10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2019

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)

Pennsylvania				23-2530374
(State or Other Jurisdiction of Incorporation or Organization)				(I.R.S. Employer Identification No.)
	77 East King Street,	P. O. Box 250	Shippensburg,	Pennsylvania	17257
	(Address of Principal Executive Offices)				(Zip Code)
	Registrant’s Telephone Number, Including Area Code:		(717)	532-6114

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

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

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, no par value	ORRF	Nasdaq Capital Market

Number of shares outstanding of the registrant’s Common Stock as of October 31, 2019: 11,190,199.

ORRSTOWN FINANCIAL SERVICES, INC.

INDEX

		Page
Part I – FINANCIAL INFORMATION
	Glossary	3
Item 1.	Financial Statements	4
	Consolidated Balance Sheets (Unaudited)	4
	Consolidated Statements of Income (Unaudited)	5
	Consolidated Statements of Comprehensive Income (Unaudited)	6
	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)	7
	Consolidated Statements of Cash Flows (Unaudited)	9
	Notes to Consolidated Financial Statements (Unaudited)	11
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	64
Item 4.	Controls and Procedures	65
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	66
Item 1A.	Risk Factors	66
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
Item 3.	Defaults upon Senior Securities	66
Item 4.	Mine Safety Disclosures	66
Item 5.	Other Information	66
Item 6.	Exhibits	67
SIGNATURES		68

2

Glossary of Defined Terms

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

Term	Definition
ALL	Allowance for loan losses
AFS	Available for sale
AOCI	Accumulated other comprehensive income (loss)
ASC	Accounting Standards Codification
ASU	Accounting Standards Update
Bank	Orrstown Bank, the commercial banking subsidiary of Orrstown Financial Services, Inc.
CDI	Core deposit intangible
CET1	Common Equity Tier 1
CMO	Collateralized mortgage obligation
Company	Orrstown Financial Services, Inc. and subsidiaries (interchangeable with "Orrstown” below)
EPS	Earnings per common share
ERM	Enterprise risk management
Exchange Act	Securities Exchange Act of 1934, as amended
FASB	Financial Accounting Standards Board
FDIC	Federal Deposit Insurance Corporation
FHLB	Federal Home Loan Bank
FRB	Board of Governors of the Federal Reserve System
GAAP	Accounting principles generally accepted in the United States of America
GSE	U.S. government-sponsored enterprise
Hamilton	Hamilton Bancorp, Inc., and its wholly-owned banking subsidiary, Hamilton Bank
IRC	Internal Revenue Code of 1986, as amended
LHFS	Loans held for sale
MBS	Mortgage-backed securities
Mercersburg	Mercersburg Financial Corporation and its wholly-owned banking subsidiary, First Community Bank of Mercersburg (acquired October 1, 2018)
MPF Program	Mortgage Partnership Finance Program
MSR	Mortgage servicing right
NIM	Net interest margin
OCI	Other comprehensive income (loss)
OREO	Other real estate owned (foreclosed real estate)
Orrstown	Orrstown Financial Services, Inc. and subsidiaries
OTTI	Other-than-temporary impairment
Parent Company	Orrstown Financial Services, Inc., the parent company of Orrstown Bank and Wheatland Advisors, Inc.
2011 Plan	2011 Orrstown Financial Services, Inc. Incentive Stock Plan
PCI loans	Purchased credit impaired loans
Repurchase Agreements	Securities sold under agreements to repurchase
ROU	Right of use (leases)
SEC	Securities and Exchange Commission
Securities Act	Securities Act of 1933, as amended
TDR	Troubled debt restructuring
Wheatland	Wheatland 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

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

Consolidated Balance Sheets (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC.

(Dollars in thousands, except per share information)	September 30, 2019		December 31, 2018
Assets
Cash and due from banks	$	31,872	$	26,156
Interest-bearing deposits with banks	19,051		45,664
Federal funds sold	0		16,995
Cash and cash equivalents	50,923		88,815
Restricted investments in bank stocks	11,399		10,842
Securities available for sale	481,120		465,844
Loans held for sale	7,610		3,340
Loans	1,593,105		1,247,657
Less: Allowance for loan losses	(14,809)		(14,014)
Net loans	1,578,296		1,233,643
Premises and equipment, net	43,031		38,201
Cash surrender value of life insurance	62,207		41,327
Goodwill	19,925		12,592
Other intangible assets, net	7,654		3,910
Accrued interest receivable	6,546		5,927
Other assets	44,966		29,947
Total assets	$	2,313,677	$	1,934,388
Liabilities
Deposits:
Noninterest-bearing	$	246,773	$	204,843
Interest-bearing	1,676,681		1,353,913
Total deposits	1,923,454		1,558,756
Short-term borrowings	36,605		64,069
Long-term debt	63,165		83,450
Subordinated notes	31,834		31,859
Accrued interest and other liabilities	35,126		22,821
Total liabilities	2,090,184		1,760,955
Shareholders’ Equity
Preferred stock, $1.25 par value per share; 500,000 shares authorized; no shares issued or outstanding	0		0
Common stock, no par value—$0.05205 stated value per share 50,000,000 shares authorized; 11,220,804 and 9,439,255 shares issued; 11,175,299 and 9,430,224 shares outstanding	584		491
Additional paid - in capital	188,582		151,678
Retained earnings	32,690		24,472
Accumulated other comprehensive income (loss)	2,675		(2,972)
Treasury stock—common, 45,505 and 9,031 shares, at cost	(1,038)		(236)
Total shareholders’ equity	223,493		173,433
Total liabilities and shareholders’ equity	$	2,313,677	$	1,934,388

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

4

Consolidated Statements of Income (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC.

	Three Months Ended				Nine Months Ended
(Dollars in thousands, except per share information)	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Interest income
Loans	$	19,999	$	12,281	$	54,611	$	35,068
Investment securities - taxable	3,787		2,922		10,958		7,754
Investment securities - tax-exempt	309		955		1,783		2,834
Short-term investments	561		68		1,237		169
Total interest income	24,656		16,226		68,589		45,825
Interest expense
Deposits	5,774		2,780		14,338		6,765
Short-term borrowings	39		332		316		1,097
Long-term debt	433		410		1,408		1,222
Subordinated notes	490		0		1,486		0
Total interest expense	6,736		3,522		17,548		9,084
Net interest income	17,920		12,704		51,041		36,741
Provision for loan losses	300		200		900		600
Net interest income after provision for loan losses	17,620		12,504		50,141		36,141
Noninterest income
Service charges on deposit accounts	1,761		1,524		4,930		4,405
Other service charges, commissions and fees	372		492		959		1,430
Loan swap referral fees	629		0		629		0
Trust and investment management income	1,892		1,668		5,399		5,037
Brokerage income	654		455		1,804		1,514
Mortgage banking activities	623		735		1,743		2,049
Income from life insurance	479		533		1,505		1,101
Other income	44		56		188		272
Investment securities gains	2,328		29		4,731		891
Total noninterest income	8,782		5,492		21,888		16,699
Noninterest expenses
Salaries and employee benefits	10,489		7,610		28,088		23,487
Occupancy	1,133		775		3,200		2,252
Furniture and equipment	1,252		990		3,415		2,977
Data processing	830		661		2,658		1,875
Telephone and communication	198		181		612		542
Automated teller and interchange fees	270		187		744		548
Advertising and bank promotions	279		279		1,348		898
FDIC insurance	(9)		169		397		507
Legal fees	189		215		362		364
Other professional services	625		361		1,716		1,140
Directors' compensation	228		207		725		663
Real estate owned	22		18		36		96
Taxes other than income	306		259		926		761
Intangible asset amortization	486		24		1,096		72
Merger related	471		319		7,976		473
Insurance claim receivable write off	0		0		615		0
Other operating expenses	1,392		1,081		3,743		3,022
Total noninterest expenses	18,161		13,336		57,657		39,677
Income before income tax expense	8,241		4,660		14,372		13,163
Income tax expense	1,340		644		1,682		1,510
Net income	$	6,901	$	4,016	$	12,690	$	11,653
Per share information:
Basic earnings per share	$	0.63	$	0.50	$	1.25	$	1.44
Diluted earnings per share	0.62		0.49		1.23		1.41

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

5

Consolidated Statements of Comprehensive Income (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC.

	Three Months Ended				Nine Months Ended
(Dollars in thousands)	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Net income	$	6,901	$	4,016	$	12,690	$	11,653
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities available for sale arising during the period	1,400		(3,488)		11,880		(9,637)
Reclassification adjustment for gains realized in net income	(2,328)		(29)		(4,731)		(891)
Net unrealized gains (losses)	(928)		(3,517)		7,149		(10,528)
Tax effect	195		738		(1,502)		2,211
Total other comprehensive income (loss), net of tax and reclassification adjustments	(733)		(2,779)		5,647		(8,317)
Total comprehensive income	$	6,168	$	1,237	$	18,337	$	3,336

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

6

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC.

	Three Months Ended September 30, 2018
(Dollars in thousands, except per share information)	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Shareholders’ Equity
Balance, June 30, 2018	$	438	$	126,402	$	21,584	$	(2,693)	$	(594)	$	145,137
Net income	0		0		4,016		0		0		4,016
Total other comprehensive loss, net of taxes	0		0		0		(2,779)		0		(2,779)
Cash dividends ($0.13 per share)	0		0		(1,071)		0		0		(1,071)
Share-based compensation plans:
30,321 net common shares forfeited and 15,251 net treasury shares issued, including compensation expense totaling $188	(1)		(142)		0		0		397		254
Balance, September 30, 2018	$	437	$	126,260	$	24,529	$	(5,472)	$	(197)	$	145,557
	Nine Months Ended September 30, 2018
(Dollars in thousands, except per share information)	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Shareholders’ Equity
Balance, January 1, 2018	$	435	$	125,458	$	16,042	$	2,845	$	(15)	$	144,765
Net income	0		0		11,653		0		0		11,653
Total other comprehensive loss, net of taxes	0		0		0		(8,317)		0		(8,317)
Cash dividends ($0.38 per share)	0		0		(3,166)		0		0		(3,166)
Share-based compensation plans:
45,302 net common shares issued and 6,714 net treasury shares acquired, including compensation expense totaling $1,112	2		802		0		0		(182)		622
Balance, September 30, 2018	$	437	$	126,260	$	24,529	$	(5,472)	$	(197)	$	145,557

7

	Three Months Ended September 30, 2019
(Dollars in thousands, except per share information)	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Shareholders’ Equity
Balance, June 30, 2019	$	584	$	188,414	$	27,462	$	3,408	$	0	$	219,868
Net income	0		0		6,901		0		0		6,901
Total other comprehensive loss, net of taxes	0		0		0		(733)		0		(733)
Cash dividends ($0.15 per share)	0		0		(1,673)		0		0		(1,673)
Share-based compensation plans:
48,694 net common shares vested/repurchased and 45,505 net treasury shares acquired, including compensation expense totaling $475	0		168		0		0		(1,038)		(870)
Balance, September 30, 2019	$	584	$	188,582	$	32,690	$	2,675	$	(1,038)	$	223,493
	Nine Months Ended September 30, 2019
(Dollars in thousands, except per share information)	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Shareholders’ Equity
Balance, January 1, 2019	$	491	$	151,678	$	24,472	$	(2,972)	$	(236)	$	173,433
Net income	0		0		12,690		0		0		12,690
Total other comprehensive loss, net of taxes	0		0		0		5,647		0		5,647
Cash dividends ($0.45 per share)	0		0		(4,472)		0		0		(4,472)
Issuance of stock (1,765,704 common shares) to acquire Hamilton Bancorp, Inc.	92		36,530		0		0		0		36,622
Share-based compensation plans:
15,845 net common shares issued and 36,474 net treasury shares acquired, including compensation expense of $1,154	1		374		0		0		(802)		(427)
Balance, September 30, 2019	$	584	$	188,582	$	32,690	$	2,675	$	(1,038)	$	223,493

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

8

Consolidated Statements of Cash Flows (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC.

	Nine Months Ended
(Dollars in thousands)	September 30, 2019		September 30, 2018
Cash flows from operating activities
Net income	$	12,690	$	11,653
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium amortization (discount accretion)	(1,594)		1,356
Depreciation and amortization (including amortization of ROU assets)	3,970		2,572
Provision for loan losses	900		600
Share-based compensation	1,154		1,112
Net gain on sales of loans originated for sale	(1,653)		(1,687)
Mortgage loans originated for sale	(78,242)		(71,008)
Proceeds from sales of loans originated for sale	75,276		73,679
Gain on sale of portfolio loans	0		(291)
Net gain on disposal of OREO	(8)		(111)
Writedown of OREO	0		24
Net loss on disposal of premises and equipment	137		16
Deferred income taxes	1,348		756
Investment securities gains	(4,731)		(891)
Income from life insurance	(1,505)		(1,101)
(Increase) decrease in accrued interest receivable	742		(345)
Increase in accrued interest payable and other liabilities	(5,618)		(46)
Other, net	589		(1,158)
Net cash provided by operating activities	3,455		15,130
Cash flows from investing activities
Proceeds from sales of AFS securities	199,910		113,180
Maturities, repayments and calls of AFS securities	22,934		12,793
Purchases of AFS securities	(166,694)		(211,014)
Net cash and cash equivalents received from acquisitions	29,442		0
Net redemptions of restricted investments in bank stocks	2,101		660
Net (increase) decrease in loans	4,023		(78,497)
Proceeds from sales of portfolio loans	0		3,589
Purchases of bank premises and equipment	(3,226)		(3,078)
Proceeds from disposal of OREO	724		1,260
Proceeds from disposal of bank premises and equipment	0		7
Purchases of bank owned life insurance	(2,280)		(900)
Proceeds from settlement of life insurance contracts	571		576
Net cash provided by (used in) investing activities	87,505		(161,424)
Cash flows from financing activities
Net increase (decrease) in deposits	(23,598)		209,655
Net decrease in borrowings with original maturities less than 90 days	(2,464)		(8,223)
Payments on other short-term borrowings	(25,000)		(40,000)
Proceeds from long-term debt	20,000		0
Payments on long-term debt	(91,678)		(272)
Subordinated note issuance costs	(59)		0
Dividends paid	(4,472)		(3,166)
Treasury shares repurchased for employee taxes associated with restricted stock vesting	(1,694)		(651)
Proceeds from issuance of stock for option exercises and employee stock purchase plan	113		161
Net cash provided by (used in) financing activities	(128,852)		157,504
Net increase (decrease) in cash and cash equivalents	(37,892)		11,210
Cash and cash equivalents at beginning of period	88,815		29,807
Cash and cash equivalents at end of period	$	50,923	$	41,017

9

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	17,573	$	8,991
Income taxes	0		60
Supplemental schedule of noncash investing activities:
OREO acquired in settlement of loans	161		538
ROU assets obtained in exchange for lease obligations	8,115		0

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

10

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Nature of Operations – Orrstown Financial Services, Inc. and subsidiaries is a financial holding company that operates Orrstown Bank, a commercial bank with banking and financial advisory offices 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 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 condensed consolidated financial statements include the accounts of Orrstown Financial Services, Inc. and its wholly owned subsidiaries, the Bank and Wheatland. 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, 2018 consolidated balance sheet information contained in this Quarterly Report on Form 10-Q was derived from the 2018 audited consolidated financial statements. Interim results are not necessarily indicative of results for a full year. 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, 2018. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. 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 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. 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, other assets and liabilities obtained or assumed in business combinations.

Leases - We evaluate our contracts at inception to determine if an arrangement is or contains a lease. Operating leases are included in operating lease ROU assets in Other assets and operating lease liabilities in Accrued interest payable and other liabilities in our consolidated balance sheets. The Company has no finance leases.

ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our 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. Our leases do not provide an implicit rate, so we use our incremental borrowing rate, which approximates our 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. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

We adopted ASU 2016-02, “Leases (Topic 842),” on January 1, 2019, the effective date of the guidance, using the practical expedient transition method whereby we did not revise comparative period information or disclosure. The new standard requires lessees to record assets and liabilities on the balance sheet for all leases with terms longer than 12 months. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carryforward the historical lease classification. We also elected certain optional practical expedients,

11

including the hindsight practical expedient under which we considered the actual outcomes of lease renewals and terminations when measuring the lease term at adoption, and we made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. We recognize these lease payments in the consolidated statements of income on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, and we have elected the practical expedient to account for these as a single lease component.

Our operating leases relate primarily to bank branches and office space. In conjunction with the adoption on January 1, 2019, we recognized operating lease liabilities of $7,971,000 and related lease assets of $7,494,000 on our balance sheet. The difference between the lease assets and lease liabilities primarily consists of deferred rent liabilities reclassified upon adoption to reduce the measurement of the lease assets. The standard did not materially impact our consolidated net income and had no impact on cash flows.

Recent Accounting Pronouncements - ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. 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 will be effective for interim and annual periods beginning after December 15, 2019. On October 16, 2019, the FASB extended the implementation deadline for smaller reporting and other companies until the fiscal year and interim periods beginning after December 15, 2022. The Company currently meets the requirements to be considered a smaller reporting company under SEC Regulation S-K and SEC Rule 405, and, pending the issuance of a final pronouncement, is evaluating the impact of the delay for adoption of the update.

We are working with a third 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 we anticipate the allowance for loan losses will increase under our current assumptions, we expect the impact of adopting ASU 2016-13 will be influenced by the composition, characteristics and quality of our loan and securities portfolios, as well as general economic conditions and forecasts at the adoption date.

ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The update simplifies how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 will be effective for the Company on January 1, 2020, with earlier adoption permitted, and is not expected to have a material impact on the Company's consolidated financial statements.

ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20). The update shortens the amortization period of certain callable debt securities held at a premium to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. Under prior guidance, entities were generally required to amortize premiums on individual, non-pooled callable debt securities as a yield adjustment over the contractual life of the security. ASU 2017-08 does not change the accounting for callable debt securities held at a discount. On January 1, 2019, we adopted ASU 2016-18 with no material impact on our consolidated financial condition or results of operations.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement and should present a reconciliation of the beginning balance to the ending balance for each period for which a statement of comprehensive income is presented. The Company implemented the additional disclosure requirements effective with the filing of its March 31, 2019 Form 10-Q.

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NOTE 2.    MERGERS AND ACQUISITIONS

Mercersburg Financial Corporation

On October 1, 2018, we acquired 100% of the outstanding common shares of Mercersburg Financial Corporation and its wholly-owned subsidiary, First Community Bank of Mercersburg, headquartered in Mercersburg, Pennsylvania. We issued 1,052,635 shares of our common stock and paid $4,866,000 in cash for all outstanding shares of Mercersburg stock. Based on our $23.80 closing stock price on Friday, September 28, 2018, the consideration paid to acquire Mercersburg totaled $29,919,000.

The fair value of assets acquired, excluding goodwill, totaled $181,430,000, including loans totaling $141,103,000 and investment securities available for sale totaling $7,352,000. The fair value of liabilities assumed totaled $163,384,000, including deposits totaling $160,433,000. The Company recognized $11,873,000 in initial goodwill, representing consideration transferred in excess of the fair value of the net assets acquired in the Mercersburg acquisition. The goodwill resulting from the acquisition represents the value expected from the expansion of our market in south central Pennsylvania and the enhancement of our operations through customer synergies and efficiencies, thereby providing enhanced customer service.

The Mercersburg acquisition was accounted for using the acquisition method of accounting and, accordingly, purchased assets, including identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair values. The fair value measurements of assets acquired and liabilities assumed were subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values became available. No material measurement period adjustments were made in the nine months ended September 30, 2019. The results of operations for the Company include Mercersburg's results from and after October 1, 2018.

Hamilton Bancorp, Inc.

On May 1, 2019, we acquired 100% of the outstanding common shares of Hamilton Bancorp, Inc., and its wholly-owned subsidiary, Hamilton Bank, based in Towson, Maryland. We acquired Hamilton to introduce our banking and financial services into the Greater Baltimore area of Maryland.

Pursuant to the merger agreement, we issued 1,765,704 shares of our common stock and paid $14,197,000 in cash for all outstanding shares of Hamilton stock and options vesting upon acquisition. Based on our closing stock price of $20.74 on Tuesday, April 30, 2019, the consideration paid to acquire Hamilton totaled approximately $50,819,000.

The fair value of assets acquired, excluding goodwill, totaled $492,844,000, including loans totaling $347,361,000. The fair value of liabilities assumed totaled $449,358,000, including deposits totaling $388,246,000. Goodwill represents consideration transferred in excess of the fair value of the net assets acquired. At May 1, 2019, the Company recognized $7,333,000 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 become available. The Company continues to finalize the fair values of loans, intangible assets, other assets, income taxes and liabilities. As a result, the fair value adjustments are preliminary and may change as information becomes available. Fair value adjustments will be finalized no later than May 2020. No material measurement period adjustments were made from the date of acquisition through

September 30, 2019. The results of operations for the Company include Hamilton's results from and after May 1, 2019.

The following table summarizes the consideration paid for Hamilton and the estimated fair values of the assets acquired and liabilities assumed recognized at the acquisition date:

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(Dollars in thousands)
Fair value of consideration transferred:
Cash	$	14,197
Common stock issued	36,622
Total consideration transferred	$	50,819
Estimated fair values of assets acquired and (liabilities) assumed:
Cash and cash equivalents	$	43,140
Securities available for sale	60,882
Restricted investments in bank stocks	2,658
Loans	347,361
Premises and equipment	3,749
Core deposit intangible	4,550
Goodwill	7,333
Cash surrender value of life insurance	17,948
Deferred tax asset, net	5,838
ROU lease asset	2,793
Other assets	3,925
Total assets acquired	500,177
Deposits	(388,246)
Borrowings	(51,393)
Other liabilities	(9,719)
Total liabilities assumed	(449,358)
	$	50,819

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 we 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 12 - 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).

We recognized a core deposit intangible of $4,550,000, which will be 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.

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.

(in thousands)	Performing		PCI		Total
Commercial real estate:
Owner-occupied	$	42,148	$	6,324	$	48,472
Non-owner occupied	45,401		770		46,171
Multi-family	10,773		0		10,773
Acquisition and development:
1-4 family residential construction	7,450		0		7,450
Commercial and land development	4,528		0		4,528
Commercial and industrial	32,316		1,702		34,018
Residential mortgage:
First lien	152,657		10,494		163,151
Home-equity - term	4,478		1		4,479
Home equity - lines of credit	13,657		0		13,657
Installment and other loans	14,467		195		14,662
Total loans acquired	$	327,875	$	19,486	$	347,361

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

(in thousands)
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	(5,508)
Estimated fair value of acquired loans	$	347,361

The market rate adjustment represents the movement in market interest rates, irrespective of credit adjustments, compared to the contractual rates of the acquired loans. The credit fair value adjustment made on non-credit impaired loans represents the changes in credit quality of the underlying borrowers from loan inception to the acquisition date. The credit fair value adjustment on PCI loans is derived in accordance with ASC 310-30 and represents the portion of the loan balance that has been deemed uncollectible based on our expectations of future cash flows for each respective loan.

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The following table provides information about acquired PCI loans at May 1, 2019.

(in thousands)
Contractually required principal and interest at acquisition	$	31,599
Nonaccretable difference	(8,616)
Expected cash flows at acquisition	22,983
Accretable yield	(3,497)
Estimated fair value of acquired PCI loans	$	19,486

Unaudited pro forma net income for the three and nine months ended September 30, 2018, would have totaled $4,353,000 and $6,869,000, and revenues would have totaled $28,862,000 and $87,557,000 for the same periods had the Mercersburg and Hamilton acquisitions occurred January 1, 2018. Unaudited pro forma net income for the three and nine months ended September 30, 2019, would have totaled $7,566,000 and $13,355,000, and revenues would have totaled $38,675,000 and $95,714,000 for the same periods had the Hamilton acquisition occurred January 1, 2019.

In connection with the Mercersburg and Hamilton acquisitions, we incurred merger related expenses totaling $471,000 and $7,976,000 for the three and nine months ended September 30, 2019, which are included in noninterest expenses. The expenses consisted primarily of $0 and $1,967,000 of investment banking, legal and consulting fees; $236,000 and $3,855,000 of information systems expense, including canceling of contracts; and $235,000 and $2,154,000 of other expenses, including payout of employee termination contracts.

NOTE 3. SECURITIES AVAILABLE FOR SALE

At September 30, 2019 and December 31, 2018, all investment securities were classified as AFS. The following table summarizes amortized cost and fair value of AFS securities, and the corresponding amounts of gross unrealized gains and losses recognized in AOCI, at September 30, 2019 and December 31, 2018.

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2019
States and political subdivisions	$	77,553	$	5,159	$	0	$	82,712
GSE residential CMOs	70,214		1,142		355		71,001
Private label commercial CMOs	87,848		146		227		87,767
Asset-backed and other	242,119		153		2,632		239,640
Totals	$	477,734	$	6,600	$	3,214	$	481,120
December 31, 2018
States and political subdivisions	$	144,596	$	1,919	$	1,511	$	145,004
GSE residential CMOs	110,421		332		2,689		108,064
Private label residential CMOs	144		0		1		143
Private label commercial CMOs	75,911		55		921		75,045
Asset-backed and other	138,535		126		1,073		137,588
Totals	$	469,607	$	2,432	$	6,195	$	465,844

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The following table summarizes AFS securities with unrealized losses at September 30, 2019 and December 31, 2018, aggregated by major security type and length of time in a continuous unrealized loss position.

	Less Than 12 Months					12 Months or More					Total
(Dollars in thousands)	# of Securities	Fair Value		Unrealized Losses		# of Securities	Fair Value		Unrealized Losses		# of Securities	Fair Value		Unrealized Losses
September 30, 2019
GSE residential CMOs	3	27,100		45		1	12,147		310		4	39,247		355
Private label commercial CMOs	7	33,093		71		6	34,644		156		13	67,737		227
Asset-backed and other	15	176,324		2,258		2	18,324		374		17	194,648		2,632
Totals	25	$	236,517	$	2,374	9	$	65,115	$	840	34	$	301,632	$	3,214
December 31, 2018
States and political subdivisions	27	$	46,585	$	662	6	$	23,036	$	849	33	$	69,621	$	1,511
GSE residential CMOs	1	18,037		122		7	46,168		2,567		8	64,205		2,689
Private label residential CMOs	1	143		1		0	0		0		1	143		1
Private label commercial CMOs	11	56,499		712		2	6,349		209		13	62,848		921
Asset-backed and other	6	78,900		859		3	10,808		214		9	89,708		1,073
Totals	46	$	200,164	$	2,356	18	$	86,361	$	3,839	64	$	286,525	$	6,195

States and Political Subdivisions. The unrealized losses presented in the table above have been caused by a widening of spreads and/or a rise in interest rates from the time these securities were purchased. Management considers the investment 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 December 31, 2018.

GSE Residential CMOs. The unrealized losses presented in the table above have been caused by a widening of spreads and/or a rise in interest rates from the time 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 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 September 30, 2019 or at December 31, 2018.

Private Label Residential CMOs, Private Label Commercial CMOs and Asset-backed and Other. The unrealized losses presented in the table above have been caused by a widening of spreads and/or a rise in interest rates from the time the securities were purchased. 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 September 30, 2019 or at December 31, 2018.

The following table summarizes amortized cost and fair value of AFS securities by contractual maturity at September 30, 2019. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

	Available for Sale
(Dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	230	$	230
Due after one year through five years	0		0
Due after five years through ten years	26,456		27,952
Due after ten years	50,867		54,530
CMOs	158,062		158,768
Asset-backed and other	242,119		239,640
	$	477,734	$	481,120

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The following table summarizes proceeds from sales of AFS securities and gross gains and gross losses for the three and nine months ended September 30, 2019 and 2018.

	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2019		2018		2019		2018
Proceeds from sale of AFS securities	$	25,575	$	25,070	$	199,910	$	113,180
Gross gains	2,328		185		4,956		1,237
Gross losses	0		156		225		346

AFS securities with a fair value of $161,627,000 and $164,233,000 at September 30, 2019 and December 31, 2018 were pledged to secure public funds and for other purposes as required or permitted by law.

NOTE 4. LOANS AND ALLOWANCE FOR LOAN LOSSES

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

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

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

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

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

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.

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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 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.

The following table presents the loan portfolio by segment and class, excluding residential LHFS, at September 30, 2019 and December 31, 2018.

(Dollars in thousands)	September 30, 2019		December 31, 2018
Commercial real estate:
Owner occupied	$	171,327	$	129,650
Non-owner occupied	310,334		252,794
Multi-family	108,751		78,933
Non-owner occupied residential	120,395		100,367
Acquisition and development:
1-4 family residential construction	12,257		7,385
Commercial and land development	38,494		42,051
Commercial and industrial	215,734		160,964
Municipal	47,920		50,982
Residential mortgage:
First lien	353,811		235,296
Home equity - term	15,175		12,208
Home equity - lines of credit	159,930		143,616
Installment and other loans	38,977		33,411
Total Loans (1)	$	1,593,105	$	1,247,657

⁽¹⁾ Includes $425,940,000 and $135,009,000 of acquired loans at September 30, 2019 and December 31, 2018.

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 ERM Committee, comprised of executive officers and loan department personnel, is charged with the oversight of overall credit quality and risk exposure of the Company's loan portfolio. This includes the monitoring of the lending activities of all Company personnel with respect to underwriting and processing new loans and the timely follow-up and corrective action for loans showing signs of deterioration in quality. A loan review program provides the Company with an independent review

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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 $500,000, which includes confirmation of risk rating by an independent credit officer. Credit Administration also reviews loans in excess of $1,000,000. In addition, all commercial relationships greater than $250,000 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 ERM Committee.

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The following table summarizes the Company’s loan portfolio ratings based on its internal risk rating system at September 30, 2019 and December 31, 2018.

(Dollars in thousands)	Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		PCI Loans		Total
September 30, 2019
Commercial real estate:
Owner occupied	$	153,327	$	5,750	$	2,664	$	3,324	$	0	$	6,262	$	171,327
Non-owner occupied	298,268		10,685		0		0		0		1,381		310,334
Multi-family	101,479		5,537		940		105		0		690		108,751
Non-owner occupied residential	113,248		3,139		1,246		137		0		2,625		120,395
Acquisition and development:
1-4 family residential construction	12,004		253		0		0		0		0		12,257
Commercial and land development	37,582		348		564		0		0		0		38,494
Commercial and industrial	198,348		2,316		10,101		1,089		0		3,880		215,734
Municipal	47,920		0		0		0		0		0		47,920
Residential mortgage:
First lien	340,619		713		0		2,547		0		9,932		353,811
Home equity - term	15,068		76		0		11		0		20		15,175
Home equity - lines of credit	159,063		75		39		753		0		0		159,930
Installment and other loans	38,715		0		0		7		0		255		38,977
	$	1,515,641	$	28,892	$	15,554	$	7,973	$	0	$	25,045	$	1,593,105
December 31, 2018
Commercial real estate:
Owner occupied	$	121,903	$	3,024	$	987	$	1,880	$	0	$	1,856	$	129,650
Non-owner occupied	242,136		10,008		0		0		0		650		252,794
Multi-family	71,482		5,886		717		131		0		717		78,933
Non-owner occupied residential	97,590		736		1,197		309		0		535		100,367
Acquisition and development:
1-4 family residential construction	7,385		0		0		0		0		0		7,385
Commercial and land development	41,251		25		583		0		0		192		42,051
Commercial and industrial	150,286		2,278		2,940		286		0		5,174		160,964
Municipal	50,982		0		0		0		0		0		50,982
Residential mortgage:
First lien	229,971		0		0		2,877		0		2,448		235,296
Home equity - term	12,170		0		0		16		0		22		12,208
Home equity - lines of credit	142,638		165		15		798		0		0		143,616
Installment and other loans	33,229		15		1		0		0		166		33,411
	$	1,201,023	$	22,137	$	6,440	$	6,297	$	0	$	11,760	$	1,247,657

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

21

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 two, and management expects the performing note to continue to perform and is adequately secured. The second, or non-performing note, would be charged-off. 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 September 30, 2019 and December 31, 2018, nearly all of the Company’s impaired loans’ extent of impairment were measured based on the estimated fair value of the collateral securing the loan, except for TDRs. By definition, TDRs are considered impaired. All restructured loans’ impairment was determined based on discounted cash flows for those loans classified as TDRs and still accruing interest. 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 $250,000. 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 one or a combination of approaches. In those situations in which a combination of approaches is considered, the factor that carries the most consideration will be the one management believes is warranted. The approaches are: 

•Original appraisal – if the original 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 original certified appraised value may be used. Discounts as deemed appropriate for selling costs are factored into the appraised value in arriving at fair value.

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

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

The Company distinguishes Substandard loans on both an impaired and nonimpaired 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 Substandard. As a result, the Company’s methodology includes an evaluation of certain accruing commercial real estate, acquisition and

22

development and commercial and industrial loans rated Substandard to be collectively, as opposed to individually, evaluated for impairment. Although the Company believes these loans meet the definition of Substandard, they are generally performing and management has concluded that it is likely we will be able to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement.

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

The following table, which excludes PCI loans, summarizes impaired loans by segment and class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required at September 30, 2019 and December 31, 2018. 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 Allowance						Impaired Loans with No Specific Allowance
(Dollars in thousands)	Recorded Investment (Book Balance)		Unpaid Principal Balance (Legal Balance)		Related Allowance		Recorded Investment (Book Balance)		Unpaid Principal Balance (Legal Balance)
September 30, 2019
Commercial real estate:
Owner occupied	$	0	$	0	$	0	$	3,324	$	5,490
Multi-family	0		0		0		105		325
Non-owner occupied residential	26		48		0		111		319
Commercial and industrial	0		0		0		1,089		2,769
Residential mortgage:
First lien	498		498		36		2,049		3,098
Home equity - term	0		0		0		11		19
Home equity - lines of credit	0		0		0		753		1,081
Installment and other loans	0		0		0		7		17
	$	524	$	546	$	36	$	7,449	$	13,118
December 31, 2018
Commercial real estate:
Owner occupied	$	0	$	0	$	0	$	1,880	$	2,576
Multi-family	0		0		0		131		336
Non-owner occupied residential	0		0		0		309		632
Commercial and industrial	0		0		0		286		457
Residential mortgage:
First lien	743		743		38		2,134		2,727
Home equity - term	0		0		0		16		23
Home equity - lines of credit	0		0		0		798		1,081
	$	743	$	743	$	38	$	5,554	$	7,832

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The following table, which excludes PCI loans, summarizes the average recorded investment in impaired loans and related recognized interest income for the three and nine months ended September 30, 2019 and 2018.

	2019				2018
(Dollars in thousands)	Average Impaired Balance		Interest Income Recognized		Average Impaired Balance		Interest Income Recognized
Three Months Ended September 30,
Commercial real estate:
Owner-occupied	$	2,126	$	0	$	1,569	$	1
Non-owner occupied	150		0		0		0
Multi-family	110		0		144		0
Non-owner occupied residential	173		0		336		0
Acquisition and development:
1-4 family residential construction	0		0		201		0
Commercial and industrial	765		0		316		0
Residential mortgage:
First lien	2,392		12		2,900		15
Home equity – term	12		0		18		0
Home equity - lines of credit	768		0		692		0
Installment and other loans	8		0		1		0
	$	6,504	$	12	$	6,177	$	16
Nine Months Ended September 30,
Commercial real estate:
Owner occupied	$	1,950	$	1	$	1,372	$	2
Non-owner occupied	60		0		2,395		0
Multi-family	118		0		152		0
Non-owner occupied residential	246		0		355		0
Acquisition and development:
1-4 family residential construction	0		0		235		0
Commercial and industrial	469		0		330		0
Residential mortgage:
First lien	2,574		41		3,312		44
Home equity - term	13		0		20		0
Home equity - lines of credit	752		1		621		1
Installment and other loans	8		0		6		0
	$	6,190	$	43	$	8,798	$	47

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The following table presents impaired loans that are TDRs, with the recorded investment at September 30, 2019 and December 31, 2018.

	September 30, 2019			December 31, 2018
(Dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Accruing:
Commercial real estate:
Owner occupied	1	$	30	1	$	39
Residential mortgage:
First lien	10	992		11	1,069
Home equity - lines of credit	1	20		1	24
	12	1,042		13	1,132
Nonaccruing:
Commercial real estate:
Owner occupied	4	1,898		1	37
Residential mortgage:
First lien	5	368		8	658
	9	2,266		9	695
	21	$	3,308	22	$	1,827

There were three new commercial real estate owner occupied TDR's, totaling $1,867,000, for the quarter ended September 30, 2019. There were no modified restructured loans in 2018. No additional commitments have been made to borrowers whose loans are considered TDRs.

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Management further monitors the performance and credit quality of the loan portfolio by analyzing the length of time a portfolio is past due, by aggregating loans based on its delinquencies. The following table presents the classes of loan portfolio summarized by aging categories of performing loans and nonaccrual loans at September 30, 2019 and December 31, 2018.

			Days Past Due
(Dollars in thousands)	Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans
September 30, 2019
Commercial real estate:
Owner occupied	$	161,771	$	0	$	0	$	0	$	0	$	3,294	$	165,065
Non-owner occupied	308,823		0		0		130		130		0		308,953
Multi-family	107,707		0		0		249		249		105		108,061
Non-owner occupied residential	117,301		225		69		38		332		137		117,770
Acquisition and development:
1-4 family residential construction	12,257		0		0		0		0		0		12,257
Commercial and land development	38,358		0		0		136		136		0		38,494
Commercial and industrial	210,112		320		333		0		653		1,089		211,854
Municipal	47,920		0		0		0		0		0		47,920
Residential mortgage:
First lien	339,460		1,101		1696		67		2,864		1,555		343,879
Home equity - term	15,122		17		0		5		22		11		15,155
Home equity - lines of credit	158,601		475		121		0		596		733		159,930
Installment and other loans	38,556		122		37		0		159		7		38,722
Subtotal	1,555,988		2,260		2,256		625		5,141		6,931		1,568,060
Loans acquired with credit deterioration:
Commercial real estate:
Owner occupied	6,089		131		0		42		173		0		6,262
Non-owner occupied	585		0		0		796		796		0		1,381
Multi-family	690		0		0		0		0		0		690
Non-owner occupied residential	2,025		0		188		412		600		0		2,625
Commercial and industrial	3,863		0		0		17		17		0		3,880
Residential mortgage:
First lien	8,459		74		357		1,042		1,473		0		9,932
Home equity - term	16		4		0		0		4		0		20
Installment and other loans	190		17		0		48		65		0		255
Subtotal	21,917		226		545		2,357		3,128		0		25,045
	$	1,577,905	$	2,486	$	2,801	$	2,982	$	8,269	$	6,931	$	1,593,105

26

			Days Past Due
(Dollars in thousands)	Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans
December 31, 2018
Commercial real estate:
Owner occupied	$	125,887	$	66	$	0	$	0	$	66	$	1,841	$	127,794
Non-owner occupied	252,144		0		0		0		0		0		252,144
Multi-family	78,085		0		0		0		0		131		78,216
Non-owner occupied residential	99,268		226		29		0		255		309		99,832
Acquisition and development:
1-4 family residential construction	7,385		0		0		0		0		0		7,385
Commercial and land development	41,822		37		0		0		37		0		41,859
Commercial and industrial	154,988		411		105		0		516		286		155,790
Municipal	50,982		0		0		0		0		0		50,982
Residential mortgage:
First lien	228,714		1,592		734		0		2,326		1,808		232,848
Home equity - term	11,487		678		5		0		683		16		12,186
Home equity - lines of credit	142,394		420		28		0		448		774		143,616
Installment and other loans	33,135		66		44		0		110		0		33,245
Subtotal	1,226,291		3,496		945		0		4,441		5,165		1,235,897
Loans acquired with credit deterioration:
Commercial real estate:
Owner occupied	1,784		0		72		0		72		0		1,856
Non-owner occupied	650		0		0		0		0		0		650
Multi-family	717		0		0		0		0		0		717
Non-owner occupied residential	535		0		0		0		0		0		535
Acquisition and development:
Commercial and land development	192		0		0		0		0		0		192
Commercial and industrial	4,943		231		0		0		231		0		5,174
Residential mortgage:
First lien	1,971		382		42		53		477		0		2,448
Home equity - term	17		5		0		0		5		0		22
Installment and other loans	149		13		0		4		17		0		166
Subtotal	10,958		631		114		57		802		0		11,760
	$	1,237,249	$	4,127	$	1,059	$	57	$	5,243	$	5,165	$	1,247,657

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, management assesses the adequacy of the ALL utilizing a defined methodology which considers specific credit evaluation of impaired loans as discussed above, past 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.

