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Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20202021
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission file number: 001-34292
ORRSTOWN FINANCIAL SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)

Pennsylvania23-2530374
(State or Other Jurisdiction of Incorporation or Organization)(I.R.S. Employer Identification No.)
77 East King StreetP. O. Box 250ShippensburgPennsylvania17257
(Address of Principal Executive Offices)(Zip Code)
Registrant’s Telephone Number, Including Area Code:(717)532-6114
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, no par valueORRFNasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨  Accelerated filer ☒
Non-accelerated filer ¨  Smaller reporting company ☒
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.).    Yes  ☐    No  x
Number of shares outstanding of the registrant’s Common Stock as of August 2, 2021: 11,253,921. July 30, 2020: 11,209,146.


Table of Contents

ORRSTOWN FINANCIAL SERVICES, INC.
INDEX
  Page
3
Item 1.
4
4
5
6
7
9
1110
Item 2
5143
Item 3.
7564
Item 4.
7665
Item 1.
7766
Item 1A.
7766
Item 2.
7766
Item 3.
7766
Item 4.
7766
Item 5.
7766
Item 6.
7867
7968

2
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Glossary of Defined Terms
The following terms may be used throughout this Report, including the unaudited condensed 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.
CDICore deposit intangible
CET1Common Equity Tier 1
CMOCollateralized mortgage obligation
CompanyOrrstown Financial Services, Inc. and subsidiariessubsidiary (interchangeable with "Orrstown” below)
EPSEarnings per common share
ERMEnterprise risk management
Exchange ActSecurities Exchange Act of 1934, as amended
FASBFinancial Accounting Standards Board
FDICFederal Deposit Insurance Corporation
FHLBFederal Home Loan Bank
FRBBoard of Governors of the Federal Reserve System
GAAPAccounting principles generally accepted in the United States of America
GDPGross Domestic Deposit
GSEU.S. 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
LIBORLondon Interbank Offered Rate
MBSMortgage-backed securities
MPF ProgramMortgage Partnership Finance Program
MSRMortgage servicing right
NIMNet interest margin
OCIOther comprehensive income
OREOOther real estate owned
OrrstownOrrstown Financial Services, Inc. and subsidiariessubsidiary
OTTIOther-than-temporary impairment
2011 Plan2011 Orrstown Financial Services, Inc. Incentive Stock Plan
PCI loansPurchased credit impaired loans
PPPPaycheck Protection Program
Repurchase AgreementsSecurities sold under agreements to repurchase
ROURight of use (leases)
SBAU.S. Small Business Administration
SECSecurities and Exchange Commission
Securities ActSecurities Act of 1933, as amended
SOFRSecured Overnight Financing Rate
TDRTroubled debt restructuring
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.

3
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PART I – FINANCIAL INFORMATION
 
Item 1.     Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
ORRSTOWN FINANCIAL SERVICES, INC.
(Dollars in thousands, except per share amounts)June 30,
2020		December 31,
2019
Assets
Cash and due from banks$26,652  $25,969  
Interest-bearing deposits with banks25,638  29,994  
Cash and cash equivalents52,290  55,963  
Restricted investments in bank stocks16,256  16,184  
Securities available for sale (amortized cost of $488,433 and $491,492 at June 30, 2020 and December 31, 2019, respectively)483,936  490,885  
Loans held for sale, at fair value13,594  9,364  
Loans2,041,317  1,644,330  
Less: Allowance for loan losses(17,517) (14,655) 
Net loans2,023,800  1,629,675  
Premises and equipment, net36,976  37,524  
Cash surrender value of life insurance64,411  63,613  
Goodwill18,724  19,925  
Other intangible assets, net6,160  7,180  
Accrued interest receivable8,182  6,040  
Other assets48,467  46,921  
Total assets$2,772,796  $2,383,274  
Liabilities
Deposits:
Noninterest-bearing$436,290  $249,450  
Interest-bearing1,815,441  1,626,072  
Total deposits2,251,731  1,875,522  
Securities sold under agreements to repurchase23,716  8,269  
FHLB advances and other202,804  209,667  
Subordinated notes31,875  31,847  
Other liabilities37,032  34,720  
Total liabilities2,547,158  2,160,025  
Commitments and contingencies
Shareholders’ Equity
Preferred 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; 11,268,429 shares issued and 11,209,146 outstanding at June 30, 2020; 11,220,604 shares issued and 11,199,874 outstanding at December 31, 2019586  584  
Additional paid - in capital188,226  188,365  
Retained earnings42,862  35,246  
Accumulated other comprehensive loss(5,114) (480) 
Treasury stock— 59,283 and 20,730 shares, at cost at June 30, 2020 and December 31, 2019, respectively(922) (466) 
Total shareholders’ equity225,638  223,249  
Total liabilities and shareholders’ equity$2,772,796  $2,383,274  
(Dollars in thousands, except per share amounts)June 30,
2021		December 31,
2020
Assets
Cash and due from banks$27,623 $26,203 
Interest-bearing deposits with banks309,139 99,055 
Cash and cash equivalents336,762 125,258 
Restricted investments in bank stocks9,691 10,563 
Securities available for sale (amortized cost of $440,411 and $460,999 at June 30, 2021 and December 31, 2020, respectively)450,402 466,465 
Loans held for sale, at fair value8,092 11,734 
Loans1,945,383 1,979,690 
Less: Allowance for loan losses(19,381)(20,151)
Net loans1,926,002 1,959,539 
Premises and equipment, net34,529 35,149 
Cash surrender value of life insurance69,375 68,554 
Goodwill18,724 18,724 
Other intangible assets, net4,800 5,458 
Accrued interest receivable7,930 8,927 
Other assets46,410 40,201 
Total assets$2,912,717 $2,750,572 
Liabilities
Deposits:
Noninterest-bearing$529,137 $456,778 
Interest-bearing1,964,963 1,900,102 
Total deposits2,494,100 2,356,880 
Securities sold under agreements to repurchase22,872 19,466 
FHLB advances and other57,837 58,045 
Subordinated notes31,932 31,903 
Other liabilities40,038 38,029 
Total liabilities2,646,779 2,504,323 
Commitments and contingencies
Shareholders’ Equity
Preferred stock, $1.25 par value per share; 500,000 shares authorized; 0 shares issued or outstanding0 0 
Common stock, no par value—$0.05205 stated value per share 50,000,000 shares authorized; 11,265,510 shares issued and 11,262,751 outstanding at June 30, 2021; 11,257,046 shares issued and 11,201,317 outstanding at December 31, 2020586 586 
Additional paid - in capital188,772 189,066 
Retained earnings69,052 54,099 
Accumulated other comprehensive income7,578 3,346 
Treasury stock— 2,759 and 55,729 shares, at cost at June 30, 2021 and December 31, 2020, respectively(50)(848)
Total shareholders’ equity265,938 246,249 
Total liabilities and shareholders’ equity$2,912,717 $2,750,572 
The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.
4
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Condensed Consolidated Statements of Income (Unaudited)
ORRSTOWN FINANCIAL SERVICES, INC.
 Three Months EndedSix Months Ended
(Dollars in thousands, except per share amounts)June 30,
2020		June 30,
2019		June 30,
2020		June 30,
2019
Interest income
Loans$21,794  $19,658  $41,960  $34,809  
Investment securities - taxable2,795  3,681  6,233  7,173  
Investment securities - tax-exempt420  632  704  1,474  
Short-term investments13  501  92  674  
Total interest income25,022  24,472  48,989  44,130  
Interest expense
Deposits3,310  4,892  7,664  8,607  
Securities sold under agreements to repurchase152  28  184  55  
FHLB advances and other260  538  1,078  1,197  
Subordinated notes502  499  1,003  996  
Total interest expense4,224  5,957  9,929  10,855  
Net interest income20,798  18,515  39,060  33,275  
Provision for loan losses1,900  200  2,825  600  
Net interest income after provision for loan losses18,898  18,315  36,235  32,675  
Noninterest income
Service charges on deposit accounts554  837  1,401  1,590  
Interchange income819  843  1,607  1,579  
Other service charges, commissions and fees165  241  305  390  
Swap fees232  —  432  —  
Trust and investment management income1,696  1,749  3,336  3,507  
Brokerage income599  672  1,318  1,150  
Mortgage banking activities1,609  652  1,941  1,120  
Gain on sale of portfolio loans925  —  2,803  —  
Income from life insurance532  684  1,072  1,026  
Investment securities gains (losses)9  2,064  (31) 2,403  
Other income53  32  83  144  
Total noninterest income7,193  7,774  14,267  12,909  
Noninterest expenses
Salaries and employee benefits10,063  8,922  21,657  17,599  
Occupancy1,122  1,066  2,249  2,067  
Furniture and equipment1,204  1,140  2,366  2,163  
Data processing791  1,058  1,662  1,828  
Automated teller and interchange fees249  238  500  474  
Advertising and bank promotions167  548  956  1,069  
FDIC insurance214  221  261  406  
Other professional services1,021  707  1,737  1,264  
Directors' compensation264  261  465  497  
Taxes other than income449  314  451  620  
Intangible asset amortization404  402  867  610  
Merger related and branch consolidation expenses—  6,860  —  7,505  
Insurance claim receivable (recovery) write-off—  —  (486) 615  
Other operating expenses2,483  1,555  4,050  2,736  
Total noninterest expenses18,431  23,292  36,735  39,453  
Income before income tax expense7,660  2,797  13,767  6,131  
Income tax expense1,301  110  2,340  342  
Net income$6,359  $2,687  $11,427  $5,789  
Per share information:
Basic earnings per share$0.58  $0.26  $1.04  $0.59  
Diluted earnings per share0.58  0.26  1.04  0.58  
Dividends paid per share0.17  0.15  0.34  0.30  
 Three Months EndedSix Months Ended
(Dollars in thousands, except per share amounts)June 30,
2021		June 30,
2020		June 30,
2021		June 30,
2020
Interest income
Loans$21,323 $21,794 $42,834 $41,960 
Investment securities - taxable1,614 2,795 3,493 6,233 
Investment securities - tax-exempt638 420 1,138 704 
Short-term investments81 13 120 92 
Total interest income23,656 25,022 47,585 48,989 
Interest expense
Deposits1,081 3,310 2,473 7,664 
Securities sold under agreements to repurchase8 152 17 184 
FHLB advances and other164 260 335 1,078 
Subordinated notes502 502 1,004 1,003 
Total interest expense1,755 4,224 3,829 9,929 
Net interest income21,901 20,798 43,756 39,060 
Provision for loan losses625 1,900 (375)2,825 
Net interest income after provision for loan losses21,276 18,898 44,131 36,235 
Noninterest income
Service charges on deposit accounts698 554 1,435 1,401 
Interchange income1,064 819 2,019 1,607 
Other service charges, commissions and fees182 165 330 305 
Swap fee income15 232 68 432 
Trust and investment management income2,020 1,696 3,932 3,336 
Brokerage income910 599 1,721 1,318 
Mortgage banking activities1,162 1,609 3,351 1,941 
Gains on sale of portfolio loans0 925 0 2,803 
Income from life insurance564 532 1,121 1,072 
Investment securities gains (losses)11 9 156 (31)
Other income38 53 75 83 
Total noninterest income6,664 7,193 14,208 14,267 
Noninterest expenses
Salaries and employee benefits10,212 10,063 20,409 21,657 
Occupancy1,098 1,122 2,338 2,249 
Furniture and equipment1,302 1,204 2,580 2,366 
Data processing1,032 791 2,051 1,662 
Automated teller and interchange fees319 249 568 500 
Advertising and bank promotions274 167 699 956 
FDIC insurance158 214 352 261 
Professional services579 1,021 1,300 1,737 
Directors' compensation235 264 469 465 
Taxes other than income462 449 913 451 
Intangible asset amortization324 404 658 867 
Insurance claim receivable recovery0 0 0 (486)
Other operating expenses1,038 2,483 2,479 4,050 
Total noninterest expenses17,033 18,431 34,816 36,735 
Income before income tax expense10,907 7,660 23,523 13,767 
Income tax expense2,131 1,301 4,540 2,340 
Net income$8,776 $6,359 $18,983 $11,427 
Per share information:
Basic earnings per share$0.80 $0.58 $1.73 $1.04 
Diluted earnings per share0.79 0.58 1.71 1.04 
Dividends paid per share0.18 0.17 0.36 0.34 
The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.
5
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Condensed Consolidated Statements of Comprehensive Income (Unaudited)
ORRSTOWN FINANCIAL SERVICES, INC.
 Three Months EndedSix Months Ended
(Dollars in thousands)June 30,
2020		June 30,
2019		June 30,
2020		June 30,
2019
Net income$6,359  $2,687  $11,427  $5,789  
Other comprehensive income, net of tax:
Unrealized (losses) gains on securities available for sale arising during the period13,367  5,353  (3,921) 10,480  
Reclassification adjustment for (gains) losses realized in net income(9) (2,064) 31  (2,403) 
Net unrealized gains (losses) on securities available for sale13,358  3,289  (3,890) 8,077  
Tax effect(2,805) (691) 817  (1,697) 
Total other comprehensive income (loss), net of tax and reclassification adjustments on securities available for sale10,553  2,598  (3,073) 6,380  
Unrealized loss on interest rate swaps used in cash flow hedges(842) —  (2,101) —  
Reclassification adjustment for losses realized in net income121  —  125  —  
Net unrealized loss on interest rate swaps used in cash flow hedges(721) —  (1,976) —  
Tax effect151  —  415  —  
Total other comprehensive loss, net of tax and reclassification adjustments on interest rate swaps(570) —  (1,561) —  
Total other comprehensive income (loss), net of tax and reclassification adjustments9,983  2,598  (4,634) 6,380  
Total comprehensive income$16,342  $5,285  $6,793  $12,169  
 Three Months EndedSix Months Ended
(Dollars in thousands)June 30,
2021		June 30,
2020		June 30,
2021		June 30,
2020
Net income$8,776 $6,359 $18,983 $11,427 
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities available for sale arising during the period5,402 13,367 4,681 (3,921)
Reclassification adjustment for (gains) losses realized in net income(11)(9)(156)31 
Net unrealized gains (losses) on securities available for sale5,391 13,358 4,525 (3,890)
Tax effect(1,132)(2,805)(950)817 
Total other comprehensive income (loss), net of tax and reclassification adjustments on securities available for sale4,259 10,553 3,575 (3,073)
Unrealized (losses) gains on interest rate swaps used in cash flow hedges(83)(842)656 (2,101)
Reclassification adjustment for losses realized in net income89 121 176 125 
Net unrealized gains (losses) on interest rate swaps used in cash flow hedges6 (721)832 (1,976)
Tax effect(2)151 (175)415 
Total other comprehensive gains (losses), net of tax and reclassification adjustments on interest rate swaps used in cash flow hedges4 (570)657 (1,561)
Total other comprehensive income (loss), net of tax and reclassification adjustments4,263 9,983 4,232 (4,634)
Total comprehensive income$13,039 $16,342 $23,215 $6,793 
The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

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Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
ORRSTOWN FINANCIAL SERVICES, INC.
Three Months Ended June 30, 2021
(Dollars in thousands, except per share amounts)Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income		Treasury
Stock		Total
Shareholders’
Equity
Balance, April 1, 2021$586 $188,511 $62,302 $3,315 $(266)$254,448 
Net income— — 8,776 — — 8,776 
Total other comprehensive income, net of taxes— — — 4,263 — 4,263 
Cash dividends ($0.18 per share)— — (2,026)— — (2,026)
Share-based compensation plans:
207 net common shares acquired and 12,000 net treasury shares issued, including compensation expense totaling $478— 261 — — 216 477 
Balance, June 30, 2021$586 $188,772 $69,052 $7,578 $(50)$265,938 
Six Months Ended June 30, 2021
(Dollars in thousands, except per share amounts)Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumulated Other Comprehensive IncomeTreasury
Stock		Total
Shareholders’
Equity
Balance, January 1, 2021$586 $189,066 $54,099 $3,346 $(848)$246,249 
Net income— — 18,983 — — 18,983 
Total other comprehensive income, net of taxes— — — 4,232 — 4,232 
Cash dividends ($0.36 per share)— — (4,030)— — (4,030)
Share-based compensation plans:
8,464 net common shares issued and 52,970 net treasury shares issued, including compensation expense totaling $9450 (294)— — 798 504 
Balance, June 30, 2021$586 $188,772 $69,052 $7,578 $(50)$265,938 
Three Months Ended June 30, 2020
(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, March 31, 2020$586  $187,843  $38,408  $(15,097) $(1,170) $210,570  
Net income—  —  6,359  —  —  6,359  
Total other comprehensive income, net of taxes—  —  —  9,983  —  9,983  
Cash dividends ($0.17 per share)—  —  (1,905) —  —  (1,905) 
Share-based compensation plans:
250 net common shares forfeited and 12,672 net treasury shares issued, including compensation expense totaling $651—  383  —  —  248  631  
Balance, June 30, 2020$586  $188,226  $42,862  $(5,114) $(922) $225,638  
Six Months Ended June 30, 2020
(Dollars in thousands, except per share amounts)Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumulated Other Comprehensive LossTreasury
Stock		Total
Shareholders’
Equity
Balance, January 1, 2020$584  $188,365  $35,246  $(480) $(466) $223,249  
Net income—  —  11,427  —  —  11,427  
Total other comprehensive loss, net of taxes—  —  —  (4,634) —  (4,634) 
Cash dividends ($0.34 per share)—  —  (3,811) —  —  (3,811) 
Share-based compensation plans:
47,825 net common shares issued and 38,553 net treasury shares acquired, including compensation expense totaling $1,1762  (139) —  —  (456) (593) 
Balance, June 30, 2020$586  $188,226  $42,862  $(5,114) $(922) $225,638  

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

7
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Three Months Ended June 30, 2019
(Dollars in thousands, except per share amounts)Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income		Treasury
Stock		Total
Shareholders’
Equity
Balance, March 31, 2019$494  $151,702  $26,161  $810  $—  $179,167  
Net income—  —  2,687  —  —  2,687  
Total other comprehensive loss, net of taxes—  —  —  2,598  —  2,598  
Cash dividends ($0.15 per share)—  —  (1,386) —  —  (1,386) 
Issuance of stock (1,765,704 common shares) to acquire Hamilton Bancorp, Inc.92  36,530  —  —  —  36,622  
Share-based compensation plans:
26,480 net common shares forfeited, including compensation expense of $180(2) 182  —  —  —  180  
Balance, June 30, 2019$584  $188,414  $27,462  $3,408  $—  $219,868  
Six Months Ended June 30, 2019
(Dollars in thousands, except per share amounts)Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income		Treasury
Stock		Total
Shareholders’
Equity
Balance, January 1, 2019$491  $151,678  $24,472  $(2,972) $(236) $173,433  
Net income—  —  5,789  —  —  5,789  
Total other comprehensive income, net of taxes—  —  —  6,380  —  6,380  
Cash dividends ($0.30 per share)—  —  (2,799) —  —  (2,799) 
Issuance of stock (1,765,704 common shares) to acquire Hamilton Bancorp, Inc.92  36,530  —  —  —  36,622  
Share-based compensation plans:
19,034 net common shares issued and 9,031 net treasury shares acquired, including compensation expense totaling $6791  206  —  —  236  443  
Balance, June 30, 2019$584  $188,414  $27,462  $3,408  $—  $219,868  
Three Months Ended June 30, 2020
(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, April 1, 2020$586 $187,843 $38,408 $(15,097)$(1,170)$210,570 
Net income— — 6,359 — — 6,359 
Total other comprehensive income, net of taxes— — — 9,983 — 9,983 
Cash dividends ($0.17 per share)— — (1,905)— — (1,905)
Share-based compensation plans:
250 net common shares forfeited and 12,672 net treasury shares issued, including compensation expense totaling 6510 383 — — 248 631 
Balance, June 30, 2020$586 $188,226 $42,862 $(5,114)$(922)$225,638 
Six Months Ended June 30, 2020
(Dollars in thousands, except per share amounts)Common
Stock		Additional
Paid-In
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Loss		Treasury
Stock		Total
Shareholders’
Equity
Balance, January 1, 2020$584 $188,365 $35,246 $(480)$(466)$223,249 
Net income— — 11,427 — — 11,427 
Total other comprehensive loss, net of taxes— — — (4,634)— (4,634)
Cash dividends ($0.34 per share)— — (3,811)— — (3,811)
Share-based compensation plans:
47,825 net common shares issued and 38,553 net treasury shares acquired, including compensation expense totaling $1,1762 (139)— — (456)(593)
Balance, June 30, 2020$586 $188,226 $42,862 $(5,114)$(922)$225,638 
The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.


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Condensed Consolidated Statements of Cash Flows (Unaudited)
ORRSTOWN FINANCIAL SERVICES, INC.
 Six Months Ended
(Dollars in thousands)June 30, 2020June 30, 2019
Cash flows from operating activities
Net income$11,427  $5,789  
Adjustments to reconcile net income to net cash provided by operating activities:
Net (discount accretion) premium amortization(2,020) 2,203  
Depreciation and amortization expense2,707  2,366  
Impairment of intangibles153  —  
Provision for loan losses2,825  600  
Share-based compensation1,176  679  
Gain on sales of loans originated for sale(1,903) (909) 
Mortgage loans originated for sale(76,417) (43,471) 
Proceeds from sales of loans originated for sale73,323  40,392  
Gain on sale of portfolio loans(2,803) —  
Net gain on disposal of OREO(21) (8) 
Net loss on disposal of premises and equipment1  607  
Deferred income taxes63  263  
Investment securities losses (gains)31  (2,403) 
Income from life insurance(1,072) (1,026) 
(Increase) decrease in accrued interest receivable(2,142) 730  
Increase (decrease) in accrued interest payable and other liabilities85  (1,147) 
Other, net1,445  1,100  
Net cash provided by operating activities6,858  5,765  
Cash flows from investing activities
Proceeds from sales of AFS securities—  173,836  
Maturities, repayments and calls of AFS securities29,317  15,297  
Purchases of AFS securities(26,691) (150,386) 
Net cash and cash equivalents received from acquisitions—  29,442  
Net (purchases) redemptions of restricted investments in bank stocks(72) 3,395  
Net decrease (increase) in loans43,961  (8,395) 
Proceeds from sales of portfolio loans22,665  —  
Purchases of bank premises and equipment(464) (1,489) 
Proceeds from disposal of OREO198  374  
Death benefit proceeds from life insurance contracts—  571  
Net cash provided by investing activities68,914  62,645  
Cash flows from financing activities
Net (decrease) increase in deposits(82,449) 68,525  
Net decrease in borrowings with original maturities less than 90 days(111,152) (29,696) 
Proceeds from FHLB advances and other borrowings160,284  20,000  
Payments on FHLB advances and other borrowings(40,548) (96,582) 
Subordinated note issuance costs—  (57) 
Dividends paid(3,811) (2,799) 
Acquisition of treasury stock(1,170) —  
Treasury shares repurchased for employee taxes associated with restricted stock vesting(660) (294) 
Proceeds from issuance of employee stock purchase plan shares61  58  
Net cash used in financing activities(79,445) (40,845) 
Net (decrease) increase in cash and cash equivalents(3,673) 27,565  
Cash and cash equivalents at beginning of period55,963  88,815  
Cash and cash equivalents at end of period$52,290  $116,380  
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Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest$10,367  $10,326  
Supplemental schedule of noncash investing activities:
OREO acquired in settlement of loans—  161  
Lease liabilities arising from obtaining ROU assets—  8,115  
SBA PPP loans originated458,606  —  
 Six Months Ended
(Dollars in thousands)June 30, 2021June 30, 2020
Cash flows from operating activities
Net income$18,983 $11,427 
Adjustments to reconcile net income to net cash provided by operating activities:
Net discount accretion(812)(2,020)
Depreciation and amortization expense2,692 2,707 
Impairment of intangibles0 153 
Provision for loan losses(375)2,825 
Share-based compensation945 1,176 
Gain on sales of loans originated for sale(2,791)(1,903)
Mortgage loans originated for sale(104,190)(76,417)
Proceeds from sales of loans originated for sale109,877 73,323 
Gain on sale of portfolio loans0 (2,803)
Deferred income taxes(2,371)63 
Investment securities (gains) losses(156)31 
Income from life insurance(1,121)(1,072)
(Increase) decrease in accrued interest receivable997 (2,142)
Increase in accrued interest payable and other liabilities1,449 85 
Other, net(3,292)1,425 
Net cash provided by operating activities19,835 6,858 
Cash flows from investing activities
Proceeds from sales of AFS securities75,719 0 
Maturities, repayments and calls of AFS securities21,227 29,317 
Purchases of AFS securities(76,858)(26,691)
Net redemptions (purchases) of restricted investments in bank stocks872 (72)
Net decrease in loans35,337 43,961 
Proceeds from sales of portfolio loans0 22,665 
Purchases of bank premises and equipment(556)(464)
Proceeds from disposal of OREO0 198 
Net cash used in investing activities55,741 68,914 
Cash flows from financing activities
Net increase (decrease) in deposits137,200 (82,449)
Net increase (decrease) in borrowings with original maturities less than 90 days3,406 (111,152)
Proceeds from FHLB advances and other borrowings0 160,284 
Payments on FHLB advances and other borrowings(208)(40,548)
Dividends paid(4,030)(3,811)
Acquisition of treasury stock0 (1,170)
Shares repurchased as treasury stock for employee taxes associated with restricted stock vesting(514)(660)
Proceeds from issuance of employee stock purchase plan shares74 61 
Net cash provided by financing activities135,928 (79,445)
Net increase (decrease) in cash and cash equivalents211,504 (3,673)
Cash and cash equivalents at beginning of period125,258 55,963 
Cash and cash equivalents at end of period$336,762 $52,290 
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest$3,900 $10,367 
Income taxes2,100 0 

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

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Notes to Condensed Consolidated Financial Statements (Unaudited)
(All dollar amounts presented in the tables, except per share amounts, are in thousands)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See the Glossary of Defined Terms at the beginning of this Report for terms used throughout the unaudited condensed consolidated financial statements and related notes of this Form 10-Q.
Nature of Operations – Orrstown Financial Services, Inc. is a financial holding company that operates Orrstown Bank, a commercial bank withproviding banking and financial advisory officesservices in Berks, Cumberland, Dauphin, Franklin, Lancaster, Perry and York Counties, Pennsylvania, and in Anne Arundel, Baltimore, Howard and Washington Counties, Maryland, as well as Baltimore City, Maryland and Wheatland Advisors, Inc., a registered investment advisor non-bank subsidiary, headquartered in Lancaster County, Pennsylvania. The Wheatland operations were discontinued effective July 31, 2020.Maryland. The Company operates in the community banking segment and engages in lending activities, including commercial, residential, commercial mortgages, construction, municipal, and various forms of consumer lending, and deposit services, including checking, savings, time, and money market deposits. The Company also provides fiduciary services, investment advisory, insurance and brokerage services. The Company and the Bank are subject to regulation by certain federal and state agencies and undergo periodic examinations by such regulatory authorities.
Basis of Presentation – The accompanying unaudited condensed consolidated financial statements include the accounts of Orrstown Financial Services, Inc. and its wholly owned subsidiaries,subsidiary, the Bank and Wheatland.Bank. The Company has prepared these unaudited condensed consolidated financial statements in accordance with GAAP for interim financial information, SEC rules that permit reduced disclosure for interim periods, and Article 10 of Regulation S-X. In the opinion of management, all adjustments (all of which are of a normal recurring nature) that are necessary for a fair statement are reflected in the unaudited condensed consolidated financial statements. The December 31, 20192020 consolidated balance sheet information contained in this Quarterly Report on Form 10-Q was derived from the Company's 20192020 audited consolidated financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.2020. Operating results for the three and six months ended June 30, 20202021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.2021. All significant intercompany transactions and accounts have been eliminated. Certain reclassifications may have been made to prior year amounts to conform with current year classifications.
The Company's management has evaluated all activity of the Company and concluded that subsequent events are properly reflected in the Company's unaudited condensed consolidated financial statements and notes as required by GAAP.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions 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 from those estimates. The effects of the COVID-19 pandemic may negatively impact material estimates. Material estimates that are particularly susceptible to significant change include the determination of the ALL and those used in valuation methodologies in areas with no observable market, such as loans, deposits, borrowings, goodwill, core deposit and other intangible assets, mortgage servicing rights, other assets and liabilities obtained or assumed in business combinations.
Derivatives - FASB ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair
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value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.
The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. The Company's objectives in using
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interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
Changes to the fair value of derivatives designated and that qualify as cash flow hedges are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged transaction affects earnings. During the six months ended June 30, 2020,2021, such derivatives were used to hedge the variable cash flows associated with overnight borrowings.
Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.

