Certain statements appearing herein, which are not historical in nature, are forward-looking statements within the meaning of Section 27A of the Private Securities Litigation Reform Act of 1995.1933, 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, that contain such statements. SuchForward-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 refer to a future period or periods, reflecting ourare not historical facts, and are based on current expectations, estimates and projections about the Company's industry, management’s beliefs as to likely future developments, and use words like “may,” “will,” “expect,” “estimate,” “anticipate” or similar terms. Forward-lookingcertain 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 that include projections, predictions, expectations,are reasonable as of the date made, actual results may prove to be materially different from the results expressed or beliefs about events or results or otherwise are not statements of historical facts, including, but not limited to, statements related to new business development, new loan opportunities, growth inimplied by the balance sheet and fee based revenue lines of business, merger and acquisition activity, reducing risk assets, and mitigating losses in the future. Actual results and trends could differ materially from those set forth in suchforward-looking statements and there can be no assurances that wethe Company will achievebe able to continue to successfully execute on its strategic growth plan into Dauphin, Lancaster, York and Berks counties, Pennsylvania, and the desired levelgreater Baltimore market in Maryland, with newer markets continuing to be receptive to our community banking model; to take advantage of new business development and new loans,market disruption; to experience sustained growth in loans and deposits or maintain the balance sheetmomentum experienced to date from these actions; and fee based revenue lines of business, successful mergerto realize cost savings from our branch consolidation efforts. In addition to risks and acquisition activity, continueuncertainties related to reduce risk assets or mitigate losses in the future. Factors thatCOVID-19 pandemic and resulting governmental and societal responses, factors which could cause the actual results of the Company's operations to differ materially from those expressed or implied by the forward-looking statementsexpectations include, but are not limited to, the following:to: ineffectiveness of the Company’s business strategyCompany's strategic growth plan due to changes in current or future market conditions; the effects of competition and how it may impact our community banking model, including industry consolidation and development of competing financial products and services; the integration of the Company's strategic acquisitions; the inability to fully achieve expected savings, efficiencies or synergies from mergers and acquisitions, or taking longer than estimated for such savings, efficiencies and synergies to be realized; changes in laws and regulations; interest rate movements; changes in credit quality; inability to raise capital, if necessary, under favorable conditions; volatilitiesvolatility in the securities markets; deteriorating economic conditions; expenses associated with pending litigation and legal proceedings; the failure of the SBA to honor its guarantee of loans issued under the SBA PPP; the timing of the repayment of SBA PPP loans and the impact it has on fee recognition; our ability to convert new relationships gained through the SBA PPP efforts to full banking relationships; and other risks and uncertainties. The foregoing list of factors is not exhaustive.

On October 1, 2018, the CompanyOrrstown 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.

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,subsidiary, the Bank and Wheatland.Bank. 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, 2018,2020, the Company had total assets of $1,934,388,000,$2.8 billion, total deposits of $1,558,756,000$2.4 billion and total shareholders’ equity of $173,433,000.$246.2 million.

The Parent Company has no employees. Its 1012 officers are employees of the Bank. On December 31, 2018,2020, the Bank and Wheatland combined had 367400 full-time and 1918 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, granting loans and granting loans.providing wealth management services. The Bank holds commercial, residential, consumer and agribusiness loans, primarily in its market areas of Cumberland, Dauphin, Franklin, Lancaster, Perry and York Counties in Pennsylvania;south central Pennsylvania, the greater Baltimore region, Washington County, Maryland;Maryland, and in contiguous counties. The concentrations of credit by type of loan are 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 Bank maintains a diversified loan portfolio and evaluates each customer’sclient’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.

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 borrowers meet acceptable standards for liquidity and marketability. Loans secured by real estate generally do not exceed 90%85% 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.

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 acrossto commercial 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 rates against different forms of collateral, loan-to-value ratios and maximum term.

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 loan-to-value ratio of no greater than 90% of the value of the real estate being taken as collateral. WeThe Bank also, at times, purchasepurchases consumer loans to help diversify credit risk in our loan portfolio.

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 BankCompany has a loan review policy and program which is designed to identify and monitor risk in the lending function. The Management ERM Committee, comprised of executive officers 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’s commercial loan portfolio on an ongoing basis. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as extended delinquencies, bankruptcy, repossession or death of the borrower occurs, which heightens awareness as to a possible credit event.