27

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 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.

28

The following table presents the activity in the ALL for the three and nine months ended September 30, 2019 and 2018.

	Commercial										Consumer
(Dollars in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total
Three Months Ended
September 30, 2019
Balance, beginning of period	$	6,847	$	1,008	$	2,120	$	94	$	10,069	$	3,734	$	209	$	3,943	$	448	$	14,460
Provision for loan losses	465		(188)		269		(1)		545		27		50		77		(322)		300
Charge-offs	0		0		(50)		0		(50)		(24)		(49)		(73)		0		(123)
Recoveries	111		0		33		0		144		5		23		28		0		172
Balance, end of period	$	7,423	$	820	$	2,372	$	93	$	10,708	$	3,742	$	233	$	3,975	$	126	$	14,809
September 30, 2018
Balance, beginning of period	$	6,680	$	720	$	1,598	$	80	$	9,078	$	3,544	$	230	$	3,774	$	585	$	13,437
Provision for loan losses	194		19		(38)		(1)		174		(45)		146		101		(75)		200
Charge-offs	(17)		0		0		0		(17)		(62)		(80)		(142)		0		(159)
Recoveries	200		0		1		0		201		102		31		133		0		334
Balance, end of period	$	7,057	$	739	$	1,561	$	79	$	9,436	$	3,539	$	327	$	3,866	$	510	$	13,812
Nine Months Ended
September 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	347		1		753		(5)		1,096		184		64		248		(444)		900
Charge-offs	(25)		0		(140)		0		(165)		(295)		(121)		(416)		0		(581)
Recoveries	225		2		103		0		330		100		46		146		0		476
Balance, end of period	$	7,423	$	820	$	2,372	$	93	$	10,708	$	3,742	$	233	$	3,975	$	126	$	14,809
September 30, 2018
Balance, beginning of period	$	6,763	$	417	$	1,446	$	84	$	8,710	$	3,400	$	211	$	3,611	$	475	$	12,796
Provision for loan losses	(217)		319		114		(5)		211		157		197		354		35		600
Charge-offs	(17)		0		0		0		(17)		(148)		(198)		(346)		0		(363)
Recoveries	528		3		1		0		532		130		117		247		0		779
Balance, end of period	$	7,057	$	739	$	1,561	$	79	$	9,436	$	3,539	$	327	$	3,866	$	510	$	13,812

29

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 September 30, 2019 and December 31, 2018, including PCI loans.

	Commercial										Consumer
(Dollars in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total
September 30, 2019
Loans allocated by:
Individually evaluated for impairment	$	3,566	$	0	$	1,089	$	0	$	4,655	$	3,311	$	7	$	3,318	$	0	$	7,973
Collectively evaluated for impairment	707,241		50,751		214,645		47,920		1,020,557		525,605		38,970		564,575		0		1,585,132
	$	710,807	$	50,751	$	215,734	$	47,920	$	1,025,212	$	528,916	$	38,977	$	567,893	$	0	$	1,593,105
ALL allocated by:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	36	$	0	$	36	$	0	$	36
Collectively evaluated for impairment	7,423		820		2,372		93		10,708		3,706		233		3,939		126		14,773
	$	7,423	$	820	$	2,372	$	93	$	10,708	$	3,742	$	233	$	3,975	$	126	$	14,809
December 31, 2018
Loans allocated by:
Individually evaluated for impairment	$	2,320	$	0	$	286	$	0	$	2,606	$	3,691	$	0	$	3,691	$	0	$	6,297
Collectively evaluated for impairment	559,424		49,436		160,678		50,982		820,520		387,429		33,411		420,840		0		1,241,360
	$	561,744	$	49,436	$	160,964	$	50,982	$	823,126	$	391,120	$	33,411	$	424,531	$	0	$	1,247,657
ALL allocated by:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	38	$	0	$	38	$	0	$	38
Collectively evaluated for impairment	6,876		817		1,656		98		9,447		3,715		244		3,959		570		13,976
	$	6,876	$	817	$	1,656	$	98	$	9,447	$	3,753	$	244	$	3,997	$	570	$	14,014

The following table provides activity for the accretable yield of purchased credit impaired loans for the three and nine months ended September 30, 2019.

	Three Months Ended		Nine Months Ended
(Dollars in thousands)	September 30, 2019		September 30, 2019
Accretable yield, beginning of period	$	4,988	$	2,065
New loans purchased	0		3,497
Accretion of income	(422)		(1,814)
Reclassifications from nonaccretable difference due to improvement in expected cash flows	825		1,441
Other changes, net	319		521
Accretable yield, end of period	$	5,710	$	5,710

30

NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS

The following table presents changes in goodwill at September 30, 2019 and December 31, 2018.

(Dollars in thousands)	September 30, 2019		December 31, 2018
Balance, beginning of year	$	12,592	$	719
Acquired goodwill	7,029		11,873
Adjustments to acquired goodwill	304		0
Balance, end of period	$	19,925	$	12,592

The following table presents changes in other intangible assets for the three and nine months ended September 30, 2019 and 2018.

	Three Months Ended				Nine Months Ended
(Dollars in thousands)	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Beginning of period	$	8,140	$	308	$	3,910	$	356
Acquired CDI	0		0		4,550		0
Non-compete agreement	0		0		290		0
Amortization Expense	(486)		(24)		(1,096)		(72)
Balance, end of period	$	7,654	$	284	$	7,654	$	284

The following table presents the components of other identifiable intangible assets at September 30, 2019 and December 31, 2018.

	September 30, 2019				December 31, 2018
(Dollars in thousands)	Gross Amount		Accumulated Amortization		Gross Amount		Accumulated Amortization
Amortized intangible assets:
Core deposit intangibles	$	8,390	$	1,106	$	3,840	$	190
Other customer relationship intangibles	931		730		931		671
Non-compete agreement	290		121		0		0
Total	$	9,611	$	1,957	$	4,771	$	861

The following table presents estimated aggregate amortization expense for intangible assets remaining at September 30, 2019.

(Dollars in thousands)
Remainder of 2019	$	474
2020	1,591
2021	1,313
2022	1,137
2023	960
Thereafter	2,179
	$	7,654

31

NOTE 6. 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 our leases contain renewal options, which we are reasonably certain to exercise. Including renewal options, our leases range from 3 years to 50 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 Consolidated Balance Sheet.

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 summarizes the Company's ROU assets and related lease liabilities for the three and nine months at September 30, 2019.

	Three Months Ended		Nine Months Ended
(Dollars in thousands)	September 30, 2019		September 30, 2019
Cash paid for operating lease liabilities	330		$	791
Right-of-use assets obtained in exchange for operating lease obligations (1)	0		$	10,908
Weighted-average remaining lease term (in years)	17.6		17.6
Weighted-average discount rate	4.5	%	4.5		%

⁽¹⁾ Includes $7,971,000 for operating leases existing on January 1, 2019, $144,000 for operating leases that commenced in the first quarter of 2019, and $2,793,000 for operating leases that were acquired in the second quarter of 2019.

The following table presents maturities of the Company's lease liabilities.

(Dollars in thousands)
Remainder of 2019	$	332
2020	1,336
2021	1,207
2022	788
2023	810
2024	801
Thereafter	10,976
	16,250
Less imputed interest	5,810
Total lease liabilities	$	10,440

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 2015.

The following table summarizes income tax expense for the three and nine months ended September 30, 2019 and 2018.

	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2019		2018		2019		2018
Current expense	$	244	$	406	$	334	$	754
Deferred expense	1,096		238		1,348		756
Income tax expense	$	1,340	$	644	$	1,682	$	1,510

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Income tax expense includes $489,000 and $6,000 related to net securities gains for the three months ended September 30, 2019 and 2018, and $994,000 and $187,000 related to net security gains for the nine months ended September 30, 2019 and 2018.

The following table summarizes deferred tax assets and liabilities at September 30, 2019 and December 31, 2018.

(Dollars in thousands)	September 30, 2019		December 31, 2018
Deferred tax assets:
Allowance for loan losses	$	3,465	$	3,143
Deferred compensation	396		723
Retirement and salary continuation plans	2,326		1,416
Share-based compensation	592		742
Off-balance sheet reserves	270		219
Nonaccrual loan interest	843		537
Net unrealized losses on AFS securities	0		791
Purchase accounting adjustments	4,349		1,795
Bonus accrual	366		470
Low-income housing credit carryforward	341		641
Net operating loss carryovers	1,872		0
Other	473		321
Total deferred tax assets	15,293		10,798
Deferred tax liabilities:
Depreciation	440		458
Net unrealized gains on AFS securities	711		0
Mortgage servicing rights	644		590
Purchase accounting adjustments	1,682		1,021
Other	250		150
Total deferred tax liabilities	3,727		2,219
Net deferred tax asset, included in Other Assets	$	11,566	$	8,579

The provision for income taxes differs from that computed by applying statutory rates to income before income taxes, primarily due to the effects of tax-exempt income, non-deductible expenses and tax credits. In the first quarter of 2019, the Company recorded a tax benefit of $185,000, related to a favorable tax law clarification concerning the treatment of life insurance assets of an acquired entity. In the second quarter of 2019, the Company recorded a tax benefit of $334,000, 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.

At September 30, 2019, the Company had low-income housing credit carryforwards that expire through 2038 and acquired federal and state net operating loss carryforwards, that are subject to annual loss limitation limits, that expire through 2037.

NOTE 8. 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 September 30, 2019, 881,920 shares of the common stock of the Company were reserved to be issued and 483,178 shares were available to be issued.

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

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The table below presents a summary of nonvested restricted shares activity for the nine months ended September 30, 2019.

	Shares	Weighted Average Grant Date Fair Value
Nonvested shares, beginning of year	275,412	$	20.33
Granted	86,543	19.71
Forfeited	(35,869)	19.42
Vested	(114,405)	17.22
Nonvested shares, at period end	211,681	$	21.91

The following table presents restricted shares compensation expense, with tax benefit information, and fair value of shares vested, for the three and nine months ended September 30, 2019 and 2018.

	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2019		2018		2019		2018
Restricted share award expense	$	470	$	179	$	1,146	$	1,099
Restricted share award tax benefit	212		38		361		231
Fair value of shares vested	2,056		0		2,500		1,056

The unrecognized compensation expense related to the share awards totaled $1,993,000 at September 30, 2019 and $2,115,000 at December 31, 2018. The unrecognized compensation expense at September 30, 2019 is expected to be recognized over a weighted-average period of 1.7 years.

The following table presents a summary of outstanding stock options activity for the nine months ended September 30, 2019.

	Shares	Weighted Average Exercise Price
Outstanding, beginning of year	40,984	$	24.34
Expired	(10,425)	32.47
Options outstanding and exercisable	30,559	$	21.56

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 September 30, 2019.

Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price
$21.14 - $25.76	30,559	0.78	$	21.56

Outstanding and exercisable options had an intrinsic value of $21,000 at September 30, 2019 and $0 at December 31, 2018.

The Company maintains an employee stock purchase plan to provide employees of the Company an opportunity to purchase Company common stock. Eligible employees may purchase shares in an amount that does not exceed 10% of their annual salary, at the lower of 95% of the fair market value of the shares on the semi-annual offering date or related purchase date. The Company reserved 350,000 shares of its common stock to be issued under the employee stock purchase plan. At September 30, 2019, 168,066 shares were available to be issued.

The following table presents information for the employee stock purchase plan for the three and nine months ended September 30, 2019 and 2018.

	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands except share information)	2019		2018		2019		2018
Shares purchased	2,395		2,951		5,399		5,907
Weighted average price of shares purchased	$	22.87	$	22.61	$	20.69	$	23.04
Compensation expense recognized	5		10		8		14
Tax benefits	1		2		2		3

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

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NOTE 9. 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 required capital conservation buffer was 1.875% for 2018 and is 2.50% for 2019 under phase-in rules which were completed in 2019.

The consolidated asset limit on small bank holding companies is $3,000,000,000 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 September 30, 2019 and December 31, 2018.

At September 30, 2019, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's classification. 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.

The following table presents capital amounts and ratios at September 30, 2019 and December 31, 2018.  

	Actual				For Capital Adequacy Purposes (includes applicable capital conservation buffer)				To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2019
Total Capital to risk weighted assets
Consolidated	$	240,674	14.5	%	$	174,255	10.5	%	n/a		n/a
Bank	226,296		13.6	%	174,112		10.5	%	$	165,821	10.0	%
Tier 1 Capital to risk weighted assets
Consolidated	192,818		11.6	%	141,064		8.5	%	n/a		n/a
Bank	210,274		12.7	%	140,948		8.5	%	132,656		8.0	%
Common Tier 1 (CET1) to risk weighted assets
Consolidated	192,818		11.6	%	116,170		7.0	%	n/a		n/a
Bank	210,274		12.7	%	116,074		7.0	%	107,783		6.5	%
Tier 1 Capital to average assets
Consolidated	192,818		8.2	%	94,360		4.0	%	n/a		n/a
Bank	210,274		8.9	%	94,413		4.0	%	118,016		5.0	%
December 31, 2018
Total Capital to risk weighted assets
Consolidated	$	206,988	15.6	%	$	131,393	9.875	%	n/a		n/a
Bank	177,892		13.4	%	131,286		9.875	%	$	132,948	10.0	%
Tier 1 Capital to risk weighted assets
Consolidated	160,117		12.0	%	104,782		7.875	%	n/a		n/a
Bank	162,880		12.3	%	104,696		7.875	%	106,358		8.0	%
Common Tier 1 (CET1) to risk weighted assets
Consolidated	160,117		12.0	%	84,823		6.375	%	n/a		n/a
Bank	162,880		12.3	%	84,754		6.375	%	86,416		6.5	%
Tier 1 Capital to average assets
Consolidated	160,117		8.4	%	76,089		4.0	%	n/a		n/a
Bank	162,880		8.6	%	76,113		4.0	%	95,142		5.0	%

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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. When and if appropriate, repurchases may be made in open market or privately negotiated transactions, depending on market conditions, regulatory requirements and other corporate considerations, as determined by management. Share repurchases may not occur and may be discontinued at any time. At September 30, 2019, 82,725 shares had been repurchased under the program at a total cost of $1,438,000, or $17.38 per share.

On October 23, 2019, the Board declared a cash dividend of $0.15 per common share, which will be paid on November 12, 2019 to shareholders of record at November 4, 2019.

NOTE 10. EARNINGS PER SHARE

The following table presents earnings per share for the three and nine months ended September 30, 2019 and 2018.

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share information)	2019		2018		2019		2018
Net income	$	6,901	$	4,016	$	12,690	$	11,653
Weighted average shares outstanding - basic	10,949		8,099		10,159		8,092
Dilutive effect of share-based compensation	145		172		159		182
Weighted average shares outstanding - diluted	11,094		8,271		10,318		8,274
Per share information:
Basic earnings per share	$	0.63	$	0.50	$	1.25	$	1.44
Diluted earnings per share	0.62		0.49		1.23		1.41

Average outstanding stock options and restricted shares totaling 21,000 and 21,000 for the three months ended September 30, 2019 and 2018, and totaling 36,000 and 23,000 for the nine months ended September 30, 2019 and 2018, 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. The dilutive effect of share-based compensation in each period above relates principally to restricted stock awards.

NOTE 11. 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 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 contract, or notional, amounts.

	Contract or Notional Amount
(Dollars in thousands)	September 30, 2019		December 31, 2018
Commitments to fund:
Home equity lines of credit	$	201,353	$	160,971
1-4 family residential construction loans	26,630		13,002
Commercial real estate, construction and land development loans	15,742		31,133
Commercial, industrial and other loans	173,780		147,518
Standby letters of credit	14,604		13,909

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

36

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.

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 September 30, 2019 and December 31, 2018, for guarantees under standby letters of credit issued was not material.

NOTE 12. 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 the Company’s securities are classified as available for sale.

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The Company had no fair value liabilities measured on a recurring basis at September 30, 2019 and December 31, 2018.

The following table summarizes assets measured at fair value on a recurring basis at September 30, 2019 and December 31, 2018.

(Dollars in Thousands)	Level 1		Level 2		Level 3		Total Fair Value Measurements
September 30, 2019
AFS Securities:
States and political subdivisions	$	0	$	82,712	$	0	$	82,712
GSE residential CMOs	0		71,001		0		71,001
Private label commercial CMOs	0		80,554		7,213		87,767
Asset-backed and other	0		239,640		0		239,640
Totals	$	0	$	473,907	$	7,213	$	481,120
December 31, 2018
AFS Securities:
States and political subdivisions	$	0	$	145,004	$	0	$	145,004
GSE residential CMOs	0		108,064		0		108,064
Private label residential CMOs	0		143		0		143
Private label commercial CMOs	0		67,836		7,209		75,045
Asset-backed and other	0		137,588		0		137,588
Totals	$	0	$	458,635	$	7,209	$	465,844

One private label commercial CMO was measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at September 30, 2019 and December 31, 2018. Fair value for this investment totaled $7,213,000 at September 30, 2019 and $7,209,000 at December 31, 2018. The investment was purchased at $7,213,000. Premium amortization expense totaling $31,000 and $72,000 was included in earnings for the three and nine months ended September 30, 2019, and an unrealized gain (loss) totaling $(87,000) and $76,000 was recognized in other comprehensive income for the three and nine months ended September 30, 2019. 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.

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

Impaired Loans

Loans are designated as impaired when, in the judgment of management and based on current information and events, it is probable that all amounts due, according to the contractual terms of the loan agreement, will not be collected. The measurement of loss associated with impaired loans for all loan classes can be based on either the observable market price of the loan, the fair value of the collateral, or discounted cash flows based on a market rate of interest 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 consolidated statements of income. Specific allocations to the ALL or partial charge-offs totaled $863,000 and $928,000 at September 30, 2019 and December 31, 2018.

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The following table presents changes in the fair value for impaired loans still held at September 30, considered in the determination of the provision for loan losses, for the three and nine months ended September 30, 2019 and 2018.

	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2019		2018		2019		2018
Changes in fair value of impaired loans still held	$	21	$	63	$	49	$	147

Foreclosed Real Estate

OREO property acquired through foreclosure is initially recorded at the fair value of the property at the transfer date less estimated selling cost. Subsequently, OREO is carried at the lower of its carrying value or the fair value less estimated selling cost. Fair value is usually determined based upon an independent third-party appraisal of the property or occasionally upon a recent sales offer. Specific charges to value OREO at the lower of cost or fair value on properties held at September 30, 2019 and December 31, 2018 both totaled $0. There were no changes in the fair value of OREO for properties, still held at September 30, that were charged to real estate expenses for the three and nine months ended September 30, 2019. The fair value of OREO properties changed $11,000 for the three and nine months ended September 30, 2018.

Mortgage Servicing Rights

The fair value of mortgage servicing rights is estimated to be equal to its carrying value, unless the quarterly valuation model calculates the present value of the estimated net servicing income is less than its carrying value, in which case a lower of cost or fair value charge is taken. At September 30, 2019, a $240,000 lower of cost or fair value reserve existed on the mortgage servicing right portfolio. For the three and nine months ended September 30, 2019, impairment charges of $221,000 and $240,000 were recorded. No reserve existed at December 31, 2018, and no impairment charges were recorded in 2018.

The following table summarizes assets measured at fair value on a nonrecurring basis at September 30, 2019 and December 31, 2018.

(Dollars in thousands)	Level 1		Level 2		Level 3		Total Fair Value Measurements
September 30, 2019
Impaired Loans
Commercial real estate:
Owner occupied	$	0	$	0	$	971	$	971
Multi-family	0		0		105		105
Non-owner occupied residential	0		0		136		136
Commercial and industrial	0		0		6		6
Residential mortgage:
First lien	0		0		722		722
Home equity - lines of credit	0		0		407		407
Installment and other loans	0		0		7		7
Total impaired loans	$	0	$	0	$	2,354	$	2,354
Mortgage servicing rights	$	0	$	3,116	$	0	$	3,116
December 31, 2018
Impaired Loans
Commercial real estate:
Owner occupied	$	0	$	0	$	1,087	$	1,087
Multi-family	0		0		131		131
Non-owner occupied residential	0		0		278		278
Commercial and industrial	0		0		25		25
Residential mortgage:
First lien	0		0		1,121		1,121
Home equity - lines of credit	0		0		409		409
Total impaired loans	$	0	$	0	$	3,051	$	3,051

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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.

(Dollars in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range
September 30, 2019
Impaired loans	$	2,354	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	5% - 30% discount
				- Management adjustments for liquidation expenses	6%- 33% discount
Mortgage servicing rights	3,116		Discounted cash flows	Weighted average CPR	12.7%
				- Weighted average discount rate	9.5%
December 31, 2018
Impaired loans	$	3,051	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	5% - 75% discount
				- Management adjustments for liquidation expenses	6% - 20% discount

Fair values of financial instruments

The following table presents carrying amounts and estimated fair values of the Company’s financial instruments at September 30, 2019 and December 31, 2018:

(Dollars in thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
September 30, 2019
Financial Assets
Cash and due from banks	$	31,872	$	31,872	$	31,872	$	0	$	0
Interest-bearing deposits with banks	19,051		19,051		19,051		0		0
Restricted investments in bank stocks	11,399		n/a		n/a		n/a		n/a
AFS securities	481,120		481,120		0		473,907		7,213
Loans held for sale	7,610		7,819		0		7,819		0
Loans (carrying amount net of allowance for loan losses)	1,578,296		1,605,129		0		0		1,605,129
Accrued interest receivable	6,546		6,546		0		2,371		4,175
Financial Liabilities
Deposits	1,923,454		1,923,901		0		1,923,901		0
Short-term borrowings	36,605		36,605		0		36,605		0
Long-term debt	63,165		63,497		0		63,497		0
Subordinated notes	31,834		32,474		0		32,474		0
Accrued interest payable	1,468		1,468		0		1,468		0
Off-balance sheet instruments	0		0		0		0		0
December 31, 2018
Financial Assets
Cash and due from banks	$	26,156	$	26,156	$	26,156	$	0	$	0
Interest-bearing deposits with banks	45,664		45,664		45,664		0		0
Federal Funds Sold	16,995		16,995		16,995		0		0
Restricted investments in bank stocks	10,842		n/a		n/a		n/a		n/a
AFS securities	465,844		465,844		0		458,635		7,209
Loans held for sale	3,340		3,413		0		3,413		0
Loans, net of allowance for loan losses	1,233,643		1,229,645		0		0		1,229,645
Accrued interest receivable	5,927		5,927		0		2,853		3,074
Financial Liabilities
Deposits	1,558,756		1,555,912		0		1,555,912		0
Short-term borrowings	64,069		64,069		0		64,069		0
Long-term debt	83,450		82,951		0		82,951		0
Subordinated notes	31,859		31,256		0		31,256		0
Accrued interest payable	1,301		1,301		0		1,301		0
Off-balance sheet instruments	0		0		0		0		0

The methods utilized to measure the fair value of financial instruments at September 30, 2019 and December 31, 2018 represent an approximation of exit price; however, an actual exit price may differ.

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NOTE 13. REVENUE FROM CONTRACTS WITH CUSTOMERS

All of the Company's revenue from contracts with customers within the scope of ASC 606 is recognized within noninterest income on the consolidated statements of income. Consistent with ASC 606, noninterest income covered by this guidance is recognized as services are transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

Service Charges on Deposit Accounts - The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed, as that is the point in time the Company fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance.

Interchange Income - The Company earns interchange fees from debit/credit cardholder transactions conducted through the MasterCard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Interchange income is presented net of cardholder rewards.

Loan swap referral fees - The Company earns fees from a third-party service provider for loan hedging referrals provided to lending clients. The Company acts as an agent in arranging the relationship between our client and the third-party service provider. The company is paid and recognizes income upon completion of the loan hedge between our client and the third-party service provider.

Wealth Management and Investment Advisory Income (Gross) - The Company earns wealth management and investment brokerage fees from its contracts with trust and wealth management customers to manage assets for investment, and/or to transact on their accounts. Asset management fees are primarily earned over time as the Company provides the contracted services and are generally assessed based on a tiered scale of the market value of assets under management. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed, i.e., the trade date. Other related services provided included financial planning services, and the fees the Company earns for such services, which are based on a fixed fee schedule, are recognized when the services are rendered. Services are generally billed in arrears and a receivable is recorded until fees are paid.

Investment Brokerage Income (Net) - The Company earns fees from investment management and brokerage services provided to its customers through a third-party service provider. The Company receives commissions from the third-party service provider and recognizes income on a weekly basis based upon customer activity. Because the Company acts as an agent in arranging the relationship between the customer and the third-party service provider and does not control the services rendered to the customers, investment brokerage income is presented net of related costs.

Gains/Losses on Sales of OREO - The Company records a gain or loss on the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. If the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.

At September 30, 2019 and December 31, 2018, the Company had receivables from customers totaling $737,000 and $640,000.

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The following table presents our noninterest income disaggregated by revenue source for the three and nine months ended September 30, 2019 and 2018.

	Three Months Ended				Nine Months Ended
(Dollars in thousands)	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Noninterest income
Service charges on deposits	$	1,025	$	926	$	2,802	$	2,599
Loan swap referral fees	629		0		629		0
Trust and investment management income	1,892		1,668		5,399		5,037
Brokerage income	654		455		1,804		1,514
Merchant and bankcard fees (interchange income)	843		681		2,422		2,047
Revenue from contracts with customers	5,043		3,730		13,056		11,197
Other service charges	265		409		665		1,189
Mortgage banking activities	623		735		1,743		2,049
Income from life insurance	479		533		1,505		1,101
Other income	44		56		188		272
Investment securities gains	2,328		29		4,731		891
Total noninterest income	$	8,782	$	5,492	$	21,888	$	16,699

NOTE 14. CONTINGENCIES

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

On May 25, 2012, SEPTA 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 “Defendants”). The complaint alleges, among other things, that (i) in connection with the Company’s Registration Statement on Form S-3 dated February 23, 2010 and its Prospectus Supplement dated March 23, 2010, and (ii) during the purported class period of March 24, 2010 through October 27, 2011, the Company issued materially false and misleading statements regarding the Company’s lending practices and financial results, including misleading statements concerning the stringent nature of the Bank’s credit practices and underwriting standards, the quality of its loan portfolio, and the intended use of the proceeds from the Company’s March 2010 public offering of common stock. The complaint asserts claims under Sections 11, 12(a) and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and seeks class certification, unspecified money damages, interest, costs, fees and equitable or injunctive relief. Under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), motions for appointment of Lead Plaintiff in this case were due by July 24, 2012. SEPTA was the sole movant and the Court appointed SEPTA Lead Plaintiff on August 20, 2012.

Pursuant to the PSLRA and the Court’s September 27, 2012 Order, SEPTA was given until October 26, 2012 to file an amended complaint and the Defendants until December 7, 2012 to file a motion to dismiss the amended complaint. SEPTA’s opposition to the Defendant’s 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 expands the list of defendants in the action to include the Company’s independent registered public accounting firm and the underwriters of the Company’s March 2010 public offering of common stock. In addition, among other things, the amended complaint extends the purported 1934 Exchange Act class period from March 15, 2010 through April 5, 2012. Pursuant to the Court’s March 28, 2013 Second

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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 Securities Exchange Act of 1934, as amended. The Court ordered that, within 30 days, SEPTA either seek leave to amend its amended complaint, accompanied by the proposed amendment, or file a notice of its intention to stand on the amended complaint.

On July 22, 2015, SEPTA filed a motion for leave to amend under Local Rule 15.1, and attached a copy of its proposed second amended complaint to its motion. Many of the allegations of the proposed second amended complaint are essentially the same or similar to the allegations of the dismissed amended complaint. The proposed second amended complaint also alleges that the Orrstown Defendants did not publicly disclose certain alleged failures of internal controls over loan underwriting, risk management, and financial reporting during the period 2009 to 2012, in violation of the federal securities laws. On February 8, 2016, the Court granted SEPTA’s motion for leave to amend and SEPTA filed its second amended complaint that same day.

On February 25, 2016, the Court issued a scheduling Order directing: all defendants to file any motions to dismiss by March 18, 2016; SEPTA to file an omnibus opposition to defendants’ motions to dismiss by April 8, 2016; and all defendants to file reply briefs in support of their motions to dismiss by April 22, 2016. Defendants timely filed their motions to dismiss the second amended complaint and the parties filed their briefs in accordance with the Court-ordered schedule, above. The February 25, 2016 Order stays all discovery and other deadlines in the case (including the filing of SEPTA’s motion for class certification) pending the outcome of the motions to dismiss.

The allegations of SEPTA’s 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 $1,000,000. 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 closes on March 1, 2018, and SEPTA’s motion for class certification is due the same day; expert merits discovery closes May 30, 2018;

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summary judgment motions are due by June 26, 2018; the mandatory pretrial and settlement conference is set for December 11, 2018; and trial is scheduled to begin on January 7, 2019.

On December 15, 2017, the Orrstown Defendants and SEPTA exchanged expert reports in opposition to and in support of class certification, respectively. On January 15, 2018, the parties exchanged expert rebuttal reports. SEPTA’s motion for class certification was due March 1, 2018, with the Orrstown Defendants’ opposition due April 2, 2018, and SEPTA’s reply due April 23, 2018.

On February 9, 2018, SEPTA filed a Status Report and Request for a Telephonic Status Conference asking the Court to convene a conference to discuss the status of discovery in the case and possible revisions to the case schedule. On February 12, 2018, the Orrstown Defendants filed their status report to provide the Court with a summary of document discovery in the case to date. On February 27, 2018, SEPTA filed an unopposed motion for a continuance of the existing case deadlines pending a status conference with the Court or the issuance of a revised case schedule. On February 28, 2018, the Court issued an Order continuing all case management deadlines until further order of the Court.

On March 27, 2018, the Court held a telephonic status conference with the parties to discuss outstanding discovery issues and case deadlines. On May 2, 2018, the parties filed a joint status report. On May 10, 2018, the Court held a follow-up telephonic status conference at which the parties reported on the progress of discovery to date. Party and non-party document discovery in the case has continued. To date, SEPTA has taken a few non-party depositions.

On August 9, 2018, SEPTA filed a motion to compel the production of Confidential Supervisory Information (CSI) of non-parties the Board of Governors of the Federal Reserve System (FRB) and the Pennsylvania Department of Banking and Securities, in the possession of Orrstown and third parties. On August 23, 2018, the Orrstown Defendants filed a response to the motion to compel. On August 30, 2018, the FRB filed an unopposed motion to intervene in the Action for the 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. That motion is pending.

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 Smith Elliott Kearns & Company, LLC and the underwriters joined in Orrstown’s motion for protective order. On June 25, 2019, SEPTA filed its opposition to Orrstown’s motion. On July 9, 2019, Orrstown filed a reply brief in further support of its motion. On July 17, 2019, the Court entered an Order partially granting Orrstown’s motion for protective order, ruling that all deposition discovery in the case is stayed pending a decision on SEPTA’s motion for leave to file a third amended complaint.

The Company believes that the allegations of SEPTA’s second amended complaint, and the allegations of the proposed third amended complaint, are without merit and intends to defend itself vigorously against those claims. It is not possible at this time to estimate reasonably possible losses, or even a range of reasonably possible losses, in connection with the litigation.

NOTE 15. SUBSEQUENT EVENT

In October, 2019, the Board of Directors approved a plan to consolidate five Pennsylvania branch locations and to sell an operations center. The plan is part of the Company's ongoing efforts to target serving local communities, to invest in new technologies to support changes in client preferences, to grow the Bank, and to optimize returns for shareholders. Subject to regulatory approval, the five Pennsylvania branches will be consolidated into other, larger, Orrstown Bank branches.

One time charges associated with the branch consolidations and operations center sale are estimated to be in the range of $800,000 to $1,200,000 in the fourth quarter of 2019 and thereafter cost savings are estimated to be in the range of $1,500,000 to $2,000,000 annually, beginning in the second quarter of 2020. It is anticipated that the consolidations and operations center sale will be completed in the first quarter of 2020. Approximately one third of the operations center space will be leased back to the Bank, eliminating approximately 50,000 square feet of excess back office space. The sale is not expected to result in a material gain or loss or materially impact future earnings.

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See the Glossary of Defined Terms at the beginning of this Report for terms used throughout this Form 10-Q.

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

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, the Bank and Wheatland. At September 30, 2019, the Company had total assets of $2,313,677,000, total liabilities of $2,090,184,000 and total shareholders’ equity of $223,493,000.

Caution About Forward-Looking Statements

Certain statements appearing herein, which are not historical in nature, are forward-looking statements within the meaning 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. 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 strategy due to changes in current or future market conditions; the effects of competition, including industry consolidation and development of competing financial products and services; difficulty integrating 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; volatilities in the securities markets; deteriorating economic conditions; expenses associated with pending litigation and legal proceedings; and other risks and uncertainties, including those detailed in our Annual Report on Form 10-K for the year ended December 31, 2018, 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.

The following is a discussion of our consolidated financial condition at September 30, 2019 and results of operations for the nine months ended September 30, 2019 and 2018. 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. The discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and accompanying notes presented elsewhere in this report. Certain prior period amounts, presented in this discussion and analysis, may have been reclassified to conform to current period classifications.

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, 2018. 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, 2018. Additional disclosures regarding the effects of new accounting pronouncements are included in this report in Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements under Part I, Item 1, "Financial Information."

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RESULTS OF OPERATIONS

Quarter ended September 30, 2019 compared with quarter ended September 30, 2018

Summary

Net income totaled $6,901,000 for the three months ended September 30, 2019 compared with net income totaling $4,016,000 for the same period in 2018. Diluted EPS for the three months ended September 30, 2019 totaled $0.62, compared with $0.49 for the three months ended September 30, 2018. Net interest income positively influenced results of operations, and totaled $17,920,000 for the three months ended September 30, 2019, a 41.06% increase compared with 2018. Noninterest income, excluding investment securities gains, totaled $6,454,000 for the three months ended September 30, 2019 and $5,463,000 for 2018. Investment securities gains totaled $2,328,000 in the three months ended September 30, 2019, compared with $29,000 for the same period in 2018. Noninterest expenses totaled $18,161,000 and $13,336,000 for the three months ended September 30, 2019 and 2018. Noninterest expenses in 2019 included merger related expenses totaling $471,000 associated with the Company's ongoing growth strategy.

The comparability of operating results for 2019 with 2018 have generally been impacted by the Mercersburg acquisition, completed on October 1, 2018, and the Hamilton acquisition, completed on May 1, 2019.

Net Interest Income

Net interest income increased $5,216,000, from $12,704,000 to $17,920,000, for the three months ended September 30, 2019 compared with the same period in 2018. Interest and fees income on loans increased $7,718,000, from $12,281,000 to $19,999,000, securities interest income increased $219,000, from $3,877,000 to $4,096,000, and total interest expense increased $3,214,000 from $3,522,000 to $6,736,000, in comparing the three months ended September 30, 2019 with 2018.

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The following table presents net interest income, net interest spread and net interest margin for the three months ended September 30, 2019 and 2018 on a taxable-equivalent basis.

	Three Months Ended September 30, 2019						Three Months Ended September 30, 2018
(Dollars in thousands)	Average Balance		Taxable- Equivalent Interest		Taxable- Equivalent Rate		Average Balance		Taxable- Equivalent Interest		Taxable- Equivalent Rate
Assets
Federal funds sold & interest-bearing bank balances	$	96,212	$	561	2.31	%	$	13,058	$	68	2.07	%
Securities (1)	496,482		4,177		3.34		490,750		4,131		3.34
Loans (1)(2)	1,604,491		20,126		4.98		1,074,106		12,376		4.57
Total interest-earning assets	2,197,185		24,864		4.49		1,577,914		16,575		4.17
Other assets	193,946						108,976
Total	$	2,391,131					$	1,686,890
Liabilities and Shareholders’ Equity
Interest-bearing demand deposits	$	954,824	2,185		0.91		$	759,789	$	1,377	0.72
Savings deposits	151,692		81		0.21		97,527		38		0.15
Time deposits (3)	658,587		3,508		2.11		328,321		1,365		1.65
Short-term borrowings	10,497		39		1.48		63,617		332		2.07
Long-term debt	74,524		433		2.30		83,596		410		1.95
Subordinated notes	31,826		490		6.10		0		0		0.00
Total interest-bearing liabilities	1,881,950		6,736		1.42		1,332,850		3,522		1.05
Noninterest-bearing demand deposits	252,211						191,533
Other	35,720						17,323
Total Liabilities	2,169,881						1,541,706
Shareholders’ Equity	221,250						145,184
Total	$	2,391,131					$	1,686,890
Taxable-equivalent net interest income /net interest spread			18,128		3.07	%			13,053		3.12	%
Taxable-equivalent net interest margin					3.27	%					3.28	%
Taxable-equivalent adjustment			(208)						(349)
Net interest income			$	17,920					$	12,704

Table notes: ⁽¹⁾ Yields and interest income on tax-exempt assets have been computed on a taxable-equivalent basis assuming a 21% tax rate.

⁽²⁾ For yield calculation purposes, nonaccruing loans are included in the average loan balance.

⁽³⁾ For the three months ended September 30, 2019, expenses associated with the early redemption of brokered time deposits totaled $215,000, and increased the cost of funds by 13 basis points.

For the quarter ended September 30, 2019, taxable-equivalent basis net interest income increased $5,075,000 from 2018. The increase reflected a changing interest rate environment with increased average interest-earning assets balances partially offset by a higher average balance of interest-bearing liabilities. The FOMC increased the Fed Funds target rate 25 basis points in both September and December, 2018, and decreased it 25 basis points in both July and September, 2019.

