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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2023
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 |

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer |  | ¨ |  | Accelerated filer |  | ☒
Non-accelerated filer |  | ¨ |  | Smaller reporting company |  | ☒
|  |  |  | Emerging growth company |  | ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.). Yes ☐ No x
Number of shares outstanding of the registrant’s Common Stock as of November 3, 2023: 10,614,071.

Table of Contents
ORRSTOWN FINANCIAL SERVICES, INC.
INDEX

|  | Page
Part I – FINANCIAL INFORMATION |
| Glossary | 3
Item 1. | Financial Statements | 4
| Consolidated Balance Sheets (Unaudited) | 4
| Consolidated Statements of Income (Loss) (Unaudited) | 5
| Consolidated Statements of Comprehensive (Loss) Income (Unaudited) | 7
| Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) | 8
| Consolidated Statements of Cash Flows (Unaudited) | 10
| Notes to Consolidated Financial Statements (Unaudited) | 12
Item 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 51
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 82
Item 4. | Controls and Procedures | 84
PART II – OTHER INFORMATION |
Item 1. | Legal Proceedings | 85
Item 1A. | Risk Factors | 85
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 85
Item 3. | Defaults upon Senior Securities | 85
Item 4. | Mine Safety Disclosures | 85
Item 5. | Other Information | 85
Item 6. | Exhibits | 86
SIGNATURES | 87

2

Table of Contents
Glossary of Defined Terms
The following terms may be used throughout this Report, including the unaudited condensed consolidated financial statements and related notes.

Term | Definition
ACL | Allowance for credit losses
ALL | Allowance for loan losses
AFS | Available-for-sale
AOCI | Accumulated other comprehensive income (loss)
ASC | Accounting Standards Codification
ASU | Accounting Standards Update
Bank | Orrstown Bank, the commercial banking subsidiary of Orrstown Financial Services, Inc.
CDI | Core deposit intangible
CECL | Current expected credit losses
CMO | Collateralized mortgage obligation
EITC | Educational Improvement Tax Credit Program
ERM | Enterprise Risk Management
Exchange Act | Securities Exchange Act of 1934, as amended
FASB | Financial Accounting Standards Board
FDIC | Federal Deposit Insurance Corporation
FDM | Financial difficulty modification
FHLB | Federal Home Loan Bank
FRB | Board of Governors of the Federal Reserve System
GAAP | Accounting principles generally accepted in the United States of America
GDP | Gross Domestic Deposit
GSE | U.S. government-sponsored enterprise
IEL | Individually evaluated loan
IRC | Internal Revenue Code of 1986, as amended
LHFS | Loans held for sale
LIBOR | London Interbank Offered Rate
MBS | Mortgage-backed securities
MSR | Mortgage servicing right
OCI | Other comprehensive income
OREO | Other real estate owned
OTTI | Other-than-temporary impairment
2011 Plan | 2011 Orrstown Financial Services, Inc. Incentive Stock Plan
PCD loans | Purchased credit deteriorated loans
PCI loans | Purchased credit impaired loans
PACE | Property Assessed Clean Energy loans
PPP | Paycheck Protection Program
ReRemic | Re-securitization of Real Estate Mortgage Investment Conduits
ROU | Right of use (leases)
SBA | U.S. Small Business Administration
SEC | Securities and Exchange Commission
Securities Act | Securities Act of 1933, as amended
SOFR | Secured Overnight Financing Rate
TDR | Troubled debt restructuring
Unless the context otherwise requires, the terms “Orrstown,” “we,” “us,” “our,” and “Company” refer to Orrstown Financial Services, Inc. and its subsidiaries.

3

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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
ORRSTOWN FINANCIAL SERVICES, INC.

(Dollars in thousands, except per share amounts) | September 30, 2023 |  | December 31, 2022
Assets |  |  |
Cash and due from banks | $ | 34,728 |  |  | $ | 28,477 |
Interest-bearing deposits with banks | 60,211 |  |  | 32,346 |
Cash and cash equivalents | 94,939 |  |  | 60,823 |
Restricted investments in bank stocks | 12,987 |  |  | 10,642 |
Securities available for sale (amortized cost of $553,222 and $563,278 at September 30, 2023 and December 31, 2022, respectively) | 495,162 |  |  | 513,728 |
Loans held for sale, at fair value | 6,448 |  |  | 10,880 |
Loans | 2,266,836 |  |  | 2,151,232 |
Less: Allowance for credit losses | (28,278) |  |  | (25,178) |
Net loans | 2,238,558 |  |  | 2,126,054 |
Premises and equipment, net | 29,385 |  |  | 29,328 |
Cash surrender value of life insurance | 72,754 |  |  | 71,760 |
Goodwill | 18,724 |  |  | 18,724 |
Other intangible assets, net | 2,650 |  |  | 3,078 |
Accrued interest receivable | 12,212 |  |  | 11,027 |
Deferred tax assets, net | 25,500 |  |  | 24,031 |
Other assets | 45,116 |  |  | 42,333 |
Total assets | $ | 3,054,435 |  |  | $ | 2,922,408 |
Liabilities |  |  |
Deposits: |  |  |
Noninterest-bearing | $ | 435,488 |  |  | $ | 494,131 |
Interest-bearing | 2,110,947 |  |  | 1,950,807 |
Deposits held for assumption in connection with sale of bank branch | — |  |  | 31,307 |
Total deposits | 2,546,435 |  |  | 2,476,246 |
Securities sold under agreements to repurchase and federal funds purchased | 17,991 |  |  | 17,251 |
FHLB advances and other borrowings | 157,250 |  |  | 106,139 |
Subordinated notes | 32,076 |  |  | 32,026 |
Other liabilities | 57,603 |  |  | 61,850 |
Total liabilities | 2,811,355 |  |  | 2,693,512 |
Commitments and contingencies |  |  |
Shareholders’ Equity |  |  |
Preferred stock, $1.25 par value per share; 500,000 shares authorized; no shares issued or outstanding | — |  |  | — |
Common stock, no par value—$0.05205 stated value per share; 50,000,000 shares authorized; 11,206,480 shares issued and 10,613,271 outstanding at September 30, 2023; 11,229,242 shares issued and 10,671,413 outstanding at December 31, 2022 | 583 |  |  | 584 |
Additional paid - in capital | 188,458 |  |  | 189,264 |
Retained earnings | 112,144 |  |  | 92,473 |
Accumulated other comprehensive loss | (44,343) |  |  | (39,913) |
Treasury stock—593,209 and 557,829 shares, at cost at September 30, 2023 and December 31, 2022, respectively | (13,762) |  |  | (13,512) |
Total shareholders’ equity | 243,080 |  |  | 228,896 |
Total liabilities and shareholders’ equity | $ | 3,054,435 |  |  | $ | 2,922,408 |

The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.
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Condensed Consolidated Statements of Income (Loss) (Unaudited)
ORRSTOWN FINANCIAL SERVICES, INC.

| Three Months Ended |  | Nine Months Ended
(Dollars in thousands, except per share amounts) | September 30, 2023 |  | September 30, 2022 |  | September 30, 2023 |  | September 30, 2022
Interest income |  |  |  |  |  |  |
Loans | $ | 32,738 |  |  | $ | 23,152 |  |  | $ | 92,685 |  |  | $ | 66,548 |
Investment securities - taxable | 4,459 |  |  | 2,907 |  |  | 13,244 |  |  | 6,462 |
Investment securities - tax-exempt | 861 |  |  | 1,160 |  |  | 2,591 |  |  | 3,013 |
Short-term investments | 633 |  |  | 200 |  |  | 1,349 |  |  | 536 |
Total interest income | 38,691 |  |  | 27,419 |  |  | 109,869 |  |  | 76,559 |
Interest expense |  |  |  |  |  |  |
Deposits | 10,582 |  |  | 1,372 |  |  | 25,392 |  |  | 2,758 |
Securities sold under agreements to repurchase and federal funds purchased | 31 |  |  | 10 |  |  | 84 |  |  | 24 |
FHLB advances and other borrowings | 1,354 |  |  | 78 |  |  | 3,992 |  |  | 121 |
Subordinated notes | 505 |  |  | 504 |  |  | 1,513 |  |  | 1,510 |
Total interest expense | 12,472 |  |  | 1,964 |  |  | 30,981 |  |  | 4,413 |
Net interest income | 26,219 |  |  | 25,455 |  |  | 78,888 |  |  | 72,146 |
Provision for credit losses | 136 |  |  | 1,500 |  |  | 1,264 |  |  | 3,575 |
Net interest income after provision for credit losses | 26,083 |  |  | 23,955 |  |  | 77,624 |  |  | 68,571 |
Noninterest income |  |  |  |  |  |  |
Service charges on deposit accounts | 1,020 |  |  | 977 |  |  | 2,966 |  |  | 2,861 |
Interchange income | 963 |  |  | 1,014 |  |  | 2,921 |  |  | 3,059 |
Other service charges, commissions and fees | 240 |  |  | 239 |  |  | 702 |  |  | 622 |
Swap fee income | 255 |  |  | 197 |  |  | 451 |  |  | 1,935 |
Trust and investment management income | 1,853 |  |  | 2,006 |  |  | 5,668 |  |  | 5,852 |
Brokerage income | 973 |  |  | 947 |  |  | 2,727 |  |  | 2,864 |
Mortgage banking activities | (142) |  |  | (1,014) |  |  | 448 |  |  | 205 |
Income from life insurance | 620 |  |  | 583 |  |  | 1,855 |  |  | 1,742 |
Investment securities gain (losses) | 2 |  |  | (14) |  |  | (8) |  |  | (163) |
Other income | 141 |  |  | 1,123 |  |  | 1,431 |  |  | 1,749 |
Total noninterest income | 5,925 |  |  | 6,058 |  |  | 19,161 |  |  | 20,726 |
Noninterest expenses |  |  |  |  |  |  |
Salaries and employee benefits | 12,885 |  |  | 12,705 |  |  | 38,135 |  |  | 35,354 |
Occupancy | 1,089 |  |  | 1,166 |  |  | 3,249 |  |  | 3,586 |
Furniture and equipment | 1,371 |  |  | 1,214 |  |  | 3,810 |  |  | 3,784 |
Data processing | 1,248 |  |  | 1,192 |  |  | 3,666 |  |  | 3,410 |
Automated teller and interchange fees | 314 |  |  | 329 |  |  | 920 |  |  | 952 |
Advertising and bank promotions | 332 |  |  | 278 |  |  | 1,656 |  |  | 1,514 |
FDIC insurance | 477 |  |  | 294 |  |  | 1,500 |  |  | 767 |
Professional services | 965 |  |  | 887 |  |  | 2,203 |  |  | 2,417 |
Directors' compensation | 199 |  |  | 213 |  |  | 667 |  |  | 674 |
Taxes other than income | 387 |  |  | 488 |  |  | 847 |  |  | 1,160 |
Intangible asset amortization | 228 |  |  | 272 |  |  | 717 |  |  | 845 |
Provision for legal settlement | — |  |  | 13,000 |  |  | — |  |  | 13,000 |
Restructuring expenses | — |  |  | 3,155 |  |  | — |  |  | 3,155 |
Other operating expenses | 952 |  |  | 1,219 |  |  | 4,081 |  |  | 3,952 |
Total noninterest expenses | 20,447 |  |  | 36,412 |  |  | 61,451 |  |  | 74,570 |
continued

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| Three Months Ended |  | Nine Months Ended
| September 30, 2023 |  | September 30, 2022 |  | September 30, 2023 |  | September 30, 2022
Income (loss) before income tax expense (benefit) | 11,561 |  |  | (6,399) |  |  | 35,334 |  |  | 14,727 |
Income tax expense (benefit) | 2,535 |  |  | (1,571) |  |  | 7,314 |  |  | 2,316 |
Net income (loss) | $ | 9,026 |  |  | $ | (4,828) |  |  | $ | 28,020 |  |  | $ | 12,411 |
Per share information: |  |  |  |  |  |  |
Basic earnings (loss) per share | $ | 0.87 |  |  | $ | (0.47) |  |  | $ | 2.71 |  |  | $ | 1.17 |
Diluted earnings (loss) per share | 0.87 |  |  | (0.47) |  |  | 2.68 |  |  | 1.16 |
Dividends paid per share | 0.20 |  |  | 0.19 |  |  | 0.60 |  |  | 0.57 |

The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.
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Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited)
ORRSTOWN FINANCIAL SERVICES, INC.

| Three Months Ended |  | Nine Months Ended
(Dollars in thousands) | September 30, 2023 |  | September 30, 2022 |  | September 30, 2023 |  | September 30, 2022
Net income (loss) | $ | 9,026 |  |  | $ | (4,828) |  |  | $ | 28,020 |  |  | $ | 12,411 |
Other comprehensive (loss) income, net of tax: |  |  |  |  |  |  |
Unrealized losses on securities available for sale arising during the period | (14,448) |  |  | (17,283) |  |  | (8,510) |  |  | (60,242) |
Reclassification adjustment for losses realized in net income | — |  |  | — |  |  | — |  |  | 149 |
Net unrealized losses on securities available for sale | (14,448) |  |  | (17,283) |  |  | (8,510) |  |  | (60,093) |
Tax effect | 3,179 |  |  | 3,629 |  |  | 1,872 |  |  | 12,620 |
Total other comprehensive loss, net of tax and reclassification adjustments on securities available for sale | (11,269) |  |  | (13,654) |  |  | (6,638) |  |  | (47,473) |
Unrealized gains (loss) on interest rate swaps used in cash flow hedges | 1,439 |  |  | (562) |  |  | 2,831 |  |  | (562) |
Reclassification adjustment for losses realized in net income | — |  |  | — |  |  | — |  |  | — |
Net unrealized gains (loss) on interest rate swaps used in cash flow hedges | 1,439 |  |  | (562) |  |  | 2,831 |  |  | (562) |
Tax effect | (317) |  |  | 118 |  |  | (623) |  |  | 118 |
Total other comprehensive income (loss), net of tax and reclassification adjustments on interest rate swaps used in cash flow hedges | 1,122 |  |  | (444) |  |  | 2,208 |  |  | (444) |
Total other comprehensive loss, net of tax and reclassification adjustments | (10,147) |  |  | (14,098) |  |  | (4,430) |  |  | (47,917) |
Total comprehensive (loss) income | $ | (1,121) |  |  | $ | (18,926) |  |  | $ | 23,590 |  |  | $ | (35,506) |

The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.
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Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
ORRSTOWN FINANCIAL SERVICES, INC.

| Three Months Ended September 30, 2023
(Dollars in thousands, except per share amounts) | Common Stock |  | Additional Paid-In Capital |  | Retained Earnings |  | Accumulated Other Comprehensive Loss |  | Treasury Stock |  | Total Shareholders’ Equity
Balance, July 1, 2023 | $ | 583 |  |  | $ | 187,859 |  |  | $ | 105,239 |  |  | $ | (34,196) |  |  | $ | (13,844) |  |  | $ | 245,641 |
Net income | — |  |  | — |  |  | 9,026 |  |  | — |  |  | — |  |  | 9,026 |
Total other comprehensive loss, net of taxes | — |  |  | — |  |  | — |  |  | (10,147) |  |  | — |  |  | (10,147) |
Cash dividends ($0.20 per share) | — |  |  | — |  |  | (2,121) |  |  | — |  |  | — |  |  | (2,121) |
Share-based compensation plans: |  |  |  |  |  |  |  |  |  |  |
1,600 net common shares acquired and 3,446 net treasury shares issued, including compensation expense totaling $1,228 | — |  |  | 599 |  |  | — |  |  | — |  |  | 82 |  |  | 681 |
Balance, September 30, 2023 | $ | 583 |  |  | $ | 188,458 |  |  | $ | 112,144 |  |  | $ | (44,343) |  |  | $ | (13,762) |  |  | $ | 243,080 |
| Nine Months Ended September 30, 2023
(Dollars in thousands, except per share amounts) | Common Stock |  | Additional Paid-In Capital |  | Retained Earnings |  | Accumulated Other Comprehensive Loss |  | Treasury Stock |  | Total Shareholders’ Equity
Balance, January 1, 2023 | $ | 584 |  |  | $ | 189,264 |  |  | $ | 92,473 |  |  | $ | (39,913) |  |  | $ | (13,512) |  |  | $ | 228,896 |
Cumulative effect of change in accounting principle - CECL (Note 3) | — |  |  | — |  |  | (1,984) |  |  | — |  |  | — |  |  | (1,984) |
Net income | — |  |  | — |  |  | 28,020 |  |  | — |  |  | — |  |  | 28,020 |
Total other comprehensive loss, net of taxes | — |  |  | — |  |  | — |  |  | (4,430) |  |  | — |  |  | (4,430) |
Cash dividends ($0.60 per share) | — |  |  | — |  |  | (6,365) |  |  | — |  |  | — |  |  | (6,365) |
Share-based compensation plans: |  |  |  |  |  |  |  |  |  |  |
22,762 net common shares acquired and 35,380 net treasury shares acquired, including compensation expense totaling $1,763 | (1) |  |  | (806) |  |  | — |  |  | — |  |  | (250) |  |  | (1,057) |
Balance, September 30, 2023 | $ | 583 |  |  | $ | 188,458 |  |  | $ | 112,144 |  |  | $ | (44,343) |  |  | $ | (13,762) |  |  | $ | 243,080 |

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

The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.
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Condensed Consolidated Statements of Cash Flows (Unaudited)
ORRSTOWN FINANCIAL SERVICES, INC.

| Nine Months Ended
(Dollars in thousands) | September 30, 2023 |  | September 30, 2022
Cash flows from operating activities |  |  |
Net income | $ | 28,020 |  |  | $ | 12,411 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |
Net premium amortization | 1,534 |  |  | 1,319 |
Depreciation and amortization expense | 3,194 |  |  | 3,536 |
Provision for credit losses | 1,264 |  |  | 3,575 |
Share-based compensation | 1,763 |  |  | 1,608 |
Gains on sales of loans originated for sale | (214) |  |  | (1,305) |
Fair value adjustments on loans held for sale | 182 |  |  | 1,405 |
Mortgage loans originated for sale | (14,924) |  |  | (72,247) |
Proceeds from sales of loans originated for sale | 19,388 |  |  | 67,554 |
Gains on sale of portfolio loans | — |  |  | (306) |
Net gain on sale of OREO and premises held for sale | (436) |  |  | — |
Writedown of OREO and premises held for sale | — |  |  | 1,297 |
Net loss on disposal of premises and equipment | 242 |  |  | 483 |
Deferred income tax expense (benefit) | 339 |  |  | (2,489) |
Investment securities losses | 8 |  |  | 163 |
Provision for legal settlement | — |  |  | 13,000 |
Return on investments in limited partnerships | (27) |  |  | (964) |
Net unrealized gains on derivatives | (87) |  |  | (83) |
Income from life insurance | (1,855) |  |  | (1,742) |
Premium on branch sale | (1,102) |  |  | — |
Decrease (increase) in accrued interest receivable and other assets | 2,171 |  |  | (1,660) |
(Decrease) increase in accrued interest payable and other liabilities | (9,975) |  |  | 10,358 |
Other, net | 520 |  |  | 1,845 |
Net cash provided by operating activities | 30,005 |  |  | 37,758 |
Cash flows from investing activities |  |  |
Proceeds from sales of AFS securities | 19,900 |  |  | 3,075 |
Maturities, repayments and calls of AFS securities | 27,456 |  |  | 42,442 |
Purchases of AFS securities | (39,387) |  |  | (139,580) |
Net (purchases) redemptions of restricted investments in bank stocks | (2,345) |  |  | 783 |
Net distributions from investments in limited partnerships | 179 |  |  | 1,410 |
Net increase in loans | (115,681) |  |  | (109,424) |
Proceeds from sales of portfolio loans | — |  |  | 4,443 |
Investment in limited partnerships | (1,037) |  |  | — |
Purchases of bank premises and equipment | (1,771) |  |  | (805) |
Proceeds from disposal of OREO and premises held for sale | 2,536 |  |  | — |
Proceeds from disposal of premises and equipment | 43 |  |  | — |
Net cash paid in branch sale | (17,641) |  |  | — |
Death benefit proceeds from life insurance contracts | 342 |  |  | 142 |
Other | (72) |  |  | — |
Net cash used in investing activities | (127,478) |  |  | (197,514) |
continued

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| Nine Months Ended
| September 30, 2023 |  | September 30, 2022
Cash flows from financing activities |  |  |
Net increase in deposits | 88,924 |  |  | 40,917 |
Net increase (decrease) in borrowings with original maturities less than 90 days | 13,306 |  |  | (2,236) |
Proceeds from FHLB advances with original maturities greater than 90 days | 40,000 |  |  | — |
Payments on FHLB advances with original maturities greater than 90 days | (1,455) |  |  | (329) |
Dividends paid | (6,365) |  |  | (6,244) |
Acquisition of treasury stock | (2,579) |  |  | (14,056) |
Shares repurchased as treasury stock for employee taxes associated with restricted stock vesting | (378) |  |  | (262) |
Proceeds from issuance of employee stock purchase plan shares | 136 |  |  | 183 |
Net cash provided by financing activities | 131,589 |  |  | 17,973 |
Net increase (decrease) in cash and cash equivalents | 34,116 |  |  | (141,783) |
Cash and cash equivalents at beginning of period | 60,823 |  |  | 208,710 |
Cash and cash equivalents at end of period | $ | 94,939 |  |  | $ | 66,927 |
| Nine Months Ended
| September 30, 2023 |  | September 30, 2022
Supplemental disclosures of cash flow information: |  |  |
Cash paid during the period for: |  |  |
Interest | $ | 29,655 |  |  | $ | 3,917 |
Income taxes | 4,750 |  |  | 3,400 |
Supplemental schedule of noncash activities: |  |  |
Loans transferred from LHFS to portfolio loans | — |  |  | 1,510 |
OREO acquired in settlement of loans | 85 |  |  | — |
Premise and equipment transferred to held for sale | — |  |  | 2,844 |
Lease liabilities arising from obtaining ROU assets | 2,416 |  |  | 94 |