Leases - The Company evaluates its contracts at inception to determine if an arrangement either is a lease or contains one. Operating lease ROU assets are included in other assets and operating lease liabilities in accrued interest payable and other liabilities in the unaudited condensed consolidated balance sheets. The Company had no finance leases at June 30, 2020.2021.
ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent an obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The Company's leases do not provide an implicit rate, so the Company's incremental borrowing rate is used, which approximates its fully collateralized borrowing rate, based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate is reevaluated upon lease modification. The operating lease ROU asset also includes any initial direct costs and prepaid lease payments made less any lease incentives. The Company'sIn calculating the present value of lease termspayments, the Company may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option.
In accordance with ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), the Company keeps leases with an initial term of 12 months or less off of the balance sheet. The Company recognizes these lease payments in the unaudited condensed consolidated statements of income on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components and has elected the practical expedient to account for them as a single lease component.
The Company's operating leases relate primarily to bank branches and office space. Upon the adoption of ASU 2016-02 on January 1, 2019, operating lease liabilities of $10.5 million and related lease assets of $7.5 million were recognized on the unaudited condensed 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.
Recent Accounting Pronouncements - ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("("ASU 2016-13"). The amendments in this update require an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will use forward-looking information to better 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 this update amend the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. For certain public companies, this update was effective for interim and annual periods beginning after December 15, 2019. The Company delayed the adoption of ASU 2016-13 as noted below.
ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates ("ASU 2019-10"), extended the implementation deadline of ASU 2016-13 for smaller reporting and other companies until the fiscal year and interim periods beginning after December 15, 2022. The Company meets the
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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. The Company is evaluating the impact of the delay for adoption of ASU 2016-13. The Company2016-13, and is working with a third partythird-party vendor solution to assist with the application of ASU 2016-13 and finalizing the loss estimation models to be 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 anticipates 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 date. The other provisions of ASU 2019-10 were not applicable to the Company.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04)2020-04"). ASU 2020-04 contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting
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certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The optional expedients apply consistently to all contracts or transactions within the scope of this topic, while the optional expedients for hedging relationships can be elected on an individual basis. The Company has formed a cross-functional working group to lead the transition from LIBOR to a planned adoption of an alternate index. The Company has not yet determined what index willcurrently plans to replace LIBOR with the daily simple SOFR in its loan agreements. The Company is in the process of implementing fallback language for loans that will mature after 2021. The Company expects to adopt the LIBOR transition relief allowed under this standard, and is currently evaluating the potential impact of this guidance on its financial statements.

NOTE 2.    MERGERS AND ACQUISITIONS
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 April 30, 2019, the consideration paid to acquire Hamilton totaled approximately $50.8 million.
The fair value of assets acquired, excluding goodwill, totaled $494.0 million, including loans totaling $347.1 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 $6.1 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 customer synergies and efficiencies, thereby providing enhanced customer 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 becomes available. The Company finalized the fair values of loans, intangible assets, other assets, income taxes and liabilities associated with Hamilton as of May 1, 2020. Measurement period adjustments made from the date of acquisition through May 1, 2020 are summarized in Note 6 - Goodwill and Other Intangible Assets.
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The following table summarizes the consideration paid for Hamilton and the estimated fair values of the assets acquired and liabilities assumed recognized 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$43,140 
Securities available for sale60,882 
Restricted investments in bank stocks2,658 
Loans347,143 
Premises and equipment3,749 
Core deposit intangible4,550 
Goodwill6,132 
Cash surrender value of life insurance17,948 
Deferred tax asset, net7,257 
ROU lease asset2,793 
Other assets3,925 
Total assets acquired500,177 
Deposits(388,246)
Borrowings(51,393)
Other liabilities(9,719)
Total liabilities assumed$(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 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 13 - Fair Value. The remaining acquisition date fair values represent either Level 2 fair value measurements or Level 3 fair value measurements (premises and equipment and core deposit intangible).
Upon completion of the 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.
The Company recognized a core deposit intangible of $4.6 million, which is being amortized using an accelerated method over a 10-year amortization period, consistent with expected future cash flows.
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Loans acquired with Hamilton were measured at fair value at the acquisition date with no carryover of any ALL. Loans were segregated into those loans considered to be performing and those considered PCI. The following table presents performing and PCI loans acquired, by loan class, at May 1, 2019:
PerformingPCITotal
Commercial real estate:
Owner-occupied$42,148  $5,894  $48,042  
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  1,914  34,230  
Residential mortgage:
First lien152,657  10,494  163,151  
Home-equity - term4,478  1  4,479  
Home equity - lines of credit13,657  —  13,657  
Installment and other loans14,467  195  14,662  
Total loans acquired$327,875  $19,268  $347,143  

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 PCI loans(5,726)
Estimated fair value of acquired loans$347,143 

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, Loans and Debt Securities Acquired with Deteriorated Credit Quality,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.
The following table provides information about acquired PCI loans at May 1, 2019:
Contractually required principal and interest at acquisition$31,599 
Nonaccretable difference(8,834)
Expected cash flows at acquisition22,765 
Accretable yield(3,497)
Estimated fair value of acquired PCI loans$19,268 

Unaudited pro forma net income for the Company for the three and six months ended June 30, 2019, would have totaled $6.2 million and $9.7 million, respectively. Revenues would have totaled $27.6 million and $50.9 million, respectively, for the three and six months ended June 30, 2019, had the Hamilton acquisition occurred on January 1, 2019.
In connection with the Mercersburg and Hamilton acquisitions, the Company incurred merger related expenses totaling $6.9 million and $7.5 million for the three and six months ending June 30, 2019, which are included in noninterest expenses.
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The Company did 0t incur any merger related expenses in connection with the Hamilton acquisition for the three and six months ended June 30, 2020.

NOTE 3.2. INVESTMENT SECURITIES
At June 30, 20202021 and December 31, 2019,2020, all investment securities were classified as AFS. The following table summarizes amortized cost and fair value of investment securities, and the corresponding amounts of gross unrealized gains and losses recognized in AOCI, at June 30, 20202021 and December 31, 2019:
Amortized CostGross Unrealized
Gains		Gross Unrealized
Losses		Fair Value
June 30, 2020
States and political subdivisions$105,122  $8,156  $183  $113,095  
GSE residential MBSs4,519  86  —  4,605  
GSE residential CMOs63,655  3,116  704  66,067  
Non-agency CMOs17,213  97  —  17,310  
Private label commercial CMOs73,388  25  3,677  69,736  
Asset-backed224,181  97  11,510  212,768  
Other355  —  —  355  
Totals$488,433  $11,577  $16,074  $483,936  
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-backed235,406  138  5,029  230,515  
Other637  —  —  637  
Totals$491,492  $5,582  $6,189  $490,885  
2020:
Amortized CostGross Unrealized
Gains		Gross Unrealized
Losses		Fair Value
June 30, 2021
States and political subdivisions$149,885 $9,556 $25 $159,416 
GSE residential MBSs9,326 76 1 9,401 
GSE residential CMOs62,271 798 1,297 61,772 
Non-agency CMOs14,013 629 0 14,642 
Asset-backed204,517 1,164 909 204,772 
Other399 0 0 399 
Totals$440,411 $12,223 $2,232 $450,402 
December 31, 2020
States and political subdivisions$104,704 $9,091 $1,125 $112,670 
GSE residential MBSs4,197 96 0 4,293 
GSE residential CMOs56,856 2,226 1,071 58,011 
Non-agency CMOs16,505 413 0 16,918 
Private label commercial CMOs63,941 57 1,762 62,236 
Asset-backed214,425 171 2,630 211,966 
Other371 0 0 371 
Totals$460,999 $12,054 $6,588 $466,465 

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The following table summarizes investment securities with unrealized losses at June 30, 20202021 and December 31, 2019,2020, aggregated by major investment security type and the length of time in a continuous unrealized loss position.
 Less Than 12 Months12 Months or MoreTotal
# of SecuritiesFair ValueUnrealized
Losses		# of SecuritiesFair ValueUnrealized
Losses		# of SecuritiesFair ValueUnrealized
Losses
June 30, 2020
States and political subdivisions1  $10,032  $183  —  $—  $—  1  $10,032  $183  
GSE residential CMOs3  26,496  704  —  —  —  3  26,496  704  
Private label commercial CMOs5  29,410  1,618  8  33,814  2,059  13  63,224  3,677  
Asset-backed9  73,071  2,724  11  133,451  8,786  20  206,522  11,510  
Totals18  $139,009  $5,229  19  $167,265  $10,845  37  $306,274  $16,074  
December 31, 2019
States and political subdivisions1  $6,173  $32  —  $—  $—  1  $6,173  $32  
GSE residential CMOs5  37,158  309  1  11,602  465  6  48,760  774  
Non-agency CMOs1  17,087  123  —  —  —  1  17,087  123  
Private label commercial CMOs6  26,079  67  8  39,726  164  14  65,805  231  
Asset-backed9  92,189  1,145  9  121,399  3,884  18  213,588  5,029  
Totals22  $178,686  $1,676  18  $172,727  $4,513  40  $351,413  $6,189  
 Less Than 12 Months12 Months or MoreTotal
# of SecuritiesFair ValueUnrealized
Losses		# of SecuritiesFair ValueUnrealized
Losses		# of SecuritiesFair ValueUnrealized
Losses
June 30, 2021
States and political subdivisions3 $12,424 $25 0 $0 $0 3 $12,424 $25 
GSE residential MBSs1 689 1 0 0 0 1 689 1 
GSE residential CMOs4 19,958 79 2 17,242 1,218 6 37,200 1,297 
Asset-backed0 0 0 4 46,642 909 4 46,642 909 
Totals8 $33,071 $105 6 $63,884 $2,127 14 $96,955 $2,232 
December 31, 2020
States and political subdivisions1 $9,079 $1,125 0 $0 $0 1 $9,079 $1,125 
GSE residential CMOs3 23,954 1,071 0 0 0 3 23,954 1,071 
Private label commercial CMOs1 4,314 685 10 42,403 1,077 11 46,717 1,762 
Asset-backed2 16,921 12 15 183,161 2,618 17 200,082 2,630 
Totals7 $54,268 $2,893 25 $225,564 $3,695 32 $279,832 $6,588 

The Company determines whether unrealized losses are temporary in nature in accordance with FASB ASC 320-10, Investments - Overall, (“FASB ASC 320-10”) and FASB ASC 325-40, Investments – Beneficial Interests in Securitized Financial Assets, when applicable. 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 been less than cost and near-term prospects of the issuer.
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 the fair value of the security. If neither of these situations applies, the Company is required to assess whether it is expected to recover the entire amortized cost basis of the security. If the Company is not expected to recover the entire amortized cost basis of the security, the guidance requires the Company to bifurcate the identified OTTI into a credit loss component and a component representing loss related to other factors. A discount rate is applied which equals the effective yield of the security. The difference between the present value of the expected flows and the amortized book value is considered a credit loss, which would be recorded through earnings as an OTTI charge. When a market price is not readily available, the market value of the security is determined using the same expected cash flows; the discount rate is a rate the Company determines from the open market and other sources as appropriate for the security. The difference between the market value and the present value of cash flows expected to be collected is recognized in accumulated other comprehensive loss on the unaudited condensed consolidated statements of financial condition.
As of June 30, 2020,2021, the Company had no cumulative OTTI. There were no OTTI charges recognized in earnings as a result of credit losses on investments in the three and six months ended June 30, 20202021 and 2019.2020. During the six months ended June 30, 2020, unrealized losses were substantially higher due to market uncertainty brought about by the COVID-19 pandemic. The sudden and desperate need for liquidity from many institutional pools of capital, combined with the global economic implications of the COVID-19 pandemic, caused significant widening of spreads. Market conditions improved in the second half of 2020 and into 2021 as the uncertainty dissipated with economies re-opening and the distribution of vaccines.
States and Political Subdivisions. The unrealized losses presented in the table above have been caused by a widening of spreads from the time these 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 OTTI. Because the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be maturity, the Company does not consider these securities to be OTTI at June 30, 20202021 or December 31, 2019.2020.
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GSE Residential CMOs.CMOs and GSE Residential MBS. The unrealized losses presented in the table above have been caused by a widening of spreads from the time these securities were purchased. The contractual terms of these securities do not permit the issuer to settle the securities at a price less than its par value basis. Because the Company does not intend to sell these
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securities and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be maturity, the Company does not consider these securities to be OTTI at June 30, 20202021 or December 31, 2019.2020.
Non-agency CMOsAsset-backed. . The unrealized losses presented in the table above have beenwere caused by a widening of spreads from the time the securities were purchased. Management considers the investment rating and other credit support in determining whether a security is other-than-temporarily impaired. As of June 30, 2020, 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.
Private Label Commercial CMOs and Asset-backed. The unrealized losses presented in the table above have been caused by a widening of spreads from the time the securities were purchased. Management considers the investment rating and other credit support in determining whether a security is other-than-temporarily impaired.OTTI. Because the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be maturity, the Company does not consider these securities to be OTTI at June 30, 20202021 or December 31, 2019.
The following table summarizes the credit ratings and collateral associated with the Company's investment portfolio, excluding equity securities, at June 30, 2020:
SectorPortfolio MixAmortized BookFair ValueCredit EnhancementAAAAAABBBNRCollateral Type
Unsecured ABS2 %$10,003  $9,694  41 %6 %— %— %— %94 %Unsecured Consumer Debt
Student Loan ABS3 %12,624  11,777  26 %— %— %— %— %100 %Seasoned Student Loans
Federal Family Education Loan ABS37 %182,759  172,613  6 %4 %74 %22 %— %— %
Federal Family Education Loan (1)
PACE Loan ABS1 %6,149  6,246  6 %100 %— %— %— %— %PACE Loans
Non-Agency CMBS15 %73,388  69,735  55 %80 %7 %3 %10 %— %Commercial Real Estate
Non-Agency RMBS4 %17,213  17,310  33 %100 %— %— %— %— %
Reverse Mortgages (2)
Municipal - General Obligation11 %53,984  58,963  3 %84 %12 %— %— %
Municipal - Revenue10 %51,138  54,132  — %61 %19 %— %20 %
SBA ReRemic3 %12,647  12,439  — %100 %— %— %— %
SBA Guarantee (3)
Agency MBS14 %68,174  70,673  — %100 %— %— %— %
Residential Mortgages (3)
Bank CDs— %249  249  — %— %— %— %100 %FDIC Insured CD
100 %$488,328  $483,831  19 %61 %12 %1 %7 %
(1) 97% guaranteed by U.S. government
(2) Currently 6% credit enhancement; expected credit enhancement is provided above
(3) 100% guaranteed by U.S. government agencies
Note : Ratings in table are the lowest of the six rating agencies (Standard & Poors, Moody's, Morningstar, DBRS, KBRA and Fitch). Standard & Poors rates U.S. government obligations at AA+
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The following table summarizes amortized cost and fair value of investment securities by contractual maturity at June 30, 2020.2021. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
Amortized CostFair Value
Due in one year or less$—  $—  
Due after one year through five years249  249  
Due after five years through ten years27,182  29,157  
Due after ten years78,046  84,044  
CMOs158,775  157,718  
Asset-backed224,181  212,768  
$488,433  $483,936  
Amortized CostFair Value
Due in one year or less$0 $0 
Due after one year through five years249 249 
Due after five years through ten years37,142 39,694 
Due after ten years112,893 119,872 
CMOs and MBSs85,610 85,815 
Asset-backed204,517 204,772 
$440,411 $450,402 

The following table summarizes proceeds from sales of investment securities and gross gains and gross losses for the three and six months ended June 30, 20202021 and 2019:2020:
Three months ended June 30,Six months ended June 30,
2021202020212020
Proceeds from sale of investment securities$0 $0 $75,719 $0 
Gross gains11 9 1,362 0 
Gross losses0 0 1,206 31 
Three months ended June 30,Six months ended June 30,
2020201920202019
Proceeds from sale of investment securities$—  $114,372  $—  $173,836  
Gross gains9  2,109  —  2,628  
Gross losses—  45  31  225  

During the three and six months ended June 30, 2020,2021, net investment security gains of $11 thousand and $156 thousand were recorded, compared to a net gain of $9 thousand and a net loss of $31 thousand respectively, was recorded to adjust an equity security to market value compared to net investment security gains of $2.1 million and $2.4 million, respectively, for the three and six months ended June 30, 2019 from security sales.2020. During the six months ended June 30, 2021, 14 securities with a principal balance of $75.6 million were sold for proceeds of $75.7 million. There were no sales of investment securities during the three months ended June 30, 2021 and six months ended June 30, 2020. Investment securities with a fair value of $428.1$312.3 million and $158.7$398.7 million at June 30, 20202021 and December 31, 2019,2020, respectively, were pledged to secure public funds and for other purposes as required or permitted by law.

NOTE 4.3. LOANS AND ALLOWANCE FOR LOAN LOSSES

Consistent with ASU 2010-20,
TheDisclosures about the Credit Quality of Financing Receivables and the Allowance for Loan Losses, the Company’s loan portfolio is grouped into segments which are further broken down into classes to allow management to monitor the performance by the borrower and to monitor the yield on the portfolio. 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 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.
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Non-owner occupied and multi-family commercial real estate loans and non-owner occupied residential loans present a different credit risk to the Company than owner occupied commercial real estate loans, as the repayment of the loan is dependent upon the borrower’s ability to generate a sufficient level of occupancy to produce rental income that exceeds debt service requirements and operating expenses. Lower occupancy or lease rates may result in a reduction in cash flows, which hinders the ability of the borrower to meet debt service requirements, and may result in lower collateral values. The Company generally recognizes that greater risk is inherent in these credit relationships as compared to owner occupied loans mentioned above.
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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, including, 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-rated borrowers, the majority of these loans are secured by the borrower’s accounts receivable, inventory and machinery and equipment. In a significant number of these loans, the collateral also includes the business real estate or the business owner’s personal real estate or assets. Commercial and industrial loans present credit exposure to the Company, as they are more susceptible to risk of loss during a downturn in the economy as borrowers may have greater difficulty in meeting their debt service requirements and the value of the collateral may decline. The Company attempts to mitigate this risk through its underwriting standards, including evaluating the creditworthiness of the borrower and, to the extent available, credit ratings on the business. Additionally, monitoring of the loans through annual renewals and meetings with the borrowers are typical. However, these procedures cannot eliminate the risk of loss associated with commercial and industrial lending. At June 30, 20202021 and December 31, 2019,2020, commercial and industrial loans include $447.2$355.6 million and $0,$403.3 million, respectively, of loans, net of deferred fees and costs, originated through the U.S. Small Business Administration Paycheck Protection Program ("SBA PPP").PPP.
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 customers for a specific utility.
The Company originates loans to its retail customers, including fixed-rate and adjustable first lien mortgage loans, with the underlying 1-4 family owner occupied residential property securing the loan. The Company’s risk exposure is minimized in these types of loans through the evaluation of the creditworthiness of the borrower, including credit scores and debt-to-income ratios, and underwriting standards, which limit the loan-to-value ratio to generally no more than 80% upon loan origination, unless the borrower obtains private mortgage insurance.
Home equity loans, including term loans and lines of credit, present a slightly higher risk to the Company than 1-4 family first liens, as these loans can be first or second liens on 1-4 family owner occupied residential property, but can have loan-to-value ratios of no greater than 90% of the value of the real estate taken as collateral. The creditworthiness of the borrower is also considered, including credit scores and debt-to-income ratios.
Installment and other loans’ credit risk are mitigated through prudent underwriting standards, including evaluation of the creditworthiness of the borrower through credit scores and debt-to-income ratios and, if secured, the collateral value of the assets. These loans can be unsecured or secured by assets the value of which may depreciate quickly or may fluctuate, and may present a greater risk to the Company than 1-4 family residential loans.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted. The CARES Act established the SBA PPP. The SBA PPP is intended to provide economic relief to small businesses nationwide adversely impacted under the COVID-19 Emergency Declaration issued on March 13, 2020. The SBA PPP, which began on April 3, 2020, providesprovided small businesses with funds to cover up to 24 weeks of payroll costs and other expenses, including benefits. It also provides for forgiveness of up to the full principal amount of qualifying loans. TheThrough December 31, 2020, the Bank closed and funded almost 2,800 PPP3,200 loans for a total gross loan amount of $459.6 million in the three months ended June 30, 2020. As these loans are 100% guaranteed by the SBA, there is no associated allowance for loan losses at June 30, 2020.$467.7 million. These loans resulted in net fee incomeprocessing fees of $13.2$13.5 million to be recognized through net interest income over the life of the loans, which is between two and five years. DuringFor the three and six months ended June 30, 2020,2021, the Company recognized $1.9Bank closed and funded almost 3,300 PPP loans for a total loan amount of $231.7 million. In total, the Bank closed and funded almost 6,500 PPP loans for a total gross loan amount of $699.4 million.
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The loans originated in 2021 resulted in net processing fees of $12.3 million. At June 30, 2021, the Bank has $11.2 million of net deferred SBA PPP fees included inremaining to be recognized through net interest income onover the life of the loans, onwhich is between two and five years. The timing of the condensed consolidated statementsrecognition of income. these fees is dependent upon the loan forgiveness process established by the SBA. The Bank continues to closely monitor the SBA guidance regarding this process. As these loans are 100% guaranteed by the SBA, there is no associated allowance for loan losses at June 30, 2021.
In addition, in an effort to assist clients whichthat were negatively impacted by the COVID-19 pandemic, the Bank offered various mitigation options, including a loan payment deferral program. Under this program, most commercial deferrals were for a 90-day period, while most consumer deferrals were for a 180-day period. As of Commercial and consumer deferrals totaled $3.5 million and $0.4 million, respectively, at June 30, 2020, the Company processed loan deferrals under this program for2021 and $15.7 million commercial and consumer clients with a total loan balance of $218.1$2.5 million and $21.2 million, respectively. , respectively, at December 31, 2020. In accordance with the revised Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the CoronavirusCoronavirus issued by the federal bank regulatory agencies on April 7, 2020, these deferrals are exempt from TDR status as they meet the specified requirements.
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The following table presents the loan portfolio by segment and class, excluding residential mortgage LHFS, at June 30, 20202021 and December 31, 2019:
June 30, 2020December 31, 2019
Commercial real estate:
Owner occupied$164,442  $170,884  
Non-owner occupied390,980  361,050  
Multi-family111,016  106,893  
Non-owner occupied residential116,531  120,038  
Acquisition and development:
1-4 family residential construction7,966  15,865  
Commercial and land development50,220  41,538  
Commercial and industrial (1)
665,312  214,554  
Municipal34,276  47,057  
Residential mortgage:
First lien295,736  336,372  
Home equity - term11,944  14,030  
Home equity - lines of credit160,842  165,314  
Installment and other loans32,052  50,735  
Total loans$2,041,317  $1,644,330  
2020:
June 30, 2021December 31, 2020
Commercial real estate:
Owner occupied$191,595 $174,908 
Non-owner occupied471,541 409,567 
Multi-family112,420 113,635 
Non-owner occupied residential99,631 114,505 
Acquisition and development:
1-4 family residential construction9,686 9,486 
Commercial and land development55,330 51,826 
Commercial and industrial (1)
599,123 647,368 
Municipal14,452 20,523 
Residential mortgage:
First lien211,918 244,321 
Home equity - term8,321 10,169 
Home equity - lines of credit149,601 157,021 
Installment and other loans21,765 26,361 
Total loans$1,945,383 $1,979,690 

(1) This balance includes $447.2$355.6 million and $0$403.3 million of SBA PPP loans, net of deferred fees and costs, at June 30, 20202021 and December 31, 2019,2020, respectively.
In order to monitor ongoing risk associated with its loan portfolio and specific loans within the segments, management uses an internal grading system. The first several rating categories, representing the lowest risk to the Bank, are combined and given a “Pass” rating. Management generally follows regulatory definitions in assigning criticized ratings to loans, including "Special Mention," "Substandard," "Doubtful" or "Loss." The Special Mention category includes loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Bank's position at some future date. These assets pose elevated risk, but their weakness does not yet justify a more severe, or classified rating. Substandard loans are classified as they have a well-defined weakness, or weaknesses that jeopardize liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Substandard loans include loans that management has determined not to be impaired, as well as loans considered to be impaired. A Doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as Loss is deferred. Loss loans are considered uncollectible, as the borrowers are often in bankruptcy, have suspended debt repayments, or have ceased business operations. Once a loan is classified as Loss, there is little prospect of collecting the loan’s principal or interest and it is charged-off.
The Company has a loan review policy and program which is designed to identify and monitor risk in the lending function. The Management ERM Committee, comprised of executive officers 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
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lending activities of all Company personnel with respect to underwriting and processing new loans and the timely follow-up and corrective action for loans showing signs of deterioration in quality. A loan review program provides the Company with an independent review of the commercial loan portfolio on an ongoing basis. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as extended delinquencies, bankruptcy, repossession or death of the borrower occurs, which heightens awareness as to a possible credit event.
Internal loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $500 thousand,$1.0 million, which includes confirmation of risk rating by an independent credit officer. In addition, all commercial relationships greater than $500 thousand rated Substandard, Doubtful or Loss are reviewed quarterly and corresponding risk ratings are reaffirmed by the Company's Problem Loan Committee, with subsequent reporting to the Management ERM Committee and the Board of Directors.
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The following table summarizes the Company’s loan portfolio ratings based on its internal risk rating system at June 30, 20202021 and December 31, 2019:
PassSpecial MentionNon-Impaired SubstandardImpaired - SubstandardDoubtfulPCI LoansTotal
June 30, 2020
Commercial real estate:
Owner occupied$144,332  $7,223  $4,666  $3,371  $—  $4,850  $164,442  
Non-owner occupied345,176  45,468  —  —  —  336  390,980  
Multi-family95,478  14,796  662  80  —  —  111,016  
Non-owner occupied residential108,985  4,404  1,357  283  —  1,502  116,531  
Acquisition and development:
1-4 family residential construction7,844  122  —  —  —  —  7,966  
Commercial and land development38,947  9,895  541  837  —  —  50,220  
Commercial and industrial636,604  15,372  9,222  708  —  3,406  665,312  
Municipal30,025  4,251  —  —  —  —  34,276  
Residential mortgage:
First lien287,633  —  —  2,461  —  5,642  295,736  
Home equity - term11,841  —  72  11  —  20  11,944  
Home equity - lines of credit160,036  175  35  596  —  —  160,842  
Installment and other loans31,950  —  —  17  —  85  32,052  
$1,898,851  $101,706  $16,555  $8,364  $—  $15,841  $2,041,317  
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  
2020:
PassSpecial MentionNon-Impaired SubstandardImpaired - SubstandardDoubtfulPCI LoansTotal
June 30, 2021
Commercial real estate:
Owner occupied$166,636 $10,690 $7,554 $4,326 $0 $2,389 $191,595 
Non-owner occupied422,074 48,779 367 0 0 321 471,541 
Multi-family91,959 19,836 625 0 0 0 112,420 
Non-owner occupied residential94,035 2,690 1,435 253 0 1,218 99,631 
Acquisition and development:
1-4 family residential construction9,686 0 0 0 0 0 9,686 
Commercial and land development54,179 643 508 0 0 0 55,330 
Commercial and industrial578,129 10,485 5,022 3,174 0 2,313 599,123 
Municipal14,452 0 0 0 0 0 14,452 
Residential mortgage:
First lien204,353 0 0 2,561 0 5,004 211,918 
Home equity - term8,288 0 0 17 0 16 8,321 
Home equity - lines of credit149,078 22 53 448 0 0 149,601 
Installment and other loans21,713 0 0 14 0 38 21,765 
$1,814,582 $93,145 $15,564 $10,793 $0 $11,299 $1,945,383 
December 31, 2020
Commercial real estate:
Owner occupied$148,846 $12,491 $7,855 $3,260 $0 $2,456 $174,908 
Non-owner occupied351,860 57,378 0 0 0 329 409,567 
Multi-family92,769 20,224 642 0 0 0 113,635 
Non-owner occupied residential107,557 3,948 1,422 268 0 1,310 114,505 
Acquisition and development:
1-4 family residential construction9,101 385 0 0 0 0 9,486 
Commercial and land development49,832 655 525 814 0 0 51,826 
Commercial and industrial617,213 17,561 6,118 3,639 0 2,837 647,368 
Municipal20,523 0 0 0 0 0 20,523 
Residential mortgage:
First lien236,381 0 0 2,628 0 5,312 244,321 
Home equity - term10,076 0 64 10 0 19 10,169 
Home equity - lines of credit156,264 95 54 608 0 0 157,021 
Installment and other loans26,283 0 0 17 0 61 26,361 
$1,826,705 $112,737 $16,680 $11,244 $0 $12,324 $1,979,690 