Taxable-equivalent interest income earned on loans increased $7,750,000 year-over-year. The $530,385,000 increase in average loan balance year-over-year reflects loans acquired in the Mercersburg and Hamilton transactions, which totaled approximately $425,900,000 at September 30, 2019. During the third quarter of 2019, the Company experienced a net $9,000,000 reduction in loans outstanding due to repayments totaling $16,000,000 from the acquired Hamilton loan portfolio. The focus on the successful Hamilton system conversion in the third quarter while simultaneously recruiting and onboarding a team of experienced lenders in the Maryland Region resulted in a slowdown in loan origination activity in Maryland. The noted rate increases in 2018 contributed to the 41 basis point increase in yield, but a flattened yield curve and the rate reductions in July and September, 2019, partially offset the benefit of the 2018 rate increases. Accretion of purchase accounting adjustments in connection with the Mercersburg and Hamilton acquisitions increased third quarter 2019 interest income by $880,000. Interest income included $21,000 related to the payoff of purchased credit impaired loans.

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Taxable-equivalent securities interest income increased $46,000 year-over-year, with the average balance of securities increasing $5,732,000 from September 30, 2018 to September 30, 2019. The taxable equivalent yield was 3.34% year-over-year and reflected the changing interest rate environment and certain repositioning within the portfolio under the Company's asset/liability management strategies.

Interest expense on deposits and borrowings increased $3,214,000 year-over-year, with the average balance of interest-bearing deposits increasing $579,466,000 and the average balance of total borrowings decreasing $30,366,000. In addition to the impact of the noted changing interest rate environment on interest expense, the Company issued $32,500,000 of 6.0% subordinated notes in December 2018. A seasonal increase in government deposits contributed to an increase in average cash on the balance sheet in the quarter in 2019. Due to the short-term increase in cash, the Company took steps to reduce brokered deposits in an effort to reduce cash to a normal target range of $25,000,000 or less. The excess cash held on the balance sheet, totaling approximately $70,000,000 during the third quarter, negatively impacted the interest margin by 11 basis points.

Provision for Loan Losses

Asset quality trends continue to be solid with a low level of charge-offs and low nonperforming loans. The provision for loan losses totaled $300,000 in the third quarter of 2019, compared with $200,000 for the same period in 2018.

Net recoveries in the quarter ended September 30, 2019 totaled $49,000, equating to (0.01)% annualized as compared with net charge-offs totaling $23,000, or 0.01% annualized, in the previous quarter. Nonperforming loans to loans totaled 0.44% of loans at September 30, 2019, compared with 0.27% of loans at June 30, 2019. Loans outstanding decreased in the quarter with net recoveries, however, the Company experienced a $2,500,000 increase in nonperforming loans during the third quarter of 2019, which required additional reserves.

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

Noninterest Income

The following table compares noninterest income for the three months ended September 30, 2019 and 2018.

	Three Months Ended September 30,				$ Change		% Change
(Dollars in thousands)	2019		2018		2019-2018		2019-2018
Service charges on deposit accounts	$	1,761	$	1,524	$	237	15.6	%
Other service charges, commissions and fees	372		492		(120)		(24.4)	%
Loan swap referral fees	629		0		629		nm*
Trust and investment management income	1,892		1,668		224		13.4	%
Brokerage income	654		455		199		43.7	%
Mortgage banking activities	623		735		(112)		(15.2)	%
Income from life insurance	479		533		(54)		(10.1)	%
Other income	44		56		(12)		(21.4)	%
Subtotal before securities gains	6,454		5,463		991		18.1	%
Investment securities gains	2,328		29		2,299		nm*
Total noninterest income	$	8,782	$	5,492	$	3,290	59.9	%
nm*: not meaningful

The following factors contributed to the more significant changes in noninterest income between the three months ended September 30, 2019 and 2018.

•Income for trust and investment management income and brokerage income included the effect of increased revenue from additional advisors and increased estate fees in 2019.

•In the third quarter of 2019, the Company recognized $629,000 for loan swap referral fees under a program in which it refers qualified commercial borrowers to a third party, which enters into an interest rate swap agreement with the borrower. The rate swap provides the borrower with the economic equivalent of a fixed-rate loan while allowing the Company to receive a variable rate of interest. Income from this program will vary from quarter to quarter depending on demand from qualified borrowers with a preference to enter into swap agreements with the third party.

48

•Mortgage banking income decreased in the year-over-year comparison. In the third quarter of 2019, a $221,000 impairment charge due to decreasing interest rates was recognized on mortgage servicing rights. Loans sold in the quarter totaled $34.4 million compared with $27.6 million in the previous year.

•Income from bank owned life insurance included death benefit proceeds totaling $242,000 in 2018, with the remainder of the change in 2019 attributable to additional life insurance policies acquired in the Mercersburg and Hamilton acquisitions.

•Other line items within noninterest income showed fluctuations between 2019 and 2018 attributable to normal business operations and the effect of the acquisitions.

The Company recognized net investment securities gains in 2019 and 2018 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.

Noninterest Expenses

The following table compares noninterest expenses for the three months ended September 30, 2019 and 2018.

	Three Months Ended September 30,				$ Change		% Change
(Dollars in thousands)	2019		2018		2019-2018		2019-2018
Salaries and employee benefits	$	10,489	$	7,610	$	2,879	37.8	%
Occupancy	1,133		775		358		46.2	%
Furniture and equipment	1,252		990		262		26.5	%
Data processing	830		661		169		25.6	%
Telephone and communication	198		181		17		9.4	%
Automated teller machine and interchange fees	270		187		83		44.4	%
Advertising and bank promotions	279		279		0		0.0	%
FDIC insurance	(9)		169		(178)		(105.3)	%
Legal	189		215		(26)		(12.1)	%
Other professional services	625		361		264		73.1	%
Directors' compensation	228		207		21		10.1	%
Real estate owned	22		18		4		22.2	%
Taxes other than income	306		259		47		18.1	%
Intangible asset amortization	486		24		462		nm*
Merger related	471		319		152		47.6	%
Other operating expenses	1,392		1,081		311		28.8	%
Total noninterest expenses	$	18,161	$	13,336	$	4,825	36.2	%
nm*: not meaningful

The following factors contributed to the more significant changes in noninterest expenses between the three months ended September 30, 2019 and 2018.

•Expanded operations with the addition of employees and branches from the Mercersburg acquisition in October 2018 and the Hamilton acquisition in May 2019; two branches opened in the fourth quarter of 2018 and two opened in the first quarter of 2019 in Lancaster County, Pennsylvania; and additional support personnel for the Company's ongoing expansion efforts all contributed to increases in salaries and employee benefits, occupancy costs, furniture and equipment, and data processing costs year-over-year, as well as the timing of advertising and bank promotions expenses incurred.

49

•Salaries and employee benefits principally reflected employees added in the acquisitions and for additional employees for the Company's new branches. In addition, the net increase included the impact of our overall expansion efforts, annual merit increases, and incremental expense for additional share-based compensation awards granted in 2019, net of the benefit of forfeitures. In 2019, overall costs associated with the Company's self-insured group health plan were higher than in 2018 due to an increased number of employees and fluctuations in claims experience.

•Occupancy, furniture and equipment costs reflected Mercersburg and Hamilton branches acquired, and the Company's expanded presence in Lancaster County, Pennsylvania.

•The decrease in FDIC insurance expense reflects credits received in the third quarter that offset the Bank's second quarter 2019 FDIC assessment. The FDIC's assessment regulations provide that, for banks with consolidated total assets under $10 billion, after the reserve ratio reaches 1.38 percent (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. If the reserve ratio remains at least 1.38%, the Company estimates it will receive credits that will offset its third quarter 2019 assessment and partially offset its fourth quarter 2019 assessment.

•Intangible asset amortization increased principally due to amortization of core deposit intangibles recorded in the Mercersburg and Hamilton acquisitions.

•The Company incurred merger related expenses in the second quarter of 2019, principally employee termination costs and system conversion related fees for the Hamilton acquisition.

•Other line items within noninterest expenses showed fluctuations between 2019 and 2018 attributable to normal business operations and the impact of the acquisitions.

Income Tax Expense

Income tax expense totaled $1,340,000, an effective tax rate of 16.3%, for the three months ended September 30, 2019, compared with $644,000, an effective tax rate of 13.8%, for the three months ended September 30, 2018. The Company’s effective tax rate is significantly 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 certain merger related expenses.

Nine months ended September 30, 2019 compared with nine months ended September 30, 2018

Summary

Net income totaled $12,690,000 for the nine months ended September 30, 2019 compared with net income of $11,653,000 for the same period in 2018. Diluted EPS for the nine months ended September 30, 2019 totaled $1.23, compared with $1.41 for the nine months ended September 30, 2018. Net interest income positively influenced results of operations, and totaled $51,041,000 for the nine months ended September 30, 2019, a $14,300,000 increase compared with 2018. Noninterest income, excluding investment securities gains, totaled $17,157,000 for the nine months ended September 30, 2019 compared with $15,808,000 in 2018. Investment securities gains totaled $4,731,000 in the nine months ended September 30, 2019, compared with $891,000 for the same period in 2018. Noninterest expenses totaled $57,657,000 and $39,677,000 for the nine months ended September 30, 2019 and 2018. Noninterest expenses in 2019 included merger related expenses totaling $7,976,000 associated with the Company's ongoing growth strategy, increased salaries and occupancy expenses, and the write-off of an insurance claim receivable totaling $615,000 resulting from an insurer's denial of a claim from a cyber security incident reported in 2018.

The comparability of operating results for 2019 with 2018 have generally been impacted by the Mercersburg acquisition, completed on October 1, 2018, and the Hamilton acquisition, completed on May 1, 2019.

50

Net Interest Income

Net interest income increased $14,300,000, from $36,741,000 to $51,041,000, for the nine months ended September 30, 2019 compared with the same period in 2018. Interest and fees income on loans increased $19,543,000, from $35,068,000 to $54,611,000, securities interest income increased $2,153,000, from $10,588,000 to $12,741,000, and total interest expense increased $8,464,000 from $9,084,000 to $17,548,000, in comparing the nine months ended September 30, 2019 with 2018.

The following table presents net interest income, net interest spread and net interest margin for the nine months ended September 30, 2019 and 2018 on a taxable-equivalent basis.

	Nine Months Ended September 30, 2019						Nine Months Ended September 30, 2018
(Dollars in thousands)	Average Balance		Taxable- Equivalent Interest		Taxable- Equivalent Rate		Average Balance		Taxable- Equivalent Interest		Taxable- Equivalent Rate
Assets
Federal funds sold & interest-bearing bank balances	$	70,300	$	1237	2.35	%	$	12,169	$	169	1.86	%
Securities (1)	497,669		13,214		3.55		470,290		11,341		3.22
Loans (1)(2)	1,454,468		54,983		5.05		1,053,654		35,343		4.48
Total interest-earning assets	2,022,437		69,434		4.59		1,536,113		46,853		4.08
Other assets	169,308						106,979
Total	$	2,191,745					$	1,643,092
Liabilities and Shareholders’ Equity
Interest-bearing demand deposits	$	907,911	6,053		0.89		$	739,616	3,191		0.58
Savings deposits	137,493		206		0.20		98,105		115		0.16
Time deposits (3)	546,717		8,079		1.98		303,749		3,459		1.52
Short-term borrowings	20,622		316		2.05		83,485		1,097		1.76
Long-term debt	86,537		1,408		2.18		83,686		1,222		1.95
Subordinated notes	31,843		1,486		6.24		0		0		0.00
Total interest-bearing liabilities	1,731,123		17,548		1.36		1,308,641		9,084		0.93
Noninterest-bearing demand deposits	230,056						174,896
Other	30,286						16,480
Total Liabilities	1,991,465						1,500,017
Shareholders’ Equity	200,280						143,075
Total	$	2,191,745					$	1,643,092
Taxable-equivalent net interest income /net interest spread			51,886		3.23	%			37,769		3.15	%
Taxable-equivalent net interest margin					3.43	%					3.29	%
Taxable-equivalent adjustment			(845)						(1,028)
Net interest income			$	51,041					$	36,741

Table notes: (1) Yields and interest income on tax-exempt assets have been computed on a taxable-equivalent basis assuming a 21% tax rate.

(2) For yield calculation purposes, nonaccruing loans are included in the average loan balance.

(3) For the nine months ended September 30, 2019, expenses associated with the early redemption of brokered time deposits totaled $215,000, and increased the cost of funds by 5 basis points.

For the nine months ended September 30, 2019, taxable-equivalent basis net interest income increased $14,117,000 compared with 2018. The increase reflected a changing interest rate environment with increased average interest-earning assets balances partially offset by a higher average balance of interest-bearing liabilities. The FOMC increased the Fed Funds target rate 25 basis points in March, June, September and December, 2018, and decreased it 25 basis points in both July and September, 2019.

Taxable-equivalent interest income earned on loans increased $19,640,000 year-over-year. The $400,814,000 increase in average loan balance year-over-year reflects loans acquired in the Mercersburg and Hamilton transactions, which totaled approximately $425,900,000 at September 30, 2019. Growth in legacy and newer markets through sales efforts with additional loan officers in the first half of 2019 was partially offset by repayments within the acquired Hamilton loan portfolio in the third quarter, as previously described. The interest rate increases in 2018 contributed to the 57 basis point increase in yield, but a flattened yield curve and the rate reduction in July and September, 2019, partially offset the benefit of the 2018 rate increases.

51

Accretion of purchase accounting adjustments in connection with the Mercersburg and Hamilton acquisitions increased interest income in the first nine months of 2019 by $2,500,000, including $736,000 related to the payoff of purchased credit impaired loans.

Taxable-equivalent securities interest income increased $1,873,000 year-over-year, with the average balance of securities increasing $27,379,000 from September 30, 2018 to September 30, 2019, and the taxable equivalent yield increasing from 3.22% to 3.55%. The 33 basis point increase in taxable-equivalent yield on securities reflected the increased interest rate environment between years and certain repositioning within the portfolio under the Company's asset/liability management strategies.

Interest expense on deposits and borrowings increased $8,464,000 year-over-year, with the average balance of interest-bearing deposits increasing $450,651,000 and the average balance of total borrowings decreasing $28,169,000. In addition to the impact of the noted increased interest rate environment on interest expense, the Company issued $32,500,000 of 6.0% subordinated notes in December 2018. As described in the 2019 to 2018 quarter over quarter comparison, the Company utilized a short-term cash increase to reduce brokered deposits in the third quarter of 2019.

Provision for Loan Losses

Asset quality trends continue to be solid with a low level of charge-offs and low nonperforming loans. The provision for loan losses totaled $900,000 for the nine months ended September 30, 2019 compared with $600,000 for the same period in 2018. Net charge-offs in the nine months ended September 30, 2019 totaled $105,000, equating to 0.01% annualized, as compared with net recoveries totaling $416,000, or (0.05)% annualized, in the prior year. Nonperforming loans to loans totaled 0.44% of loans at September 30, 2019, compared with 0.41% of loans at December 31, 2018. Loans outstanding increased in 2019 with net charge-offs, and there was a $1,800,000 increase in nonperforming loans, which required additional reserves.

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

Noninterest Income

The following table compares noninterest income for the nine months ended September 30, 2019 and 2018.

	Nine Months Ended September 30,				$ Change		% Change
(Dollars in thousands)	2019		2018		2019-2018		2019-2018
Service charges on deposit accounts	$	4,930	$	4,405	$	525	11.9	%
Other service charges, commissions and fees	959		1,430		(471)		(32.9)	%
Loan swap referral fees	629		0		629		0.0	%
Trust and investment management income	5,399		5,037		362		7.2	%
Brokerage income	1,804		1,514		290		19.2	%
Mortgage banking activities	1,743		2,049		(306)		(14.9)	%
Income from life insurance	1,505		1,101		404		36.7	%
Other income	188		272		(84)		(30.9)	%
Subtotal before securities gains	17,157		15,808		1,349		8.5	%
Investment securities gains	4,731		891		3,840		431.0	%
Total noninterest income	$	21,888	$	16,699	$	5,189	31.1	%
nm*: not meaningful

52

The following factors contributed to the more significant changes in noninterest income between the nine months ended September 30, 2019 and 2018.

•Other service charges, commissions and fees included increased loan transaction fees in 2018.

•In 2019, the Company recognized $629,000 for loan swap referral fees under a program in which it refers qualified commercial borrowers to a third party, which enters into an interest rate swap agreement with the borrower. The rate swap provides the borrower with the economic equivalent of a fixed-rate loan while allowing the Company to receive a variable rate of interest. Income from this program will vary from quarter to quarter depending on demand from qualified borrowers with a preference to enter into swap agreements with the third party.

•Income for trust and investment management income and brokerage income reflected fluctuations in customer volumes and market conditions, as well as the effect of increased revenue from additional advisors and increased estate fees in 2019.

•Mortgage banking income decreased and included a $240,000 impairment charge on mortgage servicing rights due to decreasing interest rates. Loans sold in the first nine months of 2019 totaled $74,000,000 compared with $73,200,000 in 2018.

•Other line items within noninterest income showed fluctuations between 2019 and 2018 attributable to normal business operations and the effect of the acquisitions.

The Company recognized net investment securities gains in 2019 and 2018 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.

Noninterest Expenses

The following table compares noninterest expenses for the nine months ended September 30, 2019 and 2018.

	Nine Months Ended September 30,				$ Change		% Change
(Dollars in thousands)	2019		2018		2019-2018		2019-2018
Salaries and employee benefits	$	28,088	$	23,487	$	4,601	19.6	%
Occupancy	3,200		2,252		948		42.1	%
Furniture and equipment	3,415		2,977		438		14.7	%
Data processing	2,658		1,875		783		41.8	%
Telephone and communication	612		542		70		12.9	%
Automated teller machine and interchange fees	744		548		196		35.8	%
Advertising and bank promotions	1,348		898		450		50.1	%
FDIC insurance	397		507		(110)		(21.7)	%
Legal	362		364		(2)		(0.5)	%
Other professional services	1,716		1,140		576		50.5	%
Directors' compensation	725		663		62		9.4	%
Real estate owned	36		96		(60)		(62.5)	%
Taxes other than income	926		761		165		21.7	%
Intangible asset amortization	1,096		72		1,024		nm*
Merger related	7,976		473		7,503		nm*
Insurance claim receivable write off	615		0		615		nm*
Other operating expenses	3,743		3,022		721		23.9	%
Total noninterest expenses	$	57,657	$	39,677	$	17,980	45.3	%
nm*: not meaningful

The following factors contributed to the more significant changes in noninterest expenses between the nine months ended September 30, 2019 and 2018.

53

•Expanded operations with the addition of employees and branches from the Mercersburg acquisition in October, 2018, and the Hamilton merger in May, 2019; two branches opened in the fourth quarter of 2018 and two opened in the first quarter of 2019 in Lancaster County, Pennsylvania; and additional support personnel for the Company's ongoing expansion efforts all contributed to increases in salaries and employee benefits, occupancy costs, furniture and equipment, and data processing costs year-over-year, as well as the timing of advertising and bank promotions expenses incurred.

•Salaries and employee benefits principally reflected employees added in the acquisitions and for additional employees for the Company's new branches. 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 2019, net of the benefit of forfeitures. In 2019, overall costs associated with the Company's self-insured group health plan were higher than in 2018 due to an increased number of employees and fluctuations in claims experience.

•Occupancy, furniture and equipment costs reflected Mercersburg and Hamilton branches acquired, and the Company's expanded presence in Lancaster County, Pennsylvania.

•The decrease in FDIC insurance expense reflects credits received in the third quarter of 2019 that offset the Bank's second quarter 2019 FDIC assessment. The FDIC's assessment regulations provide that, for banks with consolidated total assets under $10 billion, after the reserve ratio reaches 1.38 percent (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. If the reserve ratio remains at least 1.38%, the Company estimates it will receive credits that will offset its third quarter 2019 assessment and partially offset its fourth quarter 2019 assessment.

•Intangible asset amortization increased principally due to amortization of core deposit intangibles recorded in the Mercersburg and Hamilton acquisitions.

•The Company incurred merger related expenses, principally in the second quarter of 2019, for data processing contract termination costs, employee contract termination costs and legal and consulting fees for the Hamilton acquisition. We also incurred system conversion expenses for the Mercersburg acquisition in the first quarter of 2019 and the Hamilton acquisition in the third quarter of 2019.

•As previously reported, in the first quarter of 2019, we incurred a $615,000 expense to write off an insurance claim receivable from a 2018 cyber security incident.

•Other line items within noninterest expenses showed fluctuations between 2019 and 2018 attributable to normal business operations and the impact of acquisitions.

Income Tax Expense

Income tax expense totaled $1,682,000, an effective tax rate of 11.7%, for the nine months ended September 30, 2019, compared with $1,510,000, an effective tax rate of 11.5%, for the nine months ended September 30, 2018. The Company’s effective tax rate is significantly 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 $185,000 in the first quarter of 2019, related to a favorable tax law clarification concerning the treatment of life insurance assets of an acquired entity. In the second quarter of 2019, we recorded a tax benefit of $334,000, related to an increase in our deferred state income tax asset for the effect of the state tax rate change resulting from the Hamilton acquisition. These tax benefit items had the effect of lowering the effective tax rate for the nine months ended September 30, 2019, from approximately 15.3% to 11.7%.

FINANCIAL CONDITION

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

AFS Securities

The Company utilizes securities available for sale 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 September 30, 2019, AFS securities totaled $481,120,000, an increase of $15,276,000, from the $465,844,000 balance at December 31, 2018.

In the nine months ended September 30, 2019, the Company realized net gains totaling $4,731,000 from sales of investments, as it repositioned parts of its portfolio in response to market and interest rate opportunities under its asset/liability management strategies. Sales of investments in states and political subdivisions were the principal driver of the realized net

54

gains. Sale proceeds totaling $199,910,000 were principally redeployed in investments in asset-backed securities.

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, Loans Receivable and Allowance for Loan Losses, to the 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 September 30, 2019 and December 31, 2018.

(Dollars in thousands)	September 30, 2019		December 31, 2018
Commercial real estate:
Owner occupied	$	171,327	$	129,650
Non-owner occupied	310,334		252,794
Multi-family	108,751		78,933
Non-owner occupied residential	120,395		100,367
Acquisition and development:
1-4 family residential construction	12,257		7,385
Commercial and land development	38,494		42,051
Commercial and industrial	215,734		160,964
Municipal	47,920		50,982
Residential mortgage:
First lien	353,811		235,296
Home equity - term	15,175		12,208
Home equity - lines of credit	159,930		143,616
Installment and other loans	38,977		33,411
	$	1,593,105	$	1,247,657

The above totals include $425,940,000 and $135,009,000 of acquired loans at September 30, 2019 and December 31, 2018.

Total loans grew $345,448,000 from December 31, 2018 to September 30, 2019. Balances at September 30, 2019, include approximately $335,000,000 acquired from Hamilton. The Hamilton acquisition increased the Company's loan portfolio principally in the residential mortgage - first lien, commercial real estate - owner occupied and non-owner occupied, and commercial and industrial classes.

Competition for new business opportunities remains strong, which has contributed to a reduced rate of organic loan growth in 2019 compared with prior years and may temper loan growth in future quarters. As previously described, during the third quarter of 2019, the Company experienced a net $9,000,000 reduction in loans outstanding due to repayments totaling $16,000,000 from the acquired Hamilton loan portfolio. The focus on the successful Hamilton system conversion in the third quarter while simultaneously recruiting and onboarding a team of experienced lenders in the Maryland Region resulted in a slowdown in loan origination activity in Maryland.

55

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

Loans, 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.

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 September 30, 2019, December 31, 2018 and September 30, 2018. Relevant asset quality ratios are also presented.

(Dollars in thousands)	September 30, 2019			December 31, 2018			September 30, 2018
Nonaccrual loans (cash basis)	$	6,931		$	5,165		$	5,458
OREO	642			130			286
Total nonperforming assets	7,573			5,295			5,744
Restructured loans still accruing	1,042			1,132			1,143
Loans past due 90 days or more and still accruing	2,982			57			0
Total nonperforming and other risk assets	$	11,597		$	6,484		$	6,887
Loans 30-89 days past due	$	5,287		$	5,186		$	1,681
Asset quality ratios:
Total nonperforming loans to total loans	0.44		%	0.41		%	0.50		%
Total nonperforming assets to total assets	0.33		%	0.27		%	0.33		%
Total nonperforming assets to total loans and OREO	0.48		%	0.42		%	0.53		%
Total risk assets to total loans and OREO	0.73		%	0.52		%	0.63		%
Total risk assets to total assets	0.50		%	0.34		%	0.40		%
ALL to total loans	0.93		%	1.12		%	1.27		%
ALL to nonperforming loans	213.66		%	271.33		%	253.06		%
ALL to nonperforming loans and restructured loans still accruing	185.74		%	222.55		%	209.24		%

Total nonperforming and other risk assets increased $5,113,000, or 78.9%, from December 31, 2018 to September 30, 2019 and increased $4,710,000, or 68.4%, from September 30, 2018. The principal driver for the increase in nonperforming

56

and risk assets is the increase in loans past due 90 days or more and still accruing, all of which were acquired in the mergers with Mercersburg and Hamilton.

The following table presents detail of impaired loans at September 30, 2019 and December 31, 2018. 

	September 30, 2019						December 31, 2018
(Dollars in thousands)	Nonaccrual Loans		Restructured Loans Still Accruing		Total		Nonaccrual Loans		Restructured Loans Still Accruing		Total
Commercial real estate:
Owner occupied	$	3,294	$	30	$	3,324	$	1,841	$	39	$	1,880
Multi-family	105		0		105		131		0		131
Non-owner occupied residential	137		0		137		309		0		309
Commercial and industrial	1,089		0		1,089		286		0		286
Residential mortgage:
First lien	1,555		992		2,547		1,808		1,069		2,877
Home equity - term	11		0		11		16		0		16
Home equity - lines of credit	733		20		753		774		24		798
Installment and other loans	7		0		7		0		0		0
	$	6,931	$	1,042	$	7,973	$	5,165	$	1,132	$	6,297

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 September 30, 2019 and December 31, 2018. Of the relationships deemed to be impaired at September 30, 2019, one had a recorded balance in excess of $1,000,000 and 62, or 46.5%, of total impaired loans, had recorded balances of less than $250,000.

(Dollars in thousands)	# of Relationships	Recorded Investment		Partial Charge-offs to Date		Specific Reserves
September 30, 2019
Relationships greater than $1,000,000	1	$	1,641	$	0	$	0
Relationships greater than $500,000 but less than $1,000,000	2	1,533		17		0
Relationships greater than $250,000 but less than $500,000	3	1,088		0		0
Relationships less than $250,000	62	3,711		810		37
	68	$	7,973	$	827	$	37
December 31, 2018
Relationships greater than $500,000 but less than $1,000,000	1	810		17		0
Relationships greater than $250,000 but less than $500,000	2	673		0		0
Relationships less than $250,000	64	4,814		873		38
	67	$	6,297	$	890	$	38

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 $500,000, which includes confirmation of risk rating by an independent credit officer. Credit Administration also reviews loans in excess of $1,000,000. In addition, all relationships greater than $250,000 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 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 September 30, 2019. 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.

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The Company’s OREO totaled $642,000 at September 30, 2019 and consisted of two commercial and one residential properties. The increase in OREO from $130,000 at December 31, 2018 was the result of the addition of one commercial and one residential property. All properties are carried at the lower of cost or fair value, less costs to dispose.

At September 30, 2019, the Company believes the value of OREO represents the properties' fair values, but if the real estate market changes, additional expense may be recorded.

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, Loans and Allowance for Loan Losses, to the 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 September 30, 2019 and December 31, 2018:

(Dollars in thousands)	Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		PCI Loans		Total
September 30, 2019
Commercial real estate:
Owner occupied	$	153,327	$	5,750	$	2,664	$	3,324	$	0	$	6,262	$	171,327
Non-owner occupied	298,268		10,685		0		0		0		1,381		310,334
Multi-family	101,479		5,537		940		105		0		690		108,751
Non-owner occupied residential	113,248		3,139		1,246		137		0		2,625		120,395
Acquisition and development:
1-4 family residential construction	12,004		253		0		0		0		0		12,257
Commercial and land development	37,582		348		564		0		0		0		38,494
Commercial and industrial	198,348		2,316		10,101		1089		0		3,880		215,734
Municipal	47,920		0		0		0		0		0		47,920
Residential mortgage:
First lien	340,619		713		0		2,547		0		9,932		353,811
Home equity - term	15,068		76		0		11		0		20		15,175
Home equity - lines of credit	159,063		75		39		753		0		0		159,930
Installment and other loans	38,715		0		0		7		0		255		38,977
	$	1,515,641	$	28,892	$	15,554	$	7,973	$	0	$	25,045	$	1,593,105
December 31, 2018
Commercial real estate:
Owner occupied	$	121,903	$	3,024	$	987	$	1,880	$	0	$	1,856	$	129,650
Non-owner occupied	242,136		10,008		0		0		0		650		252,794
Multi-family	71,482		5,886		717		131		0		717		78,933
Non-owner occupied residential	97,590		736		1,197		309		0		535		100,367
Acquisition and development:
1-4 family residential construction	7,385		0		0		0		0		0		7,385
Commercial and land development	41,251		25		583		0		0		192		42,051
Commercial and industrial	150,286		2,278		2,940		286		0		5,174		160,964
Municipal	50,982		0		0		0		0		0		50,982
Residential mortgage:
First lien	229,971		0		0		2,877		0		2,448		235,296
Home equity - term	12,170		0		0		16		0		22		12,208
Home equity - lines of credit	142,638		165		15		798		0		0		143,616
Installment and other loans	33,229		15		1		0		0		166		33,411
	$	1,201,023	$	22,137	$	6,440	$	6,297	$	0	$	11,760	$	1,247,657

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.

The following table summarizes activity in the ALL for the three and nine months ended September 30, 2019 and 2018.

	Commercial										Consumer
(Dollars in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total
Three Months Ended
September 30, 2019
Balance, beginning of period	$	6,847	$	1,008	$	2,120	$	94	$	10,069	$	3,734	$	209	$	3,943	$	448	$	14,460
Provision for loan losses	465		(188)		269		(1)		545		27		50		77		(322)		300
Charge-offs	0		0		(50)		0		(50)		(24)		(49)		(73)		0		(123)
Recoveries	111		0		33		0		144		5		23		28		0		172
Balance, end of period	$	7,423	$	820	$	2,372	$	93	$	10,708	$	3,742	$	233	$	3,975	$	126	$	14,809
September 30, 2018
Balance, beginning of period	$	6,680	$	720	$	1,598	$	80	$	9,078	$	3,544	$	230	$	3,774	$	585	$	13,437
Provision for loan losses	194		19		(38)		(1)		174		(45)		146		101		(75)		200
Charge-offs	(17)		0		0		0		(17)		(62)		(80)		(142)		0		(159)
Recoveries	200		0		1		0		201		102		31		133		0		334
Balance, end of period	$	7,057	$	739	$	1,561	$	79	$	9,436	$	3,539	$	327	$	3,866	$	510	$	13,812
Nine Months Ended
September 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	347		1		753		(5)		1,096		184		64		248		(444)		900
Charge-offs	(25)		0		(140)		0		(165)		(295)		(121)		(416)		0		(581)
Recoveries	225		2		103		0		330		100		46		146		0		476
Balance, end of period	$	7,423	$	820	$	2,372	$	93	$	10,708	$	3,742	$	233	$	3,975	$	126	$	14,809
September 30, 2018
Balance, beginning of period	$	6,763	$	417	$	1,446	$	84	$	8,710	$	3,400	$	211	$	3,611	$	475	$	12,796
Provision for loan losses	(217)		319		114		(5)		211		157		197		354		35		600
Charge-offs	(17)		0		0		0		(17)		(148)		(198)		(346)		0		(363)
Recoveries	528		3		1		0		532		130		117		247		0		779
Balance, end of period	$	7,057	$	739	$	1,561	$	79	$	9,436	$	3,539	$	327	$	3,866	$	510	$	13,812

The ALL at September 30, 2019, increased $795,000 from December 31, 2018, reflecting the $900,000 provision for loan losses and net charge-offs during the quarter. Net recoveries totaled $49,000 and $(105,000) for the three and nine months ended September 30, 2019, compared with net recoveries of $175,000 and $416,000 for the same periods in 2018. The ratio of annualized net charge-offs (recoveries) to average loans outstanding was (0.01)% and 0.01% for the three and nine months ended September 30, 2019, compared with (0.06)% and (0.05)% for 2018. Classified loans totaled $23,527,000 at September 30, 2019, or 1.5% of total loans outstanding, and increased from $12,737,000 at December 31, 2018, or 1.0% of loans outstanding. 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 contributed to management's determination that a provision for loan losses was required to maintain an adequate ALL, with an ALL to total loans ratio of 0.93% at September 30, 2019. A principal factor impacting a comparison with the ALL to total loans ratio of 1.27% at September 30, 2018, was loans acquired in the Mercersburg and Hamilton transactions that were recorded at fair value, which incorporated a credit factor, and did not require an increase in the Company's ALL.

Despite generally favorable historical charge-off data and stable economic and market conditions, the growth the Company has experienced in its loan portfolio may result in the need for additional provisions for loan losses in future quarters.

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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 September 30, 2019 and December 31, 2018, including PCI loans.

	Commercial										Consumer
(Dollars in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total
September 30, 2019
Loans allocated by:
Individually evaluated for impairment	$	3,566	$	0	$	1,089	$	0	$	4,655	$	3,311	$	7	$	3,318	$	0	$	7,973
Collectively evaluated for impairment	707,241		50,751		214,645		47,920		1,020,557		525,605		38,970		564,575		0		1,585,132
	$	710,807	$	50,751	$	215,734	$	47,920	$	1,025,212	$	528,916	$	38,977	$	567,893	$	0	$	1,593,105
ALL allocated by:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	36	$	0	$	36	$	0	$	36
Collectively evaluated for impairment	7,423		820		2,372		93		10,708		3,706		233		3,939		126		14,773
	$	7,423	$	820	$	2,372	$	93	$	10,708	$	3,742	$	233	$	3,975	$	126	$	14,809
December 31, 2018
Loans allocated by:
Individually evaluated for impairment	$	2,320	$	0	$	286	$	0	$	2,606	$	3,691	$	0	$	3,691	$	0	$	6,297
Collectively evaluated for impairment	559,424		49,436		160,678		50,982		820,520		387,429		33,411		420,840		0		1,241,360
	$	561,744	$	49,436	$	160,964	$	50,982	$	823,126	$	391,120	$	33,411	$	424,531	$	0	$	1,247,657
ALL allocated by:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	38	$	0	$	38	$	0	$	38
Collectively evaluated for impairment	6,876		817		1,656		98		9,447		3,715		244		3,959		570		13,976
	$	6,876	$	817	$	1,656	$	98	$	9,447	$	3,753	$	244	$	3,997	$	570	$	14,014

In addition to the specific reserve allocations on impaired loans noted previously, 17 loans, with aggregate outstanding principal balances of $3,470,000, have had cumulative partial charge-offs to the ALL totaling $827,000 at September 30, 2019. 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, 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 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 $126,000, or 0.9% of the ALL balance, at September 30, 2019 compared with $570,000, or 4.1% of the ALL balance at December 31, 2018. The Company monitors the unallocated portion of the ALL and, by policy, has determined it should not exceed 6% of the total reserve. Future negative provisions for loan losses may result if the unallocated portion was to increase, and management determined the reserves were not required for the anticipated risk in the portfolio.

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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 $1,923,454,000 at September 30, 2019, an increase of $364,698,000, or 23.4%, from $1,558,756,000 at December 31, 2018.

Noninterest-bearing deposits increased $41,930,000, or 20.5%, from December 31, 2018 to September 30, 2019. Interest-bearing deposits totaled $1,676,681,000 at September 30, 2019, an increase of $322,768,000, or 23.8% from the $1,353,913,000 balance at December 31, 2018. The Hamilton acquisition contributed approximately 80% of the increase in total deposits.

The Company continues to increase both noninterest-bearing and interest-bearing deposit relationships from its enhanced cash management offerings as it increases its commercial relationships. Deposit growth in the first nine months of 2019 was principally used to reduce total borrowings, to fund growth in the loan and investment portfolios, and to reduce brokered deposits by approximately $91,000,000.

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 $223,493,000 at September 30, 2019, and increased $50,060,000 or 28.9%, from $173,433,000 at December 31, 2018. The increase was attributable to growth in retained earnings totaling $12,690,000 for the nine months ended September 30, 2019, net of dividends paid on common stock totaling $4,472,000, and improvement in net unrealized gains/losses in AOCI, net of taxes, totaling $5,647,000, and the issuance of the Company's common stock in connection with the acquisition of Hamilton totaling $36,622,000.

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 $3,000,000,000 and a company with assets under that limit is not subject to the FRB consolidated capital rules, but may file reports that include capital amounts and ratios. The Company has elected to file those reports.

At September 30, 2019 and December 31, 2018, 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 9, Shareholders' Equity and Regulatory Capital, to the Notes to Consolidated Financial Statements under Part I, Item 1, "Financial Information," includes a table presenting capital amounts and ratios for the Company and the Bank at September 30, 2019 and December 31, 2018.

In addition to the minimum capital ratio requirement and minimum capital ratio to be well capitalized presented in the referenced table in Note 9, 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, 2018, Item 1 - Business, under the topic Basel III Capital Rules. At September 30, 2019, the Bank's capital conservation buffer, based on the most restrictive Total Capital to risk weighted assets capital ratio, was 5.6%, which is greater than the 2.50% requirement for 2019.

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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 influenced by general interest rates, economic conditions and competition.

We regularly adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities and the objectives of our asset/liability management policy.

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.

Supplemental Reporting of Non-GAAP Measures

As a result of acquisitions, the Company has intangible assets consisting of goodwill and core deposit and other intangible assets totaling $27,579,000 and $16,502,000 at September 30, 2019 and December 31, 2018.

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, as used by the Company in this supplemental reporting presentation, are determined by methods other than in accordance with U.S. Generally Accepted Accounting Principles ("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.

(in thousands, except per share information)	September 30, 2019		December 31, 2018
Tangible Book Value per Common Share
Shareholders' equity	$	223,493	$	173,433
Goodwill and other intangible assets, net of related tax effect	25,972		15,698
Tangible common equity (non-GAAP)	$	197,521	$	157,735
Common shares outstanding	11,175		9,430
Book value per share (most directly comparable GAAP based measure)	$	20.00	$	18.39
Intangible assets per share	2.33		1.66
Tangible book value per share (non-GAAP)	$	17.67	$	16.73

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	At or For The Three Months Ended				At or For The Nine Months Ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Net Interest Margin (excluding the impact of purchase accounting)
Net interest margin as reported	3.27	%	3.28	%	3.43	%	3.29	%
Adjustment for purchase accounting:
Total interest-earning assets (loans)	0.19	%	0.00	%	0.19	%	0.00	%
Net Interest Margin (excluding the impact of purchase accounting) (non-GAAP)	3.08	%	3.28	%	3.24	%	3.29	%

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 and brokered deposits to manage its interest rate risk position. Additionally, pricing, promotion and product development activities are directed in an effort to emphasize the loan and deposit term or repricing characteristics that best meet current interest rate risk objectives. At present, we do not use hedging instruments for risk management, but we do evaluate them and may use them in the future.

