1,318  1,413  541  
Purchases of bank owned life insurance(3,280) (900) (600) 
Death benefit proceeds from life insurance contracts571  576  —  
Other—   74  
Net cash provided by (used in) investing activities18,962  (139,396) (145,892) 
Cash flows from financing activities
Net (decrease) increase in deposits(71,561) 178,798  67,063  
Net increase (decrease) in borrowings with original maturities less than 90 days115,800  (14,507) (34,288) 
Proceeds from other short-term borrowings—  25,000  70,000  
Payments on other short-term borrowings(25,000) (40,000) (30,000) 
Proceeds from long-term debt20,000  —  80,000  
Payments on long-term debt(91,776) (365) (20,348) 
Proceeds from subordinated notes, net of issuance costs—  31,857  —  
Payment of subordinated notes issuance costs(59) —  —  
Dividends paid(6,150) (4,375) (3,488) 
Treasury shares repurchased for employee taxes associated with restricted stock vesting(1,772) (651) —  
Proceeds from issuance of stock for option exercises and employee stock purchase plan113  160  137  
Net cash (used in) provided by financing activities(60,405) 175,917  129,076  
Net (decrease) increase in cash and cash equivalents(32,353) 59,008  (466) 
Cash and cash equivalents at beginning of year88,815  29,807  30,273  
Cash and cash equivalents at end of year$56,462  $88,815  $29,807  

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Table of Contents
 Years Ended December 31,
(Dollars in thousands)2016 2015 2014
Cash flows from operating activities     
Net income$6,628
 $7,874
 $29,142
Adjustments to reconcile net income to net cash provided by operating activities:     
Amortization of premiums on securities available for sale5,295
 6,033
 6,429
Depreciation and amortization2,951
 2,907
 2,838
Provision for loan losses250
 (603) (3,900)
Share-based compensation958
 740
 190
Net change in loans held for sale3,149
 (2,758) (1,223)
Net gain on disposal of other real estate owned(182) (234) (299)
Writedown of other real estate owned183
 45
 170
Net loss on disposal of premises and equipment147
 0
 41
Deferred income taxes, including valuation allowance(232) 797
 (16,223)
Investment securities gains(1,420) (1,924) (1,935)
Earnings on cash surrender value of life insurance(1,099) (1,025) (950)
(Increase) decrease in accrued interest receivable(827) (748) 303
Increase in accrued interest payable and other liabilities561
 2,017
 1,046
Other, net(775) (963) 1,629
Net cash provided by operating activities15,587
 12,158
 17,258
Cash flows from investing activities     
Proceeds from sales of available for sale securities64,742
 65,611
 169,573
Maturities, repayments and calls of available for sale securities30,192
 32,251
 41,520
Purchases of available for sale securities(108,448) (120,475) (175,014)
Net (purchases) redemptions of restricted investments in bank stocks750
 (370) 1,571
Net increase in loans(108,509) (78,776) (44,222)
Proceeds from sales of portfolio loans5,100
 0
 5,743
Investment in limited partnerships0
 (2,205) 0
Purchases of bank premises and equipment(13,369) (1,471) (859)
Proceeds from disposal of other real estate owned1,090
 1,839
 2,415
Purchases of bank owned life insurance0
 (3,750) 0
Other(439) 0
 0
Net cash provided by (used in) investing activities(128,891) (107,346) 727
Cash flows from financing activities     
Net increase (decrease) in deposits120,285
 82,463
 (50,686)
Net increase (decrease) in short-term borrowings(1,292) 2,414
 27,710
Proceeds from long-term debt0
 20,000
 10,000
Payments on long-term debt(332) (10,317) (11,265)
Dividends paid(2,898) (1,822) 0
Net proceeds from issuance of common stock105
 190
 105
Acquisition of treasury stock(631) (809) 0
Net cash provided by (used in) financing activities115,237
 92,119
 (24,136)
Net increase (decrease) in cash and cash equivalents1,933
 (3,069) (6,151)
Cash and cash equivalents at beginning of year28,340
 31,409
 37,560
Cash and cash equivalents at end of year$30,273
 $28,340
 $31,409
Supplemental disclosure of cash flow information:     
Cash paid during the year for:     
Interest$5,346
 $4,208
 $4,219
Income taxes1,300
 800
 0
Supplemental schedule of noncash investing and financing activities:     
Other real estate acquired in settlement of loans688
 1,428
 2,231



The Notes to Consolidated Financial Statements are an integral part
Years Ended Years Ended December 31,
(Dollars in thousands)201920182017
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest$24,313  $12,930  $7,586  
Income taxes—  60  1,638  
Supplemental schedule of noncash investing and financing activities:
Other real estate acquired in settlement of loans161  539  1,007  
Premises and equipment transferred to held for sale4,894  1,003  —  
The Notes to Consolidated Financial Statements are an integral part of these statements.

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Table of these statements.Contents

Notes to Consolidated Financial Statements

(All dollar amounts presented in the tables, except share and 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 consolidated financial statements and related notes of this Form 10-K.

Nature of Operations – Orrstown Financial Services, Inc. and subsidiaries (collectively the “Company”) is a financial holding company that operates Orrstown Bank, (the "Bank"), a commercial bank with 25 branchesbanking and financial advisory offices in Berks, Cumberland, Dauphin, Franklin, Lancaster, Perry and PerryYork Counties, of Pennsylvania, and in Anne Arundel, Baltimore, Howard and Washington County,Counties, Maryland, as well as Baltimore City, Maryland and a Registered Investment Advisor non-bank subsidiary, Wheatland Advisors, Inc. ("Wheatland"), a registered investment advisor non-bank subsidiary, headquartered in Lancaster County, Pennsylvania. The BankCompany operates in the community banking segment and engages in lending services foractivities, including commercial, residential, commercial mortgages, construction, municipal, and various forms of consumer lending. Depositlending, and deposit services, includeincluding checking, savings, time, and money market deposits. The BankCompany also provides fiduciary services, investment advisory, insurance and brokerage services through its Orrstown Financial Advisors division.services. The Company isand the Bank are subject to the regulation ofby certain federal and state agencies and undergoesundergo periodic examinations by such regulatory authorities.
The accounting and reporting policies
Basis of the Company conform to accounting principles generally accepted in the United States of America ("GAAP") and, where applicable, to accounting and reporting guidelines prescribed by bank regulatory authorities. The more significant accounting policies follow:
Principles of ConsolidationPresentation – The accompanying consolidated financial statements include the accounts of Orrstown Financial Services, Inc. (the "Parent Company") and its wholly owned subsidiaries, the Bank and Wheatland. The accounting and reporting policies of the Company conform to GAAP and, where applicable, to accounting and reporting guidelines prescribed by bank regulatory authorities. All significant intercompany transactions and accounts have been eliminated in consolidation.eliminated. Certain reclassifications have been made to prior year amounts to conform with current year classifications. In December 2016,October 2018, the Company acquired Wheatland.Mercersburg Financial Corporation and its wholly-owned subsidiary, First Community Bank of Mercersburg, based in Mercersburg, Pennsylvania. In May 2019, the Company acquired Hamilton Bancorp, Inc., and its wholly-owned subsidiary, Hamilton Bank, based in Towson, Maryland. The results of operations orand assets acquired and liabilities assumed from acquired entities are included only from the date of acquisition. Pro forma financial information for this transaction has not been included becauseThe comparability of the acquisition was immaterial. The purchase price allocationCompany's results of operations for the acquisition is estimated atyears ended December 31, 2016.2019, to 2018 and 2017 have been impacted by these acquisitions.

The Company's management has evaluated all activity of the Company and concluded that subsequent events are properly reflected in the Company's consolidated financial statements and notes as required by GAAP.
Use of Estimates –
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions based on available information.that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate toinclude the determination of the allowance for loan lossesALL and accounting for income taxes.those used in valuation methodologies in areas with no observable market, such as loans, deposits, borrowings, goodwill, core deposit and other intangible assets, other assets and liabilities obtained or assumed in business combinations.
Reclassifications – Certain prior year amounts have been reclassified to conform to current period classifications. The reclassifications had no effect on gross revenues, gross expenses, net income, shareholders' equity, or the net change in cash and cash equivalents and are not material to previously issued consolidated financial statements.
Concentration of Credit Risk – The Company grants commercial, residential, construction, municipal, and various forms of consumer lending to customersclients primarily in its market area of Berks, Cumberland, Dauphin, Franklin, Lancaster, and Perry Counties ofin south central Pennsylvania and in the greater Baltimore region and Washington County, Maryland.Maryland.. Therefore, the Company's exposure to credit risk is significantly affected by changes in the economy in that area.those areas. Although the Company believes it maintains a diversified loan portfolio, a significant portion of its customers’clients’ ability to honor their contracts is dependent upon economic sectors for commercial real estate, including office space, retail strip centers, multi-family and hospitality, residential building operators, sales finance, sub-dividers and developers.developers, and multi-family, hospitality, and residential building operators. Management evaluates each customer’sclients' creditworthiness on a case-by-case basis. The amount of collateral obtained if collateral is deemed necessary by the Company upon the extension of credit, is based on management’s credit evaluation of the customer.client. Collateral held varies, but generally includes real estate and equipment.
The types of securities the Company invests in are included in Note 3, Securities Available for Sale, and the typetypes of lending the Company engages in are included in Note 4, Loans and Allowance for Loan Losses.
Cash and Cash Equivalents – Cash and cash equivalents includeincludes cash, balances due from banks, federal funds sold and interest bearinginterest-bearing deposits due on demand, all of which have original maturities of 90 days or less. Net cash flows are reported for customerclient loan and deposit transactions, loans held for sale, redemption (purchases) of restricted investments in bank stocks, and short-term borrowings.
69

Cash and cash equivalents includes amounts that the Company is required to maintain on hand or on deposit at the Federal Reserve Bank to meet certain regulatory reserve balance requirements. At December 31, 2019 and 2018, the Company had reserve requirements of $9.2 million and $11.0 million, respectively.
Balances with correspondent banks may, at times, exceed federally insured limits. The Company considers this to be a normal business risk and reviews the financial condition of its correspondent banks on a quarterly basis.
Restricted Investments in Bank Stocks – Restricted investments in bank stocks consist of Federal Reserve Bank of Philadelphia (“Federal Reserve Bank”) stock, Federal Home Loan BankFHLB of Pittsburgh (“FHLB”) stock and Atlantic Community Bankers Bank stock. Federal law requires a member institution of the district Federal Reserve Bank and FHLB to hold stock according to predetermined formulas. Atlantic Community Bankers Bank requires its correspondent banking institutions to hold stock as a condition of membership. The restricted investment in bank stocks is carried at cost. Quarterly,On a quarterly basis, management evaluates the bank stocks for impairment based on assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by

criteria such as operating performance, liquidity, funding and capital positions, stock repurchase history, dividend history, and impact of legislative and regulatory changes.
Securities – The Company typically classifies debt and marketable equity securities as available for sale on the date of purchase. At December 31, 20162019 and 20152018, the Company had no held to maturity or trading securities. Securities classified as available for saleAFS securities are reported at fair value. Interest income and dividends on debt securities are recognized in interest income on an accrual basis. Purchase premiums and discounts on debt securities are amortized to interest income using the interest method over the terms of the securities and approximate the level yield method.
Changes in unrealized gains and losses, net of related deferred taxes, for available for saleAFS securities are recorded in accumulated other comprehensive income.AOCI. Realized gains and losses on securities are recorded on the trade date using the specific identification method and are included in noninterest income on the consolidated statements of income.
Securities classified as available for saleAFS securities include investments that management intends to use as part of its asset/liability management strategy. Securities may be sold in response to changes in interest rates, changes in prepayment raterates and other factors. The Company does not have the intent to sell any of its available for saleAFS securities that are in an unrealized loss position and it is more likely than not that the Company will not be required to sell these securities before recovery of their amortized cost.
Management evaluates securities for other-than-temporary impairment (“OTTI”)OTTI on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as an impairment through earnings.  For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components: OTTI related to credit loss, which must be recognized in the income statement; and OTTI related to other factors, which is recognized in other comprehensive income.OCI, and the remaining OTTI, which is recognized in earnings.  The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.
The Company’s securities are exposed to various risks, such as interest rate risk, market risk, and credit risks.risk. Due to the level of risk associated with certain investments and the level of uncertainty related to changes in the value of investments, it is at least reasonably possible that changes in risks in the near term would materially affect investment assets reported in the consolidated financial statements.
Loans Held for Sale – Loans Effective October 1, 2019, The Company adopted the fair value option on these loans which allows the Company to record the mortgage loans held for sale portfolio at fair market value as opposed to the lower of cost or market. The Company economically hedges its residential loans held for sale portfolio with forward sale agreements which are reported at fair value. A lower of cost or market accounting treatment would not allow the Company to record the excess of the fair market value over book value but would require the Company to record the corresponding reduction in value on the hedges. Both the loans and related hedges are carried at fair value which reduces earnings volatility as the amounts more closely offset, particularly in environments when interest rates are declining. For loans held for sale for which the fair value option has been elected, the aggregate fair value exceeded the aggregate principal balance by $226 thousand. There were no loans held for sale that were nonaccrual or 90 or more days past due as of December 31, 2019. In previous periods, loans originated and intended for sale in the secondary market arewere carried at the lower of aggregate cost or fair value ("LOCM").value. Gains and losses on loans soldloan sales (sales proceeds minus carrying value) are includedrecorded in noninterest income. Interest income on these loans is recognized in interest and fees on loans in the consolidated statements of operations.
Loans – The Company grants commercial loans; residential, commercial and construction mortgage loans; and various forms of consumer loans to its customers located principally in South Central Pennsylvania and northern Maryland. The ability of the Company’s debtors to honor their contracts is dependent largely upon the real estate and general economic conditions in this area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses,ALL, and any deferred fees or costs on
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originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and amortized as a yield adjustment over the respective term of the loan. For purchased loans that are not deemed impaired at the acquisition date, premiums and discounts are amortized or accreted as adjustments to interest income using the effective yield method.
For all classes of loans, the accrual of interest income on loans, including impaired loans, ceases when principal or interest is past due 90 days or more 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, at the date of placement on nonaccrual status, is reversed and charged against current interest income, unless fully collateralized. Subsequent payments received are either applied to the outstanding principal balance or recorded as interest income, depending upon 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 loan has 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 the contractual terms of the loan.

Loans, the terms of which are modified, are classified as troubled debt restructurings ("TDRs")TDRs if a concession was granted in connection with the modification, for legal or economic reasons, related to athe debtor’s financial difficulties. Concessions granted under a TDR typically involve a temporary deferral of scheduled loan payments, an extension of a loan’sloans' stated maturity date, a temporary reduction in interest rates, or granting of an interest rate below market rates given the risk of the transaction. If a modification occurs while the loan is on accruingaccrual status, it will continue to accrue interest under the modified terms. Nonaccrual TDRs may be restored to accrual status if scheduled principal and interest payments, under the modified terms, are current for six months after modification, and the borrower continues to demonstrate its ability to meet the modified terms. TDRs are evaluated individually for impairment on a quarterly basis including monitoring of performance according to their modified terms.

Allowance for Loan Losses The allowance for loan lossesALL is evaluated on at least a quarterly basis, as losses are estimated to be probable and incurred, and, if deemed necessary, is increased or decreased through athe provision for loan losses charged to earnings.on the consolidated statements of income. Loan losses are charged against the allowanceALL when management determines that all or a portion of the loan is uncollectible. Recoveries on previously charged-off loans are credited to the allowanceALL when received. The allowanceALL is allocated to loan portfolio classes on a quarterly basis, but the entire balance is available to cover losses from any of the portfolio classes when those losses are confirmed.
Management uses internal policies and bank regulatory guidance in periodically evaluating loans for collectability and incorporates historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the 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.
See Note 4, Loans and Allowance for Loan Losses, for additional details.information.
Acquired Loans - Loans acquired in connection with business combinations are recorded at fair value with no carryover of any allowance for loan losses. Fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.

The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. These loans are accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"). The nonaccretable discount includes estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases in expected cash flows will require us to evaluate the need for an addition to the allowance for loan losses. Subsequent improvement in expected cash flows will result in the reversal of a corresponding amount of the nonaccretable discount, which we will then reclassify as accretable discount to be recognized into interest income over the remaining life of the loan.

Loans acquired through business combinations that do meet the specific criteria of ASC 310-30 are individually evaluated each period to analyze expected cash flows. To the extent that the expected cash flows of a loan have decreased due to credit deterioration, the Company establishes an allowance.

Loans acquired through business combinations that do not meet the specific criteria of ASC 310-30 are accounted for under ASC 310-20, Receivables - Nonrefundable Fees and Other Costs. 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. There is no allowance for
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loan losses established at the acquisition date for acquired performing loans. An allowance for loan losses is recorded for any credit deterioration in these loans subsequent to acquisition.

Acquired loans that meet 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 nonperforming and may accrue interest on these loans, including the impact of any accretable discount. In addition, charge-offs on such loans would be first applied to the nonaccretable difference portion of the fair value adjustment.

Loan Commitments and Related Financial Instruments – Financial instruments include off-balance sheet credit instruments,commitments issued to meet client financing needs, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay.credit. These financial instruments are recorded when they are funded. The face amount represents the exposure to loss, before considering client collateral or ability to repay. The Company maintains a reserve for probable losses on off-balance sheet commitments which is included in Other Liabilities.other liabilities on the consolidated balance sheets.
Loans Serviced – The Bank administers secondary market mortgage programs available through the FHLB and the Federal National Mortgage Association and offers residential mortgage products and services to customers.clients. The Bank originates single-family residential mortgage loans for immediate sale in the secondary market and retains the servicing of those loans. At December 31, 20162019 and 2015,2018, the balance of loans serviced for others was $328,701,000totaled $360.1 million and $317,793,000.$360.3 million, respectively.
Transfers of Financial Assets – Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Cash Surrender Value of Life Insurance – The Company has purchased life insurance policies on certain employees. Life insurance is recorded at the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Premises and Equipment – Buildings, improvements, equipment, furniture and fixtures are carried at cost less accumulated depreciation and amortization. Land is carried at cost. Depreciation and amortization has been providedrecognized generally on the straight-line method and is computed over the estimated useful lives of the various assets as follows: buildings and improvements, including leasehold improvements – 10 to 40 years; and furniture and equipment – 3 to 15 years. Leasehold improvements are amortized over the shorter of the lease term or the indicated life. Repairs and maintenance are charged to operations as incurred, while major additions and improvements are typically capitalized. GainGains or losslosses on the retirement or disposal of individual assets is recorded as income or expense in the period of retirement or disposal. Premises no longer in use and held for sale are included in other assets on the consolidated balance sheets at the lower of carrying value or fair value and no depreciation is charged on them. At December 31, 2019 and 2018, premises held for sale totaled $5.2 million and $1.0 million, respectively.
Leases - The Company evaluates its contracts at inception to determine if an arrangement is,or contains, a lease. Operating leases are included in operating lease ROU assets in other assets and operating lease liabilities in accrued interest payable and other liabilities in the consolidated balance sheets. The Company had no finance leases at December 31, 2019.
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 it uses our incremental borrowing rate, 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 lease payments made less any lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option.
The Company adopted ASU 2016-02, “Leases (Topic 842),” on January 1, 2019, using the practical expedient transition method whereby the Company did not revise comparative period information or disclosure. The new standard requires lessees to record assets and liabilities on the balance sheet for all leases with terms longer than 12 months. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows the Company to carryforward the historical lease classification. The Company also elected certain optional practical expedients, including the hindsight practical expedient under which the Company considered the actual outcomes of lease renewals and terminations when measuring the lease term at adoption, and the Company made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. The Company recognizes these lease payments in
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the 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 these as a single lease component.
The Company's operating leases relate primarily to bank branches and office space. Upon the adoption on January 1, 2019, operating lease liabilities of $8.0 million and related lease assets of $7.5 million were recognized on the consolidated balance sheets. The difference between the lease assets and lease liabilities primarily consists of deferred rent liabilities reclassified upon adoption to reduce the measurement of the lease assets. The standard did not materially impact the Company's consolidated net income and had no impact on cash flows.
Goodwill and Other Intangible Assets – Goodwill is calculated as the purchase premium, if any, after adjusting for the fair value of net assets acquired in purchase transactions. 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 would more likely than notcould potentially reduce the fair value of a reporting unit. Other intangible assets represent purchased assets that can be distinguished from goodwill because of contractual or other legal rights. The Company’s other intangible assets have finite lives and are amortized on aeither an accelerated amortization method or straight line basis over their estimated lives, generally 10 years for deposit premiums and 10 to 15 years for customer lists.other client relationship intangibles.
Mortgage Servicing Rights – The estimated fair value of mortgage servicing rights ("MSRs")MSRs related to loans sold and serviced by the Company is recorded as an asset upon the sale of such loans. MSRs are amortized as a reduction to servicing income over the estimated lives of the underlying loans. MSRs are evaluated periodically for impairment by comparing the carrying amount to estimated fair value. Fair value is determined periodically through a discounted cash flowsflow valuation