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
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management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. 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. Updated fair values are incorporated into the impairment analysis in the next reporting period.
Loan charge-offs, which may include partial charge-offs, are taken on an impaired loan that is collateral dependent if the loan’s carrying balance exceeds its collateral’s appraised value, the loan has been identified as uncollectible, and it is deemed to be a confirmed loss. Typically, impaired loans with a charge-off or partial charge-off will continue to be considered impaired, unless the note is split into 2, and management expects the performing note to continue to perform and 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 June 30, 20202021 and December 31, 2019,2020, nearly all of the Company’s loan 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 TDR impairment analyses are initially based on discounted cash flows for those 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.
Updated appraisals are generally required every 18 months for classified commercial loans in excess of $250 thousand. The “as is" value provided in the appraisal is often used as the fair value of the collateral in determining impairment, unless circumstances, such as subsequent improvements, approvals, or other circumstances, dictate that another value than that provided by the appraiser is more appropriate.
Generally, impaired commercial loans secured by real estate, other than performing TDRs, are measured at fair value using certified real estate appraisals that had been completed within the last 18 months. Appraised values are discounted for estimated costs to sell the property and other selling considerations to arrive at the property’s fair value. In those situations in which it is determined an updated appraisal is not required for loans individually evaluated for impairment, fair values are based on either an existing appraisal or a discounted cash flow analysis as determined by management. The approaches are discussed below:
•Existing appraisal – if the existing appraisal provides a strong loan-to-value ratio (generally 70% or lower) and, after consideration of market conditions and knowledge of the property and area, it is determined by the Credit Administration staff that there has not been a significant deterioration in the collateral value, the existing certified appraised value may be used. Discounts to the appraised value, as deemed appropriate for selling costs, are factored into the fair value.
•Discounted cash flows – in limited cases, discounted cash flows may be used on projects in which the collateral is liquidated to reduce the borrowings outstanding, and is used to validate collateral values derived from other approaches.
Collateral on certain impaired loans is not limited to real estate, and may consist of accounts receivable, inventory, equipment or other business assets. Estimated fair values are determined based on borrowers’ financial statements, inventory ledgers, accounts receivable aging or appraisals from individuals with knowledge in the business. Stated balances are generally discounted for the age of the financial information or the quality of the assets. In determining fair value, liquidation discounts are applied to this collateral based on existing loan evaluation policies.
The Company distinguishes substandard loans 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 substandard classification does not automatically meet the definition of impaired. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual extensions of credit classified as substandard. As a result, the Company’s methodology includes an evaluation of certain accruing commercial real estate, acquisition and development, and commercial and industrial loans rated substandard to be collectively evaluated for impairment. Although the Company believes
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these loans meet the definition of substandard, they are generally performing and management has concluded that it is likely the Company will be able to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement.
Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment. 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 accruing 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 June 30, 20202021 and December 31, 2019.2020. The recorded investment in loans excludes accrued interest receivable due to insignificance. Related allowances established generally pertain to those loans in which loan forbearance agreements were in the process of being negotiated or updated appraisals were pending, and any partial charge-off will be recorded when final information is received.
Impaired Loans with a Specific AllowanceImpaired Loans with No Specific Allowance
Recorded Investment (Book Balance)Unpaid Principal Balance (Legal Balance)Related AllowanceRecorded Investment (Book Balance)Unpaid Principal Balance (Legal Balance)
June 30, 2021
Commercial real estate:
Owner-occupied$0 $0 $0 $4,326 $5,531 
Non-owner occupied residential0 0 0 253 385 
Commercial and industrial0 0 0 3,174 3,849 
Residential mortgage:
First lien634 634 31 1,927 3,233 
Home equity—term0 0 0 17 23 
Home equity—lines of credit0 0 0 448 680 
Installment and other loans0 0 0 14 14 
$634 $634 $31 $10,159 $13,715 
December 31, 2020
Commercial real estate:
Owner-occupied$0 $0 $0 $3,260 $4,091 
Non-owner occupied residential0 0 0 268 393 
Acquisition and development:
Commercial and land development0 0 0 814 875 
Commercial and industrial0 0 0 3,639 4,269 
Residential mortgage:
First lien424 508 33 2,204 3,264 
Home equity—term0 0 0 10 13 
Home equity—lines of credit0 0 0 608 832 
Installment and other loans0 0 0 17 18 
$424 $508 $33 $10,820 $13,755 

Impaired Loans with a Specific AllowanceImpaired Loans with No Specific Allowance
Recorded Investment (Book Balance)Unpaid Principal Balance (Legal Balance)Related AllowanceRecorded Investment (Book Balance)Unpaid Principal Balance (Legal Balance)
June 30, 2020
Commercial real estate:
Owner-occupied$—  $—  $—  $3,371  $4,124  
Non-owner occupied—  —  —  —  313  
Multi-family—  —  —  80  —  
Non-owner occupied residential—  —  —  283  399  
Acquisition and development:
Commercial and land development—  —  —  837  875  
Commercial and industrial—  —  —  708  1,858  
Residential mortgage:
First lien688  688  35  1,773  3,083  
Home equity—term—  —  —  11  14  
Home equity—lines of credit—  —  —  596  830  
Installment and other loans—  —  —  17  28  
$688  $688  $35  $7,676  $11,524  
December 31, 2019
Commercial real estate:
Owner-occupied$—  $—  $—  $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  
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The following table, which excludes accruing PCI loans, summarizes the average recorded investment in impaired loans and related recognized interest income for the three and six months ended June 30, 20202021 and 2019:2020:
2020201920212020
Average
Impaired
Balance		Interest
Income
Recognized		Average
Impaired
Balance		Interest
Income
Recognized		Average
Impaired
Balance		Interest
Income
Recognized		Average
Impaired
Balance		Interest
Income
Recognized
Three Months Ended June 30,Three Months Ended June 30,Three Months Ended June 30,
Commercial real estate:Commercial real estate:Commercial real estate:
Owner-occupiedOwner-occupied$4,639  $—  $1,770  $1  Owner-occupied$4,072 $0 $4,639 $0 
Non-owner occupiedNon-owner occupied169  —  —  —  Non-owner occupied0 0 169 0 
Multi-familyMulti-family270  —  118  —  Multi-family0 0 270 0 
Non-owner occupied residentialNon-owner occupied residential521  —  282  —  Non-owner occupied residential259 0 521 0 
Acquisition and development:Acquisition and development:Acquisition and development:
Commercial and land developmentCommercial and land development837  —  —  —  Commercial and land development0 0 837 0 
Commercial and industrialCommercial and industrial1,320  —  260  —  Commercial and industrial3,302 0 1,320 0 
Residential mortgage:Residential mortgage:Residential mortgage:
First lienFirst lien3,177  12  2,512  14  First lien2,542 10 3,177 12 
Home equity – termHome equity – term12  —  13  —  Home equity – term18 0 12 0 
Home equity - lines of creditHome equity - lines of credit704  1  709  1  Home equity - lines of credit547 0 704 1 
Installment and other loansInstallment and other loans18  —  9  —  Installment and other loans13 0 18 0 
$11,667  $13  $5,673  $16  $10,753 $10 $11,667 $13 
Six Months Ended June 30,Six Months Ended June 30,Six Months Ended June 30,
Commercial real estate:Commercial real estate:Commercial real estate:
Owner occupiedOwner occupied$5,143  $1  $1,819  $1  Owner occupied$3,726 $1 $5,143 $1 
Non-owner occupiedNon-owner occupied96  —  —  —  Non-owner occupied0 0 96 0 
Multi-familyMulti-family301  —  122  —  Multi-family11 0 301 0 
Non-owner occupied residentialNon-owner occupied residential396  —  291  —  Non-owner occupied residential263 0 396 0 
Acquisition and development:Acquisition and development:Acquisition and development:
Commercial and land developmentCommercial and land development478  —  —  —  Commercial and land development351 0 478 0 
Commercial and industrialCommercial and industrial1,384  —  269  —  Commercial and industrial3,049 0 1,384 0 
Residential mortgage:Residential mortgage:Residential mortgage:
First lienFirst lien2,874  24  2,652  29  First lien2,593 21 2,874 24 
Home equity - termHome equity - term12  —  14  —  Home equity - term14 0 12 0 
Home equity - lines of creditHome equity - lines of credit715  1  736  1  Home equity - lines of credit581 0 715 1 
Installment and other loansInstallment and other loans34  —  8  —  Installment and other loans12 0 34 0 
$11,433  $26  $5,911  $31  $10,600 $22 $11,433 $26 

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The following table presents impaired loans that are TDRs, with the recorded investment at June 30, 20202021 and December 31, 2019:2020:

June 30, 2020December 31, 2019June 30, 2021December 31, 2020
Number of
Contracts		Recorded
Investment		Number of
Contracts		Recorded
Investment		Number of
Contracts		Recorded
Investment		Number of
Contracts		Recorded
Investment
Accruing:Accruing:Accruing:
Commercial real estate:Commercial real estate:Commercial real estate:
Owner occupiedOwner occupied1  $28  1  $30  Owner occupied1 $27 1 $28 
Residential mortgage:Residential mortgage:Residential mortgage:
First lienFirst lien9  916  9  931  First lien8 823 9 898 
Home equity - lines of creditHome equity - lines of credit1  16  1  18  Home equity - lines of credit1 2 1 8 
11  960  11  979  10 852 11 934 
Nonaccruing:Nonaccruing:Nonaccruing:
Commercial real estate:
Owner occupied1  215  4  1,909  
Residential mortgage:Residential mortgage:Residential mortgage:
First lienFirst lien5  337  5  359  First lien5 299 5 320 
6  552  9  2,268  5 299 5 320 
17  $1,512  20  $3,247  15 $1,151 16 $1,254 

There were 0 new TDR's for the three and six months ended June 30, 20202021 or 2019.2020.


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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 its delinquencies. The following table presents the classes of loan portfolio summarized by aging categories of performing loans and nonaccrual loans at June 30, 20202021 and December 31, 2019:
Days Past Due
Current30-5960-8990+
(still accruing)		Total
Past Due		Non-
Accrual		Total
Loans
June 30, 2020
Commercial real estate:
Owner occupied$155,868  $113  $268  $—  $381  $3,343  $159,592  
Non-owner occupied390,644  —  —  —  —  —  390,644  
Multi-family110,936  —  —  —  —  80  111,016  
Non-owner occupied residential114,303  106  286  51  443  283  115,029  
Acquisition and development:
1-4 family residential construction7,966  —  —  —  —  —  7,966  
Commercial and land development49,356  27  —  —  27  837  50,220  
Commercial and industrial661,099  99  —  —  99  708  661,906  
Municipal34,276  —  —  —  —  —  34,276  
Residential mortgage:
First lien284,370  2,038  1,877  264  4,179  1,545  290,094  
Home equity - term11,826  87  —  —  87  11  11,924  
Home equity - lines of credit159,724  273  265  —  538  580  160,842  
Installment and other loans31,889  42  13  6  61  17  31,967  
Subtotal2,012,257  2,785  2,709  321  5,815  7,404  2,025,476  
Loans acquired with credit deterioration:
Commercial real estate:
Owner occupied4,850  —  —  —  —  —  4,850  
Non-owner occupied336  —  —  —  —  —  336  
Non-owner occupied residential1,270  —  66  166  232  —  1,502  
Commercial and industrial3,382  —  —  24  24  —  3,406  
Residential mortgage:
First lien3,922  1,304  18  398  1,720  —  5,642  
Home equity - term20  —  —  —  —  —  20  
Installment and other loans66  1  18  —  19  —  85  
Subtotal13,846  1,305  102  588  1,995  —  15,841  
$2,026,103  $4,090  $2,811  $909  $7,810  $7,404  $2,041,317  
2020:
Days Past Due
Current30-5960-8990+
(still accruing)		Total
Past Due		Non-
Accrual		Total
Loans
June 30, 2021
Commercial real estate:
Owner occupied$184,866 $41 $0 $0 $41 $4,299 $189,206 
Non-owner occupied471,220 0 0 0 0 0 471,220 
Multi-family112,420 0 0 0 0 0 112,420 
Non-owner occupied residential97,880 0 280 0 280 253 98,413 
Acquisition and development:
1-4 family residential construction9,592 0 94 0 94 0 9,686 
Commercial and land development55,320 10 0 0 10 0 55,330 
Commercial and industrial593,592 7 21 16 44 3,174 596,810 
Municipal14,452 0 0 0 0 0 14,452 
Residential mortgage:
First lien204,544 573 31 28 632 1,738 206,914 
Home equity - term8,278 10 0 0 10 17 8,305 
Home equity - lines of credit149,107 48 0 0 48 446 149,601 
Installment and other loans21,524 139 50 0 189 14 21,727 
Subtotal1,922,795 828 476 44 1,348 9,941 1,934,084 
Loans acquired with credit deterioration:
Commercial real estate:
Owner occupied2,389 0 0 0 0 0 2,389 
Non-owner occupied321 0 0 0 0 0 321 
Non-owner occupied residential1,085 0 0 133 133 0 1,218 
Commercial and industrial2,313 0 0 0 0 0 2,313 
Residential mortgage:
First lien4,698 271 0 35 306 0 5,004 
Home equity - term16 0 0 0 0 0 16 
Installment and other loans38 0 0 0 0 0 38 
Subtotal10,860 271 0 168 439 0 11,299 
$1,933,655 $1,099 $476 $212 $1,787 $9,941 $1,945,383 
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Days Past DueDays Past Due
Current30-5960-8990+
(still accruing)		Total
Past Due		Non-
Accrual		Total
Loans		Current30-5960-8990+
(still accruing)		Total
Past Due		Non-
Accrual		Total
Loans
December 31, 2019
December 31, 2020December 31, 2020
Commercial real estate:Commercial real estate:Commercial real estate:
Owner occupiedOwner occupied$158,723  $144  $—  $—  $144  $5,842  $164,709  Owner occupied$168,262 $958 $0 $0 $958 $3,232 $172,452 
Non-owner occupiedNon-owner occupied359,425  480  —  —  480  —  359,905  Non-owner occupied409,130 108 0 0 108 0 409,238 
Multi-familyMulti-family105,865  —  —  —  —  345  106,210  Multi-family113,635 0 0 0 0 0 113,635 
Non-owner occupied residentialNon-owner occupied residential116,370  841  66  69  976  235  117,581  Non-owner occupied residential112,443 484 0 0 484 268 113,195 
Acquisition and development:Acquisition and development:Acquisition and development:
1-4 family residential construction1-4 family residential construction15,587  278  —  —  278  —  15,865  1-4 family residential construction9,486 0 0 0 0 0 9,486 
Commercial and land developmentCommercial and land development40,403  1,135  —  —  1,135  —  41,538  Commercial and land development50,922 32 58 0 90 814 51,826 
Commercial and industrialCommercial and industrial208,668  315  —  —  315  1,763  210,746  Commercial and industrial640,573 9 310 0 319 3,639 644,531 
MunicipalMunicipal47,057  —  —  —  —  —  47,057  Municipal19,677 846 0 0 846 0 20,523 
Residential mortgage:Residential mortgage:Residential mortgage:
First lienFirst lien314,473  9,092  1,234  150  10,476  1,659  326,608  First lien230,903 5,758 535 83 6,376 1,730 239,009 
Home equity - termHome equity - term13,993  —  4  —  4  13  14,010  Home equity - term10,099 40 0 1 41 10 10,150 
Home equity - lines of creditHome equity - lines of credit163,907  417  275  —  692  715  165,314  Home equity - lines of credit156,153 268 0 0 268 600 157,021 
Installment and other loansInstallment and other loans50,224  236  37  —  273  85  50,582  Installment and other loans26,052 168 49 14 231 17 26,300 
SubtotalSubtotal1,594,695  12,938  1,616  219  14,773  10,657  1,620,125  Subtotal1,947,335 8,671 952 98 9,721 10,310 1,967,366 
Loans acquired with credit deterioration:Loans acquired with credit deterioration:Loans acquired with credit deterioration:
Commercial real estate:Commercial real estate:Commercial real estate:
Owner occupiedOwner occupied6,015  —  129  31  160  —  6,175  Owner occupied2,456 0 0 0 0 0 2,456 
Non-owner occupiedNon-owner occupied564  —  —  581  581  —  1,145  Non-owner occupied329 0 0 0 0 0 329 
Multi-family683  —  —  —  —  —  683  
Non-owner occupied residentialNon-owner occupied residential1,710  105  111  531  747  —  2,457  Non-owner occupied residential1,161 0 0 149 149 0 1,310 
Commercial and industrialCommercial and industrial3,792  —  —  16  16  —  3,808  Commercial and industrial2,837 0 0 0 0 0 2,837 
Residential mortgage:Residential mortgage:Residential mortgage:
First lienFirst lien6,308  1,857  745  854  3,456  —  9,764  First lien4,341 655 9 307 971 0 5,312 
Home equity - termHome equity - term16  4  —  —  4  —  20  Home equity - term19 0 0 0 0 0 19 
Installment and other loansInstallment and other loans131  22  —  —  22  —  153  Installment and other loans57 4 0 0 4 0 61 
SubtotalSubtotal19,219  1,988  985  2,013  4,986  —  24,205  Subtotal11,200 659 9 456 1,124 0 12,324 
$1,613,914  $14,926  $2,601  $2,232  $19,759  $10,657  $1,644,330  $1,958,535 $9,330 $961 $554 $10,845 $10,310 $1,979,690 
The Company maintains its ALL at a level management believes adequate for probable incurred credit losses. The ALL is established and maintained through a provision for loan losses charged to earnings. Quarterly,On a quarterly basis, management assesses the adequacy of the ALL 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 its approach properly addresses relevant accounting guidance for loans individually identified as impaired and for loans collectively evaluated for impairment, and other bank regulatory guidance.
In connection with its quarterly evaluation of the adequacy of the ALL, management reviews its methodology to determine if it properly addresses the current risk in the loan portfolio. For each loan class, general allowances based on quantitative factors, principally historical loss trends, are provided for loans that are collectively evaluated for impairment. An
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adjustment to historical loss factors may be incorporated for delinquency and other potential risk not elsewhere defined within the ALL methodology.
In addition to this quantitative analysis, adjustments to the ALL requirements are allocated on loans collectively evaluated for impairment based on additional qualitative factors, including:
Nature and Volume of Loans– including loan growth in the current and subsequent quarters based on the Company’s targeted growth and strategic plan, coupled with the types of loans booked based on risk management and credit culture; the number of exceptions to loan policy; and supervisory loan to value exceptions.
Concentrations of Credit and Changes within Credit Concentrations– including the composition of the Company’s overall portfolio makeup and management's evaluation related to concentration risk management and the inherent risk associated with the concentrations identified.
Underwriting Standards and Recovery Practices – including changes to underwriting standards and perceived impact on anticipated losses; trends in the number of exceptions to loan policy; supervisory loan to value exceptions; and administration of loan recovery practices.
Delinquency Trends – including delinquency percentages noted in the portfolio relative to economic conditions; severity of the delinquencies; and whether the ratios are trending upwards or downwards.
Classified Loans Trends – including internal loan ratings of the portfolio; severity of the ratings; whether the loan segment’s ratings show a more favorable or less favorable trend; and underlying market conditions and impact on the collateral values securing the loans.
Experience, Ability and Depth of Management/Lending staff – including the years’ experience of senior and middle management and the lending staff; turnover of the staff; and instances of repeat criticisms of ratings.
Quality of Loan Review – including the years of experience of the loan review staff; in-house versus outsourced provider of review; turnover of staff and the perceived quality of their work in relation to other external information.
National and Local Economic Conditions – including trends in the consumer price index, unemployment rates, the housing price index, housing statistics compared to the prior year, bankruptcy rates, regulatory and legal environment risks and competition. During the three and six months ended June 30, 2020,2021, this factor was increasedunchanged for the commercial and consumer portfolios to account for the negative economic impact of the COVID-19 pandemic.
COVID-19– during the threesix months ended June 30, 2020,2021, a qualitative allocation was implemented associated with the potential impact of the COVID-19 pandemic on the Company's commercial loan portfolio. The factor assumes downgrades of loans withwhich were granted deferrals or forbearances based upon identified hardships resulting from the economic shutdown driven by the pandemic. The qualitative reserve on these loans will be reduced over time as sustained performance is demonstrated after the loans are removed from deferral status or the forbearance period has ended. During the three and six months ended June 30, 2021, this qualitative reserve was reduced by $0.8 million and $1.7 million, respectively. This reserve is $1.0 million at June 30, 2021.
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The following table presents the activity in the ALL for the three and six months ended June 30, 20202021 and 2019:
CommercialConsumer
Commercial
Real Estate		Acquisition
and
Development		Commercial
and
Industrial		MunicipalTotalResidential
Mortgage		Installment
and Other		TotalUnallocatedTotal
Three Months Ended
June 30, 2020
Balance, beginning of period$8,420  $1,033  $2,647  $99  $12,199  $3,139  $294  $3,433  $171  $15,803  
Provision for loan losses877  31  590  (24) 1,474  323  102  425  1  1,900  
Charge-offs—  —  (421) —  (421) (18) (14) (32) —  (453) 
Recoveries50  5  100  —  155  108  4  112  —  267  
Balance, end of period$9,347  $1,069  $2,916  $75  $13,407  $3,552  $386  $3,938  $172  $17,517  
June 30, 2019
Balance, beginning of period$7,025  $969  $1,814  $98  $9,906  $3,765  $217  $3,982  $395  $14,283  
Provision for loan losses(221) 39  325  (4) 139  (32) 40  8  53  200  
Charge-offs—  —  (47) —  (47) (25) (51) (76) —  (123) 
Recoveries43  —  28  —  71  26  3  29  —  100  
Balance, end of period$6,847  $1,008  $2,120  $94  $10,069  $3,734  $209  $3,943  $448  $14,460  
Six Months Ended
June 30, 2020
Balance, beginning of period$7,634  $959  $2,356  $100  $11,049  $3,147  $319  $3,466  $140  $14,655  
Provision for loan losses1,260  102  912  (25) 2,249  400  144  544  32  2,825  
Charge-offs—  —  (496) —  (496) (109) (86) (195) —  (691) 
Recoveries453  8  144  —  605  114  9  123  —  728  
Balance, end of period$9,347  $1,069  $2,916  $75  $13,407  $3,552  $386  $3,938  $172  $17,517  
June 30, 2019
Balance, beginning of period$6,876  $817  $1,656  $98  $9,447  $3,753  $244  $3,997  $570  $14,014  
Provision for loan losses(118) 189  484  (4) 551  157  14  171  (122) 600  
Charge-offs(25) —  (90) —  (115) (271) (71) (342) —  (457) 
Recoveries114  2  70  —  186  95  22  117  —  303  
Balance, end of period$6,847  $1,008  $2,120  $94  $10,069  $3,734  $209  $3,943  $448  $14,460  
2020:
CommercialConsumer
Commercial
Real Estate		Acquisition
and
Development		Commercial
and
Industrial		MunicipalTotalResidential
Mortgage		Installment
and Other		TotalUnallocatedTotal
Three Months Ended
June 30, 2021
Balance, beginning of period$10,671 $1,046 $3,714 $38 $15,469 $3,058 $208 $3,266 $232 $18,967 
Provision for loan losses806 197 (223)(9)771 (142)19 (123)(23)625 
Charge-offs(181)0 (112)0 (293)(71)(9)(80)0 (373)
Recoveries19 0 116 0 135 18 9 27 0 162 
Balance, end of period$11,315 $1,243 $3,495 $29 $16,082 $2,863 $227 $3,090 $209 $19,381 
June 30, 2020
Balance, beginning of period$8,420 $1,033 $2,647 $99 $12,199 $3,139 $294 $3,433 $171 $15,803 
Provision for loan losses877 31 590 (24)1,474 323 102 425 1 1,900 
Charge-offs0 0 (421)0 (421)(18)(14)(32)0 (453)
Recoveries50 5 100 0 155 108 4 112 0 267 
Balance, end of period$9,347 $1,069 $2,916 $75 $13,407 $3,552 $386 $3,938 $172 $17,517 
Six Months Ended
June 30, 2021
Balance, beginning of period$11,151 $1,114 $3,942 $40 $16,247 $3,362 $324 $3,686 $218 $20,151 
Provision for loan losses312 128 (277)(11)152 (431)(87)(518)(9)(375)
Charge-offs(181)0 (566)0 (747)(92)(29)(121)0 (868)
Recoveries33 1 396 0 430 24 19 43 0 473 
Balance, end of period$11,315 $1,243 $3,495 $29 $16,082 $2,863 $227 $3,090 $209 $19,381 
June 30, 2020
Balance, beginning of period$7,634 $959 $2,356 $100 $11,049 $3,147 $319 $3,466 $140 $14,655 
Provision for loan losses1,260 102 912 (25)2,249 400 144 544 32 2,825 
Charge-offs0 0 (496)0 (496)(109)(86)(195)0 (691)
Recoveries453 8 144 0 605 114 9 123 0 728 
Balance, end of period$9,347 $1,069 $2,916 $75 $13,407 $3,552 $386 $3,938 $172 $17,517 
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The following table summarizes the ending loan balance individually evaluated for impairment based upon loan segment, as well as the related ALL loss allocation for each at June 30, 20202021 and December 31, 2019.2020. Accruing PCI loans are excluded from loans individually evaluated for impairment.
 CommercialConsumer  
Commercial
Real Estate		Acquisition
and
Development		Commercial
and
Industrial		MunicipalTotalResidential
Mortgage		Installment
and Other		TotalUnallocatedTotal
June 30, 2020
Loans allocated by:
Individually evaluated for impairment$3,734  $837  $708  $—  $5,279  $3,068  $17  $3,085  $—  $8,364  
Collectively evaluated for impairment779,235  57,349  664,604  34,276  1,535,464  465,454  32,035  497,489  —  2,032,953  
$782,969  $58,186  $665,312  $34,276  $1,540,743  $468,522  $32,052  $500,574  $—  $2,041,317  
ALL allocated by:
Individually evaluated for impairment$—  $—  $—  $—  $—  $35  $—  $35  $—  $35  
Collectively evaluated for impairment9,347  1,069  2,916  75  13,407  3,517  386  3,903  172  17,482  
$9,347  $1,069  $2,916  $75  $13,407  $3,552  $386  $3,938  $172  $17,517  
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  $—  $1,644,330  
ALL allocated by:
Individually evaluated for impairment$—  $—  $—  $—  $—  $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  
 CommercialConsumer  
Commercial
Real Estate		Acquisition
and
Development		Commercial
and
Industrial		MunicipalTotalResidential
Mortgage		Installment
and Other		TotalUnallocatedTotal
June 30, 2021
Loans allocated by:
Individually evaluated for impairment$4,579 $0 $3,174 $0 $7,753 $3,026 $14 $3,040 $0 $10,793 
Collectively evaluated for impairment870,608 65,016 595,949 14,452 1,546,025 366,814 21,751 388,565 0 1,934,590 
$875,187 $65,016 $599,123 $14,452 $1,553,778 $369,840 $21,765 $391,605 $0 $1,945,383 
ALL allocated by:
Individually evaluated for impairment$0 $0 $0 $0 $0 $31 $0 $31 $0 $31 
Collectively evaluated for impairment11,315 1,243 3,495 29 16,082 2,832 227 3,059 209 19,350 
$11,315 $1,243 $3,495 $29 $16,082 $2,863 $227 $3,090 $209 $19,381 
December 31, 2020
Loans allocated by:
Individually evaluated for impairment$3,528 $814 $3,639 $0 $7,981 $3,246 $17 $3,263 $0 $11,244 
Collectively evaluated for impairment809,087 60,498 643,729 20,523 1,533,837 408,265 26,344 434,609 0 1,968,446 
$812,615 $61,312 $647,368 $20,523 $1,541,818 $411,511 $26,361 $437,872 $0 $1,979,690 
ALL allocated by:
Individually evaluated for impairment$0 $0 $1 $0 $1 $33 $0 $33 $0 $34 
Collectively evaluated for impairment11,151 1,114 3,941 40 16,246 3,329 324 3,653 218 20,117 
$11,151 $1,114 $3,942 $40 $16,247 $3,362 $324 $3,686 $218 $20,151 

The following table provides activity for the accretable yield of PCI loans for the three and six months ended June 30, 20202021 and 2019:2020:
Three Months EndedSix Months Ended
June 30, 2021June 30, 2020June 30, 2021June 30, 2020
Accretable yield, beginning of period$3,072 $4,414 $3,438 $6,950 
Additions (1)
0 0 0 570 
Accretion of income(209)(1,315)(676)(1,913)
Reclassifications from nonaccretable difference due to improvement in expected cash flows74 1,104 118 1,121 
Other changes, net (2)
79 (21)136 (2,546)
Accretable yield, end of period$3,016 $4,182 $3,016 $4,182 
Three Months EndedSix Months Ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Accretable yield, beginning of period$4,414  $1,894  $6,950  $2,065  
Additions (1)
—  3,497  570  3,497  
Accretion of income(1,315) (1,221) (1,913) (1,392) 
Reclassifications from nonaccretable difference due to improvement in expected cash flows1,104  617  1,121  617  
Other changes, net (2)
(21) 201  (2,546) 201  
Accretable yield, end of period$4,182  $4,988  $4,182  $4,988  
(1) ThisThe amount reflects a measurement period adjustment duringfor the six months ended June 30, 2020 reflects a measurement period adjustment for Hamilton loans that should have been in the PCI pool at the acquisition date.
(2) This balance represents the impact of purchased credit impaired loans sold duringThe amount for the six months ended June 30, 2020.2020 represents the impact of PCI loans sold during that period.