The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.
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Notes to Condensed Consolidated Financial Statements (Unaudited)
(All dollar amounts presented in the tables, except per share amounts, are in thousands)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See the Glossary of Defined Terms at the beginning of this Report for terms used throughout the unaudited condensed consolidated financial statements and related notes of this Form 10-Q.
Nature of Operations – Orrstown Financial Services, Inc. is a financial holding company that operates Orrstown Bank, a commercial bank providing banking and financial advisory services in Berks, Cumberland, Dauphin, Franklin, Lancaster, Perry and York Counties, Pennsylvania, and in Anne Arundel, Baltimore, Howard and Washington Counties, Maryland. The Company operates in the community banking segment and engages in lending activities, including commercial, residential, commercial mortgages, construction, municipal, and various forms of consumer lending, and deposit services, including checking, savings, time, and money market deposits. The Company’s lending area also includes adjacent counties in Pennsylvania and Maryland, as well as Loudon County, Virginia and Berkeley, Jefferson and Morgan Counties, West Virginia. The Company also provides fiduciary services, investment advisory, insurance and brokerage services. The Company and the Bank are subject to regulation by certain federal and state agencies and undergo periodic examinations by such regulatory authorities.
Basis of Presentation – The accompanying unaudited condensed consolidated financial statements include the accounts of Orrstown Financial Services, Inc. and its wholly owned subsidiary, the Bank. The Company has prepared these unaudited condensed consolidated financial statements in accordance with GAAP for interim financial information, SEC rules that permit reduced disclosure for interim periods, and Article 10 of Regulation S-X. In the opinion of management, all adjustments (all of which are of a normal recurring nature) that are necessary for a fair statement are reflected in the unaudited condensed consolidated financial statements. There have been no material changes to the Company's significant accounting policies for the nine months ended September 30, 2023, except for the adoption of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces our ALL policy under the incurred loss model, and adoption of ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which replaces our TDR accounting model policy, which are both discussed below in Recently Adopted Accounting Standards. The December 31, 2022 consolidated balance sheet information contained in this Quarterly Report on Form 10-Q was derived from the Company's 2022 audited consolidated financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Operating results for the nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023. All significant intercompany transactions and accounts have been eliminated. Certain reclassifications have been made to the prior period amounts to conform with current period classifications. These reclassifications did not have a material impact on the Company's consolidated financial condition, results of operations or statement of consolidated cash flows.
The Company's management has evaluated all activity of the Company and concluded that subsequent events are properly reflected in the Company's unaudited condensed consolidated financial statements and notes as required by GAAP.
To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.
Derivatives - FASB ASC 815, Derivatives and Hedging (“ASC 8 15”), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows,
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or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.
The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. The Company's objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed or variable amounts from a counterparty in exchange for the Company making variable-rate or fixed rate payments over the life of the agreements without exchange of the underlying notional amount.
Changes to the fair value of derivatives designated and that qualify as cash flow hedges are recorded in AOCI and are subsequently reclassified into earnings in the period that the hedged transaction affects earnings. The Company discontinues cash flow hedge accounting if it is probable the forecasted hedged transactions will not occur in the initially identified time period due to circumstances. Upon discontinuance, the associated gains and losses deferred in AOCI are reclassified immediately into earnings and subsequent changes in the fair value of the cash flow hedge are recognized in earnings. At September 30, 2023, the Company had two interest rate swaps designated as hedging instruments with a total notional value of $125.0 million compared to two interest rate swaps designated as hedging instruments with a total notional value of $100.0 million at December 31, 2022.
Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps and interest rate caps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps and interest rate caps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. At September 30, 2023 and December 31, 2022, the Company had interest rate swaps not designated as hedges with a total notional value of $319.5 million and $268.8 million, respectively.
The Company also may enter into risk participation agreements with a financial institution counterparty for an interest rate derivative contract related to a loan in which the Company may be a participant or the agent bank. The risk participation agreement provides credit protection to the agent bank should the borrower fail to perform on its interest rate derivative contracts with the agent bank. The Company manages its credit risk on risk participation agreements by monitoring the creditworthiness of the borrower, which follows the same credit review process as derivative instruments entered into directly with the borrower. The notional amount of a risk participation agreement reflects the Company's pro-rata share of the derivative instrument, consistent with its share of the related participated loan. Changes in the fair value of the risk participation agreement are recognized directly into earnings. At September 30, 2023 and December 31, 2022, the Company had four risk participations with sold protection with a total notional value of $32.6 million and $29.0 million, respectively, and a risk participation with purchased protection with a notional value of $4.9 million at both September 30, 2023 and December 31, 2022.
As a part of its normal residential mortgage operations, the Company will enter into an interest rate lock commitment with a potential borrower. The Company may enter into a corresponding commitment with an investor to sell that loan at a specific price shortly after origination. In accordance with FASB ASC 820, adjustments are recorded through earnings to account for the net change in fair value of these held for sale loans. The fair value of held for sale loans can vary based on the interest rate locked with the customer and the current market interest rate at the balance sheet date. At September 30, 2023 and December 31, 2022, the Company had interest rate lock commitments with a notional value of $593 thousand and $1.4 million, respectively, and forward sale loan commitments with a notional value of $150 thousand and $3.5 million, respectively.
Recently Adopted Accounting Standards
Allowance for Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). On January 1, 2023, the Company adopted ASU 2016-13, the current expected credit losses accounting standard commonly referred to as "CECL," which replaces the incurred loss model with the lifetime expected loss model. The CECL methodology requires an organization to measure all expected credit losses over the contractual term for financial assets measured at amortized cost, including loan receivables and held-to-maturity securities, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The CECL methodology also applies to off-balance sheet credit exposures not accounted for as insurance (e.g., loan commitments, standby
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letters of credit, financial guarantees and other similar instruments), net investments in leases recognized by a lessor in accordance with ASC Topic 842 on leases and AFS debt securities.
To implement the new standard, the Company established a cross-discipline governance structure, which included a dedicated working group and a CECL Committee consisting of members from different functions including Finance, Credit, Risk and Lending, who provided implementation oversight and reviewed policy elections, key assumptions, processes, and model results. The working group was responsible for the implementation process that included developing the loan segmentation, data sourcing and validation, loss driver inputs, qualitative factors, parallel model runs, scenario testing and back testing.
The Company utilized a third-party vendor to assist in the implementation process of its new model to calculate credit losses over the estimated life of the applicable financial assets. The Company elected to use the discounted cash flow (“DCF”) methodology for the quantitative analysis for the majority of its loan segments, which applies the probability of default and loss given default factors to future cash flows, and then adjusts to the net present value to derive the required reserve. Reasonable and supportable macroeconomic conditions include unemployment and GDP. Model assumptions include the discount rate, prepayments and curtailments. The development and validation of credit models also included determining the length of the reasonable and supportable forecast and regression period and utilizing national peer group historical loss rates. For the consumer loan segments, the remaining life methodology was selected as a practical expedient and based on the risk characteristics. The implementation also included review of model runs and certain assumptions, documentation of policies, procedures and controls, and engagement of another third-party consultant for model validation.
The Company adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. The adoption of the new CECL standard resulted in a cumulative-effect adjustment that increased the ACL for loans by $2.4 million and increased the off-balance sheet credit exposures reserve by $100 thousand. Retained earnings, net of deferred taxes, decreased by $2.0 million, and deferred tax assets increased by $559 thousand. Results for reporting periods beginning after January 1, 2023 are presented under ASU 2016-13 while prior period amounts continue to be reported in accordance with the incurred loss model under the previously applicable GAAP.
The following table illustrates the impact of the adoption of CECL, and the transition away from the incurred loss method, on January 1, 2023. The impact to the ACL is presented at the loan segment level:

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

Allowance for Credit Losses on Loans
The allowance for credit losses represents the amount that, in management's judgment, appropriately reflects credit losses inherent in the loan portfolio at the balance sheet date. Loans deemed to be uncollectible are charged against the ACL on loans, and subsequent recoveries, if any, are credited to the ACL on loans when received. Changes to the ACL are recorded through the provision for credit losses on loans in the consolidated statement of income.
The ACL is maintained at a level considered appropriate to absorb credit losses over the expected life of the loan. The ACL for expected credit losses is determined based on a quantitative assessment of two categories of loans: collectively
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evaluated loans and individually evaluated loans. In addition, the ACL also includes a qualitative component which adjusts the CECL model results for risk factors that are not considered within the CECL model, but are relevant in assessing the expected credit losses within the loan classes.
The ACL on loans is measured on a collective basis when similar risk characteristics exist within the Company's loan segments between commercial and consumer. For purposes of estimating the Company’s ACL, management generally evaluates collectively evaluated loans by federal call code in order to group loans with similar risk characteristics. Each of these loan segments are broken down into multiple loan classes, which are characterized by loan type, collateral type, risk attributions and the manner in which management monitors the performance of the borrower. The risks associated with lending activities differ and are subject to the impact of change in interest rates, market conditions and the impact on the collateral securing the loans, and general economic conditions. The commercial loan segment includes commercial real estate, acquisition and development, commercial and industrial and municipal loan classes. The consumer loan segment includes residential mortgage, installment and other consumer loans.
Loans collectively evaluated includes loans on accrual status, except for loans previously restructured that do not share similar risk characteristics which are individually evaluated. The ACL for loans collectively evaluated is measured using a lifetime expected loss rate model that considers historical loss performance and past events in addition to forecasts of future economic conditions. The Company elected to use the DCF methodology for the quantitative analysis for the majority of its loan segments, which applies the probability of default, using a loss driver model and loss given default factors to future cash flows, and then adjusts to the net present value to derive the required reserve. The probability of default estimates are derived through the application of reasonable and supportable economic forecasts to the regression models, which incorporates the Company's and peer loss-rate data, unemployment rate and GDP. The reasonable and supportable forecasts of the selected economic metrics are then input into the regression model to calculate an expected default rate. The expected default rates are then applied to expected loan balances estimated through the consideration of contractual repayment terms and expected prepayments. The prepayment and curtailment assumptions adjust the contractual terms of the loan to arrive at the expected cash flows. The development and validation of credit models also included determining the length of the reasonable and supportable forecast and regression period and utilizing national peer group historical loss rates. Management selected the national unemployment rate and GDP as the drivers of the quantitative portion of collectively evaluated reserves on loan classes reliant upon the DCF methodology, primarily as a result of high correlation coefficients identified in regression modeling. For the consumer loan segment, the quantitative reserve was calculated using the remaining life methodology where the average historical bank-specific and peer loss rates are applied to expected loan balances over an estimated remaining life of loans. The estimated remaining life is calculated using historical bank-specific loan attrition data.
Loans that do not share similar risk characteristics are evaluated on an individual basis, and are excluded from the collective evaluation for the ACL. Loans identified to be individually evaluated under CECL include loans on nonaccrual status and may include accruing loans that do not share similar risk characteristics to other accruing loans collectively evaluated. A specific reserve analysis is applied to the individually evaluated loans, which considers collateral value, an observable market price or the present value of expected future cash flows. A specific reserve may be assigned if the measured value of the loan using one of the before mentioned methods is less than the current carrying value of the loans.
A loan is considered collateral-dependent when the Company determines foreclosure is probable or the borrower is experiencing financial difficulty and the Company expects repayment to be provided substantially through the operation or sale of the collateral. Collateral could be in the form of real estate, equipment or business assets. An ACL may result for a collateral-dependent loan if the fair value of the underlying collateral, as of the reporting date, adjusted for expected costs to repair or sell, was less than the amortized cost basis of the loan. If repayment of the loan is instead dependent only on the operation, rather than the sale of the collateral, the measure of the ACL does not incorporate estimated costs to sell. For loans analyzed on the basis of projected future principal and interest cash flows, the Company will discount the expected cash flows at the effective interest rate of the loan, and an ACL would result if the present value of expected cash flows was less than the amortized cost basis of the loan.
Based on management's analysis, adjustments may be applied for additional factors impacting the risk of loss in the loan portfolio beyond the quantitatively calculated reserve on collectively evaluated loans. As the quantitative reserve calculation incorporates historical conditions, management may consider an additional or reduced reserve is warranted through qualitative risk factors based on current and expected conditions. These qualitative risk factors considered by management are comparable to legacy factors prior to the adoption of CECL and include significant or unexpected changes in:
•Lending policies, procedures, underwriting standards and recovery practices;
•Nature and volume of loans;
•Concentrations of credit;
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•Collateral valuation trends;
•Delinquency and classified loan trends;
•Experience, ability and depth of management and lending staff;
•Quality of loan review system; and
•Economic conditions and other external factors.
For PCD loans, the nonaccrual status is determined in the same manner as for other loans. Prior to the adoption of CECL, these PCD loans were classified as PCI loans and accounted for under ASC Subtopic 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"). In accordance with the CECL standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the adoption date. As permitted by CECL, the Company elected to account for its PCD loans under ASC 310-20, Receivables - Nonrefundable Fees and Other Assets ("ASC 310-20"). These loans are initially recorded at fair value, and include credit and interest rate marks associated with acquisition accounting adjustments. Purchase premiums or discounts are subsequently amortized as an adjustment to yield over the estimated contractual lives of the loans. Under ASC 310-20, the acquired loans are analyzed on an individual asset level, and no longer maintained in pools and accounted for as units of accounts, which would permit treating each pool as a single asset. The impact of this election resulted in loans reported as nonaccrual and individually evaluated for credit expected losses under the CECL methodology.
For off-balance sheet credit exposures, the Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk from the contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL on off-balance sheet credit exposures includes consideration of the utilization rates expected on the loan commitments, and estimates the expected credit losses for the undrawn commitments by the loan segments. The ACL on off-balance sheet credit exposures is recorded in other liabilities on the consolidated balance sheets and is adjusted through the provision for credit losses in the consolidated statements of income.
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). ASU 2022-02 eliminates the TDR accounting model, and requires that the Company evaluate, based on the accounting for loan modifications, whether the borrower is experiencing financial difficulty and the modification results in a more-than-insignificant direct change in the contractual cash flows and represents a new loan or a continuation of an existing loan, which the Company refers to these loans as "financial difficulty modifications" or "FDMs." This change required all loan modifications to be accounted for under the general loan modification guidance in ASC 310-20, Receivables – Nonrefundable Fees and Other Costs, and subject entities to new disclosure requirements on loan modifications to borrowers experiencing financial difficulty. Upon adoption of CECL, the TDRs were evaluated and included in the CECL loan segment pools if the loans shared similar risk characteristics to other loans in the pool or remained with loans individually evaluated for which the ACL was measured using the collateral-dependent or discounted cash flow method. On January 1, 2023, the Company adopted ASU 2022-02 on a modified retrospective basis, which did not have a material impact on the consolidated financial statements.
A comprehensive analysis of the ACL is performed by the Company on a quarterly basis. Management evaluates the adequacy of the ACL utilizing a defined methodology to determine if it properly addresses the current and expected risks in the loan portfolio, which considers the performance of borrowers and specific evaluation of individually evaluated loans including historical loss experiences, trends in delinquencies, nonperforming loans and other risk assets, and the qualitative factors. Risk factors are continuously reviewed and adjusted, as needed, by management when conditions support a change. Management believes its approach properly addresses relevant accounting and bank regulatory guidance for loans both collectively and individually evaluated. The results of the comprehensive analysis, including recommended changes, are governed by the Company's Reserve Adequacy Committee, whose members were also a part of the Company's CECL Committee.
See Note 3, Loans and Allowance for Credit Losses, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information," for a description of the Company’s loan classes and differing levels of associated credit risk.
Allowance for Credit Losses on AFS Securities
Prior to implementation of CECL, unrealized losses on AFS debt securities caused by a credit event would require the direct write-down of the AFS security through the other-than-temporary impairment approach; however, the new standard requires credit losses to be presented as an ACL. The Company is still required to conduct an impairment evaluation on AFS securities to determine whether the Company has the intent to sell the security or it is more likely than not that it will be
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required to sell the security before recovery. If these situations apply, the guidance continues to require the Company to reduce the security's amortized cost basis down to its fair value through earnings. The Company also evaluates the unrealized losses on AFS securities to determine if a security's decline in fair value below its amortized cost basis is due to credit factors. The evaluation is based upon factors such as the creditworthiness of the underlying borrowers, performance of the underlying collateral, if applicable, and the level of credit support in the security structure. Management also evaluates other factors and circumstances that may be indicative of a decline in the fair value of the security due to a credit factor. This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost and near-term prospects of the issuer. If this assessment indicates that a credit loss exists, the present value of the expected cash flows of the security is compared to the amortized cost basis of the security. Under the CECL standard, if the present value of the cash flows expected to be collected is less than the amortized cost, an ACL is recorded for the credit loss, which is limited by the amount that the fair value is less than the amortized cost basis. Any additional amount of loss would be due to non-credit factors and is recorded in AOCI, net of taxes. If a credit loss is recognized in earnings, subsequent improvements to the expectation of collectability will be recognized through the ACL. If the fair value of the security increases above its amortized cost, the unrealized gain will be recorded in AOCI, net of taxes, on the unaudited condensed consolidated statements of financial condition. Accrued interest receivable on AFS securities is excluded from the estimate of credit losses. The Company did not record a cumulative-effect adjustment related to its AFS securities upon adoption of CECL on January 1, 2023.
See Note 2, Investment Securities, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information," for a description of the Company’s investment securities and impairment evaluation.
Reference Rate Reform
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). ASU 2020-04 contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The optional expedients apply consistently to all contracts or transactions within the scope of this topic, while the optional expedients for hedging relationships can be elected on an individual basis. In December 2022, the FASB issued ASU No. 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. This update defers the sunset date for applying the reference rate relief by two years to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. In 2021, the administrator of LIBOR delayed the intended cessation date of certain tenors of LIBOR to June 30, 2023. After June 30, 2023, the publication of the one-month, three-month and twelve-month tenors of LIBOR ceased.
The Company had a cross-functional working group who led the transition from LIBOR to the adoption of an alternate index. This group identified the loans and financial instruments indexed to LIBOR, verified proper transition language existed in the contracts and executed contractual updates, as needed, with the impacted borrowers. The Company replaced LIBOR, in most cases with the 30-Day Average SOFR or Term SOFR, in its loan agreements and will utilize Fallback Rate SOFR, where prescribed. The implementation of Topic 848 did not have a significant impact on the Company's financial statements.
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NOTE 2. INVESTMENT SECURITIES
At September 30, 2023 and December 31, 2022, all investment securities were classified as AFS. The following table summarizes amortized cost, fair value and ACL of investment securities, and the corresponding amounts of gross unrealized gains and losses recognized in AOCI, and the allowance for credit losses at September 30, 2023 and December 31, 2022:

| Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Allowance for Credit Losses |  | Fair Value
September 30, 2023 |  |  |  |  |  |  |  |  |
U.S. Treasury securities | $ | 20,060 |  |  | $ | — |  |  | $ | 2,917 |  |  | $ | — |  |  | $ | 17,143 |
U.S. Government Agencies | 4,149 |  |  | 173 |  |  | — |  |  | — |  |  | 4,322 |
States and political subdivisions | 223,807 |  |  | — |  |  | 35,690 |  |  | — |  |  | 188,117 |
GSE residential MBSs | 62,395 |  |  | — |  |  | 5,044 |  |  | — |  |  | 57,351 |
GSE commercial MBSs | 4,413 |  |  | 365 |  |  | — |  |  | — |  |  | 4,778 |
GSE residential CMOs | 80,693 |  |  | — |  |  | 8,656 |  |  | — |  |  | 72,037 |
Non-agency CMOs | 43,772 |  |  | 274 |  |  | 5,067 |  |  | — |  |  | 38,979 |
Asset-backed | 113,813 |  |  | 447 |  |  | 1,945 |  |  | — |  |  | 112,315 |
Other | 120 |  |  | — |  |  | — |  |  | — |  |  | 120 |
Totals | $ | 553,222 |  |  | $ | 1,259 |  |  | $ | 59,319 |  |  | $ | — |  |  | $ | 495,162 |
December 31, 2022 |  |  |  |  |  |  |  |  |
U.S. Treasury securities | $ | 20,070 |  |  | $ | — |  |  | $ | 2,779 |  |  | n/a |  | $ | 17,291 |
U.S. Government Agencies | 4,907 |  |  | 228 |  |  | — |  |  | n/a |  | 5,135 |
States and political subdivisions | 225,825 |  |  | 19 |  |  | 28,430 |  |  | n/a |  | 197,414 |
GSE residential MBSs | 63,778 |  |  | — |  |  | 4,376 |  |  | n/a |  | 59,402 |
GSE residential CMOs | 75,446 |  |  | — |  |  | 7,068 |  |  | n/a |  | 68,378 |
Non-agency CMOs | 42,298 |  |  | 243 |  |  | 2,783 |  |  | n/a |  | 39,758 |
Asset-backed | 130,577 |  |  | — |  |  | 4,604 |  |  | n/a |  | 125,973 |
Other | 377 |  |  | — |  |  | — |  |  | n/a |  | 377 |
Totals | $ | 563,278 |  |  | $ | 490 |  |  | $ | 50,040 |  |  | n/a |  | $ | 513,728 |

The following table summarizes investment securities with unrealized losses aggregated by major investment security type and the length of time in a continuous unrealized loss position. For these investment securities, no ACL was recorded at September 30, 2023 and no cumulative OTTI expense was recorded at December 31, 2022.

| Less Than 12 Months |  | 12 Months or More |  | Total
| # of Securities |  | Fair Value |  | Unrealized Losses |  | # of Securities |  | Fair Value |  | Unrealized Losses |  | # of Securities |  | Fair Value |  | Unrealized Losses
September 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities | — |  |  | $ | — |  |  | $ | — |  |  | 3 |  |  | $ | 17,143 |  |  | $ | 2,917 |  |  | 3 |  |  | $ | 17,143 |  |  | $ | 2,917 |
States and political subdivisions | 10 |  |  | 4,147 |  |  | 294 |  |  | 41 |  |  | 183,970 |  |  | 35,396 |  |  | 51 |  |  | 188,117 |  |  | 35,690 |
GSE residential MBSs | — |  |  | — |  |  | — |  |  | 15 |  |  | 57,351 |  |  | 5,044 |  |  | 15 |  |  | 57,351 |  |  | 5,044 |
GSE residential CMOs | 5 |  |  | 16,044 |  |  | 581 |  |  | 14 |  |  | 55,993 |  |  | 8,075 |  |  | 19 |  |  | 72,037 |  |  | 8,656 |
Non-agency CMOs | 1 |  |  | 6,024 |  |  | 512 |  |  | 4 |  |  | 15,868 |  |  | 4,555 |  |  | 5 |  |  | 21,892 |  |  | 5,067 |
Asset-backed | 1 |  |  | 892 |  |  | 7 |  |  | 15 |  |  | 77,377 |  |  | 1,938 |  |  | 16 |  |  | 78,269 |  |  | 1,945 |
Totals | 17 |  |  | $ | 27,107 |  |  | $ | 1,394 |  |  | 92 |  |  | $ | 407,702 |  |  | $ | 57,925 |  |  | 109 |  |  | $ | 434,809 |  |  | $ | 59,319 |
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities | — |  |  | $ | — |  |  | $ | — |  |  | 3 |  |  | $ | 17,291 |  |  | $ | 2,779 |  |  | 3 |  |  | $ | 17,291 |  |  | $ | 2,779 |
States and political subdivisions | 29 |  |  | 135,579 |  |  | 13,809 |  |  | 17 |  |  | 60,102 |  |  | 14,621 |  |  | 46 |  |  | 195,681 |  |  | 28,430 |
GSE residential MBSs | 5 |  |  | 26,100 |  |  | 925 |  |  | 10 |  |  | 33,302 |  |  | 3,451 |  |  | 15 |  |  | 59,402 |  |  | 4,376 |
GSE residential CMOs | 8 |  |  | 28,732 |  |  | 1,884 |  |  | 9 |  |  | 39,646 |  |  | 5,184 |  |  | 17 |  |  | 68,378 |  |  | 7,068 |
Non-agency CMOs | 4 |  |  | 26,555 |  |  | 1,135 |  |  | 2 |  |  | 8,639 |  |  | 1,648 |  |  | 6 |  |  | 35,194 |  |  | 2,783 |
Asset-backed | 17 |  |  | 78,873 |  |  | 2,432 |  |  | 5 |  |  | 47,100 |  |  | 2,172 |  |  | 22 |  |  | 125,973 |  |  | 4,604 |
Totals | 63 |  |  | $ | 295,839 |  |  | $ | 20,185 |  |  | 46 |  |  | $ | 206,080 |  |  | $ | 29,855 |  |  | 109 |  |  | $ | 501,919 |  |  | $ | 50,040 |