Internal loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $500,000,$1.0 million, which includes confirmation of risk rating by an independent credit officer. 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 changed or reaffirmed by the Bank'sCompany's Problem Loan Committee, with subsequent reporting to the Management ERM Committee.Committee and the Board of Directors.

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 are reported quarterly to the Management and Board ERM CommitteeCommittees for approval.review. The loan ratings provide the basis for evaluating the adequacy of the ALL.

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 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. At December 31, 2018,2020, assets under management by OFA totaled $1.7 billion.

The Bank’s principal market area consists of south central Pennsylvania, the greater Baltimore region, and Wheatland totaled $1,330,595,000.Washington County, Maryland. The Bank serves a substantial number of depositors in this market area and its contiguous counties.

The Parent Company is a bank holding company registered with the FRB and has elected status as a financial holding company. As a registered bank holding company and FHC, the Company is subject to regulation under the Bank Holding Company Act of 1956 and to inspection, examination, and supervision by the FRB.

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.

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

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 FDIC. 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.

The Bank’s operations areCompany is also subject to regulationsthe disclosure and regulatory requirements of the Pennsylvania DepartmentSecurities Act of Banking and Securities, the FRB1933, as amended, and the FDIC.

Several of the more significant regulatory provisions applicable to bank holding companiesBHCs 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.

As ana 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 ana FHC, the CompanyOrrstown is generally subject to the same regulation as other bank holding companies,BHCs, including the reporting, examination, supervision and consolidated capital requirements of the FRB. To preserve ourits FHC status, weOrrstown 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 its periodic Community Reinvestment Act examinations. An FHC ceasing to meet these standards is subject to a variety of restrictions, depending on the circumstances.

If the FRB determines that ana FHC or its subsidiaries do not satisfy the CRA requirements, the potential restrictions are different. In that case, until all of 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 thesuch 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.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010, substantially increased regulatory oversight and enforcement and imposed additional costs and risks on the operations of financial holding companies and banks.

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 contracts 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.

Under the Dodd-Frank Act and applicable FRB policy, a bank holding companyOrrstown 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 FRB at times when the Bank might

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.”

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 and Securities 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.

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.

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.

Compliance by the Company and the Bank with respect to capital requirements is incorporated by reference from Note 15,17, 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.”

Under the U.S. Basel III capital rules, Orrstown's and the Bank’s assets, exposures, and certain off-balance sheet items are subject to risk weights used to determine the Basel III Capital Rules, which prescribe a standardized approach for risk weightings that expanded the risk-weighting categories to a larger and more risk-sensitive number of categories than previously used, depending on the nature of theinstitutions’ risk-weighted assets. These categories generally range from 0%,risk-weighted assets are used to calculate the following minimum capital ratios for U.S. governmentOrrstown and agency securities,the Bank:

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, and it effectively increases the required minimum risk-based capital ratios. The Capital Conservation Buffer requirement was phased in over a three-year period that began on January 1, 2016. The phase-in period ended on January 1, 2019, and the Capital Conservation Buffer was at its fully phased-in level of at least 10.5%.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.

The Basel III Capital RulesOrrstown has the ability to provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement 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 CET1additional capital to the extentBank to maintain the Bank’s risk-based capital ratios at levels which would be considered well-capitalized.

BHCs must obtain prior approval of the Federal Reserve in connection with any acquisition that any one such category exceeds 10% of CET1 or all such categories,results in the aggregate, exceed 15%BHC owning or controlling 5% or more of CET1. Underany class of voting securities of a one-time permanent election made by the Company and the Bank, the effectsbank or another BHC.

Acquisitions of Orrstown's voting stock above certain accumulated other comprehensive income items are not excluded from regulatory capital, including unrealized gains or losses on certain securities available for sale. Implementation of the deductions and other adjustments to CET1 were phased in and fully implemented beginning January 1, 2018.

Federal and state law contains extensive consumer privacy protection provisions. The GLB Act; and

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 sound business 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 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

Changes in federal laws and regulations, as well as laws and regulations in states where the Parent Company and the Bank dodoes 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.

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.

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.

An investment in our common stock is subject to risks inherent in our business. The material risks and uncertainties that management believes affect us are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing us. Additional risks and 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.

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. The 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 ALL 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 ALL.