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, changes in market conditions and strategies management may undertake to reduce the impact of any changes, particularly in a low interest rate environment, 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

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economic data to inform the committee on the selection of investment securities. Regulatory authorities also monitor our interest rate risk position along with other liquidity ratios.

Earnings at Risk

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

The simulation analysis results are presented in the Earnings at Risk table below. At September 30, 2019, similar to at December 31, 2018, these results indicate the Company would be better positioned in a moderately rising rate environment than it would be if interest rates increased more substantially or decreased.

Value at Risk

Net present value analysis provides information on the risk inherent in the balance sheet that might not be taken into account in the simulation analysis due to the short time horizon used in that analysis. The net present value of the balance sheet 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, assuming a point in time balance sheet with no management actions to actively manage the balance sheet for improved results. 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 September 30, 2019, similar to at December 31, 2018, these results indicate the Company would be better positioned in a rising interest rate environment than it would be if interest rates decreased.

Earnings at Risk					Value at Risk
	% Change in Net Interest Income					% Change in Market Value
Change in Market Interest Rates (basis points)	September 30, 2019		December 31, 2018		Change in Market Interest Rates (basis points)	September 30, 2019		December 31, 2018
(100)	(1.6)	%	(2.1)	%	(100)	(30.0)	%	(14.1)	%
100	(0.5)	%	(0.6)	%	100	17.0	%	6.1	%
200	(2.7)	%	(2.2)	%	200	25.0	%	7.1	%

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 Principal Executive Officer and Principal Financial Officer, conducted an evaluation of the effectiveness of disclosure controls and procedures, as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e), at September 30, 2019.  Based on that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the disclosure controls and procedures were effective at September 30, 2019.  There have been no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the third quarter of 2019.

65

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Information regarding legal proceedings is included in Note 13, Contingencies, to the Consolidated Financial Statements under Part I, Item 1, "Financial Statements" and incorporated herein by reference.

Item 1A – Risk Factors

Except as described below, there have been no material changes from the risk factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.

Certain risk factors related to mergers and acquisitions in our Annual Report on Form 10-K for the year ended December 31, 2018 referenced risks associated with the completion of the Company's merger with Hamilton. As noted elsewhere in this Form 10-Q, the merger with Hamilton was completed on May 1, 2019 and our market area now includes Anne Arundel, Baltimore, and Howard Counties, Maryland, as well as Baltimore City, Maryland.

The risk factor related to changes in our accounting policies or in accounting standards appearing in our Annual Report on Form 10-K for the year ended December 31, 2018 referenced an adoption date in 2020 for ASU 2016-13, for changes in measurement of credit losses. As noted elsewhere in this Form 10-Q, the FASB has approved a delay in the effective date of this ASU for smaller reporting companies until fiscal years beginning after December 15, 2022, with earlier adoption permitted. Pending issuance of the final pronouncement, the Company is evaluating the impact of the delay for adoption of the update.

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

No shares of the Company were repurchased from July 1, 2019 to September 30, 2019.

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. When and if appropriate, repurchases may be made in open market or privately negotiated transactions, depending on market conditions, regulatory requirements and other corporate considerations, as determined by management. Share repurchases may not occur and may be discontinued at any time. At September 30, 2019, 82,725 shares had been repurchased under the program at a total cost of $1,438,000, or 17.38 per share. The maximum number of shares that may yet be purchased under the plan is 333,275 at September 30, 2019.  

Item 3 – Defaults Upon Senior Securities

Not applicable.

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 – Other Information

None.

66

Item 6 – Exhibits

2.1(a)	Agreement and Plan of Merger, dated May 31, 2018, by and between Orrstown Financial Services, Inc. and Mercersburg Financial Corporation, incorporated by reference to Exhibit 2.1 of the Registrant's Form 8-K filed June 1, 2018.
2.1(b)	Agreement and Plan of Merger, dated October 23, 2018, by and between Orrstown Financial Services, Inc. and Hamilton Bancorp, Inc., incorporated by reference to Exhibit 2.1 of the Registrant's Form 8-K filed October 24, 2018.
3.1	Articles of Incorporation as amended, incorporated by reference to Exhibit 3.1 of the Registrant’s Report on Form 8-K filed on January 29, 2010.
3.2	By-laws as amended, incorporated by reference to Exhibit 3.2 to the Registrant’s Report on Form 8-K filed January 30, 2018.
4.1	Specimen Common Stock Certificate, incorporated by reference to the Registrant’s Registration Statement on Form S-3 filed February 8, 2010 (File No. 333-164780).
10.1	Deferred Compensation Agreement between Orrstown Bank and Thomas R. Quinn, Jr., incorporated by reference to Exhibit 10.1 to the Registrant's Report on Form 8-K filed September 27, 2019.
10.2	Amendment No. 1 to Change in Control Agreement between Orrstown Financial Services, Inc., Orrstown Bank and Thomas R. Quinn, Jr., incorporated by reference to Exhibit 10.2 to the Registrant's Report on Form 8-K filed September 27, 2019.
10.3	First Amendment to Salary Continuation Agreement between Orrstown Bank and Thomas R. Quinn, Jr., incorporated by reference to Exhibit 10.3 to the Registrant's Report on Form 8-K filed September 27, 2019.
31.1	Rule 13a – 14(a)/15d-14(a) Certification (Principal Executive Officer)
31.2	Rule 13a – 14(a)/15d-14(a) Certifications (Principal Financial Officer)
32.1	Section 1350 Certifications (Principal Executive Officer)
32.2	Section 1350 Certifications (Principal Financial Officer)
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase

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.

67

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. Brugger

Thomas R. Brugger

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

Date:  November 8, 2019

68

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Thomas R. Quinn, Jr., certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Orrstown Financial Services, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  November 8, 2019	By:	/s/ Thomas R. Quinn, Jr.
		Thomas R. Quinn, Jr.
		President and Chief Executive Officer
		(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Thomas R. Brugger, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Orrstown Financial Services, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  November 8, 2019	By:	/s/ Thomas R. Brugger
		Thomas R. Brugger
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Orrstown Financial Services, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2019 as filed with the Securities and Exchange Commission on the date therein specified (the “Report”), I, Thomas R. Quinn, Jr., President and Chief Executive Officer (Principal Executive Officer) of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

Date:  November 8, 2019	By:	/s/ Thomas R. Quinn, Jr.
		Thomas R. Quinn, Jr.
		President and Chief Executive Officer
		(Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Orrstown Financial Services, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2019 as filed with the Securities and Exchange Commission on the date therein specified (the “Report”), I, Thomas R. Brugger, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

Date:  November 7, 2019	By:	/s/ Thomas R. Brugger
		Thomas R. Brugger
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

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GOODWILL AND OTHER INTANGIBLE ASSETS

9 Months Ended

Sep. 30, 2019

Goodwill and Intangible Assets Disclosure [Abstract]

GOODWILL AND OTHER INTANGIBLE ASSETS

GOODWILL AND OTHER INTANGIBLE ASSETS

The following table presents changes in goodwill at September 30, 2019 and December 31, 2018.

(Dollars in thousands)	September 30, 2019		December 31, 2018
Balance, beginning of year	$	12,592	$	719
Acquired goodwill	7,029		11,873
Adjustments to acquired goodwill	304		0
Balance, end of period	$	19,925	$	12,592

The following table presents changes in other intangible assets for the three and nine months ended September 30, 2019 and 2018.

	Three Months Ended				Nine Months Ended
(Dollars in thousands)	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Beginning of period	$	8,140	$	308	$	3,910	$	356
Acquired CDI	0		0		4,550		0
Non-compete agreement	0		0		290		0
Amortization Expense	(486)		(24)		(1,096)		(72)
Balance, end of period	$	7,654	$	284	$	7,654	$	284

The following table presents the components of other identifiable intangible assets at September 30, 2019 and December 31, 2018.

	September 30, 2019				December 31, 2018
(Dollars in thousands)	Gross Amount		Accumulated Amortization		Gross Amount		Accumulated Amortization
Amortized intangible assets:
Core deposit intangibles	$	8,390	$	1,106	$	3,840	$	190
Other customer relationship intangibles	931		730		931		671
Non-compete agreement	290		121		0		0
Total	$	9,611	$	1,957	$	4,771	$	861

The following table presents estimated aggregate amortization expense for intangible assets remaining at September 30, 2019.

(Dollars in thousands)
Remainder of 2019	$	474
2020	1,591
2021	1,313
2022	1,137
2023	960
Thereafter	2,179
	$	7,654

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SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL

9 Months Ended

Sep. 30, 2019

Equity [Abstract]

SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL

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 required capital conservation buffer was 1.875% for 2018 and is 2.50% for 2019 under phase-in rules which were completed in 2019.

The consolidated asset limit on small bank holding companies is $3,000,000,000 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 September 30, 2019 and December 31, 2018.

At September 30, 2019, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's classification. 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.

The following table presents capital amounts and ratios at September 30, 2019 and December 31, 2018.  

	Actual				For Capital Adequacy Purposes (includes applicable capital conservation buffer)				To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2019
Total Capital to risk weighted assets
Consolidated	$	240,674	14.5	%	$	174,255	10.5	%	n/a		n/a
Bank	226,296		13.6	%	174,112		10.5	%	$	165,821	10.0	%
Tier 1 Capital to risk weighted assets
Consolidated	192,818		11.6	%	141,064		8.5	%	n/a		n/a
Bank	210,274		12.7	%	140,948		8.5	%	132,656		8.0	%
Common Tier 1 (CET1) to risk weighted assets
Consolidated	192,818		11.6	%	116,170		7.0	%	n/a		n/a
Bank	210,274		12.7	%	116,074		7.0	%	107,783		6.5	%
Tier 1 Capital to average assets
Consolidated	192,818		8.2	%	94,360		4.0	%	n/a		n/a
Bank	210,274		8.9	%	94,413		4.0	%	118,016		5.0	%
December 31, 2018
Total Capital to risk weighted assets
Consolidated	$	206,988	15.6	%	$	131,393	9.875	%	n/a		n/a
Bank	177,892		13.4	%	131,286		9.875	%	$	132,948	10.0	%
Tier 1 Capital to risk weighted assets
Consolidated	160,117		12.0	%	104,782		7.875	%	n/a		n/a
Bank	162,880		12.3	%	104,696		7.875	%	106,358		8.0	%
Common Tier 1 (CET1) to risk weighted assets
Consolidated	160,117		12.0	%	84,823		6.375	%	n/a		n/a
Bank	162,880		12.3	%	84,754		6.375	%	86,416		6.5	%
Tier 1 Capital to average assets
Consolidated	160,117		8.4	%	76,089		4.0	%	n/a		n/a
Bank	162,880		8.6	%	76,113		4.0	%	95,142		5.0	%

In September 2015, the Board of Directors of the Company authorized a share repurchase program under which the Company may repurchase up to 5% of the Company's outstanding shares of common stock, or approximately 416,000 shares, in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Exchange Act of 1934, as amended. When and if appropriate, repurchases may be made in open market or privately negotiated transactions, depending on market conditions, regulatory requirements and other corporate considerations, as determined by management. Share repurchases may not occur and may be discontinued at any time. At September 30, 2019, 82,725 shares had been repurchased under the program at a total cost of $1,438,000, or $17.38 per share.

On October 23, 2019, the Board declared a cash dividend of $0.15 per common share, which will be paid on November 12, 2019 to shareholders of record at November 4, 2019.

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FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (Tables)

9 Months Ended

Sep. 30, 2019

Fair Value Disclosures [Abstract]

Commitments and Conditional Obligations, Contract or Notional Amounts

The following table presents these contract, or notional, amounts.

	Contract or Notional Amount
(Dollars in thousands)	September 30, 2019		December 31, 2018
Commitments to fund:
Home equity lines of credit	$	201,353	$	160,971
1-4 family residential construction loans	26,630		13,002
Commercial real estate, construction and land development loans	15,742		31,133
Commercial, industrial and other loans	173,780		147,518
Standby letters of credit	14,604		13,909

XML

INCOME TAXES (Tables)

9 Months Ended

Sep. 30, 2019

Income Tax Disclosure [Abstract]

Summary of Income Tax Expense

The following table summarizes income tax expense for the three and nine months ended September 30, 2019 and 2018.

	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2019		2018		2019		2018
Current expense	$	244	$	406	$	334	$	754
Deferred expense	1,096		238		1,348		756
Income tax expense	$	1,340	$	644	$	1,682	$	1,510

Summary of Deferred Tax Assets and Liabilities

The following table summarizes deferred tax assets and liabilities at September 30, 2019 and December 31, 2018.

(Dollars in thousands)	September 30, 2019		December 31, 2018
Deferred tax assets:
Allowance for loan losses	$	3,465	$	3,143
Deferred compensation	396		723
Retirement and salary continuation plans	2,326		1,416
Share-based compensation	592		742
Off-balance sheet reserves	270		219
Nonaccrual loan interest	843		537
Net unrealized losses on AFS securities	0		791
Purchase accounting adjustments	4,349		1,795
Bonus accrual	366		470
Low-income housing credit carryforward	341		641
Net operating loss carryovers	1,872		0
Other	473		321
Total deferred tax assets	15,293		10,798
Deferred tax liabilities:
Depreciation	440		458
Net unrealized gains on AFS securities	711		0
Mortgage servicing rights	644		590
Purchase accounting adjustments	1,682		1,021
Other	250		150
Total deferred tax liabilities	3,727		2,219
Net deferred tax asset, included in Other Assets	$	11,566	$	8,579

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MERGERS AND ACQUISITIONS - Narrative (Details) - USD ($) $ / shares in Units, $ in Thousands			3 Months Ended		9 Months Ended
	May 01, 2019	Oct. 01, 2018	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Apr. 30, 2019	Dec. 31, 2018	Sep. 28, 2018	Dec. 31, 2017
Business Acquisition [Line Items]
Goodwill			$ 19,925		$ 19,925			$ 12,592		$ 719
Unaudited pro forma net Income			7,566	$ 4,353	13,355	$ 6,869
Unaudited pro forma revenue			38,675	28,862	95,714	87,557
Merger related			471	$ 319	7,976	$ 473
Investment Banking, Legal And Consulting Fees
Business Acquisition [Line Items]
Merger related			0		1,967
Information System Expense
Business Acquisition [Line Items]
Merger related			236		3,855
Other expenses
Business Acquisition [Line Items]
Merger related			$ 235		$ 2,154
Mercersburg Financial Corporation
Business Acquisition [Line Items]
Percentage of ownership interests acquired		100.00%
Acquisition, cash paid		$ 4,866
Consideration paid for acquisition		29,919
Total assets acquired excluding goodwill		181,430
Loans		141,103
Securities available for sale		7,352
Total liabilities assumed		163,384
Deposits		160,433
Goodwill		$ 11,873
Mercersburg Financial Corporation | Common Stock
Business Acquisition [Line Items]
Shares issued for common stock (in shares)		1,052,635
Price per share (in usd per share)									$ 23.80
Hamilton Bancorp, Inc.
Business Acquisition [Line Items]
Percentage of ownership interests acquired	100.00%
Acquisition, cash paid	$ 14,197
Total assets acquired excluding goodwill	492,844
Loans	347,361
Securities available for sale	60,882
Total liabilities assumed	449,358
Deposits	388,246
Goodwill	7,333
Consideration paid	50,819
Core deposit intangible	$ 4,550
Core deposit intangible amortization period	10 years
Hamilton Bancorp, Inc. | Common Stock
Business Acquisition [Line Items]
Shares issued for common stock (in shares)	1,765,704
Price per share (in usd per share)							$ 20.74

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Consolidated Balance Sheets (Unaudited) (Parenthetical) - $ / shares	Sep. 30, 2019	Dec. 31, 2018
Statement of Financial Position [Abstract]
Preferred stock, par value (usd per share)	$ 1.25	$ 1.25
Preferred stock, shares authorized (in shares)	500,000	500,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock, stated value (usd per share)	$ 0.05205	$ 0.05205
Common stock, shares authorized (in shares)	50,000,000	50,000,000
Common stock, shares issued (in shares)	11,220,804	9,439,255
Common stock, shares outstanding (in shares)	11,175,299	9,430,224
Treasury stock - common - shares (in shares)	45,505	9,031

XML

GOODWILL AND OTHER INTANGIBLE ASSETS - Components of Other Identifiable Intangible Assets (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Finite-Lived Intangible Assets [Line Items]
Gross Amount	$ 9,611	$ 4,771
Accumulated Amortization	1,957	861
Core deposit intangibles
Finite-Lived Intangible Assets [Line Items]
Gross Amount	8,390	3,840
Accumulated Amortization	1,106	190
Other customer relationship intangibles
Finite-Lived Intangible Assets [Line Items]
Gross Amount	931	931
Accumulated Amortization	730	671
Non-compete agreement
Finite-Lived Intangible Assets [Line Items]
Gross Amount	290	0
Accumulated Amortization	$ 121	$ 0

XML

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) (Parenthetical) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Statement of Stockholders' Equity [Abstract]
Dividends per share (in usd per share)	$ 0.15	$ 0.13	$ 0.45	$ 0.38
Issuance of stock to acquire Hamilton Bancorp, Inc. (in shares)			1,765,704
Common shares issued during the period (in shares)	48,694	30,321	15,845	45,302
Issuance of treasury stock (in shares)		15,251
Treasury stock, shares acquired (in shares)	45,505		36,474	6,714
Compensation expense, issuance of stock	$ 475	$ 188	$ 1,154	$ 1,112

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LOANS AND ALLOWANCE FOR LOAN LOSSES - Average Recorded Investment in Impaired Loans and Related Interest Income (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Financing Receivable, Impaired [Line Items]
Average Impaired Balance	$ 6,504	$ 6,177	$ 6,190	$ 8,798
Interest Income Recognized	12	16	43	47
Commercial real estate | Owner occupied
Financing Receivable, Impaired [Line Items]
Average Impaired Balance	2,126	1,569	1,950	1,372
Interest Income Recognized	0	1	1	2
Commercial real estate | Non-owner occupied
Financing Receivable, Impaired [Line Items]
Average Impaired Balance	150	0	60	2,395
Interest Income Recognized	0	0	0	0
Commercial real estate | Multi-family
Financing Receivable, Impaired [Line Items]
Average Impaired Balance	110	144	118	152
Interest Income Recognized	0	0	0	0
Commercial real estate | Non-owner occupied residential
Financing Receivable, Impaired [Line Items]
Average Impaired Balance	173	336	246	355
Interest Income Recognized	0	0	0	0
Acquisition and development | 1-4 family residential construction
Financing Receivable, Impaired [Line Items]
Average Impaired Balance	0	201	0	235
Interest Income Recognized	0	0	0	0
Commercial and industrial
Financing Receivable, Impaired [Line Items]
Average Impaired Balance	765	316	469	330
Interest Income Recognized	0	0	0	0
Residential mortgage | First lien
Financing Receivable, Impaired [Line Items]
Average Impaired Balance	2,392	2,900	2,574	3,312
Interest Income Recognized	12	15	41	44
Residential mortgage | Home equity - term
Financing Receivable, Impaired [Line Items]
Average Impaired Balance	12	18	13	20
Interest Income Recognized	0	0	0	0
Residential mortgage | Home equity - lines of credit
Financing Receivable, Impaired [Line Items]
Average Impaired Balance	768	692	752	621
Interest Income Recognized	0	0	1	1
Installment and other loans
Financing Receivable, Impaired [Line Items]
Average Impaired Balance	8	1	8	6
Interest Income Recognized	$ 0	$ 0	$ 0	$ 0

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LOANS AND ALLOWANCE FOR LOAN LOSSES - Summary of Ending Loan Balances Evaluated for Impairment and Related Allowance for Loan Losses Allocation (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jun. 30, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Dec. 31, 2017
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans, Individually evaluated for impairment	$ 7,973		$ 6,297
Loans, Collectively evaluated for impairment	1,585,132		1,241,360
Total Loans	1,593,105		1,247,657
Allowance for loan losses, Individually evaluated for impairment	36		38
Allowance for loan losses, Collectively evaluated for impairment	14,773		13,976
Allowance for loan losses, Total	14,809	$ 14,460	14,014	$ 13,812	$ 13,437	$ 12,796
Commercial and Industrial
Financing Receivable, Allowance for Credit Losses [Line Items]
Total Loans	215,734		160,964
Municipal
Financing Receivable, Allowance for Credit Losses [Line Items]
Total Loans	47,920		50,982
Installment and Other
Financing Receivable, Allowance for Credit Losses [Line Items]
Total Loans	38,977		33,411
Commercial
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans, Individually evaluated for impairment	4,655		2,606
Loans, Collectively evaluated for impairment	1,020,557		820,520
Total Loans	1,025,212		823,126
Allowance for loan losses, Individually evaluated for impairment	0		0
Allowance for loan losses, Collectively evaluated for impairment	10,708		9,447
Allowance for loan losses, Total	10,708		9,447
Commercial | Commercial Real Estate
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans, Individually evaluated for impairment	3,566		2,320
Loans, Collectively evaluated for impairment	707,241		559,424
Total Loans	710,807		561,744
Allowance for loan losses, Individually evaluated for impairment	0		0
Allowance for loan losses, Collectively evaluated for impairment	7,423		6,876
Allowance for loan losses, Total	7,423		6,876
Commercial | Acquisition and Development
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans, Individually evaluated for impairment	0		0
Loans, Collectively evaluated for impairment	50,751		49,436
Total Loans	50,751		49,436
Allowance for loan losses, Individually evaluated for impairment	0		0
Allowance for loan losses, Collectively evaluated for impairment	820		817
Allowance for loan losses, Total	820		817
Commercial | Commercial and Industrial
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans, Individually evaluated for impairment	1,089		286
Loans, Collectively evaluated for impairment	214,645		160,678
Total Loans	215,734		160,964
Allowance for loan losses, Individually evaluated for impairment	0		0
Allowance for loan losses, Collectively evaluated for impairment	2,372		1,656
Allowance for loan losses, Total	2,372		1,656
Commercial | Municipal
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans, Individually evaluated for impairment	0		0
Loans, Collectively evaluated for impairment	47,920		50,982
Total Loans	47,920		50,982
Allowance for loan losses, Individually evaluated for impairment	0		0
Allowance for loan losses, Collectively evaluated for impairment	93		98
Allowance for loan losses, Total	93		98
Consumer
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans, Individually evaluated for impairment	3,318		3,691
Loans, Collectively evaluated for impairment	564,575		420,840
Total Loans	567,893		424,531
Allowance for loan losses, Individually evaluated for impairment	36		38
Allowance for loan losses, Collectively evaluated for impairment	3,939		3,959
Allowance for loan losses, Total	3,975		3,997
Consumer | Residential Mortgage
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans, Individually evaluated for impairment	3,311		3,691
Loans, Collectively evaluated for impairment	525,605		387,429
Total Loans	528,916		391,120
Allowance for loan losses, Individually evaluated for impairment	36		38
Allowance for loan losses, Collectively evaluated for impairment	3,706		3,715
Allowance for loan losses, Total	3,742		3,753
Consumer | Installment and Other
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans, Individually evaluated for impairment	7		0
Loans, Collectively evaluated for impairment	38,970		33,411
Total Loans	38,977		33,411
Allowance for loan losses, Individually evaluated for impairment	0		0
Allowance for loan losses, Collectively evaluated for impairment	233		244
Allowance for loan losses, Total	233		244
Unallocated
Financing Receivable, Allowance for Credit Losses [Line Items]
Loans, Individually evaluated for impairment	0		0
Loans, Collectively evaluated for impairment	0		0
Total Loans	0		0
Allowance for loan losses, Individually evaluated for impairment	0		0
Allowance for loan losses, Collectively evaluated for impairment	126		570
Allowance for loan losses, Total	$ 126		$ 570

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EARNINGS PER SHARE - Additional Information (Details) - shares shares in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Earnings Per Share [Abstract]
Stock options excluded from diluted earnings per share (in shares)	21	21	36	23

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Subsequent Events (Details) ft² in Thousands, $ in Thousands	3 Months Ended
	Jun. 30, 2020 USD ($)	Dec. 31, 2019 USD ($)	Oct. 31, 2019 ft² bank
Subsequent Event | Minimum
Subsequent Event [Line Items]
Restructuring Charges		$ 800
Pennsylvania Branch Locations | Minimum | Forecast
Subsequent Event [Line Items]
Cost savings estimate	$ 1,500
Pennsylvania Branch Locations | Maximum | Forecast
Subsequent Event [Line Items]
Cost savings estimate	$ 2,000
Pennsylvania Branch Locations | Subsequent Event
Subsequent Event [Line Items]
Number of branch locations to be consolidated | bank			5
Square footage of excess back office space to be eliminated | ft²			50
Pennsylvania Branch Locations | Subsequent Event | Maximum
Subsequent Event [Line Items]
Restructuring Charges		$ 1,200

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FAIR VALUE - Summary of Additional Qualitative Information (Details) - Fair Value, Measurements, Nonrecurring $ in Thousands	Sep. 30, 2019 USD ($)	Dec. 31, 2018 USD ($)
Impaired loans | Minimum
Fair Value Measurement Inputs and Valuation Techniques [Line Items]
Servicing asset, measurement Input (percent)		0.06
Impaired loans | Maximum
Fair Value Measurement Inputs and Valuation Techniques [Line Items]
Servicing asset, measurement Input (percent)		0.20
Impaired loans | Measurement Input, Discount Rate | Minimum
Fair Value Measurement Inputs and Valuation Techniques [Line Items]
Servicing asset, measurement Input (percent)	0.06
Impaired loans | Measurement Input, Discount Rate | Maximum
Fair Value Measurement Inputs and Valuation Techniques [Line Items]
Servicing asset, measurement Input (percent)	0.33
Impaired loans | Appraisal of collateral
Fair Value Measurement Inputs and Valuation Techniques [Line Items]
Fair Value Estimate	$ 2,354	$ 3,051
Impaired loans | Appraisal of collateral | Minimum
Fair Value Measurement Inputs and Valuation Techniques [Line Items]
Servicing asset, measurement Input (percent)		0.05
Impaired loans | Appraisal of collateral | Maximum
Fair Value Measurement Inputs and Valuation Techniques [Line Items]
Servicing asset, measurement Input (percent)		0.75
Impaired loans | Appraisal of collateral | Measurement Input, Discount Rate | Minimum
Fair Value Measurement Inputs and Valuation Techniques [Line Items]
Servicing asset, measurement Input (percent)	0.05
Impaired loans | Appraisal of collateral | Measurement Input, Discount Rate | Maximum
Fair Value Measurement Inputs and Valuation Techniques [Line Items]
Servicing asset, measurement Input (percent)	0.30
Mortgage servicing rights | Measurement Input, Discount Rate
Fair Value Measurement Inputs and Valuation Techniques [Line Items]
Servicing asset, measurement Input (percent)	0.095
Mortgage servicing rights | Measurement Input, Constant Prepayment Rate
Fair Value Measurement Inputs and Valuation Techniques [Line Items]
Servicing asset, measurement Input (percent)	0.127
Mortgage servicing rights | Discounted cash flow
Fair Value Measurement Inputs and Valuation Techniques [Line Items]
Fair Value Estimate	$ 3,116

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SHARE-BASED COMPENSATION PLANS - Schedule of Employee Stock Purchase Plan (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Employee Stock Ownership Plan (ESOP) Disclosures [Line Items]
Shares purchased (in shares)		15,251
Employee Stock Purchase Plan
Employee Stock Ownership Plan (ESOP) Disclosures [Line Items]
Shares purchased (in shares)	2,395	2,951	5,399	5,907
Weighted average price of shares purchased (in usd per share)	$ 22.87	$ 22.61	$ 20.69	$ 23.04
Compensation expense recognized	$ 5	$ 10	$ 8	$ 14
Tax benefits	$ 1	$ 2	$ 2	$ 3

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SECURITIES AVAILABLE FOR SALE - Summary of AFS Securities with Unrealized Losses (Details) $ in Thousands	Sep. 30, 2019 USD ($) security	Dec. 31, 2018 USD ($) security
Number of Securities
Less Than 12 Months | security	25	46
12 Months or More | security	9	18
Total | security	34	64
Fair Value
Less Than 12 Months	$ 236,517	$ 200,164
12 Months or More	65,115	86,361
Total	301,632	286,525
Unrealized Losses
Less Than 12 Months	2,374	2,356
12 Months or More	840	3,839
Total	$ 3,214	$ 6,195
States and political subdivisions
Number of Securities
Less Than 12 Months | security		27
12 Months or More | security		6
Total | security		33
Fair Value
Less Than 12 Months		$ 46,585
12 Months or More		23,036
Total		69,621
Unrealized Losses
Less Than 12 Months		662
12 Months or More		849
Total		$ 1,511
GSE residential CMOs
Number of Securities
Less Than 12 Months | security	3	1
12 Months or More | security	1	7
Total | security	4	8
Fair Value
Less Than 12 Months	$ 27,100	$ 18,037
12 Months or More	12,147	46,168
Total	39,247	64,205
Unrealized Losses
Less Than 12 Months	45	122
12 Months or More	310	2,567
Total	$ 355	$ 2,689
Private label residential CMOs
Number of Securities
Less Than 12 Months | security		1
12 Months or More | security		0
Total | security		1
Fair Value
Less Than 12 Months		$ 143
12 Months or More		0
Total		143
Unrealized Losses
Less Than 12 Months		1
12 Months or More		0
Total		$ 1
Private label commercial CMOs
Number of Securities
Less Than 12 Months | security	7	11
12 Months or More | security	6	2
Total | security	13	13
Fair Value
Less Than 12 Months	$ 33,093	$ 56,499
12 Months or More	34,644	6,349
Total	67,737	62,848
Unrealized Losses
Less Than 12 Months	71	712
12 Months or More	156	209
Total	$ 227	$ 921
Asset-backed and other
Number of Securities
Less Than 12 Months | security	15	6
12 Months or More | security	2	3
Total | security	17	9
Fair Value
Less Than 12 Months	$ 176,324	$ 78,900
12 Months or More	18,324	10,808
Total	194,648	89,708
Unrealized Losses
Less Than 12 Months	2,258	859
12 Months or More	374	214
Total	$ 2,632	$ 1,073

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MERGERS AND ACQUISITIONS - Performing and PCI Loans Acquired (Details) - Hamilton Bancorp, Inc. $ in Thousands	May 01, 2019 USD ($)
Business Acquisition [Line Items]
Performing loans	$ 327,875
PCI loans	19,486
Total Loans	347,361
Commercial and industrial
Business Acquisition [Line Items]
Performing loans	32,316
PCI loans	1,702
Total Loans	34,018
Installment and other loans
Business Acquisition [Line Items]
Performing loans	14,467
PCI loans	195
Total Loans	14,662
Owner occupied | Commercial real estate
Business Acquisition [Line Items]
Performing loans	42,148
PCI loans	6,324
Total Loans	48,472
Non-owner occupied | Commercial real estate
Business Acquisition [Line Items]
Performing loans	45,401
PCI loans	770
Total Loans	46,171
Multi-family | Commercial real estate
Business Acquisition [Line Items]
Performing loans	10,773
PCI loans	0
Total Loans	10,773
1-4 family residential construction | Acquisition and development
Business Acquisition [Line Items]
Performing loans	7,450
PCI loans	0
Total Loans	7,450
Commercial and land development | Acquisition and development
Business Acquisition [Line Items]
Performing loans	4,528
PCI loans	0
Total Loans	4,528
First lien | Residential mortgage
Business Acquisition [Line Items]
Performing loans	152,657
PCI loans	10,494
Total Loans	163,151
Home equity - term | Residential mortgage
Business Acquisition [Line Items]
Performing loans	4,478
PCI loans	1
Total Loans	4,479
Home equity - lines of credit | Residential mortgage
Business Acquisition [Line Items]
Performing loans	13,657
PCI loans	0
Total Loans	$ 13,657

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LOANS AND ALLOWANCE FOR LOAN LOSSES - Summary of Loan Portfolio, Excluding Residential Loans Held for Sale, Broken Out by Classes (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	$ 1,593,105	$ 1,247,657
Acquired loans	425,940	135,009
Commercial real estate | Owner occupied
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	171,327	129,650
Commercial real estate | Non-owner occupied
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	310,334	252,794
Commercial real estate | Multi-family
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	108,751	78,933
Commercial real estate | Non-owner occupied residential
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	120,395	100,367
Acquisition and development | 1-4 family residential construction
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	12,257	7,385
Acquisition and development | Commercial and land development
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	38,494	42,051
Commercial and industrial
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	215,734	160,964
Municipal
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	47,920	50,982
Residential mortgage | First lien
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	353,811	235,296
Residential mortgage | Home equity - term
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	15,175	12,208
Residential mortgage | Home equity - lines of credit
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	159,930	143,616
Installment and other loans
Accounts, Notes, Loans and Financing Receivable [Line Items]
Total Loans	$ 38,977	$ 33,411

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LEASES - Schedule of Maturities of Leases Liabilities (Details) $ in Thousands	Sep. 30, 2019 USD ($)
Leases [Abstract]
Remainder of 2019	$ 332
2020	1,336
2021	1,207
2022	788
2023	810
2024	801
Thereafter	10,976
Total payments due	16,250
Less imputed interest	5,810
Total lease liabilities	$ 10,440

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SHARE-BASED COMPENSATION PLANS - Additional Information (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized compensation expense, recognition period	1 year 8 months 12 days
Orrstown 2011 Incentive Stock Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares reserved to be issued (in shares)	881,920
Number of shares available to be issued under employee stock purchase plan (in shares)	483,178
Orrstown 2011 Incentive Stock Plan | Restricted Stock
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized compensation expense	$ 1,993	$ 2,115
Orrstown 2011 Incentive Stock Plan | Employee Stock Option
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Intrinsic value of options outstanding and exercisable	$ 21	$ 0
Orrstown 2011 Incentive Stock Plan | Employee Stock Option | Maximum
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Maximum term to exercise option	10 years
Employee Stock Purchase Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares reserved to be issued (in shares)	350,000
Number of shares available to be issued under employee stock purchase plan (in shares)	168,066
Maximum shares purchase, as percentage of salary	10.00%
Percentage of value of the shares on the semi-annual offering	95.00%

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LEASES (Tables)

9 Months Ended

Sep. 30, 2019

Leases [Abstract]

Summary of ROU Assets and Related Lease Liabilities

The following table summarizes the Company's ROU assets and related lease liabilities for the three and nine months at September 30, 2019.

	Three Months Ended		Nine Months Ended
(Dollars in thousands)	September 30, 2019		September 30, 2019
Cash paid for operating lease liabilities	330		$	791
Right-of-use assets obtained in exchange for operating lease obligations (1)	0		$	10,908
Weighted-average remaining lease term (in years)	17.6		17.6
Weighted-average discount rate	4.5	%	4.5		%

⁽¹⁾ Includes $7,971,000 for operating leases existing on January 1, 2019, $144,000 for operating leases that commenced in the first quarter of 2019, and $2,793,000 for operating leases that were acquired in the second quarter of 2019.

Schedule of Maturities of Lease Liabilities

The following table presents maturities of the Company's lease liabilities.

(Dollars in thousands)
Remainder of 2019	$	332
2020	1,336
2021	1,207
2022	788
2023	810
2024	801
Thereafter	10,976
	16,250
Less imputed interest	5,810
Total lease liabilities	$	10,440

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REVENUE FROM CONTRACTS WITH CUSTOMERS

9 Months Ended

Sep. 30, 2019

Revenue from Contract with Customer [Abstract]

REVENUE FROM CONTRACTS WITH CUSTOMERS

REVENUE FROM CONTRACTS WITH CUSTOMERS

All of the Company's revenue from contracts with customers within the scope of ASC 606 is recognized within noninterest income on the consolidated statements of income. Consistent with ASC 606, noninterest income covered by this guidance is recognized as services are transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

Service Charges on Deposit Accounts - The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed, as that is the point in time the Company fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance.

Interchange Income - The Company earns interchange fees from debit/credit cardholder transactions conducted through the MasterCard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Interchange income is presented net of cardholder rewards.

Loan swap referral fees - The Company earns fees from a third-party service provider for loan hedging referrals provided to lending clients. The Company acts as an agent in arranging the relationship between our client and the third-party service provider. The company is paid and recognizes income upon completion of the loan hedge between our client and the third-party service provider.

Wealth Management and Investment Advisory Income (Gross) - The Company earns wealth management and investment brokerage fees from its contracts with trust and wealth management customers to manage assets for investment, and/or to transact on their accounts. Asset management fees are primarily earned over time as the Company provides the contracted services and are generally assessed based on a tiered scale of the market value of assets under management. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed, i.e., the trade date. Other related services provided included financial planning services, and the fees the Company earns for such services, which are based on a fixed fee schedule, are recognized when the services are rendered. Services are generally billed in arrears and a receivable is recorded until fees are paid.

Investment Brokerage Income (Net) - The Company earns fees from investment management and brokerage services provided to its customers through a third-party service provider. The Company receives commissions from the third-party service provider and recognizes income on a weekly basis based upon customer activity. Because the Company acts as an agent in arranging the relationship between the customer and the third-party service provider and does not control the services rendered to the customers, investment brokerage income is presented net of related costs.

Gains/Losses on Sales of OREO - The Company records a gain or loss on the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. If the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.

At September 30, 2019 and December 31, 2018, the Company had receivables from customers totaling $737,000 and $640,000.

The following table presents our noninterest income disaggregated by revenue source for the three and nine months ended September 30, 2019 and 2018.

	Three Months Ended				Nine Months Ended
(Dollars in thousands)	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Noninterest income
Service charges on deposits	$	1,025	$	926	$	2,802	$	2,599
Loan swap referral fees	629		0		629		0
Trust and investment management income	1,892		1,668		5,399		5,037
Brokerage income	654		455		1,804		1,514
Merchant and bankcard fees (interchange income)	843		681		2,422		2,047
Revenue from contracts with customers	5,043		3,730		13,056		11,197
Other service charges	265		409		665		1,189
Mortgage banking activities	623		735		1,743		2,049
Income from life insurance	479		533		1,505		1,101
Other income	44		56		188		272
Investment securities gains	2,328		29		4,731		891
Total noninterest income	$	8,782	$	5,492	$	21,888	$	16,699

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MERGERS AND ACQUISITIONS (Tables)

9 Months Ended

Sep. 30, 2019

Business Combinations [Abstract]

Summary of consideration Paid and Estimated Fair Values of Assets Acquired and Liabilities Assumed

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:

(Dollars in thousands)
Fair value of consideration transferred:
Cash	$	14,197
Common stock issued	36,622
Total consideration transferred	$	50,819
Estimated fair values of assets acquired and (liabilities) assumed:
Cash and cash equivalents	$	43,140
Securities available for sale	60,882
Restricted investments in bank stocks	2,658
Loans	347,361
Premises and equipment	3,749
Core deposit intangible	4,550
Goodwill	7,333
Cash surrender value of life insurance	17,948
Deferred tax asset, net	5,838
ROU lease asset	2,793
Other assets	3,925
Total assets acquired	500,177
Deposits	(388,246)
Borrowings	(51,393)
Other liabilities	(9,719)
Total liabilities assumed	(449,358)
	$	50,819

Schedule of Performing and PCI Loans Acquired, by Loan Class

The following table presents performing and PCI loans acquired, by loan class, at May 1, 2019.