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The Company is required to conduct an impairment evaluation on AFS securities to determine whether the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security before recovery. If these situations apply, the guidance requires the Company to reduce the security's amortized cost basis down to its fair value through earnings. The Company also evaluates the unrealized losses on AFS securities to determine if a security's decline in fair value below its amortized cost basis is due to credit factors. The evaluation is based upon factors such as the creditworthiness of the underlying borrowers, performance of the underlying collateral, if applicable, and the level of credit support in the security structure. Management also evaluates other factors and circumstances that may be indicative of a decline in the fair value of the security due to a credit factor. This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost and near-term prospects of the issuer. If this assessment indicates that a credit loss exists, the present value of the expected cash flows of the security is compared to the amortized cost basis of the security. Under the CECL standard, if the present value of the cash flows expected to be collected is less than the amortized cost, an ACL is recorded for the credit loss, which is limited by the amount that the fair value is less than the amortized cost basis. Any additional amount of loss would be due to non-credit factors and is recorded in AOCI, net of taxes. If a credit loss is recognized in earnings, subsequent improvements to the expectation of collectability will be recognized through the ACL. If the fair value of the security increases above its amortized cost, the unrealized gain will be recorded in AOCI, net of taxes, on the consolidated statements of financial condition. Prior to implementation of the CECL standard, unrealized losses caused by a credit event would require the direct write-down of the AFS security through the other-than-temporary impairment approach.
The Company did not record an ACL on the AFS securities at September 30, 2023 or upon implementation of CECL on January 1, 2023. As of both periods, the Company considers the unrealized losses on the AFS securities to be related to fluctuations in market conditions, primarily interest rates, and not reflective of deterioration in credit. In addition, the Company maintains that it has the intent and ability to hold these AFS securities until the amortized cost is recovered and it is more likely than not that any of AFS securities in an unrealized loss position would not be required to be sold. At September 30, 2023 and December 31, 2022, unrealized losses were higher than prior periods due to market uncertainty resulting from inflation and higher interest rates from the time of the security purchase.
U.S. Treasury Securities. The unrealized losses presented in the table above have been caused by an increase in rates from the time these securities were purchased. Management considers the full faith and credit of the U.S. government in determining whether declines in fair value are due to credit factors. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell them before recovery of their amortized cost basis, which may be maturity. In addition, the unrealized losses are not credit related. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at September 30, 2023.
States and Political Subdivisions. The unrealized losses presented in the table above have been caused by a widening of spreads and/or a rise in interest rates from the time these securities were purchased. Management considers the investment rating, the state of the issuer of the security and other credit support in determining whether declines in fair value are due to credit factors. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell them before recovery of their amortized cost basis, which may be maturity. In addition, the unrealized losses are not credit related. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at September 30, 2023.
GSE Residential CMOs and GSE Residential MBS. The unrealized losses presented in the table above have been caused by a widening of spreads and a rise in interest rates from the time these securities were purchased. The contractual terms of these securities do not permit the issuer to settle the securities at a price less than its par value basis. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell them before recovery of their amortized cost basis, which may be maturity. In addition, the unrealized losses are not credit related. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at September 30, 2023.
Non-Agency CMOs. The unrealized losses presented in the table above were caused by a widening of spreads and a rise in interest rates from the time the securities were purchased. Management considers the investment rating and other credit support in determining whether declines in fair value are due to credit factors. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell them before recovery of their amortized cost basis, which may be maturity. In addition, the unrealized losses are not credit related. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at September 30, 2023.
Asset-backed. The unrealized losses presented in the table above were caused by a widening of spreads and a rise in the interest rates from the time the securities were purchased. Management considers the investment rating and other credit support in determining whether declines in fair value are due to credit factors. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell them before recovery of their amortized cost basis, which
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may be maturity. In addition, the unrealized losses are not credit related. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at September 30, 2023.
The following table summarizes amortized cost and fair value of investment securities by contractual maturity at September 30, 2023. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

| Amortized Cost |  | Fair Value
Due in one year or less | $ | — |  |  | $ | — |
Due after one year through five years | 31,439 |  |  | 27,291 |
Due after five years through ten years | 56,845 |  |  | 49,216 |
Due after ten years | 159,852 |  |  | 133,195 |
CMOs and MBSs | 191,273 |  |  | 173,145 |
Asset-backed | 113,813 |  |  | 112,315 |
Totals | $ | 553,222 |  |  | $ | 495,162 |

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

| Three months ended September 30, |  | Nine months ended September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Proceeds from sale of investment securities | $ | 19,900 |  |  | $ | — |  |  | $ | 19,900 |  |  | $ | 3,075 |
Gross gains | 2 |  |  | — |  |  | 2 |  |  | 25 |
Gross losses | — |  |  | 14 |  |  | 10 |  |  | 17 |

During the three and nine months ended September 30, 2023, the Company recorded net investment security gains of $2 thousand and net investment security losses of $8 thousand primarily from mark-to-market losses on an equity security, respectively, compared to net losses of $14 thousand and net gains of $8 thousand for the three and nine months ended September 30, 2022, respectively. During the three and nine months ended September 30, 2023, the Company sold three U.S. Treasury securities with a principal balance of $19.9 million for a nominal gain. During the nine months ended September 30, 2022, the Company completed a partial sale of one security with a principal balance of $3.1 million that was sold for proceeds of $3.1 million for a gross gain of $22 thousand. The Company did not sell any investment securities during the three months ended September 30, 2022. The Company recorded a loss of $171 thousand on a call of a non-agency CMO for the nine months ended September 30, 2022. Investment securities with a fair value of $435.9 million and $396.8 million at September 30, 2023 and December 31, 2022, respectively, were pledged to secure public funds and for other purposes as required or permitted by law.
NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES
The Company’s loan portfolio is grouped into segments which are further broken down into classes to allow management to monitor the performance by the borrower and to monitor the yield on the portfolio. The risks associated with lending activities differ among the various loan classes and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions. All of these factors may adversely impact both the borrower’s ability to repay its loans and the value of its associated collateral.
The Company has various types of commercial real estate loans, which have differing levels of credit risk. Owner occupied commercial real estate loans are generally dependent upon the successful operation of the borrower’s business, with the cash flows generated from the business being the primary source of repayment of the loan. If the business suffers a downturn in sales or profitability, the borrower’s ability to repay the loan could be in jeopardy.
Non-owner occupied and multi-family commercial real estate loans and non-owner occupied residential loans present a different credit risk to the Company than owner occupied commercial real estate loans, as the repayment of the loan is dependent upon the borrower’s ability to generate a sufficient level of occupancy to produce rental income that exceeds debt service requirements and operating expenses. Lower occupancy or lease rates may result in a reduction in cash flows, which hinders the ability of the borrower to meet debt service requirements, and may result in lower collateral values. The Company generally recognizes that greater risk is inherent in these credit relationships compared to owner occupied loans mentioned above.
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Acquisition and development loans consist of 1-4 family residential construction and commercial and land development loans. The risk of loss on these loans is largely dependent on the Company’s ability to assess the property’s value at the completion of the project, which should exceed the property’s construction costs. During the construction phase, a number of factors could potentially negatively impact the collateral value, including cost overruns, delays in completing the project, competition, and real estate market conditions, which may change based on the supply of similar properties in the area. In the event the collateral value at the completion of the project is not sufficient to cover the outstanding loan balance, the Company must rely upon other repayment sources, if any, including the guarantors of the project or other collateral securing the loan.
Commercial and industrial loans include advances to local and regional businesses for general commercial purposes and include permanent and short-term working capital, machinery and equipment financing, and may be either in the form of lines of credit or term loans. Although commercial and industrial loans may be unsecured to our highest-rated borrowers, the majority of these loans are secured by the borrower’s accounts receivable, inventory and machinery and equipment. In a significant number of these loans, the collateral also includes the business real estate or the business owner’s personal real estate or assets. Commercial and industrial loans present credit exposure to the Company, as they are more susceptible to risk of loss during a downturn in the economy as borrowers may have greater difficulty in meeting their debt service requirements and the value of the collateral may decline. The Company's underwriting standards are developed to mitigate this risk. The underwriting process includes 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 is typical. However, these procedures cannot eliminate the risk of loss associated with commercial and industrial lending. At September 30, 2023 and December 31, 2022, commercial and industrial loans include $6.2 million and $13.8 million, respectively, net of deferred fees and costs, originated through the SBA PPP. At September 30, 2023, the Bank has $88 thousand of net deferred SBA PPP fees remaining to be recognized through net interest income over the remaining life of the loans. As these loans are 100% guaranteed by the SBA, there is no associated ACL at September 30, 2023.
Municipal loans consist of extensions of credit to municipalities and school districts within the Company’s market area. These loans generally present a lower risk than commercial and industrial loans, as they are generally secured by the municipality’s full taxing authority, by revenue obligations, or by its ability to raise assessments on its clients for a specific utility.
The Company originates loans to its retail clients, including fixed-rate and adjustable first lien mortgage loans, with the underlying 1-4 family owner occupied residential property securing the loan. The Company’s risk exposure is minimized in these types of loans through the evaluation of the creditworthiness of the borrower, including credit scores and debt-to-income ratios, and underwriting standards, which limit the loan-to-value ratio to generally no more than 80% upon loan origination, unless the borrower obtains private mortgage insurance.
Home equity loans, including term loans and lines of credit, present a slightly higher risk to the Company than 1-4 family first liens, as these loans can be first or second liens on 1-4 family owner occupied residential property, but can have loan-to-value ratios of no greater than 85% of the value of the real estate taken as collateral. The creditworthiness of the borrower is also considered, including credit scores and debt-to-income ratios.
Installment and other loans’ credit risk is mitigated through prudent underwriting standards, including evaluation of the creditworthiness of the borrower through credit scores and debt-to-income ratios and, if secured, the collateral value of the assets. These loans can be unsecured or secured by assets the value of which may depreciate quickly or may fluctuate, and may present a greater risk to the Company than 1-4 family residential loans.
The Company adopted the new current expected credit loss accounting guidance, CECL, and all related amendments as of January 1, 2023. Certain credit quality disclosures related to impaired loans and individually and collectively evaluated loans were superseded with the current CECL guidance, which was adopted on January 1, 2023, and have not been included below as of September 30, 2023.
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The following table presents the loan portfolio by segment and class, excluding residential LHFS, at September 30, 2023 and December 31, 2022:

| September 30, 2023 |  | December 31, 2022
Commercial real estate: |  |  |
Owner occupied | $ | 376,350 |  |  | $ | 315,770 |
Non-owner occupied | 630,514 |  |  | 608,043 |
Multi-family | 143,437 |  |  | 138,832 |
Non-owner occupied residential | 100,391 |  |  | 104,604 |
Acquisition and development: |  |  |
1-4 family residential construction | 25,642 |  |  | 25,068 |
Commercial and land development | 153,279 |  |  | 158,308 |
Commercial and industrial (1) | 374,190 |  |  | 357,774 |
Municipal | 10,334 |  |  | 12,173 |
Residential mortgage: |  |  |
First lien | 248,335 |  |  | 229,849 |
Home equity - term | 5,223 |  |  | 5,505 |
Home equity - lines of credit | 188,736 |  |  | 183,241 |
Installment and other loans | 10,405 |  |  | 12,065 |
Total loans | $ | 2,266,836 |  |  | $ | 2,151,232 |

(1) This balance includes $6.2 million and $13.8 million of SBA PPP loans, net of deferred fees and costs, at September 30, 2023 and December 31, 2022, respectively.
In order to monitor ongoing risk associated with its loan portfolio and specific loans within the segments, management uses an internal grading system. The first several rating categories, representing the lowest risk to the Bank, are combined and given a “Pass” rating. Management generally follows regulatory definitions in assigning criticized ratings to loans, including "Special Mention," "Substandard," "Doubtful" or "Loss." The Special Mention category includes loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Bank's position at some future date. These assets pose elevated risk, but their weakness does not yet justify a more severe, or classified rating. Substandard loans are classified as they have a well-defined weakness, or weaknesses that jeopardize liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Substandard loans include loans that management may determine to be either individually evaluated, referred to as "Substandard - Individually Evaluated Loan," or collectively evaluated, referred to as "Substandard Non-Individually Evaluated Loan." A Doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as Loss is deferred. Loss loans are considered uncollectible, as the borrowers are often in bankruptcy, have suspended debt repayments, or have ceased business operations. Once a loan is classified as Loss, there is little prospect of collecting the loan’s principal or interest and it is charged-off.
The Company has a loan review policy and program, which is designed to identify and monitor risk in the lending function. The Management ERM Committee, comprised of executive officers, senior officers and loan department personnel, is charged with the oversight of overall credit quality and risk exposure of the Company's loan portfolio. This includes the monitoring of the lending activities of all Company personnel with respect to underwriting and processing new loans and the timely follow-up and corrective action for loans showing signs of deterioration in quality. A loan review program provides the Company with an independent review of the commercial loan portfolio on an ongoing basis. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as extended delinquencies, bankruptcy, repossession or death of the borrower occurs, which heightens awareness as to a possible credit event.
Internal loan reviews are completed annually on all commercial relationships with a committed loan balance in excess of $1.0 million, which includes confirmation of risk rating by an independent credit officer. In addition, all commercial relationships greater than $500 thousand rated Substandard, Doubtful or Loss are reviewed quarterly and corresponding risk ratings are reaffirmed by the Company's Problem Loan Committee, with subsequent reporting to the Management ERM Committee and the Board of Directors.
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The following table presents the amortized cost basis of the loan portfolio, by year of origination, loan class, and credit quality, as of September 30, 2023. For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan and payment activity, which residential mortgage and installment and other consumer loans are presented below based on payment performance: performing or nonperforming.

| Term Loans Amortized Cost Basis by Origination Year |  |  |  |  |  |
As of September 30, 2023 | 2023 |  | 2022 |  | 2021 |  | 2020 |  | 2019 |  | Prior |  | Revolving Loans Amortized Basis |  | Revolving Loans Converted to Term |  | Total
Commercial Real Estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 46,027 |  |  | $ | 94,573 |  |  | $ | 79,707 |  |  | $ | 22,354 |  |  | $ | 21,605 |  |  | $ | 66,222 |  |  | $ | 5,372 |  |  | $ | — |  |  | $ | 335,860 |
Special mention | — |  |  | 10,007 |  |  | 2,541 |  |  | — |  |  | — |  |  | 2,398 |  |  | — |  |  | — |  |  | 14,946 |
Substandard - Non-IEL | — |  |  | — |  |  | — |  |  | 6,122 |  |  | — |  |  | 2,165 |  |  | 457 |  |  | — |  |  | 8,744 |
Substandard - IEL | — |  |  | — |  |  | — |  |  | 14,321 |  |  | — |  |  | 2,479 |  |  | — |  |  | — |  |  | 16,800 |
Total owner-occupied loans | $ | 46,027 |  |  | $ | 104,580 |  |  | $ | 82,248 |  |  | $ | 42,797 |  |  | $ | 21,605 |  |  | $ | 73,264 |  |  | $ | 5,829 |  |  | $ | — |  |  | $ | 376,350 |
Current period gross charge offs - owner-occupied | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Non-owner occupied: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 36,918 |  |  | $ | 98,722 |  |  | $ | 206,053 |  |  | $ | 85,808 |  |  | $ | 63,827 |  |  | $ | 135,331 |  |  | $ | 510 |  |  | $ | 871 |  |  | $ | 628,040 |
Special mention | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2,144 |  |  | — |  |  | — |  |  | 2,144 |
Substandard - Non-IEL | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 78 |  |  | — |  |  | — |  |  | 78 |
Substandard - IEL | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 252 |  |  | — |  |  | — |  |  | 252 |
Total non-owner occupied loans | $ | 36,918 |  |  | $ | 98,722 |  |  | $ | 206,053 |  |  | $ | 85,808 |  |  | $ | 63,827 |  |  | $ | 137,805 |  |  | $ | 510 |  |  | $ | 871 |  |  | $ | 630,514 |
Current period gross charge offs - non-owner occupied | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Multi-family: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 2,255 |  |  | $ | 59,413 |  |  | $ | 8,732 |  |  | $ | 12,765 |  |  | $ | 7,791 |  |  | $ | 50,300 |  |  | $ | 150 |  |  | $ | — |  |  | $ | 141,406 |
Special mention | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2,031 |  |  | — |  |  | — |  |  | 2,031 |
Substandard - Non-IEL | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Substandard - IEL | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total multi-family loans | $ | 2,255 |  |  | $ | 59,413 |  |  | $ | 8,732 |  |  | $ | 12,765 |  |  | $ | 7,791 |  |  | $ | 52,331 |  |  | $ | 150 |  |  | $ | — |  |  | $ | 143,437 |
Current period gross charge offs - multi-family | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |

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| Term Loans Amortized Cost Basis by Origination Year |  |  |  |  |  |
As of September 30, 2023 | 2023 |  | 2022 |  | 2021 |  | 2020 |  | 2019 |  | Prior |  | Revolving Loans Amortized Basis |  | Revolving Loans Converted to Term |  | Total
Non-owner occupied residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 7,137 |  |  | $ | 23,451 |  |  | $ | 18,807 |  |  | $ | 10,005 |  |  | $ | 6,775 |  |  | $ | 31,144 |  |  | $ | 1,503 |  |  | $ | — |  |  | $ | 98,822 |
Special mention | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 894 |  |  | — |  |  | — |  |  | 894 |
Substandard - Non-IEL | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 385 |  |  | — |  |  | — |  |  | 385 |
Substandard - IEL | 2 |  |  | — |  |  | 192 |  |  | — |  |  | — |  |  | 96 |  |  | — |  |  | — |  |  | 290 |
Total non-owner occupied residential loans | $ | 7,139 |  |  | $ | 23,451 |  |  | $ | 18,999 |  |  | $ | 10,005 |  |  | $ | 6,775 |  |  | $ | 32,519 |  |  | $ | 1,503 |  |  | $ | — |  |  | $ | 100,391 |
Current period gross charge offs - non-owner occupied residential | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 12 |  |  | $ | — |  |  | $ | — |  |  | $ | 12 |
Acquisition and development: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential construction: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 13,111 |  |  | $ | 12,383 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 25,494 |
Special mention | — |  |  | — |  |  | 148 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 148 |
Substandard - Non-IEL | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Substandard - IEL | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total 1-4 family residential construction loans | $ | 13,111 |  |  | $ | 12,383 |  |  | $ | 148 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 25,642 |
Current period gross charge offs - 1-4 family residential construction | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Commercial and land development: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 21,879 |  |  | $ | 52,815 |  |  | $ | 50,957 |  |  | $ | 9,946 |  |  | $ | 114 |  |  | $ | 1,841 |  |  | $ | 6,655 |  |  | $ | 5,990 |  |  | $ | 150,197 |
Special mention | — |  |  | — |  |  | — |  |  | 1,223 |  |  | — |  |  | 442 |  |  | — |  |  | — |  |  | 1,665 |
Substandard - Non-IEL | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Substandard - IEL | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 1,417 |  |  | — |  |  | — |  |  | 1,417 |
Total commercial and land development loans | $ | 21,879 |  |  | $ | 52,815 |  |  | $ | 50,957 |  |  | $ | 11,169 |  |  | $ | 114 |  |  | $ | 3,700 |  |  | $ | 6,655 |  |  | $ | 5,990 |  |  | $ | 153,279 |
Current period gross charge offs - commercial and land development | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Commercial and Industrial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 55,922 |  |  | $ | 77,312 |  |  | $ | 75,336 |  |  | $ | 25,943 |  |  | $ | 10,988 |  |  | $ | 22,123 |  |  | $ | 92,100 |  |  | $ | 2,223 |  |  | $ | 361,947 |
Special mention | — |  |  | 1,387 |  |  | 3,699 |  |  | 15 |  |  | 1,248 |  |  | 386 |  |  | 3,235 |  |  | — |  |  | 9,970 |
Substandard - Non-IEL | — |  |  | — |  |  | 1,223 |  |  | — |  |  | 9 |  |  | 287 |  |  | 92 |  |  | — |  |  | 1,611 |
Substandard - IEL | — |  |  | — |  |  | — |  |  | 8 |  |  | — |  |  | 508 |  |  | 146 |  |  | — |  |  | 662 |
Total commercial and industrial loans | $ | 55,922 |  |  | $ | 78,699 |  |  | $ | 80,258 |  |  | $ | 25,966 |  |  | $ | 12,245 |  |  | $ | 23,304 |  |  | $ | 95,573 |  |  | $ | 2,223 |  |  | $ | 374,190 |
Current period gross charge offs - commercial and industrial | $ | — |  |  | $ | 161 |  |  | $ | 106 |  |  | $ | — |  |  | $ | — |  |  | $ | 8 |  |  | $ | 473 |  |  | $ | — |  |  | $ | 748 |
Municipal: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | — |  |  | $ | 4 |  |  | $ | 3,403 |  |  | $ | — |  |  | $ | — |  |  | $ | 6,927 |  |  | $ | — |  |  | $ | — |  |  | $ | 10,334 |
Total municipal loans | $ | — |  |  | $ | 4 |  |  | $ | 3,403 |  |  | $ | — |  |  | $ | — |  |  | $ | 6,927 |  |  | $ | — |  |  | $ | — |  |  | $ | 10,334 |
Current period gross charge offs - municipal | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |

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| Term Loans Amortized Cost Basis by Origination Year |  |  |  |  |  |
As of September 30, 2023 | 2023 |  | 2022 |  | 2021 |  | 2020 |  | 2019 |  | Prior |  | Revolving Loans Amortized Basis |  | Revolving Loans Converted to Term |  | Total
Residential mortgage: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
First lien: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Payment performance |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing | $ | 27,657 |  |  | $ | 65,681 |  |  | $ | 35,176 |  |  | $ | 8,071 |  |  | $ | 7,690 |  |  | $ | 100,990 |  |  | $ | — |  |  | $ | 642 |  |  | $ | 245,907 |
Nonperforming | — |  |  | — |  |  | — |  |  | — |  |  | 172 |  |  | 2,256 |  |  | — |  |  | — |  |  | 2,428 |
Total first lien loans | $ | 27,657 |  |  | $ | 65,681 |  |  | $ | 35,176 |  |  | $ | 8,071 |  |  | $ | 7,862 |  |  | $ | 103,246 |  |  | $ | — |  |  | $ | 642 |  |  | $ | 248,335 |
Current period gross charge offs - first lien | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 58 |  |  | $ | — |  |  | $ | — |  |  | $ | 58 |
Home equity - term: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Payment performance |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing | $ | 553 |  |  | $ | 750 |  |  | $ | 140 |  |  | $ | 443 |  |  | $ | 124 |  |  | $ | 3,210 |  |  | $ | — |  |  | $ | — |  |  | $ | 5,220 |
Nonperforming | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 3 |  |  | — |  |  | — |  |  | 3 |
Total home equity - term loans | $ | 553 |  |  | $ | 750 |  |  | $ | 140 |  |  | $ | 443 |  |  | $ | 124 |  |  | $ | 3,213 |  |  | $ | — |  |  | $ | — |  |  | $ | 5,223 |
Current period gross charge offs - home equity - term | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Home equity - lines of credit: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Payment performance |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 111,582 |  |  | $ | 76,259 |  |  | $ | 187,841 |
Nonperforming | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 877 |  |  | 18 |  |  | 895 |
Total residential real estate - home equity - lines of credit loans | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 112,459 |  |  | $ | 76,277 |  |  | $ | 188,736 |
Current period gross charge offs - home equity - lines of credit | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 40 |  |  | $ | — |  |  | $ | 40 |
Installment and other loans: |  |  |  |  |  |  |  |  |  |  |  |
Payment performance |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing | $ | 718 |  |  | $ | 457 |  |  | $ | 357 |  |  | $ | 118 |  |  | $ | 861 |  |  | $ | 1,350 |  |  | $ | 6,516 |  |  | $ | — |  |  | $ | 10,377 |
Nonperforming | — |  |  | — |  |  | — |  |  | — |  |  | 19 |  |  | 5 |  |  | 4 |  |  | — |  |  | 28 |
Total Installment and other loans | $ | 718 |  |  | $ | 457 |  |  | $ | 357 |  |  | $ | 118 |  |  | $ | 880 |  |  | $ | 1,355 |  |  | $ | 6,520 |  |  | $ | — |  |  | $ | 10,405 |
Current period gross charge offs - installment and other | $ | 139 |  |  | $ | 24 |  |  | $ | — |  |  | $ | — |  |  | $ | 4 |  |  | $ | 10 |  |  | $ | 21 |  |  | $ | — |  |  | $ | 198 |