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NOTE 5.4. LEASES
A lease provides the lessee the right to control the use of an identified asset for a period of time in exchange for consideration. The Company has primarily entered into operating leases for branches and office space. Most of the Company's
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leases contain renewal options, which the Company is reasonably certain to exercise. Including renewal options, the Company's leases range from three years7 to 5032 years. Operating lease right-of-use assets and lease liabilities are included in other assets and accrued interest and other liabilities on the Company's unaudited condensed consolidated balance sheets.
The Company uses its incremental borrowing rate to determine the present value of the lease payments, as the rate implicit in the Company's leases is not readily determinable. Lease agreements that contain non-lease components are generally accounted for as a single lease component, while variable costs, such as common area maintenance expenses and property taxes, are expensed as incurred.
The following table presents information related tosummarizes the Company's operating leases at June 30, 20202021 and December 31, 2019:2020:
June 30, 2021December 31, 2020
Operating lease ROU assets$9,557 $8,686 
Operating lease ROU liabilities10,060 9,143 
Weighted-average remaining lease term (in years)16.016.8
Weighted-average discount rate4.2 %4.3 %
June 30, 2020December 31, 2019
Operating lease ROU assets$8,746  $9,222  
Operating lease ROU liabilities9,265  9,688  
Weighted-average remaining lease term (in years)17.917.6
Weighted-average discount rate4.6 %4.5 %
The following table presents information related to the Company's operating leases for the three and six months ended June 30, 20202021 and 2019:2020:
Three Months EndedSix Months Ended
June 30, 2021June 30, 2020June 30, 2021June 30, 2020
Cash paid for operating lease liabilities$318 $319 $616 $637 
Operating lease expense388 370 791 750 
Three Months EndedSix Months Ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Cash paid for operating lease liabilities$319  $281  $637  $461  
Operating lease expense370  256  750  509  
The following table presents expected future maturities of the Company's lease liabilities as of June 30, 2020:
Remainder of 2020$642  
20211,147  
2022727  
2023748  
2024738  
Thereafter10,549  
14,551  
Less: imputed interest5,286  
Total lease liabilities$9,265  
2021:
Remainder of 2021$627 
2022926 
2023951 
2024974 
2025991 
Thereafter10,387 
14,856 
Less: imputed interest4,796 
Total lease liabilities$10,060 

NOTE 6.5. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table presents changes in goodwill atfor the six months ended June 30, 20202021 and December 31, 2019:2020:
June 30, 2021June 30, 2020
Balance, beginning of year$18,724 $19,925 
Adjustments to acquired goodwill (1)
0 (1,201)
Balance, end of period$18,724 $18,724 
June 30, 2020December 31, 2019
Balance, beginning of year$19,925  $12,592  
Acquired goodwill—  7,029  
Adjustments to acquired goodwill (1)
(1,201) 304  
Balance, end of period$18,724  $19,925  
(1) The Company finalized its purchase accounting adjustments associated with Hamilton as of May 1, 2020.
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Goodwill is not amortized but is reviewed for potential impairment on at least an annual basis, with testing between annual tests if an event occurs or circumstances change that could potentially reduce the fair value of a reporting unit.
The Company typically completes its annual goodwill impairment assessment as of November 30. Due to the severe economic impact of COVID-19 and a resulting sustained decline in the Company reviewedCompany's market value below book value, management performed a quantitative Step 1 impairment analysis of its goodwill for impairment.to determine whether the Company's goodwill was impaired as of August 31, 2020. This analysis, which was performed in accordance with ASU 2017-04, Intangibles-Goodwill and Other, considered several factors, such as future cash flow projections and estimated market acquisition
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premiums in its analysis. In performing the analysis, management made several assumptions with respect to future operating performance, economic and market conditions and various others, many of which required significant judgment. The analysis performed and the related assumptions reflected the best currently available estimates and judgements regarding future performance of the Company. It was concluded that 0 impairment existed at June 30, 2020. Management will continue to evaluate current economic conditions to determine if a triggering eventAugust 31, 2020 as the calculated fair value of the reporting unit exceeded its book value. No changes have occurred that would impact the current valuations for these assets.results of that analysis through June 30, 2021.
The following table presents changes in other intangible assets for the three and six months ended June 30, 20202021 and 2019:2020:
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Beginning of period$5,124 $6,717 $5,458 $7,180 
Amortization expense(324)(404)(658)(867)
Impairment0 (153)0 (153)
Balance, end of period$4,800 $6,160 $4,800 $6,160 
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Beginning of period$6,717  $3,702  $7,180  $3,910  
Acquired CDI—  4,550  —  4,550  
Non-compete agreement—  290  —  290  
Amortization Expense(404) (402) (867) (610) 
Impairment(153) —  (153) —  
Balance, end of period$6,160  $8,140  $6,160  $8,140  
DuringNaN impairment charges were recorded in the three and six months ended June 30, 2021.During the six months ended June 30, 2020, the Company recorded an impairment charge of $153 thousand for the full remaining balance attributable to a customer list intangible asset due to the pending dissolution of Wheatland. NaN impairment charges were recorded in the three and six months ended June 30, 2019.Wheatland Advisors, Inc.
The following table presents the components of other identifiable intangible assets at June 30, 20202021 and December 31, 2019:
June 30, 2020December 31, 2019
Gross AmountAccumulated
Amortization		Gross AmountAccumulated
Amortization
Amortized intangible assets:
Core deposit intangibles$8,390  $2,235  $8,390  $1,493  
Other customer relationship intangibles174  169  524  338  
Non-compete agreement—  —  290  193  
Total$8,564  $2,404  $9,204  $2,024  
2020:
June 30, 2021December 31, 2020
Gross AmountAccumulated
Amortization		Gross AmountAccumulated
Amortization
Amortized intangible assets:
Core deposit intangibles$8,390 $3,592 $8,390 $2,935 
Other customer relationship intangibles25 23 25 22 
Total$8,415 $3,615 $8,415 $2,957 

The following table presents future estimated aggregate amortization expense for intangible assets remaining at June 30, 2020:
Remainder of 2020$702  
20211,275  
20221,105  
2023935  
2024766  
Thereafter1,377  
$6,160  
2021:
Remainder of 2021$617 
20221,105 
2023935 
2024766 
2025596 
Thereafter781 
$4,800 


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NOTE 7. 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 2016.
The following table summarizes income tax expense for the three and six months ended June 30, 2020 and 2019:

Three months ended June 30,Six months ended June 30,
2020201920202019
Current expense$427  $69  $455  $90  
Deferred expense874  41  1,885  252  
Income tax expense$1,301  $110  $2,340  $342  


The following table summarizes deferred tax assets and liabilities at June 30, 2020 and December 31, 2019:
(Dollars in thousands)June 30,
2020		December 31,
2019
Deferred tax assets:
Allowance for loan losses$4,056  $3,418  
Deferred compensation505  415  
Retirement and salary continuation plans2,429  2,357  
Share-based compensation620  631  
Off-balance sheet reserves270  234  
Nonaccrual loan interest740  697  
Net unrealized losses on AFS securities944  127  
Purchase accounting adjustments2,496  4,081  
Bonus accrual257  493  
Interest Rate Swaps441  —  
Low-income housing credit carryforward230  —  
Net operating loss carryovers1,645  1,872  
Other719  672  
Total deferred tax assets15,352  14,997  
Deferred tax liabilities:
Depreciation433  452  
Mortgage servicing rights557  694  
Purchase accounting adjustments1,356  1,599  
Other275  275  
Total deferred tax liabilities2,621  3,020  
Net deferred tax asset, included in other assets$12,731  $11,977  
At June 30, 2020, the Company 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 2037. A deferred tax asset is recognized for these carryforwards because the benefit is more likely than not to be realized.
FASB ASC 740, Income Taxes, (“ASC 740”) clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position 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 sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. ASC 740 was applied to all existing tax positions upon initial adoption. There was no liability for uncertain tax positions and no known unrecognized tax benefits at June 30, 2020 or December 31, 2019.

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NOTE 8.6. SHARE-BASED COMPENSATION PLANS
The Company maintains share-based compensation plans under the shareholder-approved 2011 Plan. The purpose of the share-based compensation plans is to provide officers, employees, and non-employee members of the Board of Directors of the Company with additional incentive to further the success of the Company. At June 30, 2020,2021, 881,920 shares of the common stock of the Company were reserved to be issued and 347,721256,340 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 and members of the Board of Directors of the Company and its subsidiaries, are eligible to participate in the 2011 Plan. The 2011 Plan allows for the Compensation Committee of
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the Board of Directors to determine the type of incentive to be awarded, its term, manner of exercise, vesting and restrictions on shares. Generally, awards are nonqualified under the IRC, unless the awards are deemed to be incentive awards to employees at the Compensation Committee’s discretion.
The table below presents a summary of nonvested restricted shares activity for the six months ended June 30, 2020:2021:
SharesWeighted Average Grant Date Fair Value
Nonvested shares, beginning of year245,576 $21.45 
Granted118,447 18.91 
Forfeited(23,316)19.77 
Vested(78,588)23.52 
Nonvested shares, at period end262,119 $19.80 
SharesWeighted Average Grant Date Fair Value
Nonvested shares, beginning of year228,758  $21.90  
Granted111,307  20.24  
Forfeited(4,000) 19.65  
Vested(61,731) 20.52  
Nonvested shares, at period end274,334  $21.57  
The following table presents restricted shares compensation expense, with tax benefit information, and fair value of shares vested, for the three and six months ended June 30, 20202021 and 2019:
Three months ended June 30,Six months ended June 30,
2020201920202019
Restricted share award expense$654  $181  $1,173  $676  
Restricted share award tax benefit137  38  246  148  
Fair value of shares vested347  —  1,089  444  
2020:
Three months ended June 30,Six months ended June 30,
2021202020212020
Restricted share award expense$478 $654 $912 $1,173 
Restricted share award tax benefit126 137 218 246 
Fair value of shares vested511 347 1,539 1,089 
The unrecognized compensation expense related to the share awards totaled $3.1$2.9 million at June 30, 20202021 and $2.2$2.0 million at December 31, 2019.2020. The unrecognized compensation expense at June 30, 20202021 is expected to be recognized over a weighted-average period of 2.01.9 years.
The following table presents a summary of outstanding stock options activity for the six months ended June 30, 2020:
SharesWeighted Average Exercise Price
Outstanding, beginning of year30,559  $21.56  
Forfeited(1,000) 21.14  
Expired(2,792) 25.76  
Options outstanding and exercisable26,767  $21.14  
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 June 30, 2020:
Exercise PriceNumber OutstandingRemaining Contractual Life (Years)Exercise Price
$21.1426,767  0.06$21.14  

Outstanding and exercisable options had an intrinsic value of 0 at June 30, 2020 and $41 thousand at December 31, 2019.
The Company maintains an employee stock purchase plan to provide its employees with an opportunity to purchase Company common stock. Eligible employees may purchase shares in an amount that does not exceed 10% of their annual
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salary, at the lower of 95% of the fair market value of the shares on the semi-annual offering date or related purchase date. The purchases occur in March and September of each year. The Company reserved 350,000 shares of its common stock to be issued under the employee stock purchase plan. At June 30, 2020, 164,4532021, 154,751 shares were available to be issued.
The following table presents information for the employee stock purchase plan for the three and six months ended June 30, 20202021 and 2019:
Three months ended June 30,Six months ended June 30,
2020201920202019
Shares purchased—  —  3,613  3,004  
Weighted average price of shares purchased$—  $—  $16.91  $18.96  
Compensation expense recognized—  —  3  3  
Tax benefits—  —  1  1  
2020:
Three months ended June 30,Six months ended June 30,
2021202020212020
Shares purchased0 0 5,484 3,613 
Weighted average price of shares purchased$0 $0 $13.44 $16.91 
Compensation expense recognized0 0 33 3 
The Company issues either new shares or treasury shares, depending on market conditions, for award through its share-based compensation plans.

NOTE 9.7. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used as risk management tools by the Company to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings and are not used for trading or speculative purposes.
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable
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amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. At June 30, 2021 and December 31, 2020, the Company had 21 interest rate derivativesderivative designated as a hedging instrumentsinstrument with an aggregate notional amount of $100.0$50.0 million. The Company had 0 derivative instruments at December 31, 2019. Such derivatives were used to hedge the variable cash flows associated with the Company's borrowings. At June 30, 2021 and December 31, 2020, the Company had cash collateral of $2.3$690 thousand and $1.7 million held with the counterparty for these derivatives.derivatives, respectively.
The Company enters into interest rate swaps that allow its commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. The Company then enters into a corresponding swap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps with both the customers and third parties are not designated as hedges and are marked through earnings. At June 30, 2020,2021, the Company had 210 customer and 10 corresponding third-party broker interest rate derivativederivatives not designated as a hedging instrument with an aggregate notional amount of $14.2$64.6 million. The Company had 0$61.3 million of such derivative instruments at December 31, 2019.2020.
The Company entered into a risk participation agreement with a financial institution counterparty (the “Agent Bank”) for an interest rate derivative contract related to a loan in which the Company is a participant. The risk protection agreement provides credit protection to the Agent Bank should the borrower fail to perform on its interest rate derivative contracts with the Agent Bank. The Company received an upfront fee of $53 thousand upon entry into the risk participation agreement in the six months ended June 30, 2021. The Company manages its credit risk on the risk participation agreement by monitoring the creditworthiness of the borrower, which is based on the same credit review process as though the Company had entered into the derivative instruments directly with the borrower. The notional amount of such risk participation agreement reflects the Company’s pro-rata share of the derivative instrument, consistent with its share of the related participated loan. As of June 30, 2021 and December 31, 2020, the total notional amount of the risk participation agreement was $15.9 million and 0, respectively.
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
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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 following table summarizes the fair value of the Company's derivative instruments at June 30, 20202021 and December 31, 2019:
6/30/202012/31/2019
Notional AmountBalance Sheet LocationFair ValueNotional AmountBalance Sheet LocationFair Value
Derivatives designated as hedging instruments:
Interest rate swaps - balance sheet hedge$100,000  Other liabilities$(1,978) $—  $—  
Total derivatives designated as hedging instruments$(1,978) $—  
Derivatives not designated as hedging instruments:
Interest rate swap - commercial borrower$7,100  Other assets$234  $—  $—  
Interest rate swap - counterparty7,100  Other liabilities(251) —  —  
Interest rate lock commitments with customers34,839  Other assets986  4,408  Other assets103  
Forward sale commitments13,187  Other liabilities(54) 8,969  Other assets1  
Total derivatives not designated as hedging instruments$915  $104  
2020:
June 30, 2021December 31, 2020
Notional AmountBalance Sheet LocationFair ValueNotional AmountBalance Sheet LocationFair Value
Derivatives designated as hedging instruments:
Interest rate swaps - balance sheet hedge$50,000 Other liabilities$(399)$50,000 Other liabilities$(1,230)
Total derivatives designated as hedging instruments$(399)$(1,230)
Derivatives not designated as hedging instruments:
Interest rate swap - commercial borrower$32,304 Other assets$181 $30,673 Other assets$690 
Interest rate swap - counterparty32,304 Other liabilities(179)30,673 Other liabilities(726)
Risk participation15,855 Other liabilities(4)— — 
Interest rate lock commitments with customers20,046 Other assets456 22,560 Other assets673 
Forward sale commitment8,064 Other assets22 10,400 Other liabilities(61)
Total derivatives not designated as hedging instruments$476 $576 

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The following tables summarize the effect of the Company's derivative financial instruments on OCI and net income for the three and six months ended June 30, 20202021 and 2019:2020:
Amount of Loss Recognized in OCI on DerivativeAmount of Loss Recognized in OCI on DerivativeAmount of Loss Recognized in OCI on DerivativeAmount of Gain (Loss) Recognized in OCI on Derivative
Three Months Ended June 30,Six Months Ended June 30,Three Months Ended June 30,Six Months Ended June 30,
20202019202020192021202020212020
Derivatives in cash flow hedging relationships:Derivatives in cash flow hedging relationships:Derivatives in cash flow hedging relationships:
Interest rate productsInterest rate products$(842) $—  $(2,101) $—  Interest rate products$(83)$(842)$656 $(2,101)
TotalTotal$(842) $—  $(2,101) $—  Total$(83)$(842)$656 $(2,101)

Amount of Loss Reclassified from Accumulated OCI into IncomeAmount of Loss Reclassified from AOCI into IncomeLocation of Loss Recognized from AOCI into IncomeAmount of Loss Reclassified from AOCI into IncomeAmount of Loss Reclassified from AOCI into IncomeLocation of Loss Recognized from AOCI into Income
Three Months Ended June 30,Six Months Ended June 30,Three Months Ended June 30,Six Months Ended June 30,
20202019202020192021202020212020
Derivatives in cash flow hedging relationships:Derivatives in cash flow hedging relationships:Derivatives in cash flow hedging relationships:
Interest rate productsInterest rate products$(121) $—  $(125) $—  Interest expenseInterest rate products$(89)$(121)$(176)$(125)Interest expense
TotalTotal$(121) $—  $(125) $—  Total$(89)$(121)$(176)$(125)

Amount of Gain (Loss) Recognized in IncomeAmount of Gain (Loss) Recognized in IncomeLocation of Gain (Loss) Recognized in IncomeAmount of Gain (Loss) Recognized in IncomeAmount of Gain (Loss) Recognized in IncomeLocation of Gain (Loss) Recognized in Income
Three Months Ended June 30,Six Months Ended June 30,Three Months Ended June 30,Six Months Ended June 30,
20202019202020192021202020212020
Derivatives not designated as hedging instruments:Derivatives not designated as hedging instruments:Derivatives not designated as hedging instruments:
Interest rate productsInterest rate products$(17) $—  $(17) $—  Other operating expensesInterest rate products$(16)$(17)$37 $(17)Other operating expenses
Risk participation agreementRisk participation agreement0 0 (4)0 Other operating expenses
Interest rate lock commitments with customersInterest rate lock commitments with customers551  —  883  —  Mortgage banking activitiesInterest rate lock commitments with customers(216)551 (217)883 Mortgage banking activities
Forward sale commitmentForward sale commitment141  —  (197) —  Mortgage banking activitiesForward sale commitment(171)141 83 (197)Mortgage banking activities
TotalTotal$675  $—  $669  $—  Total$(403)$675 $(101)$669 

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The following table is a summary of interest rate swap components at June 30, 20202021 and December 31, 20192020:
June 30, 2020December 31, 2019
Weighted average pay rate0.54 %— %
Weighted average receive rate0.08 %— %
Weighted average maturity in years5.7—
June 30, 2021December 31, 2020
Weighted average pay rate0.77 %0.77 %
Weighted average receive rate0.10 %0.09 %
Weighted average maturity in years3.74.2

NOTE 10.8. SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Under the Basel Committee on Banking Supervision's capital guidelines for U.S. Banks ("Basel III rules"), an entity must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The
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Company and the Bank have elected not to include net unrealized gain or loss on available for sale securities in computing regulatory capital.
The consolidated asset limit on small bank holding companies is $3.0 billion and a company with assets under that limit is not subject to the FRB consolidated capital rules, but may file reports that include capital amounts and ratios. The Company has elected to file those reports.
Management believes that the Company and the Bank met all capital adequacy requirements to which they are subject at June 30, 20202021 and December 31, 2019.2020.
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 June 30, 2020,2021, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's classification.
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The following table presents capital amounts and ratios at June 30, 20202021 and December 31, 2019:
 ActualFor Capital Adequacy Purposes
(includes applicable capital conservation buffer)		To Be Well
Capitalized Under
Prompt Corrective Action Provisions
AmountRatioAmountRatioAmountRatio
June 30, 2020
Total risk-based capital:
Orrstown Financial Services, Inc.$256,183  14.5 %$185,262  10.5 %n/an/a
Orrstown Bank244,669  13.9 %185,169  10.5 %$176,352  10.0 %
Tier 1 risk-based capital:
Orrstown Financial Services, Inc.205,582  11.7 %149,974  8.5 %n/an/a
Orrstown Bank225,943  12.8 %149,899  8.5 %141,081  8.0 %
Tier 1 common equity risk-based capital:
Orrstown Financial Services, Inc.205,582  11.7 %123,508  7.0 %n/an/a
Orrstown Bank225,943  12.8 %123,446  7.0 %114,629  6.5 %
Tier 1 leverage capital:
Orrstown Financial Services, Inc.205,582  7.6 %107,855  4.0 %n/an/a
Orrstown Bank225,943  8.4 %107,901  4.0 %134,876  5.0 %
December 31, 2019
Total risk-based capital:
Orrstown Financial Services, Inc.$244,003  14.1 %$182,028  10.5 %n/an/a
Orrstown Bank231,805  13.4 %181,948  10.5 %$173,284  10.0 %
Tier 1 risk-based capital:
Orrstown Financial Services, Inc.196,451  11.3 %147,356  8.5 %n/an/a
Orrstown Bank216,100  12.5 %147,291  8.5 %138,627  8.0 %
Tier 1 common equity risk-based capital:
Orrstown Financial Services, Inc.196,451  11.3 %121,352  7.0 %n/an/a
Orrstown Bank216,100  12.5 %121,299  7.0 %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 %

2020:
 ActualFor Capital Adequacy Purposes
(includes applicable capital conservation buffer)		To Be Well
Capitalized Under
Prompt Corrective Action Provisions
AmountRatioAmountRatioAmountRatio
June 30, 2021
Total risk-based capital:
Orrstown Financial Services, Inc.$285,200 15.6 %$191,913 10.5 %n/an/a
Orrstown Bank267,582 14.6 %191,846 10.5 %$182,711 10.0 %
Tier 1 risk-based capital:
Orrstown Financial Services, Inc.232,507 12.7 %155,358 8.5 %n/an/a
Orrstown Bank246,821 13.5 %155,304 8.5 %146,169 8.0 %
Tier 1 common equity risk-based capital:
Orrstown Financial Services, Inc.232,507 12.7 %127,942 7.0 %n/an/a
Orrstown Bank246,821 13.5 %127,898 7.0 %118,762 6.5 %
Tier 1 leverage capital:
Orrstown Financial Services, Inc.232,507 8.0 %115,968 4.0 %n/an/a
Orrstown Bank246,821 8.5 %116,031 4.0 %145,038 5.0 %
December 31, 2020
Total risk-based capital:
Orrstown Financial Services, Inc.$271,184 15.6 %$183,099 10.5 %n/an/a
Orrstown Bank256,376 14.7 %183,012 10.5 %$174,297 10.0 %
Tier 1 risk-based capital:
Orrstown Financial Services, Inc.217,582 12.5 %148,223 8.5 %n/an/a
Orrstown Bank234,677 13.5 %148,152 8.5 %139,437 8.0 %
Tier 1 common equity risk-based capital:
Orrstown Financial Services, Inc.217,582 12.5 %122,066 7.0 %n/an/a
Orrstown Bank234,677 13.5 %122,008 7.0 %113,293 6.5 %
Tier 1 leverage capital:
Orrstown Financial Services, Inc.217,582 8.1 %108,063 4.0 %n/an/a
Orrstown Bank234,677 8.7 %108,148 4.0 %135,185 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 Exchange Act of 1934, as amended. On April 19, 2021, the Board of Directors authorized the additional future repurchase of up to 562,000 shares of its outstanding common stock. As of June 30, 2021, 154,680 shares had been repurchased under the 2015 program at a total cost of $2.6 million, or $16.88 per share. Common stock available for future repurchase totals approximately 823,320 shares, or 7%
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of the Company's outstanding common stock at June 30, 2021. When and if appropriate, repurchases may be made in the open market or privately negotiated transactions, depending on market conditions, regulatory requirements and other corporate considerations, as determined by management. Share repurchases may not occur and may be discontinued at any time. At June 30, 2020, 154,680 shares had been repurchased under the program at a total cost of $2.6 million, or $16.88 per share.
On July 21, 2020,19, 2021, the Board declared a cash dividend of $0.17$0.19 per common share, which will be paid on August 10, 20209, 2021 to shareholders of record at August 3, 2020.
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NOTE 11.9. EARNINGS PER SHARE
The following table presents earnings per share for the three and six months ended June 30, 20202021 and 2019:2020:
Three Months Ended June 30,Six Months Ended June 30,Three Months Ended June 30,Six Months Ended June 30,
20202019202020192021202020212020
Net incomeNet income$6,359  $2,687  $11,427  $5,789  Net income$8,776 $6,359 $18,983 $11,427 
Weighted average shares outstanding - basicWeighted average shares outstanding - basic10,916  10,348  10,937  9,757  Weighted average shares outstanding - basic10,975 10,916 10,975 10,937 
Dilutive effect of share-based compensationDilutive effect of share-based compensation77  166  90  166  Dilutive effect of share-based compensation137 77 118 90 
Weighted average shares outstanding - dilutedWeighted average shares outstanding - diluted10,993  10,514  11,027  9,923  Weighted average shares outstanding - diluted11,112 10,993 11,093 11,027 
Per share information:Per share information:Per share information:
Basic earnings per shareBasic earnings per share$0.58  $0.26  $1.04  $0.59  Basic earnings per share$0.80 $0.58 $1.73 $1.04 
Diluted earnings per shareDiluted earnings per share0.58  0.26  1.04  0.58  Diluted earnings per share0.79 0.58 1.71 1.04 

Average outstanding restricted shares and stock options totaling 12,000 and restricted shares totaling 27,667 and 37,232 for the three months ended June 30, 20202021 and 2019,2020, respectively, and of 29,11354,643 and 39,10829,113 for the six months ended June 30, 20202021 and 2019,2020, respectively, were not included in the computation of earnings per share because the effect was antidilutive, due to the exercise price exceeding the average market price.antidilutive. The dilutive effect of share-based compensation in each period above relates principally to restricted stock awards.