performed by a third party. Significant inputs to the valuation include expected servicing income, net of expense, the discount rate and the expected life of the underlying loans. To the extent the amortized cost of the MSRs exceeds their estimated fair values, a valuation allowance is established for such impairment through a charge against servicing income on the consolidated statementstatements of operations.income. If the Company determines, based on subsequent valuations, that the impairment no longer exists or is reduced, the valuation allowance is reduced through a credit to earnings. The balance of mortgage servicing rights was $2,835,000MSRs totaled $3.1 million and $2,672,000$3.2 million at December 31, 20162019 and December 31, 2015,2018, respectively, and isare included in Other Assets.other assets on the consolidated balance sheets.
Foreclosed Real Estate – Real estate property acquired through foreclosure or other means is initially recorded at the fair value of the related real estate collateral at the transfer date less estimated selling costs, and subsequently at the lower of its carrying value or fair value less estimated costs to sell throughsell. Fair value is determined based on an independent third party appraisal of the property or, when appropriate, a valuation reserve.recent sales offer. Costs to maintain foreclosedsuch real estate are expensed as incurred. Costs that significantly improve the value of the properties are capitalized. Foreclosed realReal estate acquired through foreclosure or other means totaled $346,000$197 thousand and $710,000$130 thousand at December 31, 20162019 and 20152018, respectively, and is included in Other Assets.other assets on the consolidated balance sheets.
Investments in Real Estate Partnerships – The Company currently has a 99% limited partner interest in several real estate partnerships in central Pennsylvania. These investments are affordable housing projects, which entitle the Company to tax deductions and credits that expire through 2025. The Company accounts for its investments in affordable housing projects under the proportional amortization method when the criteria are met, which is limited to one1 investment entered into in 2015. Investments prior to 2015 did not meet the criteria, andat December 31, 2019. Other investments are accounted for under the equity method of accounting. The recorded investment in these real estate partnerships, included in Other Assets,other assets on the consolidated balance sheets, totaled $4,909,000$3.6 million and $5,450,000$3.9 million at December 31, 20162019 and 2015,2018, respectively, of which $1,993,000$1.3 million and $2,205,000$1.6 million are accounted for under the proportional amortization method.
Losses accounted for under the equityEquity method of $350,000, $384,000losses totaled $55 thousand, $331 thousand and $150,000 were recorded$277 thousand for the years ended December 31, 2016, 20152019, 2018 and 20142017, respectively, and are included in other noninterest income. Lossesincome on the investments accounted for under the proportionalconsolidated income statements. Proportional amortization method of $191,000losses totaled $214 thousand, $214 thousand and $217 thousand for the yearyears ended December 31, 2016 net of federal2019, 2018 and 2017, respectively, and are included in income tax benefit, is netted againstexpense on the consolidated income tax expense.statements. During 2016, 20152019, 2018 and 2014,2017, the Company recognized federal tax credits from thethese projects totaling $736,000, $475,000$460 thousand, $578 thousand and $475,000,$1.0 million, respectively, which isare included in income tax expense.expense on the consolidated income statements.
Advertising – The Company expenses advertising as incurred. Advertising expense was $763,000, $723,000totaled $577 thousand, $418 thousand and $540,000,$631 thousand for the years ended December 31, 2016, 20152019, 2018 and 2014.2017, respectively.
Securities Sold UnderRepurchase Agreements to Repurchase (“Repurchase Agreements”) The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities which are included in short-term borrowings.borrowings on the consolidated balance sheets. Under these agreements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, these Repurchase Agreementsrepurchase agreements are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability inon the Company’s consolidated balance sheet,sheets, while the securities underlying the Repurchase Agreements remain isrepurchase agreements remaining are reflected in securities available for sale; theAFS securities. The repurchase obligation and underlying securities are not offset or netted. Thenetted as the Company does not enter into reverse Repurchase Agreements, so there is no offsetting to be done with Repurchase Agreements.repurchase agreements.
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The right of setoff for a Repurchase Agreementrepurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the Repurchase Agreementrepurchase agreement should the Company be in default (e.g., failsfail to make an interest payment to the counterparty). For the Repurchase Agreements,repurchase agreements, the collateral is held by the Company in a segregated custodial account under a third party agreement. Repurchase agreements are secured by U.S. Government Sponsored Enterprises mortgage-backed securitiesGSE MBSs and mature overnight.
Share Compensation Plans – The Company has share compensation plans that cover employees and non-employee directors. Compensation expense relating to share-based payment transactions is measured based on the grant date fair value of the share award, including a Black-Scholes model for stock options. Compensation expense for all share awards is calculated and recognized over the employees’ or non-employee directors' service period, generally defined as the vesting period.
Income Taxes – The income Income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the

more-likely-than-not more likely than not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-notmore likely than not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if,when, based on the weight of available evidence, available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company recognizes interest and penalties, if any, on income taxes as a component of income tax expense.
Loss Contingencies – Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Treasury Stock – Common stock shares repurchased are recorded as treasury stock, at cost.cost on the consolidated balance sheets.
Earnings Per Share – Basic earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Restricted stock awards are included in weighted average common shares outstanding as they are earned. Diluted earnings per share includes additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate solely to outstanding stock options and restricted stock awards and are determined using the treasury stock method.
Treasury shares are not deemed outstanding for earnings per share calculations.
Comprehensive Income – Comprehensive income consists of net income and other comprehensive income. Other comprehensive income is limited to unrealized gains (losses) on securities available for sale for all years presented.OCI. Unrealized gains (losses) on securities available for sale, net of tax, was the sole component of accumulated other comprehensive incomeAOCI at December 31, 20162019 and 2015 and totaled ($1,165,000) and $1,199,000.2018.
Fair Value – Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 17,the Fair Value.Value note to the consolidated financial statements. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.
Segment Reporting – The Company operates in one significant1 segment – Community Banking. The Company’s non-bankingnon-community banking activities, principally related to Wheatland, are insignificant to the consolidated financial statements.
Recent Accounting Pronouncements - In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. ("ASU") 2014-9, Revenue from Contracts with Customers (Topic 606). ASU 2014-9, as amended, creates a new topic, Topic 606, to provide guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. These changes become effective for the Company on January 1, 2018. Management is evaluating the impact of this standard on the Company's financial position and results of operations.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 provides updated accounting and reporting requirements for both public and non-public entities. The most significant provisions that will impact the Company are: equity securities available for sale will be measured at fair value, with the changes in fair value recognized in the income statement;the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments at amortized cost on the balance sheet has been eliminated; a provision to require the utilization of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and a requirement for separate presentation of both financial assets and liabilities by measurement category and form of financial asset on the balance sheet or accompanying notes to the financial statements. These changes become effective for the Company on January 1, 2018, using a cumulative-effect adjustment to the balance sheet. Management is evaluating the impact of this standard on the Company's financial position and results of operations.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-12 provides updated accounting and reporting requirements, which, among other things, require lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. These changes become effective for the Company on January 1, 2019.

Earlier application is permitted. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. The Company anticipates that the impact on its balance sheet will result in an increase in assets and liabilities for its right of use assets and related lease liabilities for those leases that are outstanding at the date of adoption, however, it does not anticipate it will have a material impact on its results of operations. Management is evaluating other effects of this standard on the Company's financial position and regulatory capital.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting (Topic 718). ASU 2016-09 requires recognition of the income tax effects of share-based awards in the income statement when the awards vest or are settled, eliminating additional paid-in capital pools. The adoption of these changes by the Company on January 1, 2017 will not have a material impact on its financial position or results of operations.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Instruments ("ASU 2016-13 replaces2016-13"). The amendments in this update require an organization to measure all expected credit losses for financial assets held at the existing incurred loss impairment methodology in current GAAP with an expected loss impairment methodology, which considers a broader range of reasonable and supportable information to support credit loss estimates, includingreporting date based on historical loss experience, current conditions, and reasonable and foreseeablesupportable forecasts. ASU 2016-13 also requires enhancedFinancial institutions and greater disclosure pertainingother organizations will use forward-looking information to significant estimates and judgments usedbetter inform their credit loss estimates. Many 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 to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the amendments in estimatingthis update amend the accounting for credit losses as well as theon available-for-sale debt securities and purchased financial assets with credit quality and underwriting standards
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deterioration. For certain public companies, this update will be effective for interim and annual periods beginning after December 15, 2019. ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, extended the implementation deadline 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 did not adopt ASU 2016-13 on January 1, 2020 with adoption permitted one year earlier. Management2020. The Company is evaluating the impact of this standard on the Company's financial position, resultsdelay for adoption of operationsASU 2016-13.

The Company is working with a third party vendor solution to assist with the application of ASU 2016-13 and regulatory capital.
In August 2016,finalizing the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 makes eight target changesloss estimation models to how cash receipts and cash payments are presented and classified in the consolidated statement of cash flows. These changes become effective forbe used. Once management determines which methods will be utilized, a third party will be contracted to perform a model validation prior to adoption. While the Company on January 1, 2018 withanticipates the allowance for loan losses will increase under its current assumptions, it expects the impact of adopting ASU 2016-13 will be influenced by the composition, characteristics and quality of its loan and securities portfolios, as well as general economic conditions and forecasts at the adoption on a retrospective basis. Management does not anticipate this update will have a material impact on the Company's financial position or results of operations.date.
In January 2017, the FASB issued
ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04Impairment. The update simplifies how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. These changes becomeThe adoption of this guidance, effective for the Company on January 1, 2020, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Management doeswill not anticipate this update will have a material impact on the Company's consolidated financial position or results of operations.statements.

NOTE 2.    RESTRICTIONS ON CASHMERGERS AND DUE FROM BANKSACQUISITIONS AND BRANCH CONSOLIDATIONS
Mercersburg Financial Corporation
On October 1, 2018, the Company acquired 100% of the outstanding common shares of Mercersburg Financial Corporation and its wholly-owned subsidiary, First Community Bank of Mercersburg, headquartered in Mercersburg, Pennsylvania. The Company issued 1,052,635 shares of its common stock and paid $4.9 million in cash for all outstanding shares of Mercersburg stock. Based on the Company's $23.80 closing stock price on Friday, September 28, 2018, the consideration paid to acquire Mercersburg totaled $29.9 million.
The fair value of assets acquired, excluding goodwill, totaled $181.4 million, including loans totaling $141.1 million and investment securities available for sale totaling $7.4 million. The fair value of liabilities assumed totaled $163.4 million, including deposits totaling $160.4 million. The Company recognized $11.9 million in initial goodwill, representing consideration transferred in excess of the fair value of the net assets acquired in the Mercersburg acquisition. The goodwill resulting from the acquisition represents the value expected from the expansion of our market in south central Pennsylvania and the enhancement of our operations through client synergies and efficiencies, thereby providing enhanced client service.
The Mercersburg acquisition was accounted for using the acquisition method of accounting and, accordingly, purchased assets, including identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair values. The fair value measurements of assets acquired and liabilities assumed were subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values became available. No material measurement period adjustments were made in the year ended December 31, 2019. The results of operations for the Company include Mercersburg's results from and after October 1, 2018.
Hamilton Bancorp, Inc.
On May 1, 2019, the Company acquired 100% of the outstanding common shares of Hamilton Bancorp, Inc., and its wholly-owned subsidiary, Hamilton Bank, based in Towson, Maryland. The Company acquired Hamilton to introduce our banking and financial services into the greater Baltimore area of Maryland.
Pursuant to the merger agreement, the Company issued 1,765,704 shares of its common stock and paid $14.2 million in cash for all outstanding shares of Hamilton stock and options vesting upon acquisition. Based on the Company's closing stock price of $20.74 on Tuesday, April 30, 2019, the consideration paid to acquire Hamilton totaled $50.8 million.
The fair value of assets acquired, excluding goodwill, totaled $492.8 million, including loans totaling $347.4 million. The fair value of liabilities assumed totaled $449.4 million, including deposits totaling $388.2 million. Goodwill represents consideration transferred in excess of the fair value of the net assets acquired. At May 1, 2019, the Company recognized $7.3 million in goodwill associated with the Hamilton acquisition. The goodwill resulting from the acquisition represents the value expected from the expansion of our market in the greater Baltimore area and the enhancement of our operations through client
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synergies and efficiencies, thereby providing enhanced client service. Goodwill acquired in the Hamilton acquisition is not deductible for tax purposes.
The Hamilton acquisition was accounted for using the acquisition method of accounting and, accordingly, purchased assets, including identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair values. The fair value measurements of assets acquired and liabilities assumed are subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values become available. The Company continues to finalize the fair values of loans, intangible assets, other assets, income taxes and liabilities. As a result, the recorded fair value adjustments are preliminary and may change as additional information becomes available. Fair value adjustments will be finalized no later than May 2020. No material measurement period adjustments were made from the date of acquisition through December 31, 2019. The results of operations for the Company include Hamilton's results from and after May 1, 2019.
The following table summarizes the consideration paid for Hamilton and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.
Fair value of consideration transferred:
Cash$14,197 
Common stock issued36,622 
Total consideration transferred$50,819 
Estimated fair values of assets acquired and liabilities assumed:
Cash and cash equivalents$43,140 
Securities available for sale60,882 
Restricted investments in bank stocks2,658 
Loans347,361 
Premises and equipment3,749 
Core deposit intangible4,550 
Goodwill7,333 
Cash surrender value of life insurance17,948 
Deferred tax asset, net5,838 
ROU lease asset2,793 
Other assets3,925 
Total assets acquired$500,177 
Deposits$(388,246)
Borrowings(51,393)
Other liabilities(9,719)
Total liabilities assumed$(449,358)
The determination of estimated fair values of the acquired loans required the Company to make certain estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature. Based on such factors as past due status, nonaccrual status, bankruptcy status, and credit risk ratings, the acquired loans were divided into loans with evidence of credit quality deterioration, which are accounted for under ASC 310-30 (purchased credit impaired), and loans that do not meet this criteria, which are accounted for under ASC 310-20 (purchased non-impaired). Expected cash flows, both principal and interest, were estimated based on key assumptions covering such factors as prepayments, default rates and severity of loss given default. These assumptions were developed using both Hamilton's historical experience and the portfolio characteristics as of the acquisition date as well as available market research. The fair value estimates for acquired loans were based on the amount and timing of expected principal, interest and other cash flows, including expected prepayments, discounted at prevailing market interest rates applicable to the types of acquired loans, which the Company considered to be level 3 fair value measurements. Deposit liabilities assumed in the Hamilton acquisition were segregated into two categories: time-deposits (i.e., deposit accounts with a stated maturity) and demand deposits, both using level 2 fair value measurements. In determining fair value of time deposits, the Company discounted the contractual cash flows of the deposit accounts using prevailing market interest rates for time deposit accounts of similar type and duration. For demand deposits, the
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acquisition date outstanding balance of the assumed demand deposit accounts approximates fair value. Acquisition date fair values for securities available for sale were determined using Level 1 or Level 2 inputs consistent with the methods discussed further in Note 19 - Fair Value. The remaining acquisition date fair values represent either Level 2 or Level 3 fair value measurements (premises and equipment and core deposit intangible).
The Company maintainsrecognized a core deposit balancesintangible of $4.6 million, which is being amortized using an accelerated method over a 10-year amortization period, consistent with expected future cash flows.
Loans acquired from Hamilton were measured at two correspondent banks which provide check collectionfair value at the acquisition date with no carryover of any ALL. Loans were segregated into those loans considered to be performing and item processing servicesthose considered PCI. The following table presents performing and PCI loans acquired, by loan class, at May 1, 2019.
Upon completion of the Hamilton acquisition, the Company sold the acquired investment portfolio and paid off acquired borrowings at the indicated fair value amounts in conjunction with its asset/liability management strategies.


PerformingPCITotal
Commercial real estate:
Owner-occupied$42,148  $6,324  $48,472  
Non-owner occupied45,401  770  46,171  
Multi-family10,773  —  10,773  
Acquisition and development:
1-4 family residential construction7,450  —  7,450  
Commercial and land development4,528  —  4,528  
Commercial and industrial32,316  1,702  34,018  
Residential mortgage:
First lien152,657  10,494  163,151  
Home-equity - term4,478   4,479  
Home equity - lines of credit13,657  —  13,657  
Installment and other loans14,467  195  14,662  
Total loans acquired$327,875  $19,486  $347,361  


The following table presents the fair value adjustments made to the amortized cost basis of loans acquired at May 1, 2019.

Gross amortized cost basis at acquisition$362,125 
Market rate adjustment(5,309)
Credit fair value adjustment on non-credit impaired loans(3,947)
Credit fair value adjustment on impaired loans(5,508)
Estimated fair value of acquired loans$347,361 

The market rate adjustment represents the movement in market interest rates, irrespective of credit adjustments, compared to the contractual rates of the acquired loans. The credit fair value adjustment made on non-credit impaired loans represents the changes in credit quality of the underlying borrowers from loan inception to the acquisition date. The credit fair value adjustment on PCI loans is derived in accordance with ASC 310-30 and represents the portion of the loan balance that has been deemed uncollectible based on our expectations of future cash flows for each respective loan.
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The following table provides information about acquired PCI loans at May 1, 2019.
Contractually required principal and interest at acquisition$31,599 
Contractual cash flows not expected to be collected (nonaccretable discount)(8,616)
Expected cash flows at acquisition22,983 
Interest component of expected cash flows (accretable discount)(3,497)
Estimated fair value of acquired PCI loans$19,486 

Unaudited pro forma net income for the Company.year ended December 31, 2019 would have totaled $20.9 million, and revenues would have totaled $102.5 million for the same period had the Hamilton acquisition occurred January 1, 2019. Unaudited pro forma net income for the year ended December 31, 2018, would have totaled $12.2 million, and revenues would have totaled $95.3 million for the same period had the Mercersburg and Hamilton acquisitions occurred January 1, 2018.
In connection with the Mercersburg and Hamilton acquisitions, the Company incurred merger related expenses. Mercersburg related merger expenses totaled $280 thousand and $2.9 million during the years ended December 31, 2019 and 2018, respectively, which are included in merger related and branch consolidation expenses on the consolidated statements of income. For December 31, 2019 and 2018, the expenses consisted primarily of $81 thousand and $1.2 million of investment banking, legal and consulting fees; $199 thousand and $1.1 million of information systems expense, including canceling of contracts; and 0 and $617 thousand, respectively, of other expenses, including payout of employee termination contracts. Hamilton related merger expenses totaled $7.7 million and $267 thousand for the years ended December 31, 2019 and 2018, respectively, which are included in merger related and branch consolidation expenses on the consolidated statements of income. For December 31, 2019 and 2018, these expenses consisted primarily of $1.9 million and $254 thousand of investment banking, legal and consulting fees; $3.7 million and 0 of information systems expense, including canceling of contracts; and $2.2 million and $13 thousand, respectively, of other expenses, including payout of employee termination contracts.
Branch Consolidation
In October, 2019, the Company announced the consolidation of 5 branches in Franklin and Perry Counties, Pennsylvania, into other, larger branches of the Bank, as part of its ongoing evaluation of branch profitability. The average balances that areCompany also announced the sale/leaseback of an operations center facility to eliminate approximately 50,000 square feet of excess back office space. The branch consolidations were completed in January 2020, and the sale of the operations center facility is anticipated to be maintained either on hand orcompleted in the second quarter of 2020.
In conjunction with the correspondent banks totaled $4,371,000consolidation and $1,265,000 atoperations center facility sale/leaseback, the Company recorded $988 thousand in expenses in the fourth quarter of 2019, consisting of $762 thousand in fixed asset writedowns, $126 thousand in lease termination costs, and $100 thousand in severance and other costs. At December 31, 20162019, fixed assets included in this consolidation, with an estimated fair value of $4.9 million, were held for sale and 2015.carried in other assets on the consolidated balances sheets.
The balances with these correspondent banks, at times, exceed federally insured limits; however the Company considers this to be a normal business risk. The Company reviews the correspondent banks' financial condition on a quarterly basis.



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NOTE 3. SECURITIES AVAILABLE FOR SALE
At December 31, 2019 and 2018, all investment securities were classified as AFS. The following table summarizes amortized cost and fair value of AFS securities, available for sale at December 31, 2016 and 2015 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss). AtAOCI at December 31, 20162019 and 2015 all investment securities were classified as available for sale.2018.