The information presented in the table above is not required for periods prior to the adoption of CECL. The following table summarizes the Company’s loan portfolio ratings based on its internal risk rating system at December 31, 2022, which presents the most comparable required information. Prior to the adoption of CECL, PCD loans were classified as PCI loans and accounted for under ASC 310-30. In accordance with the CECL standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the adoption date. At September 30, 2023, the amortized cost of the PCD loans was $8.8 million.
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| Pass |  | Special Mention |  | Non-Impaired Substandard |  | Impaired - Substandard |  | Doubtful |  | PCI Loans |  | Total
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied | $ | 305,159 |  |  | $ | 2,109 |  |  | $ | 3,532 |  |  | $ | 2,767 |  |  | $ | — |  |  | $ | 2,203 |  |  | $ | 315,770 |
Non-owner occupied | 601,244 |  |  | 4,243 |  |  | 2,273 |  |  | — |  |  | — |  |  | 283 |  |  | 608,043 |
Multi-family | 130,851 |  |  | 7,739 |  |  | 242 |  |  | — |  |  | — |  |  | — |  |  | 138,832 |
Non-owner occupied residential | 102,674 |  |  | 810 |  |  | 482 |  |  | 81 |  |  | — |  |  | 557 |  |  | 104,604 |
Acquisition and development: |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential construction | 25,068 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 25,068 |
Commercial and land development | 142,424 |  |  | 458 |  |  | — |  |  | 15,426 |  |  | — |  |  | — |  |  | 158,308 |
Commercial and industrial | 331,103 |  |  | 17,579 |  |  | 7,013 |  |  | 31 |  |  | — |  |  | 2,048 |  |  | 357,774 |
Municipal | 12,173 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 12,173 |
Residential mortgage: |  |  |  |  |  |  |  |  |  |  |  |  |
First lien | 222,849 |  |  | — |  |  | 215 |  |  | 2,520 |  |  | — |  |  | 4,265 |  |  | 229,849 |
Home equity - term | 5,485 |  |  | — |  |  | — |  |  | 5 |  |  | — |  |  | 15 |  |  | 5,505 |
Home equity - lines of credit | 182,801 |  |  | — |  |  | 45 |  |  | 395 |  |  | — |  |  | — |  |  | 183,241 |
Installment and other loans | 12,017 |  |  | — |  |  | — |  |  | 40 |  |  | — |  |  | 8 |  |  | 12,065 |
| $ | 2,073,848 |  |  | $ | 32,938 |  |  | $ | 13,802 |  |  | $ | 21,265 |  |  | $ | — |  |  | $ | 9,379 |  |  | $ | 2,151,232 |

For commercial real estate, acquisition and development, commercial and industrial and municipal segments, a loan is evaluated individually when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by 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 individually evaluated. Generally, loans that are more than 90 days past due will be individually evaluated for a specific reserve. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed to determine if the loan should be placed on nonaccrual status. Nonaccrual loans are, by definition, deemed to be individually evaluated under CECL. A specific reserve allocation for individually evaluated loans is measured on a loan-by-loan basis for commercial and construction loans by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. For loans that are experiencing financial difficulty for extended periods of time, periodic updates on fair values are obtained, which may include updated appraisals. Updated fair values are incorporated into the analysis in the next reporting period.
Loan charge-offs, which may include partial charge-offs, are taken on an individually evaluated loan that is collateral dependent if the carrying balance of the loan exceeds the appraised value of the collateral, the loan has been placed on nonaccrual status or identified as uncollectible, and it is deemed to be a confirmed loss. Typically, loans with a charge-off or partial charge-off will continue to be individually evaluated. Generally, an individually evaluated loan with a partial charge-off may continue to have a specific reserve on it after the partial charge-off, if factors warrant.
At September 30, 2023, the Company’s individually evaluated loans were measured based on the estimated fair value of the collateral securing the loan, except for purchased auto loans on nonaccrual status and accruing loans accounted for as TDRs prior to the adoption of ASU 2022-02. At December 31, 2022, except for TDRs, the Company's individually evaluated loans were measured based on the estimated fair value of the collateral securing the loan. Prior to the adoption of ASU 2022-02, by definition, TDRs were considered impaired and the related impairment analyses were initially based on discounted cash flows. For real estate loans, collateral generally consists of commercial or residential real estate, but in the case of commercial and industrial loans, it could also consist of accounts receivable, inventory, equipment or other business assets. Commercial and industrial loans may also have real estate collateral.
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Updated appraisals are generally required every 18 months for classified commercial loans, secured by commercial real estate, in excess of $250 thousand. The “as is" value provided in the appraisal is often used as the fair value of the collateral in determining impairment, unless circumstances, such as subsequent improvements, approvals, or other circumstances, dictate that another value than that provided by the appraiser is more appropriate.
Generally, commercial loans secured by real estate that are evaluated individually are measured at fair value using certified real estate appraisals that had been completed within the last 18 months. Appraised values are discounted for estimated costs to sell the property and other selling considerations to arrive at the property’s fair value. In those situations, in which it is determined an updated appraisal is not required for loans individually evaluated for credit expected losses, fair values are based on either an existing appraisal or a discounted cash flow analysis as determined by management. The approaches are discussed below:
•Existing appraisal – if the existing appraisal provides a strong loan-to-value ratio (generally 70% or lower) and, after consideration of market conditions and knowledge of the property and area, it is determined by the Credit Administration staff that there has not been a significant deterioration in the collateral value, the existing certified appraised value may be used. Discounts to the appraised value, as deemed appropriate for selling costs, are factored into the fair value.
•Discounted cash flows – in limited cases, discounted cash flows may be used on projects in which the collateral is liquidated to reduce the borrowings outstanding, and is used to validate collateral values derived from other approaches.
Collateral on loans evaluated individually is not limited to real estate, and may consist of accounts receivable, inventory, equipment or other business assets. Estimated fair values are determined based on borrowers’ financial statements, inventory ledgers, accounts receivable aging or appraisals from individuals with knowledge in the business. Stated balances are generally discounted for the age of the financial information or the quality of the assets. In determining fair value, liquidation discounts are applied to this collateral based on existing loan evaluation policies.
The Company distinguishes substandard loans for both loans individually and collectively evaluated, as it places less emphasis on a loan’s classification, and increased reliance on whether the loan was performing in accordance with the contractual terms. A substandard classification does not automatically meet the definition of an individually evaluated loan. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual extensions of credit classified as substandard. As a result, the Company’s methodology includes an evaluation of certain accruing commercial real estate, acquisition and development, commercial and industrial and municipal loans rated substandard to be collectively evaluated for credit expected losses. Although the Company believes these loans meet the definition of substandard, they are generally performing and management has concluded that it is likely the Company will be able to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement.
Larger groups of smaller balance homogeneous loans are collectively evaluated for credit expected losses. Generally, the Company does not separately identify individual residential mortgage and installment and other consumer loans for disclosures, unless such loans are the subject of a modified agreement due to financial difficulties of the borrower.
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The following table presents the amortized cost basis of nonaccrual loans, according to loan class, with and without reserves on individually evaluated loans as of September 30, 2023, as compared to nonaccrual loans at December 31, 2022. The Company did not recognize interest income on nonaccrual loans during the three and nine months ended September 30, 2023.

| September 30, 2023 |  |  |  |  |  | December 31, 2022
| Nonaccrual loans with a related ACL |  | Nonaccrual loans with no related ACL |  | Total nonaccrual loans |  | Loans Past Due 90+ Accruing |  |  |  |  |  | Total nonaccrual loans |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied | $ | — |  |  | $ | 16,800 |  |  | $ | 16,800 |  |  | $ | — |  |  |  |  |  |  | $ | 2,767 |  |  |
Non-owner occupied | — |  |  | 252 |  |  | 252 |  |  | — |  |  |  |  |  |  | — |  |  |
Non-owner occupied residential | — |  |  | 288 |  |  | 288 |  |  | — |  |  |  |  |  |  | 81 |  |  |
Acquisition and development: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and land development | — |  |  | 1,417 |  |  | 1,417 |  |  | — |  |  |  |  |  |  | 15,426 |  |  |
Commercial and industrial | — |  |  | 662 |  |  | 662 |  |  | — |  |  |  |  |  |  | 31 |  |  |
Residential mortgage: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
First lien | — |  |  | 2,025 |  |  | 2,025 |  |  | 277 |  |  |  |  |  |  | 1,838 |  |  |
Home equity – term | — |  |  | 3 |  |  | 3 |  |  | — |  |  |  |  |  |  | 5 |  |  |
Home equity – lines of credit | — |  |  | 849 |  |  | 849 |  |  | — |  |  |  |  |  |  | 395 |  |  |
Installment and other loans | 4 |  |  | 24 |  |  | 28 |  |  | — |  |  |  |  |  |  | 40 |  |  |
Total | $ | 4 |  |  | $ | 22,320 |  |  | $ | 22,324 |  |  | $ | 277 |  |  |  |  |  |  | $ | 20,583 |  |  |

A loan is considered to be collateral-dependent when the borrower is experiencing financial difficulty and the repayment is expected to be provided substantially through the operation or sale of collateral. At September 30, 2023, substantially all individually evaluated loans were collateral-dependent and consisted primarily of commercial real estate, acquisition and development and residential mortgage loans, which were primarily secured by commercial or residential real estate. All of the Company’s collateral-dependent loans had appraised collateral values which exceeded the amortized cost basis of the related loan as of September 30, 2023. The following table presents the amortized cost basis of collateral-dependent loans by class as of September 30, 2023:

| Type of Collateral
| Business Assets |  | Commercial Real Estate |  | Equipment |  | Land |  | Residential Real Estate |  |  |  | Other |  | Total
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied | $ | — |  |  | $ | 16,800 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  |  |  | $ | — |  |  | $ | 16,800 |
Non-owner occupied | — |  |  | 252 |  |  | — |  |  | — |  |  | — |  |  |  |  | — |  |  | 252 |
Non-owner occupied residential | — |  |  | 288 |  |  | — |  |  | — |  |  | — |  |  |  |  | — |  |  | 288 |
Acquisition and development: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and land development | — |  |  | 1,417 |  |  | — |  |  | — |  |  | — |  |  |  |  | — |  |  | 1,417 |
Commercial and industrial | 654 |  |  | — |  |  | 8 |  |  | — |  |  | — |  |  |  |  | — |  |  | 662 |
Residential mortgage: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
First lien | — |  |  | — |  |  | — |  |  | — |  |  | 1,940 |  |  |  |  | — |  |  | 1,940 |
Home equity - term | — |  |  | — |  |  | — |  |  | — |  |  | 3 |  |  |  |  | — |  |  | 3 |
Home equity - lines of credit | — |  |  | — |  |  | — |  |  | — |  |  | 849 |  |  |  |  | — |  |  | 849 |
Installment and other loans | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 4 |  |  | 4 |
Total | $ | 654 |  |  | $ | 18,757 |  |  | $ | 8 |  |  | $ | — |  |  | $ | 2,792 |  |  |  |  | $ | 4 |  |  | $ | 22,215 |

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

| Impaired Loans with a Specific Allowance |  | Impaired Loans with No Specific Allowance
| Recorded Investment (Book Balance) |  | Unpaid Principal Balance (Legal Balance) |  | Related Allowance |  | Recorded Investment (Book Balance) |  | Unpaid Principal Balance (Legal Balance)
December 31, 2022 |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |
Owner-occupied | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 2,767 |  |  | $ | 3,799 |
Non-owner occupied residential | — |  |  | — |  |  | — |  |  | 81 |  |  | 207 |
Acquisition and development: |  |  |  |  |  |  |  |  |
Commercial and land development | — |  |  | — |  |  | — |  |  | 15,426 |  |  | 15,426 |
Commercial and industrial | — |  |  | — |  |  | — |  |  | 31 |  |  | 112 |
Residential mortgage: |  |  |  |  |  |  |  |  |
First lien | 178 |  |  | 178 |  |  | 28 |  |  | 2,342 |  |  | 3,126 |
Home equity—term | — |  |  | — |  |  | — |  |  | 5 |  |  | 8 |
Home equity—lines of credit | — |  |  | — |  |  | — |  |  | 395 |  |  | 684 |
Installment and other loans | — |  |  | — |  |  | — |  |  | 40 |  |  | 40 |
| $ | 178 |  |  | $ | 178 |  |  | $ | 28 |  |  | $ | 21,087 |  |  | $ | 23,402 |

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

| September 30, 2022 |  |
| Average Impaired Balance |  | Interest Income Recognized |  |  |  |
Three Months Ended September 30, |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |
Owner-occupied | $ | 2,881 |  |  | $ | — |  |  |  |  |
Non-owner occupied residential | 93 |  |  | — |  |  |  |  |
Commercial and industrial | 51 |  |  | — |  |  |  |  |
Residential mortgage: |  |  |  |  |  |  |
First lien | 2,390 |  |  | 10 |  |  |  |  |
Home equity – term | 5 |  |  | — |  |  |  |  |
Home equity - lines of credit | 382 |  |  | — |  |  |  |  |
Installment and other loans | 43 |  |  | — |  |  |  |  |
| $ | 5,845 |  |  | $ | 10 |  |  |  |  |
Nine Months Ended September 30, |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |
Owner occupied | $ | 3,126 |  |  | $ | — |  |  |  |  |
Non-owner occupied residential | 100 |  |  | — |  |  |  |  |
Commercial and industrial | 132 |  |  | — |  |  |  |  |
Residential mortgage: |  |  |  |  |  |  |
First lien | 2,370 |  |  | 25 |  |  |  |  |
Home equity - term | 6 |  |  | — |  |  |  |  |
Home equity - lines of credit | 407 |  |  | — |  |  |  |  |
Installment and other loans | 45 |  |  | — |  |  |  |  |
| $ | 6,186 |  |  | $ | 25 |  |  |  |  |

On January 1, 2023, the Company adopted ASU 2022-02 on a modified retrospective basis. ASU 2022-02 eliminates the TDR accounting model, and requires that the Company evaluate, based on the accounting for loan modifications, whether the borrower is experiencing financial difficulty and the modification results in a more-than-insignificant direct change in the contractual cash flows and represents a new loan or a continuation of an existing loan. This change required all loan modifications to be accounted for under the general loan modification guidance in ASC 310-20, Receivables – Nonrefundable Fees and Other Costs, and subject entities to new disclosure requirements on loan modifications to borrowers experiencing financial difficulty. Upon adoption of CECL, the TDRs were evaluated and included in the CECL loan segment pools if the loans shared similar risk characteristics to other loans in the pool or remained with individually evaluated loans for which the ACL was measured using the collateral-dependent or discounted cash flow method.
The Company may modify loans to borrowers experiencing financial difficulty by providing principal forgiveness, term extension, interest rate reduction or an other-than-insignificant payment delay. When principal forgiveness is provided, the amount of forgiveness is charged off against the ACL. The Company may also provide multiple types of modifications on an individual loan. For the nine months ended September 30, 2023, the Company did not extend any modifications to borrowers experiencing financial difficulty that had a more-than-insignificant direct change in the contractual cash flows of the loan.
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The following table presents the most comparable required information for impaired loans that were TDRs, with the recorded investment at December 31, 2022:

|  |  | December 31, 2022
|  |  |  |  | Number of Contracts |  | Recorded Investment
Accruing: |  |  |  |  |  |  |
Residential mortgage: |  |  |  |  |  |  |
First lien |  |  |  |  | 8 |  |  | $ | 682 |
Nonaccruing: |  |  |  |  |  |  |
Residential mortgage: |  |  |  |  |  |  |
First lien |  |  |  |  | 4 |  |  | 212 |
Installment and other loans |  |  |  |  | 1 |  |  | 2 |
|  |  |  |  | 5 |  |  | 214 |
|  |  |  |  | 13 |  |  | $ | 896 |

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

|  |  | 30-59 Days Past Due |  | 60-89 Days Past Due |  | 90+ Days Past Due |  | Total Past Due |  | Loans Not Past Due |  | Total Loans
September 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  | $ | — |  |  | $ | 230 |  |  | $ | 131 |  |  | $ | 361 |  |  | $ | 375,989 |  |  | $ | 376,350 |
Non-owner occupied |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 630,514 |  |  | 630,514 |
Multi-family |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 143,437 |  |  | 143,437 |
Non-owner occupied residential |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 100,391 |  |  | 100,391 |
Acquisition and development: |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential construction |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 25,642 |  |  | 25,642 |
Commercial and land development |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 153,279 |  |  | 153,279 |
Commercial and industrial |  |  | 893 |  |  | 16 |  |  | 38 |  |  | 947 |  |  | 373,243 |  |  | 374,190 |
Municipal |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 10,334 |  |  | 10,334 |
Residential mortgage: |  |  |  |  |  |  |  |  |  |  |  |  |
First lien |  |  | 1,564 |  |  | 1,311 |  |  | 749 |  |  | 3,624 |  |  | 244,711 |  |  | 248,335 |
Home equity - term |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 5,223 |  |  | 5,223 |
Home equity - lines of credit |  |  | 1,174 |  |  | 887 |  |  | 513 |  |  | 2,574 |  |  | 186,162 |  |  | 188,736 |
Installment and other loans |  |  | 70 |  |  | 5 |  |  | 4 |  |  | 79 |  |  | 10,326 |  |  | 10,405 |
|  |  | $ | 3,701 |  |  | $ | 2,449 |  |  | $ | 1,435 |  |  | $ | 7,585 |  |  | $ | 2,259,251 |  |  | $ | 2,266,836 |

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The following table presents the most comparable required information, which includes the classes of the loan portfolio summarized by aging categories of performing loans and nonaccrual loans at December 31, 2022:

|  |  | Days Past Due |  |  |  |  |  |
| Current |  | 30-59 |  | 60-89 |  | 90+ (still accruing) |  | Total Past Due |  | Non- Accrual |  | Total Loans
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied | $ | 310,769 |  |  | $ | 31 |  |  | $ | — |  |  | $ | — |  |  | $ | 31 |  |  | $ | 2,767 |  |  | $ | 313,567 |
Non-owner occupied | 607,760 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 607,760 |
Multi-family | 138,832 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 138,832 |
Non-owner occupied residential | 103,782 |  |  | 184 |  |  | — |  |  | — |  |  | 184 |  |  | 81 |  |  | 104,047 |
Acquisition and development: |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential construction | 24,622 |  |  | 446 |  |  | — |  |  | — |  |  | 446 |  |  | — |  |  | 25,068 |
Commercial and land development | 142,613 |  |  | 269 |  |  | — |  |  | — |  |  | 269 |  |  | 15,426 |  |  | 158,308 |
Commercial and industrial | 355,179 |  |  | 464 |  |  | 52 |  |  | — |  |  | 516 |  |  | 31 |  |  | 355,726 |
Municipal | 12,173 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 12,173 |
Residential mortgage: |  |  |  |  |  |  |  |  |  |  |  |  |
First lien | 219,715 |  |  | 3,485 |  |  | 414 |  |  | 132 |  |  | 4,031 |  |  | 1,838 |  |  | 225,584 |
Home equity – term | 5,485 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 5 |  |  | 5,490 |
Home equity – lines of credit | 181,350 |  |  | 1,395 |  |  | 101 |  |  | — |  |  | 1,496 |  |  | 395 |  |  | 183,241 |
Installment and other loans | 11,953 |  |  | 64 |  |  | — |  |  | — |  |  | 64 |  |  | 40 |  |  | 12,057 |
Subtotal | 2,114,233 |  |  | 6,338 |  |  | 567 |  |  | 132 |  |  | 7,037 |  |  | 20,583 |  |  | 2,141,853 |
Loans acquired with credit deterioration: |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied | 2,203 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2,203 |
Non-owner occupied | 283 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 283 |
Non-owner occupied residential | 452 |  |  | — |  |  | — |  |  | 105 |  |  | 105 |  |  | — |  |  | 557 |
Commercial and industrial | 2,048 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2,048 |
Residential mortgage: |  |  |  |  |  |  |  |  |  |  |  |  |
First lien | 3,657 |  |  | 327 |  |  | 79 |  |  | 202 |  |  | 608 |  |  | — |  |  | 4,265 |
Home equity – term | 15 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 15 |
Installment and other loans | 8 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 8 |
Subtotal | 8,666 |  |  | 327 |  |  | 79 |  |  | 307 |  |  | 713 |  |  | — |  |  | 9,379 |
| $ | 2,122,899 |  |  | $ | 6,665 |  |  | $ | 646 |  |  | $ | 439 |  |  | $ | 7,750 |  |  | $ | 20,583 |  |  | $ | 2,151,232 |