NOTE 12.10. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the unaudited condensed consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The following table presents these contractual, or notional, amounts:
Contractual or Notional Amount
June 30, 2020December 31, 2019
Commitments to fund:
Home equity lines of credit$215,471  $205,502  
1-4 family residential construction loans18,836  19,812  
Commercial real estate, construction and land development loans28,505  19,018  
Commercial, industrial and other loans244,489  222,288  
Standby letters of credit10,684  10,588  
Contractual or Notional Amount
June 30, 2021December 31, 2020
Commitments to fund:
Home equity lines of credit$240,916 $223,216 
1-4 family residential construction loans35,308 28,928 
Commercial real estate, construction and land development loans92,763 60,606 
Commercial, industrial and other loans303,386 268,931 
Standby letters of credit15,534 14,491 
Commitments to extend credit are agreements to lend to a customer 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’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. Collateral varies but may include accounts receivable, inventory, equipment, residential real estate, and income-producing commercial properties.
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Standby letters of credit and financial guarantees written are conditional commitments issued by the Company to guarantee the performance of a customer 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. The Company holds collateral supporting those commitments when deemed necessary by management. The liability, at June 30, 20202021 and December 31, 2019,2020, for guarantees under standby letters of credit issued was not considered to be material.
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The Company maintains a reserve, based on historical loss experience of the related loan class and utilization assumptions, for off-balance sheet credit exposures that currently are not funded, in other liabilities on the unaudited condensed consolidated balance sheets. A review of historical loss and line utilization experience in the three months ended June 30, 2021 resulted in a reduction of loss and utilization assumptions from prior periods. This reserve totaled $1.2$1.4 million at June 30, 20202021 and $1.0$1.5 million at December 31, 2019.
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NOTE 13.11. FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are:
Level 1 – quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date.
Level 2 – significant other observable inputs other than Level 1 prices such as prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – at least one significant unobservable input that reflects a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.
In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The Company used the following methods and significant assumptions to estimate fair value for instruments measured on a recurring basis:
Where quoted prices are available in an active market, 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 theThe Company’s investment securities are classified as available for sale.
The fair values of interest rate swaps and risk participation derivatives are determined using models that incorporate readily observable market data into a market standard methodology. This methodology nets the discounted future cash receipts and the discounted expected cash payments. The discounted variable cash receipts and payments are based on expectations of future interest rates derived from observable market interest rate curves. In addition, fair value is adjusted for the effect of nonperformance risk by incorporating credit valuation adjustments for the Company and its counterparties. These assets and liabilities are classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
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The Company had 0 fair value liabilities measured on a recurring basis at June 30, 2020 and December 31, 2019.
The following table summarizes assets measured at fair value on a recurring basis at June 30, 20202021 and December 31, 2019:
Level 1Level 2Level 3Total Fair
Value
Measurements
June 30, 2020
Investment securities:
States and political subdivisions$—  $113,095  $—  $113,095  
GSE residential MBSs—  4,605  —  4,605  
GSE residential CMOs—  66,067  —  66,067  
Nonagency CMOs—  —  17,309  17,310  
Private label commercial CMOs—  63,211  6,525  69,736  
Asset-backed—  212,768  —  212,768  
Other355  —  —  355  
Loans held for sale—  13,594  —  13,594  
Interest rate swaps—  234  —  234  
Interest rate lock commitments on residential mortgages—  —  986  986  
Totals$355  $473,574  $24,820  $498,750  
December 31, 2019
Investment securities:
States and political subdivisions$—  $87,863  $—  $87,863  
GSE residential CMOs—  68,154  —  68,154  
Nonagency CMOs—  —  17,087  17,087  
Private label commercial CMOs—  79,437  7,192  86,629  
Asset-backed—  230,515  —  230,515  
Other637  —  —  637  
Loans held for sale—  9,364  —  9,364  
Interest rate lock commitments on residential mortgages—  —  103  103  
Totals$637  $475,333  $24,382  $500,352  
2020:
Level 1Level 2Level 3Total Fair
Value
Measurements
June 30, 2021
Financial Assets
Investment securities:
States and political subdivisions$0 $149,133 $10,283 $159,416 
GSE residential MBSs0 9,401 0 9,401 
GSE residential CMOs0 61,772 0 61,772 
Nonagency CMOs0 0 14,642 14,642 
Asset-backed0 204,772 0 204,772 
Other399 0 0 399 
Loans held for sale0 8,092 0 8,092 
Derivatives0 181 456 637 
Totals$399 $433,351 $25,381 $459,131 
Financial Liabilities
Derivatives$0 $582 $0 $582 
December 31, 2020
Financial Assets
Investment securities:
States and political subdivisions$0 $103,591 $9,079 $112,670 
GSE residential MBSs0 4,293 0 4,293 
GSE residential CMOs0 58,011 0 58,011 
Nonagency CMOs0 0 16,918 16,918 
Private label commercial CMOs0 56,730 5,506 62,236 
Asset-backed0 211,966 0 211,966 
Other371 0 0 371 
Loans held for sale0 11,734 0 11,734 
Derivatives0 690 673 1,363 
Totals$371 $447,015 $32,176 $479,562 
Financial Liabilities
Derivatives$0 $1,956 $0 $1,956 

The Company has CMOshad a municipal bond and a CMO measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at June 30, 2020 and2021. At December 31, 2019.2020, this municipal bond as well as 3 CMOs were measured on a recurring basis using Level 3 unobservable inputs. NaN of the CMOs held at December 31, 2020 was sold and one was called in the six months ended June 30, 2021. 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, theThe Company’s residential mortgage loans held for sale wereare recorded at fair value utilizing Level 2 measurements. This fair value measurement is determined based upon third party quotes obtained on similar loans. For loans held for sale for which the fair value option has been elected, the aggregate fair value exceeded the aggregate principal balance by $407$200 thousand as of June 30, 2020.2021.
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 average pull through percentage, which is based
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upon historical experience, was 93%88% as of June 30, 2020.2021. An increase or decrease of 5% in the pull through assumption would result in a positive or negative change of $57$25 thousand in the fair value of interest rate lock commitments at June 30, 2020.
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2021.
The following provides details of the Level 3 fair value measurement activity for the periods ended June 30, 20202021 and 2019:2020:
CMOs:
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Balance, beginning of period$23,250  $—  $24,279  $—  
Unrealized gain (loss) included in OCI532  —  (429) —  
Principal payments and other52  —  (16) —  
Balance, end of period$23,834  $—  $23,834  $—  
Investment securities:
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Balance, beginning of period$25,564 $23,250 $31,503 $24,279 
Unrealized gain (loss) included in OCI2,096 532 1,431 (429)
Principal payments and other(2,735)52 (4,464)(16)
Sales0 0 (3,545)0 
Balance, end of period$24,925 $23,834 $24,925 $23,834 

Interest rate lock commitments on residential mortgages:
Three Months Ended June 30,Six Months Ended June 30,
2020201920202019
Balance, beginning of period$435  $—  $103  $—  
Total gains, realized/unrealized:
Included in earnings551  —  883  —  
Balance, end of period$986  $—  $986  $—  
Three Months Ended June 30,Six Months Ended June 30,
2021202020212020
Balance, beginning of period$672 $435 $673 $103 
Total gains
Included in earnings(216)551 (217)883 
Balance, end of period$456 $986 $456 $986 

Certain financial assets are measured at fair value on a nonrecurring basis. Adjustments to the fair value of these assets usually results from the application of lower of cost or market accounting or write-downs of individual assets. The Company used the following methods and significant assumptions to estimate fair value for these financial assets.
Impaired 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 using a marketthe rate of interestreturn implicit in the original loan for performing TDRs. For collateral-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 ALL are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the unaudited condensed consolidated statements of income.
Any changes in the fair value of impaired loans still held were not material for the three and six months ended June 30, 20202021 and 2019:

2020.
Foreclosed Real Estate

OREO property acquired through foreclosure is initially recorded at the fair value of the property at the transfer date less estimated selling cost. Subsequently, OREO is carried at the lower of its carrying value or the fair value less estimated selling
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cost. Fair value is usually determined based upon an independent third-party appraisal of the property or occasionally upon a recent sales offer. There were 0 charges recorded to the value ofThe Company had no OREO at the lower of cost or fair value on properties held during the three and six months ended June 30, 2020 and 2019. There were 0 changes in the fair value of OREO for properties, still heldbalances at June 30, that were charged to real estate expenses for the three2021 and six months ended June 30, 2020 and 2019.
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December 31, 2020.
Mortgage Servicing Rights

The MSR fair value 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 an impairment charge is taken. At June 30, 20202021 and December 31, 2019,2020, an impairment reserve of $890$415 thousand and $70 thousand,$1.1 million, respectively, existed on the mortgage servicing right portfolio. For the three months ended June 30, 2021 and 2020, and 2019,an impairment chargesvaluation allowance reversal of $317$45 thousand and $0an impairment charge of $319 thousand were included, respectively, in mortgage banking activities on the unaudited condensed consolidated statements of income. For the six months ended June 30, 2021 and 2020, an impairment valuation allowance reversal of $651 thousand and 2019,an impairment chargescharge of $820 thousand, and $0respectively, were included respectively, in mortgage banking activities on the unaudited condensed consolidated statements of income. The impairment charges resulted from rapidly declining market rates caused by the COVID-19 pandemic. The reversal in the three and six months ended June 30, 2021 was due to a subsequent increase in market rates.
The following table summarizes assets measured at fair value on a nonrecurring basis at June 30, 20202021 and December 31, 2019:
Level 1Level 2Level 3Total
Fair Value
Measurements
June 30, 2020
Impaired Loans
Commercial real estate:
Owner occupied$—  $—  $892  $892  
Multi-family—  —  80  80  
Non-owner occupied residential—  —  42  42  
Commercial and industrial—  —  211  211  
Residential mortgage:
First lien—  —  885  885  
Home equity - lines of credit—  —  179  179  
Installment and other loans—  —  7  7  
Total impaired loans$—  $—  $2,296  $2,296  
Mortgage servicing rights$—  $—  $2,501  $2,501  
December 31, 2019
Impaired Loans
Commercial real estate:
Owner occupied$—  $—  $938  $938  
Multi-family—  —  96  96  
Non-owner occupied residential—  —  103  103  
Commercial and industrial—  —  11  11  
Residential mortgage:
First lien—  —  641  641  
Home equity - lines of credit—  —  400  400  
Installment and other loans—  —  7  7  
Total impaired loans$—  $—  $2,196  $2,196  
Mortgage servicing rights$—  $—  $3,119  $3,119  
2020:
Level 1Level 2Level 3Total
Fair Value
Measurements
June 30, 2021
Impaired Loans
Commercial real estate:
Owner occupied$0 $0 $1,213 $1,213 
Non-owner occupied residential0 0 29 29 
Commercial and industrial0 0 3 3 
Residential mortgage:
First lien0 0 849 849 
Home equity - lines of credit0 0 81 81 
Total impaired loans$0 $0 $2,175 $2,175 
Mortgage servicing rights$0 $0 $3,580 $3,580 
December 31, 2020
Impaired Loans
Commercial real estate:
Owner occupied$0 $0 $846 $846 
Non-owner occupied residential0 0 36 36 
Commercial and industrial0 0 12 12 
Residential mortgage:
First lien0 0 638 638 
Home equity - lines of credit0 0 89 89 
Total impaired loans$0 $0 $1,621 $1,621 
Mortgage servicing rights$0 $0 $2,745 $2,745 

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The following table presents additional qualitative information about assets measured on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
Fair Value
Estimate		Valuation
Techniques		Unobservable InputRange
June 30, 2020
Impaired loans$2,296  Appraisal of collateralManagement adjustments on appraisals for property type and recent activity0% - 20% discount
 - Management adjustments for liquidation expenses6%- 33% discount
Mortgage servicing rights$2,501  Discounted cash flowsWeighted average CPR15.16%
 - Weighted average discount rate9.59%
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 rights$3,119  Discounted cash flowsWeighted average CPR11.63%
- Weighted average discount rate9.54%
Fair Value
Estimate		Valuation
Techniques		Unobservable InputRange
June 30, 2021
Impaired loans$2,175 Appraisal of collateralManagement adjustments on appraisals for property type and recent activity5% - 25% discount
 - Management adjustments for liquidation expenses6% - 19% discount
Mortgage servicing rights$3,580 Discounted cash flowsWeighted average CPR14.50%
 - Weighted average discount rate9.05%
December 31, 2020
Impaired loans$1,621 Appraisal of collateralManagement adjustments on appraisals for property type and recent activity5% - 25% discount
 - Management adjustments for liquidation expenses6% - 19% discount
Mortgage servicing rights$2,745 Discounted cash flowsWeighted average CPR18.02%
- Weighted average discount rate9.56%
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Fair values of financial instruments
The following table presents carrying amounts and estimated fair values of the Company’s financial instruments at June 30, 20202021 and December 31, 2019:
Carrying
Amount		Fair ValueLevel 1Level 2Level 3
June 30, 2020
Financial Assets
Cash and due from banks$26,652  $26,652  $26,652  $—  $—  
Interest-bearing deposits with banks25,638  25,638  25,638  —  —  
Restricted investments in bank stocks16,256  n/an/an/an/a
Investment securities483,936  483,936  —  460,102  23,834  
Loans held for sale13,594  13,594  —  13,594  —  
Loans, net of allowance for loan losses2,023,800  2,007,374  —  —  2,007,374  
Interest rate lock commitments on residential mortgages986  986  —  —  986  
Interest rate swaps234  234  —  234  —  
Accrued interest receivable8,182  8,182  —  1,750  6,432  
Financial Liabilities
Deposits2,251,731  2,255,147  —  2,255,147  —  
Securities sold under agreements to repurchase23,716  23,716  —  23,716  —  
FHLB Advances202,804  203,100  —  203,100  —  
Subordinated notes31,875  32,436  —  32,436  —  
Interest rate swaps2,227  2,227  —  2,227  —  
Accrued interest payable441  441  —  441  —  
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 stocks16,184  n/an/an/an/a
Investment 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  —  
Securities sold under agreements to repurchase8,269  8,269  —  8,269  —  
FHLB Advances209,667  210,005  —  210,005  —  
Subordinated notes31,847  33,953  —  33,953  —  
Accrued interest payable879  879  —  879  —  
2020:
Carrying
Amount		Fair ValueLevel 1Level 2Level 3
June 30, 2021
Financial Assets
Cash and due from banks$27,623 $27,623 $27,623 $0 $0 
Interest-bearing deposits with banks309,139 309,139 309,139 0 0 
Restricted investments in bank stocks9,691 n/an/an/an/a
Investment securities450,402 450,402 399 425,078 24,925 
Loans held for sale8,092 8,092 0 8,092 0 
Loans, net of allowance for loan losses1,926,002 1,924,850 0 0 1,924,850 
Derivatives637 637 0 181 456 
Accrued interest receivable7,930 7,930 0 1,895 6,035 
Financial Liabilities
Deposits2,494,100 2,495,844 0 2,495,844 0 
Securities sold under agreements to repurchase22,872 22,872 0 22,872 0 
FHLB advances and other57,837 58,033 0 58,033 0 
Subordinated notes31,932 32,588 0 32,588 0 
Derivatives582 582 0 582 0 
Accrued interest payable167 167 0 167 0 
December 31, 2020
Financial Assets
Cash and due from banks$26,203 $26,203 $26,203 $0 $0 
Interest-bearing deposits with banks99,055 99,055 99,055 0 0 
Restricted investments in bank stocks10,563 n/an/an/an/a
Investment securities466,465 466,465 371 434,591 31,503 
Loans held for sale11,734 11,734 0 11,734 0 
Loans, net of allowance for loan losses1,959,539 1,953,860 0 0 1,953,860 
Derivatives1,363 1,363 0 690 673 
Accrued interest receivable8,927 8,927 0 1,529 7,398 
Financial Liabilities
Deposits2,356,880 2,359,317 0 2,359,317 0 
Securities sold under agreements to repurchase19,466 19,466 0 19,466 0 
FHLB advances and other58,045 58,298 0 58,298 0 
Subordinated notes31,903 31,712 0 31,712 0 
Derivatives1,956 1,956 0 1,956 0 
Accrued interest payable238 238 0 238 0 

The methods used to estimate the fair value of financial instruments at June 30, 20202021 did not necessarily represent an exit price. In accordance with the Company's adoption of ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, the methods utilized to measure the fair value of financial instruments at June 30, 20202021 represents an approximation of exit price; however, an actual exit price may differ.

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NOTE 14.12. 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 0no 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 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 alleged, among other things,
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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 was alleged to have aided and abetted the Hamilton directors’ alleged breaches of their fiduciary duties. The Action sought, among other remedies, to enjoin the merger or, in the event the merger was completed, rescission of the merger or rescissory damages; unspecified damages; and costs of the lawsuit, including attorneys’ and experts’ fees. A settlementsettlement was reached on the Action in March 2020 which resulted in a payment by the Company of $135 thousand in mootness fees to the defendants in April 2020.
On May 25, 2012, SEPTA filed a putative class action complaint in the U.S. District Court for the Middle District of Pennsylvania against the Company, the Bank and certain current and former directors and executive officers (collectively, the “Orrstown Defendants”). The complaint alleges,alleged, among other things, that (i) in connection with the Company’s Registration Statement on Form S-3 dated February 23, 2010 and its Prospectus Supplement dated March 23, 2010, and (ii) during the purported class period of March 24, 2010 through October 27, 2011, the Company issued materially false and misleading statements regarding the Company’s lending practices and financial results, including misleading statements concerning the stringent nature of the Bank’s credit practices and underwriting standards, the quality of its loan portfolio, and the intended use of the proceeds from the Company’s March 2010 public offering of common stock. The complaint assertsasserted 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 seekssought 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 Orrstown Defendants’ motion to dismiss was originally due January 11, 2013. Under the PSLRA, 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 expanded the list of defendants in the action to include the Company’s former independent registered public accounting firm, Smith Elliott Kearns & Company, LLC (“SEK”), and the underwriters of the Company’s March 2010 public offering of common stock. In addition, among other things, the amended complaint extendsextended 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 U.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
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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 again 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 second amended complaint disclosed the existence of a confidential, non-public, fact-finding inquiry regarding the Company being conducted by the 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 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 of the SEC’s administrative proceedings and pursuant to the cease-and-desist order, without admitting or denying the SEC’s findings, the Company, its Chief Executive Officer, its former Chief Financial Officer, its former Executive Vice President and Chief Credit Officer, and its Chief Accounting Officer, agreed to pay civil money penalties to the SEC. The Company agreed to pay a civil money penalty of $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 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 SEC. The Notice attached a copy of the SEC’s cease-and-desist order and briefly described what the Company believed were the most salient terms of the neither-admit-nor-deny settlement. On September 29, 2016, SEPTA filed a Response to the Notice, in which SEPTA argued that the settlement with the SEC 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 Securities Act claims against all defendants, and granted the motions to dismiss the Exchange Act Section 10(b) and Rule 10b-5 claims against all defendants except Orrstown Financial Services, Inc., Orrstown Bank, Thomas R. Quinn, Jr., Bradley S. Everly, and Jeffrey W. Embly. The Court also denied the motions to dismiss the Exchange Act Section 20(a) claims against Quinn, Everly, and Embly.
On January 31, 2017, the Court entered a Case Management Order establishing the schedule for the litigation and, on August 15, 2017, it entered a revised Order that, among other things, set the following deadlines: all fact discovery closed on March 1, 2018, and SEPTA’s motion for class certification was due the same day; expert merits discovery closed May 30, 2018; summary judgment motions were due by June 26, 2018; the mandatory pretrial and settlement conference was set for December 11, 2018; and trial was 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’sSEPTA has not yet filed a 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
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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.certification.
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)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 purpose 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 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 iswas stayed pending a decision on SEPTA’s motion for leave to file a third amended complaint. Party and non-party document discovery in the case has largely been completed.
On February 14, 2020, the Court issued an Order and Memorandum granting SEPTA’s motion for leave to file a third amended complaint. The third amended complaint is now the operative complaint. It reinstates the Orrstown Defendants, as well as SEK and the underwriter defendants, previously dismissed from the case on December 7, 2016. The third amended
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complaint also revives the previously-dismissed 1933previously dismissed Securities Act claim against the Orrstown Defendants, SEK, and the underwriter defendants. Under the Court-ordered briefing schedule, defendantsDefendants filed their motions to dismiss the third amended complaint on April 24, 2020. SEPTA’s opposition was filed on July 8, 2020, and defendants’Orrstown’s reply briefs are duebrief was filed on August 12, 2020. The motions to dismiss the third amended complaint are currently pending.
OnAdditionally, 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 District Court to certify its February 14, 2020 Order granting leave to file the third amended complaint for interlocutory appeal to the Third Circuit Court of Appeals. The District Court granted those motions on July 17, 2020, and defendants filed their Petition for Permission to Appeal with the Third Circuit on July 27, 2020. SEPTA’s oppositionThe Third Circuit granted permission to appeal the PetitionOrder pursuant to 28 U.S.C. § 1292(b) on August 13, 2020. Defendants filed their joint Opening Brief in the Third Circuit on November 2, 2020, asking the Court to reverse the district court’s Order. SEPTA filed its responsive brief on December 2, 2020 and defendants filed their reply brief on December 23, 2020. Oral argument was held on February 10, 2021. The Third Circuit’s decision is due by August 6, 2020.pending.
The Company believes that the allegations of SEPTA’s third amended complaint are without merit and intends to defend itself vigorously against those claims. It is not possible at this time to reasonably estimate reasonably possible losses, or even a range of reasonably possible losses, in connection with the litigation.


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to assist readers in understanding the consolidated financial condition and results of operations of Orrstown and should be read in conjunction with the preceding unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q, as well as with the audited consolidated financial statements and notes thereto for the year ended December 31, 2019,2020, included in our Annual Report on Form 10-K. Throughout this discussion, the yield on earning assets is stated on a fully taxable-equivalent basis and balances represent average daily balances unless otherwise stated. Certain prior period amounts presented in this discussion and analysis have been reclassified to conform to current period classifications.
Overview
The Company, headquartered in Shippensburg, Pennsylvania, is a one-bank holding company that has elected status as a financial holding company. The consolidated financial information presented herein reflects the Company and its wholly-owned subsidiaries,subsidiary, the Bank and Wheatland.Bank. At June 30, 2020,2021, the Company had total assets of $2.8$2.9 billion, total liabilities of $2.5$2.6 billion and total shareholders’ equity of $225.6$265.9 million.
Caution About Forward-Looking Statements
Certain statements appearing herein, which are not historical in nature, aremay constitute 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, and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, we may make other written and oral communications, from time to time, that contain such statements. Such forward-looking statements refer to a future period or periods, reflecting our current beliefs as to likely future developments, and use words like “may,” “will,” “expect,” “estimate,” “anticipate” or similar terms. Forward-looking statements are statements that include projections, predictions, expectations, 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 in 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 such statements and there can be no assurances that we will achieve the desired level of new business development and new loans, growth in the balance sheet and fee based revenue lines of business, successful merger and acquisition activity, continue to reduce risk assets or mitigate losses in the future. In addition to risks and uncertainties related to the COVID-19 pandemic (including those related to variants, such as the delta variant) and resulting governmental and societal responses, factors that could cause actual results to differ from those expressed or implied by the forward-looking statements include, but are not limited to, the following: ineffectiveness of the Company’s business strategystrategic 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; difficulty integratingthe integration of the Company's strategic acquisitions; the inability to fully achieve expected savings, efficiencies or synergies from mergers and acquisitions, or taking longer than estimated for such savings, efficiencies and synergies to be realized; changes in laws and regulations; interest rate movements; changes in credit quality; inability to raise capital, if necessary, under favorable conditions; volatility in the securities markets; deteriorating economic conditions; operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics; 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, including those detailed in our Annual Report on Form 10-K for the year ended December 31, 2019,2020, and our Quarterly Reports on Form 10-Q under the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other filings made with the SEC. The statements are valid only as of the date hereof and we disclaim any obligation to update this information.
Economic Climate and Market Conditions
The pace of U.S. economic growth weakened substantially late in the 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.
Preliminary real GDP for the second quarter of 2020 resulted in a record decline2021 reflected an annualized increase of 32.9%6.5%. This is a substantial decreasean increase from negative 5.0%the revised first quarter 2021 annual growth rate of 6.3% and annualized growth of 4.3% for the firstfourth quarter of 2020. The declineincrease in the second quarter GDP reflectedwas driven by reopening of businesses and ongoing government efforts related to COVID-19. During the responsesecond quarter, loans to businesses and grants to state and local governments increased through the government assistance programs. Consumer spending continued to increase notably in food services, accommodations and other nondurable goods. Uncertainty still exists with COVID-19 variants, such as shelter-in-place orders issuedthe delta variant, and a worker shortage. The national unemployment rate declined to 5.9% in MarchJune 2021 from 6.1% in April 2021 and Aprilfrom 6.7% in December 2020. There were partially liftednotable job gains in some areas of the country in Mayleisure and June,hospitality, education, professional and government pandemic assistance payments were distributed to householdsbusiness services, retail trade and businesses. This led to shifts in economic activity, as businesses remained closed or operated remotely and consumers and businesses significantly reduced or redirected their spending. Actions taken to mitigate the spread of COVID-19 have had and are expected to continue to have an adverseother services.
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impact on the economies and financial markets of many countries, including the geographical area in which the Company operates.
DueDue to the COVID-19 pandemic, market interest rates have declined significantly, with the 10-year Treasury bond falling for the first time below 1.00% on March 3, 2020 for the first time and2020; it was at 0.66%0.93% on December 31, 2020 and has since recovered to 1.47% as of June 30, 2020. On March 3,2021. In 2020, in reaction to the increase in uncertainty, the Federal Reserve cut 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, this time by 100150 basis points to 0% to 0.25%. In its most recent meeting in July 2021, the Federal Reserve Open Markets Committee left the Fed Funds rate unchanged with rates expected to remain at this level for an extended period of time. The Committee recognized the progress with vaccinations to reduce the spread of the COVID-19 virus and its effect on economic activity and employment. However, uncertainty remains on the economic outlook. The Committee has indicated that they will not increase rates until the recovery achieves maximum employment and inflation has reached 2% and longer term inflation expectations are maintained above 2%. These reductions inlow 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 Company. It is reasonably foreseeable that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including expected credit losses on loans and the fair value of financial instruments that are carried at fair value.

Critical Accounting Estimates
The Company’s accounting and reporting policies are in accordance with GAAP and follow accounting and reporting guidelines prescribed by bank regulatory authorities and general practices within the financial services industry in which it operates. Our financial position and results of operations are affected by management's application of accounting policies, including estimates, and assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the balance sheet date and through the date the financial statements are filed with the SEC. Different assumptions in the application of these policies could result in material changes in the consolidated financial position and/or consolidated results of operations and related disclosures. The more critical accounting estimates include accounting for credit losses and valuation methodologies. Accordingly, these critical accounting estimates are discussed in detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2019.2020. Significant accounting policies and any changes in accounting principles and effects of new accounting pronouncements are discussed in Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data," in our Annual Report on Form 10-K for the year ended December 31, 2019.2020. Additional disclosures regarding the effects of new accounting pronouncements are included in this report in Note 1, Summary of Significant Accounting Policies, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information."

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RESULTS OF OPERATIONS
Three months ended June 30, 20202021 compared with three months ended June 30, 20192020
Summary
Net income totaled $6.4$8.8 million for the three months ended June 30, 20202021 compared with net income of $2.7$6.4 million for the same period in 2019.2020. Diluted EPSearnings per share for the three months ended June 30, 20202021 totaled $0.58,$0.79, compared with $0.26$0.58 for the three months ended June 30, 2019.2020. Net interest income positively influenced results of operations and totaled $20.8$21.9 million for the three months ended June 30, 2020,2021, a $2.3$1.1 million increase compared with 2019.from $20.8 million in the three months ended June 30, 2020. Noninterest income excluding investment securities gains, totaled $7.2$6.7 million for the three months ended June 30, 20202021 compared with $5.7$7.2 million in 2019. Investment securities gains totaled $9 thousand in the three months ended June 30, 2020, compared with net gains of $2.1 million for the same period in 2019.2020. Noninterest expenses totaled $18.4$17.0 million and $23.3$18.4 million for the three months ended June 30, 2021 and 2020, and 2019, respectively.
The comparability of operating results for 2020 with 2019 has generally been impacted by the Hamilton acquisition completed on May 1, 2019 and the SBA PPP loans originated in the three months ended June 30, 2020.
Net Interest Income
Net interest income increased by $2.3$1.1 million, from $18.5$20.8 million to $20.8$21.9 million, for the three months ended June 30, 20202021 compared with the three months ended June 30, 2019.2020. Interest income on loans increaseddecreased by $2.1 million,$471 thousand, from $19.7$21.8 million to $21.8$21.3 million, securities interest income decreased $1.1 million,by $963 thousand, from $4.3$3.2 million to $3.2$2.3 million, and total interest expense decreased $1.7by $2.5 million from $6.0$4.2 million to $4.2$1.8 million, in comparing the three months ended June 30, 20202021 with the three months ended June 30, 2019.2020.
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The following table presents net interest income, net interest spread and net interest margin for the three months ended June 30, 20202021 and 20192020 on a taxable-equivalent basis:

Three Months Ended June 30, 2020Three Months Ended June 30, 2019
Average BalanceTaxable- Equivalent InterestTaxable- Equivalent RateAverage BalanceTaxable- Equivalent InterestTaxable- Equivalent Rate
Assets
Federal funds sold & interest-bearing bank balances$27,949  $13  0.18 %$84,344  $501  2.38 %
Securities (1)
493,847  3,327  2.71  497,302  4,481  3.61  
Loans (1)(2)(3)
1,988,114  21,912  4.43  1,497,445  19,782  5.30  
Total interest-earning assets2,509,910  25,252  4.05  2,079,091  24,764  4.78  
Other assets200,684  175,566  
Total$2,710,594  $2,254,657  
Liabilities and Shareholders’ Equity
Interest-bearing demand deposits$1,154,434  1,259  0.44  $922,612  2,062  0.90  
Savings deposits160,738  63  0.16  153,235  89  0.23  
Time deposits462,664  1,988  1.73  568,488  2,741  1.93  
Securities sold under agreements to repurchase21,582  24  0.45  8,847  29  1.31  
FHLB Advances and other175,336  388  0.89  97,908  537  2.20  
Subordinated notes31,867  502  6.33  31,819  499  6.28  
Total interest-bearing liabilities2,006,621  4,224  0.85  1,782,909  5,957  1.34  
Noninterest-bearing demand deposits452,253  235,046  
Other36,511  31,692  
Total Liabilities2,495,385  2,049,647  
Shareholders’ Equity215,209  205,010  
Total$2,710,594  $2,254,657  
Taxable-equivalent net interest income /net interest spread21,028  3.20 %18,807  3.44 %
Taxable-equivalent net interest margin3.37 %3.63 %
Taxable-equivalent adjustment(230) (292) 
Net interest income$20,798  $18,515  

Three Months Ended June 30, 2021Three Months Ended June 30, 2020
Average
Balance		Taxable-
Equivalent
Interest		Taxable-
Equivalent
Rate		Average
Balance		Taxable-
Equivalent
Interest		Taxable-
Equivalent
Rate
Assets
Federal funds sold & interest-bearing bank balances$290,039 $81 0.11 %$27,949 $13 0.18 %
Investment securities (1)
438,110 2,421 2.22 493,847 3,327 2.71 
Loans (1)(2)(3)
2,014,600 21,375 4.26 1,988,114 21,912 4.43 
Total interest-earning assets2,742,749 23,877 3.49 2,509,910 25,252 4.05 
Other assets188,810 200,684 
Total$2,931,559 $2,710,594 
Liabilities and Shareholders’ Equity
Interest-bearing demand deposits$1,394,384 292 0.08 $1,154,434 1,259 0.44 
Savings deposits200,439 50 0.10 160,738 63 0.16 
Time deposits382,467 739 0.78 462,664 1,988 1.73 
Securities sold under agreements to repurchase22,417 8 0.14 21,582 24 0.45 
FHLB Advances and other57,896 164 1.14 175,336 388 0.89 
Subordinated notes31,924 502 6.29 31,867 502 6.33 
Total interest-bearing liabilities2,089,527 1,755 0.34 2,006,621 4,224 0.85 
Noninterest-bearing demand deposits545,617 452,253 
Other37,561 36,511 
Total liabilities2,672,705 2,495,385 
Shareholders’ equity258,854 215,209 
Total$2,931,559 $2,710,594 
Taxable-equivalent net interest income /net interest spread22,122 3.15 %21,028 3.20 %
Taxable-equivalent net interest margin3.24 %3.37 %
Taxable-equivalent adjustment(221)(230)
Net interest income$21,901 $20,798 
NOTES TO ANALYSIS OF NET INTEREST INCOME:
(1)Yields and interest income on tax-exempt assets have been computed on a taxable-equivalent basis assuming a 21% tax rate.
(2)Average balances include nonaccrual loans.
(3)Interest income on loans includes prepayment and late fees.