(Dollars in thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Fair Value
December 31, 2016       
U.S. Government Agencies$39,569
 $147
 $124
 $39,592
States and political subdivisions163,677
 1,782
 1,177
 164,282
U.S. Government Sponsored Enterprises (GSE) residential mortgage-backed securities116,022
 928
 6
 116,944
GSE residential collateralized mortgage obligations (CMOs)72,411
 240
 3,268
 69,383
GSE commercial CMOs5,148
 0
 292
 4,856
Private label CMOs5,042
 0
 36
 5,006
Total debt securities401,869
 3,097
 4,903
 400,063
Equity securities50
 41
 0
 91
Totals$401,919
 $3,138
 $4,903
 $400,154
December 31, 2015       
U.S. Government Agencies$47,209
 $200
 $182
 $47,227
States and political subdivisions124,421
 2,483
 943
 125,961
GSE residential mortgage-backed securities132,389
 229
 269
 132,349
GSE residential CMOs15,668
 215
 40
 15,843
GSE commercial CMOs63,598
 735
 563
 63,770
Private label CMOs8,944
 0
 43
 8,901
Total debt securities392,229
 3,862
 2,040
 394,051
Equity securities50
 23
 0
 73
Totals$392,279
 $3,885
 $2,040
 $394,124
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
December 31, 2019
States and political subdivisions$83,607  $4,288  $32  $87,863  
GSE residential CMOs67,928  1,000  774  68,154  
Non-agency CMOs17,210  —  123  17,087  
Private label commercial CMOs86,704  156  231  86,629  
Asset-backed and other235,544  138  5,029  230,653  
Totals$490,993  $5,582  $6,189  $490,386  
December 31, 2018
States and political subdivisions$144,596  $1,919  $1,511  $145,004  
GSE residential CMOs110,421  332  2,689  108,064  
Private label residential CMOs144  —   143  
Private label commercial CMOs75,911  55  921  75,045  
Asset-backed and other138,535  126  1,073  137,588  
Totals$469,607  $2,432  $6,195  $465,844  


The following table summarizes AFS securities available for sale with unrealized losses at December 31, 20162019 and 2015,2018, aggregated by major security type and length of time in a continuous unrealized loss position.
 Less Than 12 Months 12 Months or More Total
(Dollars in thousands)
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
December 31, 2016           
U.S. Government Agencies$10,710
 $23
 $13,531
 $101
 $24,241
 $124
States and political subdivisions58,924
 610
 5,075
 567
 63,999
 1,177
GSE residential mortgage-backed securities5,034
 6
 0
 0
 5,034
 6
GSE residential CMOs59,534
 3,264
 634
 4
 60,168
 3,268
GSE commercial CMOs4,856
 292
 0
 0
 4,856
 292
Private label CMOs0
 0
 5,005
 36
 5,005
 36
Totals$139,058
 $4,195
 $24,245
 $708
 $163,303
 $4,903
December 31, 2015           
U.S. Government Agencies$27,640
 $182
 $0
 $0
 $27,640
 $182
States and political subdivisions30,252
 373
 14,139
 570
 44,391
 943
GSE residential mortgage-backed securities82,911
 269
 0
 0
 82,911
 269
GSE residential CMOs0
 0
 4,237
 40
 4,237
 40
GSE commercial CMOs33,606
 563
 0
 0
 33,606
 563
Private label CMOs8,901
 43
 0
 0
 8,901
 43
Totals$183,310
 $1,430
 $18,376
 $610
 $201,686
 $2,040
 Less Than 12 Months12 Months or MoreTotal
# of Securities
Fair
Value
Unrealized
Losses
# of Securities
Fair
Value
Unrealized
Losses
# of Securities
Fair
Value
Unrealized
Losses
December 31, 2019
States and political subdivisions $6,173  $32  —  $ $  $6,173  $32  
GSE residential CMOs 37,158  309   11,602  465   48,760  774  
Non-agency CMOs 17,087  123  —  —  —   17,087  123  
Private label commercial CMOs 26,079  67   39,726  164  14  65,805  231  
Asset-backed and other 92,189  1,145   121,399  3,884  18  213,588  5,029  
Totals22  $178,686  $1,676  18  $172,727  $4,513  40  $351,413  $6,189  
December 31, 2018
States and political subdivisions27  $46,585  $662   $23,036  $849  33  $69,621  $1,511  
GSE residential CMOs 18,037  122   46,168  2,567   64,205  2,689  
Private label residential CMOs 143   —  —  —   143   
Private label commercial CMOs11  56,499  712   6,349  209  13  62,848  921  
Asset-backed and other 78,900  859   10,808  214   89,708  1,073  
Totals46  $200,164  $2,356  18  $86,361  $3,839  64  $286,525  $6,195  

The Company determines whether unrealized losses are temporary in nature in accordance with FASB ASC 325-40, when applicable, and FASB ASC 320-10, Investments - Overall, (“FASB ASC 320-10”). 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 an OTTI condition. 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 46been less than cost and near-term prospects of the issuer.
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FASB ASC 320-10 requires the Company to assess if an OTTI exists by considering 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 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 basis of the security and 53 securities atthe 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 recognized in accumulated other comprehensive loss on the consolidated statements of financial condition.
As of December 31, 2016 and 2015 for which amortized cost exceeds fair value, as discussed below.
U.S. Government Agencies and GSE Securities. At December 31, 2016, a total of 17 U.S. Government Agencies and GSE securities, including mortgage-backed and CMOs have unrealized losses, 14 of which were in the less than 12 months category, and 3 which were in the 12 months or more category. At December 31, 2015,2019, the Company had 29 such securities withno cumulative OTTI. There were no OTTI charges recognized in earnings as a result of credit losses on investments in the years ended December 31, 2019, 2018 and 2017.
State and Political Subdivisions. The unrealized losses 25 of which werepresented in the less than 12 months category, and 4 of which were in the 12 months or more category. These unrealized lossestable above have been caused by a widening of spreads and/or a rise in interest rates from the time the securities were purchased. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the par value basis of the investments. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2016 or 2015.
State and Political Subdivisions. At December 31, 2016, a total of 26 state and political subdivision securities have unrealized losses, 25 of which were in the less than 12 months category, and 1 which was in the 12 months or more category. At December 31, 2015, the Company had 21 such securities with unrealized losses, 16 of which were in the less than 12 months category, and 5 of which were in the 12 months or more category. These unrealized losses have been caused by a widening of spreads or a rise in interest rates from the time the securities were purchased. Management considers the investment rating, the state of the issuer of the security and other credit support in determining whether the security is other-than-temporarily impaired. BecauseOTTI. As of December 31, 2019 and 2018, management concluded that an OTTI did not exist on any of the Companyaforementioned securities based upon its assessment. Management also concluded that it does not intend to sell the investments andnor will it is not more likely than not that the Company will be required to sell the investmentssecurities, before recovery of their amortized cost basis,recovery, which may be maturity, and management expects to recover the Company does not considerentire amortized cost basis of these investments to be other-than-temporarily impaired at December 31, 2016 or 2015.securities.
Private Label CMOs. At December 31, 2016, a total of 3 private labelGSE Residential CMOs have. The unrealized losses all 3 of which werepresented in the 12 months or more category. At December 31, 2015, the Company had 3 such securities with unrealized losses, all 3 of which were in the less than 12 months category. These unrealized lossestable above have been caused by a widening of spreads and/or 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. As of December 31, 2019 and 2018, management concluded that an OTTI did not exist on any of the aforementioned securities based upon its assessment. Management also concluded that it does not intend to sell nor will it be required to sell the securities, before their recovery, which may be maturity, and management expects to recover the entire amortized cost basis of these securities.
Non-agency CMOs. 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 the securities were purchased. BecauseAs of December 31, 2019, management concluded that an OTTI did not exist on any of the Companyaforementioned securities based upon its assessment. Management also concluded that it does not intend to sell the investments andnor will it is not more likely than not that the Company will be required to sell the investmentssecurities, before recovery of their amortized cost basis,recovery, which may be maturity, and management expects to recover the Companyentire amortized cost basis of these securities.
Private Label Residential CMOs, Private Label Commercial CMOs and Asset-backed and Other. 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 the securities were purchased. As of December 31, 2019 and 2018, management concluded that an OTTI did not exist on any of the aforementioned securities based upon its assessment. Management also concluded that it does not considerintend to sell nor will it be required to sell the securities, before their recovery, which may be maturity, and management expects to recover the entire amortized cost basis of these investments to be other-than-temporarily impaired at December 31, 2016.

securities.
The following table summarizes amortized cost and fair value of AFS securities available for saleby contractual maturity at December 31, 2016 by contractual maturity.2019. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
 
 Available for Sale
Amortized CostFair Value
Due in one year or less$230  $230  
Due after one year through five years—  —  
Due after five years through ten years26,346  27,631  
Due after ten years57,031  60,002  
CMOs171,842  171,870  
Asset-backed and other235,544  230,653  
$490,993  $490,386  

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 Available for Sale
(Dollars in thousands)Amortized Cost Fair Value
    
Due in one year or less$15
 $15
Due after one year through five years7,157
 7,258
Due after five years through ten years72,205
 72,817
Due after ten years123,869
 123,784
Mortgage-backed securities and CMOs198,623
 196,189
Total debt securities401,869
 400,063
Equity securities50
 91
Totals$401,919
 $400,154
ProceedsThe following table summarizes proceeds from sales of AFS securities available for saleand gross gains and gross losses for the years ended December 31, 2016, 20152019, 2018 and 2014 totaled $64,742,000, $65,611,000 and $169,573,000. Gross gains on the sales of2017.
201920182017
Proceeds from sale of AFS securities$199,928  $156,364  $162,320  
Gross gains4,974  1,681  1,477  
Gross losses225  675  287  
AFS securities totaled $1,468,000, $1,948,000 and $2,301,000 for the years ended December 31, 2016, 2015 and 2014. Gross losses on sales of securities available for sale totaled $48,000, $24,000 and $366,000 for the years ended December 31, 2016, 2015 and 2014.
Securities pledged at December 31, 2016 and 2015 hadwith a fair value of $317,282,000$158.7 million and $250,397,000$164.2 million at December 31, 2019 and 2018, respectively, were pledged to secure public funds and for other purposes as required or permitted by law.
NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES
The Company’s loan portfolio is grouped into classes to allow management to monitor the performance by the borrower and to monitor the yield on the portfolio. Consistent with ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Loan Losses, the segments are further broken down into classes to allow for differing risk characteristics within a segment.
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 associated collateral.
The Company has various types of commercial real estate loans, which have differing levels of credit risk. Owner-occupiedOwner 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-occupiedowner 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 as compared to owner-occupied loans.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, 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.
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 ratedhighest-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 credit worthinesscreditworthiness of the borrower and, to the extent available, credit ratings onof 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.
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 customersclients for a specific utility.
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The Company originates loans to its retail customers,clients, including fixed-rate and adjustable first lien mortgage loans with the underlying 1-4 family owner-occupiedowner occupied residential property securing the loan. The Company’s risk exposure is minimized in these types of loans through the evaluation of the credit worthinesscreditworthiness 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 90% of the value of the real estate taken as collateral. The credit worthinesscreditworthiness of the borrower is considered including credit scores and debt-to-income ratios, which generally cannot exceed 43%.ratios.
Installment and other loans’ credit risk are mitigated through conservativeprudent underwriting standards, including the evaluation of the credit worthinesscreditworthiness of the borrower through credit scores and debt-to-income ratios and, if secured, the collateral value of the assets. As theseThese loans can be unsecured or secured by assets the value of which may depreciate quickly or may fluctuate, they typicallyand may present a greater risk to the Company than 1-4 family residential loans.

The following table presents the loan portfolio by segment and class, excluding residential loans held for sale, broken out by classesLHFS, at December 31, was as follows:2019 and 2018.
 
20192018
(Dollars in thousands)2016 2015
Commercial real estate:   Commercial real estate:
Owner-occupied$112,295
 $103,578
Owner-occupied$170,884  $129,650  
Non-owner occupied206,358
 145,401
Non-owner occupied361,050  252,794  
Multi-family47,681
 35,109
Multi-family106,893  78,933  
Non-owner occupied residential62,533
 54,175
Non-owner occupied residential120,038  100,367  
Acquisition and development:   Acquisition and development:
1-4 family residential construction4,663
 9,364
1-4 family residential construction15,865  7,385  
Commercial and land development26,085
 41,339
Commercial and land development41,538  42,051  
Commercial and industrial88,465
 73,625
Commercial and industrial214,554  160,964  
Municipal53,741
 57,511
Municipal47,057  50,982  
Residential mortgage:   Residential mortgage:
First lien139,851
 126,022
First lien336,372  235,296  
Home equity – term14,248
 17,337
Home equity – term14,030  12,208  
Home equity – lines of credit120,353
 110,731
Home equity – lines of credit165,314  143,616  
Installment and other loans7,118
 7,521
Installment and other loans50,735  33,411  
$883,391
 $781,713
Total loans (1)
Total loans (1)
$1,644,330  $1,247,657  

(1) Includes $395.9 million and $135.0 million of acquired loans at December 31, 2019 and 2018, 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 Company,Bank, are combined and given a “Pass” rating. Management generally follows regulatory definitions in assigning criticized ratings to loans, including special mention, substandard, doubtful"Special Mention," "Substandard," "Doubtful" or loss."Loss." The “Special Mention”Special Mention category includes loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Company’sBank'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”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”Substandard loans include loans that management has determined not to be impaired, as well as loans considered to be impaired. A “Doubtful”Doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification of lossas Loss is deferred. “Loss” assetsLoss loans are considered uncollectible, as the underlying borrowers are often in bankruptcy, have suspended debt repayments, or have ceased business operations. Once a loan is classified as “Loss,”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 mitigatemonitor risk in the lending function. The Enterprise Risk Management (“ERM”)ERM Committee, comprised of executive 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. TheA loan review program provides the Company with an
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independent review of the Company’scommercial loan portfolio on an ongoing basis. Generally, consumer and residential mortgage loans are included in the "Pass"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.
Internal loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $500,000,$500 thousand, which includes confirmation of risk rating by an independent credit officer. Credit Administration also reviews loans in excess of $1,000,000. In addition, all commercial relationships greater than $250,000$500 thousand rated Substandard, Doubtful or Loss are reviewed quarterly and corresponding risk ratings are reaffirmed by the Bank'sCompany's Problem Loan Committee, with subsequent reporting to the Management ERM Committee.Committee and the Board of Directors.

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The following summarizes the Company’s loan portfolio ratings based on its internal risk rating system at December 31, 20162019 and 2015:2018:
 
Pass
Special
Mention
Non-Impaired
Substandard
Impaired -
Substandard
DoubtfulPCI LoansTotal
December 31, 2019
Commercial real estate:
Owner-occupied$151,161  $4,513  $3,163  $5,872  $—  $6,175  $170,884  
Non-owner occupied342,753  17,152  —  —  —  1,145  361,050  
Multi-family100,361  4,822  682  345  —  683  106,893  
Non-owner occupied residential111,697  4,534  1,115  235  —  2,457  120,038  
Acquisition and development:
1-4 family residential construction15,865  —  —  —  —  —  15,865  
Commercial and land development39,939  206  1,393  —  —  —  41,538  
Commercial and industrial198,951  1,133  8,899  1,763  —  3,808  214,554  
Municipal42,649  4,408  —  —  —  —  47,057  
Residential mortgage:
First lien323,040  978  —  2,590  —  9,764  336,372  
Home equity – term13,774  74  149  13  —  20  14,030  
Home equity – lines of credit164,469  74  38  733  —  —  165,314  
Installment and other loans50,497  —  —  85  —  153  50,735  
$1,555,156  $37,894  $15,439  $11,636  $—  $24,205  $1,644,330  
December 31, 2018
Commercial real estate:
Owner-occupied$121,903  $3,024  $987  $1,880  $—  $1,856  $129,650  
Non-owner occupied242,136  10,008  —  —  —  650  252,794  
Multi-family71,482  5,886  717  131  —  717  78,933  
Non-owner occupied residential97,590  736  1,197  309  —  535  100,367  
Acquisition and development:
1-4 family residential construction7,385  —  —  —  —  —  7,385  
Commercial and land development41,251  25  583  —  —  192  42,051  
Commercial and industrial150,286  2,278  2,940  286  —  5,174  160,964  
Municipal50,982  —  —  —  —  —  50,982  
Residential mortgage:
First lien229,971  —  —  2,877  —  2,448  235,296  
Home equity – term12,170  —  —  16  —  22  12,208  
Home equity – lines of credit142,638  165  15  798  —  —  143,616  
Installment and other loans33,229  15   —  —  166  33,411  
$1,201,023  $22,137  $6,440  $6,297  $—  $11,760  $1,247,657  

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(Dollars in thousands)Pass 
Special
Mention
 
Non-Impaired
Substandard
 
Impaired -
Substandard
 Doubtful Total
December 31, 2016           
Commercial real estate:           
Owner-occupied$103,652
 $5,422
 $2,151
 $1,070
 $0
 $112,295
Non-owner occupied190,726
 4,791
 10,105
 736
 0
 206,358
Multi-family42,473
 4,222
 787
 199
 0
 47,681
Non-owner occupied residential59,982
 949
 1,150
 452
 0
 62,533
Acquisition and development:           
1-4 family residential construction4,560
 103
 0
 0
 0
 4,663
Commercial and land development25,435
 10
 639
 1
 0
 26,085
Commercial and industrial87,588
 251
 32
 594
 0
 88,465
Municipal53,741
 0
 0
 0
 0
 53,741
Residential mortgage:           
First lien135,558
 0
 0
 4,293
 0
 139,851
Home equity – term14,155
 0
 0
 93
 0
 14,248
Home equity – lines of credit119,681
 82
 61
 529
 0
 120,353
Installment and other loans7,112
 0
 0
 6
 0
 7,118
 $844,663
 $15,830
 $14,925
 $7,973
 $0
 $883,391
December 31, 2015           
Commercial real estate:           
Owner-occupied$96,715
 $1,124
 $3,630
 $2,109
 $0
 $103,578
Non-owner occupied125,043
 12,394
 108
 7,856
 0
 145,401
Multi-family31,957
 1,779
 1,140
 233
 0
 35,109
Non-owner occupied residential50,601
 1,305
 1,374
 895
 0
 54,175
Acquisition and development:           
1-4 family residential construction9,364
 0
 0
 0
 0
 9,364
Commercial and land development40,181
 219
 934
 5
 0
 41,339
Commercial and industrial70,967
 1,380
 544
 734
 0
 73,625
Municipal57,511
 0
 0
 0
 0
 57,511
Residential mortgage:           
First lien121,214
 0
 0
 4,808
 0
 126,022
Home equity – term17,234
 0
 0
 103
 0
 17,337
Home equity – lines of credit109,731
 230
 180
 590
 0
 110,731
Installment and other loans7,504
 0
 0
 17
 0
 7,521
 $738,022
 $18,431
 $7,910
 $17,350
 $0
 $781,713
Classified loans may also be evaluated for impairment. For commercial real estate, acquisition and development, and commercial and industrial loans, a loan is considered impaired 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 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. Generally, loans that are more than 90 days past due are deemed impaired. 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 is measured on a loan-by-loan basis for commercial, construction and restructured 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 for extended periods of time, periodic updates on fair values are obtained, which may include updated appraisals. The updatedUpdated fair values will beare incorporated into the impairment analysis atin the next reporting period.
Loan charge-offs, which may include partial charge-offs, are taken on an impaired loan that is collateral dependent if the loan’s carrying balance exceeds its collateral’s appraised value;value, the loan has been identified as uncollectible;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,2 and management expects the performing note to continue to perform and the loan is adequately secured. The second, or non-performing note, would be charged-off. Generally, an impaired loan with a partial charge-off may continue to have an impairment reserve on it after the partial charge-off, if factors warrant.
At December 31, 20162019 and 2015,2018, nearly all of the Company’s impaired loans’ extent of impairmentloan impairments were measured based on the estimated fair value of the collateral securing the loan, except for TDRs. By definition, TDRs are considered impaired. All restructured loans’TDR impairment were determinedanalyses are initially based on discounted cash flows for those loans classified as TDRs but are still accruing interest.loans. For real estate loans, collateral generally consists of commercial 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.
According to policy, updatedUpdated appraisals are generally required every 18 months for classified commercial loans in excess of $250,000.$250 thousand. The “as is value”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 circumstancesapprovals, dictate that another value provided by the appraiser is more appropriate.
Generally, impaired commercial loans secured by real estate, wereother than new and performing TDRs, are measured at fair value using certified real estate appraisals that had been completed within the last 18 months. Appraised values are further 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, fair values are based on oneeither an existing appraisal or a combination of the following approaches. In those situations in which a combination of approaches is considered, the factor that carries the most consideration will be the one management believes is warranted.discounted cash flow analysis as determined by management. The approaches are as follows:discussed below:
 
OriginalExisting appraisal – if the originalexisting 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 originalexisting certified appraised value may be used. Discounts to the appraised value, as deemed appropriate for selling costs, are factored into the appraised value in arriving at 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 is not limited to real estate, and may consist of accounts receivable, inventory, equipment or other business assets. Estimated fair values aremay be determined based on borrowers’ financial statements, inventory ledgers, accounts receivable agings 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 evaluationvaluation policies.
The Company distinguishes Substandardsubstandard loans on both an impaired and non-impaired basis, 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 Substandardsubstandard classification does not automatically meet the definition of impaired. A Substandard loan is one that is inadequately protected by current sound worth and paying capacity of the obligor or the collateral pledged, if any. Extensions of credit so classified have well-defined weaknesses which may jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate
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amount of substandard loans, does not have to exist in individual extensions of credit classified Substandard.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 loans rated Substandardsubstandard to be collectively evaluated for impairment as opposed to evaluating these loans individually for impairment. Although the Company believes these loans have well-defined weaknesses and meet the definition of Substandard,substandard, they are generally performing and management has concluded that

it is likely itthe 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. Generally, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.
The following table, which excludes PCI loans, 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, 20162019 and 2015.2018. The recorded investment in loans excludes accrued interest receivable due to insignificance. AllowancesRelated 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 theany partial charge-off will be recorded when final information is received.
 
 Impaired Loans with a Specific AllowanceImpaired 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, 2019
Commercial real estate:
Owner-occupied$—  $—  $—  $5,872  $8,086  
Multi-family—  —  —  345  569  
Non-owner occupied residential—  —  —  235  422  
Commercial and industrial—  —  —  1,763  3,361  
Residential mortgage:
First lien425  425  36  2,165  3,164  
Home equity—term—  —  —  13  15  
Home equity—lines of credit—  —  —  733  1,077  
Installment and other loans—  —  —  85  97  
$425  $425  $36  $11,211  $16,791  
December 31, 2018
Commercial real estate:
Owner-occupied$—  $—  $—  $1,880  $2,576  
Multi-family—  —  —  131  336  
Non-owner occupied residential—  —  —  309  632  
Commercial and industrial—  —  —  286  457  
Residential mortgage:
First lien743  743  38  2,134  2,727  
Home equity—term—  —  —  16  23  
Home equity—lines of credit—  —  —  798  1,081  
$743  $743  $38  $5,554  $7,832  

86

 Impaired Loans with a Specific Allowance Impaired Loans with No Specific Allowance
(Dollars in thousands)
Recorded
Investment
(Book Balance)
 
Unpaid
Principal Balance
(Legal Balance)
 
Related
Allowance
 
Recorded
Investment
(Book Balance)
 
Unpaid
Principal Balance
(Legal Balance)
December 31, 2016         
Commercial real estate:         
Owner-occupied$0
 $0
 $0
 $1,070
 $2,236
Non-owner occupied0
 0
 0
 736
 1,323
Multi-family0
 0
 0
 199
 368
Non-owner occupied residential0
 0
 0
 452
 706
Acquisition and development:         
Commercial and land development0
 0
 0
 1
 16
Commercial and industrial0
 0
 0
 594
 715
Residential mortgage:         
First lien643
 643
 43
 3,650
 4,399
Home equity—term0
 0
 0
 93
 103
Home equity—lines of credit0
 0
 0
 529
 659
Installment and other loans0
 0
 0
 6
 34
 $643
 $643
 $43
 $7,330
 $10,559
December 31, 2015         
Commercial real estate:         
Owner-occupied$0
 $0
 $0
 $2,109
 $3,344
Non-owner occupied0
 0
 0
 7,856
 8,600
Multi-family0
 0
 0
 233
 385
Non-owner occupied residential0
 0
 0
 895
 1,211
Acquisition and development:         
Commercial and land development0
 0
 0
 5
 19
Commercial and industrial0
 0
 0
 734
 780
Residential mortgage:         
First lien1,952
 1,984
 271
 2,856
 3,369
Home equity—term0
 0
 0
 103
 110
Home equity—lines of credit22
 23
 10
 568
 688
Installment and other loans8
 9
 8
 9
 35
 $1,982
 $2,016
 $289
 $15,368
 $18,541
Table of Contents

The following table, which excludes PCI loans, summarizes the average recorded investment in impaired loans and related recognized interest income recognized on loans deemed impaired for the years ended December 31, 2016, 20152019, 2018 and 2014:2017.
 