As disclosed in Note 1, on January 1, 2023 the Company implemented CECL and increased the ACL, previously the ALL, with a cumulative-effect adjustment to the ACL for loans of $2.4 million. The Company’s ACL is calculated quarterly, with any adjustment recorded to the provision for credit losses in the consolidated statement of income. Management calculates the quantitative portion of collectively evaluated loans for all loan categories, with the exception of the consumer loan segment, using DCF methodology. For purposes of calculating the quantitative portion of collectively evaluated reserves on the consumer loan segment, the remaining life methodology is utilized. For purposes of estimating the Company’s ACL, management generally evaluates collectively evaluated loans by federal call code in order to group loans with similar risk characteristics.
Loans that do not share similar risk characteristics are evaluated on an individual loan basis, and are excluded from the collective evaluation for the ACL. Loans identified to be individually evaluated under CECL include loans on nonaccrual status and may include accruing loans that do not share similar risk characteristics to other accruing loans that are collectively evaluated on a loan pool basis. A specific reserve analysis may be applied to the individually evaluated loans, which considers collateral value, an observable market price or the present value of expected future cash flows. A specific reserve is assigned if the measured value of the loan using one of the before mentioned methods is less than the current carrying value of the loan.
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Based on management's analysis, adjustments may be applied for additional factors impacting the risk of loss in the loan portfolio beyond the quantitatively calculated reserve calculated on collectively evaluated loans. As the quantitative reserve calculation incorporates historical conditions, management may consider an additional or reduced reserve is warranted through qualitative risk factors based on current and expected conditions. These qualitative risk factors considered by management are comparable to legacy factors prior to the adoption of CECL and include significant or unexpected changes in:
Nature and Volume of Loans – including loan growth in the current and subsequent quarters based on the Company’s targeted growth and strategic plan, coupled with the types of loans booked based on risk management and credit culture; the number of exceptions to loan policy; and supervisory loan to value exceptions.
Concentrations of Credit and Changes within Credit Concentrations – including the composition of the Company’s overall portfolio makeup and management's evaluation related to concentration risk management and the inherent risk associated with the concentrations identified.
Lending Policies and Procedures, Underwriting Standards and Recovery Practices – including changes to credit policies and procedures, underwriting standards and perceived impact on anticipated losses; trends in the number of exceptions to loan policy; supervisory loan to value exceptions; and administration of loan recovery practices.
Delinquency and Classified Loan Trends – including delinquency percentages and internal loan ratings noted in the portfolio relative to economic conditions; severity of the delinquencies and the ratings; and whether the ratios are trending upwards or downwards.
Collateral Valuation Trends – including underlying market conditions and impact on the collateral values securing the loans.
Experience, Ability and Depth of Management/Lending staff – including the level of experience of senior and middle management and the lending staff; turnover of the staff; and instances of repeat criticisms.
Quality of Loan Review System – including the level of experience of the loan review staff; in-house versus outsourced provider of review; turnover of the staff; and instances of repeat criticisms from independent testing, which includes the evaluation of internal loan ratings of the portfolio.
Economic Conditions – including trends in the international, national, regional and local conditions that monitor the interest rate environment, inflationary pressures, the consumer price index, the housing price index, housing statistics, and bankruptcy rates.
Other External Factors - including regulatory and legal environment risks and competition.
All factors noted above were established upon adoption of CECL and were deemed appropriate at September 30, 2023. For the three and nine months ended September 30, 2023, these factors were unchanged from levels at adoption of CECL, except for an increase in the Delinquency and Classified Loan Trends qualitative factor for the commercial & industrial and owner-occupied commercial real estate loan classes, which was based on a recent trend of increases in loans downgraded to the special mention or classified risk rating, and an increase in the Economic Conditions qualitative factor for the residential mortgages, installment and other loans, which was based on growing concerns related to consumer debt levels, the impact of inflationary pressures and the reinstatement of student loan repayments.
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The following table presents the activity in the ACL, including the impact of adopting CECL, for the three and nine months ended September 30, 2023 and the activity in the ALL for the three and nine months ended September 30, 2022:

| Commercial |  | Consumer |  |  |  |
| Commercial Real Estate |  | Acquisition and Development |  | Commercial and Industrial |  | Municipal |  | Total |  | Residential Mortgage |  | Installment and Other |  | Total |  | Unallocated |  | Total
Three Months Ended |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
September 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance, beginning of period | $ | 16,996 |  |  | $ | 2,767 |  |  | $ | 5,854 |  |  | $ | 167 |  |  | $ | 25,784 |  |  | $ | 2,307 |  |  | $ | 292 |  |  | $ | 2,599 |  |  | $ | — |  |  | $ | 28,383 |
Provision for credit losses | (173) |  |  | 125 |  |  | (62) |  |  | (11) |  |  | (121) |  |  | 239 |  |  | 18 |  |  | 257 |  |  | — |  |  | 136 |
Charge-offs | — |  |  | — |  |  | (267) |  |  | — |  |  | (267) |  |  | — |  |  | (75) |  |  | (75) |  |  | — |  |  | (342) |
Recoveries | 17 |  |  | 1 |  |  | 33 |  |  | — |  |  | 51 |  |  | 31 |  |  | 19 |  |  | 50 |  |  | — |  |  | 101 |
Balance, end of period | $ | 16,840 |  |  | $ | 2,893 |  |  | $ | 5,558 |  |  | $ | 156 |  |  | $ | 25,447 |  |  | $ | 2,577 |  |  | $ | 254 |  |  | $ | 2,831 |  |  | $ | — |  |  | $ | 28,278 |
September 30, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance, beginning of period | $ | 12,294 |  |  | $ | 3,024 |  |  | $ | 4,471 |  |  | $ | 26 |  |  | $ | 19,815 |  |  | $ | 3,004 |  |  | $ | 223 |  |  | $ | 3,227 |  |  | $ | 237 |  |  | $ | 23,279 |
Provision for loan losses | 551 |  |  | 342 |  |  | 296 |  |  | (1) |  |  | 1,188 |  |  | 309 |  |  | (5) |  |  | 304 |  |  | 8 |  |  | 1,500 |
Charge-offs | — |  |  | — |  |  | (87) |  |  | — |  |  | (87) |  |  | — |  |  | (24) |  |  | (24) |  |  | — |  |  | (111) |
Recoveries | — |  |  | 1 |  |  | 32 |  |  | — |  |  | 33 |  |  | 2 |  |  | 6 |  |  | 8 |  |  | — |  |  | 41 |
Balance, end of period | $ | 12,845 |  |  | $ | 3,367 |  |  | $ | 4,712 |  |  | $ | 25 |  |  | $ | 20,949 |  |  | $ | 3,315 |  |  | $ | 200 |  |  | $ | 3,515 |  |  | $ | 245 |  |  | $ | 24,709 |
Nine Months Ended |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
September 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance, prior to adoption of CECL | $ | 13,558 |  |  | $ | 3,214 |  |  | $ | 4,505 |  |  | $ | 24 |  |  | $ | 21,301 |  |  | $ | 3,444 |  |  | $ | 188 |  |  | $ | 3,632 |  |  | $ | 245 |  |  | $ | 25,178 |
Impact of adopting CECL | 2,857 |  |  | (214) |  |  | 928 |  |  | 169 |  |  | 3,740 |  |  | (1,121) |  |  | 49 |  |  | (1,072) |  |  | (245) |  |  | 2,423 |
Provision for credit losses | 335 |  |  | (111) |  |  | 790 |  |  | (37) |  |  | 977 |  |  | 163 |  |  | 124 |  |  | 287 |  |  | — |  |  | 1,264 |
Charge-offs | (12) |  |  | — |  |  | (748) |  |  | — |  |  | (760) |  |  | (98) |  |  | (198) |  |  | (296) |  |  | — |  |  | (1,056) |
Recoveries | 102 |  |  | 4 |  |  | 83 |  |  | — |  |  | 189 |  |  | 189 |  |  | 91 |  |  | 280 |  |  | — |  |  | 469 |
Balance, end of period | $ | 16,840 |  |  | $ | 2,893 |  |  | $ | 5,558 |  |  | $ | 156 |  |  | $ | 25,447 |  |  | $ | 2,577 |  |  | $ | 254 |  |  | $ | 2,831 |  |  | $ | — |  |  | $ | 28,278 |
September 30, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance, beginning of period | $ | 12,037 |  |  | $ | 2,062 |  |  | $ | 3,814 |  |  | $ | 30 |  |  | $ | 17,943 |  |  | $ | 2,785 |  |  | $ | 215 |  |  | $ | 3,000 |  |  | $ | 237 |  |  | $ | 21,180 |
Provision for loan losses | 776 |  |  | 1,295 |  |  | 980 |  |  | (5) |  |  | 3,046 |  |  | 508 |  |  | 13 |  |  | 521 |  |  | 8 |  |  | 3,575 |
Charge-offs | — |  |  | — |  |  | (202) |  |  | — |  |  | (202) |  |  | (10) |  |  | (42) |  |  | (52) |  |  | — |  |  | (254) |
Recoveries | 32 |  |  | 10 |  |  | 120 |  |  | — |  |  | 162 |  |  | 32 |  |  | 14 |  |  | 46 |  |  | — |  |  | 208 |
Balance, end of period | $ | 12,845 |  |  | $ | 3,367 |  |  | $ | 4,712 |  |  | $ | 25 |  |  | $ | 20,949 |  |  | $ | 3,315 |  |  | $ | 200 |  |  | $ | 3,515 |  |  | $ | 245 |  |  | $ | 24,709 |

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

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

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NOTE 4. LEASES
A lease provides the lessee the right to control the use of an identified asset for a period of time in exchange for consideration. The Company has primarily entered into operating leases for branches and office space. Most of the Company's leases contain renewal options, which the Company is reasonably certain to exercise. Including renewal options, the Company's leases range from 4 to 30 years. Operating lease right-of-use assets and lease liabilities are included in other assets and accrued interest and other liabilities on the Company's unaudited condensed consolidated balance sheets.
The Company uses its incremental borrowing rate to determine the present value of the lease payments, as the rate implicit in the Company's leases is not readily determinable. Lease agreements that contain non-lease components are generally accounted for as a single lease component, while variable costs, such as common area maintenance expenses and property taxes, are expensed as incurred.
The following table summarizes the Company's operating leases at September 30, 2023 and December 31, 2022:

| September 30, 2023 |  | December 31, 2022
Operating lease ROU assets | $ | 11,053 |  |  | $ | 9,270 |
Operating lease ROU liabilities | 11,821 |  |  | 9,976 |
Weighted-average remaining lease term (in years) | 15.2 |  | 14.3
Weighted-average discount rate | 4.3 | % |  | 4.1 | %

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

| Three Months Ended |  | Nine Months Ended
| September 30, 2023 |  | September 30, 2022 |  | September 30, 2023 |  | September 30, 2022
Cash paid for operating lease liabilities | $ | 319 |  |  | $ | 300 |  |  | $ | 890 |  |  | $ | 889 |
Operating lease expense | 337 |  |  | 347 |  |  | 948 |  |  | 1,090 |

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

2023 | $ | 334 |
2024 | 1,349 |
2025 | 1,371 |
2026 | 1,403 |
2027 | 1,437 |
Thereafter | 11,381 |
| 17,275 |
Less: imputed interest | 5,454 |
Total lease liabilities | $ | 11,821 |

NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS
At September 30, 2023 and December 31, 2022, goodwill was $18.7 million. No impairment charges were recorded in the three and nine months ended September 30, 2023 and 2022.

Goodwill is not amortized but is reviewed for potential impairment on at least an annual basis, with testing between annual tests if an event occurs or circumstances change that could potentially reduce the fair value of a reporting unit.
The Company conducted its last annual goodwill impairment test as of November 30, 2022 using generally accepted valuation methods. As a result of that impairment test, no goodwill impairment was identified. During the nine months ended September 30, 2023, the market and banking sector was impacted by the rising interest rates and current economic conditions, which caused the Company's stock price and market capitalization to decline. The Company performed a qualitative assessment, which indicated that it was more likely than not that the fair value exceeded its carrying value, resulting in no impairment charge for the nine months ended September 30, 2023. Management will continue to evaluate the economic conditions for any potential applicable changes.
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The following table presents changes in and components of other intangible assets for the three and nine months ended September 30, 2023 and 2022. During the three months ended September 30, 2023, the Company acquired an investment advisory firm and related accounts with assets under management of approximately $67.2 million. In connection with this acquisition, the Company recorded an intangible asset totaling $289 thousand associated with the customer list.
No impairment charges were recorded on other intangible assets during the three and nine months ended September 30, 2023 and September 30, 2022.

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Beginning of period | $ | 2,589 |  |  | $ | 3,610 |  |  | $ | 3,078 |  |  | $ | 4,183 |
Acquired customer list | 289 |  |  | — |  |  | 289 |  |  | — |
Amortization expense | (228) |  |  | (272) |  |  | (717) |  |  | (845) |
Balance, end of period | $ | 2,650 |  |  | $ | 3,338 |  |  | $ | 2,650 |  |  | $ | 3,338 |

The following table presents the components of other identifiable intangible assets at September 30, 2023 and December 31, 2022:

| September 30, 2023 |  | December 31, 2022
| Gross Amount |  | Accumulated Amortization |  | Gross Amount |  | Accumulated Amortization
Amortized intangible assets: |  |  |  |  |  |  |
Core deposit intangibles | $ | 8,390 |  |  | $ | 6,029 |  |  | $ | 8,390 |  |  | $ | 5,312 |
Other customer relationship intangibles | 289 |  |  | — |  |  | 25 |  |  | 25 |
Total | $ | 8,679 |  |  | $ | 6,029 |  |  | $ | 8,415 |  |  | $ | 5,337 |

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

2023 | $ | 291 |
2024 | 827 |
2025 | 648 |
2026 | 468 |
2027 | 289 |
Thereafter | 127 |
| $ | 2,650 |

NOTE 6. SHARE-BASED COMPENSATION PLANS
The Company maintains share-based compensation plans under the shareholder-approved 2011 Plan. The purpose of the share-based compensation plans is to provide officers, employees, and non-employee members of the Board of Directors of the Company with additional incentive to further the success of the Company. At September 30, 2023, 1,281,920 shares of the common stock of the Company were reserved, of which 422,358 shares are available to be issued.
The 2011 Plan incentive awards may consist of grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, deferred stock units and performance shares. All employees and members of the Board of Directors of the Company and its subsidiaries are eligible to participate in the 2011 Plan. The 2011 Plan allows for the Compensation Committee of the Board of Directors to determine the type of incentive to be awarded, its term, manner of exercise, vesting and restrictions on shares. Generally, awards are nonqualified under the IRC, unless the awards are deemed to be incentive awards to employees at the Compensation Committee’s discretion.
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The following table presents a summary of nonvested restricted shares activity for the nine months ended September 30, 2023:

| Shares |  | Weighted Average Grant Date Fair Value
Nonvested shares, beginning of year | 284,909 |  |  | $ | 22.35 |
Granted | 148,501 |  |  | 23.57 |
Forfeited | (33,832) |  |  | 22.58 |
Vested | (107,466) |  |  | 22.56 |
Nonvested shares, at period end | 292,112 |  |  | $ | 22.87 |

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

| Three months ended September 30, |  | Nine months ended September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Restricted share award expense | $ | 606 |  |  | $ | 602 |  |  | $ | 1,756 |  |  | $ | 1,461 |
Restricted share award tax benefit | 127 |  |  | 126 |  |  | 369 |  |  | 307 |
Fair value of shares vested | — |  |  | 71 |  |  | 2,460 |  |  | 1,935 |

The unrecognized compensation expense related to the share awards totaled $3.9 million at September 30, 2023 and $3.0 million at December 31, 2022. The unrecognized compensation expense at September 30, 2023 is expected to be recognized over a weighted-average period of 1.8 years.
The Company maintains an employee stock purchase plan to provide employees of the Company with an opportunity to purchase Company common stock. Eligible employees may purchase shares in an amount that does not exceed the lesser of the IRS limit of $25,000 or 10% of their annual salary at the lower of 95% of the fair market value of the shares on the semi-annual offering date, or related purchase date. The purchases occur in March and September of each year. The Company reserved 350,000 shares of its common stock to be issued under the employee stock purchase plan. At September 30, 2023, 139,146 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, 2023 and 2022:

| Three months ended September 30, |  | Nine months ended September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Shares purchased | 3,446 |  |  | 4,154 |  |  | 6,449 |  |  | 8,107 |
Weighted average price of shares purchased | $ | 20.52 |  |  | $ | 22.60 |  |  | $ | 21.14 |  |  | $ | 22.53 |
Compensation expense recognized | 4 |  |  | 13 |  |  | 7 |  |  | 21 |

The Company issues new shares or treasury shares, depending on market conditions, in its share-based compensation plans.
NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company's derivative financial instruments are used as risk management tools by the Company to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investment securities and borrowings and are not used for trading or speculative purposes.
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate swaps and interest rate caps
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as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed or variable amounts from a counterparty in exchange for the Company making variable-rate or fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company, however, discontinues cash flow hedge accounting if it is probable the forecasted hedged transactions will not occur in the initially identified time period due to circumstances. Upon discontinuance, the associated gains and losses deferred in AOCI are reclassified immediately into earnings and subsequent changes in the fair value of the cash flow hedge are recognized in earnings. The Company entered into one new interest rate swap designed as a hedging instrument with a notional value of $75.0 million during the nine months ended September 30, 2023. At September 30, 2023, the Company had two interest rate swaps designated as hedging instruments with a total notional value of $125.0 million for the purpose of hedging the variable cash flows of selected AFS securities or loans or hedging variable cash flows associated with the Company's borrowings compared to two interest rate swaps designated as hedging instruments with a total notional value of $100.0 million at December 31, 2022 for the purpose of hedging the variable cash flows of selected AFS securities. During the three months ended September 30, 2023, the Company had one interest rate swap designated as a hedging instrument mature with a total notional value of $50.0 million.
The Company enters into interest rate swap agreements that allow its commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. In addition, the Company may enter into interest rate caps that allow its commercial loan customers to gain protection against significant interest rate increases and provide a upper limit, or cap, on the variable interest rate. The Company then enters into a corresponding swap or cap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps and interest rate caps with both the customers and third parties are not designated as hedges and are marked through earnings. At September 30, 2023, the Company had 31 customer and 31 corresponding third-party broker interest rate derivatives not designated as a hedging instrument with an aggregate notional amount of $319.5 million, compared to $268.8 million in notional amount of such derivative instruments at December 31, 2022. The Company entered into four new interest rate swaps with its commercial loan customers and recognized swap fee income of $255 thousand during the three months ended September 30, 2023 and six new interest rate swaps that resulted in swap fee income $451 thousand during the nine months ended September 30, 2023. This is compared to four new interest rate swaps that resulted in swap fee income of $197 thousand during the three months ended September 30, 2022 and nine new interest rate swaps that resulted in swap fee income of $1.9 million during the nine months ended September 30, 2022. Swap fee income is included in noninterest income in the unaudited condensed consolidated statements of income.
At September 30, 2023 and December 31, 2022, the Company had cash collateral of $9.7 million and $5.4 million with the third parties for certain of these derivatives, respectively. At September 30, 2023 and December 31, 2022, the Company received cash collateral of $16.1 million and $8.5 million from a counterparty for these derivatives, respectively.
The Company also may enter into risk participation agreements with a financial institution counterparty for an interest rate derivative contract related to a loan in which the Company may be a participant or the agent bank. The risk participation agreement provides credit protection to the agent bank should the borrower fail to perform on its interest rate derivative contracts with the agent bank. The Company manages its credit risk on the risk participation agreement by monitoring the creditworthiness of the borrower, which is based on the same credit review process as though the Company had entered into the derivative instruments directly with the borrower. The notional amount of such risk participation agreement reflects the Company’s pro-rata share of the derivative instrument, consistent with its share of the related participated loan. At September 30, 2023 and December 31, 2022, the Company had four risk participation agreements with sold protection with a notional value of $32.6 million and $29.0 million, respectively. In addition, the Company had a risk participation with purchased protection with a notional value of $4.9 million at both September 30, 2023 and December 31, 2022. The Company did not enter into any risk participation agreements during the three and nine months ended September 30, 2023 compared to one new risk participation agreement with purchased protection with a notional value of $4.9 million during the three and nine months ended September 30, 2022. There was no upfront fee on the new risk participation during the three and nine months ended September 30, 2022.
As a part of its normal residential mortgage operations, the Company will enter into an interest rate lock commitment with a potential borrower. The Company may enter into a corresponding commitment with an investor to sell that loan at a specific price shortly after origination. In accordance with FASB ASC 820, adjustments are recorded through earnings to account for the net change in fair value of these transactions for the held for sale loans. The fair value of held for sale loans can vary based on the interest rate locked with the customer and the current market interest rate at the balance sheet date.
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The following table summarizes the fair value of the Company's derivative instruments at September 30, 2023 and December 31, 2022:

| September 30, 2023 |  | December 31, 2022
| Notional Amount |  | Balance Sheet Location |  | Fair Value |  | Notional Amount |  | Balance Sheet Location |  | Fair Value
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps - balance sheet hedge | $ | 75,000 |  |  | Other assets |  | $ | 2,616 |  |  | n/a |  | n/a |  | n/a
Interest rate swaps - balance sheet hedge | $ | 50,000 |  |  | Other liabilities |  | $ | (758) |  |  | $ | 100,000 |  |  | Other liabilities |  | $ | (973) |
Total derivatives designated as hedging instruments |  |  |  |  | $ | 1,858 |  |  |  |  |  |  | $ | (973) |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |
Interest rate swaps | $ | 153,828 |  |  | Other assets |  | $ | 13,911 |  |  | $ | 128,385 |  |  | Other assets |  | $ | 10,437 |
Interest rate swaps | 153,828 |  |  | Other liabilities |  | (13,517) |  |  | 128,385 |  |  | Other liabilities |  | (10,262) |
Purchased options – rate cap | 5,932 |  |  | Other assets |  | 21 |  |  | 6,000 |  |  | Other assets |  | 29 |
Written options – rate cap | 5,932 |  |  | Other liabilities |  | (21) |  |  | 6,000 |  |  | Other liabilities |  | (29) |
Risk participations - sold credit protection | 32,588 |  |  | Other liabilities |  | (32) |  |  | 29,019 |  |  | Other liabilities |  | (69) |
Risk participations - purchased credit protection | 4,864 |  |  | Other assets |  | 5 |  |  | 4,941 |  |  | Other assets |  | 16 |
Interest rate lock commitments with customers | 593 |  |  | Other assets |  | 15 |  |  | 1,356 |  |  | Other assets |  | 35 |
Forward sale commitments | 150 |  |  | Other assets |  | 2 |  |  | 3,483 |  |  | Other assets |  | 140 |
Total derivatives not designated as hedging instruments |  |  |  |  | $ | 384 |  |  |  |  |  |  | $ | 297 |

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

| Amount of Gain (Loss) Recognized in OCI on Derivative |  | Amount of Gain (Loss) Recognized in OCI on Derivative
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Derivatives in cash flow hedging relationships: |  |  |  |  |  |
Interest rate products | $ | 1,439 |  |  | $ | (562) |  |  | $ | 2,831 |  |  | $ | (562) |
Total | $ | 1,439 |  |  | $ | (562) |  |  | $ | 2,831 |  |  | $ | (562) |

| Amount of Loss Reclassified from AOCI into Income |  | Amount of Loss Reclassified from AOCI into Income |  | Location of Loss Recognized from AOCI into Income
| Three Months Ended September 30, |  | Nine Months Ended September 30, |  |
| 2023 |  | 2022 |  | 2023 |  | 2022 |  |
Derivatives in cash flow hedging relationships: |  |  |  |  |  |
Interest rate products | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | Interest income
Total | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  |

| Amount of Gain (Loss) Recognized in Income |  | Amount of Gain (Loss) Recognized in Income |  | Location of Gain (Loss) Recognized in Income
| Three Months Ended September 30, |  | Nine Months Ended September 30, |  |
| 2023 |  | 2022 |  | 2023 |  | 2022 |  |
Derivatives not designated as hedging instruments: |  |  |  |  |  |
Interest rate products | $ | 307 |  |  | $ | 179 |  |  | $ | 188 |  |  | $ | 309 |  |  | Other operating expenses
Risk participation agreements | 31 |  |  | (11) |  |  | 58 |  |  | 19 |  |  | Other operating expenses
Interest rate lock commitments with customers | (52) |  |  | (98) |  |  | (20) |  |  | (265) |  |  | Mortgage banking activities
Forward sale commitments | — |  |  | (610) |  |  | (139) |  |  | 21 |  |  | Mortgage banking activities
Total | $ | 286 |  |  | $ | (540) |  |  | $ | 87 |  |  | $ | 84 |  |  |

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The following table is a summary of components for interest rate swaps designated as hedging instruments at September 30, 2023 and December 31, 2022:

| September 30, 2023 |  | December 31, 2022
Weighted average pay rate | 4.22 | % |  | 3.81 | %
Weighted average receive rate | 4.68 | % |  | 3.81 | %
Weighted average maturity in years | 3.1 |  | 1.2

NOTE 8. SHORT-TERM BORROWINGS
The Company has short-term borrowing capability from the FHLB, federal funds purchased and the FRB discount window. The following table summarizes these short-term borrowings at September 30, 2023 and December 31, 2022, and for the nine and twelve months then ended:

| September 30, 2023 |  | December 31, 2022
Balance at period-end | $ | 117,250 |  |  | $ | 104,684 |
Weighted average interest rate during the period | 5.68 | % |  | 4.45 | %
Average balance during the period | $ | 87,245 |  |  | $ | 13,846 |
Average interest rate during the period | 5.35 | % |  | 3.97 | %
Maximum month-end balance during the period | $ | 120,984 |  |  | $ | 104,684 |