In addition, bank regulatory agencies periodically review our ALL 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 ALL, there would be a need to record additional provisions to increase our ALL. Furthermore, growth in the loan portfolio would generally lead to an increase in the provision for loan losses. Generally, increases in our ALL 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 deterioration of one or more of our 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.

Our business strategy includes 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 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 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 creditworthiness of the borrower and, to the extent available, credit ratings on the business. Additionally, monitoring of the loans through annual renewals and meetings with the borrowers are typical. However, these procedures cannot entirely eliminate the risk of loss associated with commercial and industrial lending.

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;competition, general economic conditions;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 higher 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”) for the applicable interest period 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.

If another rateSOFR 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 rateShould SOFR ultimately replacesreplace 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 rateSOFR 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 negatively impacted upon its discontinuance or if it is limited.phase out.

Our operations are sensitive to general business and economic conditions in the U.S. If the growth of the U.S. economy slows, or if the economy worsens or enters into a recession, our growth and profitability could be constrained. In addition,

Our operations and the properties securing our loans are primarily located in south central Pennsylvania, 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.

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-lineonline 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 expansive 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.

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, we may consider the acquisition of other financial

Technological advances impact our business. The banking industry undergoes constant 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.

Our computer systems and network infrastructure and those of third parties, on which we are highly 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 computer and data management systems and networks, and in the computer and data management systems and networks of third parties. In addition, in order to access our network, products, and services, our clients and other third parties may not be ableuse personal mobile devices or computing devices that are outside of our network environment and are subject to attracttheir own cybersecurity risks.

We, our clients, regulators, and retain skilled people.

Cybersecurity risks for banking organizations have significantly increased in recent years in part because of the proliferation of new technologies, and hire sufficiently skilled peoplethe use of the internet and telecommunications technologies to fill openconduct financial transactions. For example, cybersecurity risks may increase in the future as we continue to increase our mobile-payment and newly created positions orother internet-based product offerings to retain current or future employees. An inability to attractmeet client demand and retain individuals with the necessary skills to fill open positions, or the unexpected lossexpand our internal usage of services of one or more of our key personnel, couldweb-based products and applications. In addition, cybersecurity risks have a material adverse impact on our businesssignificantly increased in recent years, in part due to the lossincreased sophistication and activities of their skills, knowledge of our markets, years of industry experienceorganized crime affiliates, terrorist organizations, hostile foreign governments, disgruntled employees or vendors, activists, and other external parties, including those involved in corporate espionage. Even the difficulty of promptly finding qualified replacement personnel.

Cyber attacks or other information or security breaches, whether directed at us or third parties, may result in a material loss of revenue, any future incidents, particularly of larger scope or longer duration, couldhave material consequences. Furthermore, the public perception that a cyber attack on our systems has been successful, whether or not this perception is correct, may damage our brandreputation with clients and reputationthird 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 materialviolation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of revenue. If an actual or perceived security breach occurs, the market perception of the effectiveness ofconfidence in our security measures, reputational damage, reimbursement or other compensatory costs, additional compliance costs, and could be harmed, we could lose customers, and we could suffer significant legaladversely impact our results of operations, liquidity and financial harm duecondition. In addition, we may not have adequate insurance coverage to such eventscompensate for losses from a cybersecurity event.

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 in connection with remediation effortsadopted cybersecurity legislation and costs, investigation costs or penalties, litigation, regulatoryregulations, which require, among other things, notification to affected individuals when there has been a security breach of their personal data.

We receive, maintain, and enforcement actions, changed securitystore non-public personal information of our clients and systemcounterparties, including, but not limited to, personally identifiable information and personal financial information. The sharing, use, disclosure, and protection measures. Any of these actions could have a materialtypes of information are governed by federal and adverse effect on our business, reputationstate law. Both personally identifiable information and operating results. In addition,personal financial information are increasingly subject to legislation and regulation, the costintent of which is to protect the privacy of personal information and operational consequencespersonal financial information that is collected and handled.

We may become subject to new legislation or regulation concerning cybersecurity or the privacy of investigating, remediating, eliminatingpersonally identifiable information and putting in place additionalpersonal financial information technology tools and devices designed to prevent actual or perceived security breaches, as well as the costs to comply withof any notification obligations resulting from such a breach, could have a significant impact on our financial and operating results.

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

To the extent that the merger consideration, consisting of the cash and the number of shares of our common stock, issued in the Mercersburg merger or to be issued in the Hamilton merger, 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 mergermergers could adversely impact the carrying value of the goodwill recognized in the mergermergers and, in turn, negatively affect our financial results.