201920182017
2016 2015 2014
Average
Impaired
Balance
Interest
Income
Recognized
Average
Impaired
Balance
Interest
Income
Recognized
Average
Impaired
Balance
Interest
Income
Recognized
(Dollars in thousands)
Average
Impaired
Balance
 
Interest
Income
Recognized
 
Average
Impaired
Balance
 
Interest
Income
Recognized
 
Average
Impaired
Balance
 
Interest
Income
Recognized
Commercial real estate:           Commercial real estate:
Owner-occupied$1,758
 $0
 $2,613
 $0
 $3,740
 $20
Owner-occupied$2,455  $ $1,495  $ $1,000  $ 
Non-owner occupied6,831
 0
 3,470
 0
 6,711
 143
Non-owner occupied46  —  1,842  —  392  —  
Multi-family216
 0
 402
 0
 274
 2
Multi-family152  —  148  —  182  —  
Non-owner occupied residential645
 0
 1,020
 0
 2,095
 13
Non-owner occupied residential217  —  346  —  418  —  
Acquisition and development:           Acquisition and development:
1-4 family residential construction1-4 family residential construction—  —  181  —  154  —  
Commercial and land development3
 0
 266
 137
 1,250
 34
Commercial and land development21  —   —  —  —  
Commercial and industrial575
 0
 1,208
 0
 1,700
 5
Commercial and industrial683  —  322  —  413  —  
Residential mortgage:           Residential mortgage:
First lien4,525
 33
 4,644
 37
 4,226
 53
First lien2,582  50  3,234  59  4,012  58  
Home equity – term98
 0
 130
 0
 85
 0
Home equity – term13  —  19  —  61  —  
Home equity – lines of credit455
 0
 571
 0
 111
 3
Home equity – lines of credit750   657   488   
Installment and other loans12
 0
 22
 0
 9
 1
Installment and other loans13  —   —  10  —  
$15,118
 $33
 $14,346
 $174
 $20,201
 $274
$6,932  $54  $8,249  $63  $7,130  $66  
The following table presents impaired loans that are TDRs, with the recorded investment at December 31, 20162019 and 2018.
 20192018
Number��of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
Accruing:
Commercial real estate:
Owner-occupied $30   $39  
Residential mortgage:
First lien 931  11  1,069  
Home equity - lines of credit 18   24  
11  979  13  1,132  
Nonaccruing:
Commercial real estate:
Owner-occupied 1,909   37  
Residential mortgage:
First lien 359   658  
 2,268   695  
20  $3,247  22  $1,827  

There were 3 new commercial real estate owner occupied TDRs totaling $1.9 million for the year ended December 31, 2015.
 2016 2015
(Dollars in thousands)
Number of
Contracts
 
Recorded
Investment
 
Number of
Contracts
 
Recorded
Investment
Accruing:       
Residential mortgage:       
First lien8
 $896
 8
 $793
Home equity - lines of credit1
 34
 0
 0
 9
 930
 8
 793
Nonaccruing:       
Residential mortgage:       
First lien12
 1,035
 12
 1,153
Installment and other loans1
 6
 1
 10
 13
 1,041
 13
 1,163
 22
 $1,971
 21
 $1,956

The following table presents2019, no restructured loans included in nonaccrual status,for the year ended December 31, 2018, and 2 commercial real estate owner occupied TDRs totaling $119 thousand for the year ended December 31, 2017 that were modified as TDRs within the previous 12 months and for which there was awere in payment default subsequentdefault. No additional commitments have been made to the modification for the years ended December 31, 2016, 2015, and 2014.
borrowers whose loans are considered TDRs.
87

 2016 2015 2014
(Dollars in thousands)
Number of
Contracts
 
Recorded
Investment
 
Number of
Contracts
 
Recorded
Investment
 
Number of
Contracts
 
Recorded
Investment
            
Commercial real estate:           
Non-owner occupied0
 $0
 0
 $0
 1
 $3,495
Acquisition and development:           
Commercial and land development0
 0
 0
 0
 1
 544
Residential mortgage:           
First lien0
 0
 0
 0
 2
 177
 0
 $0
 0
 $0
 4
 $4,216
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The following table presents the number of loans modified, and their pre-modification and post-modification investment balances for the years ended December 31, 2016, 2015,2019, and 2014:2017. There were 0 loans modified during 2018.
 
Number of
Contracts
Pre-
Modification
Investment
Balance
Post-
Modification
Investment
Balance
December 31, 2019
Commercial real estate:
Owner-occupied $1,866  $1,881  
December 31, 2017
Commercial real estate:
Owner-occupied $119  $119  
(Dollars in thousands)
Number of
Contracts
 
Pre-
Modification
Investment
Balance
 
Post-
Modification
Investment
Balance
December 31, 2016     
Commercial real estate:     
Non-owner occupied1
 $6,095
 $6,095
Residential mortgage:     
First lien2
 265
 265
Home equity - lines of credit1
 34
 34
 4
 $6,394
 $6,394
December 31, 2015     
Residential mortgage:     
First lien1
 $59
 $59
 1
 $59
 $59
December 31, 2014     
Residential mortgage:     
First lien19
 $1,876
 $1,810
Installment and other loans1
 36
 14
 20
 $1,912
 $1,824

The loans presented in the tablestable above were considered TDRs as a result of the Company agreeing to below market interest rates forgiven the risk of the transaction,transaction; allowing the loan to remain on interest only status,status; or a reduction in interest rates, in order to give the borrowers an opportunity to improve their cash flows. For new and accruing TDRs, impairment is generally assessed using a discounted cash flow analysis. For TDRs in default of their modified terms, impairment is generally determined on a collateral dependent approach, except for accruing residential mortgage TDRs, which are generally on the discounted cash flow approach. Certain loans modified during a period may no longer be outstanding at the end of the period if the loan was paid off.
No additional commitments have been made to borrowers whose loans are considered TDRs.

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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 itstheir delinquencies. The following table presents the classes of the loan portfolio summarized by aging categories of performing loans and nonaccrual loans at December 31, 20162019 and 2015:2018.
 
  Days Past Due   
Current30-5960-89
90+
(still accruing)
Total
Past Due
Non-
Accrual
Total
Loans
December 31, 2019
Commercial real estate:
Owner-occupied$158,723  $144  $—  $—  $144  $5,842  $164,709  
Non-owner occupied359,425  480  —  —  480  —  359,905  
Multi-family105,865  —  —  —  —  345  106,210  
Non-owner occupied residential116,370  841  66  69  976  235  117,581  
Acquisition and development:
1-4 family residential construction15,587  278  —  —  278  —  15,865  
Commercial and land development40,403  1,135  —  —  1,135  —  41,538  
Commercial and industrial208,668  315  —  —  315  1,763  210,746  
Municipal47,057  —  —  —  —  —  47,057  
Residential mortgage:
First lien314,473  9,092  1,234  150  10,476  1,659  326,608  
Home equity – term13,993  —   —   13  14,010  
Home equity – lines of credit163,907  417  275  —  692  715  165,314  
Installment and other loans50,224  236  37  —  273  85  50,582  
Subtotal1,594,695  12,938  1,616  219  14,773  10,657  1,620,125  
Loans acquired with credit deterioration:
Commercial real estate:
Owner-occupied6,015  —  129  31  160  —  6,175  
Non-owner occupied564  —  —  581  581  —  1,145  
Multi-family683  —  —  —  —  —  683  
Non-owner occupied residential1,710  105  111  531  747  —  2,457  
Commercial and industrial3,792  —  —  16  16  —  3,808  
Residential mortgage:
First lien6,308  1,857  745  854  3,456  —  9,764  
Home equity – term16   —  —   —  20  
Installment and other loans131  22  —  —  22  —  153  
Subtotal19,219  1,988  985  2,013  4,986  —  24,205  
$1,613,914  $14,926  $2,601  $2,232  $19,759  $10,657  $1,644,330  

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Days Past Due
  Days Past Due      Current30-5960-89
90+
(still accruing)
Total
Past Due
Non-
Accrual
Total
Loans
Current 30-59 60-89 
90+
(still accruing)
 
Total
Past Due
 
Non-
Accrual
 
Total
Loans
December 31, 2016             
December 31, 2018December 31, 2018
Commercial real estate:             Commercial real estate:
Owner-occupied$111,225
 $0
 $0
 $0
 $0
 $1,070
 $112,295
Owner-occupied$125,887  $66  $—  $—  $66  $1,841  $127,794  
Non-owner occupied205,622
 0
 0
 0
 0
 736
 206,358
Non-owner occupied252,144  —  —  —  —  —  252,144  
Multi-family47,482
 0
 0
 0
 0
 199
 47,681
Multi-family78,085  —  —  —  —  131  78,216  
Non-owner occupied residential62,081
 0
 0
 0
 0
 452
 62,533
Non-owner occupied residential99,268  226  29  —  255  309  99,832  
Acquisition and development:             Acquisition and development:
1-4 family residential construction4,548
 115
 0
 0
 115
 0
 4,663
1-4 family residential construction7,385  —  —  —  —  —  7,385  
Commercial and land development26,084
 0
 0
 0
 0
 1
 26,085
Commercial and land development41,822  37  —  —  37  —  41,859  
Commercial and industrial87,871
 0
 0
 0
 0
 594
 88,465
Commercial and industrial154,988  411  105  —  516  286  155,790  
Municipal53,741
 0
 0
 0
 0
 0
 53,741
Municipal50,982  —  —  —  —  —  50,982  
Residential mortgage:             Residential mortgage:
First lien135,499
 628
 328
 0
 956
 3,396
 139,851
First lien228,714  1,592  734  —  2,326  1,808  232,848  
Home equity – term14,155
 0
 0
 0
 0
 93
 14,248
Home equity – term11,487  678   —  683  16  12,186  
Home equity – lines of credit119,733
 125
 0
 0
 125
 495
 120,353
Home equity – lines of credit142,394  420  28  —  448  774  143,616  
Installment and other loans7,090
 20
 2
 0
 22
 6
 7,118
Installment and other loans33,135  66  44  —  110  —  33,245  
$875,131
 $888
 $330
 $0
 $1,218
 $7,042
 $883,391
December 31, 2015             
SubtotalSubtotal1,226,291  3,496  945  —  4,441  5,165  1,235,897  
Loans acquired with credit deterioration:Loans acquired with credit deterioration:
Commercial real estate:             Commercial real estate:
Owner-occupied$101,395
 $74
 $0
 $0
 $74
 $2,109
 $103,578
Owner-occupied1,784  —  72  —  72  —  1,856  
Non-owner occupied137,545
 0
 0
 0
 0
 7,856
 145,401
Non-owner occupied650  —  —  —  —  —  650  
Multi-family34,876
 0
 0
 0
 0
 233
 35,109
Multi-family717  —  —  —  —  —  717  
Non-owner occupied residential53,280
 0
 0
 0
 0
 895
 54,175
Non-owner occupied residential535  —  —  —  —  —  535  
Acquisition and development:             Acquisition and development:
1-4 family residential construction9,364
 0
 0
 0
 0
 0
 9,364
Commercial and land development41,236
 0
 98
 0
 98
 5
 41,339
Commercial and land development192  —  —  —  —  —  192  
Commercial and industrial72,846
 24
 21
 0
 45
 734
 73,625
Commercial and industrial4,943  231  —  —  231  —  5,174  
Municipal57,511
 0
 0
 0
 0
 0
 57,511
Residential mortgage:             Residential mortgage:
First lien120,119
 1,844
 44
 0
 1,888
 4,015
 126,022
First lien1,971  382  42  53  477  —  2,448  
Home equity – term17,200
 34
 0
 0
 34
 103
 17,337
Home equity – term17   —  —   —  22  
Home equity – lines of credit109,740
 286
 91
 24
 401
 590
 110,731
Installment and other loans7,488
 16
 0
 0
 16
 17
 7,521
Installment and other loans149  13  —   17  —  166  
SubtotalSubtotal10,958  631  114  57  802  —  11,760  
$762,600
 $2,278
 $254
 $24
 $2,556
 $16,557
 $781,713
$1,237,249  $4,127  $1,059  $57  $5,243  $5,165  $1,247,657  


The Company maintains the allowance for loan lossesits ALL at a level believedmanagement believes adequate by management for probable incurred credit losses. The allowanceALL is established and maintained through a provision for loan losses charged to earnings. Quarterly,On a quarterly basis, management assesses the adequacy of the allowance for loan lossesALL utilizing a defined methodology which considers specific credit evaluation of impaired loans as discussed above, pasthistorical loan loss historical experience, and qualitative factors. Management believes theits approach properly addresses the requirements of ASC Section 310-10-35relevant accounting guidance for loans individually identified as impaired and ASC Subtopic 450-20 for loans collectively evaluated for impairment, and other bank regulatory guidance.
In connection with its quarterly evaluation of the adequacy of the allowance for loan losses,ALL, management continually reviews its methodology to determine if it continues to properly addressaddresses the current risk in the loan portfolio. For each loan class, presented above, general allowances based on
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quantitative factors, principally historical loss trends, are provided for loans that are collectively evaluated for impairment, which is based on quantitative factors, principally historical loss trends for the respective loan class, adjusted for qualitative factors. In addition, an additionalimpairment. An adjustment to the historical loss factors is made to accountmay be incorporated for delinquency and other potential risk not elsewhere defined within the Allowance for Loan LossesALL methodology.
Prior to December 31, 2015, the look back period for historical losses was 12 quarters, weighted one-half for the most recent four quarters, and one-quarter for each of the two previous four quarter periods in order to appropriately capture the loss history in the loan segment. Effective December 31, 2015, the Company extended the look back period to 16 quarters which increased to 20 quarters by December 31, 2016. The extended period was on a prospective basis, more heavily weighted to the most recent four quarters. The look back period was extended as it was determined that a longer look back period is more consistent with the duration of an economic cycle. Management considers current economic, business, and real estate conditions, and the trends in historical charge-off percentages that resulted from applying partial charge-offs to impaired loans, and the impact of distressed loan sales during the year in determining the look back period.
In addition to this quantitative analysis, adjustments to the reserveALL requirements are allocated on loans collectively evaluated for impairment based on additional qualitative factors. At December 31, 2016, and 2015 the qualitative factors, used by management to adjust the historical loss percentage to the anticipated loss allocation, which may range from a minus 150 basis points to a positive 150 basis points per factor, include:including:
Nature and Volume of LoansLoanincluding 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, andculture; the number of exceptions to loan policy; and supervisory loan to value exceptions etc.exceptions.
Concentrations of Credit and Changes within Credit ConcentrationsFactors considered includeincluding 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.
Underwriting Standards and Recovery PracticesFactors considered includeincluding changes to underwriting standards and perceived impact on anticipated losses,losses; trends in the number of exceptions to loan policy; supervisory loan to value exceptions; and effectiveness of administration of loan recovery practices.
Delinquency TrendsFactors considered include theincluding delinquency percentages noted in the portfolio relative to economic conditions,conditions; severity of the delinquencies,delinquencies; and whether the ratios are trending upwards or downwards.
Classified Loans TrendsFactors considered include theincluding internal loan ratings of the portfolio, theportfolio; severity of the ratings, andratings; whether the loan segment’s ratings show a more favorable or less favorable trend,trend; and underlying market conditions and its impact on the collateral values securing the loans.
Experience, Ability and Depth of Management/Lending staffFactors considered includeincluding the years’years of experience of senior and middle management and the lending staff andstaff; turnover of the staff,staff; and instances of repeatrepeated criticisms of ratings.
Quality of Loan ReviewFactors includeincluding the years of experience of the loan review staff,staff; in-house versus outsourced provider of review,review; turnover of staffstaff; and the perceived quality of their work in relation to other external information.
National and Local Economic ConditionsRatios and factors considered includeincluding trends in the consumer price index, (CPI), unemployment rates, the housing price index, housing statistics compared to the prior year, bankruptcy rates, regulatory and legal environment risks and competition.

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ActivityThe following table presents activity in the allowance for loan lossesALL for the years ended December 31, 2016, 20152019, 2018 and 2014 was as follows:2017.
 
 CommercialConsumer  
Commercial
Real Estate
Acquisition
and
Development
Commercial
and
Industrial
MunicipalTotal
Residential
Mortgage
Installment
and Other
TotalUnallocatedTotal
December 31, 2019
Balance, beginning of year$6,876  $817  $1,656  $98  $9,447  $3,753  $244  $3,997  $570  $14,014  
Provision for loan losses515  139  841   1,497  (347) 180  (167) (430) 900  
Charge-offs(25) —  (299) —  (324) (386) (155) (541) —  (865) 
Recoveries268   158  —  429  127  50  177  —  606  
Balance, end of year$7,634  $959  $2,356  $100  $11,049  $3,147  $319  $3,466  $140  $14,655  
December 31, 2018
Balance, beginning of year$6,763  $417  $1,446  $84  $8,710  $3,400  $211  $3,611  $475  $12,796  
Provision for loan losses(442) 396  209  14  177  363  165  528  95  800  
Charge-offs(17) (7) —  —  (24) (148) (292) (440) —  (464) 
Recoveries572  11   —  584  138  160  298  —  882  
Balance, end of year$6,876  $817  $1,656  $98  $9,447  $3,753  $244  $3,997  $570  $14,014  
December 31, 2017
Balance, beginning of year$7,530  $580  $1,074  $54  $9,238  $2,979  $144  $3,123  $414  $12,775  
Provision for loan losses38  (167) 333  30  234  531  174  705  61  1,000  
Charge-offs(835) —  (85) —  (920) (180) (166) (346) —  (1,266) 
Recoveries30   124  —  158  70  59  129  —  287  
Balance, end of year$6,763  $417  $1,446  $84  $8,710  $3,400  $211  $3,611  $475  $12,796  

92

 Commercial Consumer    
(Dollars in thousands)
Commercial
Real Estate
 
Acquisition
and
Development
 
Commercial
and
Industrial
 Municipal Total 
Residential
Mortgage
 
Installment
and Other
 Total Unallocated Total
December 31, 2016                   
Balance, beginning of year$7,883
 $850
 $1,012
 $58
 $9,803
 $2,870
 $121
 $2,991
 $774
 $13,568
Provision for loan losses107
 (270) 129
 (4) (38) 532
 116
 648
 (360) 250
Charge-offs(872) 0
 (79) 0
 (951) (577) (194) (771) 0
 (1,722)
Recoveries412
 0
 12
 0
 424
 154
 101
 255
 0
 679
Balance, end of year$7,530
 $580
 $1,074
 $54
 $9,238
 $2,979
 $144
 $3,123
 $414
 $12,775
December 31, 2015                   
Balance, beginning of year$9,462
 $697
 $806
 $183
 $11,148
 $2,262
 $119
 $2,381
 $1,218
 $14,747
Provision for loan losses(1,020) (440) 249
 (125) (1,336) 1,122
 55
 1,177
 (444) (603)
Charge-offs(711) (22) (115) 0
 (848) (592) (62) (654) 0
 (1,502)
Recoveries152
 615
 72
 0
 839
 78
 9
 87
 0
 926
Balance, end of year$7,883
 $850
 $1,012
 $58
 $9,803
 $2,870
 $121
 $2,991
 $774
 $13,568
December 31, 2014                   
Balance, beginning of year$13,215
 $670
 $864
 $244
 $14,993
 $3,780
 $124
 $3,904
 $2,068
 $20,965
Provision for loan losses(1,674) 92
 (554) (61) (2,197) (960) 107
 (853) (850) (3,900)
Charge-offs(2,637) (70) (270) 0
 (2,977) (587) (177) (764) 0
 (3,741)
Recoveries558
 5
 766
 0
 1,329
 29
 65
 94
 0
 1,423
Balance, end of year$9,462
 $697
 $806
 $183
 $11,148
 $2,262
 $119
 $2,381
 $1,218
 $14,747
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The following table summarizes the ending loan balancebalances individually evaluated for impairment based upon loan segment, as well as the related allowance for loanALL loss allocation for each at December 31, 20162019 and 2015:2018. PCI loans are excluded from loans individually evaluated for impairment.
 