NOTE 9. LONG-TERM DEBT
The following table presents components of the Company’s long-term debt at September 30, 2023 and December 31, 2022:

| Amount |  | Weighted Average Rate
| September 30, 2023 |  | December 31, 2022 |  | September 30, 2023 |  | December 31, 2022
FHLB fixed rate advances maturing: |  |  |  |  |  |  |
2025 | $ | 15,000 |  |  | $ | — |  |  | 4.57 | % |  | — | %
2028 | 25,000 |  |  | — |  |  | 3.98 | % |  | — | %
| 40,000 |  |  | — |  |  | 4.20 | % |  | — | %
Total FHLB amortizing advance requiring monthly principal and interest payments, maturing: |  |  |  |  |  |  |
2025 | — |  |  | 1,455 |  |  | — | % |  | 4.74 | %
Total FHLB Advances | $ | 40,000 |  |  | $ | 1,455 |  |  | 4.20 | % |  | 4.74 | %

The Bank is a member of the FHLB of Pittsburgh and has access to the FHLB program of overnight and term advances. Under terms of a blanket collateral agreement for advances, lines and letters of credit from the FHLB, collateral for all outstanding advances, lines and letters of credit consisted of 1-4 family mortgage loans and other real estate secured loans totaling $1.1 billion at September 30, 2023. The Bank had additional availability of $917.5 million at the FHLB on September 30, 2023 based on its qualifying collateral, net of short-term borrowings and long-term debt detailed above, deposit letters of credit of $26.0 million and non-deposit letters of credit of $609 thousand at September 30, 2023.
At September 30, 2023 and December 31, 2022, the Bank had availability under FHLB lines totaling $43.2 million and $45.3 million, respectively.
The Bank has available unsecured lines of credit, with interest based on the daily Federal Funds rate, with two correspondent banks totaling $30.0 million, at September 30, 2023 and December 31, 2022. There were no borrowings under these lines of credit at September 30, 2023 and December 31, 2022.
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NOTE 10. SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Under the Basel Committee on Banking Supervision's capital guidelines for U.S. Banks ("Basel III rules"), an entity must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The Company and the Bank have elected not to include net unrealized gains or losses included in AOCI in computing regulatory capital.
On January 1, 2023, the Company adopted ASU No. 2016-13, which replaced the existing incurred loss model for recognizing credit losses with an expected loss model referred to as the CECL model, and resulted in a reduction to opening retained earnings, net of income tax, and an increase to the allowance for credit losses for loans of approximately $2.4 million and allowance for credit losses for off-balance sheet exposures of $100 thousand, which combined totals $2.5 million. The federal bank regulatory agencies issued a rule, which provided for the option to elect a three-year transition provision of the day-one impact of the CECL model beginning with regulatory capital at March 31, 2023. The Company elected the three-year phase in option.
The Company and the Bank met all capital adequacy requirements to which they are subject at September 30, 2023 and December 31, 2022. Prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At September 30, 2023, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's classification.
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The following table presents capital amounts and ratios at September 30, 2023 and December 31, 2022:

| Actual |  | For Capital Adequacy Purposes (includes applicable capital conservation buffer) |  | To Be Well Capitalized Under Prompt Corrective Action Provisions
| Amount |  | Ratio |  | Amount |  | Ratio |  | Amount |  | Ratio
September 30, 2023 |  |  |  |  |  |  |  |  |  |  |
Total risk-based capital: |  |  |  |  |  |  |  |  |  |  |
Orrstown Financial Services, Inc. | $ | 326,549 |  |  | 13.0 | % |  | $ | 263,141 |  |  | 10.5 | % |  | n/a |  | n/a
Orrstown Bank | 313,992 |  |  | 12.5 | % |  | 263,085 |  |  | 10.5 | % |  | $ | 250,557 |  |  | 10.0 | %
Tier 1 risk-based capital: |  |  |  |  |  |  |  |  |  |  |
Orrstown Financial Services, Inc. | 266,370 |  |  | 10.6 | % |  | 213,019 |  |  | 8.5 | % |  | n/a |  | n/a
Orrstown Bank | 285,889 |  |  | 11.4 | % |  | 212,974 |  |  | 8.5 | % |  | 200,446 |  |  | 8.0 | %
Tier 1 common equity risk-based capital: |  |  |  |  |  |  |  |  |  |  |
Orrstown Financial Services, Inc. | 266,370 |  |  | 10.6 | % |  | 175,427 |  |  | 7.0 | % |  | n/a |  | n/a
Orrstown Bank | 285,889 |  |  | 11.4 | % |  | 175,390 |  |  | 7.0 | % |  | 162,862 |  |  | 6.5 | %
Tier 1 leverage capital: |  |  |  |  |  |  |  |  |  |  |
Orrstown Financial Services, Inc. | 266,370 |  |  | 8.7 | % |  | 122,433 |  |  | 4.0 | % |  | n/a |  | n/a
Orrstown Bank | 285,889 |  |  | 9.3 | % |  | 122,433 |  |  | 4.0 | % |  | 153,041 |  |  | 5.0 | %
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |
Total risk-based capital: |  |  |  |  |  |  |  |  |  |  |
Orrstown Financial Services, Inc. | $ | 304,589 |  |  | 12.7 | % |  | $ | 250,939 |  |  | 10.5 | % |  | n/a |  | n/a
Orrstown Bank | 292,933 |  |  | 12.3 | % |  | 250,566 |  |  | 10.5 | % |  | $ | 238,634 |  |  | 10.0 | %
Tier 1 risk-based capital: |  |  |  |  |  |  |  |  |  |  |
Orrstown Financial Services, Inc. | 245,752 |  |  | 10.3 | % |  | 203,141 |  |  | 8.5 | % |  | n/a |  | n/a
Orrstown Bank | 266,122 |  |  | 11.2 | % |  | 202,839 |  |  | 8.5 | % |  | 190,907 |  |  | 8.0 | %
Tier 1 common equity risk-based capital: |  |  |  |  |  |  |  |  |  |  |
Orrstown Financial Services, Inc. | 245,752 |  |  | 10.3 | % |  | 167,293 |  |  | 7.0 | % |  | n/a |  | n/a
Orrstown Bank | 266,122 |  |  | 11.2 | % |  | 167,044 |  |  | 7.0 | % |  | 155,112 |  |  | 6.5 | %
Tier 1 leverage capital: |  |  |  |  |  |  |  |  |  |  |
Orrstown Financial Services, Inc. | 245,752 |  |  | 8.5 | % |  | 116,325 |  |  | 4.0 | % |  | n/a |  | n/a
Orrstown Bank | 266,122 |  |  | 9.2 | % |  | 116,219 |  |  | 4.0 | % |  | 145,273 |  |  | 5.0 | %

The Company maintains a stockholder dividend reinvestment and stock purchase plan. Under the plan, shareholders may purchase additional shares of the Company’s common stock at the prevailing market prices with reinvested dividends and voluntary cash payments. The Company reserved 1,045,000 shares of its common stock to be issued under the dividend reinvestment and stock purchase plan. At September 30, 2023, approximately 665,000 shares were available to be issued under the plan.
In September 2015, the Board of Directors of the Company authorized a share repurchase program pursuant to which the Company could repurchase up to 416,000 shares of the Company's outstanding shares of common stock, in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Exchange Act, as amended. On April 19, 2021, the Board of Directors authorized the additional repurchase of up to 562,000 shares of its outstanding common stock for a total of 978,000 shares. When and if appropriate, repurchases may be made in the open market or privately negotiated transactions, depending on market conditions, regulatory requirements and other corporate considerations, as determined by management. Share repurchases may not occur and may be discontinued at any time. For the three months ended September 30, 2023, the Company repurchased zero shares of its common stock. At September 30, 2023, 949,533 shares had been repurchased at a total cost of $21.2 million, or $22.36 per share. Common stock available for future repurchase totals 28,467 shares, or 0.3% of the Company's outstanding common stock at September 30, 2023.
On October 24, 2023, the Board of Directors declared a cash dividend of $0.20 per common share, which will be paid on November 14, 2023 to shareholders of record at November 7, 2023.
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NOTE 11. EARNINGS (LOSS) PER SHARE
The following table presents earnings (loss) per share for the three and nine months ended September 30, 2023 and 2022:

| Three Months Ended September 30, |  | Nine Months Ended September 30,
(shares presented in the table are in thousands) | 2023 |  | 2022 |  | 2023 |  | 2022
Net income (loss) | $ | 9,026 |  |  | $ | (4,828) |  |  | $ | 28,020 |  |  | $ | 12,411 |
Weighted average shares outstanding - basic | 10,319 |  |  | 10,369 |  |  | 10,346 |  |  | 10,611 |
Dilutive effect of share-based compensation | 86 |  |  | — |  |  | 94 |  |  | 147 |
Weighted average shares outstanding - diluted | 10,405 |  |  | 10,369 |  |  | 10,440 |  |  | 10,758 |
Per share information: |  |  |  |  |  |  |
Basic earnings (loss) per share | $ | 0.87 |  |  | $ | (0.47) |  |  | $ | 2.71 |  |  | $ | 1.17 |
Diluted earnings (loss) per share | 0.87 |  |  | (0.47) |  |  | 2.68 |  |  | 1.16 |

For the three and nine months ended September 30, 2023, there were average outstanding restricted award shares totaling 5,262 and 8,348, respectively, compared to 1,000 and 39,219 for the three and nine months ended September 30, 2022, respectively, excluded from the computation of earnings (loss) per share because the effect was antidilutive, as the grant price exceeded the average market price. The dilutive effect of share-based compensation in each period above relates principally to restricted stock awards.
NOTE 12. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its clients. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the unaudited condensed consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The following table presents these contractual, or notional, amounts at September 30, 2023 and December 31, 2022.

| Contractual or Notional Amount
| September 30, 2023 |  | December 31, 2022
Commitments to fund: |  |  |
Home equity lines of credit | $ | 324,248 |  |  | $ | 296,213 |
1-4 family residential construction loans | 50,332 |  |  | 49,538 |
Commercial real estate, construction and land development loans | 159,107 |  |  | 156,560 |
Commercial, industrial and other loans | 335,685 |  |  | 338,286 |
Standby letters of credit | 21,960 |  |  | 23,229 |

Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each client’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the client. Collateral varies but may include accounts receivable, inventory, equipment, residential real estate, and income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional commitments issued by the Company to guarantee the performance of a client to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to clients. The Company holds collateral supporting those commitments when deemed necessary by management. The liability at September 30, 2023 and December 31, 2022 for guarantees under standby letters of credit issued was not considered to be material.
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The Company maintains a reserve on its off-balance sheet credit exposures, which totaled approximately $1.7 million and $1.6 million at September 30, 2023 and December 31, 2022, respectively, and is recorded in other liabilities on the unaudited condensed consolidated balance sheets. On January 1, 2023, the Company adopted CECL and recorded a day-one adjustment, which increased the allowance for credit losses for off-balance sheet credit exposures by $100 thousand. The reserve is based on management's estimate of expected losses in its off-balance sheet credit exposures. The reserve specific to unfunded loan commitments is determined by applying utilization assumptions based on historical experience and applying the expected loss rates by loan class. Following adoption of CECL, the change in the reserve for off-balance sheet credit exposures is recorded as a provision or reduction to expense through the provision for credit losses in the consolidated statements of income. The Company did not record a provision for credit losses for off-balance sheet credit exposures for the three and nine months ended September 30, 2023. Prior to January 1, 2023, the Company maintained the reserve based on historical loss experience of the related loan class and utilization assumptions, for off-balance sheet credit exposures that currently are not funded. For the three and nine months ended September 30, 2022, the Company recorded expense of zero and $28 thousand, respectively, to other operating expenses in the unaudited condensed consolidated statements of income associated with its reserve for off-balance sheet credit exposures.
NOTE 13. FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are:
Level 1 – quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date.
Level 2 – significant other observable inputs other than Level 1 prices such as prices for similar assets and liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – at least one significant unobservable input that reflects a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.
In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The Company used the following methods and significant assumptions to estimate fair value for instruments measured on a recurring basis:
Where quoted prices are available in an active market, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, investment securities are classified within Level 2 and fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flow. Level 2 investment securities include U.S. agency securities, MBS, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy. The Company’s investment securities are classified as available-for-sale.
The fair values of interest rate swaps and risk participation derivatives are determined using models that incorporate readily observable market data into a market standard methodology. This methodology nets the discounted future cash receipts and the discounted expected cash payments. The discounted variable cash receipts and payments are based on expectations of future interest rates derived from observable market interest rate curves. In addition, fair value is adjusted for the effect of nonperformance risk by incorporating credit valuation adjustments for the Company and its counterparties. These assets and
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liabilities are classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
The following table summarizes assets and liabilities measured at fair value on a recurring basis at September 30, 2023 and December 31, 2022:

| Level 1 |  | Level 2 |  | Level 3 |  | Total Fair Value Measurements
September 30, 2023 |  |  |  |  |  |  |
Financial Assets |  |  |  |  |  |  |
Investment securities: |  |  |  |  |  |  |
U.S. Treasury securities | $ | 17,143 |  |  | $ | — |  |  | $ | — |  |  | $ | 17,143 |
U.S. Government Agencies | — |  |  | 4,322 |  |  | — |  |  | 4,322 |
States and political subdivisions | — |  |  | 182,522 |  |  | 5,595 |  |  | 188,117 |
GSE residential MBSs | — |  |  | 57,351 |  |  | — |  |  | 57,351 |
GSE commercial MBSs | — |  |  | 4,778 |  |  | — |  |  | 4,778 |
GSE residential CMOs | — |  |  | 72,037 |  |  | — |  |  | 72,037 |
Non-agency CMOs | — |  |  | 17,521 |  |  | 21,458 |  |  | 38,979 |
Asset-backed | — |  |  | 112,315 |  |  | — |  |  | 112,315 |
Other | 120 |  |  | — |  |  | — |  |  | 120 |
Loans held for sale | — |  |  | 6,448 |  |  | — |  |  | 6,448 |
Derivatives | — |  |  | 16,553 |  |  | 15 |  |  | 16,568 |
Totals | $ | 17,263 |  |  | $ | 473,847 |  |  | $ | 27,068 |  |  | $ | 518,178 |
Financial Liabilities |  |  |  |  |  |  |
Derivatives | $ | — |  |  | $ | 14,328 |  |  | $ | — |  |  | $ | 14,328 |
December 31, 2022 |  |  |  |  |  |  |
Financial Assets |  |  |  |  |  |  |
Investment securities: |  |  |  |  |  |  |
U.S. Treasury securities | $ | 17,291 |  |  | $ | — |  |  | $ | — |  |  | $ | 17,291 |
U.S. Government Agencies | — |  |  | 5,135 |  |  | — |  |  | 5,135 |
States and political subdivisions | — |  |  | 191,488 |  |  | 5,926 |  |  | 197,414 |
GSE residential MBSs | — |  |  | 59,402 |  |  | — |  |  | 59,402 |
GSE residential CMOs | — |  |  | 68,378 |  |  | — |  |  | 68,378 |
Non-agency CMOs | — |  |  | 18,491 |  |  | 21,267 |  |  | 39,758 |
Asset-backed | — |  |  | 125,973 |  |  | — |  |  | 125,973 |
Other | 377 |  |  | — |  |  | — |  |  | 377 |
Loans held for sale | — |  |  | 10,880 |  |  | — |  |  | 10,880 |
Derivatives | — |  |  | 10,482 |  |  | 35 |  |  | 10,517 |
Totals | $ | 17,668 |  |  | $ | 490,229 |  |  | $ | 27,228 |  |  | $ | 535,125 |
Financial Liabilities |  |  |  |  |  |  |
Derivatives | $ | — |  |  | $ | 11,333 |  |  | $ | — |  |  | $ | 11,333 |

The Company had one municipal bond and three CMOs measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at both September 30, 2023 and December 31, 2022 compared to one municipal bond at September 30, 2022. During the nine months ended September 30, 2022, the Company had one non-agency CMO security called by the issuer. The Level 3 valuation is based on a non-executable broker quote, which is considered a significant unobservable input. Such quotes are updated as available and may remain constant for a period of time for certain broker-quoted securities that do not move with the market or that are not interest rate sensitive as a result of their structure or overall attributes.
The Company’s residential mortgage LHFS are recorded at fair value utilizing Level 2 measurements. This fair value measurement is determined based upon third party quotes obtained on similar loans. For loans held-for-sale, for which the fair
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value option has been elected, the aggregate fair value was below the aggregate principal balance by $1.4 million and $1.2 million as of September 30, 2023, and December 31, 2022, respectively.
The determination of the fair value of interest rate lock commitments on residential mortgages is based on agreed upon pricing with the respective investor on each loan and includes a pull through percentage. The pull through percentage represents an estimate of loans in the pipeline to be delivered to an investor versus the total loans committed for delivery. Significant changes in this input could result in a significantly higher or lower fair value measurement. As the pull through percentage is a significant unobservable input, this is deemed a Level 3 valuation input. The average pull through percentage, which is based upon historical experience, was 92% as of September 30, 2023. An increase or decrease of 5% in the pull through assumption would result in a positive or negative change of $1 thousand in the fair value of interest rate lock commitments at September 30, 2023.
The following provides details of the Level 3 fair value measurement activity for the periods ended September 30, 2023 and 2022:
Investment securities:

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Balance, beginning of period | $ | 27,994 |  |  | $ | 6,255 |  |  | $ | 27,193 |  |  | $ | 23,147 |
Unrealized losses included in OCI | (736) |  |  | (422) |  |  | (600) |  |  | (2,002) |
Purchases | — |  |  | — |  |  | 871 |  |  | — |
Net discount accretion (premium amortization) | 19 |  |  | (4) |  |  | 42 |  |  | 62 |
Principal payments and other | (225) |  |  | — |  |  | (454) |  |  | — |
Sales | — |  |  | — |  |  | — |  |  | (3,053) |
Calls | — |  |  | — |  |  | — |  |  | (12,154) |
OTTI | — |  |  | — |  |  | — |  |  | (171) |
Balance, end of period | $ | 27,052 |  |  | $ | 5,829 |  |  | $ | 27,052 |  |  | $ | 5,829 |

Interest rate lock commitments on residential mortgages:

| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2023 |  | 2022 |  | 2023 |  | 2022
Balance, beginning of period | $ | 67 |  |  | $ | 186 |  |  | $ | 35 |  |  | $ | 353 |
Total losses included in earnings | (52) |  |  | (98) |  |  | (20) |  |  | (265) |
Balance, end of period | $ | 15 |  |  | $ | 88 |  |  | $ | 15 |  |  | $ | 88 |

Certain financial assets are measured at fair value on a nonrecurring basis. Adjustments to the fair value of these assets usually results from the application of lower of cost or market accounting or write-downs of individual assets. The Company used the following methods and significant assumptions to estimate fair value for these financial assets.
Individually Evaluated Loans
Upon adoption of CECL, loans individually evaluated for credit expected losses included nonaccrual loans and other loans that do not share similar risk characteristics to loans in the CECL loan pools, which have been classified as Level 3. Individually evaluated loans with an allocation to the ACL are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for credit losses on the unaudited condensed consolidated statements of income. Prior to the adoption of CECL and ASU No. 2022-02, which eliminated the TDR accounting model, loans were designated as impaired when, in the judgment of management and based on current information and events, it is probable that all amounts due, according to the contractual terms of the loan agreement, will not be collected.
The measurement of loss associated with loans evaluated individually for all loan classes was based on either the observable market price of the loan, the fair value of the collateral, or discounted cash flows. For collateral-dependent loans, fair value was measured based on the value of the collateral securing the loan, less estimated costs to sell. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The value of the real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction, or if management adjusts the appraisal value, then the fair value is considered Level 3.
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The value of business equipment is based upon an outside appraisal, if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3).
Changes in the fair value of individually evaluated loans still held and considered in the determination of the provision for credit losses were a decline of $224 thousand and an increase of $286 thousand for the three and nine months ended September 30, 2023, respectively, compared to zero and a decline of $40 thousand for the three and nine months ended September 30, 2022, respectively.
Mortgage Servicing Rights
MSRs are evaluated for impairment by comparing the carrying value to the fair value, which is determined through a discounted cash flow valuation. To the extent the amortized cost of the MSRs exceeds their estimated fair values, a valuation allowance is established for such impairment. Fair value adjustments on the MSRs only occurs if there is an impairment charge. At September 30, 2023 and December 31, 2022, the MSR impairment reserve was zero for both periods. For both the three months ended September 30, 2023 and 2022, there was no impairment valuation allowance adjustment. The adjustments in the three and nine months ended September 30, 2022 were zero and a $79 thousand reversal, respectively, due to increases in market rates, which increased the MSR fair value.
The following table summarizes assets measured at fair value on a nonrecurring basis at September 30, 2023 and December 31, 2022:

| Level 1 |  | Level 2 |  | Level 3 |  | Total Fair Value Measurements
September 30, 2023 |  |  |  |  |  |  |
Individually Evaluated Loans |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |
Owner occupied | $ | — |  |  | $ | — |  |  | $ | 88 |  |  | $ | 88 |
Non-owner occupied residential | — |  |  | — |  |  | — |  |  | — |
Commercial and industrial | — |  |  | — |  |  | 146 |  |  | 146 |
Residential mortgage: |  |  |  |  |  |  |
First lien | — |  |  | — |  |  | 226 |  |  | 226 |
Home equity - lines of credit | — |  |  | — |  |  | 62 |  |  | 62 |
Total individually evaluated loans | $ | — |  |  | $ | — |  |  | $ | 522 |  |  | $ | 522 |
December 31, 2022 |  |  |  |  |  |  |
Impaired Loans |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |
Owner occupied | $ | — |  |  | $ | — |  |  | $ | 116 |  |  | $ | 116 |
Non-owner occupied residential | — |  |  | — |  |  | 9 |  |  | 9 |
Residential mortgage: |  |  |  |  |  |  |
First lien | — |  |  | — |  |  | 309 |  |  | 309 |
Home equity - lines of credit | — |  |  | — |  |  | 86 |  |  | 86 |
Total impaired loans | $ | — |  |  | $ | — |  |  | $ | 520 |  |  | $ | 520 |

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The following table presents additional qualitative information about assets measured on a nonrecurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

| Fair Value Estimate |  | Valuation Techniques |  | Unobservable Input |  | Range
September 30, 2023 |  |  |  |  |  |  |
Individually evaluated loans | $ | 522 |  |  | Appraisal of collateral |  | Management adjustments on appraisals for property type and recent activity |  | 10% - 25% discount
|  |  |  |  | - Management adjustments for liquidation expenses |  | 6.75% - 10.29% discount
December 31, 2022 |  |  |  |  |  |  |
Impaired loans | $ | 520 |  |  | Appraisal of collateral |  | Management adjustments on appraisals for property type and recent activity |  | 10% - 25% discount
|  |  |  |  | - Management adjustments for liquidation expenses |  | 6.08% - 17.93% discount