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.

(in thousands)	Performing		PCI		Total
Commercial real estate:
Owner-occupied	$	42,148	$	6,324	$	48,472
Non-owner occupied	45,401		770		46,171
Multi-family	10,773		0		10,773
Acquisition and development:
1-4 family residential construction	7,450		0		7,450
Commercial and land development	4,528		0		4,528
Commercial and industrial	32,316		1,702		34,018
Residential mortgage:
First lien	152,657		10,494		163,151
Home-equity - term	4,478		1		4,479
Home equity - lines of credit	13,657		0		13,657
Installment and other loans	14,467		195		14,662
Total loans acquired	$	327,875	$	19,486	$	347,361

Schedule of Fair Value Adjustments Made to Amortized Costs Basis of Loans Acquired

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

(in thousands)
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	(5,508)
Estimated fair value of acquired loans	$	347,361

Schedule of Information About Acquired PCI Loans

The following table provides information about acquired PCI loans at May 1, 2019.

(in thousands)
Contractually required principal and interest at acquisition	$	31,599
Nonaccretable difference	(8,616)
Expected cash flows at acquisition	22,983
Accretable yield	(3,497)
Estimated fair value of acquired PCI loans	$	19,486

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LOANS AND ALLOWANCE FOR LOAN LOSSES - Company's Loan Portfolio Ratings Based on its Internal Risk Rating System (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Financing Receivable, Recorded Investment [Line Items]
Total Loans	$ 1,593,105	$ 1,247,657
Commercial real estate | Owner occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	171,327	129,650
Commercial real estate | Non-owner occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	310,334	252,794
Commercial real estate | Multi-family
Financing Receivable, Recorded Investment [Line Items]
Total Loans	108,751	78,933
Commercial real estate | Non-owner occupied residential
Financing Receivable, Recorded Investment [Line Items]
Total Loans	120,395	100,367
Acquisition and development | 1-4 family residential construction
Financing Receivable, Recorded Investment [Line Items]
Total Loans	12,257	7,385
Acquisition and development | Commercial and land development
Financing Receivable, Recorded Investment [Line Items]
Total Loans	38,494	42,051
Commercial and industrial
Financing Receivable, Recorded Investment [Line Items]
Total Loans	215,734	160,964
Municipal
Financing Receivable, Recorded Investment [Line Items]
Total Loans	47,920	50,982
Residential mortgage | First lien
Financing Receivable, Recorded Investment [Line Items]
Total Loans	353,811	235,296
Residential mortgage | Home equity - term
Financing Receivable, Recorded Investment [Line Items]
Total Loans	15,175	12,208
Residential mortgage | Home equity - lines of credit
Financing Receivable, Recorded Investment [Line Items]
Total Loans	159,930	143,616
Installment and other loans
Financing Receivable, Recorded Investment [Line Items]
Total Loans	38,977	33,411
Pass
Financing Receivable, Recorded Investment [Line Items]
Total Loans	1,515,641	1,201,023
Pass | Commercial real estate | Owner occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	153,327	121,903
Pass | Commercial real estate | Non-owner occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	298,268	242,136
Pass | Commercial real estate | Multi-family
Financing Receivable, Recorded Investment [Line Items]
Total Loans	101,479	71,482
Pass | Commercial real estate | Non-owner occupied residential
Financing Receivable, Recorded Investment [Line Items]
Total Loans	113,248	97,590
Pass | Acquisition and development | 1-4 family residential construction
Financing Receivable, Recorded Investment [Line Items]
Total Loans	12,004	7,385
Pass | Acquisition and development | Commercial and land development
Financing Receivable, Recorded Investment [Line Items]
Total Loans	37,582	41,251
Pass | Commercial and industrial
Financing Receivable, Recorded Investment [Line Items]
Total Loans	198,348	150,286
Pass | Municipal
Financing Receivable, Recorded Investment [Line Items]
Total Loans	47,920	50,982
Pass | Residential mortgage | First lien
Financing Receivable, Recorded Investment [Line Items]
Total Loans	340,619	229,971
Pass | Residential mortgage | Home equity - term
Financing Receivable, Recorded Investment [Line Items]
Total Loans	15,068	12,170
Pass | Residential mortgage | Home equity - lines of credit
Financing Receivable, Recorded Investment [Line Items]
Total Loans	159,063	142,638
Pass | Installment and other loans
Financing Receivable, Recorded Investment [Line Items]
Total Loans	38,715	33,229
Special Mention
Financing Receivable, Recorded Investment [Line Items]
Total Loans	28,892	22,137
Special Mention | Commercial real estate | Owner occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	5,750	3,024
Special Mention | Commercial real estate | Non-owner occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	10,685	10,008
Special Mention | Commercial real estate | Multi-family
Financing Receivable, Recorded Investment [Line Items]
Total Loans	5,537	5,886
Special Mention | Commercial real estate | Non-owner occupied residential
Financing Receivable, Recorded Investment [Line Items]
Total Loans	3,139	736
Special Mention | Acquisition and development | 1-4 family residential construction
Financing Receivable, Recorded Investment [Line Items]
Total Loans	253	0
Special Mention | Acquisition and development | Commercial and land development
Financing Receivable, Recorded Investment [Line Items]
Total Loans	348	25
Special Mention | Commercial and industrial
Financing Receivable, Recorded Investment [Line Items]
Total Loans	2,316	2,278
Special Mention | Municipal
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Special Mention | Residential mortgage | First lien
Financing Receivable, Recorded Investment [Line Items]
Total Loans	713	0
Special Mention | Residential mortgage | Home equity - term
Financing Receivable, Recorded Investment [Line Items]
Total Loans	76	0
Special Mention | Residential mortgage | Home equity - lines of credit
Financing Receivable, Recorded Investment [Line Items]
Total Loans	75	165
Special Mention | Installment and other loans
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	15
Non-Impaired Substandard
Financing Receivable, Recorded Investment [Line Items]
Total Loans	15,554	6,440
Non-Impaired Substandard | Commercial real estate | Owner occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	2,664	987
Non-Impaired Substandard | Commercial real estate | Non-owner occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Non-Impaired Substandard | Commercial real estate | Multi-family
Financing Receivable, Recorded Investment [Line Items]
Total Loans	940	717
Non-Impaired Substandard | Commercial real estate | Non-owner occupied residential
Financing Receivable, Recorded Investment [Line Items]
Total Loans	1,246	1,197
Non-Impaired Substandard | Acquisition and development | 1-4 family residential construction
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Non-Impaired Substandard | Acquisition and development | Commercial and land development
Financing Receivable, Recorded Investment [Line Items]
Total Loans	564	583
Non-Impaired Substandard | Commercial and industrial
Financing Receivable, Recorded Investment [Line Items]
Total Loans	10,101	2,940
Non-Impaired Substandard | Municipal
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Non-Impaired Substandard | Residential mortgage | First lien
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Non-Impaired Substandard | Residential mortgage | Home equity - term
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Non-Impaired Substandard | Residential mortgage | Home equity - lines of credit
Financing Receivable, Recorded Investment [Line Items]
Total Loans	39	15
Non-Impaired Substandard | Installment and other loans
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	1
Impaired - Substandard
Financing Receivable, Recorded Investment [Line Items]
Total Loans	7,973	6,297
Impaired - Substandard | Commercial real estate | Owner occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	3,324	1,880
Impaired - Substandard | Commercial real estate | Non-owner occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Impaired - Substandard | Commercial real estate | Multi-family
Financing Receivable, Recorded Investment [Line Items]
Total Loans	105	131
Impaired - Substandard | Commercial real estate | Non-owner occupied residential
Financing Receivable, Recorded Investment [Line Items]
Total Loans	137	309
Impaired - Substandard | Acquisition and development | 1-4 family residential construction
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Impaired - Substandard | Acquisition and development | Commercial and land development
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Impaired - Substandard | Commercial and industrial
Financing Receivable, Recorded Investment [Line Items]
Total Loans	1,089	286
Impaired - Substandard | Municipal
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Impaired - Substandard | Residential mortgage | First lien
Financing Receivable, Recorded Investment [Line Items]
Total Loans	2,547	2,877
Impaired - Substandard | Residential mortgage | Home equity - term
Financing Receivable, Recorded Investment [Line Items]
Total Loans	11	16
Impaired - Substandard | Residential mortgage | Home equity - lines of credit
Financing Receivable, Recorded Investment [Line Items]
Total Loans	753	798
Impaired - Substandard | Installment and other loans
Financing Receivable, Recorded Investment [Line Items]
Total Loans	7	0
Doubtful
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Doubtful | Commercial real estate | Owner occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Doubtful | Commercial real estate | Non-owner occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Doubtful | Commercial real estate | Multi-family
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Doubtful | Commercial real estate | Non-owner occupied residential
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Doubtful | Acquisition and development | 1-4 family residential construction
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Doubtful | Acquisition and development | Commercial and land development
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Doubtful | Commercial and industrial
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Doubtful | Municipal
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Doubtful | Residential mortgage | First lien
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Doubtful | Residential mortgage | Home equity - term
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Doubtful | Residential mortgage | Home equity - lines of credit
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
Doubtful | Installment and other loans
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
PCI Loans
Financing Receivable, Recorded Investment [Line Items]
Total Loans	25,045	11,760
PCI Loans | Commercial real estate | Owner occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	6,262	1,856
PCI Loans | Commercial real estate | Non-owner occupied
Financing Receivable, Recorded Investment [Line Items]
Total Loans	1,381	650
PCI Loans | Commercial real estate | Multi-family
Financing Receivable, Recorded Investment [Line Items]
Total Loans	690	717
PCI Loans | Commercial real estate | Non-owner occupied residential
Financing Receivable, Recorded Investment [Line Items]
Total Loans	2,625	535
PCI Loans | Acquisition and development | 1-4 family residential construction
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
PCI Loans | Acquisition and development | Commercial and land development
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	192
PCI Loans | Commercial and industrial
Financing Receivable, Recorded Investment [Line Items]
Total Loans	3,880	5,174
PCI Loans | Municipal
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
PCI Loans | Residential mortgage | First lien
Financing Receivable, Recorded Investment [Line Items]
Total Loans	9,932	2,448
PCI Loans | Residential mortgage | Home equity - term
Financing Receivable, Recorded Investment [Line Items]
Total Loans	20	22
PCI Loans | Residential mortgage | Home equity - lines of credit
Financing Receivable, Recorded Investment [Line Items]
Total Loans	0	0
PCI Loans | Installment and other loans
Financing Receivable, Recorded Investment [Line Items]
Total Loans	$ 255	$ 166

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SECURITIES AVAILABLE FOR SALE - Schedule of Amortized Cost and Fair Values of AFS Securities by Contractual Maturity (Details) $ in Thousands	Sep. 30, 2019 USD ($)
Amortized Cost
Due in one year or less	$ 230
Due after one year through five years	0
Due after five years through ten years	26,456
Due after ten years	50,867
CMOs	158,062
Asset-backed and other	242,119
Total Amortized Cost	477,734
Fair Value
Due in one year	230
Due after one year through five years	0
Due after five years through ten years	27,952
Due after ten years	54,530
CMOs	158,768
Asset-backed and other	239,640
Total Fair Value	$ 481,120

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MERGERS AND ACQUISITIONS - Schedule of Fair Value Adjustments Made to Amortized Cost Basis of Loans (Details) - Hamilton Bancorp, Inc. $ in Thousands	May 01, 2019 USD ($)
Business Acquisition [Line Items]
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	(5,508)
Estimated fair value of acquired loans	$ 347,361

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LEASES - Summary of ROU Assets and Related Lease Liabilities (Details) - USD ($) $ in Thousands	3 Months Ended			9 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2019	Sep. 30, 2018	Jan. 01, 2019
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Cash paid for operating lease liabilities	$ 330			$ 791
Right-of-use asset obtained in exchange for operating lease obligations	$ 0			$ 10,908
Weighted-average remaining lease term (in years)	17 years 7 months 6 days			17 years 7 months 6 days
Weighted-average discount rate	4.50%			4.50%
Operating lease liability	$ 10,440			$ 10,440
Operating leases acquired			$ 144	$ 8,115	$ 0
ASU 2016-02
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Operating lease liability						$ 7,971
Hamilton Bancorp, Inc.
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Operating leases acquired		$ 2,793

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INCOME TAXES - Summary of Deferred Tax Assets and Liabilities (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Deferred tax assets:
Allowance for loan losses	$ 3,465	$ 3,143
Deferred compensation	396	723
Retirement and salary continuation plans	2,326	1,416
Share-based compensation	592	742
Off-balance sheet reserves	270	219
Nonaccrual loan interest	843	537
Net unrealized losses on AFS securities	0	791
Purchase accounting adjustments	4,349	1,795
Bonus accrual	366	470
Low-income housing credit carryforward	341	641
Net operating loss carryovers	1,872	0
Other	473	321
Total deferred tax assets	15,293	10,798
Deferred tax liabilities:
Depreciation	440	458
Net unrealized gains on AFS securities	711	0
Mortgage servicing rights	644	590
Purchase accounting adjustments	1,682	1,021
Other	250	150
Total deferred tax liabilities	3,727	2,219
Net deferred tax asset, included in Other Assets	$ 11,566	$ 8,579

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FAIR VALUE

9 Months Ended

Sep. 30, 2019

Fair Value Disclosures [Abstract]

FAIR VALUE

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 the Company’s securities are classified as available for sale.

The Company had no fair value liabilities measured on a recurring basis at September 30, 2019 and December 31, 2018.

The following table summarizes assets measured at fair value on a recurring basis at September 30, 2019 and December 31, 2018.

(Dollars in Thousands)	Level 1		Level 2		Level 3		Total Fair Value Measurements
September 30, 2019
AFS Securities:
States and political subdivisions	$	0	$	82,712	$	0	$	82,712
GSE residential CMOs	0		71,001		0		71,001
Private label commercial CMOs	0		80,554		7,213		87,767
Asset-backed and other	0		239,640		0		239,640
Totals	$	0	$	473,907	$	7,213	$	481,120
December 31, 2018
AFS Securities:
States and political subdivisions	$	0	$	145,004	$	0	$	145,004
GSE residential CMOs	0		108,064		0		108,064
Private label residential CMOs	0		143		0		143
Private label commercial CMOs	0		67,836		7,209		75,045
Asset-backed and other	0		137,588		0		137,588
Totals	$	0	$	458,635	$	7,209	$	465,844

One private label commercial CMO was measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at September 30, 2019 and December 31, 2018. Fair value for this investment totaled $7,213,000 at September 30, 2019 and $7,209,000 at December 31, 2018. The investment was purchased at $7,213,000. Premium amortization expense totaling $31,000 and $72,000 was included in earnings for the three and nine months ended September 30, 2019, and an unrealized gain (loss) totaling $(87,000) and $76,000 was recognized in other comprehensive income for the three and nine months ended September 30, 2019. 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.

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

Impaired Loans

Loans are designated as impaired when, in the judgment of management and based on current information and events, it is probable that all amounts due, according to the contractual terms of the loan agreement, will not be collected. The measurement of loss associated with impaired loans for all loan classes can be based on either the observable market price of the loan, the fair value of the collateral, or discounted cash flows based on a market rate of interest 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 consolidated statements of income. Specific allocations to the ALL or partial charge-offs totaled $863,000 and $928,000 at September 30, 2019 and December 31, 2018.

The following table presents changes in the fair value for impaired loans still held at September 30, considered in the determination of the provision for loan losses, for the three and nine months ended September 30, 2019 and 2018.

	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2019		2018		2019		2018
Changes in fair value of impaired loans still held	$	21	$	63	$	49	$	147

Foreclosed Real Estate

OREO property acquired through foreclosure is initially recorded at the fair value of the property at the transfer date less estimated selling cost. Subsequently, OREO is carried at the lower of its carrying value or the fair value less estimated selling cost. Fair value is usually determined based upon an independent third-party appraisal of the property or occasionally upon a recent sales offer. Specific charges to value OREO at the lower of cost or fair value on properties held at September 30, 2019 and December 31, 2018 both totaled $0. There were no changes in the fair value of OREO for properties, still held at September 30, that were charged to real estate expenses for the three and nine months ended September 30, 2019. The fair value of OREO properties changed $11,000 for the three and nine months ended September 30, 2018.

Mortgage Servicing Rights

The fair value of mortgage servicing rights is estimated to be equal to its carrying value, unless the quarterly valuation model calculates the present value of the estimated net servicing income is less than its carrying value, in which case a lower of cost or fair value charge is taken. At September 30, 2019, a $240,000 lower of cost or fair value reserve existed on the mortgage servicing right portfolio. For the three and nine months ended September 30, 2019, impairment charges of $221,000 and $240,000 were recorded. No reserve existed at December 31, 2018, and no impairment charges were recorded in 2018.

The following table summarizes assets measured at fair value on a nonrecurring basis at September 30, 2019 and December 31, 2018.

(Dollars in thousands)	Level 1		Level 2		Level 3		Total Fair Value Measurements
September 30, 2019
Impaired Loans
Commercial real estate:
Owner occupied	$	0	$	0	$	971	$	971
Multi-family	0		0		105		105
Non-owner occupied residential	0		0		136		136
Commercial and industrial	0		0		6		6
Residential mortgage:
First lien	0		0		722		722
Home equity - lines of credit	0		0		407		407
Installment and other loans	0		0		7		7
Total impaired loans	$	0	$	0	$	2,354	$	2,354
Mortgage servicing rights	$	0	$	3,116	$	0	$	3,116
December 31, 2018
Impaired Loans
Commercial real estate:
Owner occupied	$	0	$	0	$	1,087	$	1,087
Multi-family	0		0		131		131
Non-owner occupied residential	0		0		278		278
Commercial and industrial	0		0		25		25
Residential mortgage:
First lien	0		0		1,121		1,121
Home equity - lines of credit	0		0		409		409
Total impaired loans	$	0	$	0	$	3,051	$	3,051

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.

(Dollars in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range
September 30, 2019
Impaired loans	$	2,354	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	5% - 30% discount
				- Management adjustments for liquidation expenses	6%- 33% discount
Mortgage servicing rights	3,116		Discounted cash flows	Weighted average CPR	12.7%
				- Weighted average discount rate	9.5%
December 31, 2018
Impaired loans	$	3,051	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	5% - 75% discount
				- Management adjustments for liquidation expenses	6% - 20% discount

Fair values of financial instruments

The following table presents carrying amounts and estimated fair values of the Company’s financial instruments at September 30, 2019 and December 31, 2018:

(Dollars in thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
September 30, 2019
Financial Assets
Cash and due from banks	$	31,872	$	31,872	$	31,872	$	0	$	0
Interest-bearing deposits with banks	19,051		19,051		19,051		0		0
Restricted investments in bank stocks	11,399		n/a		n/a		n/a		n/a
AFS securities	481,120		481,120		0		473,907		7,213
Loans held for sale	7,610		7,819		0		7,819		0
Loans (carrying amount net of allowance for loan losses)	1,578,296		1,605,129		0		0		1,605,129
Accrued interest receivable	6,546		6,546		0		2,371		4,175
Financial Liabilities
Deposits	1,923,454		1,923,901		0		1,923,901		0
Short-term borrowings	36,605		36,605		0		36,605		0
Long-term debt	63,165		63,497		0		63,497		0
Subordinated notes	31,834		32,474		0		32,474		0
Accrued interest payable	1,468		1,468		0		1,468		0
Off-balance sheet instruments	0		0		0		0		0
December 31, 2018
Financial Assets
Cash and due from banks	$	26,156	$	26,156	$	26,156	$	0	$	0
Interest-bearing deposits with banks	45,664		45,664		45,664		0		0
Federal Funds Sold	16,995		16,995		16,995		0		0
Restricted investments in bank stocks	10,842		n/a		n/a		n/a		n/a
AFS securities	465,844		465,844		0		458,635		7,209
Loans held for sale	3,340		3,413		0		3,413		0
Loans, net of allowance for loan losses	1,233,643		1,229,645		0		0		1,229,645
Accrued interest receivable	5,927		5,927		0		2,853		3,074
Financial Liabilities
Deposits	1,558,756		1,555,912		0		1,555,912		0
Short-term borrowings	64,069		64,069		0		64,069		0
Long-term debt	83,450		82,951		0		82,951		0
Subordinated notes	31,859		31,256		0		31,256		0
Accrued interest payable	1,301		1,301		0		1,301		0
Off-balance sheet instruments	0		0		0		0		0

The methods utilized to measure the fair value of financial instruments at September 30, 2019 and December 31, 2018 represent an approximation of exit price; however, an actual exit price may differ.

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

9 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Nature of Operations

Nature of Operations – Orrstown Financial Services, Inc. and subsidiaries is a financial holding company that operates Orrstown Bank, a commercial bank with banking and financial advisory offices 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 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

Basis of Presentation – The accompanying condensed consolidated financial statements include the accounts of Orrstown Financial Services, Inc. and its wholly owned subsidiaries, the Bank and Wheatland. 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, 2018 consolidated balance sheet information contained in this Quarterly Report on Form 10-Q was derived from the 2018 audited consolidated financial statements. Interim results are not necessarily indicative of results for a full year. 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, 2018. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. 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 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. 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, other assets and liabilities obtained or assumed in business combinations.

Leases

Leases - We evaluate our contracts at inception to determine if an arrangement is or contains a lease. Operating leases are included in operating lease ROU assets in Other assets and operating lease liabilities in Accrued interest payable and other liabilities in our consolidated balance sheets. The Company has no finance leases.

ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our 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. Our leases do not provide an implicit rate, so we use our incremental borrowing rate, which approximates our 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. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

We adopted ASU 2016-02, “Leases (Topic 842),” on January 1, 2019, the effective date of the guidance, using the practical expedient transition method whereby we did not revise comparative period information or disclosure. The new standard requires lessees to record assets and liabilities on the balance sheet for all leases with terms longer than 12 months. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carryforward the historical lease classification. We also elected certain optional practical expedients,

including the hindsight practical expedient under which we considered the actual outcomes of lease renewals and terminations when measuring the lease term at adoption, and we made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. We recognize these lease payments in the consolidated statements of income on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, and we have elected the practical expedient to account for these as a single lease component.

Our operating leases relate primarily to bank branches and office space. In conjunction with the adoption on January 1, 2019, we recognized operating lease liabilities of $7,971,000 and related lease assets of $7,494,000 on our balance sheet. The difference between the lease assets and lease liabilities primarily consists of deferred rent liabilities reclassified upon adoption to reduce the measurement of the lease assets. The standard did not materially impact our consolidated net income and had no impact on cash flows.

Recent Accounting Pronouncements

Recent Accounting Pronouncements - ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. 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 will be effective for interim and annual periods beginning after December 15, 2019. On October 16, 2019, the FASB extended the implementation deadline for smaller reporting and other companies until the fiscal year and interim periods beginning after December 15, 2022. The Company currently meets the requirements to be considered a smaller reporting company under SEC Regulation S-K and SEC Rule 405, and, pending the issuance of a final pronouncement, is evaluating the impact of the delay for adoption of the update.

We are working with a third 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 we anticipate the allowance for loan losses will increase under our current assumptions, we expect the impact of adopting ASU 2016-13 will be influenced by the composition, characteristics and quality of our loan and securities portfolios, as well as general economic conditions and forecasts at the adoption date.

ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The update simplifies how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 will be effective for the Company on January 1, 2020, with earlier adoption permitted, and is not expected to have a material impact on the Company's consolidated financial statements.

ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20). The update shortens the amortization period of certain callable debt securities held at a premium to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. Under prior guidance, entities were generally required to amortize premiums on individual, non-pooled callable debt securities as a yield adjustment over the contractual life of the security. ASU 2017-08 does not change the accounting for callable debt securities held at a discount. On January 1, 2019, we adopted ASU 2016-18 with no material impact on our consolidated financial condition or results of operations.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement and should present a reconciliation of the beginning balance to the ending balance for each period for which a statement of comprehensive income is presented. The Company implemented the additional disclosure requirements effective with the filing of its March 31, 2019 Form 10-Q.

Revenue Recognition

All of the Company's revenue from contracts with customers within the scope of ASC 606 is recognized within noninterest income on the consolidated statements of income. Consistent with ASC 606, noninterest income covered by this guidance is recognized as services are transferred to our customers in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

Service Charges on Deposit Accounts - The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed, as that is the point in time the Company fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance.

Interchange Income - The Company earns interchange fees from debit/credit cardholder transactions conducted through the MasterCard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Interchange income is presented net of cardholder rewards.

Loan swap referral fees - The Company earns fees from a third-party service provider for loan hedging referrals provided to lending clients. The Company acts as an agent in arranging the relationship between our client and the third-party service provider. The company is paid and recognizes income upon completion of the loan hedge between our client and the third-party service provider.

Wealth Management and Investment Advisory Income (Gross) - The Company earns wealth management and investment brokerage fees from its contracts with trust and wealth management customers to manage assets for investment, and/or to transact on their accounts. Asset management fees are primarily earned over time as the Company provides the contracted services and are generally assessed based on a tiered scale of the market value of assets under management. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed, i.e., the trade date. Other related services provided included financial planning services, and the fees the Company earns for such services, which are based on a fixed fee schedule, are recognized when the services are rendered. Services are generally billed in arrears and a receivable is recorded until fees are paid.

Investment Brokerage Income (Net) - The Company earns fees from investment management and brokerage services provided to its customers through a third-party service provider. The Company receives commissions from the third-party service provider and recognizes income on a weekly basis based upon customer activity. Because the Company acts as an agent in arranging the relationship between the customer and the third-party service provider and does not control the services rendered to the customers, investment brokerage income is presented net of related costs.

Gains/Losses on Sales of OREO - The Company records a gain or loss on the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. If the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.

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GOODWILL AND OTHER INTANGIBLE ASSETS (Tables)

9 Months Ended

Sep. 30, 2019

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of in Changes in Goodwill

The following table presents changes in goodwill at September 30, 2019 and December 31, 2018.

(Dollars in thousands)	September 30, 2019		December 31, 2018
Balance, beginning of year	$	12,592	$	719
Acquired goodwill	7,029		11,873
Adjustments to acquired goodwill	304		0
Balance, end of period	$	19,925	$	12,592

Schedule of Changes in Other Intangible Assets

The following table presents changes in other intangible assets for the three and nine months ended September 30, 2019 and 2018.

	Three Months Ended				Nine Months Ended
(Dollars in thousands)	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Beginning of period	$	8,140	$	308	$	3,910	$	356
Acquired CDI	0		0		4,550		0
Non-compete agreement	0		0		290		0
Amortization Expense	(486)		(24)		(1,096)		(72)
Balance, end of period	$	7,654	$	284	$	7,654	$	284

Schedule of Components of Other Intangible Assets

The following table presents the components of other identifiable intangible assets at September 30, 2019 and December 31, 2018.

	September 30, 2019				December 31, 2018
(Dollars in thousands)	Gross Amount		Accumulated Amortization		Gross Amount		Accumulated Amortization
Amortized intangible assets:
Core deposit intangibles	$	8,390	$	1,106	$	3,840	$	190
Other customer relationship intangibles	931		730		931		671
Non-compete agreement	290		121		0		0
Total	$	9,611	$	1,957	$	4,771	$	861

Schedule of Estimated Aggregated Amortization Expense

The following table presents estimated aggregate amortization expense for intangible assets remaining at September 30, 2019.

(Dollars in thousands)
Remainder of 2019	$	474
2020	1,591
2021	1,313
2022	1,137
2023	960
Thereafter	2,179
	$	7,654

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LOANS AND ALLOWANCE FOR LOAN LOSSES

9 Months Ended

Sep. 30, 2019

Receivables [Abstract]

LOANS AND ALLOWANCE FOR LOAN LOSSES

LOANS AND ALLOWANCE FOR LOAN LOSSES

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

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

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

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

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

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 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.

The following table presents the loan portfolio by segment and class, excluding residential LHFS, at September 30, 2019 and December 31, 2018.

(Dollars in thousands)	September 30, 2019		December 31, 2018
Commercial real estate:
Owner occupied	$	171,327	$	129,650
Non-owner occupied	310,334		252,794
Multi-family	108,751		78,933
Non-owner occupied residential	120,395		100,367
Acquisition and development:
1-4 family residential construction	12,257		7,385
Commercial and land development	38,494		42,051
Commercial and industrial	215,734		160,964
Municipal	47,920		50,982
Residential mortgage:
First lien	353,811		235,296
Home equity - term	15,175		12,208
Home equity - lines of credit	159,930		143,616
Installment and other loans	38,977		33,411
Total Loans (1)	$	1,593,105	$	1,247,657

⁽¹⁾ Includes $425,940,000 and $135,009,000 of acquired loans at September 30, 2019 and December 31, 2018.

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 ERM Committee, comprised of executive officers and loan department personnel, is charged with the oversight of overall credit quality and risk exposure of the Company's loan portfolio. This includes the monitoring of the lending activities of all Company personnel with respect to underwriting and processing new loans and the timely follow-up and corrective action for loans showing signs of deterioration in quality. 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 $500,000, which includes confirmation of risk rating by an independent credit officer. Credit Administration also reviews loans in excess of $1,000,000. In addition, all commercial relationships greater than $250,000 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 ERM Committee.

The following table summarizes the Company’s loan portfolio ratings based on its internal risk rating system at September 30, 2019 and December 31, 2018.

(Dollars in thousands)	Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		PCI Loans		Total
September 30, 2019
Commercial real estate:
Owner occupied	$	153,327	$	5,750	$	2,664	$	3,324	$	0	$	6,262	$	171,327
Non-owner occupied	298,268		10,685		0		0		0		1,381		310,334
Multi-family	101,479		5,537		940		105		0		690		108,751
Non-owner occupied residential	113,248		3,139		1,246		137		0		2,625		120,395
Acquisition and development:
1-4 family residential construction	12,004		253		0		0		0		0		12,257
Commercial and land development	37,582		348		564		0		0		0		38,494
Commercial and industrial	198,348		2,316		10,101		1,089		0		3,880		215,734
Municipal	47,920		0		0		0		0		0		47,920
Residential mortgage:
First lien	340,619		713		0		2,547		0		9,932		353,811
Home equity - term	15,068		76		0		11		0		20		15,175
Home equity - lines of credit	159,063		75		39		753		0		0		159,930
Installment and other loans	38,715		0		0		7		0		255		38,977
	$	1,515,641	$	28,892	$	15,554	$	7,973	$	0	$	25,045	$	1,593,105
December 31, 2018
Commercial real estate:
Owner occupied	$	121,903	$	3,024	$	987	$	1,880	$	0	$	1,856	$	129,650
Non-owner occupied	242,136		10,008		0		0		0		650		252,794
Multi-family	71,482		5,886		717		131		0		717		78,933
Non-owner occupied residential	97,590		736		1,197		309		0		535		100,367
Acquisition and development:
1-4 family residential construction	7,385		0		0		0		0		0		7,385
Commercial and land development	41,251		25		583		0		0		192		42,051
Commercial and industrial	150,286		2,278		2,940		286		0		5,174		160,964
Municipal	50,982		0		0		0		0		0		50,982
Residential mortgage:
First lien	229,971		0		0		2,877		0		2,448		235,296
Home equity - term	12,170		0		0		16		0		22		12,208
Home equity - lines of credit	142,638		165		15		798		0		0		143,616
Installment and other loans	33,229		15		1		0		0		166		33,411
	$	1,201,023	$	22,137	$	6,440	$	6,297	$	0	$	11,760	$	1,247,657

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

management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Generally, loans that are more than 90 days past due are deemed impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed to determine if the loan should be placed on nonaccrual status. Nonaccrual loans in the commercial and commercial real estate portfolios and any TDRs are, by definition, deemed to be impaired. Impairment is measured on a loan-by-loan basis for commercial, construction and restructured loans by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. For loans that are deemed to be impaired for extended periods of time, periodic updates on fair values are obtained, which may include updated appraisals. 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 two, and management expects the performing note to continue to perform and is adequately secured. The second, or non-performing note, would be charged-off. 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 September 30, 2019 and December 31, 2018, nearly all of the Company’s impaired loans’ extent of impairment were measured based on the estimated fair value of the collateral securing the loan, except for TDRs. By definition, TDRs are considered impaired. All restructured loans’ impairment was determined based on discounted cash flows for those loans classified as TDRs and still accruing interest. 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 $250,000. 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 one or a combination of approaches. In those situations in which a combination of approaches is considered, the factor that carries the most consideration will be the one management believes is warranted. The approaches are: 

•Original appraisal – if the original 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 original certified appraised value may be used. Discounts as deemed appropriate for selling costs are factored into the appraised value in arriving at fair value.

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

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

The Company distinguishes Substandard loans on both an impaired and nonimpaired 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 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, as opposed to individually, evaluated for impairment. Although the Company believes these loans meet the definition of Substandard, they are generally performing and management has concluded that it is likely we will be able to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement.

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

The following table, which excludes PCI loans, summarizes impaired loans by segment and class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required at September 30, 2019 and December 31, 2018. 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 Allowance						Impaired Loans with No Specific Allowance
(Dollars in thousands)	Recorded Investment (Book Balance)		Unpaid Principal Balance (Legal Balance)		Related Allowance		Recorded Investment (Book Balance)		Unpaid Principal Balance (Legal Balance)
September 30, 2019
Commercial real estate:
Owner occupied	$	0	$	0	$	0	$	3,324	$	5,490
Multi-family	0		0		0		105		325
Non-owner occupied residential	26		48		0		111		319
Commercial and industrial	0		0		0		1,089		2,769
Residential mortgage:
First lien	498		498		36		2,049		3,098
Home equity - term	0		0		0		11		19
Home equity - lines of credit	0		0		0		753		1,081
Installment and other loans	0		0		0		7		17
	$	524	$	546	$	36	$	7,449	$	13,118
December 31, 2018
Commercial real estate:
Owner occupied	$	0	$	0	$	0	$	1,880	$	2,576
Multi-family	0		0		0		131		336
Non-owner occupied residential	0		0		0		309		632
Commercial and industrial	0		0		0		286		457
Residential mortgage:
First lien	743		743		38		2,134		2,727
Home equity - term	0		0		0		16		23
Home equity - lines of credit	0		0		0		798		1,081
	$	743	$	743	$	38	$	5,554	$	7,832

The following table, which excludes PCI loans, summarizes the average recorded investment in impaired loans and related recognized interest income for the three and nine months ended September 30, 2019 and 2018.

	2019				2018
(Dollars in thousands)	Average Impaired Balance		Interest Income Recognized		Average Impaired Balance		Interest Income Recognized
Three Months Ended September 30,
Commercial real estate:
Owner-occupied	$	2,126	$	0	$	1,569	$	1
Non-owner occupied	150		0		0		0
Multi-family	110		0		144		0
Non-owner occupied residential	173		0		336		0
Acquisition and development:
1-4 family residential construction	0		0		201		0
Commercial and industrial	765		0		316		0
Residential mortgage:
First lien	2,392		12		2,900		15
Home equity – term	12		0		18		0
Home equity - lines of credit	768		0		692		0
Installment and other loans	8		0		1		0
	$	6,504	$	12	$	6,177	$	16
Nine Months Ended September 30,
Commercial real estate:
Owner occupied	$	1,950	$	1	$	1,372	$	2
Non-owner occupied	60		0		2,395		0
Multi-family	118		0		152		0
Non-owner occupied residential	246		0		355		0
Acquisition and development:
1-4 family residential construction	0		0		235		0
Commercial and industrial	469		0		330		0
Residential mortgage:
First lien	2,574		41		3,312		44
Home equity - term	13		0		20		0
Home equity - lines of credit	752		1		621		1
Installment and other loans	8		0		6		0
	$	6,190	$	43	$	8,798	$	47

The following table presents impaired loans that are TDRs, with the recorded investment at September 30, 2019 and December 31, 2018.

	September 30, 2019			December 31, 2018
(Dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Accruing:
Commercial real estate:
Owner occupied	1	$	30	1	$	39
Residential mortgage:
First lien	10	992		11	1,069
Home equity - lines of credit	1	20		1	24
	12	1,042		13	1,132
Nonaccruing:
Commercial real estate:
Owner occupied	4	1,898		1	37
Residential mortgage:
First lien	5	368		8	658
	9	2,266		9	695
	21	$	3,308	22	$	1,827

There were three new commercial real estate owner occupied TDR's, totaling $1,867,000, for the quarter ended September 30, 2019. There were no modified restructured loans in 2018. No additional commitments have been made to borrowers whose loans are considered TDRs.

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 September 30, 2019 and December 31, 2018.

			Days Past Due
(Dollars in thousands)	Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans
September 30, 2019
Commercial real estate:
Owner occupied	$	161,771	$	0	$	0	$	0	$	0	$	3,294	$	165,065
Non-owner occupied	308,823		0		0		130		130		0		308,953
Multi-family	107,707		0		0		249		249		105		108,061
Non-owner occupied residential	117,301		225		69		38		332		137		117,770
Acquisition and development:
1-4 family residential construction	12,257		0		0		0		0		0		12,257
Commercial and land development	38,358		0		0		136		136		0		38,494
Commercial and industrial	210,112		320		333		0		653		1,089		211,854
Municipal	47,920		0		0		0		0		0		47,920
Residential mortgage:
First lien	339,460		1,101		1696		67		2,864		1,555		343,879
Home equity - term	15,122		17		0		5		22		11		15,155
Home equity - lines of credit	158,601		475		121		0		596		733		159,930
Installment and other loans	38,556		122		37		0		159		7		38,722
Subtotal	1,555,988		2,260		2,256		625		5,141		6,931		1,568,060
Loans acquired with credit deterioration:
Commercial real estate:
Owner occupied	6,089		131		0		42		173		0		6,262
Non-owner occupied	585		0		0		796		796		0		1,381
Multi-family	690		0		0		0		0		0		690
Non-owner occupied residential	2,025		0		188		412		600		0		2,625
Commercial and industrial	3,863		0		0		17		17		0		3,880
Residential mortgage:
First lien	8,459		74		357		1,042		1,473		0		9,932
Home equity - term	16		4		0		0		4		0		20
Installment and other loans	190		17		0		48		65		0		255
Subtotal	21,917		226		545		2,357		3,128		0		25,045
	$	1,577,905	$	2,486	$	2,801	$	2,982	$	8,269	$	6,931	$	1,593,105

			Days Past Due
(Dollars in thousands)	Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans
December 31, 2018
Commercial real estate:
Owner occupied	$	125,887	$	66	$	0	$	0	$	66	$	1,841	$	127,794
Non-owner occupied	252,144		0		0		0		0		0		252,144
Multi-family	78,085		0		0		0		0		131		78,216
Non-owner occupied residential	99,268		226		29		0		255		309		99,832
Acquisition and development:
1-4 family residential construction	7,385		0		0		0		0		0		7,385
Commercial and land development	41,822		37		0		0		37		0		41,859
Commercial and industrial	154,988		411		105		0		516		286		155,790
Municipal	50,982		0		0		0		0		0		50,982
Residential mortgage:
First lien	228,714		1,592		734		0		2,326		1,808		232,848
Home equity - term	11,487		678		5		0		683		16		12,186
Home equity - lines of credit	142,394		420		28		0		448		774		143,616
Installment and other loans	33,135		66		44		0		110		0		33,245
Subtotal	1,226,291		3,496		945		0		4,441		5,165		1,235,897
Loans acquired with credit deterioration:
Commercial real estate:
Owner occupied	1,784		0		72		0		72		0		1,856
Non-owner occupied	650		0		0		0		0		0		650
Multi-family	717		0		0		0		0		0		717
Non-owner occupied residential	535		0		0		0		0		0		535
Acquisition and development:
Commercial and land development	192		0		0		0		0		0		192
Commercial and industrial	4,943		231		0		0		231		0		5,174
Residential mortgage:
First lien	1,971		382		42		53		477		0		2,448
Home equity - term	17		5		0		0		5		0		22
Installment and other loans	149		13		0		4		17		0		166
Subtotal	10,958		631		114		57		802		0		11,760
	$	1,237,249	$	4,127	$	1,059	$	57	$	5,243	$	5,165	$	1,247,657

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, management assesses the adequacy of the ALL utilizing a defined methodology which considers specific credit evaluation of impaired loans as discussed above, past 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 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.