The mergersAcquisitions involve the integration with Orrstown of companies that previously operated independently with Orrstown.independently. The difficulties of combining the companies’ operations of the acquired companies with Orrstown include: 

The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of the combined company’s businessescompany 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 of the two companies’ operationsprocess could have a material adverse effect on the business and results of operations of the combined company. 

The success of the mergers will depend,acquisitions depends, in part, on our ability to realize the anticipated benefits and cost savings from combining the business of the Companybusinesses acquired with Mercersburg and Hamilton.Orrstown. If we are unable to successfully integrate Mercersburg or Hamilton,execute on integration, the anticipated benefitsearnings and cost savings of the mergersto be derived from acquisitions may not be realized fully or may take longer to realize than expected. For example, we may fail to realize the anticipated increase in earnings and cost savings anticipated to be derived from the acquisitions. In addition, as with regard to any merger,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 mergersacquisitions not being as accretive as expected.

The businesses of the Company and Mercersburg and Hamiltonacquired entities may differ and, accordingly, the results of operations of the combined company and the market price of the combined company’s 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 of us, Mercersburg and Hamilton.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

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.

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.

We are generally unable to control the amount of premiums that are required to be paid for FDIC insurance. If there are bank or financial institution failures, the Company may be required to pay significantly higher premiums than the levels currently 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 theour results of operations.

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.

Material estimates that are particularly susceptible to significant change relate to the determination of the ALL, the fair value of certain financial instruments, particularly 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.

From time to time, the FASB, and SEC and other regulatory bodies change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can be operationally complex to implement and can materially impact how we record and report 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, effective on January 1, 2020,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

In December 2018, the Federal Reserve,FRB, OCC and FDIC released a final rule to revise their regulatory capital rules, in part to address thisthe upcoming change to the treatment of credit expense and allowances.allowances under ASC 2016-13. The final rule provides an optional three-yearthree 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 will depend on whether we elect to phase in the impact of the standardASU 2016-13 over a three-yearthree year period. The standard is likely to have a negative impact, potentially materially, to the allowanceALL and our capital position at adoption in 2020; however,adoption. When we are still evaluatingadopt ASU 2016-13, we will also determine whether we will elect the impact.phase-in provisions for regulatory capital. It is also possible that our ongoing reported earnings and lending activity will be negatively impacted in periods following adoption.adoption of ASU 2016-13.

The Basel III Capital Rules have targeted higher levels of base capital, certain capital buffers, and a migration toward common equity as the key source of regulatory capital, as domestic and international bank regulatory 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, 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, restructure our business models, and/or increase our holdings of liquid assets.

As more fully described in Note 21,23, 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") 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 February 2018, the Court issued an order continuing all case management deadlines for the completion of discovery, the filing of motions and various pre-trial conferences, until further order of the Court. Discovery in the case is ongoing.

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.

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 prohibit 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, including its depositors.

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

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, 2018,2020, 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,” banks 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 phase-in implementation of the capital conservation buffer was completed on January 1, 2019, which essentially increased the aforementioned capital ratios by 2.5% .

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

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.

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, Loans17, Shareholders' Equity and Advances,Regulatory Capital, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data."

None.

Information regarding legal proceedings is included in Note 21,23, Contingencies, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statement and Supplementary Data."

Not applicable.

Our common stock is traded on the NASDAQ Capital Market under the symbol “ORRF.” At the close of business on February 28, 2019,March 11, 2021, there were approximately 3,0000 shareholders of record.

The Board declared cash dividends of $0.51$0.68 and $0.42$0.60 per common sharesshare in 20182020 and 2017,2019, respectively. Our managementBoard is currently committed to continuing to pay regular cash dividends; however, there can be no assurance as to future dividends because they are dependent on our future earnings, capital requirements and financial condition. Restrictions on the payment of dividends are discussed in Note 15,17, Shareholders' Equity and Regulatory Capital, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data." On January 23, 2019,20, 2021, the Board declared a cash dividend of $0.15$0.18 per common share, which was paid on February 11, 2019.

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.

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, 20182020 to December 31, 2018. At2020. As of December 31, 2018, 82,7252020, 154,680 shares had been repurchased under the program at a total cost of $1,438,000,$2.6 million, or $17.38$16.88 per share and the maximum number of shares that may yet be purchased under the plan is 333,275261,320 shares.