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Fair values of financial instruments
GAAP requires disclosure of the fair value of financial assets and liabilities, including those that are not measured and reported at fair value on a recurring or nonrecurring basis. The following table presents carrying amounts and estimated fair values of the financial assets and liabilities at September 30, 2023 and December 31, 2022:

| Carrying Amount |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
September 30, 2023 |  |  |  |  |  |  |  |  |
Financial Assets |  |  |  |  |  |  |  |  |
Cash and due from banks | $ | 34,728 |  |  | $ | 34,728 |  |  | $ | 34,728 |  |  | $ | — |  |  | $ | — |
Interest-bearing deposits with banks | 60,211 |  |  | 60,211 |  |  | 60,211 |  |  | — |  |  | — |
Restricted investments in bank stock | 12,987 |  |  | n/a |  | n/a |  | n/a |  | n/a
Investment securities | 495,162 |  |  | 495,162 |  |  | 17,263 |  |  | 450,846 |  |  | 27,053 |
Loans held for sale | 6,448 |  |  | 6,448 |  |  | — |  |  | 6,448 |  |  | — |
Loans, net of allowance for credit losses | 2,238,558 |  |  | 2,083,811 |  |  | — |  |  | — |  |  | 2,083,811 |
Derivatives | 16,568 |  |  | 16,568 |  |  | — |  |  | 16,553 |  |  | 15 |
Accrued interest receivable | 12,212 |  |  | 12,212 |  |  | — |  |  | 4,338 |  |  | 7,874 |
Financial Liabilities |  |  |  |  |  |  |  |  |
Deposits | 2,546,435 |  |  | 2,542,571 |  |  | — |  |  | 2,542,571 |  |  | — |
Deposits held for assumption in connection with sale of bank branches | — |  |  | — |  |  | — |  |  | — |  |  | — |
Securities sold under agreements to repurchase and federal funds purchased | 17,991 |  |  | 17,991 |  |  | — |  |  | 17,991 |  |  | — |
FHLB advances and other borrowings | 157,250 |  |  | 156,513 |  |  | — |  |  | 156,513 |  |  | — |
Subordinated notes | 32,076 |  |  | 28,774 |  |  | — |  |  | 28,774 |  |  | — |
Derivatives | 14,328 |  |  | 14,328 |  |  | — |  |  | 14,328 |  |  | — |
Accrued interest payable | 1,783 |  |  | 1,783 |  |  | — |  |  | 1,783 |  |  | — |
Off-balance sheet instruments | — |  |  | — |  |  | — |  |  | — |  |  | — |
December 31, 2022 |  |  |  |  |  |  |  |  |
Financial Assets |  |  |  |  |  |  |  |  |
Cash and due from banks | $ | 28,477 |  |  | $ | 28,477 |  |  | $ | 28,477 |  |  | $ | — |  |  | $ | — |
Interest-bearing deposits with banks | 32,346 |  |  | 32,346 |  |  | 32,346 |  |  | — |  |  | — |
Restricted investments in bank stock | 10,642 |  |  | n/a |  | n/a |  | n/a |  | n/a
Investment securities | 513,728 |  |  | 513,728 |  |  | 17,668 |  |  | 468,867 |  |  | 27,193 |
Loans held for sale | 10,880 |  |  | 10,880 |  |  | — |  |  | 10,880 |  |  | — |
Loans, net of allowance for loan losses | 2,126,054 |  |  | 1,991,164 |  |  | — |  |  | — |  |  | 1,991,164 |
Derivatives | 10,517 |  |  | 10,517 |  |  | — |  |  | 10,482 |  |  | 35 |
Accrued interest receivable | 11,027 |  |  | 11,027 |  |  | — |  |  | 4,441 |  |  | 6,586 |
Financial Liabilities |  |  |  |  |  |  |  |  |
Deposits | 2,444,939 |  |  | 2,440,660 |  |  | — |  |  | 2,440,660 |  |  | — |
Deposits held for assumption in connection with sale of bank branches | 31,307 |  |  | 29,429 |  |  | — |  |  | 29,429 |  |  | — |
Securities sold under agreements to repurchase | 17,251 |  |  | 17,251 |  |  | — |  |  | 17,251 |  |  | — |
FHLB advances and other borrowings | 106,139 |  |  | 106,141 |  |  | — |  |  | 106,141 |  |  | — |
Subordinated notes | 32,026 |  |  | 31,321 |  |  | — |  |  | 31,321 |  |  | — |
Derivatives | 11,333 |  |  | 11,333 |  |  | — |  |  | 11,333 |  |  | — |
Accrued interest payable | 457 |  |  | 457 |  |  | — |  |  | 457 |  |  | — |
Off-balance sheet instruments | — |  |  | — |  |  | — |  |  | — |  |  | — |

In accordance with the Company's adoption of ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, the methods utilized to measure the fair value of financial instruments at September 30, 2023 and December 31, 2022 represent an approximation of exit price; however, an actual exit price may differ. At December 31, 2022, deposits held for assumption in connection with the sale of bank branches includes the balance from the Purchase and Assumption Agreement entered into by the Company and announced on December 23, 2022. This agreement provided for the sale of a branch and associated deposit liabilities at an agreed upon premium of 6.0% of the financial deposit balance transferred. The Company completed the sale of the subject branch on May 12, 2023.
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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 March 25, 2022, a customer of the Bank filed a putative class action complaint against the Bank in the Court of Common Pleas of Cumberland County, Pennsylvania, in a case captioned Alleman, on behalf of himself and all others similarly situated, v. Orrstown Bank. The complaint alleges, among other things, that the Bank breached its account agreements by charging certain overdraft fees. The complaint seeks a refund of all allegedly improper fees, damages in an amount to be proven at trial, attorneys’ fees and costs, and an injunction against the Bank’s allegedly improper overdraft practices. This lawsuit is similar to lawsuits recently filed against other financial institutions pertaining to overdraft fee disclosures. The Bank intends to vigorously defend itself against the claims brought by plaintiff in this matter.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to assist readers in understanding the consolidated financial condition and results of operations of Orrstown and should be read in conjunction with the preceding unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q, as well as with the audited consolidated financial statements and notes thereto for the year ended December 31, 2022, included in our Annual Report on Form 10-K. Throughout this discussion, the yield on earning assets is stated on a fully taxable-equivalent basis and balances represent average daily balances unless otherwise stated.
Overview
The Company is a one-bank holding company that has elected status as a financial holding company. The consolidated financial information presented herein reflects the Company and its wholly-owned subsidiary, the Bank. At September 30, 2023, the Company had total assets of $3.1 billion, total liabilities of $2.8 billion and total shareholders’ equity of $243.1 million.
For the three and nine months ended September 30, 2023, the Company had net income of $9.0 million and $28.0 million, respectively. The focus for 2023 has been limiting net interest margin compression in an increasing interest rate environment and a long period of economic uncertainty while generating prudent growth. For the three and nine months ended September 30, 2022, the Company had a net loss of $4.8 million and net income of $12.4 million, respectively. During the fourth quarter of 2022, the Company agreed to settle a litigation matter, which resulted in a provision for legal settlement ("legal settlement") of $13.0 million, before the tax effect, recorded in the third quarter of 2022. In addition, during the third quarter of 2022, the Company announced strategic initiatives designed to drive long-term growth and improve operating efficiencies through planned branch closures and staffing model adjustments, which resulted in pre-tax non-interest expenses ("restructuring charge") of $3.2 million. Excluding the legal settlement and the restructuring charge, net income for the three and nine months ended September 30, 2022 totaled $7.9 million and $25.2 million, respectively. For the three months ended September 30, 2022, diluted loss per share totaled $0.47. For the nine months ended September 30, 2022, diluted earnings per share totaled $1.16. Excluding the legal settlement and restructuring charge, diluted earnings per share totaled $0.75 and $2.34 for the three and nine months ended September 30, 2022, respectively. See “Supplemental Reporting of Non-GAAP Measures.”
Cautionary Note About Forward-Looking Statements
Certain statements appearing herein, which are not historical in nature, are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, we may make other written and oral communications, from time to time, that contain such statements. Such forward-looking statements reflect the current views of the Company's management with respect to, among other things, future events and the Company's financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “will,” “expect,” “estimate,” “anticipate” or similar terms, or the negative variations of those words or other comparable words of a future or forward-looking nature. Forward-looking statements are statements that include projections, predictions, expectations, estimates or beliefs about events or results or otherwise are not statements of historical facts, many of which, by their nature, are inherently uncertain and beyond the Company's control, and include, but are not limited to, statements related to new business development, new loan opportunities, growth in the balance sheet and fee-based revenue lines of business, merger and acquisition activity, cost savings initiatives, reducing risk assets, and mitigating losses in the future. Accordingly, the Company cautions you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements and there can be no assurances that the Company will achieve the desired level of new business development and new loans, growth in the balance sheet and fee-based revenue lines of business, successful merger and acquisition activity, cost savings initiatives, 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 strategic growth plan due to changes in current or future market conditions; the effects of competition and how it may impact our community banking model, including industry consolidation and development of competing financial products and services; the integration of the Company's strategic acquisitions; the inability to fully achieve expected savings, efficiencies or synergies from mergers and acquisitions, or taking longer than estimated for such savings, efficiencies and synergies to be realized; changes in laws and regulations; interest rate movements; changes in credit quality; inability to raise capital, if necessary, under favorable conditions; volatility in the securities markets; the demand for our products and services; deteriorating economic conditions; geopolitical tensions; operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics; expenses associated with pending litigation and legal proceedings; a continuation of the recent disruption in the banking industry and
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responsive measures to manage it; and other risks and uncertainties, including those detailed in our Annual Report on Form 10-K for the year ended December 31, 2022, and our Quarterly Reports on Form 10-Q under the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other filings made with the SEC. The statements are valid only as of the date hereof and we disclaim any obligation to update this information.
Economic Climate, Inflation and Interest Rates
Preliminary real GDP for the third quarter of 2023 increased 4.9% on an annualized basis, which is an improvement from 2.1% during the second quarter of 2023 and annualized increase of 3.2% during the third quarter of 2022. The increase in preliminary GDP during the third quarter of 2023 reflected increases in consumer spending within various services and goods, residential fixed assets and government spending, partially offset by decreases in nonresidential fixed assets. Fluctuations in real GDP in recent periods, due to inflation, credit conditions, supply chain challenges and geopolitical tensions, continues to create uncertainty in the current economic environment. The personal consumption expenditures ("PCE") price index increased by 2.9% in the third quarter of 2023, compared to an increase of 2.5% for the final estimate in the second quarter of 2023. Excluding food and energy prices, the PCE price index increased by 2.4% in the third quarter of 2023 compared to 3.7% in the second quarter of 2023, which may be a signal that inflation pressures are starting to ease.
The national unemployment rate increased slightly to 3.8% in September 2023 compared to 3.6% in June 2023, and was at 3.5% in September 2022. However, within the Company's geographic footprint, the unemployment rate has decreased considerably in Pennsylvania from 4.3% in September 2022 to 3.4% in September 2023, and decreased in Maryland from 3.2% in September 2022 to 1.6% in September 2023. These decreases in state-wide unemployment rates are consistent with those experienced by the counties in which the Company operates branches and other corporate offices. There continued to be notable job gains nationally in healthcare, leisure and hospitality, professional, scientific and technical services, and government during the third quarter of 2023.
At September 30, 2023, the 10-year Treasury bond yield was 4.59%, a considerable increase from 3.83% at both December 31, 2022 and September 30, 2022 due to current economic conditions and inflationary pressures. In an attempt to combat the impact of inflation, the rising consumer price index, supply chain disruptions, the state of the labor market and geopolitical tensions, the Federal Reserve Open Markets Committee ("FOMC") approved increases to the Fed Funds rate totaling 550 basis points since March 2022 through the date of this report.
The majority of the assets and liabilities of a financial institution are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an impact on the Company, particularly with respect to the growth of total assets and noninterest expenses, which tend to rise during periods of general inflation. Risks also exist due to supply and demand imbalances, employment shortages, the interest rate environment, and geopolitical tensions. It is reasonably foreseeable that estimates made in the financial statements could be materially and adversely impacted in the near term as a result of these conditions, including expected credit losses on loans and the fair value of financial instruments that are carried at fair value.
Recent Banking Industry Developments
Beginning in March 2023, the banking industry experienced disruption from the failures of multiple regional U.S. banking institutions, each due to unique circumstances related to risk management of liquidity, interest, and capital and associated stress on deposits and unrealized losses on investment securities. These events led to a decline of confidence in the banking industry, which has since subsided, and overall economic uncertainty, which is expected to result in increased regulatory oversight and policymaking. The industry has experienced a significant increase in competition and pricing on deposits, which has driven funding costs higher. Although the Company was not materially impacted by these events during the three and nine months ended September 30, 2023, the Company has continued to assess its funding sources and analyze its liquidity position, interest rate sensitivity and capital adequacy, while also monitoring the ongoing events and volatility in the banking industry.
Critical Accounting Estimates
The Company’s accounting and reporting policies are in accordance with GAAP and follow accounting and reporting guidelines prescribed by bank regulatory authorities and general practices within the financial services industry in which it operates. Our financial position and results of operations are affected by management's application of accounting policies, including estimates, and assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the balance sheet date and through the date the financial statements are filed with the SEC. Different assumptions in the application of these policies could result in material changes in the consolidated financial position and/or consolidated results of operations and related disclosures. The more critical accounting estimates include accounting for credit losses and valuation methodologies.
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Accordingly, these critical accounting estimates are discussed in detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2022. Significant accounting policies and any changes in accounting principles and effects of new accounting pronouncements are discussed in Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data," in our Annual Report on Form 10-K for the year ended December 31, 2022. Additional disclosures regarding the effects of new accounting pronouncements, ASU 2016-13 and ASU 2022-02, are included in this report in Note 1, Summary of Significant Accounting Policies, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information."
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RESULTS OF OPERATIONS
Three months ended September 30, 2023 compared with three months ended September 30, 2022
Summary
Net income totaled $9.0 million for the three months ended September 30, 2023 compared to a net loss of $4.8 million for the same period in 2022 primarily due to the restructuring charge and provision for legal settlement. Diluted earnings per share for the three months ended September 30, 2023 totaled $0.87 compared to a diluted loss per share of $0.47 for the three months ended September 30, 2022.
Net interest income totaled $26.2 million for the three months ended September 30, 2023 compared to $25.5 million for the three months ended September 30, 2022, reflecting the deployment of cash into higher yielding commercial loans and investment securities and the impact of rising interest rates on interest-earning asset yields, partially offset by the impact of an increase in cost of funds and an increase in interest-bearing liabilities. Interest income recognized on SBA PPP loans totaled $28 thousand for the three months ended September 30, 2023 compared to $523 thousand for the three months ended September 30, 2022.
The provision for credit losses totaled $136 thousand and $1.5 million for the three months ended September 30, 2023 and 2022, respectively. During the first quarter of 2023, the Company adopted the new accounting standard for CECL, which resulted in the change from the incurred loss model based on historical loss experience to the expected loss model and reflects the expected credit losses over the expected life of financial assets and commitments.
Noninterest income totaled $5.9 million for the three months ended September 30, 2023 compared to $6.1 million for the three months ended September 30, 2022. During the third quarter of 2022, there were distributions of $964 thousand from investments in non-housing limited partnerships. This was partially offset by a reduction in losses in mortgage banking activities of $872 thousand during the third quarter of 2023.
Noninterest expenses totaled $20.4 million for the three months ended September 30, 2023 compared to $36.4 million for the three months ended September 30, 2022. The decrease of $16.0 million is primarily due to the legal settlement and the restructuring charge incurred during the third quarter of 2022.
Net Interest Income
Net interest income increased by $764 thousand from $25.5 million for the three months ended September 30, 2022 to $26.2 million for the three months ended September 30, 2023. Interest income on loans increased by $9.5 million, from $23.2 million to $32.7 million, and interest income on investment securities increased by $1.2 million, from $4.1 million to $5.3 million, compared to the same period in the prior year. Total interest expense increased by $10.5 million from $2.0 million for the three months ended September 30, 2022 to $12.5 million for the three months ended September 30, 2023. Interest expense on deposits increased by $9.2 million from $1.4 million for the three months ended September 30, 2022 to $10.6 million for the three months ended September 30, 2023, and interest expense on borrowings increased by $1.3 million from $592 thousand from three months ended September 30, 2022 to $1.9 million for the three months ended September 30, 2023.
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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, 2023 and 2022 on a taxable-equivalent basis:

| Three Months Ended September 30, 2023 |  | Three Months Ended September 30, 2022
| Average Balance |  | Taxable- Equivalent Interest |  | Taxable- Equivalent Rate |  | Average Balance |  | Taxable- Equivalent Interest |  | Taxable- Equivalent Rate
Assets |  |  |  |  |  |  |  |  |  |  |
Federal funds sold & interest-bearing bank balances | $ | 57,778 |  |  | $ | 633 |  |  | 4.35 | % |  | $ | 38,068 |  |  | $ | 200 |  |  | 2.08 | %
Investment securities (1)(2) | 521,234 |  |  | 5,548 |  |  | 4.26 |  |  | 528,988 |  |  | 4,377 |  |  | 3.31 |
Loans (1)(3)(4) | 2,256,727 |  |  | 32,878 |  |  | 5.78 |  |  | 2,051,707 |  |  | 23,219 |  |  | 4.49 |
Total interest-earning assets | 2,835,739 |  |  | 39,059 |  |  | 5.47 |  |  | 2,618,763 |  |  | 27,796 |  |  | 4.22 |
Other assets | 200,447 |  |  |  |  |  |  | 196,277 |  |  |  |  |
Total assets | $ | 3,036,186 |  |  |  |  |  |  | $ | 2,815,040 |  |  |  |  |
Liabilities and Shareholders’ Equity |  |  |  |  |  |  |  |  |  |  |
Interest-bearing demand deposits | $ | 1,541,728 |  |  | 7,476 |  |  | 1.92 |  |  | $ | 1,379,082 |  |  | 912 |  |  | 0.26 |
Savings deposits | 190,817 |  |  | 164 |  |  | 0.34 |  |  | 237,462 |  |  | 90 |  |  | 0.15 |
Time deposits | 357,194 |  |  | 2,942 |  |  | 3.27 |  |  | 265,015 |  |  | 370 |  |  | 0.55 |
Total interest-bearing deposits | 2,089,739 |  |  | 10,582 |  |  | 2.01 |  |  | 1,881,559 |  |  | 1,372 |  |  | 0.29 |
Securities sold under agreements to repurchase and federal funds purchased | 15,006 |  |  | 31 |  |  | 0.83 |  |  | 23,480 |  |  | 10 |  |  | 0.18 |
FHLB advances and other borrowings | 128,131 |  |  | 1,354 |  |  | 4.19 |  |  | 10,394 |  |  | 78 |  |  | 3.02 |
Subordinated notes | 32,066 |  |  | 505 |  |  | 6.29 |  |  | 32,000 |  |  | 504 |  |  | 6.29 |
Total interest-bearing liabilities | 2,264,942 |  |  | 12,472 |  |  | 2.19 |  |  | 1,947,433 |  |  | 1,964 |  |  | 0.40 |
Noninterest-bearing demand deposits | 468,628 |  |  |  |  |  |  | 575,777 |  |  |  |  |
Other liabilities | 54,353 |  |  |  |  |  |  | 49,964 |  |  |  |  |
Total liabilities | 2,787,923 |  |  |  |  |  |  | 2,573,174 |  |  |  |  |
Shareholders’ equity | 248,263 |  |  |  |  |  |  | 241,866 |  |  |  |  |
Total liabilities and shareholders' equity | $ | 3,036,186 |  |  |  |  |  |  | $ | 2,815,040 |  |  |  |  |
Taxable-equivalent net interest income /net interest spread |  |  | 26,587 |  |  | 3.29 | % |  |  |  | 25,832 |  |  | 3.82 | %
Taxable-equivalent net interest margin |  |  |  |  | 3.73 | % |  |  |  |  |  | 3.92 | %
Taxable-equivalent adjustment |  |  | (368) |  |  |  |  |  |  | (377) |  |  |
Net interest income |  |  | $ | 26,219 |  |  |  |  |  |  | $ | 25,455 |  |  |

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

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The following table presents changes in net interest income on a taxable-equivalent basis for the three months ended September 30, 2023 and 2022 by rate and volume components.

| Three Months Ended September 30, 2023 Versus 2022 Increase (Decrease) Due to Change In
(in thousands) | Average Volume |  | Average Rate |  | Total
Interest Income |  |  |  |  |
Federal funds sold and interest-bearing bank balances | $ | 103 |  |  | $ | 330 |  |  | $ | 433 |
Taxable securities | 206 |  |  | 1,345 |  |  | 1,551 |
Tax-exempt securities | (295) |  |  | (85) |  |  | (380) |
Loans | 2,307 |  |  | 7,352 |  |  | 9,659 |
Total interest income | 2,321 |  |  | 8,942 |  |  | 11,263 |
Interest Expense |  |  |  |  |
Interest-bearing demand deposits | 106 |  |  | 6,458 |  |  | 6,564 |
Savings deposits | (18) |  |  | 92 |  |  | 74 |
Time deposits | 129 |  |  | 2,443 |  |  | 2,572 |
Total interest-bearing deposits | 217 |  |  | 8,993 |  |  | 9,210 |
Securities purchases under agreements to repurchase and federal funds purchased | (4) |  |  | 25 |  |  | 21 |
FHLB advances and other | 896 |  |  | 380 |  |  | 1,276 |
Subordinated notes | 1 |  |  | — |  |  | 1 |
Total interest expense | 1,110 |  |  | 9,398 |  |  | 10,508 |
Taxable-Equivalent Net Interest Income | $ | 1,211 |  |  | $ | (456) |  |  | $ | 755 |