 CommercialConsumer  
Commercial
Real Estate
Acquisition
and
Development
Commercial
and
Industrial
MunicipalTotal
Residential
Mortgage
Installment
and Other
TotalUnallocatedTotal
December 31, 2019
Loans allocated by:
Individually evaluated for impairment$6,452  $—  $1,763  $—  $8,215  $3,336  $85  $3,421  $—  $11,636  
Collectively evaluated for impairment752,413  57,403  212,791  47,057  1,069,664  512,380  50,650  563,030  —  1,632,694  
$758,865  $57,403  $214,554  $47,057  $1,077,879  $515,716  $50,735  $566,451  $—  $1,644,330  
Allowance for loan losses allocated by:
Individually evaluated for impairment$—  $—  $—  $—  $—  $36  $—  $36  $—  $36  
Collectively evaluated for impairment7,634  959  2,356  100  11,049  3,111  319  3,430  140  14,619  
$7,634  $959  $2,356  $100  $11,049  $3,147  $319  $3,466  $140  $14,655  
December 31, 2018
Loans allocated by:
Individually evaluated for impairment$2,320  $—  $286  $—  $2,606  $3,691  $—  $3,691  $—  $6,297  
Collectively evaluated for impairment559,424  49,436  160,678  50,982  820,520  387,429  33,411  420,840  —  1,241,360  
$561,744  $49,436  $160,964  $50,982  $823,126  $391,120  $33,411  $424,531  $—  $1,247,657  
Allowance for loan losses allocated by:
Individually evaluated for impairment$—  $—  $—  $—  $—  $38  $—  $38  $—  $38  
Collectively evaluated for impairment6,876  817  1,656  98  9,447  3,715  244  3,959  570  13,976  
$6,876  $817  $1,656  $98  $9,447  $3,753  $244  $3,997  $570  $14,014  
 Commercial Consumer    
(Dollars in thousands)
Commercial
Real Estate
 
Acquisition
and
Development
 
Commercial
and
Industrial
 Municipal Total 
Residential
Mortgage
 
Installment
and Other
 Total Unallocated Total
December 31, 2016               
Loans allocated by:               
Individually evaluated for impairment$2,457
 $1
 $594
 $0
 $3,052
 $4,915
 $6
 $4,921
 $0
 $7,973
Collectively evaluated for impairment426,410
 30,747
 87,871
 53,741
 598,769
 269,537
 7,112
 276,649
 0
 875,418
 $428,867
 $30,748
 $88,465
 $53,741
 $601,821
 $274,452
 $7,118
 $281,570
 $0
 $883,391
Allowance for loan losses allocated by:               
Individually evaluated for impairment$0
 $0
 $0
 $0
 $0
 $43
 $0
 $43
 $0
 $43
Collectively evaluated for impairment7,530
 580
 1,074
 54
 9,238
 2,936
 144
 3,080
 414
 12,732
 $7,530
 $580
 $1,074
 $54
 $9,238
 $2,979
 $144
 $3,123
 $414
 $12,775
December 31, 2015               
Loans allocated by:               
Individually evaluated for impairment$11,093
 $5
 $734
 $0
 $11,832
 $5,501
 $17
 $5,518
 $0
 $17,350
Collectively evaluated for impairment327,170
 50,698
 72,891
 57,511
 508,270
 248,589
 7,504
 256,093
 0
 764,363
 $338,263
 $50,703
 $73,625
 $57,511
 $520,102
 $254,090
 $7,521
 $261,611
 $0
 $781,713
Allowance for loan losses allocated by:               
Individually evaluated for impairment$0
 $0
 $0
 $0
 $0
 $281
 $8
 $289
 $0
 $289
Collectively evaluated for impairment7,883
 850
 1,012
 58
 9,803
 2,589
 113
 2,702
 774
 13,279
 $7,883
 $850
 $1,012
 $58
 $9,803
 $2,870
 $121
 $2,991
 $774
 $13,568

DuringThe following table provides activity for the yearaccretable yield of purchased impaired loans for the years ended December 31, 2016, the Company sold one note2019 and 2018.
20192018
Accretable yield, beginning of period$2,065  $—  
New loans purchased3,497  2,243  
Accretion of income(2,336) (178) 
Reclassifications from nonaccretable difference due to improvement in expected cash flows2,444  —  
Other changes, net1,280  —  
Accretable yield, end of period$6,950  $2,065  

93

During the year ended December 31, 2014, the Company sold six notes of classified loan relationships with an aggregate carrying balance of $5,407,000 to third parties. Cash proceeds totaled $5,743,000. The $336,000 difference between the carrying balances of the notes sold and the cash received was recorded as a net recovery to the allowance for loan losses.
NOTE 5. LOANS TO RELATED PARTIES
Certain directors and executive officers of the Company, including their immediate families and companies in which they have a direct or indirect material interest, were indebted to the Bank. The Company considers these loans to be within the normal course of business. The Company relies on the directors and executive officers for the identification of their associates.
The aggregate amount of these loans was $677,000 at December 31, 2016, and $647,000 at December 31, 2015. During 2016, $522,000 of new loans were granted and repayments totaled $538,000. Other changes during 2016 totaled $46,000 and represented adjustments to the beginning balance because of director and executive officer relationship changes.

NOTE 6. PREMISES AND EQUIPMENT
The following table summarizes premises and equipment at December 31.31, 2019 and 2018.
 
(Dollars in thousands)2016 2015
   20192018
Land$7,717
 $5,182
Land$8,786  $7,825  
Buildings and improvements30,626
 23,367
Buildings and improvements27,520  31,987  
Leasehold improvements1,719
 651
Leasehold improvements6,216  3,926  
Furniture and equipment21,032
 24,086
Furniture and equipment22,293  22,998  
Construction in progress68
 125
Construction in progress593  1,946  
61,162
 53,411
65,408  68,682  
Less accumulated depreciation and amortization26,291
 29,451
Less accumulated depreciationLess accumulated depreciation27,884  30,481  
$34,871
 $23,960
$37,524  $38,201  
Depreciation expense totaled $2,311,000, $2,310,000,$2.7 million, $2.6 million, and $2,459,000$2.7 million for the years ended December 31, 2016, 20152019, 2018 and 2014.2017, respectively.
During 2016, $5.6 million
NOTE 6. LEASES
A lease provides the lessee the right to control the use of premises and equipment, predominantly furniture and equipment, wasan identified as retired from active use.asset for a period of time in exchange for consideration. The Company recorded a losshas primarily entered into operating leases for branches and office space. Most of $147,000the Company's leases contain renewal options, which the Company is reasonably certain to exercise. Including renewal options, the Company's leases range from three to 50 years. Operating lease right-of-use assets and lease liabilities are included in connection with this retirement.other assets and accrued interest and other liabilities on the Company's 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 landis 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 building space associated with certainproperty taxes, are expensed as incurred.
The following table summarizes the Company's right-of-use assets and related lease liabilities for the year ended December 31, 2019.
Cash paid for operating lease liabilities$1,122 
Operating lease right-of-use assets (1)
$10,485 
Weighted-average remaining lease term (in years)17.6
Weighted-average discount rate4.5 %
(1) Includes $8.0 million for operating leases existing on January 1, 2019, $144 thousand for operating leases that commenced in the first quarter of 2019, $2.8 million for operating leases that were acquired in the second quarter of 2019, and the removal of $423 thousand of operating leases due to branch offices, remote automated teller machines, and certain equipment under operatingconsolidations recorded in the fourth quarter of 2019.
The following table presents maturities of the Company's lease agreements which expire at various times through 2027. Rent expense charged to operationsliabilities by year.
2020$1,279  
20211,147  
2022727  
2023748  
2024738  
Thereafter10,549  
15,188  
Less: imputed interest5,500  
Total lease liabilities$9,688  

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NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents changes in connection with these leases totaled $601,000, $435,000 and $427,000goodwill for the years ended December 31, 2016, 20152019 and 2014.2018.
20192018
Balance, beginning of year$12,592  $719  
Acquired goodwill7,029  11,873  
Adjustments to acquired goodwill304  —  
Balance, end of year$19,925  $12,592  

The following table summarizes minimum rental commitments under operating leases with maturitiespresents changes in excessother intangible assets for the years ended December 31, 2019 and 2018.
20192018
Balance, beginning of year$3,910  $356  
Acquired CDI4,550  3,840  
Non-compete agreement290  —  
Amortization expense(1,570) (286) 
Balance, end of year$7,180  $3,910  

The following table presents the components of one yearother identifiable intangible assets at December 31, 2016.2019 and 2018.
20192018
Gross Carrying AmountAccumulated AmortizationGross Carrying AmountAccumulated Amortization
Amortized intangible assets:
Core deposit intangibles$8,390  $1,493  $3,840  $190  
Other client relationship intangibles524  338  931  671  
Non-compete agreement290  193  —  —  
Total$9,204  $2,024  $4,771  $861  

Due in Years Ending December 31
(Dollars in thousands) 
2017$587
2018476
2019411
2020378
2021235
Thereafter539
 $2,626
During 2019, other client relationship intangibles with a gross carrying amount of $406 thousand were fully amortized.
The following table presents future estimated aggregate amortization expense at December 31, 2019.
2020$1,591  
20211,313  
20221,137  
2023960  
2024784  
Thereafter1,395  
$7,180  
The Company incurred amortization expense of $1.6 million, $286 thousand and $102 thousand, respectively, in the years ending December 31, 2019, 2018 and 2017.

NOTE 7.8. INCOME TAXES
The Company files income tax returns in the U.S. federal jurisdiction, the Commonwealth of Pennsylvania and the State of Maryland. The Company is no longer subject to tax examination by tax authorities for years before 2013.2016.

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The following table summarizes income tax expense (benefit) for the years ended December 31.31, 2019, 2018 and 2017.
201920182017
Current expense$934  $1,097  $1,260  
Deferred expense1,776  543  443  
Expense due to enactment of federal tax reform legislation—  —  2,635  
Income tax expense$2,710  $1,640  $4,338  
(Dollars in thousands)2016 2015 2014
Current expense:     
Federal$1,499
 $844
 $81
State(1) (7) 10
 1,498
 837
 91
Deferred expense (benefit):     
Federal(249) 779
 2,723
State17
 18
 18
 (232) 797
 2,741
Change in valuation allowance on deferred taxes0
 0
 (18,964)
Income tax expense (benefit)$1,266
 $1,634
 $(16,132)
The following table reconciles the Company's effective income tax rate to theits statutory federal rate for the years ended December 31.31, 2019, 2018 and 2017.
2016 2015 2014201920182017
     
Statutory federal tax rate34.0 % 35.0 % 35.0 %Statutory federal tax rate21.0 %21.0 %34.0 %
Increase (decrease) resulting from:     Increase (decrease) resulting from:
State taxes, net of federal benefit0.1 % 0.1 % 0.1 %
Tax exempt interest income(16.0)% (11.3)% (7.3)%Tax exempt interest income(4.2)%(7.7)%(13.0)%
Valuation allowance on deferred tax assets0.0 % 0.0 % (145.8)%
Earnings from life insurance(4.7)% (3.8)% (2.6)%
Income from life insuranceIncome from life insurance(1.7)%(1.7)%(2.4)%
Disallowed interest expense1.0 % 0.4 % 0.2 %Disallowed interest expense0.3 %0.8 %1.0 %
Low-income housing credits and related expense(7.2)% (5.0)% (3.7)%Low-income housing credits and related expense(1.3)%(2.5)%(4.6)%
Regulatory settlement4.3 % 0.0 % 0.0 %
Change in statutory federal tax rate2.3 % 0.0 % 0.0 %
Merger relatedMerger related0.7 %0.6 %— %
Expense due to enactment of federal tax reform legislationExpense due to enactment of federal tax reform legislation— %— %21.2 %
Other2.2 % 1.8 % 0.1 %Other(1.0)%0.9 %(1.3)%
Effective income tax rate16.0 % 17.2 % (124.0)%Effective income tax rate13.8 %11.4 %34.9 %
Income tax expense includes $483,000, $673,000$997 thousand, $211 thousand and $677,000$405 thousand related to net security gains for the years ended December 31, 2016, 2015,2019, 2018, and 2014.2017.
Effective January 1, 2016,On December 22, 2017, federal tax reform legislation, commonly referred to as the Company changedTax Cuts and Jobs Act of 2017 (the "Tax Act"), was enacted. Among other things, the Tax Act reduced the Company's statutory federal tax rate from 35% to 34% to reflect its assessment that it will not be in the higher tax bracket.21% effective January 1, 2018. As a result, the Company was required to remeasure, through income tax expense, certain deferred tax assets and liabilities using the enacted rate at which the Company expects them to be recovered or settled. The remeasurement of the Company's net deferred tax asset resulted in additional federal deferred tax expense of $2.6 million, which is included in income tax expense for 2016 increased $185,000 due2017. Also, on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provided guidance on accounting for the tax effects of the Tax Act. SAB 118 provided for a measurement period that should not extend beyond one year from the Tax Act's enactment date for companies to complete the accounting under ASC 740, Income Taxes. In remeasuring the Company's net deferred tax asset, the Company estimated the income in 2017 for its limited partnership investments in affordable housing real estate partnerships and interest income on nonperforming loans. Adjustment between the Company's estimates and the actual amounts determined during the measurement period did not have a material impact to the applicationCompany's consolidated financial statements.
The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in the provision for income taxes in the results of operations. There were 0 penalties or interest related to income taxes recorded in the new rate to existing deferred balances.consolidated income statements for the years ended December 31, 2019, 2018 and 2017 and 0 amounts accrued for penalties at December 31, 2019 and 2018.

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The following table summarizes the Company's deferred tax assets and liabilities at December 31.31, 2019, 2018 and 2017.
 
20192018
(Dollars in thousands)2016 2015
Deferred tax assets:   Deferred tax assets:
Allowance for loan losses$4,725
 $5,111
Allowance for loan losses$3,418  $3,143  
Deferred compensation545
 547
Deferred compensation415  723  
Retirement plans and salary continuation1,942
 1,824
Retirement and salary continuation plansRetirement and salary continuation plans2,357  1,416  
Share-based compensation583
 343
Share-based compensation631  742  
Off-balance sheet reserves313
 218
Off-balance sheet reserves234  219  
Nonaccrual loan interest370
 246
Nonaccrual loan interest697  537  
Net unrealized losses on securities available for sale600
 0
Net unrealized losses on securities available for sale127  791  
Goodwill92
 124
Purchase accounting adjustmentsPurchase accounting adjustments4,081  1,795  
Bonus accrual236
 359
Bonus accrual493  470  
Low-income housing credit carryforward1,983
 1,652
Low-income housing credit carryforward—  641  
Alternative minimum tax credit carryforward4,048
 2,195
Charitable contribution carryforward50
 211
Net operating loss carryforward2,520
 4,431
Net operating loss carryforward1,872  —  
Other429
 182
Other672  321  
Total deferred tax assets18,436
 17,443
Total deferred tax assets14,997  10,798  
Deferred tax liabilities:   Deferred tax liabilities:
Depreciation771
 815
Depreciation452  458  
Net unrealized gains on securities available for sale0
 646
Mortgage servicing rights777
 669
Mortgage servicing rights694  590  
Purchase accounting adjustments435
 352
Purchase accounting adjustments1,599  1,021  
Other195
 181
Other275  150  
Total deferred tax liabilities2,178
 2,663
Total deferred tax liabilities3,020  2,219  
Net deferred tax asset, included in Other Assets$16,258
 $14,780
Net deferred tax asset, included in other assetsNet deferred tax asset, included in other assets$11,977  $8,579  
At December 31, 2016,2019, the Company has charitable contribution, low-income housing,had acquired federal and state net operating loss carryforwards of $11.1 million and $6.7 million, respectively, subject to annual loss limitation limits, that expire through 2019, 2036, and 2032, respectively. Deferred2037. A deferred tax assets areasset is recognized for these carryforwards because the benefit is more likely than not to be realized.
In assessing whether or not some or all ofFASB ASC 740, Income Taxes, (“ASC 740”) clarifies the Company's deferredaccounting for income taxes by prescribing a minimum probability threshold that a tax assets areposition must meet before a financial statement benefit is recognized. The minimum threshold is defined in ASC 740 as a tax position that is more likely than not to be realized insustained upon examination by the future, management considers all positive and negative evidence,applicable taxing authority, including projected future taxable income, tax planning strategies and recent financial operating results. A valuation allowance to reflect management's estimateresolution of any related appeals or litigation processes, based on the technical merits of the temporary deductible differencesposition. The tax benefit to be recognized is measured as the largest amount of benefit that may expirehas a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 was recorded in 2012. In 2014, that valuation allowanceapplied to all existing tax positions upon initial adoption. There was reversed based on management's conclusion that profitable operations, improvements in asset quality, strengthened capital position, reduced regulatory riskno liability for uncertain tax positions and improvement in economic conditions made the allowance no longer necessary.known unrecognized tax benefits at December 31, 2019 or 2018.
NOTE 8.9. RETIREMENT PLANS
The Company maintains a 401(k) profit-sharing plan for all qualified employees. Employees are eligible to participate in the 401(k) profit-sharing plan following completion of one month of service and attaining age 18. Pursuant to the 401(k) profit-sharing plan, employees who meetcan contribute up to the plan's eligibility requirements.lesser of $53 thousand or 100% of their compensation. Substantially all of the Company’s employees are covered by the plan, which contains limited match or safe harbor provisions. The Company will match 50% of the first 6% of the base contribution that an employee contributes. The Company’s match is immediately vested and paid at the end of the year. Employer contributions to the plan are based on the performance of the Company and are at the discretion of the Board of Directors. The plan contains limited match or safe harbor provisions. Substantially all of the Company’s employees are covered by the plan. Employer contribution expense totaled $334,000, $361,000$590 thousand, $479 thousand and $357,000$432 thousand for the years ended December 31, 2016, 2015,2019, 2018, and 2014.2017, respectively.
The Company has a deferred compensation arrangementagreements with certain present and former directors, whereby a director or his beneficiaries will receive a monthly retirement benefit beginning at age 65. The arrangement is funded by an amount of life insurance on the participating director, which is calculated to meet the Company’s obligations under the compensation agreement. The cash value of the life insurance policies is an unrestricted asset of the Company and is included in other assets on the balance sheets.Company. The estimated present value of future benefits to be paid totaled $105,000$68 thousand and $115,000$82 thousand at December 31, 20162019 and 2015 and is

included in other liabilities.2018, respectively. Expense for this deferred compensation plan totaled $12,000, $12,000$8 thousand, $9 thousand and $13,000$11 thousand for the years ended December 31, 2016, 2015,2019, 2018, and 2014.2017, respectively.
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The Company also has supplemental discretionary deferred compensation plans for directors and executive officers. The plans are funded annually with director fees and salary reductions which are either placed in a trust account invested by the Company’s Orrstown Financial AdvisorsBank’s OFA division or recognized as a liability. The trust account balance totaled $1,483,000$1.8 million and $1,449,000$1.7 million at December 31, 20162019 and 20152018, respectively, and is includeddirectly offset in other assets, offset by other liabilities in the same amount.liabilities. Expense for these plans totaled $15,000, $30,000$61 thousand, $61 thousand and $25,000,$10 thousand, for the years ended December 31, 2016, 2015,2019, 2018, and 2014.2017, respectively.
In addition, the Company has two2 supplemental retirement and salary continuation plans for directors and executive officers. These plans are funded with single premium life insurance on the plan participants. The cash value of the life insurance policies is an unrestricted asset of the Company and is included in other assets.Company. The estimated present value of future benefits to be paid on these plans totaled $5,662,000$10.6 million and $5,211,000$8.5 million at December 31, 20162019 and 2015 and is included in other liabilities.2018, respectively. Expense for these plans totaled $727,000, $626,000$1.0 million, $872 thousand and $575,000,$739 thousand, for the years ended December 31, 2016, 2015,2019, 2018, and 2014.2017, respectively.
The Company has promised a continuation of life insurance coverage to certain persons post-retirement. The estimated present value of future benefits to be paid totaled $860,000$1.5 million and $799,000$1.5 million at December 31, 20162019 and 2015 and is included in other liabilities. Total annual expense2018, respectively. Expense for this plan totaled $61,000, $129,000$22 thousand, $126 thousand and $104,000$77 thousand for the years ended December 31, 2016, 2015,2019, 2018, and 2014.2017, respectively.
Trust account balances, and estimated present values of future benefits and deferred compensation liabilities, noted above are included in other assets and other liabilities, respectively, on the consolidated balance sheets.
NOTE 9.10. SHARE-BASED COMPENSATION PLANS
The Company maintains share-based compensation plans under the shareholder-approved 2011 Orrstown Financial Services, Inc. Incentive Stock Plan (the "Plan").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. Under the Plan, 381,920At December 31, 2019, 881,920 shares of the common stock of the Company were reserved to be issued. At December 31, 2016, 136,951issued and 455,028 shares were 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 of the Company and its present or future subsidiaries, and members of the Board of Directors of the Company or any subsidiary 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 of awards and restrictions on shares. Generally, awards are nonqualified under the IRS code,IRC, unless the awards are deemed to be incentive awards to employees at the Compensation Committee’s discretion.
The following table presents a summary of nonvested restricted shares activity for 2016.2019.
Shares
Weighted Average Grant Date
Fair Value
Nonvested shares, beginning of year275,412  $20.33  
Granted114,893  20.24  
Forfeited(36,069) 19.42  
Vested(125,478) 17.65  
Nonvested shares, end of year228,758  $21.90  
 Shares 
Weighted Average Grant Date
Fair Value
    
Nonvested shares, beginning of year197,381
 $16.17
Granted60,545
 18.81
Forfeited(18,089) 16.19
Vested(12,500) 15.97
Nonvested shares, at end of year227,337
 $16.88
CompensationThe following table presents restricted shares compensation expense, recognized for restricted stock awards totaled $941,000, $732,000, and $178,000 in 2016, 2015 and 2014, with tax benefits $320,000, $256,000,benefit information, and $62,000 recorded for the respective year. The total fair value of shares vested during 2016at December 31, 2019, 2018 and 2015 totaled $237,000 and $43,000. No shares vested during 2014. 2017.
201920182017
Restricted share award expense$1,578  $1,479  $1,369  
Restricted share award tax benefit451  374  465  
Fair value of shares vested2,744  1,074  303  
At December 31, 20162019 and 2015,2018, unrecognized compensation expense related to restricted stockthe share awards totaled $2,169,000,$2.2 million and $2,293,000. Unrecognized$2.1 million, respectively. The unrecognized compensation expense at December 31, 2019 is expected to be recognized over a weighted-average period of 2.41.9 years.

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The following table presents a summary of outstanding stock options activity for 2016.2019.
Shares
Weighted Average
Exercise Price
Outstanding, beginning of year40,984  $24.34  
Expired(10,425) 32.47  
Options outstanding and exercisable, end of year30,559  $21.56  
 Shares 
Weighted Average
Exercise Price
    
Outstanding at beginning of year101,460
 $28.72
Forfeited(2,825) 25.61
Expired(18,265) 35.11
Options outstanding and exercisable, at year end80,370
 $27.37
The exercise price of each option equals the market price of the Company’s stock on the grant date. An option’s maximum term is ten years. All options are fully vested upon issuance. The following table presents information pertaining to options outstanding and exercisable at December 31, 2016.2019.
Range of
Exercise Prices
 
Number
Outstanding and Exercisable
 
Weighted Average
Remaining Contractual
Life (Years)
 
Weighted
Average
Exercise Price
       
$21.14 - $24.99 34,999
 3.41 $21.47
$25.00 - $29.99 2,792
 3.25 25.76
$30.00 - $34.99 35,231
 0.92 31.34
$35.00 - $37.59 7,348
 2.56 37.08
$21.14 - $37.59 80,370
 2.23 $27.37
Range of
Exercise Prices
Number
Outstanding and Exercisable
Weighted Average
Remaining Contractual
Life (Years)
Weighted
Average
Exercise Price
$21.14 - $25.7630,559  0.53$21.56  
Outstanding and exercisable options had an intrinsic value of $39,000$41 thousand at December 31, 20162019 and had no intrinsic value$0 at December 31, 2015 as the exercise price then exceeded the market value.2018.
The Company maintains an employee stock purchase plan to provide employees of the Company an opportunity to purchase Company common stock. Eligible employees may purchase shares in an amount that does not exceed 10% of their annual salary at the lower of 95% (85% prior to August 31, 2014) of the fair market value of the shares on the semi-annual offering date, or related purchase date. The Company reserved 350,000 shares of its common stock to be issued under the employee stock purchase plan and, atplan. At December 31, 2016, 186,0042019, 168,066 shares were available to be issued. Employees purchased 6,334, 6,305 and 6,707 shares at a weighted average price of $16.64, $15.83 and $14.88 per share in 2016, 2015 and 2014. Compensation expense recognized for this plan totaled $17,000, $8,000, and $12,000 for 2016, 2015 and 2014, with tax benefits of $6,000, $3,000, and $4,000 recorded
The following table presents information for the respective year.employee stock purchase plan for years ended December 31, 2019, 2018 and 2017.
201920182017
Shares purchased5,399  5,907  6,632  
Weighted average price of shares purchased$20.69  $23.04  $20.57  
Compensation expense recognized 14  17  
Tax benefits   
The Company uses a combination of issuingissues new shares or treasury shares, depending on market conditions, to meet sharein its share-based compensation exercises.plans.
NOTE 10.11. DEPOSITS
The composition offollowing table summarizes deposits by type at December 31was as follows:31, 2019 and 2018.
20192018
  
Noninterest-bearing$249,450  $204,843  
NOW and money market963,672  856,520  
Savings142,832  113,515  
Time ($250,000 or less)450,490  343,551  
Time (over $250,000)69,078  40,327  
Total$1,875,522  $1,558,756  

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 2016 2015
(Dollars in thousands)   
Noninterest-bearing$150,747
 $131,390
NOW and money market613,232
 510,758
Savings91,706
 85,061
Time – less than $100,000192,304
 185,254
Time – greater than $100,000104,463
 119,704
Total$1,152,452
 $1,032,167
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The following table summarizes scheduled future maturities as of time deposits for the years ending December 31, are as follows:2019.
 