The performance graph below compares the cumulative total shareholder return on our common stock 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, 20132015 and reinvestment of dividends on the date of payment without commissions. Shareholder returns on our common stock are based uponon trades on the NASDAQ Stock Market. The performance graph represents past performance and should not be considered to be an indication of future performance.

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. The Performance Graph and its accompanying table are not deemed to be soliciting material or to be considered filed under the Exchange Act or the Securities Act.

The Company has not sold any equity securities within the past three years which were not registered under the Securities Act.

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.

The results of our operations are highly dependent on economic conditions and market interest rates. The Company'sOur profitability for the years ended December 31, 2018, 20172020, 2019 and 20162018 was influenced by itsour continued organic growth and ongoing expansion into targeted markets, the acquisitionacquisitions of Mercersburg and Hamilton, and a continued focus on maintaining strong asset quality. These and other matters are discussed more fully below.

The Company's consolidated financial statements are prepared in accordance with GAAP, and follow general practices within the financial services industry. 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." In applying those accounting policies, management of the CompanyCompany's management is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. Certain of the critical accounting estimates are more dependent on such judgment and, in some cases, may contribute to volatility in the Company’sour 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 management of the CompanyCompany's management applies critical assumptions and estimates include the following.

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 particular items being valued. Quoted market prices are referred to when estimating fair values for certain assets, such as;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 depositderivatives and other intangible assets, other assets and liabilities obtained or assumed in business combinations, and capitalizedmortgage 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, the Company must assess whether there are any declines in value

Readers of the Company's consolidated financial statements should be aware that the estimates and assumptions used in the Company’s 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.

Preliminary annual real GDP growth for 2018 was 2.9%the fourth quarter of 2020 resulted in an annualized increase of 4.0%. This robust pace tied with 2015is a substantial decrease from an increase of 38.3% for the strongestthird quarter of 2020, which reflected the impact of government stimulus and the gradual re-opening of the economy from COVID-19 related shutdowns as multiple vaccines have been approved. Overall, real GDP decreased by 3.5 % for 2020 as compared to an increase of 2.2% in over2019.The increase in fourth quarter of 2020 reflected both the continued economic recovery from the sharp declines earlier in the year and the ongoing impact of the COVID-19 pandemic, including new restrictions and closures that took effect in some parts of the country. The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the fourth quarter of 2020 because the impacts are generally embedded in source data and cannot be separately identified. As restrictions continue to be lifted and the world population gets vaccinated, there is hope that the leisure, travel and entertainment industries will recover. Weekly jobless claims remain high but the Labor Department announced a decade. Whiledecline to 730,000 on February 25, 2021, a decline of 110,000 claims from the previous report. Also, the prospects for a new government stimulus packages have recently been renewed, but remain uncertain.

The pace of U.S. economic growth was strongweakened substantially late in 2018, growth peaked inthe first quarter of 2020 and into the second quarter of 2020 as over 30 million people in the U.S filed for unemployment since mid-March 2020. Early in 2020, a novel coronavirus (“COVID-19”) emerged and spread, first in China and then around the globe. The fast spread of the virus and the fear that resulted combined to create a high level of uncertainty about the near and intermediate future economic outlook. Because of this uncertainty, markets were pricing in a wide range of potential outcomes by buying sovereign government bonds, especially U.S. Treasuries, and selling stocks and bonds not issued by sovereign governments. The COVID-19 pandemic has adversely affected, and is likely to continue to adversely affect, economic activity globally, nationally and locally. Actions taken around the world to help mitigate the spread of COVID-19 include restrictions on travel, quarantines in certain areas, and forced closures for certain types of public places and businesses, as well as shelter-in-place orders by many states. These restrictions have slowly been lifted as multiple vaccines have been rolled out late in the fourth quarter of 2020.