The following table presents the activity in the ALL for the three and nine months ended September 30, 2019 and 2018.

	Commercial										Consumer
(Dollars in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total
Three Months Ended
September 30, 2019
Balance, beginning of period	$	6,847	$	1,008	$	2,120	$	94	$	10,069	$	3,734	$	209	$	3,943	$	448	$	14,460
Provision for loan losses	465		(188)		269		(1)		545		27		50		77		(322)		300
Charge-offs	0		0		(50)		0		(50)		(24)		(49)		(73)		0		(123)
Recoveries	111		0		33		0		144		5		23		28		0		172
Balance, end of period	$	7,423	$	820	$	2,372	$	93	$	10,708	$	3,742	$	233	$	3,975	$	126	$	14,809
September 30, 2018
Balance, beginning of period	$	6,680	$	720	$	1,598	$	80	$	9,078	$	3,544	$	230	$	3,774	$	585	$	13,437
Provision for loan losses	194		19		(38)		(1)		174		(45)		146		101		(75)		200
Charge-offs	(17)		0		0		0		(17)		(62)		(80)		(142)		0		(159)
Recoveries	200		0		1		0		201		102		31		133		0		334
Balance, end of period	$	7,057	$	739	$	1,561	$	79	$	9,436	$	3,539	$	327	$	3,866	$	510	$	13,812
Nine Months Ended
September 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	347		1		753		(5)		1,096		184		64		248		(444)		900
Charge-offs	(25)		0		(140)		0		(165)		(295)		(121)		(416)		0		(581)
Recoveries	225		2		103		0		330		100		46		146		0		476
Balance, end of period	$	7,423	$	820	$	2,372	$	93	$	10,708	$	3,742	$	233	$	3,975	$	126	$	14,809
September 30, 2018
Balance, beginning of period	$	6,763	$	417	$	1,446	$	84	$	8,710	$	3,400	$	211	$	3,611	$	475	$	12,796
Provision for loan losses	(217)		319		114		(5)		211		157		197		354		35		600
Charge-offs	(17)		0		0		0		(17)		(148)		(198)		(346)		0		(363)
Recoveries	528		3		1		0		532		130		117		247		0		779
Balance, end of period	$	7,057	$	739	$	1,561	$	79	$	9,436	$	3,539	$	327	$	3,866	$	510	$	13,812

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 September 30, 2019 and December 31, 2018, including PCI loans.

	Commercial										Consumer
(Dollars in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total
September 30, 2019
Loans allocated by:
Individually evaluated for impairment	$	3,566	$	0	$	1,089	$	0	$	4,655	$	3,311	$	7	$	3,318	$	0	$	7,973
Collectively evaluated for impairment	707,241		50,751		214,645		47,920		1,020,557		525,605		38,970		564,575		0		1,585,132
	$	710,807	$	50,751	$	215,734	$	47,920	$	1,025,212	$	528,916	$	38,977	$	567,893	$	0	$	1,593,105
ALL allocated by:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	36	$	0	$	36	$	0	$	36
Collectively evaluated for impairment	7,423		820		2,372		93		10,708		3,706		233		3,939		126		14,773
	$	7,423	$	820	$	2,372	$	93	$	10,708	$	3,742	$	233	$	3,975	$	126	$	14,809
December 31, 2018
Loans allocated by:
Individually evaluated for impairment	$	2,320	$	0	$	286	$	0	$	2,606	$	3,691	$	0	$	3,691	$	0	$	6,297
Collectively evaluated for impairment	559,424		49,436		160,678		50,982		820,520		387,429		33,411		420,840		0		1,241,360
	$	561,744	$	49,436	$	160,964	$	50,982	$	823,126	$	391,120	$	33,411	$	424,531	$	0	$	1,247,657
ALL allocated by:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	38	$	0	$	38	$	0	$	38
Collectively evaluated for impairment	6,876		817		1,656		98		9,447		3,715		244		3,959		570		13,976
	$	6,876	$	817	$	1,656	$	98	$	9,447	$	3,753	$	244	$	3,997	$	570	$	14,014

The following table provides activity for the accretable yield of purchased credit impaired loans for the three and nine months ended September 30, 2019.

	Three Months Ended		Nine Months Ended
(Dollars in thousands)	September 30, 2019		September 30, 2019
Accretable yield, beginning of period	$	4,988	$	2,065
New loans purchased	0		3,497
Accretion of income	(422)		(1,814)
Reclassifications from nonaccretable difference due to improvement in expected cash flows	825		1,441
Other changes, net	319		521
Accretable yield, end of period	$	5,710	$	5,710

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SHARE-BASED COMPENSATION PLANS

9 Months Ended

Sep. 30, 2019

Share-based Payment Arrangement [Abstract]

SHARE-BASED COMPENSATION PLANS

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 September 30, 2019, 881,920 shares of the common stock of the Company were reserved to be issued and 483,178 shares were available to be issued.

The 2011 Plan incentive awards may consist of grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, deferred stock units and performance shares. All employees of the Company and its present or future subsidiaries, and members of the Board of Directors of the Company or any subsidiary of the Company, are eligible to participate in the 2011 Plan. The 2011 Plan allows for the Compensation Committee of the Board of Directors to determine the type of incentive to be awarded, its term, manner of exercise, vesting of awards and restrictions on shares. Generally, awards are nonqualified under the 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 nine months ended September 30, 2019.

	Shares	Weighted Average Grant Date Fair Value
Nonvested shares, beginning of year	275,412	$	20.33
Granted	86,543	19.71
Forfeited	(35,869)	19.42
Vested	(114,405)	17.22
Nonvested shares, at period end	211,681	$	21.91

The following table presents restricted shares compensation expense, with tax benefit information, and fair value of shares vested, for the three and nine months ended September 30, 2019 and 2018.

	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2019		2018		2019		2018
Restricted share award expense	$	470	$	179	$	1,146	$	1,099
Restricted share award tax benefit	212		38		361		231
Fair value of shares vested	2,056		0		2,500		1,056

The unrecognized compensation expense related to the share awards totaled $1,993,000 at September 30, 2019 and $2,115,000 at December 31, 2018. The unrecognized compensation expense at September 30, 2019 is expected to be recognized over a weighted-average period of 1.7 years.

The following table presents a summary of outstanding stock options activity for the nine months ended September 30, 2019.

	Shares	Weighted Average Exercise Price
Outstanding, beginning of year	40,984	$	24.34
Expired	(10,425)	32.47
Options outstanding and exercisable	30,559	$	21.56

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 September 30, 2019.

Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price
$21.14 - $25.76	30,559	0.78	$	21.56

Outstanding and exercisable options had an intrinsic value of $21,000 at September 30, 2019 and $0 at December 31, 2018.

The Company maintains an employee stock purchase plan to provide employees of the Company an opportunity to purchase Company common stock. Eligible employees may purchase shares in an amount that does not exceed 10% of their annual salary, at the lower of 95% of the fair market value of the shares on the semi-annual offering date or related purchase date. The Company reserved 350,000 shares of its common stock to be issued under the employee stock purchase plan. At September 30, 2019, 168,066 shares were available to be issued.

The following table presents information for the employee stock purchase plan for the three and nine months ended September 30, 2019 and 2018.

	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands except share information)	2019		2018		2019		2018
Shares purchased	2,395		2,951		5,399		5,907
Weighted average price of shares purchased	$	22.87	$	22.61	$	20.69	$	23.04
Compensation expense recognized	5		10		8		14
Tax benefits	1		2		2		3

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

XML

MERGERS AND ACQUISITIONS - Summary of Consideration Paid and Estimated Fair Value of Assets Acquired and Liabilities Assume (Details) - USD ($) $ in Thousands	May 01, 2019	Sep. 30, 2019	Dec. 31, 2018	Dec. 31, 2017
Business Acquisition [Line Items]
Goodwill		$ 19,925	$ 12,592	$ 719
Hamilton Bancorp, Inc.
Business Acquisition [Line Items]
Cash	$ 14,197
Common stock issued	36,622
Total consideration transferred	50,819
Cash and cash equivalents	43,140
Securities available for sale	60,882
Restricted investments in bank stocks	2,658
Loans	347,361
Premises and equipment	3,749
Core deposit intangible	4,550
Goodwill	7,333
Cash surrender value of life insurance	17,948
Deferred tax asset, net	5,838
ROU lease asset	2,793
Other assets	3,925
Total assets acquired	500,177
Deposits	(388,246)
Borrowings	(51,393)
Other liabilities	(9,719)
Total liabilities assumed	(449,358)
Net, Total	$ 50,819

XML

FAIR VALUE (Tables)

9 Months Ended

Sep. 30, 2019

Fair Value Disclosures [Abstract]

Summary of Assets Measured at Fair Value on Recurring Basis

The following table summarizes assets measured at fair value on a recurring basis at September 30, 2019 and December 31, 2018.

(Dollars in Thousands)	Level 1		Level 2		Level 3		Total Fair Value Measurements
September 30, 2019
AFS Securities:
States and political subdivisions	$	0	$	82,712	$	0	$	82,712
GSE residential CMOs	0		71,001		0		71,001
Private label commercial CMOs	0		80,554		7,213		87,767
Asset-backed and other	0		239,640		0		239,640
Totals	$	0	$	473,907	$	7,213	$	481,120
December 31, 2018
AFS Securities:
States and political subdivisions	$	0	$	145,004	$	0	$	145,004
GSE residential CMOs	0		108,064		0		108,064
Private label residential CMOs	0		143		0		143
Private label commercial CMOs	0		67,836		7,209		75,045
Asset-backed and other	0		137,588		0		137,588
Totals	$	0	$	458,635	$	7,209	$	465,844

Schedule of Changes in Fair Value of Impaired Loans

The following table presents changes in the fair value for impaired loans still held at September 30, considered in the determination of the provision for loan losses, for the three and nine months ended September 30, 2019 and 2018.

	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2019		2018		2019		2018
Changes in fair value of impaired loans still held	$	21	$	63	$	49	$	147

Summary of Assets Measured at Fair Value on Nonrecurring Basis

The following table summarizes assets measured at fair value on a nonrecurring basis at September 30, 2019 and December 31, 2018.

(Dollars in thousands)	Level 1		Level 2		Level 3		Total Fair Value Measurements
September 30, 2019
Impaired Loans
Commercial real estate:
Owner occupied	$	0	$	0	$	971	$	971
Multi-family	0		0		105		105
Non-owner occupied residential	0		0		136		136
Commercial and industrial	0		0		6		6
Residential mortgage:
First lien	0		0		722		722
Home equity - lines of credit	0		0		407		407
Installment and other loans	0		0		7		7
Total impaired loans	$	0	$	0	$	2,354	$	2,354
Mortgage servicing rights	$	0	$	3,116	$	0	$	3,116
December 31, 2018
Impaired Loans
Commercial real estate:
Owner occupied	$	0	$	0	$	1,087	$	1,087
Multi-family	0		0		131		131
Non-owner occupied residential	0		0		278		278
Commercial and industrial	0		0		25		25
Residential mortgage:
First lien	0		0		1,121		1,121
Home equity - lines of credit	0		0		409		409
Total impaired loans	$	0	$	0	$	3,051	$	3,051

Summary of Additional Qualitative Information

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.

(Dollars in thousands)	Fair Value Estimate		Valuation Techniques	Unobservable Input	Range
September 30, 2019
Impaired loans	$	2,354	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	5% - 30% discount
				- Management adjustments for liquidation expenses	6%- 33% discount
Mortgage servicing rights	3,116		Discounted cash flows	Weighted average CPR	12.7%
				- Weighted average discount rate	9.5%
December 31, 2018
Impaired loans	$	3,051	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	5% - 75% discount
				- Management adjustments for liquidation expenses	6% - 20% discount

Financial Instruments at Estimated Fair Values

The following table presents carrying amounts and estimated fair values of the Company’s financial instruments at September 30, 2019 and December 31, 2018:

(Dollars in thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
September 30, 2019
Financial Assets
Cash and due from banks	$	31,872	$	31,872	$	31,872	$	0	$	0
Interest-bearing deposits with banks	19,051		19,051		19,051		0		0
Restricted investments in bank stocks	11,399		n/a		n/a		n/a		n/a
AFS securities	481,120		481,120		0		473,907		7,213
Loans held for sale	7,610		7,819		0		7,819		0
Loans (carrying amount net of allowance for loan losses)	1,578,296		1,605,129		0		0		1,605,129
Accrued interest receivable	6,546		6,546		0		2,371		4,175
Financial Liabilities
Deposits	1,923,454		1,923,901		0		1,923,901		0
Short-term borrowings	36,605		36,605		0		36,605		0
Long-term debt	63,165		63,497		0		63,497		0
Subordinated notes	31,834		32,474		0		32,474		0
Accrued interest payable	1,468		1,468		0		1,468		0
Off-balance sheet instruments	0		0		0		0		0
December 31, 2018
Financial Assets
Cash and due from banks	$	26,156	$	26,156	$	26,156	$	0	$	0
Interest-bearing deposits with banks	45,664		45,664		45,664		0		0
Federal Funds Sold	16,995		16,995		16,995		0		0
Restricted investments in bank stocks	10,842		n/a		n/a		n/a		n/a
AFS securities	465,844		465,844		0		458,635		7,209
Loans held for sale	3,340		3,413		0		3,413		0
Loans, net of allowance for loan losses	1,233,643		1,229,645		0		0		1,229,645
Accrued interest receivable	5,927		5,927		0		2,853		3,074
Financial Liabilities
Deposits	1,558,756		1,555,912		0		1,555,912		0
Short-term borrowings	64,069		64,069		0		64,069		0
Long-term debt	83,450		82,951		0		82,951		0
Subordinated notes	31,859		31,256		0		31,256		0
Accrued interest payable	1,301		1,301		0		1,301		0
Off-balance sheet instruments	0		0		0		0		0

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SHARE-BASED COMPENSATION PLANS (Tables)

9 Months Ended

Sep. 30, 2019

Share-based Payment Arrangement [Abstract]

Summary of Nonvested Restricted Shares Activity

The table below presents a summary of nonvested restricted shares activity for the nine months ended September 30, 2019.

	Shares	Weighted Average Grant Date Fair Value
Nonvested shares, beginning of year	275,412	$	20.33
Granted	86,543	19.71
Forfeited	(35,869)	19.42
Vested	(114,405)	17.22
Nonvested shares, at period end	211,681	$	21.91

Schedule of Restricted Shares Compensation Expense

The following table presents restricted shares compensation expense, with tax benefit information, and fair value of shares vested, for the three and nine months ended September 30, 2019 and 2018.

	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2019		2018		2019		2018
Restricted share award expense	$	470	$	179	$	1,146	$	1,099
Restricted share award tax benefit	212		38		361		231
Fair value of shares vested	2,056		0		2,500		1,056

Summary of Outstanding Stock Options Activity

The following table presents a summary of outstanding stock options activity for the nine months ended September 30, 2019.

	Shares	Weighted Average Exercise Price
Outstanding, beginning of year	40,984	$	24.34
Expired	(10,425)	32.47
Options outstanding and exercisable	30,559	$	21.56

Information Pertaining to Options Outstanding and Exercisable

The following table presents information pertaining to options outstanding and exercisable at September 30, 2019.

Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price
$21.14 - $25.76	30,559	0.78	$	21.56

Schedule of Employee Stock Purchase Plan

The following table presents information for the employee stock purchase plan for the three and nine months ended September 30, 2019 and 2018.

	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands except share information)	2019		2018		2019		2018
Shares purchased	2,395		2,951		5,399		5,907
Weighted average price of shares purchased	$	22.87	$	22.61	$	20.69	$	23.04
Compensation expense recognized	5		10		8		14
Tax benefits	1		2		2		3

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LOANS AND ALLOWANCE FOR LOAN LOSSES - Impaired Loans by Segment Class (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Financing Receivable, Impaired [Line Items]
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	$ 524	$ 743
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	546	743
Impaired Loans with a Specific Allowance, Related Allowance	36	38
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	7,449	5,554
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	13,118	7,832
Commercial real estate | Owner occupied
Financing Receivable, Impaired [Line Items]
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	0	0
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	0	0
Impaired Loans with a Specific Allowance, Related Allowance	0	0
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	3,324	1,880
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	5,490	2,576
Commercial real estate | Multi-family
Financing Receivable, Impaired [Line Items]
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	0	0
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	0	0
Impaired Loans with a Specific Allowance, Related Allowance	0	0
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	105	131
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	325	336
Commercial real estate | Non-owner occupied residential
Financing Receivable, Impaired [Line Items]
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	26	0
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	48	0
Impaired Loans with a Specific Allowance, Related Allowance	0	0
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	111	309
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	319	632
Commercial and industrial
Financing Receivable, Impaired [Line Items]
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	0	0
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	0	0
Impaired Loans with a Specific Allowance, Related Allowance	0	0
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	1,089	286
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	2,769	457
Residential mortgage | First lien
Financing Receivable, Impaired [Line Items]
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	498	743
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	498	743
Impaired Loans with a Specific Allowance, Related Allowance	36	38
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	2,049	2,134
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	3,098	2,727
Residential mortgage | Home equity - term
Financing Receivable, Impaired [Line Items]
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	0	0
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	0	0
Impaired Loans with a Specific Allowance, Related Allowance	0	0
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	11	16
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	19	23
Residential mortgage | Home equity - lines of credit
Financing Receivable, Impaired [Line Items]
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	0	0
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	0	0
Impaired Loans with a Specific Allowance, Related Allowance	0	0
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	753	798
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	1,081	$ 1,081
Installment and other loans
Financing Receivable, Impaired [Line Items]
Impaired Loans with a Specific Allowance, Recorded Investment (Book Balance)	0
Impaired Loans with a Specific Allowance, Unpaid Principal Balance (Legal Balance)	0
Impaired Loans with a Specific Allowance, Related Allowance	0
Impaired Loans with No Specific Allowance, Recorded Investment (Book Balance)	7
Impaired Loans with No Specific Allowance, Unpaid Principal Balance (Legal Balance)	$ 17

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LOANS AND ALLOWANCE FOR LOAN LOSSES - Activity in Allowance for Loan Losses (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Activity in allowance for loan losses
Balance, beginning of period	$ 14,460	$ 13,437	$ 14,014	$ 12,796
Provision for loan losses	300	200	900	600
Charge-offs	(123)	(159)	(581)	(363)
Recoveries	172	334	476	779
Balance, end of period	14,809	13,812	14,809	13,812
Unallocated
Activity in allowance for loan losses
Balance, beginning of period	448	585	570	475
Provision for loan losses	(322)	(75)	(444)	35
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Balance, end of period	126	510	126	510
Commercial
Activity in allowance for loan losses
Balance, beginning of period	10,069	9,078	9,447	8,710
Provision for loan losses	545	174	1,096	211
Charge-offs	(50)	(17)	(165)	(17)
Recoveries	144	201	330	532
Balance, end of period	10,708	9,436	10,708	9,436
Commercial | Commercial Real Estate
Activity in allowance for loan losses
Balance, beginning of period	6,847	6,680	6,876	6,763
Provision for loan losses	465	194	347	(217)
Charge-offs	0	(17)	(25)	(17)
Recoveries	111	200	225	528
Balance, end of period	7,423	7,057	7,423	7,057
Commercial | Acquisition and Development
Activity in allowance for loan losses
Balance, beginning of period	1,008	720	817	417
Provision for loan losses	(188)	19	1	319
Charge-offs	0	0	0	0
Recoveries	0	0	2	3
Balance, end of period	820	739	820	739
Commercial | Commercial and Industrial
Activity in allowance for loan losses
Balance, beginning of period	2,120	1,598	1,656	1,446
Provision for loan losses	269	(38)	753	114
Charge-offs	(50)	0	(140)	0
Recoveries	33	1	103	1
Balance, end of period	2,372	1,561	2,372	1,561
Commercial | Municipal
Activity in allowance for loan losses
Balance, beginning of period	94	80	98	84
Provision for loan losses	(1)	(1)	(5)	(5)
Charge-offs	0	0	0	0
Recoveries	0	0	0	0
Balance, end of period	93	79	93	79
Consumer
Activity in allowance for loan losses
Balance, beginning of period	3,943	3,774	3,997	3,611
Provision for loan losses	77	101	248	354
Charge-offs	(73)	(142)	(416)	(346)
Recoveries	28	133	146	247
Balance, end of period	3,975	3,866	3,975	3,866
Consumer | Residential Mortgage
Activity in allowance for loan losses
Balance, beginning of period	3,734	3,544	3,753	3,400
Provision for loan losses	27	(45)	184	157
Charge-offs	(24)	(62)	(295)	(148)
Recoveries	5	102	100	130
Balance, end of period	3,742	3,539	3,742	3,539
Consumer | Installment and Other
Activity in allowance for loan losses
Balance, beginning of period	209	230	244	211
Provision for loan losses	50	146	64	197
Charge-offs	(49)	(80)	(121)	(198)
Recoveries	23	31	46	117
Balance, end of period	$ 233	$ 327	$ 233	$ 327

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Consolidated Balance Sheets (Unaudited) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Assets
Cash and due from banks	$ 31,872	$ 26,156
Interest-bearing deposits with banks	19,051	45,664
Federal funds sold	0	16,995
Cash and cash equivalents	50,923	88,815
Restricted investments in bank stocks	11,399	10,842
Securities available for sale	481,120	465,844
Loans held for sale	7,610	3,340
Loans	1,593,105	1,247,657
Less: Allowance for loan losses	(14,809)	(14,014)
Net loans	1,578,296	1,233,643
Premises and equipment, net	43,031	38,201
Cash surrender value of life insurance	62,207	41,327
Goodwill	19,925	12,592
Other intangible assets, net	7,654	3,910
Accrued interest receivable	6,546	5,927
Other assets	44,966	29,947
Total assets	2,313,677	1,934,388
Deposits:
Noninterest-bearing	246,773	204,843
Interest-bearing	1,676,681	1,353,913
Total deposits	1,923,454	1,558,756
Short-term borrowings	36,605	64,069
Long-term debt	63,165	83,450
Subordinated notes	31,834	31,859
Accrued interest and other liabilities	35,126	22,821
Total liabilities	2,090,184	1,760,955
Shareholders’ Equity
Preferred stock, $1.25 par value per share; 500,000 shares authorized; no shares issued or outstanding	0	0
Common stock, no par value—$0.05205 stated value per share 50,000,000 shares authorized; 11,220,804 and 9,439,255 shares issued; 11,175,299 and 9,430,224 shares outstanding	584	491
Additional paid - in capital	188,582	151,678
Retained earnings	32,690	24,472
Accumulated other comprehensive income (loss)	2,675	(2,972)
Treasury stock—common, 45,505 and 9,031 shares, at cost	(1,038)	(236)
Total shareholders’ equity	223,493	173,433
Total liabilities and shareholders’ equity	$ 2,313,677	$ 1,934,388

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GOODWILL AND OTHER INTANGIBLE ASSETS - Changes in Other Intangible Assets (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Finite-lived Intangible Assets [Roll Forward]
Balance, beginning of period	$ 8,140	$ 308	$ 3,910	$ 356
Amortization Expense	(486)	(24)	(1,096)	(72)
Balance, end of period	7,654	284	7,654	284
Acquired CDI
Finite-lived Intangible Assets [Roll Forward]
Finite-lived Intangible assets acquired	0	0	4,550	0
Non-compete agreement
Finite-lived Intangible Assets [Roll Forward]
Finite-lived Intangible assets acquired	$ 0	$ 0	$ 290	$ 0

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Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) - USD ($) $ in Thousands	Total	Common Stock	Additional Paid-In Capital	Retained Earnings	Accumulated Other Comprehensive Income (Loss)	Treasury Stock
Beginning balance at Dec. 31, 2017	$ 144,765	$ 435	$ 125,458	$ 16,042	$ 2,845	$ (15)
Increase (Decrease) in Shareholders' Equity
Net income	11,653			11,653
Total other comprehensive loss, net of taxes	(8,317)				(8,317)
Cash dividends	(3,166)			(3,166)
Share-based compensation plans:
Issuance of stock, including compensation expense	622	2	802			(182)
Ending balance at Sep. 30, 2018	145,557	437	126,260	24,529	(5,472)	(197)
Beginning balance at Jun. 30, 2018	145,137	438	126,402	21,584	(2,693)	(594)
Increase (Decrease) in Shareholders' Equity
Net income	4,016			4,016
Total other comprehensive loss, net of taxes	(2,779)				(2,779)
Cash dividends	(1,071)			(1,071)
Share-based compensation plans:
Issuance of stock, including compensation expense	254	(1)	(142)			397
Ending balance at Sep. 30, 2018	145,557	437	126,260	24,529	(5,472)	(197)
Beginning balance at Dec. 31, 2018	173,433	491	151,678	24,472	(2,972)	(236)
Increase (Decrease) in Shareholders' Equity
Net income	12,690			12,690
Total other comprehensive loss, net of taxes	5,647				5,647
Cash dividends	(4,472)			(4,472)
Issuance of stock (1,765,704 common shares) to acquire Hamilton Bancorp, Inc.	36,622	92	36,530
Share-based compensation plans:
Issuance of stock, including compensation expense	(427)	1	374			(802)
Ending balance at Sep. 30, 2019	223,493	584	188,582	32,690	2,675	(1,038)
Beginning balance at Jun. 30, 2019	219,868	584	188,414	27,462	3,408	0
Increase (Decrease) in Shareholders' Equity
Net income	6,901			6,901
Total other comprehensive loss, net of taxes	(733)				(733)
Cash dividends	(1,673)			(1,673)
Share-based compensation plans:
Issuance of stock, including compensation expense	(870)		168			(1,038)
Ending balance at Sep. 30, 2019	$ 223,493	$ 584	$ 188,582	$ 32,690	$ 2,675	$ (1,038)

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FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK - Commitments and Conditional Obligations, Contract or Notional Amount (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Home equity lines of credit
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Commitments to fund	$ 201,353	$ 160,971
1-4 family residential construction loans
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Commitments to fund	26,630	13,002
Commercial real estate, construction and land development loans
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Commitments to fund	15,742	31,133
Commercial, industrial and other loans
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Commitments to fund	173,780	147,518
Standby letters of credit
Fair Value, Off-balance Sheet Risks, Disclosure Information [Line Items]
Commitments to fund	$ 14,604	$ 13,909

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FAIR VALUE - Financial Instruments at Estimated Fair Values (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Financial Assets
Interest-bearing deposits with banks	$ 19,051	$ 45,664
Federal funds sold	0	16,995
Restricted investments in bank stocks	11,399	10,842
AFS Securities	481,120	465,844
Carrying Amount
Financial Assets
Cash and due from banks	31,872	26,156
Interest-bearing deposits with banks	19,051	45,664
Federal funds sold		16,995
Restricted investments in bank stocks	11,399	10,842
AFS Securities	481,120	465,844
Loans held for sale	7,610	3,340
Loans, net of allowance for loan losses	1,578,296	1,233,643
Accrued interest receivable	6,546	5,927
Financial Liabilities
Deposits	1,923,454	1,558,756
Short-term borrowings	36,605	64,069
Long-term debt	63,165	83,450
Subordinated Notes	31,834	31,859
Accrued interest payable	1,468	1,301
Off-balance sheet instruments	0	0
Fair Value
Financial Assets
Cash and due from banks	31,872	26,156
Interest-bearing deposits with banks	19,051	45,664
Federal funds sold		16,995
AFS Securities	481,120	465,844
Loans held for sale	7,819	3,413
Loans, net of allowance for loan losses	1,605,129	1,229,645
Accrued interest receivable	6,546	5,927
Financial Liabilities
Deposits	1,923,901	1,555,912
Short-term borrowings	36,605	64,069
Long-term debt	63,497	82,951
Subordinated Notes	32,474	31,256
Accrued interest payable	1,468	1,301
Off-balance sheet instruments	0	0
Fair Value | Level 1
Financial Assets
Cash and due from banks	31,872	26,156
Interest-bearing deposits with banks	19,051	45,664
Federal funds sold		16,995
AFS Securities	0	0
Loans held for sale	0	0
Loans, net of allowance for loan losses	0	0
Accrued interest receivable	0	0
Financial Liabilities
Deposits	0	0
Short-term borrowings	0	0
Long-term debt	0	0
Subordinated Notes	0	0
Accrued interest payable	0	0
Off-balance sheet instruments	0	0
Fair Value | Level 2
Financial Assets
Cash and due from banks	0	0
Interest-bearing deposits with banks	0	0
Federal funds sold		0
AFS Securities	473,907	458,635
Loans held for sale	7,819	3,413
Loans, net of allowance for loan losses	0	0
Accrued interest receivable	2,371	2,853
Financial Liabilities
Deposits	1,923,901	1,555,912
Short-term borrowings	36,605	64,069
Long-term debt	63,497	82,951
Subordinated Notes	32,474	31,256
Accrued interest payable	1,468	1,301
Off-balance sheet instruments	0	0
Fair Value | Level 3
Financial Assets
Cash and due from banks	0	0
Interest-bearing deposits with banks	0	0
Federal funds sold		0
AFS Securities	7,213	7,209
Loans held for sale	0	0
Loans, net of allowance for loan losses	1,605,129	1,229,645
Accrued interest receivable	4,175	3,074
Financial Liabilities
Deposits	0	0
Short-term borrowings	0	0
Long-term debt	0	0
Subordinated Notes	0	0
Accrued interest payable	0	0
Off-balance sheet instruments	$ 0	$ 0

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SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL - Capital Amounts and Ratios (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Consolidated
Total Capital to risk weighted assets
Actual, Amount	$ 240,674	$ 206,988
Actual, Ratio	14.50%	15.60%
Minimum Capital Requirement, Amount	$ 174,255	$ 131,393
Minimum Capital Requirement, Ratio	10.50%	9.875%
Tier 1 Capital to risk weighted assets
Actual, Amount	$ 192,818	$ 160,117
Actual, Ratio	11.60%	12.00%
Minimum Capital Requirement, Amount	$ 141,064	$ 104,782
Minimum Capital Requirement, Ratio	8.50%	7.875%
Common Tier 1 (CET1) to risk weighted assets
Actual, Amount	$ 192,818	$ 160,117
Actual, Ratio	11.60%	12.00%
Minimum Capital Requirement, Amount	$ 116,170	$ 84,823
Minimum Capital Requirement, Ratio	7.00%	6.375%
Tier 1 Capital to average assets
Actual, Amount	$ 192,818	$ 160,117
Actual, Ratio	8.20%	8.40%
Minimum Capital Requirement, Amount	$ 94,360	$ 76,089
Minimum Capital Requirement, Ratio	4.00%	4.00%
Bank
Total Capital to risk weighted assets
Actual, Amount	$ 226,296	$ 177,892
Actual, Ratio	13.60%	13.40%
Minimum Capital Requirement, Amount	$ 174,112	$ 131,286
Minimum Capital Requirement, Ratio	10.50%	9.875%
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions, Amount	$ 165,821	$ 132,948
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions, Ratio	10.00%	10.00%
Tier 1 Capital to risk weighted assets
Actual, Amount	$ 210,274	$ 162,880
Actual, Ratio	12.70%	12.30%
Minimum Capital Requirement, Amount	$ 140,948	$ 104,696
Minimum Capital Requirement, Ratio	8.50%	7.875%
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions, Amount	$ 132,656	$ 106,358
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions, Ratio	8.00%	8.00%
Common Tier 1 (CET1) to risk weighted assets
Actual, Amount	$ 210,274	$ 162,880
Actual, Ratio	12.70%	12.30%
Minimum Capital Requirement, Amount	$ 116,074	$ 84,754
Minimum Capital Requirement, Ratio	7.00%	6.375%
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions, Amount	$ 107,783	$ 86,416
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions, Ratio	6.50%	6.50%
Tier 1 Capital to average assets
Actual, Amount	$ 210,274	$ 162,880
Actual, Ratio	8.90%	8.60%
Minimum Capital Requirement, Amount	$ 94,413	$ 76,113
Minimum Capital Requirement, Ratio	4.00%	4.00%
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions, Amount	$ 118,016	$ 95,142
Minimum to Be Well Capitalized Under Prompt Corrective Action Provisions, Ratio	5.00%	5.00%

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SHARE-BASED COMPENSATION PLANS - Summary of Nonvested Restricted Shares Activity (Details) - Orrstown 2011 Incentive Stock Plan - Restricted Stock	9 Months Ended
	Sep. 30, 2019 $ / shares shares
Shares
Nonvested shares, beginning of year (in shares) | shares	275,412
Granted (in shares) | shares	86,543
Forfeited (in shares) | shares	(35,869)
Vested (in usd per share) | shares	(114,405)
Nonvested shares, at period end (in shares) | shares	211,681
Weighted Average Grant Date Fair Value
Nonvested shares, beginning of year (in usd per share) | $ / shares	$ 20.33
Granted (in usd per share) | $ / shares	19.71
Forfeited (in usd per share) | $ / shares	19.42
Vested (in usd per share) | $ / shares	17.22
Nonvested shares, at period end (in usd per share) | $ / shares	$ 21.91

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GOODWILL AND INTANGIBLE ASSETS - Schedule of Estimated Aggregate Amortization Expense (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jun. 30, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Dec. 31, 2017
Finite-Lived Intangible Assets, Amortization Expense, Maturity Schedule [Abstract]
Remainder of 2019	$ 474
2020	1,591
2021	1,313
2022	1,137
2023	960
Thereafter	2,179
Total	$ 7,654	$ 8,140	$ 3,910	$ 284	$ 308	$ 356

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INCOME TAXES - Summary of Income Tax Expenses (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Income Tax Disclosure [Abstract]
Current expense	$ 244	$ 406	$ 334	$ 754
Deferred expense	1,096	238	1,348	756
Income tax expense	$ 1,340	$ 644	$ 1,682	$ 1,510

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LOANS AND ALLOWANCE FOR LOAN LOSSES - Additional Information (Details)	9 Months Ended
	Sep. 30, 2019 USD ($) note
Financing Receivable, Allowance for Credit Losses [Line Items]
Amount of loan on which review have been made annually	$ 500,000
Loans reviewed by Credit Administration (more than)	1,000,000
Amount of loan on which reviews require approval	$ 250,000
Loans that are deemed impaired, number of days past due (more than)	90 days
Number of notes split | note	2
Appraisals, required period interval	18 months
Minimum amount on which annual updated appraisals for classified loans is required	$ 250,000
Maximum
Financing Receivable, Allowance for Credit Losses [Line Items]
Percentage of loan-to-value ratio upon loan origination	80.00%
Percentage of loan-to-value ratios of the value of the real estate taken as collateral	90.00%
Percentage of strong loan-to-value	70.00%

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SECURITIES AVAILABLE FOR SALE - Amortized Cost and Fair Values of AFS Securities (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Debt Securities, Available-for-sale [Line Items]
Amortized Cost	$ 477,734	$ 469,607
Gross Unrealized Gains	6,600	2,432
Gross Unrealized Losses	3,214	6,195
Fair Value	481,120	465,844
States and political subdivisions
Debt Securities, Available-for-sale [Line Items]
Amortized Cost	77,553	144,596
Gross Unrealized Gains	5,159	1,919
Gross Unrealized Losses	0	1,511
Fair Value	82,712	145,004
GSE residential CMOs
Debt Securities, Available-for-sale [Line Items]
Amortized Cost	70,214	110,421
Gross Unrealized Gains	1,142	332
Gross Unrealized Losses	355	2,689
Fair Value	71,001	108,064
Private label residential CMOs
Debt Securities, Available-for-sale [Line Items]
Amortized Cost		144
Gross Unrealized Gains		0
Gross Unrealized Losses		1
Fair Value		143
Private label commercial CMOs
Debt Securities, Available-for-sale [Line Items]
Amortized Cost	87,848	75,911
Gross Unrealized Gains	146	55
Gross Unrealized Losses	227	921
Fair Value	87,767	75,045
Asset-backed and other
Debt Securities, Available-for-sale [Line Items]
Amortized Cost	242,119	138,535
Gross Unrealized Gains	153	126
Gross Unrealized Losses	2,632	1,073
Fair Value	$ 239,640	$ 137,588

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CONTINGENCIES

9 Months Ended

Sep. 30, 2019

Commitments and Contingencies Disclosure [Abstract]

CONTINGENCIES

CONTINGENCIES

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

On May 25, 2012, SEPTA 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 “Defendants”). The complaint alleges, among other things, that (i) in connection with the Company’s Registration Statement on Form S-3 dated February 23, 2010 and its Prospectus Supplement dated March 23, 2010, and (ii) during the purported class period of March 24, 2010 through October 27, 2011, the Company issued materially false and misleading statements regarding the Company’s lending practices and financial results, including misleading statements concerning the stringent nature of the Bank’s credit practices and underwriting standards, the quality of its loan portfolio, and the intended use of the proceeds from the Company’s March 2010 public offering of common stock. The complaint asserts claims under Sections 11, 12(a) and 15 of the Securities Act of 1933, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, and seeks class certification, unspecified money damages, interest, costs, fees and equitable or injunctive relief. Under the Private Securities Litigation Reform Act of 1995 (“PSLRA”), motions for appointment of Lead Plaintiff in this case were due by July 24, 2012. SEPTA was the sole movant and the Court appointed SEPTA Lead Plaintiff on August 20, 2012.