2020$375,795  
202185,047  
202231,533  
202319,131  
20245,244  
Thereafter2,818  
$519,568  
(Dollars in thousands) 
2017$135,649
201839,262
201958,135
202060,282
20211,517
Thereafter1,922
 $296,767

Brokered time deposits totaled $85,994,000$16.1 million and $80,905,000$126.6 million at December 31, 20162019 and 2015.2018, respectively. Management continues to evaluateevaluates brokered deposits as a funding option, and considerstaking into consideration regulatory views on such deposits as non-core funding sources. Time deposits that meet or exceed the FDIC limit of $250,000 at December 31, 20162019 and 2018 totaled $18,868,000.$69.1 million and $40.3 million, respectively.
NOTE 12. RELATED PARTY TRANSACTIONS
Directors and executive officers of the Company, including their immediate families and companies in which they have a direct or indirect material interest, are considered to be related parties. In the ordinary course of business, the Company engages in various related party transactions, including extending credit and bank service transactions. The Company relies on the directors and executive officers for the identification of their associates.
Federal banking regulations require that any extensions of credit to insiders and their related interests not be offered on terms more favorable than would be offered to non-related borrowers of similar creditworthiness. The following table presents the aggregate activity in loans to related parties during 2019.
Balance, beginning of year$1,041 
New loans1,929 
Repayments(1,652)
Balance, end of year$1,318 
None of these loans are past due, on nonaccrual status or have been restructured to provide a reduction or deferral of interest or principal because of deterioration in the financial position of the borrower. There were no loans to a related party that were considered classified loans at December 31, 2019 or 2018.
The Company accepts deposits of officersfrom related parties, which totaled $5.2 million and directors of the Company$3.5 million at December 31, 2019 and 2018, respectively, on the same terms, including interest rates, as those prevailing at the time for comparable transactions with unrelated persons. Deposits of officers and directors and their related interests totaled $2,826,000 and $2,575,000 at December 31, 2016 and 2015.non-related parties.
NOTE 11.13. SHORT-TERM BORROWINGS
The Company has short-term borrowing capability including short-term borrowings from the FHLB, federal funds purchased and the FRB discount window.
The following table summarizes the use of these short-term borrowings at and for the years ended December 31.31, 2019, 2018 and 2017.
 
201920182017
Balance at year-end$146,600  $55,000  $50,000  
Weighted average interest rate at year-end1.87 %2.76 %1.21 %
Average balance during the year$23,171  $71,457  $54,610  
Average interest rate during the year2.20 %2.09 %1.08 %
Maximum month-end balance during the year$146,600  $103,000  $72,000  
100

(Dollars in thousands)2016 2015 2014
      
Balance at year-end$52,000
 $60,000
 $65,000
Weighted average interest rate at year-end0.76% 0.53% 0.36%
Average balance during the year$17,841
 $55,106
 $32,736
Average interest rate during the year0.61% 0.43% 0.34%
Maximum month-end balance during the year$52,000
 $83,500
 $65,000
In addition, theThe Company has repurchase agreementsalso enters into borrowing arrangements with certain of its deposit customers.clients by agreements to repurchase ("repurchase agreements") under which the Company pledges investment securities owned and under its control as collateral against the borrowing arrangement, which generally matures within one day from the transaction date. The Company is required to hold U.S. Treasury, U.S. Agency or U.S. GSE securities as underlying securities for Repurchase Agreements.repurchase agreements. The following table summarizes the use of securities sold underprovides additional details for repurchase agreements to repurchase at and for the years ended December 31.31, 2019, 2018 and 2017.
 
201920182017
Balance at year-end$8,269  $9,069  $43,576  
Weighted average interest rate at year-end1.31 %1.22 %0.56 %
Average balance during the year$8,830  $9,715  $43,205  
Average interest rate during the year1.28 %0.82 %0.45 %
Maximum month-end balance during the year$12,774  $14,591  $55,270  
Fair value of securities underlying the agreements at year-end13,062  17,942  53,485  
(Dollars in thousands)2016 2015 2014
      
Balance at year-end$35,864
 $29,156
 $21,742
Weighted average interest rate at year-end0.20% 0.20% 0.20%
Average balance during the year$38,546
 $30,156
 $19,186
Average interest rate during the year0.20% 0.20% 0.20%
Maximum month-end balance during the year$52,693
 $37,558
 $32,861
Fair value of securities underlying the agreements at year-end56,201
 35,470
 38,337

Federal funds purchased and securities sold under agreements to repurchase generally mature within one day from the transaction date.

NOTE 12.14. LONG-TERM DEBT
At December 31,The following table presents components of the Company’s long-term debt consisted of the following:at December 31, 2019, and 2018.
 
AmountWeighted Average rate
Amount Weighted Average rate2019201820192018
(Dollars in thousands)2016 2015 2016 2015
FHLB fixed rate advances maturing:       FHLB fixed rate advances maturing:
201720,000
 20,000
 1.00% 1.00%
2020350
 350
 7.40% 7.40%2020$40,350  $40,350  1.76 %1.76 %
2022202220,000  —  3.06 %— %
20,350
 20,350
 1.11% 1.11%60,350  40,350  2.19 %1.76 %
FHLB amortizing advance requiring monthly principal and interest payments, maturing:       FHLB amortizing advance requiring monthly principal and interest payments, maturing:
20253,813
 4,145
 4.74% 4.74%20252,717  3,100  4.74 %4.74 %
Total FHLB Advances$24,163
 $24,495
 1.68% 1.73%Total FHLB Advances$63,067  $43,450  2.30 %1.92 %
Except for amortizing advances, interest only is paid on a quarterly basis.
The following table summarizes the aggregate amount of future annual principal payments required on these borrowings at December 31, 2016:2019.
 
Years Ending December 31,
(Dollars in thousands) 
2017$20,348
2018365
2019382
2020751
2021421
Thereafter1,896
 $24,163
2020$40,751  
2021421  
202220,441  
2023462  
2024484  
Thereafter508  
$63,067  
The Bank is a member of the FHLB of Pittsburgh and has availableaccess 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, are collateralized by first mortgage loans and securities. Collateralcollateral for all outstanding advances, lines and letters of credit consisted of certain securities, 1-4 family mortgage loans and other real estate secured loans totaling $428,899,000$836.7 million at December 31, 2016.2019. The Bank had additional availability of $352,736,000$540.7 million at the FHLB on December 31, 20162019 based on its qualifying collateral.collateral, net of short-term borrowings and long-term debt detailed above, deposit letters of credit totaling $85.0 million and non-deposit letters of credit totaling $1.4 million at December 31, 2019.
The Bank has available unsecured lines of credit, with interest based on the daily Federal Funds rate, with two2 correspondent banks totaling $30,000,000,$30.0 million, at December 31, 2016.2019. The Company also has a $5,000,000$5.0 million unsecured line of
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credit, with a bank, at the prime rate of interest, at December 31, 2016.2019. There were no0 borrowings under these lines of credit at December 31, 20162019 and 2015.2018.
NOTE 13.15. SUBORDINATED NOTES
The Company has unsecured subordinated notes payable, which mature on December 30, 2028. At December 31, 2019 and 2018, subordinated notes payable outstanding totaled $31.8 million and $31.9 million, respectively, which qualified for Tier 2 capital. The notes are recorded on the consolidated balance sheets net of remaining debt issuance costs totaling $653 thousand and $641 thousand at December 31, 2019 and 2018, respectively, which are amortized over a 10 year period on an effective yield basis. The subordinated notes have a fixed interest rate of 6.0% through December 30, 2023, which then converts to a variable rate of three-month LIBOR for the applicable interest period plus 3.16% through maturity. The Company may, at its option, redeem the notes, in whole or in part, on any interest payment date on or after December 30, 2023, and at any time upon the occurrence of certain events. There are no debt covenants on the subordinated notes payable.
NOTE 16. SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL
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 reinvestment 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 December 31, 2016,2019, approximately 665,000 shares were available to be issued under the plan.
On January 19, 2016, the Company filed a shelf registration statement on Form S-3 with the SEC that provides for up to an aggregate of $100,000,000, through the sale of common stock, preferred stock, warrants, debt securities, and units. To date, the Company has not issued any securities under this shelf registration statement.
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. The final rules implementingUnder the Basel Committee on Banking Supervision's capital guidelines for U.S. Banks ("Basel III rules") became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Company, an entity must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The required capital conservation buffer is being phased in from 0.0%was 1.25% for 20152017, 1.875% for 2018 and 2.50% for 2019 under phase-in rules. The Company and the Bank have elected not to 2.50% by 2019. The capital conservation buffer for 2016 is 0.625%. Theinclude net unrealized gain or loss on available for sale securities is not included in computing regulatory capital.
Effective with the third quarter of 2018, the FRB raised the consolidated asset limit to be considered a small bank holding company from $1.0 billion to $3.0 billion, and a company with assets under the revised limits is not subject to the FRB consolidated capital rules. A company with consolidated assets under the revised limit may continue to file reports that include capital amounts and ratios. The Company has elected to continue to file those reports.
Management believes, at December 31, 20162019 and 2018, that the Company and the Bank meetmet all capital adequacy requirements to which they are subject.
Prompt corrective action regulations provide five classifications: 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 December 31, 2016 and 2015,2019, 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 category.Bank's classification.
Capital
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The following table presents capital amounts and ratios at December 31, 20162019 and December 31, 2015 are presented in the following table.2018.
 Actual 
For Capital Adequacy Purposes
 (includes applicable capital conservation buffer)
 
To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
(Dollars in thousands)Amount Ratio Amount Ratio Amount Ratio
December 31, 2016           
Total Capital to risk weighted assets           
Consolidated$139,033
 14.6% $82,391
 8.625% n/a
 n/a
Bank126,408
 13.2% 82,328
 8.625% $95,453
 10.0%
Tier 1 (Core) Capital to risk weighted assets           
Consolidated127,033
 13.3% 63,286
 6.625% n/a
 n/a
Bank114,417
 12.0% 63,238
 6.625% 76,363
 8.0%
Common Tier 1 (CET1) to risk weighted assets           
Consolidated127,033
 13.3% 48,957
 5.125% n/a
 n/a
Bank114,417
 12.0% 48,920
 5.125% 62,045
 6.5%
Tier 1 (Core) Capital to average assets           
Consolidated127,033
 9.3% 54,453
 4.0% n/a
 n/a
Bank114,417
 8.4% 54,500
 4.0% 68,126
 5.0%
December 31, 2015           
Total Capital to risk weighted assets           
Consolidated$134,562
 15.8% $68,078
 8.0% n/a
 n/a
Bank118,671
 14.0% 68,027
 8.0% $85,034
 10.0%
Tier 1 (Core) Capital to risk weighted assets           
Consolidated123,825
 14.6% 51,058
 6.0% n/a
 n/a
Bank107,942
 12.7% 51,021
 6.0% 68,027
 8.0%
Common Tier 1 (CET1) to risk weighted assets           
Consolidated123,825
 14.6% 38,294
 4.5% n/a
 n/a
Bank107,942
 12.7% 38,265
 4.5% 55,272
 6.5%
Tier 1 (Core) Capital to average assets           
Consolidated123,825
 9.8% 50,684
 4.0% n/a
 n/a
Bank107,942
 8.5% 50,695
 4.0% 63,368
 5.0%

 Actual
For Capital Adequacy Purposes
 (includes applicable capital conservation buffer)
To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
AmountRatioAmountRatioAmountRatio
December 31, 2019
Total risk-based capital:
Orrstown Financial Services, Inc.$244,003  14.1 %$182,028  10.500 %n/an/a
Orrstown Bank231,805  13.4 %181,948  10.500 %$173,284  10.0 %
Tier 1 risk-based capital:
Orrstown Financial Services, Inc.196,451  11.3 %147,356  8.500 %n/an/a
Orrstown Bank216,100  12.5 %147,291  8.500 %138,627  8.0 %
Tier 1 common equity risk-based capital:
Orrstown Financial Services, Inc.196,451  11.3 %121,352  7.000 %n/an/a
Orrstown Bank216,100  12.5 %121,299  7.000 %112,635  6.5 %
Tier 1 leverage capital:
Orrstown Financial Services, Inc.196,451  8.6 %91,782  4.0 %n/an/a
Orrstown Bank216,100  9.4 %91,798  4.0 %114,747  5.0 %
December 31, 2018
Total risk-based capital:
Orrstown Financial Services, Inc.$206,988  15.6 %$131,393  9.875 %n/an/a
Orrstown Bank177,892  13.4 %131,286  9.875 %$132,948  10.0 %
Tier 1 risk-based capital:
Orrstown Financial Services, Inc.160,117  12.0 %104,782  7.875 %n/an/a
Orrstown Bank162,880  12.3 %104,696  7.875 %106,358  8.0 %
Tier 1 common equity risk-based capital:
Orrstown Financial Services, Inc.160,117  12.0 %84,823  6.375 %n/a  n/a  
Orrstown Bank162,880  12.3 %84,754  6.375 %86,416  6.5 %
Tier 1 leverage capital:
Orrstown Financial Services, Inc.160,117  8.4 %76,089  4.0 %n/an/a
Orrstown Bank162,880  8.6 %76,113  4.0 %95,142  5.0 %
In September 2015, the Board of Directors of the Company authorized a share repurchase program under which the Company may repurchase up to 5% 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 Securities Exchange Act of 1934, as amended. 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. At December 31, 2016,2019, 82,725 shares had been repurchased under the program at a total cost of $1,438,000,$1.4 million, or $17.38 per share.
On January 25, 2017,21, 2020, the Board declared a cash dividend of $0.10$0.17 per common share, which was paid on February 17, 2017.10, 2020.
NOTE 14. RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES
Banking regulations limit the ability of the Bank to pay dividends or make loans or advances to the Parent Company. Dividends that may be paid in any calendar year are limited to the current year's net profits, combined with the retained net profits of the preceding two years. At December 31, 2019, dividends from the Bank available to be paid to the Parent Company, without prior approval of the Bank's regulatory agency, totaled $30.7 million, subject to the Bank meeting or exceeding regulatory capital requirements. The Parent Company's principal source of funds for dividend payments to shareholders is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid
At December 31, 2019, there were no loans from the Bank to any nonbank affiliate, including the Parent Company without prior approval of regulatory agencies. Accordingly, at December 31, 2016, $6,574,000 was available for dividend distribution from the Bank to the Parent Company in 2017.
Under current Federal Reserve regulations, the Bank is limited in the amount it may lend to the Parent Company and its nonbank subsidiary. LoansCompany. The Bank's loans to a single affiliate may not exceed 10%, and loans to all affiliates may not exceed 20%, of the bank’sBank’s capital stock, surplus, and undivided profits, plus the allowance for loan and lease lossesALL (as defined by regulation). Loans from the Bank to nonbank affiliates,
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including the Parent Company, are also required to be collateralized according to regulatory guidelines. At December 31, 2016,2019, the maximum amount the Bank hashad available to loan nonbank affiliates was approximately $12,798,000. At December 31, 2016, there were no loans from the Bank to any nonbank affiliate, including the Parent Company.totaled $196 thousand.
NOTE 15.17. EARNINGS PER SHARE
EarningsThe following table presents earnings per share for the years ended December 31, were as follows:2019, 2018 and 2017.
 
201920182017
(In thousands, except per share data)2016 2015 2014
     
Net income$6,628
 $7,874
 $29,142
Net income$16,924  $12,805  $8,090  
Weighted average shares outstanding - basic8,059
 8,107
 8,110
Weighted average shares outstanding - basic10,362  8,360  8,070  
Dilutive effect of share-based compensation86
 35
 6
Dilutive effect of share-based compensation152  177  156  
Weighted average shares outstanding - diluted8,145
 8,142
 8,116
Weighted average shares outstanding - diluted10,514  8,537  8,226  
Per share information:     Per share information:
Basic earnings per share$0.82
 $0.97
 $3.59
Basic earnings per share$1.63  $1.53  $1.00  
Diluted earnings per share0.81
 0.97
 3.59
Diluted earnings per share1.61  1.50  0.98  
Average outstanding stock options of 90,000, 109,000approximately 22,000, 21,000 and 178,00042,000, respectively, for the years ended December 31, 2016, 20152019, 2018 and 20142017 were not included in the computation of earnings per share because the effect was antidilutive, due toas the exercise price exceedingexceeded the average market price. The dilutive effect of share-based compensation in each year above relates principally to restricted stock awards.


NOTE 16.18. 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 financialfinancing needs of its customers and to reduce its own exposure to fluctuations in interest rates.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 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 at December 31, 2019, and 2018.
 
Contract or Notional Amount20192018
(Dollars in thousands)2016 2015
Commitments to fund:   Commitments to fund:
Home equity lines of credit$126,811
 $110,473
Home equity lines of credit$205,502  $160,971  
1-4 family residential construction loans7,820
 6,153
1-4 family residential construction loans19,812  13,002  
Commercial real estate, construction and land development loans43,830
 14,174
Commercial real estate, construction and land development loans19,018  31,133  
Commercial, industrial and other loans111,884
 84,480
Commercial, industrial and other loans222,288  147,518  
Standby letters of credit7,097
 6,510
Standby letters of credit10,588  13,909  
Commitments to extend credit are agreements to lend to a customerclient 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 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 customer’sclient’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 customer.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 customerclient 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 customers.clients. The Company holds collateral supporting those commitments when deemed necessary by management. The
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liability, at December 31, 20162019 and 2015,2018, for guarantees under standby letters of credit issued was not considered to be material.
The Company currently maintains a reserve, in other liabilities totaling $784,000 and $472,000 at December 31, 2016 and 2015based on historical loss experience of the related loan class, for off-balance sheet credit exposures that currently are not funded, basedin other liabilities on historical loss experience of the related loan class. Forconsolidated balance sheets. This reserve totaled $1.0 million and $998 thousand at December 31, 2019 and 2018, respectively. The following table presents the net amount expensed for this off-balance sheet credit exposures reserve for years ended December 31, 2016, 2015,2019, 2018 and 2014, $312,000, ($13,000) and $(44,000) was expensed (recovered) through noninterest expense for these exposures.2017.
201920182017
Off-balance sheet credit exposures expense$39  $182  $32  
The Company sells loans to the Federal Home Loan BankFHLB of Chicago as part of its Mortgage Partnership Finance Program (“MPF Program”).Program. Under the terms of the MPF Program, there is limited recourse back to the Company for loans that do not perform in accordance with the terms of the loan agreement. Each loan that is sold under the program is “credit enhanced” such that the individual loan’s rating is raised to “AA,a minimum “BBB,” as determined by the Federal Home Loan BankFHLB of Chicago. The total outstanding balance ofOutstanding loans sold under the MPF Program was $35,678,000totaled $26.0 million and $44,124,000$30.1 million at December 31, 20162019 and 2015,2018, respectively, with limited recourse back to the Company on these loans of $1,029,000$777 thousand and $8,230,000,$1.2 million, respectively. Many of the loans sold under the MPF Program have primary mortgage insurance, which reduces the Company’s overall exposure. ForThe net amount expensed or recovered for the Company's estimate of losses under its recourse exposure for loans foreclosed, or in the process of foreclosure, is recorded in other operating expenses on the consolidated statements of income. The following table presents the net amounts expensed (recovered) for years ended December 31, 2016, 2015,2019, 2018 and 2014, the Company foreclosed or was in the process of foreclosing on loans sold under the MPF program, with a resulting charge of $18,000, $127,000 and $71,000 to other expenses representing an estimate of the Company’s losses under its recourse exposure.2017.
201920182017
MPF program recourse (recovery) loss$(20) $(135) $25  

NOTE 17.19. 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 fair value 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 :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:
Securities
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Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, 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 securities include U.S. agency securities, mortgage-backed securities, 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, securities are classified within Level 3 of the valuation hierarchy. All of the Company’s securities are classified as available for sale.
The Company had no0 fair value liabilities measured on a recurring basis at December 31, 20162019 or 2015. 2018.
The following table summarizes assets at December 31 measured at fair value on a recurring basis.basis at December 31, 2019 or 2018.
Level 1Level 2Level 3
Total Fair
Value
Measurements
December 31, 2019
AFS Securities:
States and political subdivisions$—  $87,863  $—  $87,863  
GSE residential CMOs—  68,154  —  68,154  
Non-agency CMOs—  —  17,087  17,087  
Private label commercial CMOs—  79,437  7,192  86,629  
Asset-backed and other—  230,653  —  230,653  
Loans held for sale—  9,364  —  9,364  
Interest rate lock commitments on residential mortgages—  —  103  103  
Totals$—  $475,471  $24,382  $499,853  
December 31, 2018
AFS Securities:
States and political subdivisions$—  $145,004  $—  $145,004  
GSE residential CMOs—  108,064  —  108,064  
Private label residential CMOs—  143  —  143  
Private label commercial CMOs—  67,836  7,209  75,045  
Asset-backed and other—  137,588  —  137,588  
Totals$—  $458,635  $7,209  $465,844  
The Company has CMOs measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at December 31, 2019 and 2018. 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.
Effective October 1, 2019, the Company’s residential mortgage loans held-for-sale were recorded at fair value utilizing Level 2 measurements. This fair value measurement is determined based upon third party quotes obtained on similar loans. The adoption of this accounting election resulted in an increase of $226 thousand in gain on sale of loans in the consolidated statements of income for the year ended December 31, 2019. For loans held-for-sale for which the fair value option has been elected, the aggregate fair value exceeded the aggregate principal balance by $226 thousand as of December 31, 2019.
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 enters into a corresponding commitment to 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 pipeline. 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 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 pull through percentage, which is based upon historical experience, was 95% as of December 31, 2019. The fair value of interest rate lock commitments was $103 thousand at December 31, 2019 and is included in other assets on the consolidated balance sheets.
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(Dollars in Thousands)Level 1 Level 2 Level 3 
Total Fair
Value
Measurements
December 31, 2016       
Securities available for sale:       
U.S. Government Agencies$0
 $39,592
 $0
 $39,592
States and political subdivisions0
 164,282
 0
 164,282
GSE residential mortgage-backed securities0
 116,944
 0
 116,944
GSE residential CMOs0
 69,383
 0
 69,383
GSE commercial CMOs0
 4,856
 0
 4,856
Private label CMOs0
 5,006
 0
 5,006
Total debt securities0
 400,063
 0
 400,063
Equity securities0
 91
 0
 91
Totals$0
 $400,154
 $0
 $400,154
December 31, 2015       
Securities available for sale:       
U.S. Government Agencies$0
 $47,227
 $0
 $47,227
States and political subdivisions0
 125,961
 0
 125,961
GSE residential mortgage-backed securities0
 132,349
 0
 132,349
GSE residential CMOs0
 15,843
 0
 15,843
GSE commercial CMOs0
 63,770
 0
 63,770
Private label CMOs0
 8,901
 0
 8,901
Total debt securities0
 394,051
 0
 394,051
Equity securities0
 73
 0
 73
Totals$0
 $394,124
 $0
 $394,124
The following provides details of the Level 3 fair value measurement activity for the years ended December 31, 2019 or 2018.