Due to the COVID-19 pandemic, market interest rates have declined each quarter since. The positive impact of tax cuts and a significantsignificantly, with the 10-year Treasury bond falling for the first time below 1.00% on March 3, 2020; it was at 0.69% on September 30, 2020. On March 3, 2020, in reaction to the increase in government spending appears to be fading. Theuncertainty, the Federal Reserve raisedcut the Fed Funds rates by 50 basis points between regularly scheduled meetings to a target range of 1.00% to 1.25%. On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic. On March 13, 2020, a national emergency was declared by President Trump under the National Emergencies Act. On March 15, 2020, the Federal Reserve responded by again reducing the Fed Funds rate, four timesthis time by 100 basis points, to 0% to 0.25%. The Fed Funds rate was left unchanged in 2018future meetings with rates expected to remain at this level for an extended period of time. These reductions in interest rates and other effects of the COVID-19 pandemic may adversely affect the Company's financial condition and results of operations in future periods. It is unknown how long the adverse conditions associated with the COVID-19 pandemic will last and what the complete financial effect will be to the rateCompany. It is reasonably foreseeable that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of 2.50%these conditions, including expected credit losses on loans and has since announcedthe fair value of financial instruments that future interest rate increases are on hold. It remains to be seen if growth will return to the one to two percent range that persisted before the tax cuts and expansion of the federal deficit or if the economy will tip into recession. Credit spreads have recovered some of the widening they experienced late last year when the stock market entered correction territory. The unemployment rate recently increased as more of the population joined the work force, while inflation fell back from the Federal Reserve’s two percent target. The U.S. Treasury yield curve has inverted with two-year rates above five-year rates, as some market participants take out recession insurance.carried at fair value.

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 remain modest and there is great uncertainty about when, or if, inflation will increase and pressure interest rates to move higher.

Earnings in 20182020 reflected continuing increased interest income from expanding loan and investment portfolios, in a rising rate environment, partially offset by increasesthe impact of decreasing interest rates and an overall increase in interest expense. In addition, the comparability of operating results for 20182020 with 2017 have2019 has been impacted by the MercersburgHamilton acquisition, which was completed on OctoberMay 1, 2018 and2019. Hamilton added securities, loans and deposits totaling $7,352,000, $141,103,000$347.1 million and $160,433,000,$388.2 million, respectively.

The Company recorded net income of $12,805,000, $8,090,000$26.5 million, $16.9 million and $6,628,000$12.8 million for 2020, 2019 and 2018, 2017 and 2016.respectively. Diluted earnings per share totaled $2.40, $1.61 and $1.50 $0.98for 2020, 2019 and $0.81 for 2018, 2017 and 2016.respectively.

Net interest income totaled $51,370,000, $43,371,000$83.6 million, $69.3 million and $36,545,000$52.2 million for 2020, 2019 and 2018, 2017 and 2016,respectively, principally reflecting our expanded geographic footprint, organic growth in commercial loans from an expanded sales force and effortsas we continued to expand our geographic footprint while takingtake advantage of market opportunities. A higheropportunities, and SBA PPP processing fee income. As previously noted, interest rate environment each year contributedrates increased throughout 2018 and 2019 and decreased throughout 2020, contributing to increasedfluctuations in yields on loans and investments, and, to a lesser extent, costs of interest-bearing liabilities.

Favorable historical charge-off dataAsset quality trends continue to exhibit low levels of charge-offs and management's emphasis on loan quality have positively impacted our results, as the allowance for loan losses increased moderately as loans have increased.non-performing loans. The provision for loan losses totaled $800,000, $1,000,000$5.3 million, $900 thousand and $250,000$800 thousand in 2020, 2019 and 2018, 2017 and 2016.respectively. The increase in provision for loan losses in 2020 was primarily a result of increased uncertainty related to the COVID-19 pandemic.

Net interest income 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.

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. “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 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.

Core deposits are deposits that are stable, lower cost and generally reprice more slowly than other deposits when interest rates change. Core deposits, which exclude certificates of deposit, are typically funds of local customersclients who also have a borrowing or other relationship with the Bank. We are primarily funded by core deposits, with noninterest-bearing demand deposits

Net interest income totaled $51,370,000, $43,371,000$83.6 million, $69.3 million and $36,545,000$52.2 million in 2020, 2019 and 2018, 2017 and 2016.respectively. The following table presents net interest income, net interest spread and net interest margin on a taxable-equivalent basis for 2018, 20172020, 2019 and 2016.2018. Taxable-equivalent adjustments are the result of increasing income from tax-free loans and investments by an amount equal to the taxes that would be paid if the income were fully taxable based on a 21% federal corporate tax rate for 20182020, 2019 and 34% for 2017 and 2016,2018, reflecting our statutory tax rates for those years. The lower rate in 2018 reflects tax law changes to our statutory tax rate effective January 1, 2018.