Pursuant to the PSLRA and the Court’s September 27, 2012 Order, SEPTA was given until October 26, 2012 to file an amended complaint and the Defendants until December 7, 2012 to file a motion to dismiss the amended complaint. SEPTA’s opposition to the Defendant’s 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 expands the list of defendants in the action to include the Company’s independent registered public accounting firm and the underwriters of the Company’s March 2010 public offering of common stock. In addition, among other things, the amended complaint extends the purported 1934 Exchange Act class period from March 15, 2010 through April 5, 2012. Pursuant to the Court’s March 28, 2013 Second

Scheduling Order, on May 28, 2013, all defendants filed their motions to dismiss the amended complaint, and on July 22, 2013, SEPTA filed its “omnibus” opposition to all of the defendants’ motions to dismiss. On August 23, 2013, all defendants filed reply briefs in further support of their motions to dismiss. On December 5, 2013, the Court ordered oral argument on the Orrstown Defendants’ motion to dismiss the amended complaint to be heard on February 7, 2014. Oral argument on the pending motions to dismiss SEPTA’s amended complaint was held on April 29, 2014.

The Second Scheduling Order stayed all discovery in the case pending the outcome of the motions to dismiss, and informed the parties that, if required, a telephonic conference to address discovery and the filing of SEPTA’s motion for class certification would be scheduled after the Court’s ruling on the motions to dismiss.

On April 10, 2015, pursuant to Court order, all parties filed supplemental briefs addressing the impact of the 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 Securities Exchange Act of 1934, as amended. The Court ordered that, within 30 days, SEPTA either seek leave to amend its amended complaint, accompanied by the proposed amendment, or file a notice of its intention to stand on the amended complaint.

On July 22, 2015, SEPTA filed a motion for leave to amend under Local Rule 15.1, and attached a copy of its proposed second amended complaint to its motion. Many of the allegations of the proposed second amended complaint are essentially the same or similar to the allegations of the dismissed amended complaint. The proposed second amended complaint also alleges that the Orrstown Defendants did not publicly disclose certain alleged failures of internal controls over loan underwriting, risk management, and financial reporting during the period 2009 to 2012, in violation of the federal securities laws. On February 8, 2016, the Court granted SEPTA’s motion for leave to amend and SEPTA filed its second amended complaint that same day.

On February 25, 2016, the Court issued a scheduling Order directing: all defendants to file any motions to dismiss by March 18, 2016; SEPTA to file an omnibus opposition to defendants’ motions to dismiss by April 8, 2016; and all defendants to file reply briefs in support of their motions to dismiss by April 22, 2016. Defendants timely filed their motions to dismiss the second amended complaint and the parties filed their briefs in accordance with the Court-ordered schedule, above. The February 25, 2016 Order stays all discovery and other deadlines in the case (including the filing of SEPTA’s motion for class certification) pending the outcome of the motions to dismiss.

The allegations of SEPTA’s 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 $1,000,000. 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 closes on March 1, 2018, and SEPTA’s motion for class certification is due the same day; expert merits discovery closes May 30, 2018;

summary judgment motions are due by June 26, 2018; the mandatory pretrial and settlement conference is set for December 11, 2018; and trial is scheduled to begin on January 7, 2019.

On December 15, 2017, the Orrstown Defendants and SEPTA exchanged expert reports in opposition to and in support of class certification, respectively. On January 15, 2018, the parties exchanged expert rebuttal reports. SEPTA’s motion for class certification was due March 1, 2018, with the Orrstown Defendants’ opposition due April 2, 2018, and SEPTA’s reply due April 23, 2018.

On February 9, 2018, SEPTA filed a Status Report and Request for a Telephonic Status Conference asking the Court to convene a conference to discuss the status of discovery in the case and possible revisions to the case schedule. On February 12, 2018, the Orrstown Defendants filed their status report to provide the Court with a summary of document discovery in the case to date. On February 27, 2018, SEPTA filed an unopposed motion for a continuance of the existing case deadlines pending a status conference with the Court or the issuance of a revised case schedule. On February 28, 2018, the Court issued an Order continuing all case management deadlines until further order of the Court.

On March 27, 2018, the Court held a telephonic status conference with the parties to discuss outstanding discovery issues and case deadlines. On May 2, 2018, the parties filed a joint status report. On May 10, 2018, the Court held a follow-up telephonic status conference at which the parties reported on the progress of discovery to date. Party and non-party document discovery in the case has continued. To date, SEPTA has taken a few non-party depositions.

On August 9, 2018, SEPTA filed a motion to compel the production of Confidential Supervisory Information (CSI) of non-parties the Board of Governors of the Federal Reserve System (FRB) and the Pennsylvania Department of Banking and Securities, in the possession of Orrstown and third parties. On August 23, 2018, the Orrstown Defendants filed a response to the motion to compel. On August 30, 2018, the FRB filed an unopposed motion to intervene in the Action for the 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. That motion is pending.

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 Smith Elliott Kearns & Company, LLC and the underwriters joined in Orrstown’s motion for protective order. On June 25, 2019, SEPTA filed its opposition to Orrstown’s motion. On July 9, 2019, Orrstown filed a reply brief in further support of its motion. On July 17, 2019, the Court entered an Order partially granting Orrstown’s motion for protective order, ruling that all deposition discovery in the case is stayed pending a decision on SEPTA’s motion for leave to file a third amended complaint.

The Company believes that the allegations of SEPTA’s second amended complaint, and the allegations of the proposed third amended complaint, are without merit and intends to defend itself vigorously against those claims. It is not possible at this time to estimate reasonably possible losses, or even a range of reasonably possible losses, in connection with the litigation.

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SECURITIES AVAILABLE FOR SALE (Tables)

9 Months Ended

Sep. 30, 2019

Investments, Debt and Equity Securities [Abstract]

Amortized Cost and Fair Values of AFS Securities

At September 30, 2019 and December 31, 2018, all investment securities were classified as AFS. The following table summarizes amortized cost and fair value of AFS securities, and the corresponding amounts of gross unrealized gains and losses recognized in AOCI, at September 30, 2019 and December 31, 2018.

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2019
States and political subdivisions	$	77,553	$	5,159	$	0	$	82,712
GSE residential CMOs	70,214		1,142		355		71,001
Private label commercial CMOs	87,848		146		227		87,767
Asset-backed and other	242,119		153		2,632		239,640
Totals	$	477,734	$	6,600	$	3,214	$	481,120
December 31, 2018
States and political subdivisions	$	144,596	$	1,919	$	1,511	$	145,004
GSE residential CMOs	110,421		332		2,689		108,064
Private label residential CMOs	144		0		1		143
Private label commercial CMOs	75,911		55		921		75,045
Asset-backed and other	138,535		126		1,073		137,588
Totals	$	469,607	$	2,432	$	6,195	$	465,844

Summary of AFS Securities with Unrealized Losses

The following table summarizes AFS securities with unrealized losses at September 30, 2019 and December 31, 2018, aggregated by major security type and length of time in a continuous unrealized loss position.

	Less Than 12 Months					12 Months or More					Total
(Dollars in thousands)	# of Securities	Fair Value		Unrealized Losses		# of Securities	Fair Value		Unrealized Losses		# of Securities	Fair Value		Unrealized Losses
September 30, 2019
GSE residential CMOs	3	27,100		45		1	12,147		310		4	39,247		355
Private label commercial CMOs	7	33,093		71		6	34,644		156		13	67,737		227
Asset-backed and other	15	176,324		2,258		2	18,324		374		17	194,648		2,632
Totals	25	$	236,517	$	2,374	9	$	65,115	$	840	34	$	301,632	$	3,214
December 31, 2018
States and political subdivisions	27	$	46,585	$	662	6	$	23,036	$	849	33	$	69,621	$	1,511
GSE residential CMOs	1	18,037		122		7	46,168		2,567		8	64,205		2,689
Private label residential CMOs	1	143		1		0	0		0		1	143		1
Private label commercial CMOs	11	56,499		712		2	6,349		209		13	62,848		921
Asset-backed and other	6	78,900		859		3	10,808		214		9	89,708		1,073
Totals	46	$	200,164	$	2,356	18	$	86,361	$	3,839	64	$	286,525	$	6,195

Schedule of Amortized Cost and Fair Values of AFS Securities by Contractual Maturity

The following table summarizes amortized cost and fair value of AFS securities by contractual maturity at September 30, 2019. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

	Available for Sale
(Dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	230	$	230
Due after one year through five years	0		0
Due after five years through ten years	26,456		27,952
Due after ten years	50,867		54,530
CMOs	158,062		158,768
Asset-backed and other	242,119		239,640
	$	477,734	$	481,120

Proceeds From Sale of AFS Securities and Gross Gains and Gross Losses

The following table summarizes proceeds from sales of AFS securities and gross gains and gross losses for the three and nine months ended September 30, 2019 and 2018.

	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2019		2018		2019		2018
Proceeds from sale of AFS securities	$	25,575	$	25,070	$	199,910	$	113,180
Gross gains	2,328		185		4,956		1,237
Gross losses	0		156		225		346

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- Recent Accounting Pronouncements (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jan. 01, 2019
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Operating lease liability	$ 10,440
ASU 2016-02
New Accounting Pronouncements or Change in Accounting Principle [Line Items]
Operating lease liability		$ 7,971
Right-of-use asset		$ 7,494

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EARNINGS PER SHARE (Tables)

9 Months Ended

Sep. 30, 2019

Earnings Per Share [Abstract]

Earnings Per Share

The following table presents earnings per share for the three and nine months ended September 30, 2019 and 2018.

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share information)	2019		2018		2019		2018
Net income	$	6,901	$	4,016	$	12,690	$	11,653
Weighted average shares outstanding - basic	10,949		8,099		10,159		8,092
Dilutive effect of share-based compensation	145		172		159		182
Weighted average shares outstanding - diluted	11,094		8,271		10,318		8,274
Per share information:
Basic earnings per share	$	0.63	$	0.50	$	1.25	$	1.44
Diluted earnings per share	0.62		0.49		1.23		1.41

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EARNINGS PER SHARE

9 Months Ended

Sep. 30, 2019

Earnings Per Share [Abstract]

EARNINGS PER SHARE

EARNINGS PER SHARE

The following table presents earnings per share for the three and nine months ended September 30, 2019 and 2018.

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share information)	2019		2018		2019		2018
Net income	$	6,901	$	4,016	$	12,690	$	11,653
Weighted average shares outstanding - basic	10,949		8,099		10,159		8,092
Dilutive effect of share-based compensation	145		172		159		182
Weighted average shares outstanding - diluted	11,094		8,271		10,318		8,274
Per share information:
Basic earnings per share	$	0.63	$	0.50	$	1.25	$	1.44
Diluted earnings per share	0.62		0.49		1.23		1.41

Average outstanding stock options and restricted shares totaling 21,000 and 21,000 for the three months ended September 30, 2019 and 2018, and totaling 36,000 and 23,000 for the nine months ended September 30, 2019 and 2018, 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. The dilutive effect of share-based compensation in each period above relates principally to restricted stock awards.

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MERGERS AND ACQUISITIONS

9 Months Ended

Sep. 30, 2019

Business Combinations [Abstract]

MERGERS AND ACQUISITIONS

MERGERS AND ACQUISITIONS

Mercersburg Financial Corporation

On October 1, 2018, we acquired 100% of the outstanding common shares of Mercersburg Financial Corporation and its wholly-owned subsidiary, First Community Bank of Mercersburg, headquartered in Mercersburg, Pennsylvania. We issued 1,052,635 shares of our common stock and paid $4,866,000 in cash for all outstanding shares of Mercersburg stock. Based on our $23.80 closing stock price on Friday, September 28, 2018, the consideration paid to acquire Mercersburg totaled $29,919,000.

The fair value of assets acquired, excluding goodwill, totaled $181,430,000, including loans totaling $141,103,000 and investment securities available for sale totaling $7,352,000. The fair value of liabilities assumed totaled $163,384,000, including deposits totaling $160,433,000. The Company recognized $11,873,000 in initial goodwill, representing consideration transferred in excess of the fair value of the net assets acquired in the Mercersburg acquisition. The goodwill resulting from the acquisition represents the value expected from the expansion of our market in south central Pennsylvania and the enhancement of our operations through customer synergies and efficiencies, thereby providing enhanced customer service.

The Mercersburg acquisition was accounted for using the acquisition method of accounting and, accordingly, purchased assets, including identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair values. The fair value measurements of assets acquired and liabilities assumed were subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values became available. No material measurement period adjustments were made in the nine months ended September 30, 2019. The results of operations for the Company include Mercersburg's results from and after October 1, 2018.

Hamilton Bancorp, Inc.

On May 1, 2019, we acquired 100% of the outstanding common shares of Hamilton Bancorp, Inc., and its wholly-owned subsidiary, Hamilton Bank, based in Towson, Maryland. We acquired Hamilton to introduce our banking and financial services into the Greater Baltimore area of Maryland.

Pursuant to the merger agreement, we issued 1,765,704 shares of our common stock and paid $14,197,000 in cash for all outstanding shares of Hamilton stock and options vesting upon acquisition. Based on our closing stock price of $20.74 on Tuesday, April 30, 2019, the consideration paid to acquire Hamilton totaled approximately $50,819,000.

The fair value of assets acquired, excluding goodwill, totaled $492,844,000, including loans totaling $347,361,000. The fair value of liabilities assumed totaled $449,358,000, including deposits totaling $388,246,000. Goodwill represents consideration transferred in excess of the fair value of the net assets acquired. At May 1, 2019, the Company recognized $7,333,000 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 become available. The Company continues to finalize the fair values of loans, intangible assets, other assets, income taxes and liabilities. As a result, the fair value adjustments are preliminary and may change as information becomes available. Fair value adjustments will be finalized no later than May 2020. No material measurement period adjustments were made from the date of acquisition through

September 30, 2019. The results of operations for the Company include Hamilton's results from and after May 1, 2019.

The following table summarizes the consideration paid for Hamilton and the estimated fair values of the assets acquired and liabilities assumed recognized at the acquisition date:

(Dollars in thousands)
Fair value of consideration transferred:
Cash	$	14,197
Common stock issued	36,622
Total consideration transferred	$	50,819
Estimated fair values of assets acquired and (liabilities) assumed:
Cash and cash equivalents	$	43,140
Securities available for sale	60,882
Restricted investments in bank stocks	2,658
Loans	347,361
Premises and equipment	3,749
Core deposit intangible	4,550
Goodwill	7,333
Cash surrender value of life insurance	17,948
Deferred tax asset, net	5,838
ROU lease asset	2,793
Other assets	3,925
Total assets acquired	500,177
Deposits	(388,246)
Borrowings	(51,393)
Other liabilities	(9,719)
Total liabilities assumed	(449,358)
	$	50,819

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 we 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 12 - 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).

We recognized a core deposit intangible of $4,550,000, which will be amortized using an accelerated method over a 10-year amortization period, consistent with expected future cash flows.

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.

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.

(in thousands)	Performing		PCI		Total
Commercial real estate:
Owner-occupied	$	42,148	$	6,324	$	48,472
Non-owner occupied	45,401		770		46,171
Multi-family	10,773		0		10,773
Acquisition and development:
1-4 family residential construction	7,450		0		7,450
Commercial and land development	4,528		0		4,528
Commercial and industrial	32,316		1,702		34,018
Residential mortgage:
First lien	152,657		10,494		163,151
Home-equity - term	4,478		1		4,479
Home equity - lines of credit	13,657		0		13,657
Installment and other loans	14,467		195		14,662
Total loans acquired	$	327,875	$	19,486	$	347,361

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

(in thousands)
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	(5,508)
Estimated fair value of acquired loans	$	347,361

The market rate adjustment represents the movement in market interest rates, irrespective of credit adjustments, compared to the contractual rates of the acquired loans. The credit fair value adjustment made on non-credit impaired loans represents the changes in credit quality of the underlying borrowers from loan inception to the acquisition date. The credit fair value adjustment on PCI loans is derived in accordance with ASC 310-30 and represents the portion of the loan balance that has been deemed uncollectible based on our expectations of future cash flows for each respective loan.

The following table provides information about acquired PCI loans at May 1, 2019.

(in thousands)
Contractually required principal and interest at acquisition	$	31,599
Nonaccretable difference	(8,616)
Expected cash flows at acquisition	22,983
Accretable yield	(3,497)
Estimated fair value of acquired PCI loans	$	19,486

Unaudited pro forma net income for the three and nine months ended September 30, 2018, would have totaled $4,353,000 and $6,869,000, and revenues would have totaled $28,862,000 and $87,557,000 for the same periods had the Mercersburg and Hamilton acquisitions occurred January 1, 2018. Unaudited pro forma net income for the three and nine months ended September 30, 2019, would have totaled $7,566,000 and $13,355,000, and revenues would have totaled $38,675,000 and $95,714,000 for the same periods had the Hamilton acquisition occurred January 1, 2019.

In connection with the Mercersburg and Hamilton acquisitions, we incurred merger related expenses totaling $471,000 and $7,976,000 for the three and nine months ended September 30, 2019, which are included in noninterest expenses. The expenses consisted primarily of $0 and $1,967,000 of investment banking, legal and consulting fees; $236,000 and $3,855,000 of information systems expense, including canceling of contracts; and $235,000 and $2,154,000 of other expenses, including payout of employee termination contracts.

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LEASES

9 Months Ended

Sep. 30, 2019

Leases [Abstract]

LEASES

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 our leases contain renewal options, which we are reasonably certain to exercise. Including renewal options, our leases range from 3 years to 50 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 Consolidated Balance Sheet.

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 summarizes the Company's ROU assets and related lease liabilities for the three and nine months at September 30, 2019.

	Three Months Ended		Nine Months Ended
(Dollars in thousands)	September 30, 2019		September 30, 2019
Cash paid for operating lease liabilities	330		$	791
Right-of-use assets obtained in exchange for operating lease obligations (1)	0		$	10,908
Weighted-average remaining lease term (in years)	17.6		17.6
Weighted-average discount rate	4.5	%	4.5		%

⁽¹⁾ Includes $7,971,000 for operating leases existing on January 1, 2019, $144,000 for operating leases that commenced in the first quarter of 2019, and $2,793,000 for operating leases that were acquired in the second quarter of 2019.

The following table presents maturities of the Company's lease liabilities.

(Dollars in thousands)
Remainder of 2019	$	332
2020	1,336
2021	1,207
2022	788
2023	810
2024	801
Thereafter	10,976
	16,250
Less imputed interest	5,810
Total lease liabilities	$	10,440

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EARNINGS PER SHARE - Calculation of Basic and Diluted Earnings per Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Earnings Per Share [Abstract]
Net income	$ 6,901	$ 4,016	$ 12,690	$ 11,653
Weighted average shares outstanding - basic (in shares)	10,949	8,099	10,159	8,092
Dilutive effect of share-based compensation (in shares)	145	172	159	182
Weighted average shares outstanding - diluted (in shares)	11,094	8,271	10,318	8,274
Per share information:
Basic earnings per share (in usd per share)	$ 0.63	$ 0.50	$ 1.25	$ 1.44
Diluted earnings per share (in usd per share)	$ 0.62	$ 0.49	$ 1.23	$ 1.41

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CONTINGENCIES (Details)		3 Months Ended
	Jun. 22, 2015	Jun. 30, 2016 USD ($)	Sep. 30, 2019 claim
Commitments and Contingencies Disclosure [Abstract]
Number of legal proceedings (in claims) | claim			0
Number of days to file an amendment or stand on current amended complaint	30 days
Regulatory settlement | $		$ 1,000,000

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FAIR VALUE- Summary of Assets Measured at Fair Value on Nonrecurring Basis (Details) - Fair Value, Measurements, Nonrecurring - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	$ 2,354	$ 3,051
Mortgage servicing rights	3,116
Commercial real estate | Owner occupied
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	971	1,087
Commercial real estate | Multi-family
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	105	131
Commercial real estate | Non-owner occupied residential
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	136	278
Commercial and industrial
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	6	25
Residential mortgage | First lien
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	722	1,121
Residential mortgage | Home equity - lines of credit
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	407	409
Installment and other loans
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	7
Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Mortgage servicing rights	0
Level 1 | Commercial real estate | Owner occupied
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Level 1 | Commercial real estate | Multi-family
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Level 1 | Commercial real estate | Non-owner occupied residential
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Level 1 | Commercial and industrial
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Level 1 | Residential mortgage | First lien
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Level 1 | Residential mortgage | Home equity - lines of credit
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Level 1 | Installment and other loans
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0
Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Mortgage servicing rights	3,116
Level 2 | Commercial real estate | Owner occupied
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Level 2 | Commercial real estate | Multi-family
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Level 2 | Commercial real estate | Non-owner occupied residential
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Level 2 | Commercial and industrial
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Level 2 | Residential mortgage | First lien
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Level 2 | Residential mortgage | Home equity - lines of credit
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0	0
Level 2 | Installment and other loans
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	0
Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	2,354	3,051
Mortgage servicing rights	0
Level 3 | Commercial real estate | Owner occupied
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	971	1,087
Level 3 | Commercial real estate | Multi-family
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	105	131
Level 3 | Commercial real estate | Non-owner occupied residential
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	136	278
Level 3 | Commercial and industrial
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	6	25
Level 3 | Residential mortgage | First lien
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	722	1,121
Level 3 | Residential mortgage | Home equity - lines of credit
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	407	$ 409
Level 3 | Installment and other loans
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans, net	$ 7

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SHARE-BASED COMPENSATION PLANS - Information Pertaining to Options Outstanding and Exercisable (Details) - Orrstown 2011 Incentive Stock Plan - Employee Stock Option - $21.14 - $25.76	9 Months Ended
	Sep. 30, 2019 $ / shares shares
Range of Exercise Prices
Range of Exercise Prices, Minimum (in usd per share)	$ 21.14
Range of Exercise Prices, Maximum (in usd per share)	$ 25.76
Number Outstanding (in shares) | shares	30,559
Weighted Average Remaining Contractual Life (Years)	9 months 10 days
Weighted Average Exercise Price (in usd per share)	$ 21.56

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FAIR VALUE - Summary of Assets Measured at Fair Value on Recurring Basis (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	$ 481,120	$ 465,844
States and political subdivisions
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	82,712	145,004
GSE residential CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	71,001	108,064
Private label residential CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale		143
Private label commercial CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	7,213	7,209
Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	481,120	465,844
Fair Value, Measurements, Recurring | States and political subdivisions
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	82,712	145,004
Fair Value, Measurements, Recurring | GSE residential CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	71,001	108,064
Fair Value, Measurements, Recurring | Private label residential CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale		143
Fair Value, Measurements, Recurring | Private label commercial CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	87,767	75,045
Fair Value, Measurements, Recurring | Asset-backed and other
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	239,640	137,588
Fair Value, Measurements, Recurring | Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	0	0
Fair Value, Measurements, Recurring | Level 1 | States and political subdivisions
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	0	0
Fair Value, Measurements, Recurring | Level 1 | GSE residential CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	0	0
Fair Value, Measurements, Recurring | Level 1 | Private label residential CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale		0
Fair Value, Measurements, Recurring | Level 1 | Private label commercial CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	0	0
Fair Value, Measurements, Recurring | Level 1 | Asset-backed and other
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	0	0
Fair Value, Measurements, Recurring | Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	473,907	458,635
Fair Value, Measurements, Recurring | Level 2 | States and political subdivisions
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	82,712	145,004
Fair Value, Measurements, Recurring | Level 2 | GSE residential CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	71,001	108,064
Fair Value, Measurements, Recurring | Level 2 | Private label residential CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale		143
Fair Value, Measurements, Recurring | Level 2 | Private label commercial CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	80,554	67,836
Fair Value, Measurements, Recurring | Level 2 | Asset-backed and other
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	239,640	137,588
Fair Value, Measurements, Recurring | Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	7,213	7,209
Fair Value, Measurements, Recurring | Level 3 | States and political subdivisions
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	0	0
Fair Value, Measurements, Recurring | Level 3 | GSE residential CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	0	0
Fair Value, Measurements, Recurring | Level 3 | Private label residential CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale		0
Fair Value, Measurements, Recurring | Level 3 | Private label commercial CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	7,213	7,209
Fair Value, Measurements, Recurring | Level 3 | Asset-backed and other
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Securities available for sale	$ 0	$ 0

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LOANS AND ALLOWANCE FOR LOAN LOSSES - Troubled Debt Restructurings (Details) $ in Thousands	Sep. 30, 2019 USD ($) contract	Dec. 31, 2018 USD ($) contract
Financing Receivable, Modifications [Line Items]
Number of Contracts | contract	21	22
Recorded Investment | $	$ 3,308	$ 1,827
Accruing
Financing Receivable, Modifications [Line Items]
Number of Contracts | contract	12	13
Recorded Investment | $	$ 1,042	$ 1,132
Accruing | Commercial real estate | Owner occupied
Financing Receivable, Modifications [Line Items]
Number of Contracts | contract	1	1
Recorded Investment | $	$ 30	$ 39
Accruing | Residential mortgage | First lien
Financing Receivable, Modifications [Line Items]
Number of Contracts | contract	10	11
Recorded Investment | $	$ 992	$ 1,069
Accruing | Residential mortgage | Home equity - lines of credit
Financing Receivable, Modifications [Line Items]
Number of Contracts | contract	1	1
Recorded Investment | $	$ 20	$ 24
Nonaccruing
Financing Receivable, Modifications [Line Items]
Number of Contracts | contract	9	9
Recorded Investment | $	$ 2,266	$ 695
Nonaccruing | Commercial real estate | Owner occupied
Financing Receivable, Modifications [Line Items]
Number of Contracts | contract	4	1
Recorded Investment | $	$ 1,898	$ 37
Nonaccruing | Commercial real estate | New Owner Occupied
Financing Receivable, Modifications [Line Items]
Number of Contracts | contract	3
Recorded Investment | $	$ 1,867
Nonaccruing | Residential mortgage | First lien
Financing Receivable, Modifications [Line Items]
Number of Contracts | contract	5	8
Recorded Investment | $	$ 368	$ 658

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Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Cash flows from operating activities
Net income	$ 12,690	$ 11,653
Adjustments to reconcile net income to net cash provided by operating activities:
Net premium amortization (discount accretion)	(1,594)	1,356
Depreciation and amortization (including amortization of ROU assets)	3,970	2,572
Provision for loan losses	900	600
Share-based compensation	1,154	1,112
Net gain on sales of loans originated for sale	(1,653)	(1,687)
Mortgage loans originated for sale	(78,242)	(71,008)
Proceeds from sales of loans originated for sale	75,276	73,679
Gain on sale of portfolio loans	0	291
Net gain on disposal of OREO	(8)	(111)
Writedown of OREO	0	24
Net loss on disposal of premises and equipment	137	16
Deferred income taxes	1,348	756
Investment securities gains	(4,731)	(891)
Income from life insurance	(1,505)	(1,101)
(Increase) decrease in accrued interest receivable	742	(345)
Increase in accrued interest payable and other liabilities	(5,618)	(46)
Other, net	589	(1,158)
Net cash provided by operating activities	3,455	15,130
Cash flows from investing activities
Proceeds from sales of AFS securities	199,910	113,180
Maturities, repayments and calls of AFS securities	22,934	12,793
Purchases of AFS securities	(166,694)	(211,014)
Net cash and cash equivalents received from acquisitions	29,442	0
Net redemptions of restricted investments in bank stocks	2,101	660
Net (increase) decrease in loans	4,023	(78,497)
Proceeds from sales of portfolio loans	0	3,589
Purchases of bank premises and equipment	(3,226)	(3,078)
Proceeds from disposal of OREO	724	1,260
Proceeds from disposal of bank premises and equipment	0	7
Purchases of bank owned life insurance	(2,280)	(900)
Proceeds from settlement of life insurance contracts	571	576
Net cash provided by (used in) investing activities	87,505	(161,424)
Cash flows from financing activities
Net increase (decrease) in deposits	(23,598)	209,655
Net decrease in borrowings with original maturities less than 90 days	(2,464)	(8,223)
Payments on other short-term borrowings	(25,000)	(40,000)
Proceeds from long-term debt	20,000	0
Payments on long-term debt	(91,678)	(272)
Subordinated note issuance costs	(59)	0
Dividends paid	(4,472)	(3,166)
Treasury shares repurchased for employee taxes associated with restricted stock vesting	(1,694)	(651)
Proceeds from issuance of stock for option exercises and employee stock purchase plan	113	161
Net cash provided by (used in) financing activities	(128,852)	157,504
Net increase (decrease) in cash and cash equivalents	(37,892)	11,210
Cash and cash equivalents at beginning of period	88,815	29,807
Cash and cash equivalents at end of period	50,923	41,017
Cash paid during the period for:
Interest	17,573	8,991
Income taxes	0	60
Supplemental schedule of noncash investing activities:
OREO acquired in settlement of loans	161	538
ROU assets obtained in exchange for lease obligations	$ 8,115	$ 0

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LOANS AND ALLOWANCE FOR LOAN LOSSES - Schedule of Accretable Yield of Purchased Impaired Loans (Details) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2019
Accretable Yield Movement Schedule [Roll Forward]
Accretable yield, beginning of period	$ 4,988	$ 2,065
New loans purchased	0	3,497
Accretion of income	(422)	(1,814)
Reclassification from nonaccretable difference due to improvement in expected cash flows	825	1,441
Other charges, net	319	521
Accretable yield, end of period	$ 5,710	$ 5,710

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Consolidated Statements of Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Interest income
Loans	$ 19,999	$ 12,281	$ 54,611	$ 35,068
Investment securities - taxable	3,787	2,922	10,958	7,754
Investment securities - tax-exempt	309	955	1,783	2,834
Short-term investments	561	68	1,237	169
Total interest income	24,656	16,226	68,589	45,825
Interest expense
Deposits	5,774	2,780	14,338	6,765
Short-term borrowings	39	332	316	1,097
Long-term debt	433	410	1,408	1,222
Subordinated notes	490	0	1,486	0
Total interest expense	6,736	3,522	17,548	9,084
Net interest income	17,920	12,704	51,041	36,741
Provision for loan losses	300	200	900	600
Net interest income after provision for loan losses	17,620	12,504	50,141	36,141
Noninterest income
Service charges on deposit accounts	1,761	1,524	4,930	4,405
Other service charges, commissions and fees	372	492	959	1,430
Loan swap referral fees	629	0	629	0
Trust and investment management income	1,892	1,668	5,399	5,037
Brokerage income	654	455	1,804	1,514
Mortgage banking activities	623	735	1,743	2,049
Income from life insurance	479	533	1,505	1,101
Other income	44	56	188	272
Investment securities gains	2,328	29	4,731	891
Total noninterest income	8,782	5,492	21,888	16,699
Noninterest expenses
Salaries and employee benefits	10,489	7,610	28,088	23,487
Occupancy	1,133	775	3,200	2,252
Furniture and equipment	1,252	990	3,415	2,977
Data processing	830	661	2,658	1,875
Telephone and communication	198	181	612	542
Automated teller and interchange fees	270	187	744	548
Advertising and bank promotions	279	279	1,348	898
FDIC insurance	(9)	169	397	507
Legal fees	189	215	362	364
Other professional services	625	361	1,716	1,140
Directors' compensation	228	207	725	663
Real estate owned	22	18	36	96
Taxes other than income	306	259	926	761
Intangible asset amortization	486	24	1,096	72
Merger related	471	319	7,976	473
Insurance claim receivable write off	0	0	615	0
Other operating expenses	1,392	1,081	3,743	3,022
Total noninterest expenses	18,161	13,336	57,657	39,677
Income before income tax expense	8,241	4,660	14,372	13,163
Income tax expense	1,340	644	1,682	1,510
Net income	$ 6,901	$ 4,016	$ 12,690	$ 11,653
Per share information:
Basic earnings per share (in usd per share)	$ 0.63	$ 0.50	$ 1.25	$ 1.44
Diluted earnings per share (in usd per share)	$ 0.62	$ 0.49	$ 1.23	$ 1.41

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REVENUE FROM CONTRACTS WITH CUSTOMERS (Tables)

9 Months Ended

Sep. 30, 2019

Revenue from Contract with Customer [Abstract]

Noninterest Income Disaggregated by Revenue Source

The following table presents our noninterest income disaggregated by revenue source for the three and nine months ended September 30, 2019 and 2018.

	Three Months Ended				Nine Months Ended
(Dollars in thousands)	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Noninterest income
Service charges on deposits	$	1,025	$	926	$	2,802	$	2,599
Loan swap referral fees	629		0		629		0
Trust and investment management income	1,892		1,668		5,399		5,037
Brokerage income	654		455		1,804		1,514
Merchant and bankcard fees (interchange income)	843		681		2,422		2,047
Revenue from contracts with customers	5,043		3,730		13,056		11,197
Other service charges	265		409		665		1,189
Mortgage banking activities	623		735		1,743		2,049
Income from life insurance	479		533		1,505		1,101
Other income	44		56		188		272
Investment securities gains	2,328		29		4,731		891
Total noninterest income	$	8,782	$	5,492	$	21,888	$	16,699

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SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (Tables)

9 Months Ended

Sep. 30, 2019

Equity [Abstract]

Capital Amounts and Ratios

The following table presents capital amounts and ratios at September 30, 2019 and December 31, 2018.  

	Actual				For Capital Adequacy Purposes (includes applicable capital conservation buffer)				To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2019
Total Capital to risk weighted assets
Consolidated	$	240,674	14.5	%	$	174,255	10.5	%	n/a		n/a
Bank	226,296		13.6	%	174,112		10.5	%	$	165,821	10.0	%
Tier 1 Capital to risk weighted assets
Consolidated	192,818		11.6	%	141,064		8.5	%	n/a		n/a
Bank	210,274		12.7	%	140,948		8.5	%	132,656		8.0	%
Common Tier 1 (CET1) to risk weighted assets
Consolidated	192,818		11.6	%	116,170		7.0	%	n/a		n/a
Bank	210,274		12.7	%	116,074		7.0	%	107,783		6.5	%
Tier 1 Capital to average assets
Consolidated	192,818		8.2	%	94,360		4.0	%	n/a		n/a
Bank	210,274		8.9	%	94,413		4.0	%	118,016		5.0	%
December 31, 2018
Total Capital to risk weighted assets
Consolidated	$	206,988	15.6	%	$	131,393	9.875	%	n/a		n/a
Bank	177,892		13.4	%	131,286		9.875	%	$	132,948	10.0	%
Tier 1 Capital to risk weighted assets
Consolidated	160,117		12.0	%	104,782		7.875	%	n/a		n/a
Bank	162,880		12.3	%	104,696		7.875	%	106,358		8.0	%
Common Tier 1 (CET1) to risk weighted assets
Consolidated	160,117		12.0	%	84,823		6.375	%	n/a		n/a
Bank	162,880		12.3	%	84,754		6.375	%	86,416		6.5	%
Tier 1 Capital to average assets
Consolidated	160,117		8.4	%	76,089		4.0	%	n/a		n/a
Bank	162,880		8.6	%	76,113		4.0	%	95,142		5.0	%

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SECURITIES AVAILABLE FOR SALE

9 Months Ended

Sep. 30, 2019

Investments, Debt and Equity Securities [Abstract]

SECURITIES AVAILABLE FOR SALE

SECURITIES AVAILABLE FOR SALE

At September 30, 2019 and December 31, 2018, all investment securities were classified as AFS. The following table summarizes amortized cost and fair value of AFS securities, and the corresponding amounts of gross unrealized gains and losses recognized in AOCI, at September 30, 2019 and December 31, 2018.

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2019
States and political subdivisions	$	77,553	$	5,159	$	0	$	82,712
GSE residential CMOs	70,214		1,142		355		71,001
Private label commercial CMOs	87,848		146		227		87,767
Asset-backed and other	242,119		153		2,632		239,640
Totals	$	477,734	$	6,600	$	3,214	$	481,120
December 31, 2018
States and political subdivisions	$	144,596	$	1,919	$	1,511	$	145,004
GSE residential CMOs	110,421		332		2,689		108,064
Private label residential CMOs	144		0		1		143
Private label commercial CMOs	75,911		55		921		75,045
Asset-backed and other	138,535		126		1,073		137,588
Totals	$	469,607	$	2,432	$	6,195	$	465,844

The following table summarizes AFS securities with unrealized losses at September 30, 2019 and December 31, 2018, aggregated by major security type and length of time in a continuous unrealized loss position.

	Less Than 12 Months					12 Months or More					Total
(Dollars in thousands)	# of Securities	Fair Value		Unrealized Losses		# of Securities	Fair Value		Unrealized Losses		# of Securities	Fair Value		Unrealized Losses
September 30, 2019
GSE residential CMOs	3	27,100		45		1	12,147		310		4	39,247		355
Private label commercial CMOs	7	33,093		71		6	34,644		156		13	67,737		227
Asset-backed and other	15	176,324		2,258		2	18,324		374		17	194,648		2,632
Totals	25	$	236,517	$	2,374	9	$	65,115	$	840	34	$	301,632	$	3,214
December 31, 2018
States and political subdivisions	27	$	46,585	$	662	6	$	23,036	$	849	33	$	69,621	$	1,511
GSE residential CMOs	1	18,037		122		7	46,168		2,567		8	64,205		2,689
Private label residential CMOs	1	143		1		0	0		0		1	143		1
Private label commercial CMOs	11	56,499		712		2	6,349		209		13	62,848		921
Asset-backed and other	6	78,900		859		3	10,808		214		9	89,708		1,073
Totals	46	$	200,164	$	2,356	18	$	86,361	$	3,839	64	$	286,525	$	6,195

States and Political Subdivisions. The unrealized losses presented in the table above have been caused by a widening of spreads and/or a rise in interest rates from the time these securities were purchased. Management considers the investment 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 December 31, 2018.

GSE Residential CMOs. The unrealized losses presented in the table above have been caused by a widening of spreads and/or a rise in interest rates from the time 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 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 September 30, 2019 or at December 31, 2018.

Private Label Residential CMOs, Private Label Commercial CMOs and Asset-backed and Other. The unrealized losses presented in the table above have been caused by a widening of spreads and/or a rise in interest rates from the time the securities were purchased. 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 September 30, 2019 or at December 31, 2018.

The following table summarizes amortized cost and fair value of AFS securities by contractual maturity at September 30, 2019. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

	Available for Sale
(Dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	230	$	230
Due after one year through five years	0		0
Due after five years through ten years	26,456		27,952
Due after ten years	50,867		54,530
CMOs	158,062		158,768
Asset-backed and other	242,119		239,640
	$	477,734	$	481,120

The following table summarizes proceeds from sales of AFS securities and gross gains and gross losses for the three and nine months ended September 30, 2019 and 2018.

	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2019		2018		2019		2018
Proceeds from sale of AFS securities	$	25,575	$	25,070	$	199,910	$	113,180
Gross gains	2,328		185		4,956		1,237
Gross losses	0		156		225		346

AFS securities with a fair value of $161,627,000 and $164,233,000 at September 30, 2019 and December 31, 2018 were pledged to secure public funds and for other purposes as required or permitted by law.

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INCOME TAXES

9 Months Ended

Sep. 30, 2019

Income Tax Disclosure [Abstract]

INCOME TAXES

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 2015.