For the three months ended June 30, 2020,2021, taxable-equivalent basis net interest income increased by $2.2$1.1 million compared with the three months ended June 30, 20192020. The increase reflected an increase of $430.8$232.8 million in average interest-earning assets partially offset by an increase of $223.7$82.9 million in average interest-bearing liabilities from the three months ended June 30, 20192020 to the three months ended June 30, 20202021.. These balances increased primarily due to the SBA PPP loans originated infrom April 2020 to May 2021.
For the three months ended June 30, 2021, taxable-equivalent net interest margin was 3.24%, which was 13 basis points lower than 3.37% for the three months ended June 30, 2020. This reduction was driven primarily by a decrease in the yield on loans, excess liquidity that resulted from SBA PPP forgiveness and an inflow of deposit funds from the SBA PPP and government stimulus programs, partially offset by the impact of reduced cost of deposits.
Taxable-equivalent interest income earned on loans increaseddecreased by $2.1 million$537 thousand year-over-year. The $490.7$26.5 million increase in average loan balance year-over-year primarilyyear-over-year reflects average loans originated through thePPP originations, net of forgiveness, since June 30, 2020. SBA PPP of $354.3loans averaged $471.2 million during the three months ended June 30, 2020. The three months ended June 30, 2020 also reflects an extra month of loans from the Hamilton acquisition2021 as compared to the same prior year period. For$349.6 million in the three months ended June 30, 2020, interest income on2020. Partially offsetting the increase in loans includes $1.9 million of deferred fees recognized associated with thefrom SBA PPP loans. A total of $13.2 millionwas a decrease in netaverage residential mortgage
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loans during the period due to significant refinance activity in the low interest rate environment. For the three months ended June 30, 2021, interest income on loans includes $1.3 million of net deferred fees were recorded for these loans to berecognized associated with the SBA PPP loans. Net deferred SBA PPP fees of $11.2 million remain at June 30, 2021. These net deferred fees are being recognized over the life of the loans, which iswas originally between two and five years.years, but can be accelerated upon satisfactorily completing forgiveness steps with the SBA. The yield on loans was 4.43% for the three months ended June 30, 2020 as compared to 5.30%4.26% for the three months ended June 30, 2019.2021 compared to 4.43% for the three months ended June 30, 2020. This decline reflects a reduction in market interest rates on variable rate loans in the portfolio as well as a lower yield on the SBA PPP loans, which contributed to 13 basis pointsand payoff of the decline.higher yielding loans. Accretion of purchase accounting adjustments werewas $209 thousand for the three months ended June 30, 2021 as compared to $1.3 million for the three months ended June 30, 2020 as compared to $1.2 million for the three months ended June 30, 2019.2020. The three months ended June 30, 2021 and 2020 and 2019 included $278$349 thousand and $530$764 thousand, respectively, of accelerated accretion related to the payoff of purchased credit impairedPCI loans.
Taxable-equivalent securities interest income decreased by $1.2 million$906 thousand year-over-year, with the taxable equivalent yield decreasing from 3.61%2.71% for the three months ended June 30, 20192020 to 2.71%2.22% for the three months ended June 30, 2020.2021. The 9049 basis point decrease in in taxable-equivalent yield on securities reflected the decreased interest rate environment between years and certain repositioning withinwithin the portfolio under the Company's asset/liability management strategies. The impact of the interest rate declineInterest income on securities was partially offsetalso impacted by a decrease of $3.5$55.7 million in the average balance of securities from the three months ended June 30, 20192020 to the three months ended June 30, 2020.2021 due primarily to the sale of higher yielding securities during the three months ended June 30, 2021. As the Bank continues to execute its plan to grow relationship loans, it will work to reduce its investment portfolio to fund some of this loan growth through investment repayments.repayments and excess cash.
Interest expense on interest-bearing liabilitiesdeposits and borrowings decreased by $1.7$2.5 million year-over-year, due to a decline of 49 basis points in the cost of interest-bearing liabilities. The impact of a significant decline in market interest rates was partially offset bywith the average balance of interest-bearing deposits increasing by $133.5$199.5 million and the average balance of total borrowings increasingdecreasing by $90.2$116.5 million. The increase in these balancesaverage interest-bearing deposits was due primarily to the SBA PPP loans originated duringsince March 31, 2020. The average balance of interest-bearing liabilities increased by $82.9 million in the three months ended June 30, 2020. During2021 compared to the three months ended June 30, 2020 due to PPP fundings. Despite this increase, there was a decrease of 51 basis points in the Company obtained funding throughcost of interest-bearing liabilities which drove the Federal Reserve’s Paycheck Protection Program Liquidity Facility ("PPPLF") with an average balancedecrease in interest expense. Average borrowings declined due primarily to maturities of $3.2 million during the three months ended June 30, 2020.FHLB advances. The balance of deposits and borrowings associated with the SBA PPP loans are expected to decline significantly into the first quartersecond half of 2021 as the funds are drawn by the borrowers and the loans are forgiven by the SBA.
Provision for Loan Losses
Asset quality trends continueThe Company continues to be solid withexperience a low level of charge-offs and nonperforming loans. The provision for loan losses totaled $1.9 millionwas an expense of $625 thousand for the three months ended June 30, 20202021 compared with $200 thousandexpense of $1.9 million for the same period in 2019.2020. The provision expense recorded in the three months ended June 30, 2020 waswas driven by an increase in qualitative factor assumptions as a result of the COVID-19 pandemic. Due to continuing uncertainty inpandemic; whereas, the external environment, management increased the qualitative factors for certain commercial loan segments in the Bank’s allowance for loan loss analysisprovision expense recorded in the three months ended June 30, 2020.2021 was driven by commercial loan production. During the three and six months ended June 30, 2021, the Company's COVID-19 related reserve was reversed by $800 thousand and $1.7 million, respectively, due to strong credit performance. Net charge-offs in the three monthsmonths ended June 30, 2020 totaled2021 $186totaled $211 thousand as, compared to $23net charge-offs of $186 thousand in the comparable prior year period. Nonperforming loans were 0.36% of gross loans at June 30, 2020, compared with 0.65% of gross loans at December 31, 2019. Nonperforming loans decreased by $3.3 million from December 31, 2019 to June 30, 2020 due primarily to a measurement period adjustment for the transfer of a $2.6 million loan from the Hamilton acquisition into the PCI pool during the three months ended March 31, 2020.
Additional information is included in the "Credit Risk Management" section herein.
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Noninterest Income
The following table compares noninterest income for the three months ended June 30, 20202021 and 2019:

2020:
Three Months Ended June 30,$ Change% ChangeThree Months Ended June 30,$ Change% Change
202020192020-20192020-2019202120202021-20202021-2020
Service charges on deposit accountsService charges on deposit accounts$554  $837  $(283) (34)%Service charges on deposit accounts$698 $554 $144 26 %
Interchange incomeInterchange income819  843  (24) (3)%Interchange income1,064 819 245 30 %
Other service charges, commissions and feesOther service charges, commissions and fees165  241  (76) (32)%Other service charges, commissions and fees182 165 17 10 %
Swap feesSwap fees232  —  232  — %Swap fees15 232 (217)(94)%
Trust and investment management incomeTrust and investment management income1,696  1,749  (53) (3)%Trust and investment management income2,020 1,696 324 19 %
Brokerage incomeBrokerage income599  672  (73) (11)%Brokerage income910 599 311 52 %
Mortgage banking activitiesMortgage banking activities1,609  652  957  147 %Mortgage banking activities1,162 1,609 (447)(28)%
Gain on sale of portfolio loansGain on sale of portfolio loans925  —  925  — %Gain on sale of portfolio loans— 925 (925)(100)%
Income from life insuranceIncome from life insurance532  684  (152) (22)%Income from life insurance564 532 32 6 %
Other incomeOther income53  32  21  66 %Other income38 53 (15)(28)%
Subtotal before securities gains (losses)7,184  5,710  1,474  26 %
Investment securities gains (losses)9  2,064  (2,055) (100)%
Investment securities gainsInvestment securities gains11 9 2 22 %
Total noninterest incomeTotal noninterest income$7,193  $7,774  $(581) (7)%Total noninterest income$6,664 $7,193 $(529)(7)%

The following factors contributed to the more significant changes in noninterest income between the three months ended June 30, 20202021 and 2019:2020:
•Service charges on deposit accounts decreased by $283 thousandincreased in 2021 due primarily to fee waivers of ATM feesimplemented in response2020 due to the COVID-19 pandemic and reductions in overdraft charges from lowerincreased deposit account activity associated with the re-opening of the economy in the second quarter of 2021.
•Interchange income grew from 2020 to 2021 due to increased spending upon the reopening of the economy and expanded usage during the three months ended June 30, 2020of debit cards by consumers.
•Swap fees declined due to the pandemic.interest rate environment as market rates are expected to remain low for an extended period of time.
•InStrong market conditions and the three months ended June 30, 2020, the Company recognizedaddition of new clients continue to drive trust and investment management income of $232 thousand in swap fees for an interest rate swap arrangement directly entered into with one commercial borrower.and brokerage income.
•Mortgage banking income increaseddecreased by $957$447 thousand. Refinance activityThis change was strong in the three months ended June 30, 2020 due to thedriven by a decrease in interest rates, and the gain on sale margin increased. Mortgage loans sold in the three months ended June 30, 2020 totaled $49.5 million compared with $24.6 million in the three months ended June 30, 2019. In addition, there was an increase of $551$767 thousand in the fair value of interest rate lock commitments, offset by the MSR valuation reserve reversal of $45 thousand in the three months ended June 30, 2020 as2021 compared to $0 forthe impairment charge of $319 thousand in the three months ended June 30, 2019. The Company began recognizing this income in the fourth quarter of 2019. During the three months ended June 30, 2020, the Company recorded an MSR impairment charge of $319 thousand driven by significant market interest rate reductions caused by the COVID-19 pandemic, partially offsetting the mortgage gains.2020.
•Gain on sale of portfolio loans decreased from the prior year. During the three months ended June 30, 2020, the Bank recorded $925 thousand in gains due to the sale of $1.7 million of classified loans.
•During the three months ended June 30,Other line items within noninterest income showed fluctuations between 2021 and 2020 the Company recorded a net investment securities gain of $9 thousand dueattributable to the change in the value of an equity security. There were no investment sales during this period. The Company recognized net investment securities gains of $2.1 million in 2019 as opportunities became available to reposition part of the investment portfolio under asset/liability management strategies or to improve responsiveness of the portfolio to interest rate conditions, while also considering funding requirements of anticipated lending activity.normal business operations.
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Noninterest Expenses
The following table compares noninterest expenses for the three months ended June 30, 20202021 and 2019:

2020:
Three Months Ended June 30,$ Change% ChangeThree Months Ended June 30,$ Change% Change
202020192020-20192020-2019202120202021-20202021-2020
Salaries and employee benefitsSalaries and employee benefits$10,063  $8,922  $1,141  12.8 %Salaries and employee benefits$10,212 $10,063 $149 1.5 %
OccupancyOccupancy1,122  1,066  56  5.3 %Occupancy1,098 1,122 (24)(2.1)%
Furniture and equipmentFurniture and equipment1,204  1,140  64  5.6 %Furniture and equipment1,302 1,204 98 8.1 %
Data processingData processing791  1,058  (267) (25.2)%Data processing1,032 791 241 30.5 %
Automated teller machine and interchange feesAutomated teller machine and interchange fees249  238  11  4.6 %Automated teller machine and interchange fees319 249 70 28.1 %
Advertising and bank promotionsAdvertising and bank promotions167  548  (381) (69.5)%Advertising and bank promotions274 167 107 64.1 %
FDIC insuranceFDIC insurance214  221  (7) (3.2)%FDIC insurance158 214 (56)(26.2)%
Other professional services1,021  707  314  44.4 %
Professional servicesProfessional services579 1,021 (442)(43.3)%
Directors' compensationDirectors' compensation264  261  3  1.1 %Directors' compensation235 264 (29)(11.0)%
Taxes other than incomeTaxes other than income449  314  135  43.0 %Taxes other than income462 449 13 2.9 %
Intangible asset amortizationIntangible asset amortization404  402  2  0.5 %Intangible asset amortization324 404 (80)(19.8)%
Merger related and branch consolidation expenses0  6,860  (6,860) (100.0)%
Other operating expensesOther operating expenses2,483  1,555  928  59.7 %Other operating expenses1,038 2,483 (1,445)(58.2)%
Total noninterest expensesTotal noninterest expenses$18,431  $23,292  $(4,861) (20.9)%Total noninterest expenses$17,033 $18,431 $(1,398)(7.6)%

The following factors contributed to the more significant changes in noninterest expenses between the three months ended June 30, 20202021 and 2019:2020:
•TheData processing expenses increased by $241 thousand due primarily due to increase in salariesd trust, tax and employee benefits principally reflected employees added in the Hamilton acquisition and prior year additions to the Bank’s commercial lending team. In addition, the increase included the impact of our overall expansion efforts and incremental expense for additional share-based compensation awards granted in 2020, net of the benefit of forfeitures.
•There was a decline in data processing expense of $267 thousand as the completion of the Hamilton integration in the second half of 2019 resulted in reduced costs in 2020.loan activity.
•Advertising and bank promotions decreasedincreased by $381$107 thousand due primarily to targeted campaigns in the prior year which did not recur in 2020 as well as reduced marketing efforts in 2020 due to the COVID-19 pandemic.
•Other professionalThe decrease in FDIC insurance expense is due to the reduced FDIC scorecard rate.
•Professional services increaseddecreased by $314$442 thousand due to legal costs incurred in the three months ended June 30, 2020 in connection with the SEPTA litigation.
•The Company incurred merger relatedIntangible asset amortization decreased principally due to the elimination of a customer intangible associated with the discontinuance of Wheatland Advisors, Inc. on July 31, 2020 and full amortization of a covenant not to compete in 2020.
•Other operating expenses declined by $1.4 million due to a reduction in the reserve for unfunded commitments of $6.9 million$606 thousand and charges in the three months ended June 30, 2019, principally due to data processing contract termination costs, employee contract termination costs and legal and consulting fees for the Hamilton acquisition.
•2020 that included Other operating expenses increased by $928 thousand due primarily to a reduction of $544 thousand in the fair value of a property held for sale an increase of $172 thousand in the reserve for unfunded commitments due to increased qualitative factors and an impairment charge of $152 thousand on a customer list intangible asset due to the discontinuance of Wheatland, effective July 31, 2020, during the three months ended June 30, 2020.Wheatland.
•Other line items within noninterest expenses showed fluctuations between 20202021 and 20192020 attributable to normal business operations and the impact of acquisitions.operations.



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Income Tax Expense
Income tax expense totaled $2.1 million, an effective tax rate of 19.5%, for the three months ended June 30, 2021, compared with $1.3 million, an effective tax rate of 17.0%, for the three months ended June 30, 2020, compared with $110 thousand, an effective tax rate of 3.9%, for the three months ended June 30, 2019.2020. The Company’s effective tax rate is less than the 21% federal statutory rate, principally due to tax-free income, which includes interest income on tax-free loans and securities and income from life insurance policies, federal income tax credits, and the impact of non-tax deductible expenses, including merger related expenses. The Company recorded a tax benefit of $334 thousand in the second quarter of 2019, related to an increase in its deferred state income tax asset for the effect of the state tax rate change resulting from the Hamilton acquisition. This tax benefit had the effect of lowering the effective tax rate for the second quarter of 2019 by approximately 12%. The remaining difference in the effective tax rate from the three months ended June 30, 20192020 to the three months ended June 30, 20202021 was due primarily to an increase in estimated earnings before income taxes.taxes for the full 2021 fiscal year.
Summary
Six months ended June 30, 20202021 compared with six months ended June 30, 20192020
Summary
Net income totaled $11.4$19.0 million for the six months ended June 30, 20202021 compared with net income of $5.8$11.4 million for the same period in 2019.2020. Diluted earnings per share for the six months ended June 30, 20202021 totaled $1.04,$1.71, compared with $0.58$1.04 for the six months ended June 30, 2019.2020. Net interest income positively influenced results of operations, and totaled $39.1$43.8 million for the six months ended June 30, 2020,2021, a $5.8$4.7 million increase compared with 2019.from $39.1 million in the six months ended June 30, 2020. Noninterest income excluding investment securities gains, totaled $14.3$14.2 million for the six months ended June 30, 20202021 compared with $10.5$14.3 million in 2019. Investment securities losses totaled $31 thousand in the six months ended June 30, 2020, compared with net gains of $2.4 million for the same period in 2019.2020. Noninterest expenses totaled $36.7$34.8 million and $39.5$36.7 million for the six months ended June 30, 20202021 and 2019,2020, respectively.
The comparability of operating results for 20202021 with 20192020 have generally beenbeen impacted by the Hamilton acquisition completed on May 1, 2019 and the SBA PPP loans originated in the six months ended June 30,subsequent to March 31, 2020.
Net Interest Income
Net interest income increased by $5.8$4.7 million, from $33.3$39.1 million to $39.1$43.8 million, for the six months ended June 30, 20202021 compared with the six months ended June 30, 2019.2020. Interest income on loans increased by $7.2 million,$874 thousand, from $34.8$42.0 million to $42.0$42.8 million, investment securities interest income decreased $1.7by $2.3 million, from $8.6$6.9 million to $6.9$4.6 million, and total interest expense decreased $926 thousandby $6.1 million from $10.9$9.9 million to $9.9$3.8 million, in comparing the six months ended June 30, 20202021 with the six months ended June 30, 2019.2020.
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The following table presents net interest income, net interest spread and net interest margin for the six months ended June 30, 20202021 and 20192020 on a taxable-equivalent basis:
Six Months Ended June 30, 2020Six Months Ended June 30, 2019
Average
Balance		Taxable-
Equivalent
Interest		Taxable-
Equivalent
Rate		Average
Balance		Taxable-
Equivalent
Interest		Taxable-
Equivalent
Rate
Assets
Federal funds sold & interest-bearing bank balances$25,409  $92  0.73 %$56,879  $674  2.39 %
Securities (1)
497,418  7,124  2.88  498,522  9,039  3.66  
Loans (1)(2)(3)
1,820,830  42,199  4.66  1,378,213  35,054  5.13  
Total interest-earning assets2,343,657  49,415  4.24  1,933,614  44,767  4.67  
Other assets194,543  156,786  
Total$2,538,200  $2,090,400  
Liabilities and Shareholders’ Equity
Interest-bearing demand deposits$1,063,460  3,161  0.60  $884,065  3,911  0.89  
Savings deposits155,966  127  0.16  137,606  142  0.21  
Time deposits483,014  4,376  1.82  482,525  4,554  1.90  
Securities sold under agreements to repurchase15,499  52  0.67  8,755  57  1.31  
FHLB Advances and other181,372  1,210  1.34  109,658  1,195  2.20  
Subordinated notes31,860  1,003  6.29  31,852  996  6.30  
Total interest-bearing liabilities1,931,171  9,929  1.03  1,654,461  10,855  1.32  
Noninterest-bearing demand deposits351,208  218,796  
Other35,139  27,523  
Total Liabilities2,317,518  1,900,780  
Shareholders’ Equity220,682  189,620  
Total$2,538,200  $2,090,400  
Taxable-equivalent net interest income /net interest spread39,486  3.21 %33,912  3.35 %
Taxable-equivalent net interest margin3.39 %3.54 %
Taxable-equivalent adjustment(426) (637) 
Net interest income$39,060  $33,275  

Six Months Ended June 30, 2021Six Months Ended June 30, 2020
Average
Balance		Taxable-
Equivalent
Interest		Taxable-
Equivalent
Rate		Average
Balance		Taxable-
Equivalent
Interest		Taxable-
Equivalent
Rate
Assets
Federal funds sold & interest-bearing bank balances$218,216 $120 0.11 %$25,409 $92 0.73 %
Investment securities (1)
453,108 4,933 2.20 497,418 7,124 2.88 
Loans (1)(2)(3)
2,023,858 42,949 4.28 1,820,830 42,199 4.66 
Total interest-earning assets2,695,182 48,002 3.59 2,343,657 49,415 4.24 
Other assets185,791 194,543 
Total$2,880,973 $2,538,200 
Liabilities and Shareholders’ Equity
Interest-bearing demand deposits$1,364,483 728 0.11 $1,063,460 3,161 0.60 
Savings deposits192,039 96 0.10 155,966 127 0.16 
Time deposits389,828 1,649 0.85 483,014 4,376 1.82 
Securities sold under agreements to repurchase21,937 17 0.16 15,499 52 0.67 
FHLB Advances and other57,948 335 1.17 181,372 1,210 1.34 
Subordinated notes31,916 1,004 6.29 31,860 1,003 6.29 
Total interest-bearing liabilities2,058,151 3,829 0.38 1,931,171 9,929 1.03 
Noninterest-bearing demand deposits531,313 351,208 
Other36,906 35,139 
Total liabilities2,626,370 2,317,518 
Shareholders’ equity254,603 220,682 
Total$2,880,973 $2,538,200 
Taxable-equivalent net interest income /net interest spread44,173 3.22 %39,486 3.21 %
Taxable-equivalent net interest margin3.31 %3.39 %
Taxable-equivalent adjustment(417)(426)
Net interest income$43,756 $39,060 
NOTES TO ANALYSIS OF NET INTEREST INCOME:
(1)Yields and interest income on tax-exempt assets have been computed on a taxable-equivalent basis assuming a 21% tax rate.
(2)Average balances include nonaccrual loans.
(3)Interest income on loans includes prepayment and late fees.

For the six months ended June 30, 2020,2021, taxable-equivalent basis net interest income increased by $5.6$4.7 million compared with the six months ended June 30, 20192020. The increase reflected an increase of $410.0$351.5 million in average interest-earning assets partially offset by an increase of $276.7$127.0 million in average interest-bearing liabilities from the six months ended June 30, 20192020 to the six months ended June 30, 2020.2021. These balances increased primarily due to the SBA PPP loans originated in the six months ended June 30,from April 2020 as well as loans acquired from Hamilton on to May 1, 2019.2021.
Taxable-equivalent interest income earned on loans increased by $7.1 million$750 thousand year-over-year. The $442.6$203.0 million increase in average loan balance year-over-yearyear-over-year reflects four extraPPP originations, net of forgiveness, since June 30, 2020. SBA PPP loans averaged $467.5 million during the six months of Hamilton loansended June 30, 2021 as compared to $175.6 million in the six months ended June 30, 2020 as compared to2020. Partially offsetting the same prior year period. In addition,increase in loans from SBA PPP loans averaged $177.3 million during the six months ended June 30, 2020. There was an offsettinga decrease in average residential mortgage loans during the period due to significant refinance activity resulting fromin the low interest rate environment. For the six months ended June 30, 2020,2021, interest income on loans includes $1.9$7.2 million of net deferred fees recognized associated with the SBA PPP loans. A total of $13.2 million in netNet deferred fees wereof $11.2 million remain at June 30, 2021, which will be recognized over the life of the loans that is between two and five years, but can be accelerated upon satisfactorily completing forgiveness steps with the SBA. The yield on
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recorded for these loans to be recognized over the life of the loans, which is between two and five years. The yield on loans was 4.66% for the six months ended June 30, 2020 as compared to 5.13%was 4.28% for the six months ended June 30, 2019. 2021 compared to 4.66% for the six months ended June 30, 2020. This declinedecline reflects a reduction in market interest rates on variable rate loans in the portfolio as well as a lower yield on the SBA PPP loans, which contributed to 13 basis pointsand payoff of the decline.higher yielding loans. Accretion of purchase accounting adjustments was $676 thousand for the six months ended June 30, 2021 as compared to $1.9 million for the six months ended June 30, 2020 as compared to $1.4 million for the six months ended June 30, 2019.2020. The six months ended June 30, 2021 and 2020 included $764 thousand and 2019 included $743 thousand, and $639 thousand, respectively, of accelerated accretion related to the payoff purchased credit impairedof PCI loans.
Taxable-equivalent securities interest income decreased by $1.9$2.2 million year-over-year, with the taxable equivalent yield decreasing from 3.66% for the six months ended June 30, 2019 to 2.88% for the six months ended June 30, 2020.2020 to 2.20% for the six months ended June 30, 2021. The 7868 basis point decrease in taxable-equivalent yield on securities reflected the decreased interest rate environment between years and certain repositioning within the portfolio under the Company's asset/liability management strategies. The impact ofInterest income on securities was also impacted by the interest rate decline was partially offset by a decrease of $1.1$44.3 million in the average balance of securities from the six months ended June 30, 20192020 to the six months ended June 30, 2020.2021 due primarily to the sale of higher yielding securities during the six months ended June 30, 2021. As the Bank continues to execute its plan to grow relationship loans, it will work to reduce its investment portfolioseek to fund some of this loan growth through investment repayments. Given the current interest rate environment and slope of the yield curve, the Company expects liquidity to increase in both interest-bearing and noninterest-bearing demand balances, as it continues to look for investments that are consistent with its strategies.
Interest expense on deposits and borrowings decreased by $926 thousand$6.1 million year-over-year, with the average balance of interest-bearing deposits increasing by $198.2$243.9 million and the average balance of total borrowings increasingdecreasing by $78.5$116.9 million. The increase in these balancesaverage interest-bearing deposits was due primarily to the SBA PPP loans originated duringsince June 30, 2020. The average balance of interest-bearing liabilities increased by $127.0 million in the six months ended June 30, 2020. During2021 compared to the six months ended June 30, 2020 due to PPP fundings. There was a decrease of 65 basis points in the Company obtained funding throughcost of interest-bearing liabilities which drove the PPPLF with an average balance decrease in interest expense, which was partially offset by the increase in the balance. Average borrowings declined due primarily to maturities of $1.6 million during the six months ended June 30, 2020.FHLB advances. The balance of deposits and borrowings associated with the SBA PPP loans are expected to decline significantly into the first quartersecond half of 2021 as the funds are drawn by the borrowers and the loans are forgiven by the SBA.borrowers.
Provision for Loan Losses
Asset quality trends continueThe Company continues to be solid withexperience a low level of charge-offs and nonperforming loans. The provision for loan losses totaled $2.8 millionwas negative $375 thousand for the six months ended June 30, 20202021 compared with $600 thousandexpense of $2.8 million for the same period in 2019.2020. The provision expense recorded in the six months ended June 30, 2020 was driven by an increase in qualitative factor assumptions as a result of the COVID-19 pandemic. The negative provision recorded in the six months ended June 30, 2021 was due to the release of $1.7 million of the Company's COVID-19 related reserves, as the credit performance was strong in the past year. This reversal was partially offset by the impact of increased commercial loan production. Net recoveriescharge-offs in the six months ended June 30, 20202021 totaled $37$395 thousand, as compared to net charge-offs of $154$37 thousand in the comparable prior year period. NonperformingNonaccrual loans were 0.36%0.51% of gross loans at June 30, 2020,2021, compared with 0.65%0.52% of gross loans at December 31, 2019. Nonperforming2020. Nonaccrual loans decreased by $3.3 million $369 thousand from December 31, 20192020 to June 30, 2021 and classified loans decreased by $4.4 million to $28.7 million from December 31, 2020 due primarily to a measurement period adjustment for the transfer of a $2.6 million loan from the Hamilton acquisition into the PCI pool during the six months ended June 30, 2020.2021.
Additional information is included in the "Credit Risk Management" section herein.
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Noninterest Income
The following table compares noninterest income for the six months ended June 30, 20202021 and 2019:
Six Months Ended June 30,$ Change% Change
202020192020-20192020-2019
Service charges on deposit accounts$1,401  $1,590  $(189) (12)%
Interchange income1,607  1,579  28  2 %
Other service charges, commissions and fees305  390  (85) (22)%
Swap fees432  —  432  — %
Trust and investment management income3,336  3,507  (171) (5)%
Brokerage income1,318  1,150  168  15 %
Mortgage banking activities1,941  1,120  821  73 %
Gain on sale of portfolio loans2,803  —  2,803  — %
Income from life insurance1,072  1,026  46  4 %
Other income83  144  (61) (42)%
Subtotal before securities (losses) gains14,298  10,506  3,792  36 %
Investment securities (losses) gains(31) 2,403  (2,434) (101)%
Total noninterest income$14,267  $12,909  $1,358  11 %
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Six Months Ended June 30,$ Change% Change
202120202021-20202021-2020
Service charges on deposit accounts$1,435 $1,401 $34 2 %
Interchange income2,019 1,607 412 26 %
Other service charges, commissions and fees330 305 25 8 %
Swap fees68 432 (364)(84)%
Trust and investment management income3,932 3,336 596 18 %
Brokerage income1,721 1,318 403 31 %
Mortgage banking activities3,351 1,941 1,410 73 %
Gain on sale of portfolio loans— 2,803 (2,803)(100)%
Income from life insurance1,121 1,072 49 5 %
Other income75 83 (8)(10)%
Investment securities gains (losses)156 (31)187 603 %
Total noninterest income$14,208 $14,267 $(59)— %