CMOs:
20192018
Balance, beginning of year$7,209  $—  
Unrealized (loss) gain included in OCI(17) 37  
Purchases17,619  7,213  
Net discount accretion (premium amortization) (41) 
Principal payments(539) —  
Balance, end of year$24,279  $7,209  

Interest rate lock commitments on residential mortgages:
2019
Balance, beginning of year$— 
Total gains (losses), realized/unrealized:
Included in earnings103 
Balance, end of year$103 

Certain financial assets are measured at fair value on a nonrecurring basis. Adjustments to the fair value of these assets usually resultresults 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 Loans
Loans are 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 for all loan classes can be based on either the observable market price of the loan, the fair value of the collateral, or discounted cash flows based onusing a market rate of interest for performing troubled debt restructurings.TDRs. For collateral dependentcollateral-dependent loans, fair value is 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. 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 allowance for loan lossesALL 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 consolidated statementstatements of operations. Specific allocations to the allowance for loan losses or partial charge-offs were $1,967,000 and $2,246,000 at December 31, 2016 and 2015.income. Changes in the fair value of impaired loans for those still held at December 31 considered in the determination as toof the provision for loan losses totaled $268,000, $888,000$77 thousand, $146 thousand and $2,441,000$867 thousand for the years ended December 31, 2016, 2015,2019, 2018, and 2014.2017, respectively.
Foreclosed Real Estate
Other real estateOREO property acquired through foreclosure is initially recorded at the fair value of the property at the transfer date less estimated selling cost. Subsequently, other real estate ownedOREO 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. SpecificThere were 0 specific charges to value the real estate ownedOREO at the lower of cost or fair value on properties held at December 31, 20162019 and 2015 were $43,000 and $129,000.2018. Changes in the fair value of foreclosed real estate for those still held at December 31 charged to other real estate expensesOREO totaled $43,000, $32,000, and $170,000$0 for the years endingended December 31, 2016, 2015,2019, 2018, and 2014.2017.

107

Table of Contents

Mortgage Servicing Rights
The fair value of mortgage servicing rights is estimated to be equal to its carrying value, unless the quarterly valuation model calculates the present value of the estimated net servicing income is less than its carrying value, in which case a lower of cost or fair value charge is taken. At December 31, 2019, a $70 thousand lower of cost or fair value reserve existed on the mortgage servicing right portfolio. In 2019, net impairment charges of $70 thousand were recorded in mortgage banking activities on the consolidated statements of income. NaN reserve existed at December 31, 2018, and 0 impairment charges were recorded in 2018.
The following table summarizes assets at December 31 measured at fair value on a nonrecurring basis:basis at December 31, 2019 and 2018.
Level 1Level 2Level 3
Total
Fair Value
Measurements
December 31, 2019
Impaired loans
Commercial real estate:
Owner-occupied$—  $—  $938  $938  
Multi-family—  —  96  96  
Non-owner occupied residential—  —  103  103  
Commercial and industrial—  —  11  11  
Residential mortgage:
First lien—  —  641  641  
Home equity - lines of credit—  —  400  400  
Installment and other loans—  —    
Total impaired loans$—  $—  $2,196  $2,196  
Mortgage servicing rights$—  $3,119  $—  $3,119  
December 31, 2018
Impaired loans
Commercial real estate:
Owner-occupied$—  $—  $1,087  $1,087  
Multi-family—  —  131  131  
Non-owner occupied residential—  —  278  278  
Commercial and industrial—  —  25  25  
Residential mortgage:
First lien—  —  1,121  1,121  
Home equity - lines of credit—  —  409  409  
Total impaired loans$—  $—  $3,051  $3,051  
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Table of Contents
(Dollars in thousands)Level 1 Level 2 Level 3 
Total
Fair Value
Measurements
December 31, 2016       
Impaired Loans       
Commercial real estate:       
Owner-occupied$0
 $0
 $777
 $777
Non-owner occupied0
 0
 736
 736
Multi-family0
 0
 199
 199
Non-owner occupied residential0
 0
 409
 409
Acquisition and development:       
Commercial and land development0
 0
 1
 1
Commercial and industrial0
 0
 66
 66
Residential mortgage:       
First lien0
 0
 1,994
 1,994
Home equity - lines of credit0
 0
 162
 162
Installment and other loans0
 0
 6
 6
Total impaired loans$0
 $0
 $4,350
 $4,350
        
Foreclosed real estate       
Residential$0
 $0
 $88
 $88
        
December 31, 2015       
Impaired loans       
Commercial real estate:       
Owner-occupied$0
 $0
 $881
 $881
Non-owner occupied0
 0
 736
 736
Multi-family0
 0
 233
 233
Non-owner occupied residential0
 0
 570
 570
Acquisition and development:       
Commercial and land development0
 0
 5
 5
Residential mortgage:       
First lien0
 0
 2,094
 2,094
Home equity - lines of credit0
 0
 229
 229
Installment and other loans0
 0
 9
 9
Total impaired loans$0
 $0
 $4,757
 $4,757
        
Foreclosed real estate       
Residential$0
 $0
 $101
 $101
Commercial and land development0
 0
 74
 74
Total foreclosed real estate$0
 $0
 $175
 $175


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 TechniquesUnobservable InputRange
December 31, 2019
Impaired loans$2,196  Appraisal of collateralManagement adjustments on appraisals for property type and recent activity0% - 20% discount
 - Management adjustments for liquidation expenses6% - 33% discount
Mortgage servicing rights3,119  Discounted cash flowsWeighted average CPR11.63%
Discount rate9.54%
December 31, 2018
Impaired loans$3,051  Appraisal of collateralManagement adjustments on appraisals for property type and recent activity5% - 75% discount
 - Management adjustments for liquidation expenses6% - 20% discount
109

 Fair Value
Estimate
 Valuation Techniques Unobservable Input Range
December 31, 2016       
Impaired loans$4,350
 Appraisal of collateral Management adjustments on appraisals for property type and recent activity 10% - 75% discount
      - Management adjustments for liquidation expenses 0% - 41% discount
Foreclosed real estate88
 Appraisal of collateral Management adjustments on appraisals for property type and recent activity 13% - 17% discount
      - Management adjustments for liquidation expenses 10% - 18% discount
December 31, 2015       
Impaired loans$4,757
 Appraisal of collateral Management adjustments on appraisals for property type and recent activity 0% - 70% discount
      - Management adjustments for liquidation expenses 6% - 44% discount
Foreclosed real estate175
 Appraisal of collateral Management adjustments on appraisals for property type and recent activity 10% - 20% discount
      - Management adjustments for liquidation expenses 5% - 6% discount
Table of Contents
Fair values of financial instruments
In addition to those disclosed above,GAAP requires disclosure of the Company used the following methods and significant assumptions to estimate fair value forof 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 the indicated instruments:
Cash and Due from Banks and Interest-Bearing Deposits with Banks
The carrying amounts of cash and due from banks and interest-bearing deposits with banks approximate fair value.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or fair value. These loans typically consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale.
Loans
For variable rate loans that reprice frequently and have no significant change in credit risk, fair value is based on carrying value. Fair value for fixed rate loans is estimated using discounted cash flow analyses, using interest rates currently being offered in the market for loans with similar terms to borrowers of similar credit quality.
Restricted Investments in Bank Stocks
These investments are carried at cost. The Company is required to maintain minimum investment balances in these stocks, which are not actively traded and therefore have no readily determinable market value.
Deposits
The fair value disclosed for demand deposits is, by definition, equal to the amount payable on demand at the reporting date (that is, the carrying amount). The carrying amount of variable rate, fixed-term money market accounts and certificates of deposit approximates fair value at the reporting date. Fair value for fixed rate certificates of deposits and IRAs are estimated

using a discounted cash flow calculation that applies interest rates currently being offered in the market to a schedule of aggregated expected maturities on time deposits.
Short-Term Borrowings
The carrying amounts of federal funds purchased, borrowings under Repurchase Agreements, and other short-term borrowings maturing within 90 days approximates fair value. Fair value of other short-term borrowings is estimated using discounted cash flow analysis based on the Company’s current borrowing rates for similar types of borrowing arrangements.
Long-Term Debt
Fair value of the Company’s fixed rate long-term borrowings is estimated using a discounted cash flow analysis based on the Company’s current incremental borrowing rate for similar types of borrowing arrangements. The carrying amounts of variable rate long-term borrowings approximates fair value at the reporting date.
Accrued Interest
The carrying amounts of accrued interest receivable and payable approximate their fair value.
Off-Balance Sheet Instruments
The Company generally does not charge commitment fees. Fees for standby letters of credit and other off-balance sheet instruments are not significant.

The estimated fair values of financial assets and liabilities at December 31, 2019, and 2018.

Carrying
Amount
Fair ValueLevel 1Level 2Level 3
December 31, 2019
Financial Assets
Cash and due from banks$25,969  $25,969  $25,969  $—  $—  
Interest-bearing deposits with banks30,493  30,493  30,493  —  —  
Restricted investments in bank stock16,184  n/a  n/a  n/a  n/a  
AFS securities490,386  490,386  —  466,107  24,279  
Loans held for sale9,364  9,364  —  9,364  —  
Loans, net of allowance for loan losses1,629,675  1,652,788  —  —  1,652,788  
Interest rate lock commitments on residential mortgages103  103  —  —  103  
Accrued interest receivable6,040  6,040  —  1,863  4,177  
Financial Liabilities
Deposits1,875,522  1,876,555  —  1,876,555  —  
Short-term borrowings154,869  154,869  —  154,869  —  
Long-term debt63,067  63,405  —  63,405  —  
Subordinated notes31,847  33,953  —  33,953  —  
Accrued interest payable879  879  —  879  —  
December 31, 2018
Financial Assets
Cash and due from banks$26,156  $26,156  $26,156  $—  $—  
Interest-bearing deposits with banks45,664  45,664  45,664  —  —  
Federal funds sold16,995  16,995  16,995  —  —  
Restricted investments in bank stock10,842  n/a  n/a  n/a  n/a  
AFS securities465,844  465,844  —  458,635  7,209  
Loans held for sale3,340  3,413  —  3,413  —  
Loans, net of allowance for loan losses1,233,643  1,229,645  —  —  1,229,645  
Accrued interest receivable5,927  5,927  —  2,853  3,074  
Financial Liabilities
Deposits1,558,756  1,555,912  —  1,555,912  —  
Short-term borrowings64,069  64,069  —  64,069  —  
Long-term debt83,450  82,951  —  82,951  —  
Subordinated notes31,859  31,256  —  31,256  —  
Accrued interest payable1,301  1,301  —  1,301  —  

The methods used to estimate the Company’sfair value of financial instruments were as follows at December 31:31, 2019 did not necessarily represent an exit price. In accordance with the Company's adoption of ASU 2016-01, the methods utilized to measure the fair value of financial instruments at December 31, 2019 represents an approximation of exit price; however, an actual exit price may differ.
110

(Dollars in thousands)
Carrying
Amount
 Fair Value Level 1 Level 2 Level 3
December 31, 2016         
Financial Assets         
Cash and due from banks$16,072
 $16,072
 $16,072
 $0
 $0
Interest-bearing deposits with banks14,201
 14,201
 14,201
 0
 0
Restricted investments in bank stock7,970
 n/a
 n/a
 n/a
 n/a
Securities available for sale400,154
 400,154
 0
 400,154
 0
Loans held for sale2,768
 2,843
 0
 2,843
 0
Loans, net of allowance for loan losses870,616
 870,470
 0
 0
 870,470
Accrued interest receivable4,672
 4,672
 0
 2,643
 2,029
Financial Liabilities         
Deposits1,152,452
 1,149,727
 0
 1,149,727
 0
Short-term borrowings87,864
 87,864
 0
 87,864
 0
Long-term debt24,163
 24,966
 0
 24,966
 0
Accrued interest payable437
 437
 0
 437
 0
Off-balance sheet instruments0
 0
 0
 0
 0
December 31, 2015         
Financial Assets         
Cash and due from banks$11,412
 $11,412
 $11,412
 $0
 $0
Interest-bearing deposits with banks16,928
 16,928
 16,928
 0
 0
Restricted investments in bank stock8,720
 n/a
 n/a
 n/a
 n/a
Securities available for sale394,124
 394,124
 0
 394,124
 0
Loans held for sale5,917
 6,045
 0
 6,045
 0
Loans, net of allowance for loan losses768,145
 776,067
 0
 0
 776,067
Accrued interest receivable3,845
 3,845
 0
 2,257
 1,588
Financial Liabilities         
Deposits1,032,167
 1,032,265
 0
 1,032,265
 0
Short-term borrowings89,156
 89,156
 0
 89,156
 0
Long-term debt24,495
 25,357
 0
 25,357
 0
Accrued interest payable366
 366
 0
 366
 0
Off-balance sheet instruments0
 0
 0
 0
 0
Table of Contents

NOTE 18.20. REVENUE FROM CONTRACTS WITH CLIENTS
On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and all subsequent amendments (collectively “ASC 606”). The update implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to clients in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The majority of the Company's revenue comes from interest income, including loans and securities, that are outside the scope of ASC 606. The Company's services that fall within the scope of ASC 606 are presented within noninterest income on the consolidated statements of income and are recognized as revenue as the Company satisfies its obligation to the client. Services within the scope of ASC 606 include service charges on deposit accounts, income from fiduciary investment management and brokerage activities and interchange fees from service charges on ATM and debit card transactions. ASC 606 did not result in a change to the accounting for any in-scope revenue streams; as such, no cumulative effect adjustment was recorded.
Descriptions of revenue generating activities that are within the scope of ASC 606 are as follows:
Service Charges on Deposit Accounts - The Company earns fees from its deposit clients for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the client's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the client's account balance.
Interchange Income - The Company earns interchange fees from debit/credit cardholder transactions conducted through the MasterCard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Interchange income is presented net of cardholder rewards.
Loan swap referral fees - The Company earns fees from a third-party service provider for loan hedging referrals provided to lending clients. The Company acts as an agent in arranging the relationship between our client and the third-party service provider. The company is paid and recognizes income upon completion of the loan hedge between our client and the third-party service provider.
Trust and Investment Management Income - The Company earns wealth management and investment brokerage fees from its contracts with trust and wealth management clients to manage assets for investment, and/or to transact on their accounts. These fees are primarily earned over time as the Company provides the contracted services and are generally assessed based on a tiered scale of the market value of assets under management. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed, i.e., the trade date. Other related services provided included financial planning services and the associated fees the Company earns, which are based on a fixed fee schedule, are recognized when the services are rendered. Services are generally billed in arrears and a receivable is recorded until fees are paid.
Brokerage Income - The Company earns fees from investment management and brokerage services provided to its clients through a third-party service provider. The Company receives commissions from the third-party service provider and recognizes income on a weekly basis based upon client activity. As the Company acts as an agent in arranging the relationship between the client and the third-party service provider and does not control the services rendered to the clients, brokerage income is presented net of related costs.
Gains/Losses on Sales of OREO - The Company records a gain or loss on the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. If the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain or loss on sale if a significant financing component is present.
At December 31, 2019 and December 31, 2018, the Company had receivables from trust and wealth management clients totaling $719 thousand and $640 thousand, respectively.

111

The following table presents the Company's noninterest income disaggregated by revenue source for the years ended December 31, 2019, 2018 and 2017.

201920182017
Noninterest income
Service charges on deposit accounts$3,793  $3,578  $3,392  
Loan swap referral fees1,197  —  —  
Trust and investment management income7,255  6,576  6,400  
Brokerage income2,426  2,035  1,896  
Interchange income3,281  2,821  2,618  
Revenue from contracts with clients17,952  15,010  14,306  
Other service charges416  562  235  
Mortgage banking activities3,049  2,663  2,919  
Income from life insurance2,044  1,463  1,109  
Other income331  320  190  
Investment securities gains4,749  1,006  1,190  
Total noninterest income$28,541  $21,024  $19,949  


NOTE 21. ORRSTOWN FINANCIAL SERVICES, INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL INFORMATION
Condensed financial information at and for the years ended 12/31 follows:
Condensed Balance Sheets
 
December 31,
20192018
Assets
Cash in Orrstown Bank$11,568  $28,596  
Investment in Orrstown Bank242,041  175,299  
Other assets1,724  2,057  
Total assets$255,333  $205,952  
Liabilities
Subordinated notes$31,847  $31,859  
Accrued interest and other liabilities237  660  
Total liabilities32,084  32,519  
Shareholders’ Equity
Common stock584  491  
Additional paid-in capital188,365  151,678  
Retained earnings35,246  24,472  
Accumulated other comprehensive loss(480) (2,972) 
Treasury stock(466) (236) 
Total shareholders’ equity223,249  173,433  
Total liabilities and shareholders’ equity$255,333  $205,952  
112

(Dollars in thousands)2016 2015
Assets   
Cash in Orrstown Bank$10,263
 $14,032
Deposits with other banks307
 321
Total cash10,570
 14,353
Securities available for sale91
 73
Investment in Orrstown Bank121,362
 117,163
Other assets3,519
 1,561
Total assets$135,542
 $133,150
    
Liabilities$683
 $89
Shareholders’ Equity   
Common stock437
 435
Additional paid-in capital124,935
 124,317
Retained earnings11,669
 7,939
Accumulated other comprehensive income (loss)(1,165) 1,199
Treasury stock(1,017) (829)
Total shareholders’ equity134,859
 133,061
Total liabilities and shareholders’ equity$135,542
 $133,150
Condensed Statements of Income
 
For the Years Ended December 31,
201920182017
Income
Dividends from bank subsidiary$2,000  $4,450  $—  
Interest income from bank subsidiary257   15  
Other income55  102  61  
Total income2,312  4,559  76  
Expenses
Interest on short-term borrowings—  57  —  
Interest on subordinated notes1,987  73  —  
Total interest expense1,987  130  —  
Share-based compensation236  205  247  
Management fee to bank subsidiary1,350  1,042  501  
Merger related expenses1,574  1,545  —  
Other expenses802  656  1,116  
Total expenses5,949  3,578  1,864  
(Loss) income before income tax benefit and equity in undistributed income of subsidiaries(3,637) 981  (1,788) 
Income tax benefit(1,182) (735) (596) 
(Loss) income before equity in undistributed income of subsidiaries(2,455) 1,716  (1,192) 
Equity in undistributed income of subsidiaries19,379  11,089  9,282  
Net income$16,924  $12,805  $8,090  

113

(Dollars in thousands)2016 2015 2014
Income     
Dividends from subsidiaries$2,200
 $17,900
 $0
Other interest and dividend income38
 3
 2
Other income62
 35
 70
Total income2,300
 17,938
 72
Expenses     
Share-based compensation216
 135
 17
Management fee to Bank504
 500
 277
Other expenses2,152
 1,720
 1,042
Total expenses2,872
 2,355
 1,336
Income (loss) before income taxes and equity in undistributed income or distributions in excess of income of subsidiaries(572) 15,583
 (1,264)
Income tax benefit(606) (831) (474)
Income (loss) before equity in undistributed income (distributions in excess of income) of subsidiaries34
 16,414
 (790)
Equity in undistributed income (distributions in excess of income) of subsidiaries6,594
 (8,540) 29,932
Net income$6,628
 $7,874
 $29,142