The following table summarizes income tax expense for the three and nine months ended September 30, 2019 and 2018.

	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands)	2019		2018		2019		2018
Current expense	$	244	$	406	$	334	$	754
Deferred expense	1,096		238		1,348		756
Income tax expense	$	1,340	$	644	$	1,682	$	1,510

Income tax expense includes $489,000 and $6,000 related to net securities gains for the three months ended September 30, 2019 and 2018, and $994,000 and $187,000 related to net security gains for the nine months ended September 30, 2019 and 2018.

The following table summarizes deferred tax assets and liabilities at September 30, 2019 and December 31, 2018.

(Dollars in thousands)	September 30, 2019		December 31, 2018
Deferred tax assets:
Allowance for loan losses	$	3,465	$	3,143
Deferred compensation	396		723
Retirement and salary continuation plans	2,326		1,416
Share-based compensation	592		742
Off-balance sheet reserves	270		219
Nonaccrual loan interest	843		537
Net unrealized losses on AFS securities	0		791
Purchase accounting adjustments	4,349		1,795
Bonus accrual	366		470
Low-income housing credit carryforward	341		641
Net operating loss carryovers	1,872		0
Other	473		321
Total deferred tax assets	15,293		10,798
Deferred tax liabilities:
Depreciation	440		458
Net unrealized gains on AFS securities	711		0
Mortgage servicing rights	644		590
Purchase accounting adjustments	1,682		1,021
Other	250		150
Total deferred tax liabilities	3,727		2,219
Net deferred tax asset, included in Other Assets	$	11,566	$	8,579

The provision for income taxes differs from that computed by applying statutory rates to income before income taxes, primarily due to the effects of tax-exempt income, non-deductible expenses and tax credits. In the first quarter of 2019, the Company recorded a tax benefit of $185,000, related to a favorable tax law clarification concerning the treatment of life insurance assets of an acquired entity. In the second quarter of 2019, the Company recorded a tax benefit of $334,000, 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.

At September 30, 2019, the Company had low-income housing credit carryforwards that expire through 2038 and acquired federal and state net operating loss carryforwards, that are subject to annual loss limitation limits, that expire through 2037.

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FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

9 Months Ended

Sep. 30, 2019

Fair Value Disclosures [Abstract]

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

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 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 contract, or notional, amounts.

	Contract or Notional Amount
(Dollars in thousands)	September 30, 2019		December 31, 2018
Commitments to fund:
Home equity lines of credit	$	201,353	$	160,971
1-4 family residential construction loans	26,630		13,002
Commercial real estate, construction and land development loans	15,742		31,133
Commercial, industrial and other loans	173,780		147,518
Standby letters of credit	14,604		13,909

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.

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 September 30, 2019 and December 31, 2018, for guarantees under standby letters of credit issued was not material.

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FAIR VALUE - Additional Information (Details) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value	$ 481,120,000		$ 481,120,000		$ 465,844,000
Purchase of investment			166,694,000	$ 211,014,000
Premium amortization			72,000
Specific charges to value the real estate owned	0		0		0
Changes in fair value of OREO still held	0	$ 11,000	0	11,000
Reserve for mortgage servicing rights	240,000		240,000		0
Mortgage servicing rights impairment	221,000		240,000	$ 0
Private label commercial CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value	7,213,000		7,213,000		7,209,000
Purchase of investment			7,213,000
Premium amortization	31,000
Unrealized loss	87,000
Unrealized gain			76,000
Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair value liabilities	0		0		0
Fair Value	481,120,000		481,120,000		465,844,000
Allowance for loan losses	863,000		863,000		928,000
Fair Value, Measurements, Recurring | Private label commercial CMOs
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value	$ 87,767,000		$ 87,767,000		$ 75,045,000

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SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL - Additional Information (Details) - USD ($) $ / shares in Units, $ in Thousands		9 Months Ended
	Oct. 23, 2019	Sep. 30, 2019	Sep. 30, 2015
Equity, Class of Treasury Stock [Line Items]
Number of shares authorized to be repurchased (in shares)			416,000
Acquisition of treasury stock (in shares)		82,725
Acquisition of treasury stock		$ 1,438
Acquisition of treasury stock (in usd per share)		$ 17.38
Subsequent Event
Equity, Class of Treasury Stock [Line Items]
Dividends declared per share (in usd per share)	$ 0.15
Maximum
Equity, Class of Treasury Stock [Line Items]
Stock repurchase program authorized, maximum percentage of outstanding shares of common stock			5.00%

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REVENUE FROM CONTRACTS WITH CUSTOMERS (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Revenue from Contract with Customer [Abstract]
Receivables from customers	$ 737		$ 737		$ 640
Disaggregation of Revenue [Line Items]
Other service charges	265	$ 409	665	$ 1,189
Mortgage banking activities	623	735	1,743	2,049
Income from life insurance	479	533	1,505	1,101
Other income	44	56	188	272
Investment securities gains	2,328	29	4,731	891
Total noninterest income	8,782	5,492	21,888	16,699
Service charges on deposits
Disaggregation of Revenue [Line Items]
Revenue from contract with customer	1,025	926	2,802	2,599
Loan swap referral fees
Disaggregation of Revenue [Line Items]
Revenue from contract with customer	629	0	629	0
Trust and investment management income
Disaggregation of Revenue [Line Items]
Revenue from contract with customer	1,892	1,668	5,399	5,037
Brokerage income
Disaggregation of Revenue [Line Items]
Revenue from contract with customer	654	455	1,804	1,514
Merchant and bankcard fees (interchange income)
Disaggregation of Revenue [Line Items]
Revenue from contract with customer	843	681	2,422	2,047
Noninterest income
Disaggregation of Revenue [Line Items]
Revenue from contract with customer	$ 5,043	$ 3,730	$ 13,056	$ 11,197

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FAIR VALUE - Schedule of Changes in Fair Value of Impaired Loans Still Held (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Impaired loans
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Changes in fair value of impaired loans still held	$ 21	$ 63	$ 49	$ 147

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SHARE-BASED COMPENSATION PLANS - Summary of Outstanding Stock Options Activity (Details)	9 Months Ended
	Sep. 30, 2019 $ / shares shares
Shares
Options exercisable (in shares) | shares	30,559
Weighted Average Exercise Price
Options exercisable at period end (in usd per share) | $ / shares	$ 21.56
Orrstown 2011 Incentive Stock Plan | Employee Stock Option
Shares
Outstanding at beginning of year (in shares) | shares	40,984
Expired (in shares) | shares	(10,425)
Options outstanding at period end (in shares) | shares	30,559
Weighted Average Exercise Price
Outstanding at beginning of year (in usd per share) | $ / shares	$ 24.34
Expired (in usd per share) | $ / shares	32.47
Options outstanding at period end (in usd per share) | $ / shares	$ 21.56

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Cover - shares	9 Months Ended
	Sep. 30, 2019	Oct. 31, 2019
Cover page.
Document Type	10-Q
Document Quarterly Report	true
Document Period End Date	Sep. 30, 2019
Document Transition Report	false
Entity File Number	001-34292
Entity Registrant Name	ORRSTOWN FINANCIAL SERVICES, INC.
Entity Incorporation, State or Country Code	PA
Entity Tax Identification Number	23-2530374
Entity Address, Address Line One	77 East King Street
Entity Address, Address Line Two	P. O. Box 250
Entity Address, City or Town	Shippensburg
Entity Address, State or Province	PA
Entity Address, Postal Zip Code	17257
City Area Code	(717)
Local Phone Number	532-6114
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Title of 12(b) Security	Common Stock, no par value
Trading Symbol	ORRF
Securities Exchange Name	NASDAQ
Entity Common Stock, Shares Outstanding		11,190,199
Entity Central Index Key	0000826154
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q3
Amendment Flag	false

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Consolidated Statements of Comprehensive Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Statement of Comprehensive Income [Abstract]
Net income	$ 6,901	$ 4,016	$ 12,690	$ 11,653
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities available for sale arising during the period	1,400	(3,488)	11,880	(9,637)
Reclassification adjustment for gains realized in net income	(2,328)	(29)	(4,731)	(891)
Net unrealized gains (losses)	(928)	(3,517)	7,149	(10,528)
Tax effect	195	738	(1,502)	2,211
Total other comprehensive income (loss), net of tax and reclassification adjustments	(733)	(2,779)	5,647	(8,317)
Total comprehensive income	$ 6,168	$ 1,237	$ 18,337	$ 3,336

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LOANS AND ALLOWANCE FOR LOAN LOSSES - Loan Portfolio Summarized by Aging Categories of Performing Loans and Nonaccrual Loans (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	$ 21,917	$ 10,958
Past Due	3,128	802
90+ (still accruing) Days Past Due	2,357	57
Non- Accrual	0	0
Total Loans	25,045	11,760
30 to 59 Days Past Due | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	226	631
60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due		1,059
60 to 89 Days Past Due | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	545	114
Commercial real estate | Owner occupied
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	161,771	125,887
Past Due	0	66
90+ (still accruing) Days Past Due	0	0
Non- Accrual	3,294	1,841
Total Loans	165,065	127,794
Commercial real estate | Owner occupied | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	6,089	1,784
Past Due	173	72
90+ (still accruing) Days Past Due	42	0
Non- Accrual	0	0
Total Loans	6,262	1,856
Commercial real estate | Owner occupied | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	66
Commercial real estate | Owner occupied | 30 to 59 Days Past Due | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	131	0
Commercial real estate | Owner occupied | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Commercial real estate | Owner occupied | 60 to 89 Days Past Due | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	72
Commercial real estate | Non-owner occupied
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	308,823	252,144
Past Due	130	0
90+ (still accruing) Days Past Due	130	0
Non- Accrual	0	0
Total Loans	308,953	252,144
Commercial real estate | Non-owner occupied | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	585	650
Past Due	796	0
90+ (still accruing) Days Past Due	796	0
Non- Accrual	0	0
Total Loans	1,381	650
Commercial real estate | Non-owner occupied | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Commercial real estate | Non-owner occupied | 30 to 59 Days Past Due | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Commercial real estate | Non-owner occupied | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Commercial real estate | Non-owner occupied | 60 to 89 Days Past Due | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Commercial real estate | Multi-family
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	107,707	78,085
Past Due	249	0
90+ (still accruing) Days Past Due	249	0
Non- Accrual	105	131
Total Loans	108,061	78,216
Commercial real estate | Multi-family | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	690	717
Past Due	0	0
90+ (still accruing) Days Past Due	0	0
Non- Accrual	0	0
Total Loans	690	717
Commercial real estate | Multi-family | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Commercial real estate | Multi-family | 30 to 59 Days Past Due | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Commercial real estate | Multi-family | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Commercial real estate | Multi-family | 60 to 89 Days Past Due | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Commercial real estate | Non-owner occupied residential
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	117,301	99,268
Past Due	332	255
90+ (still accruing) Days Past Due	38	0
Non- Accrual	137	309
Total Loans	117,770	99,832
Commercial real estate | Non-owner occupied residential | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	2,025	535
Past Due	600	0
90+ (still accruing) Days Past Due	412	0
Non- Accrual	0	0
Total Loans	2,625	535
Commercial real estate | Non-owner occupied residential | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	225	226
Commercial real estate | Non-owner occupied residential | 30 to 59 Days Past Due | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Commercial real estate | Non-owner occupied residential | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	69	29
Commercial real estate | Non-owner occupied residential | 60 to 89 Days Past Due | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	188	0
Acquisition and development | 1-4 family residential construction
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	12,257	7,385
Past Due	0	0
90+ (still accruing) Days Past Due	0	0
Non- Accrual	0	0
Total Loans	12,257	7,385
Acquisition and development | 1-4 family residential construction | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Acquisition and development | 1-4 family residential construction | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Acquisition and development | Commercial and land development
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	38,358	41,822
Past Due	136	37
90+ (still accruing) Days Past Due	136	0
Non- Accrual	0	0
Total Loans	38,494	41,859
Acquisition and development | Commercial and land development | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current		192
Past Due		0
90+ (still accruing) Days Past Due		0
Non- Accrual		0
Total Loans		192
Acquisition and development | Commercial and land development | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	37
Acquisition and development | Commercial and land development | 30 to 59 Days Past Due | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due		0
Acquisition and development | Commercial and land development | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Acquisition and development | Commercial and land development | 60 to 89 Days Past Due | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due		0
Commercial and industrial
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	210,112	154,988
Past Due	653	516
90+ (still accruing) Days Past Due	0	0
Non- Accrual	1,089	286
Total Loans	211,854	155,790
Commercial and industrial | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	3,863	4,943
Past Due	17	231
90+ (still accruing) Days Past Due	17	0
Non- Accrual	0	0
Total Loans	3,880	5,174
Commercial and industrial | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	320	411
Commercial and industrial | 30 to 59 Days Past Due | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	231
Commercial and industrial | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	333	105
Commercial and industrial | 60 to 89 Days Past Due | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Municipal
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	47,920	50,982
Past Due	0	0
90+ (still accruing) Days Past Due	0	0
Non- Accrual	0	0
Total Loans	47,920	50,982
Municipal | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Municipal | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Residential mortgage | First lien
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	339,460	228,714
Past Due	2,864	2,326
90+ (still accruing) Days Past Due	67	0
Non- Accrual	1,555	1,808
Total Loans	343,879	232,848
Residential mortgage | First lien | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	8,459	1,971
Past Due	1,473	477
90+ (still accruing) Days Past Due	1,042	53
Non- Accrual	0	0
Total Loans	9,932	2,448
Residential mortgage | First lien | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	1,101	1,592
Residential mortgage | First lien | 30 to 59 Days Past Due | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	74	382
Residential mortgage | First lien | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	1,696	734
Residential mortgage | First lien | 60 to 89 Days Past Due | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	357	42
Residential mortgage | Home equity - term
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	15,122	11,487
Past Due	22	683
90+ (still accruing) Days Past Due	5	0
Non- Accrual	11	16
Total Loans	15,155	12,186
Residential mortgage | Home equity - term | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	16	17
Past Due	4	5
90+ (still accruing) Days Past Due	0	0
Non- Accrual	0	0
Total Loans	20	22
Residential mortgage | Home equity - term | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	17	678
Residential mortgage | Home equity - term | 30 to 59 Days Past Due | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	4	5
Residential mortgage | Home equity - term | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	5
Residential mortgage | Home equity - term | 60 to 89 Days Past Due | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Residential mortgage | Home equity - lines of credit
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	158,601	142,394
Past Due	596	448
90+ (still accruing) Days Past Due	0	0
Non- Accrual	733	774
Total Loans	159,930	143,616
Residential mortgage | Home equity - lines of credit | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	475	420
Residential mortgage | Home equity - lines of credit | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	121	28
Installment and other loans
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	38,556	33,135
Past Due	159	110
90+ (still accruing) Days Past Due	0	0
Non- Accrual	7	0
Total Loans	38,722	33,245
Installment and other loans | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	190	149
Past Due	65	17
90+ (still accruing) Days Past Due	48	4
Non- Accrual	0	0
Total Loans	255	166
Installment and other loans | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	122	66
Installment and other loans | 30 to 59 Days Past Due | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	17	13
Installment and other loans | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	37	44
Installment and other loans | 60 to 89 Days Past Due | Loans Acquired with Credit Deterioration
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	0	0
Loans Excluding Acquired PCI
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	1,555,988	1,226,291
Past Due	5,141	4,441
90+ (still accruing) Days Past Due	625	0
Non- Accrual	6,931	5,165
Total Loans	1,568,060	1,235,897
Loans Excluding Acquired PCI | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	2,260	3,496
Loans Excluding Acquired PCI | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	2,256	945
Total Portfolio
Financing Receivable, Recorded Investment, Past Due [Line Items]
Current	1,577,905	1,237,249
Past Due	8,269	5,243
90+ (still accruing) Days Past Due	2,982	57
Non- Accrual	6,931	5,165
Total Loans	1,593,105	1,247,657
Total Portfolio | 30 to 59 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	2,486	$ 4,127
Total Portfolio | 60 to 89 Days Past Due
Financing Receivable, Recorded Investment, Past Due [Line Items]
Past Due	$ 2,801

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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Nature of Operations – Orrstown Financial Services, Inc. and subsidiaries is a financial holding company that operates Orrstown Bank, a commercial bank with banking and financial advisory offices 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 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 condensed consolidated financial statements include the accounts of Orrstown Financial Services, Inc. and its wholly owned subsidiaries, the Bank and Wheatland. 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, 2018 consolidated balance sheet information contained in this Quarterly Report on Form 10-Q was derived from the 2018 audited consolidated financial statements. Interim results are not necessarily indicative of results for a full year. 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, 2018. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. 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 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. 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, other assets and liabilities obtained or assumed in business combinations.

Leases - We evaluate our contracts at inception to determine if an arrangement is or contains a lease. Operating leases are included in operating lease ROU assets in Other assets and operating lease liabilities in Accrued interest payable and other liabilities in our consolidated balance sheets. The Company has no finance leases.

ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our 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. Our leases do not provide an implicit rate, so we use our incremental borrowing rate, which approximates our 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. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

We adopted ASU 2016-02, “Leases (Topic 842),” on January 1, 2019, the effective date of the guidance, using the practical expedient transition method whereby we did not revise comparative period information or disclosure. The new standard requires lessees to record assets and liabilities on the balance sheet for all leases with terms longer than 12 months. We elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows us to carryforward the historical lease classification. We also elected certain optional practical expedients,

including the hindsight practical expedient under which we considered the actual outcomes of lease renewals and terminations when measuring the lease term at adoption, and we made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet. We recognize these lease payments in the consolidated statements of income on a straight-line basis over the lease term. We have lease agreements with lease and non-lease components, and we have elected the practical expedient to account for these as a single lease component.

Our operating leases relate primarily to bank branches and office space. In conjunction with the adoption on January 1, 2019, we recognized operating lease liabilities of $7,971,000 and related lease assets of $7,494,000 on our balance sheet. The difference between the lease assets and lease liabilities primarily consists of deferred rent liabilities reclassified upon adoption to reduce the measurement of the lease assets. The standard did not materially impact our consolidated net income and had no impact on cash flows.

Recent Accounting Pronouncements - ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. 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 will be effective for interim and annual periods beginning after December 15, 2019. On October 16, 2019, the FASB extended the implementation deadline for smaller reporting and other companies until the fiscal year and interim periods beginning after December 15, 2022. The Company currently meets the requirements to be considered a smaller reporting company under SEC Regulation S-K and SEC Rule 405, and, pending the issuance of a final pronouncement, is evaluating the impact of the delay for adoption of the update.

We are working with a third 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 we anticipate the allowance for loan losses will increase under our current assumptions, we expect the impact of adopting ASU 2016-13 will be influenced by the composition, characteristics and quality of our loan and securities portfolios, as well as general economic conditions and forecasts at the adoption date.

ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The update simplifies how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 will be effective for the Company on January 1, 2020, with earlier adoption permitted, and is not expected to have a material impact on the Company's consolidated financial statements.

ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20). The update shortens the amortization period of certain callable debt securities held at a premium to the earliest call date unless applicable guidance related to certain pools of securities is applied to consider estimated prepayments. Under prior guidance, entities were generally required to amortize premiums on individual, non-pooled callable debt securities as a yield adjustment over the contractual life of the security. ASU 2017-08 does not change the accounting for callable debt securities held at a discount. On January 1, 2019, we adopted ASU 2016-18 with no material impact on our consolidated financial condition or results of operations.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement and should present a reconciliation of the beginning balance to the ending balance for each period for which a statement of comprehensive income is presented. The Company implemented the additional disclosure requirements effective with the filing of its March 31, 2019 Form 10-Q.

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GOODWILL AND OTHER INTANGIBLE ASSETS - Changes in Goodwill (Details) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Goodwill [Roll Forward]
Goodwill, beginning of year	$ 12,592	$ 719
Acquired goodwill	7,029	11,873
Adjustments to acquired goodwill	304	0
Goodwill, ending of period	$ 19,925	$ 12,592

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LEASES - Narrative (Details)	Sep. 30, 2019
Minimum
Lessee, Lease, Description [Line Items]
Lease terms	3 years
Maximum
Lessee, Lease, Description [Line Items]
Lease terms	50 years

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INCOME TAXES - Narrative (Details) - USD ($) $ in Thousands	3 Months Ended				9 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Business Acquisition [Line Items]
Income tax expense related to net securities gains	$ 489			$ 6	$ 994	$ 187
Tax benefit due to a change in tax law, treatment of acquired life insurance assets			$ 185
Income tax benefit	$ (1,340)			$ (644)	$ (1,682)	$ (1,510)
Hamilton Bancorp, Inc.
Business Acquisition [Line Items]
Income tax benefit		$ 334

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SHARE-BASED COMPENSATION PLANS - Schedule of Restricted Shares Compensation Expense (Details) - Orrstown 2011 Incentive Stock Plan - Restricted Stock - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Restricted share award expense	$ 470	$ 179	$ 1,146	$ 1,099
Restricted share award tax benefit	212	38	361	231
Fair value of shares vested	$ 2,056	$ 0	$ 2,500	$ 1,056

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SECURITIES AVAILABLE FOR SALE - Proceeds from Sales of AFS Securities and Gross Gains and Gross Losses (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Investments, Debt and Equity Securities [Abstract]
Proceeds from sales of AFS securities	$ 25,575	$ 25,070	$ 199,910	$ 113,180
Gross gains	2,328	185	4,956	1,237
Gross losses	0	$ 156	225	$ 346
Collateral Pledged
Debt Securities, Available-for-sale [Line Items]
AFS securities pledged to secure public funds, fair value	$ 161,627		$ 161,627		$ 164,233

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MERGERS AND ACQUISITIONS - Information About Acquired PCI Loans (Details) - USD ($) $ in Thousands		3 Months Ended	9 Months Ended
	May 01, 2019	Sep. 30, 2019	Sep. 30, 2019
Business Acquisition [Line Items]
Nonaccretable difference		$ (825)	$ (1,441)
Hamilton Bancorp, Inc.
Business Acquisition [Line Items]
Contractually required principal and interest at acquisition	$ 31,599
Nonaccretable difference	(8,616)
Expected cash flows at acquisition	22,983
Accretable yield	(3,497)
Estimated fair value of acquired PCI loans	$ 19,486

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Subsequent Events

9 Months Ended

Sep. 30, 2019

Subsequent Events [Abstract]

Subsequent Eventt

SUBSEQUENT EVENT

In October, 2019, the Board of Directors approved a plan to consolidate five Pennsylvania branch locations and to sell an operations center. The plan is part of the Company's ongoing efforts to target serving local communities, to invest in new technologies to support changes in client preferences, to grow the Bank, and to optimize returns for shareholders. Subject to regulatory approval, the five Pennsylvania branches will be consolidated into other, larger, Orrstown Bank branches.

One time charges associated with the branch consolidations and operations center sale are estimated to be in the range of $800,000 to $1,200,000 in the fourth quarter of 2019 and thereafter cost savings are estimated to be in the range of $1,500,000 to $2,000,000 annually, beginning in the second quarter of 2020. It is anticipated that the consolidations and operations center sale will be completed in the first quarter of 2020. Approximately one third of the operations center space will be leased back to the Bank, eliminating approximately 50,000 square feet of excess back office space. The sale is not expected to result in a material gain or loss or materially impact future earnings.

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LOANS AND ALLOWANCE FOR LOAN LOSSES (Tables)

9 Months Ended

Sep. 30, 2019

Receivables [Abstract]

Summary of Loan Portfolio, Excluding Residential Loans Held for Sale, Broken Out by Classes

The following table presents the loan portfolio by segment and class, excluding residential LHFS, at September 30, 2019 and December 31, 2018.

(Dollars in thousands)	September 30, 2019		December 31, 2018
Commercial real estate:
Owner occupied	$	171,327	$	129,650
Non-owner occupied	310,334		252,794
Multi-family	108,751		78,933
Non-owner occupied residential	120,395		100,367
Acquisition and development:
1-4 family residential construction	12,257		7,385
Commercial and land development	38,494		42,051
Commercial and industrial	215,734		160,964
Municipal	47,920		50,982
Residential mortgage:
First lien	353,811		235,296
Home equity - term	15,175		12,208
Home equity - lines of credit	159,930		143,616
Installment and other loans	38,977		33,411
Total Loans (1)	$	1,593,105	$	1,247,657

⁽¹⁾ Includes $425,940,000 and $135,009,000 of acquired loans at September 30, 2019 and December 31, 2018.

Bank's Ratings Based on its Internal Risk Rating System

The following table summarizes the Company’s loan portfolio ratings based on its internal risk rating system at September 30, 2019 and December 31, 2018.

(Dollars in thousands)	Pass		Special Mention		Non-Impaired Substandard		Impaired - Substandard		Doubtful		PCI Loans		Total
September 30, 2019
Commercial real estate:
Owner occupied	$	153,327	$	5,750	$	2,664	$	3,324	$	0	$	6,262	$	171,327
Non-owner occupied	298,268		10,685		0		0		0		1,381		310,334
Multi-family	101,479		5,537		940		105		0		690		108,751
Non-owner occupied residential	113,248		3,139		1,246		137		0		2,625		120,395
Acquisition and development:
1-4 family residential construction	12,004		253		0		0		0		0		12,257
Commercial and land development	37,582		348		564		0		0		0		38,494
Commercial and industrial	198,348		2,316		10,101		1,089		0		3,880		215,734
Municipal	47,920		0		0		0		0		0		47,920
Residential mortgage:
First lien	340,619		713		0		2,547		0		9,932		353,811
Home equity - term	15,068		76		0		11		0		20		15,175
Home equity - lines of credit	159,063		75		39		753		0		0		159,930
Installment and other loans	38,715		0		0		7		0		255		38,977
	$	1,515,641	$	28,892	$	15,554	$	7,973	$	0	$	25,045	$	1,593,105
December 31, 2018
Commercial real estate:
Owner occupied	$	121,903	$	3,024	$	987	$	1,880	$	0	$	1,856	$	129,650
Non-owner occupied	242,136		10,008		0		0		0		650		252,794
Multi-family	71,482		5,886		717		131		0		717		78,933
Non-owner occupied residential	97,590		736		1,197		309		0		535		100,367
Acquisition and development:
1-4 family residential construction	7,385		0		0		0		0		0		7,385
Commercial and land development	41,251		25		583		0		0		192		42,051
Commercial and industrial	150,286		2,278		2,940		286		0		5,174		160,964
Municipal	50,982		0		0		0		0		0		50,982
Residential mortgage:
First lien	229,971		0		0		2,877		0		2,448		235,296
Home equity - term	12,170		0		0		16		0		22		12,208
Home equity - lines of credit	142,638		165		15		798		0		0		143,616
Installment and other loans	33,229		15		1		0		0		166		33,411
	$	1,201,023	$	22,137	$	6,440	$	6,297	$	0	$	11,760	$	1,247,657

Impaired Loans by Class

The following table, which excludes PCI loans, summarizes impaired loans by segment and class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required at September 30, 2019 and December 31, 2018. 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 Allowance						Impaired Loans with No Specific Allowance
(Dollars in thousands)	Recorded Investment (Book Balance)		Unpaid Principal Balance (Legal Balance)		Related Allowance		Recorded Investment (Book Balance)		Unpaid Principal Balance (Legal Balance)
September 30, 2019
Commercial real estate:
Owner occupied	$	0	$	0	$	0	$	3,324	$	5,490
Multi-family	0		0		0		105		325
Non-owner occupied residential	26		48		0		111		319
Commercial and industrial	0		0		0		1,089		2,769
Residential mortgage:
First lien	498		498		36		2,049		3,098
Home equity - term	0		0		0		11		19
Home equity - lines of credit	0		0		0		753		1,081
Installment and other loans	0		0		0		7		17
	$	524	$	546	$	36	$	7,449	$	13,118
December 31, 2018
Commercial real estate:
Owner occupied	$	0	$	0	$	0	$	1,880	$	2,576
Multi-family	0		0		0		131		336
Non-owner occupied residential	0		0		0		309		632
Commercial and industrial	0		0		0		286		457
Residential mortgage:
First lien	743		743		38		2,134		2,727
Home equity - term	0		0		0		16		23
Home equity - lines of credit	0		0		0		798		1,081
	$	743	$	743	$	38	$	5,554	$	7,832

Average Recorded Investment in Impaired Loans and Related Interest Income

The following table, which excludes PCI loans, summarizes the average recorded investment in impaired loans and related recognized interest income for the three and nine months ended September 30, 2019 and 2018.

	2019				2018
(Dollars in thousands)	Average Impaired Balance		Interest Income Recognized		Average Impaired Balance		Interest Income Recognized
Three Months Ended September 30,
Commercial real estate:
Owner-occupied	$	2,126	$	0	$	1,569	$	1
Non-owner occupied	150		0		0		0
Multi-family	110		0		144		0
Non-owner occupied residential	173		0		336		0
Acquisition and development:
1-4 family residential construction	0		0		201		0
Commercial and industrial	765		0		316		0
Residential mortgage:
First lien	2,392		12		2,900		15
Home equity – term	12		0		18		0
Home equity - lines of credit	768		0		692		0
Installment and other loans	8		0		1		0
	$	6,504	$	12	$	6,177	$	16
Nine Months Ended September 30,
Commercial real estate:
Owner occupied	$	1,950	$	1	$	1,372	$	2
Non-owner occupied	60		0		2,395		0
Multi-family	118		0		152		0
Non-owner occupied residential	246		0		355		0
Acquisition and development:
1-4 family residential construction	0		0		235		0
Commercial and industrial	469		0		330		0
Residential mortgage:
First lien	2,574		41		3,312		44
Home equity - term	13		0		20		0
Home equity - lines of credit	752		1		621		1
Installment and other loans	8		0		6		0
	$	6,190	$	43	$	8,798	$	47

Troubled Debt Restructurings

The following table presents impaired loans that are TDRs, with the recorded investment at September 30, 2019 and December 31, 2018.

	September 30, 2019			December 31, 2018
(Dollars in thousands)	Number of Contracts	Recorded Investment		Number of Contracts	Recorded Investment
Accruing:
Commercial real estate:
Owner occupied	1	$	30	1	$	39
Residential mortgage:
First lien	10	992		11	1,069
Home equity - lines of credit	1	20		1	24
	12	1,042		13	1,132
Nonaccruing:
Commercial real estate:
Owner occupied	4	1,898		1	37
Residential mortgage:
First lien	5	368		8	658
	9	2,266		9	695
	21	$	3,308	22	$	1,827

Loan Portfolio Summarized by Aging Categories of Performing Loans and Nonaccrual Loans

The following table presents the classes of loan portfolio summarized by aging categories of performing loans and nonaccrual loans at September 30, 2019 and December 31, 2018.

			Days Past Due
(Dollars in thousands)	Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans
September 30, 2019
Commercial real estate:
Owner occupied	$	161,771	$	0	$	0	$	0	$	0	$	3,294	$	165,065
Non-owner occupied	308,823		0		0		130		130		0		308,953
Multi-family	107,707		0		0		249		249		105		108,061
Non-owner occupied residential	117,301		225		69		38		332		137		117,770
Acquisition and development:
1-4 family residential construction	12,257		0		0		0		0		0		12,257
Commercial and land development	38,358		0		0		136		136		0		38,494
Commercial and industrial	210,112		320		333		0		653		1,089		211,854
Municipal	47,920		0		0		0		0		0		47,920
Residential mortgage:
First lien	339,460		1,101		1696		67		2,864		1,555		343,879
Home equity - term	15,122		17		0		5		22		11		15,155
Home equity - lines of credit	158,601		475		121		0		596		733		159,930
Installment and other loans	38,556		122		37		0		159		7		38,722
Subtotal	1,555,988		2,260		2,256		625		5,141		6,931		1,568,060
Loans acquired with credit deterioration:
Commercial real estate:
Owner occupied	6,089		131		0		42		173		0		6,262
Non-owner occupied	585		0		0		796		796		0		1,381
Multi-family	690		0		0		0		0		0		690
Non-owner occupied residential	2,025		0		188		412		600		0		2,625
Commercial and industrial	3,863		0		0		17		17		0		3,880
Residential mortgage:
First lien	8,459		74		357		1,042		1,473		0		9,932
Home equity - term	16		4		0		0		4		0		20
Installment and other loans	190		17		0		48		65		0		255
Subtotal	21,917		226		545		2,357		3,128		0		25,045
	$	1,577,905	$	2,486	$	2,801	$	2,982	$	8,269	$	6,931	$	1,593,105

			Days Past Due
(Dollars in thousands)	Current		30-59		60-89		90+ (still accruing)		Total Past Due		Non- Accrual		Total Loans
December 31, 2018
Commercial real estate:
Owner occupied	$	125,887	$	66	$	0	$	0	$	66	$	1,841	$	127,794
Non-owner occupied	252,144		0		0		0		0		0		252,144
Multi-family	78,085		0		0		0		0		131		78,216
Non-owner occupied residential	99,268		226		29		0		255		309		99,832
Acquisition and development:
1-4 family residential construction	7,385		0		0		0		0		0		7,385
Commercial and land development	41,822		37		0		0		37		0		41,859
Commercial and industrial	154,988		411		105		0		516		286		155,790
Municipal	50,982		0		0		0		0		0		50,982
Residential mortgage:
First lien	228,714		1,592		734		0		2,326		1,808		232,848
Home equity - term	11,487		678		5		0		683		16		12,186
Home equity - lines of credit	142,394		420		28		0		448		774		143,616
Installment and other loans	33,135		66		44		0		110		0		33,245
Subtotal	1,226,291		3,496		945		0		4,441		5,165		1,235,897
Loans acquired with credit deterioration:
Commercial real estate:
Owner occupied	1,784		0		72		0		72		0		1,856
Non-owner occupied	650		0		0		0		0		0		650
Multi-family	717		0		0		0		0		0		717
Non-owner occupied residential	535		0		0		0		0		0		535
Acquisition and development:
Commercial and land development	192		0		0		0		0		0		192
Commercial and industrial	4,943		231		0		0		231		0		5,174
Residential mortgage:
First lien	1,971		382		42		53		477		0		2,448
Home equity - term	17		5		0		0		5		0		22
Installment and other loans	149		13		0		4		17		0		166
Subtotal	10,958		631		114		57		802		0		11,760
	$	1,237,249	$	4,127	$	1,059	$	57	$	5,243	$	5,165	$	1,247,657

Activity in Allowance for Loan Losses

The following table presents the activity in the ALL for the three and nine months ended September 30, 2019 and 2018.

	Commercial										Consumer
(Dollars in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total
Three Months Ended
September 30, 2019
Balance, beginning of period	$	6,847	$	1,008	$	2,120	$	94	$	10,069	$	3,734	$	209	$	3,943	$	448	$	14,460
Provision for loan losses	465		(188)		269		(1)		545		27		50		77		(322)		300
Charge-offs	0		0		(50)		0		(50)		(24)		(49)		(73)		0		(123)
Recoveries	111		0		33		0		144		5		23		28		0		172
Balance, end of period	$	7,423	$	820	$	2,372	$	93	$	10,708	$	3,742	$	233	$	3,975	$	126	$	14,809
September 30, 2018
Balance, beginning of period	$	6,680	$	720	$	1,598	$	80	$	9,078	$	3,544	$	230	$	3,774	$	585	$	13,437
Provision for loan losses	194		19		(38)		(1)		174		(45)		146		101		(75)		200
Charge-offs	(17)		0		0		0		(17)		(62)		(80)		(142)		0		(159)
Recoveries	200		0		1		0		201		102		31		133		0		334
Balance, end of period	$	7,057	$	739	$	1,561	$	79	$	9,436	$	3,539	$	327	$	3,866	$	510	$	13,812
Nine Months Ended
September 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	347		1		753		(5)		1,096		184		64		248		(444)		900
Charge-offs	(25)		0		(140)		0		(165)		(295)		(121)		(416)		0		(581)
Recoveries	225		2		103		0		330		100		46		146		0		476
Balance, end of period	$	7,423	$	820	$	2,372	$	93	$	10,708	$	3,742	$	233	$	3,975	$	126	$	14,809
September 30, 2018
Balance, beginning of period	$	6,763	$	417	$	1,446	$	84	$	8,710	$	3,400	$	211	$	3,611	$	475	$	12,796
Provision for loan losses	(217)		319		114		(5)		211		157		197		354		35		600
Charge-offs	(17)		0		0		0		(17)		(148)		(198)		(346)		0		(363)
Recoveries	528		3		1		0		532		130		117		247		0		779
Balance, end of period	$	7,057	$	739	$	1,561	$	79	$	9,436	$	3,539	$	327	$	3,866	$	510	$	13,812

Summary of Ending Loan Balances Individually Evaluated for Impairment Based on Loan Segment

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 September 30, 2019 and December 31, 2018, including PCI loans.

	Commercial										Consumer
(Dollars in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total
September 30, 2019
Loans allocated by:
Individually evaluated for impairment	$	3,566	$	0	$	1,089	$	0	$	4,655	$	3,311	$	7	$	3,318	$	0	$	7,973
Collectively evaluated for impairment	707,241		50,751		214,645		47,920		1,020,557		525,605		38,970		564,575		0		1,585,132
	$	710,807	$	50,751	$	215,734	$	47,920	$	1,025,212	$	528,916	$	38,977	$	567,893	$	0	$	1,593,105
ALL allocated by:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	36	$	0	$	36	$	0	$	36
Collectively evaluated for impairment	7,423		820		2,372		93		10,708		3,706		233		3,939		126		14,773
	$	7,423	$	820	$	2,372	$	93	$	10,708	$	3,742	$	233	$	3,975	$	126	$	14,809
December 31, 2018
Loans allocated by:
Individually evaluated for impairment	$	2,320	$	0	$	286	$	0	$	2,606	$	3,691	$	0	$	3,691	$	0	$	6,297
Collectively evaluated for impairment	559,424		49,436		160,678		50,982		820,520		387,429		33,411		420,840		0		1,241,360
	$	561,744	$	49,436	$	160,964	$	50,982	$	823,126	$	391,120	$	33,411	$	424,531	$	0	$	1,247,657
ALL allocated by:
Individually evaluated for impairment	$	0	$	0	$	0	$	0	$	0	$	38	$	0	$	38	$	0	$	38
Collectively evaluated for impairment	6,876		817		1,656		98		9,447		3,715		244		3,959		570		13,976
	$	6,876	$	817	$	1,656	$	98	$	9,447	$	3,753	$	244	$	3,997	$	570	$	14,014

Schedule of Activity for the Accretable Yield of Purchased Impaired Loans

The following table provides activity for the accretable yield of purchased credit impaired loans for the three and nine months ended September 30, 2019.

	Three Months Ended		Nine Months Ended
(Dollars in thousands)	September 30, 2019		September 30, 2019
Accretable yield, beginning of period	$	4,988	$	2,065
New loans purchased	0		3,497
Accretion of income	(422)		(1,814)
Reclassifications from nonaccretable difference due to improvement in expected cash flows	825		1,441
Other changes, net	319		521
Accretable yield, end of period	$	5,710	$	5,710