The following factors contributed to the more significant changes in noninterest income between the six months ended June 30, 20202021 and 2019:2020:
•Service charges on deposit accounts decreased due primarily to waivers of ATM fees in response to the COVID-19 pandemic and reductions in overdraft charges from lower deposit account usage during the six months ended June 30, 2020 due to the pandemic.
•InInterchange income grew from 2020 to 2021 due to increased spending upon the six months ended June 30, 2020,reopening of the Company recognizedeconomy and expanded usage of debit cards by consumers.
• income of $432 thousand for swap fees. This includes referralSwap fees under a program in which it refers qualified commercial borrowersdeclined due to a third party, which enters into anthe interest rate swap agreement withenvironment as market rates are expected to remain low for an extended period of time
•Strong market conditions and the borrower. The program began in the third quarteraddition of 2019. The rate swap provides the borrower with the economic equivalent of a fixed-rate loan while allowing the Companynew clients continue to receive a variable rate of interest. During the three months ended June 30, 2020, the Company also earned fees on an interest rate swap arrangement entered into directly with one commercial borrower.drive trust and investment management and brokerage income.
•Mortgage banking income increased by $821 thousand. Refinance$1.4 million due to strong refinance activity was strong in the three months ended June 30, 2020 due tofirst quarter of 2021 resulting from the decrease in interest rates, and the gain on sale margin increased. Loans sold in the six months ended June 30, 2020 2021 totaled $71.8$109.9 million compared with $39.8$71.8 million in the six months ended June 30, 2019. In addition, there was an increase of $863 thousand in the fair value of interest rate lock commitments in the six months ended June 30, 2020 as compared to $0 for the six months ended June 30, 2019. The Company began recognizing this income in the fourth quarter of 2019. . During the six months ended June 30, 2020,2021, the Company recorded a MSR valuation reserve reversal of $651 thousand driven by market interest rate increases compared to a MSR impairment charges totalingcharge of $820 thousandin the six months ended thousand June 30, 2020 driven by significant market interest rate reductions caused by the COVID-19 pandemic, partially offsetting the mortgage gains.pandemic.
•Gain on sale of portfolio loans declined from 2020 to 2021. During the six months ended June 30, 2020, the Bank recorded $2.8 million in gains due to the sale of $10.9 million$10.9 million of classified loans for net gains of $2.5 million, and the sale of an $11.0 million portfolio of recreational vehicle loans for a gain of $314 thousand.
•During the six months ended June 30, 2020,2021, the Company recorded a net investment securities lossgains of $31$156 thousand due to the decreasesale of 14 commercial mortgage-backed securities and a market value increase in the value of an equity security. The Company recognized net investment securities gainslosses of $2.4 million$31 thousand in 2019 as opportunities became availablethe six months ended June 30, 2020 due to reposition partthe decrease in the value of the investment portfolio under asset/liability management strategies oran equity security.
•Other line items within noninterest income showed fluctuations between 2021 and 2020 attributable to improve responsiveness of the portfolio to interest rate conditions, while also considering funding requirements of anticipated lending activity.normal business operations.
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Noninterest Expenses
The following table compares noninterest expenses for the six months ended June 30, 20202021 and 2019:
Six Months Ended June 30,$ Change% Change
202020192020-20192020-2019
Salaries and employee benefits$21,657  $17,599  $4,058  23.1 %
Occupancy2,249  2,067  182  8.8 %
Furniture and equipment2,366  2,163  203  9.4 %
Data processing1,662  1,828  (166) (9.1)%
Automated teller machine and interchange fees500  474  26  5.5 %
Advertising and bank promotions956  1,069  (113) (10.6)%
FDIC insurance261  406  (145) (35.7)%
Other professional services1,737  1,264  473  37.4 %
Directors' compensation465  497  (32) (6.4)%
Taxes other than income451  620  (169) (27.3)%
Intangible asset amortization867  610  257  42.1 %
Merger related and branch consolidation expenses—  7,505  (7,505) (100.0)%
Insurance claim receivable (recovery) write off(486) 615  (1,101) (179.0)%
Other operating expenses4,050  2,736  1,314  48.0 %
Total noninterest expenses$36,735  $39,453  $(2,718) (6.9)%
2020:
Six Months Ended June 30,$ Change% Change
202120202021-20202021-2020
Salaries and employee benefits$20,409 $21,657 $(1,248)(5.8)%
Occupancy2,338 2,249 89 4.0 %
Furniture and equipment2,580 2,366 214 9.0 %
Data processing2,051 1,662 389 23.4 %
Automated teller machine and interchange fees568 500 68 13.6 %
Advertising and bank promotions699 956 (257)(26.9)%
FDIC insurance352 261 91 34.9 %
Professional services1,300 1,737 (437)(25.2)%
Directors' compensation469 465 4 0.9 %
Taxes other than income913 451 462 102.4 %
Intangible asset amortization658 867 (209)(24.1)%
Insurance claim receivable recovery— (486)486 (100.0)%
Other operating expenses2,479 4,050 (1,571)(38.8)%
Total noninterest expenses$34,816 $36,735 $(1,919)(5.2)%

The following factors contributed to the more significant changes in noninterest expenses between the six months ended June 30, 20202021 and 2019:
•Expanded operations with the addition of employees and branches from the Hamilton acquisition in May 2019.2020:
•The increasedecrease in salaries and employee benefits principally reflected employees added in the Hamilton acquisition and prior year additionswas primarily due to the Bank’s commercial lending team. In addition, the increase included the impact of our overall expansion efforts, annual merit increases, and incremental expense for additional share-based compensation awards granted in 2020, netreduced staffing as a result of the benefit of forfeitures.prior year's restructurings, as well as lower health insurance costs.
•Occupancy, furnitureData processing expenses increased $389 thousand due primarily due to increased trust, tax and equipment costs reflected the Hamilton branches acquired, partially offset by the impact of the consolidation of five branches in the first quarter of 2020.loan activity.
•Advertising and bank promotions decreased by $113$257 thousand due primarily to due primarily to targeted campaignsthe timing of an annual Educational Improvement Tax Credit ("EITC") Program contribution in the prior year which did not recuryear. It is anticipated that EITC contributions will be made later in 2020 as well as reduced marketing efforts in 2020 due to the COVID-19 pandemic.2021.
•The decreaseincrease in FDIC insurance expense reflects the increase in FDIC assessments during 2021 compared to 2020, which is impacted by average assets, the FDIC scorecard rate and credits received in the first quarter of 2020 that offset the Bank's fourth quarter 2019 FDIC assessment. The FDIC's assessment regulations provide that, for banks with consolidated total assets under $10 billsix months ended ion, after the reserve ratio reaches 1.38% (and provided that it remains at least 1.38%), the FDIC will automatically apply credits to reduce regular deposit insurance assessments up to the full amount of their assessments or the full amount of their credits, whichever is less. The reserve ratio reached 1.40% on June 30, 2019. Therefore, credits were first applied during the third quarter of 2019. The final credit was applied as of the March 31, 2020 payment as the reserve ratio was sufficiently maintained..
•Other professionalProfessional services increased by $473decreased $437 thousand due to legal costs incurred in the sixthree months ended June 30, 2020 in connection with the SEPTA litigation.
•Taxes other than income decreasedincreased by $169$462 thousand as increased contributionsfrom the prior year due to the Pennsylvania Educational Improvement Tax Credit program resulted in a reductiontiming of the aforementioned EITC contribution and resulting tax credit in the Bank’s Pennsylvania bank shares tax expense during the six months ended June 30, 2020.prior year.
•Intangible asset amortization increaseddecreased principally due to the elimination of a customer intangible associated with the discontinuance of Wheatland Advisors, Inc. on July 31, 2020 and full amortization of core deposit intangibles recordeda covenant not to compete in the Hamilton acquisition.2020.
•The Company incurred merger related expenses in the six months ended June 30, 2019 for data processing contract termination costs, employee contract termination costs and legal and consulting fees for the Hamilton acquisition. The Company also incurred system conversion expenses for the Mercersburg acquisition in the first quarter of 2019.
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•In the six months ended June 30, 2019, the Company incurred a $615 thousand expense to write off an insurance claim receivable from a 2018 cyber security incident. During the six months ended June 30, 2020, $486 thousand of this expense was recovered through refunds were received from thean insurance company.company related to a 2018 cyber security incident.
•Other operating expenses increased by $1.3declined $1.57 million due primarily to a reduction oin the reserve for unfunded commitments of $166 thousand and charges in the six months ended June 30, 2020 that included fa reduction of $544 thousandthousand in the fair value of a property held for sale, an increase of $172 thousand in the reserve for unfunded commitments due to increased qualitative factors and an impairment charge of $152 thousand on a customer list intangible asset due to the discontinuance of Wheatland, effective July 31, 2020, during the six months ended June 30, 2020.Wheatland.
•Other line items within noninterest expenses showed fluctuations between 20202021 and 20192020 attributable to normal business operations and the impactoperations.



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Income Tax Expense
Income tax expense totaled $4.5 million, an effective tax rate of 19.3%, for the six months ended June 30, 2021, compared with $2.3 million, an effective tax rate of 17.0%, for the six months ended June 30, 2020, compared with $342 thousand, an effective tax rate of 5.6%, for the six months ended June 30, 2019.2020. The Company’s effective tax rate is less than the 21% federal statutory rate, principally due to tax-free income, which includes interest income on tax-free loans and securities and income from life insurance policies, federal income tax credits, and the impact of non-tax deductible expenses, including merger related expenses. The Company recorded a tax benefit of $185 thousand during the six months ended June 30, 2019, related to a favorable tax law clarification concerning the treatment of life insurance assets of an acquired entity. In the prior year period, the Company also recorded a tax benefit of $334 thousand related to an increase in its deferred state income tax asset for the effect of the state tax rate change resulting from the Hamilton acquisition. These tax benefits had the effect of lowering the effective tax rate for the six months ended June 30, 2019 by approximately 8.4%. The remaining difference in the effective tax rate from the six months ended June 30, 20192020 to the six months ended June 30, 20202021 was due primarily to an increase in estimated earnings before income taxes.
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FINANCIAL CONDITION
Management devotes substantial time to overseeing the investment of funds in loans and investment securities and the formulation of policies directed toward the profitability and management of the risks associated with these investments.
Investment Securities
The Company utilizes investment securities to manage interest rate risk, to enhance income through interest and dividend income, to provide liquidity and to provide collateral for certain deposits and borrowings. At June 30, 2020,2021, investment securities totaled $483.9$450.4 million, a decrease of $6.9$16.1 million, from the $490.9$466.5 million balance at December 31, 2019.2020. During the six months ended June 30, 2021, the Company sold $75.6 million of commercial mortgage-backed securities for a net gain of $128 thousand.
During the six months ended June 30, 2021 and 2020, the Company recorded a gain of $28 thousand and a loss of $31 thousand, respectively, due to market value adjustments on an equity security. The balance of investment securities included net unrealized lossesgains of $4.510.0 million at June 30, 2021 as compared to net unrealized gains of $5.5 million at December 31, 2020. This increase reflects the impact of improved market rates on the Company's investment security portfolio.
The following table summarizes the credit ratings and collateral associated with the Company's investment portfolio, excluding equity securities, at June 30, 2020 as c2021:

SectorPortfolio MixAmortized BookFair ValueCredit EnhancementAAAAAABBBNRCollateral Type
Unsecured ABS1 %$4,044 $4,086 53 %— %— %— %— %100 %Unsecured Consumer Debt
Student Loan ABS2 %9,945 9,882 26 %— %— %— %— %100 %Seasoned Student Loans
Federal Family Education Loan ABS41 %176,220 176,388 6 %71 %16 %13 %— %— %
Federal Family Education Loan (1)
PACE Loan ABS1 %4,525 4,644 6 %100 %— %— %— %— %PACE Loans
Non-Agency RMBS3 %14,013 14,642 47 %100 %— %— %— %— %
Reverse Mortgages (2)
Municipal - General Obligation19 %83,541 89,179 2 %90 %8 %— %— %
Municipal - Revenue15 %66,344 70,237 — %70 %15 %— %15 %
SBA ReRemic2 %9,783 9,772 — %100 %— %— %— %
SBA Guarantee (3)
Agency MBS16 %71,597 71,173 — %100 %— %— %— %
Residential Mortgages (3)
Bank CDs— %249 249 — %— %— %— %100 %FDIC Insured CD
100 %$440,261 $450,252 33 %52 %9 %— %6 %
(1) Minimum of 97% guaranteed by U.S. government
(2) Reverse mortgages fund over time, credit enhancement is estimated based on prior experience
(3) 100% guaranteed by U.S. government agencies
Note : Ratings in table are the lowest of the six rating agencies (Standard & Poor's, Moody's, Morningstar, DBRS, KBRA and Fitch). Standard & Poor's rates U.S. government obligations at AA+
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ompared to net unrealized lossesTable of $607 thousand at December 31, 2019. This decline was driven by the significant reduction in market rates in the six months ended June 30, 2020, resulting from market uncertainty related to the COVID-19 pandemic.Contents
In the six months ended June 30, 2020, the Company realized
net losses totaling $31 thousand due to a market value adjustment to an equity security, compared to net investment security gains of $2.4 million for the six months ended June 30, 2019.
Loan Portfolio
The Company offers a variety of products to meet the credit needs of its borrowers, principally commercial real estate loans, commercial and industrial loans, 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.
The risks associated with lending activities differ among 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 a borrower’s ability to repay loans, and also impact the associated collateral. See Note 4,3, Loans and Allowance for Loan Losses, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information," for a description of the Company’s loan classes and differing levels of associated credit risk.
The following table presents the loan portfolio, excluding residential LHFS, by segment and class at June 30, 20202021 and December 31, 2019:2020:
June 30,
2021		December 31,
2020
Commercial real estate:
Owner occupied$191,595 $174,908 
Non-owner occupied471,541 409,567 
Multi-family112,420 113,635 
Non-owner occupied residential99,631 114,505 
Acquisition and development:
1-4 family residential construction9,686 9,486 
Commercial and land development55,330 51,826 
Commercial and industrial (1)
599,123 647,368 
Municipal14,452 20,523 
Residential mortgage:
First lien211,918 244,321 
Home equity - term8,321 10,169 
Home equity - lines of credit149,601 157,021 
Installment and other loans21,765 26,361 
$1,945,383 $1,979,690 
June 30,
2020		December 31,
2019
Commercial real estate:
Owner occupied$164,442  $170,884  
Non-owner occupied390,980  361,050  
Multi-family111,016  106,893  
Non-owner occupied residential116,531  120,038  
Acquisition and development:
1-4 family residential construction7,966  15,865  
Commercial and land development50,220  41,538  
Commercial and industrial (1)
665,312  214,554  
Municipal34,276  47,057  
Residential mortgage:
First lien295,736  336,372  
Home equity - term11,944  14,030  
Home equity - lines of credit160,842  165,314  
Installment and other loans32,052  50,735  
$2,041,317  $1,644,330  
(1) This balance includes $447.2$355.6 million and $0$403.3 million of SBA PPP loans at June 30, 20202021 and December 31, 2019,2020, respectively.

Total loans grewdeclined by $397.0$34.3 million from December 31, 20192020 to June 30, 2020.2021. This increasedecrease is due primarily to the origination of SBA PPP loansloan forgiveness of $277.8 million in the six months ended June 30, 2021 and payoffs in the residential mortgage loan portfolio, partially offset by commercial loan production during the six months ended June 30, 2020. These loans, net of deferred fees, totaled $447.2 million at June 30, 2020. This increase was partially offset by a reduction in residential mortgage loans due to significant refinancing activity. In addition, the Company sold $10.9 million in classified loans and $11.0 million of acquired recreational vehicle loans during the six months ended June 30, 2020.
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2021.
Asset Quality
Risk Elements
The Company’s loan portfolio is subject to varying degrees of credit risk. Credit risk is managed 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.
The loan portfolio consists principally of loans to borrowers in south central Pennsylvania and the greater Baltimore, Maryland region. As the majority of loans are concentrated in these geographic regions, a substantial portion of the borrowers' ability to honor their obligations may be affected by the level of economic activity in the market areas.
Nonperforming assets include nonaccrual loans and foreclosed real estate. In addition, restructured loans still accruing and loans past due 90 days or more and still accruing are also deemed to be risk assets. For all loan classes, generally the accrual of interest income generally ceases when principal or interest is past due 90 days or more and collateral is inadequate to cover principal and interest or immediately if, in the opinion of management, full collection is unlikely. Interest will continue to accrue on loans past due 90 days or more if the collateral is adequate to cover principal and interest, and the loan is in the process of collection. Interest accrued, but not collected, as of the date of placement on nonaccrual status, is generally reversed and charged against interest income, unless fully collateralized. Subsequent payments received are either applied to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectability of principal.
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Loans are returned to accrual status, for all loan classes, when all the principal and interest amounts contractually due are brought current, the loans have performed in accordance with the contractual terms of the note for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is reasonably assured. Past due status is based on contract terms of the loan.
Loans, the terms of which are modified, are classified as TDRs if a concession was granted for legal or economic reasons related to a borrower’s financial difficulties. Concessions granted under a TDR typically involve a temporary deferral of scheduled loan payments, an extension of a loan’s stated maturity date, temporary reduction in interest rates, or below market rates. If a modification occurs while the loan is on accruing status, it will continue to accrue interest under the modified terms. Nonaccrual TDRs are restored to accrual status if scheduled principal and interest payments, under the modified terms, are 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 if they have been restructured during the most recent calendar year, or if they are not performing according to their modified terms.
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The following table presents the Company’s risk elements, including the aggregate balances of nonaccrual loans, restructured loans still accruing, loans past due 90 days or more, and OREO as of June 30, 20202021 and December 31, 2019.2020. Relevant asset quality ratios are also presented.
June 30,
2021		December 31,
2020
Nonaccrual loans$9,941 $10,310 
OREO— — 
Total nonperforming assets9,941 10,310 
Restructured loans still accruing852 934 
Loans past due 90 days or more and still accruing212 554 
Total nonperforming and other risk assets (total risk assets)$11,005 $11,798 
Loans 30-89 days past due$1,575 $10,291 
Asset quality ratios:
Total nonaccrual loans to total loans0.51 %0.52 %
Total nonperforming assets to total assets0.34 %0.37 %
Total nonperforming assets to total loans and OREO0.51 %0.52 %
Total risk assets to total loans and OREO0.57 %0.60 %
Total risk assets to total assets0.38 %0.43 %
ALL to total loans1.00 %1.02 %
ALL to nonperforming loans194.96 %195.45 %
ALL to nonperforming loans and restructured loans still accruing179.57 %179.22 %
June 30,
2020		December 31,
2019
Nonaccrual loans$7,404  $10,657  
OREO17  197  
Total nonperforming assets7,421  10,854  
Restructured loans still accruing960  979  
Loans past due 90 days or more and still accruing909  2,232  
Total nonperforming and other risk assets$9,290  $14,065  
Loans 30-89 days past due$6,901  $17,527  
Asset quality ratios:
Total nonperforming loans to total loans0.36 %0.65 %
Total nonperforming assets to total assets0.27 %0.46 %
Total nonperforming assets to total loans and OREO0.36 %0.66 %
Total risk assets to total loans and OREO0.46 %0.86 %
Total risk assets to total assets0.34 %0.59 %
ALL to total loans0.86 %0.89 %
ALL to nonperforming loans236.59 %137.52 %
ALL to nonperforming loans and restructured loans still accruing209.43 %125.95 %

Total nonperforming and other risk assets decreased by $4.8 million,$793 thousand, or 33.9%6.7%, from December 31, 20192020 to June 30, 2020. The principal driver for this2021. There was a net reduction of $369 thousand in non-accrual loans due to payment activity and a decrease isof a measurement period adjustment for the transfer of a $2.6 million loan$342 thousand in loans past 90 days and still accruing from the Hamilton acquisition into the PCI pool during the six months endedDecember 31, 2020 to June 30, 2020.2021.
The following table presents detail of impaired loans at June 30, 2020 and December 31, 2019:
June 30, 2020December 31, 2019
Nonaccrual
Loans		Restructured
Loans Still
Accruing		TotalNonaccrual
Loans		Restructured
Loans Still
Accruing		Total
Commercial real estate:
Owner occupied$3,343  $28  $3,371  $5,842  $30  $5,872  
Multi-family80  —  80  345  —  345  
Non-owner occupied residential283  —  283  235  —  235  
Acquisition and development:
Commercial and land development837  —  837  —  —  —  
Commercial and industrial708  —  708  1,763  —  1,763  
Residential mortgage:
First lien1,545  916  2,461  1,659  931  2,590  
Home equity - term11  —  11  13  —  13  
Home equity - lines of credit580  16  596  715  18  733  
Installment and other loans17  —  17  85  —  85  
$7,404  $960  $8,364  $10,657  $979  $11,636  
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The following table presents detail of impaired loans at June 30, 2021 and December 31, 2020:
June 30, 2021December 31, 2020
Nonaccrual
Loans		Restructured
Loans Still
Accruing		TotalNonaccrual
Loans		Restructured
Loans Still
Accruing		Total
Commercial real estate:
Owner occupied$4,299 $27 $4,326 $3,232 $28 $3,260 
Multi-family— — — — — — 
Non-owner occupied residential253 — 253 268 — 268 
Acquisition and development:
Commercial and land development— — — 814 — 814 
Commercial and industrial3,174 — 3,174 3,639 — 3,639 
Residential mortgage:
First lien1,738 823 2,561 1,730 898 2,628 
Home equity - term17 — 17 10 — 10 
Home equity - lines of credit446 2 448 600 8 608 
Installment and other loans14 — 14 17 — 17 
$9,941 $852 $10,793 $10,310 $934 $11,244 
The following table presents our exposure to borrowers with impaired loans, partial charge-offs taken to date and specific reserves established on the borrowing relationships at June 30, 20202021 and December 31, 2019.2020. Of the relationships deemed to be impaired at June 30, 2020, one2021, two had a recorded balance in excess of $1.0 million, and 66, or 42.8%,63, which represents 34.4% of total impaired loans, had recorded balances of less than $250 thousand.
# of
Relationships		Recorded
Investment		Partial
Charge-offs
to Date		Specific
Reserves
June 30, 2020
Relationships greater than $1,000,0001  $2,765  $—  $—  
Relationships greater than $500,000 but less than $1,000,0001  706  17  —  
Relationships greater than $250,000 but less than $500,0004  1,314  242  —  
Relationships less than $250,00066  3,579  496  35  
72  $8,364  $755  $35  
December 31, 2019
Relationships greater than $1,000,0002  $5,218  $—  $—  
Relationships greater than $500,000 but less than $1,000,0002  1,516  17  —  
Relationships greater than $250,000 but less than $500,0003  980  —  —  
Relationships less than $250,00068  3,922  781  36  
75  $11,636  $798  $36  
# of
Relationships		Recorded
Investment		Partial
Charge-offs
to Date		Specific
Reserves
June 30, 2021
Relationships greater than $1,000,0002 $5,409 $— $— 
Relationships greater than $500,000 but less than $1,000,0001 631 17 — 
Relationships greater than $250,000 but less than $500,0003 1,036 183 — 
Relationships less than $250,00063 3,717 545 31 
69 $10,793 $745 $31 
December 31, 2020
Relationships greater than $1,000,0002 $5,639 $— $— 
Relationships greater than $500,000 but less than $1,000,0002 1,211 17 — 
Relationships greater than $250,000 but less than $500,0002 637 — — 
Relationships less than $250,00065 3,757 545 33 
71 $11,244 $562 $33 

The Company takes partial charge-offs on collateral-dependent loans when carrying value exceeds estimated fair value, as determined by the most recent appraisal adjusted for current (within the quarter) conditions, less costs to dispose. Impairment reserves remain in place if updated appraisals are pending, and represent management’s estimate of potential loss.
Internal loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $500 thousand,$1.0 million, which includes confirmation of risk rating by an independent credit officer. Credit Administration also reviews loans in excess of $1.0 million. In addition, all relationships greater than $250$500 thousand rated Substandard, Doubtful or Loss are reviewed and corresponding risk ratings are reaffirmed by the Bank's Problem Loan Committee, with subsequent reporting to the Management ERM Committee.
In its individual 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 June 30, 2020.2021. However, over time, additional information may result in increased reserve allocations or, alternatively, it may be deemed that the reserve allocations exceed those that are needed.
In an effort to assist clients whichthat were negatively impacted by the COVID-19 pandemic, the Bank offered various mitigation options, including a loan payment deferral program. Under this program, most commercial deferrals were for a 90-day90-
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day period, while most consumer deferrals were for a 180-day period. As of June 30, 2020,2021, the Company processedhad loan deferrals under this program for commercial and consumer clients with a total loan balance of $218.1$3.5 million and $21.2 million,$402 thousand, respectively. Deferred interest associated with these loans totaled $1.5 million for the three months ended June 30, 2020. In accordance with the revised Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus issued on April 7, 2020, these deferrals are exempt from TDR status as they meet the specified requirements. Below is a summary of select loan concentrations and the deferrals within those categories at June 30, 2020.

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As a Percentage of
CategoryOutstanding BalanceTotal LoansRisk-based CapitalCOVID-19 Deferrals as a Percentage of Category
Office$163,408  8.0 %66.8 %12.0 %
Multifamily residential111,279  5.5  45.5  32.7  
Strip Center / Retail51,328  2.5  21.0  23.1  
Commercial Construction50,220  2.5  20.5  4.2  
Hotel / Motels53,881  2.6  22.0  68.3  
Warehouses46,774  2.3  19.1  3.6  
Restaurants & Bars48,293  2.4  19.7  37.8  
Storage Units25,151  1.2  10.3  40.6  
Residential Construction7,966  0.4  3.3  13.0  

The Company’s OREO balance of $17 thousandfollowing table summarizes outstanding COVID-19 related modifications, including deferrals and forbearances at June 30, 2020 consisted of one residential property2021 and the balance at December 31, 2019 consisted of two commercial and one residential properties. All OREO properties are carried at the lower of cost or fair value, less costs to dispose.2020:
Loan TypeAmount of LoansPercent of Non-PPP Loans
June 30, 2021December 31, 2020June 30, 2021December 31, 2020
Commercial$3,525 $15,702 0.3 %1.4 %
Consumer Portfolio Loans402 2,504 0.1 0.6 
Total Loans$3,927 $18,206 0.3 %1.2 %

Credit Risk Management
Allowance for Loan Losses
The Company maintains the ALL at a level deemed adequate by management for probable incurred credit losses. The ALL is established and maintained through a provision for loan losses charged to earnings. Quarterly, management assesses the adequacy of the ALL using a defined methodology which considers specific credit evaluation of impaired loans, past loan 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 ALL 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 4,3, Loans and Allowance for Loan Losses, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information."
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The following table summarizes the Company’s internal risk ratings at June 30, 20202021 and December 31, 2019:
PassSpecial
Mention		Non-Impaired
Substandard		Impaired -
Substandard		DoubtfulPCI LoansTotal
June 30, 2020
Commercial real estate:
Owner occupied$144,332  $7,223  $4,666  $3,371  $—  $4,850  $164,442  
Non-owner occupied345,176  45,468  —  —  —  336  390,980  
Multi-family95,478  14,796  662  80  —  —  111,016  
Non-owner occupied residential108,985  4,404  1,357  283  —  1,502  116,531  
Acquisition and development:
1-4 family residential construction7,844  122  —  —  —  —  7,966  
Commercial and land development38,947  9,895  541  837  —  —  50,220  
Commercial and industrial636,604  15,372  9,222  708  —  3,406  665,312  
Municipal30,025  4,251  —  —  —  —  34,276  
Residential mortgage:
First lien287,633  —  —  2,461  —  5,642  295,736  
Home equity - term11,841  —  72  11  —  20  11,944  
Home equity - lines of credit160,036  175  35  596  —  —  160,842  
Installment and other loans31,950  —  —  17  —  85  32,052  
$1,898,851  $101,706  $16,555  $8,364  $—  $15,841  $2,041,317  
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  
2020:
PassSpecial
Mention		Non-Impaired
Substandard		Impaired -
Substandard		DoubtfulPCI LoansTotal
June 30, 2021
Commercial real estate:
Owner occupied$166,636 $10,690 $7,554 $4,326 $— $2,389 $191,595 
Non-owner occupied422,074 48,779 367 — — 321 471,541 
Multi-family91,959 19,836 625 — — — 112,420 
Non-owner occupied residential94,035 2,690 1,435 253 — 1,218 99,631 
Acquisition and development:
1-4 family residential construction9,686 — — — — — 9,686 
Commercial and land development54,179 643 508 — — — 55,330 
Commercial and industrial578,129 10,485 5,022 3,174 — 2,313 599,123 
Municipal14,452 — — — — — 14,452 
Residential mortgage:
First lien204,353 — — 2,561 — 5,004 211,918 
Home equity - term8,288 — — 17 — 16 8,321 
Home equity - lines of credit149,078 22 53 448 — — 149,601 
Installment and other loans21,713 — — 14 — 38 21,765 
$1,814,582 $93,145 $15,564 $10,793 $— $11,299 $1,945,383 
December 31, 2020
Commercial real estate:
Owner occupied$148,846 $12,491 $7,855 $3,260 $— $2,456 $174,908 
Non-owner occupied351,860 57,378 — — — 329 409,567 
Multi-family92,769 20,224 642 — — — 113,635 
Non-owner occupied residential107,557 3,948 1,422 268 — 1,310 114,505 
Acquisition and development:
1-4 family residential construction9,101 385 — — — — 9,486 
Commercial and land development49,832 655 525 814 — — 51,826 
Commercial and industrial617,213 17,561 6,118 3,639 — 2,837 647,368 
Municipal20,523 — — — — — 20,523 
Residential mortgage:
First lien236,381 — — 2,628 — 5,312 244,321 
Home equity - term10,076 — 64 10 — 19 10,169 
Home equity - lines of credit156,264 95 54 608 — — 157,021 
Installment and other loans26,283 — — 17 — 61 26,361 
$1,826,705 $112,737 $16,680 $11,244 $— $12,324 $1,979,690 