Condensed Statements of Cash Flows
 
For the Years Ended December 31,
201920182017
Cash flows from operating activities:
Net income$16,924  $12,805  $8,090  
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Amortization47   —  
Deferred income taxes16  22  16  
Equity in undistributed income of subsidiaries(19,379) (11,089) (9,282) 
Share-based compensation236  205  247  
Net change in other liabilities(423) 12  (35) 
Net change in other assets311  2,039  (377) 
Net cash (used in) provided by operating activities(2,268) 3,997  (1,341) 
Cash flows from investing activities:
Capital contributed to subsidiaries(100) —  (6,100) 
Net cash paid for acquisitions(8,142) (4,597) —  
Net cash used in investing activities(8,242) (4,597) (6,100) 
Cash flows from financing activities:
Dividends paid(6,150) (4,375) (3,488) 
Proceeds from issuance of subordinated notes, net of costs—  31,857  —  
Proceeds from issuance of common stock1,463  1,448  1,276  
Payments to repurchase common stock(1,772) (651) —  
Other, net(59) —  —  
Net cash (used in) provided by financing activities(6,518) 28,279  (2,212) 
Net (decrease) increase in cash(17,028) 27,679  (9,653) 
Cash, beginning28,596  917  10,570  
Cash, ending$11,568  $28,596  $917  

(Dollars in thousands)2016 2015 2014
Cash flows from operating activities:     
Net income$6,628
 $7,874
 $29,142
Adjustments to reconcile net income to cash used in operating activities:     
Deferred income taxes4
 (53) (25)
Gains on affiliate dissolution0
 0
 (54)
Equity in (undistributed income) distributions in excess of income of subsidiaries(6,594) 8,540
 (29,932)
Share-based compensation216
 135
 17
Net change in other liabilities(6) 17
 (26)
Other, net(849) (712) (270)
Net cash provided by (used in) operating activities(601) 15,801
 (1,148)
Cash flows from investing activities:     
Other, net(500) 0
 (72)
Net cash used in investing activities(500) 0
 (72)
Cash flows from financing activities:     
Dividends paid(2,898) (1,822) 0
Proceeds from issuance of common stock847
 794
 105
Payments to repurchase common stock(631) (809) 0
Net cash provided by (used in) financing activities(2,682) (1,837) 105
Net increase (decrease) in cash(3,783) 13,964
 (1,115)
Cash, beginning balance14,353
 389
 1,504
Cash, ending balance$10,570
 $14,353
 $389


NOTE 19.22. 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 no0 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 filed a putative class action complaint in the United StatesU.S. District Court for the Middle District of Pennsylvania against the Company, the Bank and certain current and former directors and executive officers (collectively, the “Defendants”“Orrstown Defendants”). The complaint alleges, 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. The complaint asserts claims under Sections 11, 12(a) and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and seeks class certification, unspecified money damages, interest, costs, fees and equitable or injunctive relief. Under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), motions for appointment of Lead Plaintiff in this case were due by July 24, 2012. SEPTA was the sole movant and the Court appointed SEPTA Lead Plaintiff on August 20, 2012.
Pursuant to the PSLRA and the Court’s September 27, 2012 Order, SEPTA was given until October 26, 2012 to file an amended complaint and the Orrstown Defendants until December 7, 2012 to file a motion to dismiss the amended complaint. SEPTA’s opposition to the Defendant’sOrrstown Defendants’ motion to dismiss was originally due January 11, 2013. Under the PSLRA,
114

discovery and all other proceedings in the case were stayed pending the Court’s ruling on the motion to dismiss. The September 27, 2012 Order specified that if the motion to dismiss were denied, the Court would schedule a conference to address discovery and the filing of a motion for class certification. On October 26, 2012, SEPTA filed an unopposed motion for enlargement of time to file its amended complaint in order to permit the parties and new defendants to be named in the amended complaint time to discuss plaintiff’s claims and defendants’ defenses. On October 26, 2012, the Court granted SEPTA’s motion, mooting its September 27, 2012 scheduling Order, and requiring SEPTA to file its amended complaint on or before January 16, 2013 or otherwise

advise the Court of circumstances that require a further enlargement of time. On January 14, 2013, the Court granted SEPTA’s second unopposed motion for enlargement of time to file an amended complaint on or before March 22, 2013.
On March 4, 2013, SEPTA filed an amended complaint. The amended complaint expandsexpanded 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 extends the purported 1934 Exchange Act class period from March 15, 2010 through April 5, 2012. Pursuant to the Court’s March 28, 2013 Second Scheduling Order, on May 28, 2013, all defendants filed their motions to dismiss the amended complaint, and on July 22, 2013, SEPTA filed its “omnibus” opposition to all of the defendants’ motions to dismiss. On August 23, 2013, all defendants filed reply briefs in further support of their motions to dismiss. On December 5, 2013, the Court ordered oral argument on the Orrstown Defendants’ motion to dismiss the amended complaint to be heard on February 7, 2014. Oral argument on the pending motions to dismiss SEPTA’s amended complaint was held on April 29, 2014.
The Second Scheduling Order stayed all discovery in the case pending the outcome of the motions to dismiss, and informed the parties that, if required, a telephonic conference to address discovery and the filing of SEPTA’s motion for class certification would be scheduled after the Court’s ruling on the motions to dismiss.
On April 10, 2015, pursuant to Court order, all parties filed supplemental briefs addressing the impact of the United StatesU.S. Supreme Court’s March 24, 2015 decision in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund on defendants’ motions to dismiss the amended complaint.
On June 22, 2015, in a 96-page Memorandum, 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 of 1933, as amended, or the Securities Exchange Act of 1934, as amended. The Court ordered that, within 30 days, SEPTA either seek leave to amend its amended complaint, accompanied by the proposed amendment, or file a notice of its intention to stand on the amended complaint.
On July 22, 2015, SEPTA filed a motion for leave to amend under Local Rule 15.1, and attached a copy of its proposed second amended complaint to its motion. Many of the allegations of the proposed second amended complaint are essentially the same or similar to the allegations of the dismissed amended complaint. The proposed second amended complaint also alleges that the Orrstown Defendants did not publicly disclose certain alleged failures of internal controls over loan underwriting, risk management, and financial reporting during the period 2009 to 2012, in violation of the federal securities laws. On February 8, 2016, the Court granted SEPTA’s motion for leave to amend and SEPTA filed its second amended complaint that same day.
On February 25, 2016, the Court issued a scheduling Order directing: all defendants to file any motions to dismiss by March 18, 2016; SEPTA to file an omnibus opposition to defendants’ motions to dismiss by April 8, 2016; and all defendants to file reply briefs in support of their motions to dismiss by April 22, 2016. Defendants timely filed their motions to dismiss the second amended complaint and the parties filed their briefs in accordance with the Court-ordered schedule, above. The February 25, 2016 Order stays all discovery and other deadlines in the case (including the filing of SEPTA’s motion for class certification) pending the outcome of the motions to dismiss.
The allegations of SEPTA’s proposed second amended complaint disclosed the existence of a confidential, non-public, fact-finding inquiry regarding the Company being conducted by the Commission.SEC. As disclosed in the Company’s Form 8-K filed on September 27, 2016, on that date the Company entered into a settlement agreement with the CommissionSEC resolving the investigation of accounting and related matters at the Company for the periods ended June 30, 2010, to December 31, 2011. As part of the settlement of the Commission’sSEC’s administrative proceedings and pursuant to the cease-and-desist order, without admitting or denying the Commission’sSEC’s findings, the Company, its Chief Executive Officer, its former Chief Financial Officer, isits former Executive Vice President and Chief Credit Officer, and its Chief Accounting Officer, agreed to pay civil money penalties to the Commission.SEC. The Company agreed to pay a civil money penalty of $1,000,000.$1.0 million. The Company had previously established a reserve for that amount which was expensed in the second fiscal quarter of 2016. In the settlement agreement with the Commission,SEC, the Company also agreed to cease and desist from committing or causing any violations and any future violations of Securities Act Sections 17(a)(2) and 17(a)(3) and Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B), and Rules 12b-20, 13a-1 and 13a-13 promulgated thereunder.
On September 27, 2016, the Orrstown Defendants filed with the Court a Notice of Subsequent Event in Further Support of their Motion to Dismiss the Second Amended Complaint, regarding the settlement with the Commission.SEC. The Notice attached a copy of the Commission’sSEC’s cease-and-desist order and briefly described what the Company believes arebelieved were the most salient terms of the neither-admit-nor-denyneither-
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admit-nor-deny settlement. On September 29, 2016, SEPTA filed a Response to the Notice, in which SEPTA argued that the settlement with the CommissionSEC did not support dismissal of the second amended complaint.
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 1933 Securities Act

claims against all defendants, and granted the motions to dismiss the 1934 Securities Exchange Act sectionSection 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 1934 Securities Exchange Act sectionSection 20(a) claims against Quinn, Everly, and Embly.
On January 31, 2017, the Court entered a Case Management Order establishing the schedule for the litigation. The Case Managementlitigation and, on August 15, 2017, it entered a revised Order that, among other things, setsset the following deadlines: all fact discovery closes on November 3, 2017,March 1, 2018, and SEPTA’s motion for class certification is due the same day; expert merits discovery closes MarchMay 30, 2018; summary judgment motions are due by April 27,June 26, 2018; the mandatory pretrial and settlement conference is set for SeptemberDecember 11, 2018; and trial is scheduled to begin on January 7, 2019.
On December 15, 2017, the Orrstown Defendants and SEPTA exchanged expert reports in opposition to and in support of class certification, respectively. On January 15, 2018, the parties exchanged expert rebuttal reports. SEPTA’s motion for class certification was due March 1, 2018, with the Orrstown Defendants’ opposition due April 2, 2018, and SEPTA’s reply due April 23, 2018.
On February 9, 2018, SEPTA filed a Status Report and Request for a Telephonic Status Conference asking the Court to convene a conference to discuss the status of discovery in the case and possible revisions to the case schedule. On February 12, 2018, the Orrstown Defendants filed their status report to provide the Court with a summary of document discovery in the case to date. On February 27, 2018, SEPTA filed an unopposed motion for a continuance of the existing case deadlines pending a status conference with the Court or the issuance of a revised case schedule. On February 28, 2018, the Court issued an Order continuing all case management deadlines until further order of the Court.
On March 27, 2018, the Court held a telephonic status conference with the parties to discuss outstanding discovery issues and case deadlines. On May 2, 2018, the parties filed a joint status report. On May 10, 2018, the Court held a follow-up telephonic status conference at which the parties reported on the progress of discovery to date. Party and non-party document discovery in the case has continued. To date, SEPTA has taken a few non-party depositions.
On August 9, 2018, SEPTA filed a motion to compel the production of Confidential Supervisory Information (CSI) of non-parties the Board of Governors of the Federal Reserve System (FRB) and the Pennsylvania Department of Banking and Securities, in the possession of Orrstown and third parties. On August 23, 2018, the Orrstown Defendants filed a response to the motion to compel. On August 30, 2018, the FRB filed an unopposed motion to intervene in the Action for the monthpurpose of opposing SEPTA’s motion to compel, and on September 27, 2018, the FRB filed its brief in opposition to SEPTA’s motion. On October 2018.11, 2018, SEPTA filed its reply brief in support of its motion to compel. On February 12, 2019, the Court denied SEPTA’s motion to compel the production of CSI 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 proposed third amended complaint seeks 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 proposed third amended complaint also seeks to reassert the Exchange Act claims against those defendants that the Court dismissed from the case on December 7, 2016. Defendants’ briefs in opposition to SEPTA’s motion for leave to file a third amended complaint were filed on April 25, 2019. SEPTA filed a reply brief in further support of its motion for leave to file a third amended complaint on May 9, 2019.
On June 13, 2019, Orrstown filed a motion for protective order to stay discovery pending resolution of SEPTA’s motion for leave to file a third amended complaint. On June 19, 2019, former defendants SEK and the underwriters of the Company’s March 2010 public offering joined in Orrstown’s motion for protective order. On June 25, 2019, SEPTA filed its opposition to Orrstown’s motion. On July 9, 2019, Orrstown filed a reply brief in further support of its motion. On July 17, 2019, the Court entered an Order partially granting Orrstown’s motion for protective order, ruling that all deposition discovery in the case is stayed pending a decision on SEPTA’s motion for leave to file a third amended complaint.

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 1933 Securities Act claim against the Orrstown Defendants and the underwriter defendants.Under the Court-ordered briefing schedule, all defendants’ motions to dismiss the third amended complaint are due March 27, 2020, SEPTA’s oppositions are due May 1, 2020, and defendants’ reply briefs are due May 22, 2020.
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On February 24, 2020, the Orrstown Defendants, and the underwriter defendants and SEK, separately filed motions under 28 U.S.C. § 1292(b) asking the Court to certify its February 14, 2020 Order for interlocutory appeal to the Third Circuit Court of Appeals.That motion is pending.
The Company believes that the allegations of SEPTA’s secondthird amended complaint are without merit and intends to vigorously defend itself vigorously against those claims. It is not possible at this time to estimate reasonably possible losses, or even a range of reasonably possible losses, in connection with the litigation.

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ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE


None.
ITEM 9A – CONTROLS AND PROCEDURES


Based on the evaluation required by Securities Exchange Act of 1934, as amended, 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 our disclosure controls and procedures, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e), at December 31, 2016.2019. Based on that evaluation, theour Chief Executive Officer and Chief Financial Officer concluded that theour disclosure controls and procedures were effective at December 31, 2016.2019. There werehave been no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the fourth quarter of 2016.2019.


Management's Report on Internal Controls Over Financial Reporting is included in Part II, Item 8, "Financial Statements and Supplementary Data." The effectiveness of the Company's internal control over financial reporting at December 31, 20162019 has been audited by Crowe Horwath LLP, an independent registered public accounting firm, as stated in the Report of Independent Registered Public Accounting Firm appearing in Part II, Item 8, "Financial Statements and Supplementary Data."
ITEM 9B – OTHER INFORMATION
None.


PART III
ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The Company has adopted a code of ethics that applies to all senior financial officers (including its chief executive officer, chief financial officer, chief accounting officer, and any person performing similar functions). You can find a copy of the Code of Ethics for Senior Financial Officers by visiting our website at www.orrstown.com and following the links to “Investor Relations” and “Governance Documents.” A copy of the Code of Ethics for Senior Financial Officers may also be obtained, free of charge, by written request to Orrstown Financial Services, Inc., 77 East King Street, PO Box 250, Shippensburg, Pennsylvania 17257, Attention: Secretary. The Company intends to disclose any amendments to or waivers from a provision of the Company’s Code of Ethics for Senior Financial Officers in a timely manner.
All other information required by Item 10 is incorporated by reference from the Company’s definitive proxy statement for the 20172020 Annual Meeting of Shareholders filed pursuant to Regulation 14A, under Section 16(a) Beneficial Ownership Reporting Compliance and Proposal 1 – Election of Directors – Biographical Summaries of Nominees and Directors; Information About Executive Officers; Involvement in Certain Legal Proceedings; and Proposal 1 – Election of Directors – Nomination of Directors, and Board Structure, Committees and Meeting Attendance.
ITEM 11 – EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the Company’s definitive proxy statement for the 20172020 Annual Meeting of Shareholders filed pursuant to Regulation 14A, under Proposal 1 – Election of Directors – Compensation of Directors, Compensation Discussion and Analysis, Compensation Committee Report, Executive Compensation Tables, Potential Payments Upon Termination or Change in Control and Compensation Committee Interlocks and Insider Participation.
118

ITEM 12 – SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table presents equity compensation plan information at December 31, 2016.2019.
Plan Category
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted
average exercise
price of outstanding
options, warrants and
rights
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
 (a)(b)(c)
Equity compensation plan approved by security holders27,767  $21.14  455,028  
Equity compensation plan not approved by security holders (1)
2,792  25.76  —  
Total30,559  $21.56  455,028  
 (1) Awards from the Non-Employee Director Stock Option Plan of 2000. Certain options granted remain outstanding from this plan, however no additional options will be granted under this plan.
Plan Category
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
 
Weighted
average exercise
price of outstanding
options, warrants and
rights
 
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
 (a) (b) (c)
      
Equity compensation plan approved by security holders67,295
 $27.15
 136,951
Equity compensation plan not approved by security holders (1)13,075
 28.50
 0
Total80,370
 $27.37
 136,951

(1)Awards from the Non-Employee Director Stock Option Plan of 2000. Certain options granted remain outstanding from this plan, however no additional options will be granted under this plan.
All other information required by Item 12 is incorporated, by reference, from the Company’s definitive proxy statement for the 20172020 Annual Meeting of Shareholders filed pursuant to Regulation 14A, under Share Ownership of Certain Beneficial Owners and Management.
ITEM 13 – CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 is incorporated by reference from the Company’s definitive proxy statement for the 20172020 Annual Meeting of Shareholders filed pursuant to Regulation 14A, under Proposal 1 – Election of Directors – Director Independence, and Transactions with Related Persons, Promoters and Certain Control Persons.
ITEM 14 – PRINCIPAL ACCOUNTANTACCOUNTING FEES AND SERVICES
The information required by Item 14 is incorporated by reference from the Company’s definitive proxy statement for the 20172020 Annual Meeting of Shareholders filed pursuant to Regulation 14A, under Proposal 3 – Ratification of the Audit

Committee’s Selection of Crowe Horwath LLP as the Company’s Independent Registered Public Accounting Firm for the Fiscal Year Ending December 31, 20162019 – Relationship with Independent Registered Public Accounting Firm.

119

PART IV
ITEM 15 – EXHIBITS, AND FINANCIAL STATEMENT SCHEDULES
 
(a)The following documents are filed as part of this report:
a.The following documents are filed as part of this report:
(1) – Financial Statements
Consolidated financial statements of the Company and subsidiaries required in response to this Item are incorporated by reference from Item 8 of this report.
(2) – Financial Statement Schedules
All financial statement schedules 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.
(3) – Exhibits
 
2.1(a)
3.12.1(b)
3.1 
3.2
4.1
10.1(a)4.2 
4.3 
4.4 
10.1(a)
10.1(b)
10.1(c)
10.1(d)
10.1(e)Change in Control Agreement between Orrstown Financial Services, Inc., Orrstown Bank and Benjamin W. Wallace, incorporated by reference to Exhibit 10.6 to the Registrant's Form 8-K filed June 2, 2015.
10.1(f)
10.1(g)10.1(f)
10.2(a)10.1(g)Amended and Restated Salary Continuation
10.2(b)10.1(h)
10.1(i)
120

10.2(a)
10.2(c)10.2(b)
10.2(d)10.2(c)
10.2(d)
10.3
10.4(a)
10.4(b)

10.4(c)
10.4(c)

10.4(d)
10.4(e)Director Retirement Agreement, as amended, between Orrstown Bank and Kenneth R. Shoemaker, incorporated by reference to Exhibit 10.4(e) to the Registrant’s Form 10-K filed March 15, 2010.
10.4(f)
10.4(g)10.4(f)Director Retirement Agreement, as amended, between Orrstown Bank and John S. Ward, incorporated by reference to Exhibit 10.4(g) to the Registrant’s Form 10-K filed March 15, 2010.
10.4(h)
10.5
10.6
10.7
10.8
10.9(a)
10.9(b)
10.9(c)
10.9(d)Employment Agreement between Orrstown Financial Services, Inc., Orrstown Bank and Benjamin W. Wallace, incorporated by reference to Exhibit 10.5 to the Registrant's Form 8-K filed June 2, 2015.
10.9(e)
10.9(f)10.9(e)
10.1010.9(f)
10.9(g)
10.10 
10.1110.11(a)Form of Executive Employment Agreement for selected officers – incorporated by reference to Exhibit 10.1 to Registrant’s Form 8-K filed January 22, 2010.
10.12(a)
10.12(b)10.11(b)
121

10.1410.12 Form of Restricted Share Grant
1410.13
14 Code of Ethics Policy for Senior Financial Officers posted on Registrant’s website.
21
23.1
31.1
31.2
32.1Section 1350 Certifications (Chief Executive Officer)
32.2Section 1350 Certifications (Chief Financial Officer)


101.LABXBRL Taxonomy Extension Label Linkbase
101.PREXBRL Taxonomy Extension Presentation Linkbase
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema
101.CALXBRL Taxonomy Extension Calculation Linkbase
101.DEFXBRL Taxonomy Extension Definition Linkbase

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.
 
(b)Exhibits – The exhibits to this Form 10-K begin after the signature page.
(c)Financial statement schedules – None required.

b.Exhibits – The exhibits to this Form 10-K begin after the signature page.

c.Financial statement schedules – None required.

ITEM 16 – FORM 10-K SUMMARY
Not applicable.



122

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ORRSTOWN FINANCIAL SERVICES, INC.
(Registrant)
ORRSTOWN FINANCIAL SERVICES, INC.
(Registrant)
Dated: March 13, 201716, 2020By:/s/ Thomas R. Quinn, Jr.
Thomas R. Quinn, Jr., President and Chief Executive Officer

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SignatureTitleDate
SignatureTitleDate
/s/ Thomas R. Quinn, Jr.President and Chief Executive Officer (Principal Executive Officer) and DirectorMarch 13, 201716, 2020
Thomas R. Quinn, Jr.
/s/ David P. BoyleThomas R. BruggerExecutive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)March 13, 201716, 2020
David P. BoyleThomas R. Brugger
/s/ Gary A. ManleySenior Vice President and Principal Accounting OfficerMarch 16, 2020
Gary A. Manley
/s/ Joel R. ZullingerChairman of the Board and DirectorMarch 13, 201716, 2020
Joel R. Zullinger
/s/ Jeffrey W. CoyRobert A. DeAlmeidaVice Chairman of the Board and DirectorMarch 13, 201716, 2020
Jeffrey W. CoyRobert A. DeAlmeida
/s/ Dr. Anthony F. CeddiaSecretary of the Board and DirectorMarch 13, 2017
Dr. Anthony F. Ceddia
/s/ Cindy J. JoinerDirectorMarch 13, 201716, 2020
Cindy J. Joiner
/s/ Mark K. KellerDirectorMarch 13, 201716, 2020
Mark K. Keller
/s/ Thomas D. LongeneckerDirectorMarch 13, 201716, 2020
Thomas D. Longenecker
/s/ Andrea PughDirectorMarch 13, 201716, 2020
Andrea Pugh
/s/ Gregory A. RosenberryMichael J. RiceDirectorMarch 13, 201716, 2020
Gregory A. RosenberryMichael J. Rice
/s/ Eric A. SegalDirectorMarch 13, 201716, 2020
Eric A. Segal
/s/ Glenn W. SnokeDirectorMarch 13, 201716, 2020
Glenn W. Snoke
/s/ Floyd E. StonerDirectorMarch 13, 201716, 2020
Floyd E. Stoner



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123