Potential problem 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 loans in the future. Generally, management feels that 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
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represent potential problem loans. Additionally, the Special Mention classification is intended to be a temporary classification reflective of loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Company’s position at some future date. Special Mention loans represent an elevated risk, but their weakness does not yet justify a more severe, or classified, rating. These loans require inquiry by lenders on the cause of the potential weakness and, once analyzed, the loan classification may be downgraded to Substandard or, alternatively, could be upgraded to Pass. Special Mention loans increaseddecreased by $63.8$19.6 million fromfrom December 31, 20192020 to June 30, 20202021 due to commercial loan downgrades, primarilycontinued improvements in the hospitality industry,economic conditions as a result of the significant economic impact of the COVID-19 pandemic.restrictions are eased and government stimulus drives increases in spending.
The following table summarizes activity in the ALL for the three and six months ended June 30, 20202021 and 2019:
CommercialConsumer
Commercial
Real Estate		Acquisition
and
Development		Commercial
and
Industrial		MunicipalTotalResidential
Mortgage		Installment
and Other		TotalUnallocatedTotal
Three Months Ended
June 30, 2020
Balance, beginning of period$8,420  $1,033  $2,647  $99  $12,199  $3,139  $294  $3,433  $171  $15,803  
Provision for loan losses877  31  590  (24) 1,474  323  102  425  1  1,900  
Charge-offs—  —  (421) —  (421) (18) (14) (32) —  (453) 
Recoveries50  5  100  —  155  108  4  112  —  267  
Balance, end of period$9,347  $1,069  $2,916  $75  $13,407  $3,552  $386  $3,938  $172  $17,517  
June 30, 2019
Balance, beginning of period$7,025  $969  $1,814  $98  $9,906  $3,765  $217  $3,982  $395  $14,283  
Provision for loan losses(221) 39  325  (4) 139  (32) 40  8  53  200  
Charge-offs—  —  (47) —  (47) (25) (51) (76) —  (123) 
Recoveries43  —  28  —  71  26  3  29  —  100  
Balance, end of period$6,847  $1,008  $2,120  $94  $10,069  $3,734  $209  $3,943  $448  $14,460  
Six Months Ended
June 30, 2020
Balance, beginning of period$7,634  $959  $2,356  $100  $11,049  $3,147  $319  $3,466  $140  $14,655  
Provision for loan losses1,260  102  912  (25) 2,249  400  144  544  32  2,825  
Charge-offs—  —  (496) —  (496) (109) (86) (195) —  (691) 
Recoveries453  8  144  —  605  114  9  123  —  728  
Balance, end of period$9,347  $1,069  $2,916  $75  $13,407  $3,552  $386  $3,938  $172  $17,517  
June 30, 2019
Balance, beginning of period$6,876  $817  $1,656  $98  $9,447  $3,753  $244  $3,997  $570  $14,014  
Provision for loan losses(118) 189  484  (4) 551  157  14  171  (122) 600  
Charge-offs(25) —  (90) —  (115) (271) (71) (342) —  (457) 
Recoveries114  2  70  —  186  95  22  117  —  303  
Balance, end of period$6,847  $1,008  $2,120  $94  $10,069  $3,734  $209  $3,943  $448  $14,460  
2020:
CommercialConsumer
Commercial
Real Estate		Acquisition
and
Development		Commercial
and
Industrial		MunicipalTotalResidential
Mortgage		Installment
and Other		TotalUnallocatedTotal
Three Months Ended
June 30, 2021
Balance, beginning of period$10,671 $1,046 $3,714 $38 $15,469 $3,058 $208 $3,266 $232 $18,967 
Provision for loan losses806 197 (223)(9)771 (142)19 (123)(23)625 
Charge-offs(181)— (112)— (293)(71)(9)(80)— (373)
Recoveries19 — 116 — 135 18 9 27 — 162 
Balance, end of period$11,315 $1,243 $3,495 $29 $16,082 $2,863 $227 $3,090 $209 $19,381 
June 30, 2020
Balance, beginning of period$8,420 $1,033 $2,647 $99 $12,199 $3,139 $294 $3,433 $171 $15,803 
Provision for loan losses877 31 590 (24)1,474 323 102 425 1 1,900 
Charge-offs— — (421)— (421)(18)(14)(32)— (453)
Recoveries50 5 100 — 155 108 4 112 — 267 
Balance, end of period$9,347 $1,069 $2,916 $75 $13,407 $3,552 $386 $3,938 $172 $17,517 
Six Months Ended
June 30, 2021
Balance, beginning of period$11,151 $1,114 $3,942 $40 $16,247 $3,362 $324 $3,686 $218 $20,151 
Provision for loan losses312 128 (277)(11)152 (431)(87)(518)(9)(375)
Charge-offs(181)— (566)— (747)(92)(29)(121)— (868)
Recoveries33 1 396 — 430 24 19 43 — 473 
Balance, end of period$11,315 $1,243 $3,495 $29 $16,082 $2,863 $227 $3,090 $209 $19,381 
June 30, 2020
Balance, beginning of period$7,634 $959 $2,356 $100 $11,049 $3,147 $319 $3,466 $140 $14,655 
Provision for loan losses1,260 102 912 (25)2,249 400 144 544 32 2,825 
Charge-offs— — (496)— (496)(109)(86)(195)— (691)
Recoveries453 8 144 — 605 114 9 123 — 728 
Balance, end of period$9,347 $1,069 $2,916 $75 $13,407 $3,552 $386 $3,938 $172 $17,517 

The ALL at June 30, 2020, increased2021, decreased by $2.9 million$770 thousand from December 31, 2019,2020, reflecting the $2.8 milliona provision for loan losses decrease of $375 thousand during the six months ended June 30, 2020.2021. The provisionallowance for loan losses increaseddecreased in the six months ended June 30, 20202021 as a result of the reduction of qualitative factor adjustments for the impact of the COVID-19 pandemic on the Bank’s loan portfolio as the COVID-19 related deferrals returned to normal paying status and the loans performed for an extended period of time, partially offset by the impact of increased commercial loan downgrades. Netproduction. The increase of $1.9 million in the ALL from June 30, 2020 to June 30, 2021 reflects the COVID-19 related exposure in the loan portfolio and non-SBA PPP commercial loan production. Net charge-offs totaled $186$211 thousand and $37$395 thousand for the three and six months ended June 30, 2020, respectively,2021, compared with net recoveries of $37 thousand for the six months ended June 30, 2020, and net charge-offs of $23$186 thousand and $154 thousand, respectively, for the same periods in 2019.three months ended June 30, 2020. Classified loans totaled $24.9$28.7 million at June 30, 2020,2021, or 1.2%1.5% of total loans outstanding, and decreasedreflecting a decrease from $27.1$33.1 million, or 1.7% of loans outstanding, at December 31, 2019, or 1.6% of loans outstanding.2020. The asset quality ratios previously noted are indicative of the continued benefit the Company has received from favorable historical charge-off statistics and generally stable economic and market conditions for the last few years, even while the loan portfolio has been growing. Recent loan growth trends, as well as concerns regarding the COVID-19 pandemic, contributed to management's determination that an increased provision for loan losses was required to maintain an adequate ALL, with an
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ALL to total loans ratio of 0.86%1.00% at June 30, 20202021 as compared to 0.89%1.02% at December 31, 2019.2020. Excluding SBA loans, which are 100% guaranteed, the ALL to total loans was 1.1% 1.2% at June 30, 2020. The ALL plus purchase accounting marks to unguaranteed loans was 1.8%2021 and 1.3% at June 30, 2020 and 2.0% at December 31, 2019.2020
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Despite generally favorable historical charge-off data, the impact of the COVID-19 pandemic on economic conditions may result in the need for additional provisions for loan losses in future quarters.
The following table summarizes the ending loan balances individually or collectively evaluated for impairment based on loan type, as well as the ALL allocation for each, at June 30, 20202021 and December 31, 2019,2020, including PCI loans:
CommercialConsumer
Commercial
Real Estate		Acquisition
and
Development		Commercial
and
Industrial		MunicipalTotalResidential
Mortgage		Installment
and Other		TotalUnallocatedTotal
June 30, 2020
Loans allocated by:
Individually evaluated for impairment$3,734  $837  $708  $—  $5,279  $3,068  $17  $3,085  $—  $8,364  
Collectively evaluated for impairment779,235  57,349  664,604  34,276  1,535,464  465,454  32,035  497,489  —  2,032,953  
$782,969  $58,186  $665,312  $34,276  $1,540,743  $468,522  $32,052  $500,574  $—  $2,041,317  
ALL allocated by:
Individually evaluated for impairment$—  $—  $—  $—  $—  $35  $—  $35  $—  $35  
Collectively evaluated for impairment9,347  1,069  2,916  75  13,407  3,517  386  3,903  172  17,482  
$9,347  $1,069  $2,916  $75  $13,407  $3,552  $386  $3,938  $172  $17,517  
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  $—  $1,644,330  
ALL allocated by:
Individually evaluated for impairment$—  $—  $—  $—  $—  $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  
CommercialConsumer
Commercial
Real Estate		Acquisition
and
Development		Commercial
and
Industrial		MunicipalTotalResidential
Mortgage		Installment
and Other		TotalUnallocatedTotal
June 30, 2021
Loans allocated by:
Individually evaluated for impairment$4,579 $— $3,174 $— $7,753 $3,026 $14 $3,040 $— $10,793 
Collectively evaluated for impairment870,608 65,016 595,949 14,452 1,546,025 366,814 21,751 388,565 — 1,934,590 
$875,187 $65,016 $599,123 $14,452 $1,553,778 $369,840 $21,765 $391,605 $— $1,945,383 
ALL allocated by:
Individually evaluated for impairment$— $— $— $— $— $31 $— $31 $— $31 
Collectively evaluated for impairment11,315 1,243 3,495 29 16,082 2,832 227 3,059 209 19,350 
$11,315 $1,243 $3,495 $29 $16,082 $2,863 $227 $3,090 $209 $19,381 
December 31, 2020
Loans allocated by:
Individually evaluated for impairment$3,528 $814 $3,639 $— $7,981 $3,246 $17 $3,263 $— $11,244 
Collectively evaluated for impairment809,087 60,498 643,729 20,523 1,533,837 408,265 26,344 434,609 — 1,968,446 
$812,615 $61,312 $647,368 $20,523 $1,541,818 $411,511 $26,361 $437,872 $— $1,979,690 
ALL allocated by:
Individually evaluated for impairment$— $— $1 $— $1 $33 $— $33 $— $34 
Collectively evaluated for impairment11,151 1,114 3,941 40 16,246 3,329 324 3,653 218 20,117 
$11,151 $1,114 $3,942 $40 $16,247 $3,362 $324 $3,686 $218 $20,151 

In addition to the specific reserve allocations on impaired loans noted previously, 1512 loans, with aggregate outstanding principal balances of $1.7$1.6 million, have had cumulative partial charge-offs to the ALL totaling $755$745 thousand at June 30, 2020.2021. As updated appraisals are received on collateral-dependent loans, partial charge-offs are taken to the extent the loans’ principal balance exceeds their fair value.
Management believes the allocation of the ALL between the various loan classes adequately reflects the probable incurred credit losses in each portfolio and is based on the methodology outlined in Note 4,3, Loans and Allowance for Loan Losses, to the Consolidated Financial Statements under Part I, Item 1, "Financial Information." Management re-evaluates and makes enhancements to its reserve methodology to better reflect the risks inherent in the different segments of the portfolio, particularly in light of increased charge-offs, with noticeable differences between the different loan classes. Management believes these enhancements to the ALL 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 unallocated portion of the ALL reflects estimated inherent losses within the portfolio that have not been detected, as well as the risk of error in the specific and general reserve allocation, other potential exposure in the loan portfolio, variances in
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management’s assessment of national and local economic conditions and other factors management believes appropriate at the time. The unallocated portion of the ALL totaled $172$209 thousand, or 1.0%1.1% of the ALL balance, at June 30, 20202021 compared with $140$218 thousand, or 1.0%1.1% of the ALL balance at December 31, 2019.2020. The Company monitors the unallocated portion of the ALL
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and, by policy, has determined it should not exceed 6%3% 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.
Management believes the Company’s ALL is adequate based on currently available information. Future adjustments to the ALL and enhancements to the methodology may be necessary due to changes in economic conditions, regulatory guidance, or management’s assumptions as to future delinquencies or loss rates.
Deposits
Deposits totaled $2.3$2.5 billion at June 30, 2020,2021, an increase of $376.2$137.2 million, or 20.1%5.8%, from $1.9$2.4 billion at December 31, 2019.2020.
Noninterest-bearing deposits increased by $186.8$72.4 million, or 74.9%15.8%, from December 31, 20192020 to June 30, 2020.2021. Interest-bearing deposits totaled $1.8$2.0 billion at June 30, 2020,2021, an increase of $189.4$64.9 million, or 11.6%3.4%, from the $1.6$1.9 billion balance at December 31, 2019.2020.
The Company continues to increase both noninterest-bearing and interest-bearing deposit relationships from its enhanced treasury management offerings as it increases its commercial relationships. Deposit growth in the first six months of 20202021 was principally due to clients seeking a safe haven for their deposits during the COVID-19 pandemic and the high usage of checking accounts for SBA PPP loan funds. As the SBA PPP clients utilize their borrowings to fund operations, the associated deposits are expected to decline.
Shareholders' Equity, Capital Adequacy and Regulatory Matters
Capital management in a regulated financial services industry must properly balance return on equity to its shareholders while maintaining sufficient levels of capital and related risk-based regulatory capital ratios to satisfy statutory regulatory requirements. The Company’s capital management strategies have been developed to provide attractive rates of returns to its shareholders, while maintaining a “well capitalized” position of regulatory strength.
Shareholders’ equity totaled $225.6$265.9 million at June 30, 2020,2021, an increase of $2.4$19.7 million, or 1.1%8.0%, from $223.2$246.2 million at December 31, 2019.2020. The increase was primarily attributable to net income totaling $11.4$19.0 million and other comprehensive income of $4.2 million for the six months ended June 30, 2020.2021. This increase was partiallyis offset by an increase in accumulated other comprehensive loss from changes in net unrealized gains and losses in securities available for sale, net of tax, which fell by $3.1 million from December 31, 2019 to June 30, 2020 due to declining interest rates and market uncertainty resulting from the COVID-19 pandemic. Accumulated other comprehensive loss also included $1.6 million in losses on cash flow hedges, net of tax, during the six months ended June 30, 2020. In addition, there were dividends paid on common stock totaling $3.8$4.0 million during the six months ended June 30, 20202021.
The Company routinely evaluates its capital levels in light of its risk profile to assess its capital needs. The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. The consolidated asset limit on small bank holding companies is $3.0 billion and a company with assets under that limit is not subject to the FRB consolidated capital rules, but may file reports that include capital amounts and ratios. The Company has elected to file those reports.
At June 30, 20202021 and December 31, 2019,2020, the Bank was considered well capitalized under applicable banking regulations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Prompt corrective action provisions are not applicable to bank holding companies, including financial holding companies.
Note 10,8, Shareholders' Equity and Regulatory Capital, to the Notes to Unaudited Condensed Consolidated Financial Statements under Part I, Item 1, "Financial Information," includes a table presenting capital amounts and ratios for the Company and the Bank at June 30, 20202021 and December 31, 2019.2020.
In addition to the minimum capital ratio requirement and minimum capital ratio to be well capitalized presented in the referenced table in Note 10,8, the Bank must maintain a capital conservation buffer as more fully described in the Company's Annual Report on Form 10-K for the year ended December 31, 2019,2020, Item 1 - Business, under the topic Basel III Capital Rules. At June 30, 2020,2021, the Bank's capital conservation buffer, based on the most restrictive Total Capital to risk weighted assets capital ratio, was 5.9%6.6%, which is greater than the 2.5% requirement.

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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 customers 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 FHLB of Pittsburgh. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influencedinfluenced by general interest rates, economic conditions and competition.competition. The maximum borrowing capacity from the FHLB is $843.0$802.5 million at June 30, 2020.2021.
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. Unencumbered investment securities totaled $55.7$137.9 million at June 30, 2020.2021. At June 30, 2020,2021, the Company has $211.4had $68.7 million of investment securitiessecurities pledged at the FRB Discount Window, with no associated borrowings outstanding.
The Company applied for and received access to the PPPLF, a liquidity facilityPaycheck Protection Program Liquidity Facility ("PPPLF"), created by the Federal ReserveFRB for the pledging of PPP loans, to further expand its already robust access to off balance sheet liquidity. BorrowingsAt June 30, 2021, the Company had no borrowings outstanding through the PPPLF facility totaled $33.7 million at June 30, 2020, with SBA PPP loans of the same amount pledged as collateral. The remaining availability to the Company under this facility is $424.9 million at June 30, 2020.
Mergers and Acquisitions
See Note 2, Mergers and Acquisitions, to the Consolidated Financial Statements under Part I, Item 1, "Financial Statements" in this Form 10-Q.PPPLF.
Supplemental Reporting of Non-GAAP Measures
As a result of acquisitions, the Company had intangible assets consisting of goodwill and core deposit and other intangible assets totaling $24.9$23.5 million and $27.1$24.2 million at June 30, 20202021 and December 31, 2019,2020, respectively.
Management believes providing certain “non-GAAP” financial information will assist investors in their understanding of the effect of acquisition activity on reported results, particularly to overcome comparability issues related to the influence of intangibles (principally goodwill) created in acquisitions.
Tangible book value per share and net interest margin excluding the impact of purchase accounting,allowance to non-SBA guarantee loans, as used by the Company in this supplemental reporting presentation, are determined by methods other than in accordance with GAAP. While we believe this information is a useful supplement to GAAP based measures presented in this Form 10-Q, readers are cautioned that this non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for financial measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of our results and financial condition as reported under GAAP, nor are such measures necessarily comparable to non-GAAP performance measures that may be presented by other companies. This supplemental presentation should not be construed as an inference that our future results will be unaffected by similar adjustments to be determined in accordance with GAAP.
The following table presents the computation of each non-GAAP based measure shown together with its most directly comparable GAAP based measure.
June 30, 2020December 31, 2019
Tangible Book Value per Common Share
Shareholders' equity$225,638  $223,249  
Less: Goodwill18,724  19,925  
Other intangible assets6,160  7,180  
Related tax effect(1,294) (1,508) 
Tangible common equity (non-GAAP)$202,048  $197,652  
Common shares outstanding11,209  11,200  
Book value per share (most directly comparable GAAP based measure)$20.13  $19.93  
Intangible assets per share2.10  2.28  
Tangible book value per share (non-GAAP)$18.03  $17.65  
June 30, 2021December 31, 2020
Tangible Book Value per Common Share
Shareholders' equity$265,938 $246,249 
Less: Goodwill18,724 18,724 
Other intangible assets4,800 5,458 
Related tax effect(1,008)(1,146)
Tangible common equity (non-GAAP)$243,422 $223,213 
Common shares outstanding11,263 11,201 
Book value per share (most directly comparable GAAP based measure)$23.61 $21.98 
Intangible assets per share2.00 2.05 
Tangible book value per share (non-GAAP)$21.61 $19.93 


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Three Months Ended June 30,
20202019
Taxable-Equivalent Net Interest Margin (excluding the effect of purchase accounting)
Taxable-equivalent net interest income/margin, as reported$21,028  3.37 %$18,807  3.63 %
Effect of purchase accounting:
LoansIncome(1,603) (0.27)%(1,385) (0.29)%
Time depositsExpenses24  0.00 %24  (0.01)%
Purchase accounting effect on taxable-equivalent income/ margin(1,627) (0.27)%(1,409) (0.30)%
Taxable-equivalent net interest income/margin (excluding the effect of purchase accounting) (non-GAAP)$19,401  3.10 %$17,398  3.33 %
Six Months Ended June 30,
20202019
Taxable-Equivalent Net Interest Margin (excluding the effect of purchase accounting)
Taxable-equivalent net interest income/margin, as reported$39,486  3.39 %$33,912  3.54 %
Effect of purchase accounting:
LoansIncome(2,502) (0.23)%(1,638) (0.22)%
Time depositsExpenses52  0.00 %14  0.00 %
Purchase accounting effect on taxable-equivalent income/ margin(2,554) (0.23)%(1,652) (0.22)%
Taxable-equivalent net interest income/margin (excluding the effect of purchase accounting) (non-GAAP)$36,932  3.16 %$32,260  3.32 %
June 30, 2021December 31, 2020
Allowance to Non-SBA Guaranteed Loans:
Allowance for loan losses$19,381 $20,151 
Gross loans$1,945,383 $1,979,690 
less: SBA guaranteed loans(356,905)(404,205)
Non-SBA guaranteed loans$1,588,478 $1,575,485 
Allowance to non-SBA guaranteed loans1.2 %1.3 %


June 30, 2020
Allowance to unguaranteed loans
Allowance for loan losses$17,517 
Gross loans$2,041,317 
less: SBA guaranteed loans(460,365)
Unguaranteed loans$1,580,952 
Allowance to unguaranteed loans1.11 %


June 30, 2020December 31, 2019
Allowance plus purchase accounting marks to unguaranteed loans:
Allowance for loan losses$17,517  $14,655  
Purchase accounting marks11,025  18,160  
Allowance plus purchase accounting marks28,542  32,815  
Gross loans2,041,317  1,644,330  
less: SBA guaranteed loans(460,365) (1,559) 
Unguaranteed loans$1,580,952  $1,642,771  
Allowance plus purchase accounting marks to unguaranteed loans:1.8 %2.0 %

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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk comprises exposure to interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks. In the banking industry, a major risk exposure is changing interest rates. The primary objective of monitoring our interest rate sensitivity, or risk, is to provide management the tools necessary to manage the balance sheet to minimize adverse changes in net interest income as a result of changes in the direction and level of interest rates. 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 sensitivity positions in recent years.
Interest Rate Risk
Interest rate risk is the exposure to fluctuations in the Company’s future earnings (earnings at risk) and value (value at risk) resulting from changes in interest rates. This exposure results from differences between the amounts of interest-earning assets and interest-bearing liabilities that reprice within a specified time period as a result of scheduled maturities, scheduled and unscheduled repayments, the propensity of borrowers and depositors to react to changes in their economic interests, and loan contractual interest rate changes.
We attempt to manage the level of repricing and maturity mismatch through our asset/liability management process so that fluctuations in net interest income are maintained within policy limits across a range of market conditions, while satisfying liquidity and capital requirements. Management recognizes that a certain amount of interest rate risk is inherent, appropriate and necessary to ensure the Company’s profitability. Thus, the goal of interest rate risk management is to evaluate the amount of reward for taking risk and adjusting both the size and composition of the balance sheet relative to the level of reward available for taking risk.
Management endeavors to control the exposure to changes in interest rates by understanding, reviewing and making decisions based on its risk position. The Company primarily uses its securities portfolio, FHLB advances, interest rate swaps and brokered deposits to manage its interest rate risk position. Additionally, pricing, promotion and product development activities are directed in an effort to emphasize the loan and deposit term or repricing characteristics that best meet current interest rate risk objectives.
We use simulation analysis to assess earnings at risk and net present value analysis to assess value at risk. These methods allow management to regularly monitor both the direction and magnitude of our interest rate risk exposure. These analyses require numerous assumptions including, but not limited to, changes in balance sheet mix, prepayment rates on loans and securities, cash flows and repricing of all financial instruments, changes in volumes and pricing, future shapes of the yield curve, relationship of market interest rates to each other (basis risk), credit spread and deposit sensitivity. Assumptions are based on management’s best estimates but may not accurately reflect actual results under certain changes in interest rate due to the timing, magnitude and frequency of rate changes and changes in market conditions and management strategies, among other factors. However, the analyses are useful in quantifying risk and providing a relative gauge of our interest rate risk position over time.
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.
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Net Interest Income Sensitivity
Simulation analysis evaluates the effect of upward and downward changes in market interest rates on future net interest income. The analysis involves changing the interest rates used in determining net interest income over the next twelve months. The resulting percentage change in net interest income in various rate scenarios is an indication of our short-term interest rate risk. The analysis assumes recent pricing trends in new loan and deposit volumes will continue while balances remain constant. Additional assumptions are applied to modify pricing under the various rate scenarios.
The simulation analysis results are presented in the Net Interest Income table below. At June 30, 20202021 and December 31, 2019,2020, results indicated the Company would be better positioned over the subsequent 12 months in a moderately decliningan increasing rate environment than it would be if interest rates increased.decreased. This is due to a shift in the mixlevel of assets to more floating rate loans on the Company's balance sheet, a shift in the mix of liabilities to fewer certificates of deposit and more noninterest-bearing deposits, and the steep decline in interest rates.rates over the past year. The Company has become more asset sensitive since December 31, 2020 due to the increase in liquidity, specifically through non-interest bearing deposits. As such, an increase in interest rates would benefit the Company more than in prior periods.
Economic Value
Net present value analysis provides information on the risk inherent in the balance sheet that might not be taken into accountconsidered in the simulation analysis due to the short time horizon used in that analysis. The net present value of the balance sheet incorporates the discounted present value of expected asset cash flows minus the discounted present value of expected liability cash flows. The analysis involves changing the interest rates used in determining the expected cash flows and in discounting the cash flows. The resulting percentage change in net present value in various rate scenarios is an indication of the longer term repricing risk and options embedded in the balance sheet.
At June 30, 2020,2021, similar to at December 31, 2019,2020, these results indicatedindicate the Company would be better positioned in a rising interest rate environment than it would be if interest rates decreased. As a result of the low interest rates at June 30, 2020,2021, the impact of increased rates on the economic value of the balance sheet would be substantial. To improve the comparability across periods, the Company follows best practices and maintains the size and mix of the period end balance sheet; thus, the results do not reflect actions management may take to improve results.
Net Interest IncomeEconomic Value
% Change in Net Interest Income% Change in Market Value
Change in Market Interest Rates (basis points)June 30, 2020December 31, 2019Change in Market Interest Rates (basis points)June 30, 2020December 31, 2019
(100) 0.1 %(0.5)%(100) (128.5)%(21.7)%
100  (0.4)%(1.3)%100  119.0 %10.9 %
200  (1.3)%(3.8)%200  191.3 %15.1 %
300  (4.3)%(8.1)%300  233.0 %15.0 %
Net Interest IncomeEconomic Value
% Change in Net Interest Income% Change in Market Value
Change in Market Interest Rates (basis points)June 30, 2021December 31, 2020Change in Market Interest Rates (basis points)June 30, 2021December 31, 2020
(100)(1.0)%(0.8)%(100)(54.0)%(99.6)%
100 4.0 %1.7 %100 33.0 %70.7 %
200 7.0 %2.4 %200 54.0 %116.4 %
300 7.7 %0.7 %300 67.0 %144.9 %

Item 4. Controls and Procedures
Based on the evaluation required by Securities Exchange Act Rules 13a-15(b) and 15d-15(b), the Company's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of ourits disclosure controls and procedures, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e), at June 30, 2020.2021.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that ourthe Company's disclosure controls and procedures were effective at June 30, 2020.2021.  There have been no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, ourthe Company's internal control over financial reporting during the six months ended June 30, 2020.2021.
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PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
Information regarding legal proceedings is included in Note 14,12, Contingencies, to the Consolidated Financial Statements under Part I, Item 1, "Financial Statements" and incorporated herein by reference.

Item 1A – Risk Factors
Except as noted below, thereThere have been no material changes from the risk factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, 20192020 and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020.

Interest rate volatility stemming from COVID-19 could negatively affect our net interest income, lending activities, deposits and profitability.

Our net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25 percent, citing concerns about the impact of COVID-19 on markets and stress in the energy sector. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in current fair market values of our assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition.2021.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
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 Exchange Act. On April 19, 2021, the Board of Directors authorized the additional future repurchase of up to 562,000 shares of its outstanding common stock. Common stock available for future repurchase totals approximately 823,320 shares, or 7% of the Company's outstanding common stock at June 30, 2021. At June 30, 2021, 154,680 shares had been repurchased under the 2015 program at a total cost of $2.6 million, or $16.88 per share. 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. AtNo repurchases occurred during the three and six months ended June 30, 2020, 154,680 shares had been repurchased under the program at a total cost of $2.6 million, or $16.88 per share. The maximum number of shares that may yet be purchased under the plan is 261,320 at June 30, 2020.2021.  

Item 3 – Defaults Upon Senior Securities
Not applicable.

Item 4 – Mine Safety Disclosures
Not applicable.

Item 5 – Other Information
None.
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Item 6 – Exhibits
2.1(a)
2.1(b)
3.1 
3.2 
4.1 
10.1
10.2
31.1 
31.2 
32.1 
32.2 
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.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Thomas R. Quinn, Jr.
Thomas R. Quinn, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Thomas R. BruggerNeelesh Kalani
Thomas R. BruggerNeelesh Kalani
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: August 7, 20205, 2021


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