Net interest income on a taxable-equivalent basis increased by $755 thousand to $26.6 million for the three months ended September 30, 2023 from $25.8 million for the three months ended September 30, 2022. The Company's net interest spread decreased by 53 basis points to 3.29% for the three months ended September 30, 2023 compared to 3.82% for the three months ended September 30, 2022.
Taxable-equivalent net interest margin decreased by 19 basis points to 3.73% for the three months ended September 30, 2023 from 3.92% for the three months ended September 30, 2022. The taxable-equivalent yield on interest-earning assets increased by 125 basis points from 4.22% for the three months ended September 30, 2022 to 5.47% for the three months ended September 30, 2023, reflecting the benefit of both the deployment of cash into higher yielding loans and investment securities and the impact of elevated interest rates on these interest-earning assets. This increase in yield was partially offset by the increase of 179 basis points in the cost of interest-bearing liabilities between these same periods from 0.40% during the third quarter of 2022 to 2.19% during the third quarter of 2023 due to increased funding costs from higher market interest rates, competitive pressures and an increase in higher cost borrowings.
Average loans increased by $205.0 million to $2.3 billion for the three months ended September 30, 2023 compared to $2.1 billion for the three months ended September 30, 2022. Average investment securities decreased by $7.8 million from $529.0 million for the three months ended September 30, 2022 to $521.2 million for the same period in 2023 primarily due to paydowns. Average interest-bearing liabilities increased by $317.5 million to $2.3 billion for the three months ended September 30, 2023 from $1.9 billion for the three months ended September 30, 2022. The competition for deposits increased in the latter part of 2022 and has continued throughout 2023, which was coupled with clients utilizing their funds at a higher frequency. Therefore, additional liquidity was needed to meet the credit demands of clients, which resulted in an increase in average borrowings.
The yield on loans increased by 129 basis points to 5.78% for the three months ended September 30, 2023 compared to 4.49% for the three months ended September 30, 2022. Taxable-equivalent interest income earned on loans increased by $9.7 million year-over-year due to an increase in the average balance of commercial loans, excluding SBA PPP loan forgiveness activity, home equity loans and residential mortgages and from the impact of the rising interest rate environment. The increase in interest income from loan growth and higher interest rates was partially offset by the decrease of $495 thousand in interest income from SBA PPP loans due to a lower amount of forgiveness activity during the three months ended September 30, 2023 compared to the same period in 2022.
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The average balance of commercial loans, excluding SBA PPP loan forgiveness activity, increased by $179.4 million from $1.6 billion for the three months ended September 30, 2022 to $1.8 billion for the three months ended September 30, 2023. SBA PPP loans, net of deferred fees and costs, averaged $25.0 million for the three months ended September 30, 2022 compared to $6.8 million for the three months ended September 30, 2023. This decrease was due to forgiveness of SBA PPP loans. Average residential mortgage loans increased by $37.8 million from $213.6 million during the three months ended September 30, 2022 to $251.4 million during the three months ended September 30, 2023 due primarily to adjustable-rate and jumbo mortgage loans originated for the portfolio. Average home equity loans increased by $11.7 million from $179.7 million for the three months ended September 30, 2022 to $191.4 million for the three months ended September 30, 2023. Average installment and other consumer loans decreased by $5.7 million from $25.4 million for the three months ended September 30, 2022 to $19.7 million for the three months ended September 30, 2023.
For the three months ended September 30, 2023, interest income on loans includes $28 thousand of interest and net deferred fee income associated with SBA PPP loans compared to $523 thousand of such interest and fee income for the three months ended September 30, 2022. Prepayment income on commercial loans increased by $224 thousand from $129 thousand for the three months ended September 30, 2022 to $353 thousand for the three months ended September 30, 2023. Accretion of purchase accounting adjustments included in interest income was $149 thousand and $156 thousand for the three months ended September 30, 2023 and 2022, respectively. The three months ended September 30, 2023 and 2022 included $30 thousand and $64 thousand, respectively, of accelerated accretion.
Interest income on investment securities on a tax-equivalent basis increased by $1.1 million to $5.5 million for the three months ended September 30, 2023 from $4.4 million for the three months ended September 30, 2022, with the taxable equivalent yield increasing from 3.31% for the three months ended September 30, 2022 to 4.26% for the three months ended September 30, 2023. The increase of 95 basis points reflected the higher interest rate environment since March 2022 and the impact of investment security purchases at higher yields. The average balance of investment securities decreased by $7.8 million to $521.2 million for the three months ended September 30, 2023 from $529.0 million for the three months ended September 30, 2022 due to paydowns and lower investment security purchases between the comparative periods.
The average balance of federal funds sold and interest-bearing bank balances increased by $19.7 million from $38.1 million for the three months ended September 30, 2022 to $57.8 million for the same period in 2023 due primarily to the deployment of cash into loans and investment securities. However, the related interest income on a tax-equivalent basis increased by $433 thousand to $633 thousand for the three months ended September 30, 2023 from $200 thousand for the three months ended September 30, 2022. This increase was the result of multiple Federal Funds rate increases by the FOMC since March 2022.
Interest expense on interest-bearing liabilities increased by $10.5 million year-over-year due to the increase in the cost of interest-bearing liabilities by 179 basis points from 0.40% for the three months ended September 30, 2022 to 2.19% for the three months ended September 30, 2023, as funding costs increased from higher market interest rates, competitive pressures and an increase in higher cost borrowings. During the third quarter of 2023, average interest-bearing core deposits increased by $116.0 million and average time deposits increased by $92.2 million due as clients sought higher-yielding products during the rising interest rate environment.
Interest expense on borrowings increased by $1.3 million to $1.9 million for the three months ended September 30, 2023 from $592 thousand for the three months ended September 30, 2022, as the cost of borrowings increased by 69 basis points to 4.29% for the three months ended September 30, 2023 from 3.60% for the three months ended September 30, 2022. Average borrowings increased by $109.3 million from $65.9 million for the three months ended September 30, 2022 to $175.2 million for the three months ended September 30, 2023, as the Bank opted to borrow funds to provide additional liquidity to meet the credit needs of its clients.
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Provision for Credit Losses
The Company recorded a provision for credit losses of $136 thousand for the three months ended September 30, 2023 compared to $1.5 million for the same period in 2022. On January 1, 2023, the Company adopted the new accounting standard, referred to as CECL, which transitioned from the incurred loss model based on historical loss experience and economic and market conditions to the expected loss model. The CECL standard reflects expected credit losses over the expected life of the financial assets and commitments, primarily based on the discounted cash flow methodology for the majority of the loan segments, which applies the probability of default and loss given default factors to future cash flows, and adjusts to the net present value to derive the required reserve. Macroeconomic conditions are incorporated into the model for unemployment and gross domestic product, in addition to model assumptions for discount rate and prepayment and curtailment speeds.
For the three months ended September 30, 2023, the provision for credit losses was driven by loan growth of $32.4 million in loans and an increase in the Delinquency and Classified Loan Trends qualitative factor for the commercial & industrial and owner-occupied commercial real estate loan classes and an increase in the Economic Conditions qualitative factor for consumer loans. The changes in these qualitative factors were based on a recent trend of increases in loans downgraded within the previously noted loan classes and growing concerns surrounding the economic conditions related to consumer debt levels, the impact of inflationary pressures and the reinstatement of student loan repayments, which could impact consumer loans. The increases to these qualitative factors resulted in an increase to the required ACL of $1.5 million. In addition, the provision for credit losses is impacted by the change in expected loss rates under CECL. Favorable published trends in unemployment and GDP rates, which are used in correlation with historical charge-offs to predict defaults and losses, resulted in a decrease to the required ACL of $2.0 million in the third quarter of 2023. These changes to the total loss rate resulted in a net decrease to the required ACL of $547 thousand, which was more than offset by the impact of the loan production and the adjustments to the qualitative factors during the third quarter of 2023. The ALL to total loan ratio increased from 1.18% at September 30, 2022 to an ACL to total loan ratio of 1.25% at September 30, 2023, which the increase is primarily due to the cumulative effect adjustment recorded in connect with the adoption of CECL. The provision expense recorded in the three months ended September 30, 2022 was due to commercial loan growth, excluding SBA PPP loan forgiveness activity, of $125.9 million.
Net charge-offs for the three months ended September 30, 2023 totaled $241 thousand, compared to net charge-offs of $70 thousand for the three months ended September 30, 2022. The increase in net charge-offs was due primarily to one commercial and industrial loan relationship with partial charge-offs totaling $267 thousand during the third quarter of 2023. Nonaccrual loans were 0.98% of gross loans at September 30, 2023, compared with 0.25% of gross loans at September 30, 2022. Nonaccrual loans increased by $17.0 million from September 30, 2022 to September 30, 2023, primarily due to one commercial and land development construction-to-permanent ("CTP") loan being downgraded to substandard and placed on non-accrual status in the fourth quarter of 2022. While the loan had not been past due, management determined that it was appropriate to place the loan on non-accrual status due to other relevant factors. At this time, management believes that the value of the underlying collateral is sufficient to cover any potential losses on this loan. Management does not believe that this credit is indicative of overall stress in the loan portfolio. During the second quarter of 2023, the project underlying this CTP loan received its certificate of occupancy, which resulted in the recharacterization of the loan from commercial and land development to owner-occupied. The CTP loan had a current outstanding balance of $14.3 million and $15.4 million at September 30, 2023 and December 31, 2022, respectively.
Additional information is included in the "Credit Risk Management" section herein.
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Noninterest Income
The following table compares noninterest income for the three months ended September 30, 2023 and 2022:

| Three Months Ended September 30, |  | $ Change |  | % Change
| 2023 |  | 2022 |  | 2023-2022 |  | 2023-2022
Service charges on deposit accounts | $ | 1,020 |  |  | $ | 977 |  |  | $ | 43 |  |  | 4.4 | %
Interchange income | 963 |  |  | 1,014 |  |  | (51) |  |  | (5.0) | %
Other service charges, commissions and fees | 240 |  |  | 239 |  |  | 1 |  |  | 0.4 | %
Swap fee income | 255 |  |  | 197 |  |  | 58 |  |  | 29.4 | %
Trust and investment management income | 1,853 |  |  | 2,006 |  |  | (153) |  |  | (7.6) | %
Brokerage income | 973 |  |  | 947 |  |  | 26 |  |  | 2.7 | %
Mortgage banking activities | (142) |  |  | (1,014) |  |  | 872 |  |  | (86.0) | %
Income from life insurance | 620 |  |  | 583 |  |  | 37 |  |  | 6.3 | %
Other income | 141 |  |  | 1,123 |  |  | (982) |  |  | (87.4) | %
Investment securities losses | 2 |  |  | (14) |  |  | 16 |  |  | 114.3 | %
Total noninterest income | $ | 5,925 |  |  | $ | 6,058 |  |  | $ | (133) |  |  | (2.2) | %

Noninterest income decreased by $133 thousand between the three months ended September 30, 2023 and 2022. The following were significant components of this decrease:
•Swap fee income, which will fluctuate based on market conditions and client demand, increased by $58 thousand.
•Trust and investment management income decreased by $153 thousand due to market declines.
•The losses on mortgage banking activities declined from $1.0 million for the quarter ended September 30, 2022 to $142 thousand for the same quarter in 2023. Both periods had unfavorable marks on the fair values of loans held for sale, with losses during 2022 being more significant as there was greater movement in interest rates. Market conditions and elevated interest rates also continue to hinder mortgage production. Most mortgage production remains in adjustable-rate products, which are held in portfolio. Mortgage loans sold totaled $5.2 million in the third quarter of 2023 compared to $12.7 million in the third quarter of 2022.
•Other income decreased by $982 thousand due primarily to the distribution of $964 thousand from investments in non-housing limited partnerships during the third quarter of 2022.
•Other line items within noninterest income showed fluctuations attributable to normal business operations.
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Noninterest Expenses
The following table compares noninterest expenses for the three months ended September 30, 2023 and 2022:

| Three Months Ended September 30, |  | $ Change |  | % Change
| 2023 |  | 2022 |  | 2023-2022 |  | 2023-2022
Salaries and employee benefits | $ | 12,885 |  |  | $ | 12,705 |  |  | $ | 180 |  |  | 1.4 | %
Occupancy | 1,089 |  |  | 1,166 |  |  | (77) |  |  | (6.6) | %
Furniture and equipment | 1,371 |  |  | 1,214 |  |  | 157 |  |  | 12.9 | %
Data processing | 1,248 |  |  | 1,192 |  |  | 56 |  |  | 4.7 | %
Automated teller machine and interchange fees | 314 |  |  | 329 |  |  | (15) |  |  | (4.6) | %
Advertising and bank promotions | 332 |  |  | 278 |  |  | 54 |  |  | 19.4 | %
FDIC insurance | 477 |  |  | 294 |  |  | 183 |  |  | 62.2 | %
Professional services | 965 |  |  | 887 |  |  | 78 |  |  | 8.8 | %
Directors' compensation | 199 |  |  | 213 |  |  | (14) |  |  | (6.6) | %
Taxes other than income | 387 |  |  | 488 |  |  | (101) |  |  | (20.7) | %
Intangible asset amortization | 228 |  |  | 272 |  |  | (44) |  |  | (16.2) | %
Provision for legal settlement | — |  |  | 13,000 |  |  | (13,000) |  |  | 100.0 | %
Restructuring expenses | — |  |  | 3,155 |  |  | (3,155) |  |  | 100.0 | %
Other operating expenses | 952 |  |  | 1,219 |  |  | (267) |  |  | (21.9) | %
Total noninterest expenses | $ | 20,447 |  |  | $ | 36,412 |  |  | $ | (15,965) |  |  | (43.8) | %

Noninterest expense decreased by $16.0 million from $36.4 million for the three months ended September 30, 2022 to $20.4 million for the three months ended September 30, 2023. The following were significant factors in this decrease:
•Furniture and equipment expense increased by $157 thousand due to an increase in hardware and software maintenance and services to support technology and facility improvements.
•Advertising and bank promotions expense increased by $54 thousand due to an increase in digital advertising, contributions and sponsorships to continue to promote the Company.
•FDIC insurance expense increased by $183 thousand due to increases in the assessment rate caused by an annualized two-basis point increase assessed by the FDIC to increase its deposit insurance fund, as well as growth in commercial loans and overall assets.
•Taxes other than income decreased by $101 thousand due to a decrease in the Pennsylvania Bank Shares Tax expense, which was driven by a decrease in the Bank's total equity balance from the increase in unrealized losses on investment securities and charges in the third quarter of 2022 for a provision for legal settlement and restructuring expenses.
•The Company agreed to settle a litigation matter, which resulted in a provision for legal settlement of $13.0 million recorded in the third quarter of 2022.
•During the third quarter of 2022, the Company announced that five branch locations would be closing and staffing model adjustments would be made to drive long-term growth and improve operating efficiencies in 2023 and forward. As a result of these initiatives, the Company recorded a pre-tax restructuring charge of $3.2 million, which consisted of building and fixed asset write-offs of $1.9 million and early retirement/severance costs of $1.3 million.
•Other operating expenses decreased by $267 thousand primarily due to a reduction in credit valuation adjustments on derivatives of $169 thousand.
•Other line items within noninterest expenses showed fluctuations attributable to normal business operations.
Income Tax Expense
Income tax expense totaled $2.5 million, an effective tax rate of 21.9%, for the three months ended September 30, 2023 compared with an income tax benefit of $1.6 million and an effective tax rate of 24.6% for the three months ended September 30, 2022. Excluding the impact of the legal settlement, the effective tax rate was 17.6% for the three months ended September 30, 2022. The Company's effective tax rate for the three months ended September 30, 2023 is greater than the 21% federal statutory rate primarily due to an increase in state taxes in addition to the disallowed portion of interest expense against
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earnings in association with the Bank's tax-exempt investments under the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), partially offset by tax-exempt income, including interest earned on tax-exempt loans and securities and income from life insurance policies and tax credits. The increase in the effective tax rate from the three months ended September 30, 2022 to the three months ended September 30, 2023 was primarily due an increase in taxable income as the prior year was impacted by the restructuring charge and provision for legal settlement. In addition, the effective tax rate for the three months ended September 30, 2023 was increased by the portion of interest expense disallowed as a deduction against earnings under TEFRA and an increase in state taxes as a result of a greater percentage of taxable income earned in a state with a state income tax.
Nine months ended September 30, 2023 compared with nine months ended September 30, 2022
Summary
Net income totaled $28.0 million for the nine months ended September 30, 2023 compared to $12.4 million for the same period in 2022. Diluted earnings per share for the nine months ended September 30, 2023 totaled $2.68 compared to $1.16 for the nine months ended September 30, 2022.
Net interest income totaled $78.9 million for the nine months ended September 30, 2023 compared to $72.1 million for the nine months ended September 30, 2022, reflecting the deployment of cash into higher yielding commercial loans and investment securities and the impact of rising interest rates on interest-earning asset yields, partially offset by the impact of an increase in cost of funds and an increase in interest-bearing liabilities. Interest income recognized on SBA PPP loans totaled $174 thousand for the nine months ended September 30, 2023 compared to $5.9 million for the nine months ended September 30, 2022.
The provision for credit losses on loans totaled $1.3 million and $3.6 million for the nine months ended September 30, 2023 and 2022, respectively. During the first quarter of 2023, the Company adopted the new accounting standard for CECL, which resulted in the change from the incurred loss model based on historical loss experience to the expected loss model, and reflects the expected credit losses over the expected life of financial assets and commitments.
Noninterest income totaled $19.2 million and $20.7 million for the nine months ended September 30, 2023 and 2022, respectively. The decrease of $1.5 million was due to a decrease in swap fee income of $1.5 million.
Noninterest expenses totaled $61.5 million for the nine months ended September 30, 2023 compared to $74.6 million for the three months ended September 30, 2022. The decrease of $13.1 million is primarily due to restructuring charge for branch closures and other expense savings initiatives and a provision for legal settlement recorded in the third quarter of 2022.
Net Interest Income
Net interest income increased by $6.8 million from $72.1 million for the nine months ended September 30, 2022 to $78.9 million for the nine months ended September 30, 2023. Interest income on loans increased by $26.2 million, from $66.5 million to $92.7 million, and interest income on investment securities increased by $6.3 million, from $9.5 million to $15.8 million, compared to the same period in the prior year. Total interest expense increased by $26.6 million from $4.4 million for the nine months ended September 30, 2022 to $31.0 million for the nine months ended September 30, 2023. Interest expense on deposits increased by $22.6 million from $2.8 million for the nine months ended September 30, 2022 to $25.4 million for the nine months ended September 30, 2023, and interest expense on borrowings increased by $3.9 million from $1.7 million from nine months ended September 30, 2022 to $5.6 million for the nine months ended September 30, 2023.
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The following table presents net interest income, net interest spread and net interest margin for the nine months ended September 30, 2023 and 2022 on a taxable-equivalent basis:

| Nine Months Ended September 30, 2023 |  | Nine Months Ended September 30, 2022
| Average Balance |  | Taxable- Equivalent Interest |  | Taxable- Equivalent Rate |  | Average Balance |  | Taxable- Equivalent Interest |  | Taxable- Equivalent Rate
Assets |  |  |  |  |  |  |  |  |  |  |
Federal funds sold & interest-bearing bank balances | $ | 41,861 |  |  | $ | 1,349 |  |  | 4.31 | % |  | $ | 122,509 |  |  | $ | 536 |  |  | 0.59 | %
Investment securities (1)(2) | 524,365 |  |  | 16,523 |  |  | 4.21 |  |  | 508,582 |  |  | 10,276 |  |  | 2.70 |
Loans (1)(3)(4) | 2,223,701 |  |  | 93,051 |  |  | 5.59 |  |  | 2,011,881 |  |  | 66,738 |  |  | 4.43 |
Total interest-earning assets | 2,789,927 |  |  | 110,923 |  |  | 5.31 |  |  | 2,642,972 |  |  | 77,550 |  |  | 3.92 |
Other assets | 196,694 |  |  |  |  |  |  | 191,090 |  |  |  |  |
Total | $ | 2,986,621 |  |  |  |  |  |  | $ | 2,834,062 |  |  |  |  |
Liabilities and Shareholders’ Equity |  |  |  |  |  |  |  |  |  |  |
Interest-bearing demand deposits | $ | 1,519,013 |  |  | 18,611 |  |  | 1.64 |  |  | $ | 1,399,035 |  |  | 1,470 |  |  | 0.14 |
Savings deposits | 204,832 |  |  | 431 |  |  | 0.28 |  |  | 234,054 |  |  | 209 |  |  | 0.12 |
Time deposits | 320,000 |  |  | 6,350 |  |  | 2.65 |  |  | 279,557 |  |  | 1,079 |  |  | 0.52 |
Total interest-bearing deposits | 2,043,845 |  |  | 25,392 |  |  | 1.66 |  |  | 1,912,646 |  |  | 2,758 |  |  | 0.19 |
Securities sold under agreements to repurchase and federal funds purchased | 14,190 |  |  | 84 |  |  | 0.79 |  |  | 23,685 |  |  | 24 |  |  | 0.14 |
FHLB Advances and other borrowings | 122,300 |  |  | 3,992 |  |  | 4.36 |  |  | 4,693 |  |  | 121 |  |  | 3.44 |
Subordinated notes | 32,049 |  |  | 1,513 |  |  | 6.29 |  |  | 31,985 |  |  | 1,510 |  |  | 6.29 |
Total interest-bearing liabilities | 2,212,384 |  |  | 30,981 |  |  | 1.87 |  |  | 1,973,009 |  |  | 4,413 |  |  | 0.30 |
Noninterest-bearing demand deposits | 480,006 |  |  |  |  |  |  | 562,826 |  |  |  |  |
Other liabilities | 52,618 |  |  |  |  |  |  | 46,058 |  |  |  |  |
Total liabilities | 2,745,008 |  |  |  |  |  |  | 2,581,893 |  |  |  |  |
Shareholders’ equity | 241,613 |  |  |  |  |  |  | 252,169 |  |  |  |  |
Total | $ | 2,986,621 |  |  |  |  |  |  | $ | 2,834,062 |  |  |  |  |
Taxable-equivalent net interest income / net interest spread |  |  | 79,942 |  |  | 3.44 | % |  |  |  | 73,137 |  |  | 3.62 | %
Taxable-equivalent net interest margin |  |  |  |  | 3.83 | % |  |  |  |  |  | 3.70 | %
Taxable-equivalent adjustment |  |  | (1,054) |  |  |  |  |  |  | (991) |  |  |
Net interest income |  |  | $ | 78,888 |  |  |  |  |  |  | $ | 72,146 |  |  |

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

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The following table presents changes in net interest income on a taxable-equivalent basis for the nine months ended September 30, 2023 and 2022 by rate and volume components.

| Nine Months Ended September 30, 2023 Versus 2022 Increase (Decrease) Due to Change In
(in thousands) | Average Volume |  | Average Rate |  | Total
Interest Income |  |  |  |  |
Federal funds sold and interest-bearing bank balances | $ | (353) |  |  | $ | 1,166 |  |  | $ | 813 |
Taxable securities | 640 |  |  | 6,142 |  |  | 6,782 |
Tax-exempt securities | (412) |  |  | (123) |  |  | (535) |
Loans | 7,003 |  |  | 19,310 |  |  | 26,313 |
Total interest income | 6,878 |  |  | 26,495 |  |  | 33,373 |
Interest Expense |  |  |  |  |
Interest-bearing demand deposits | 122 |  |  | 17,019 |  |  | 17,141 |
Savings deposits | (26) |  |  | 248 |  |  | 222 |
Time deposits | 156 |  |  | 5,115 |  |  | 5,271 |
Total interest-bearing deposits | 252 |  |  | 22,382 |  |  | 22,634 |
Securities purchases under agreements to repurchase and federal funds purchased | (10) |  |  | 70 |  |  | 60 |
FHLB advances and other | 3,022 |  |  | 849 |  |  | 3,871 |
Subordinated notes | 3 |  |  | — |  |  | 3 |
Total interest expense | 3,267 |  |  | 23,301 |  |  | 26,568 |
Taxable-Equivalent Net Interest Income | $ | 3,611 |  |  | $ | 3,194 |  |  | $ | 6,805 |

Net interest income on a taxable-equivalent basis increased by $6.8 million to $79.9 million for the nine months ended September 30, 2023 from $73.1 million for the nine months ended September 30, 2022. The Company's net interest spread was 3.44% for the nine months ended September 30, 2023 compared to 3.62% for the nine months ended September 30, 2022.
Taxable-equivalent net interest margin increased by 13 basis points to 3.83% for the nine months ended September 30, 2023 from 3.70% for the nine months ended September 30, 2022. The taxable-equivalent yield on interest-earning assets increased by 139 basis points from 3.92% for the nine months ended September 30, 2022 to 5.31% for the nine months ended September 30, 2023 reflecting the benefit of both the deployment of cash into higher yielding loans and investment securities and the impact of rising interest rates on these interest-earning assets. This increase in yield was partially offset by the increase of 157 basis points in the cost of interest-bearing liabilities from 0.30% to 1.87% between these same periods due to increased funding costs from higher market interest rates, competitive pressures and an increase in borrowings.
Average loans increased by $211.8 million to $2.2 billion for the nine months ended September 30, 2023 compared to $2.0 billion for the nine months ended September 30, 2022. The increase in average loans was due to loan growth, partially offset by the impact of SBA PPP loan forgiveness activity. Average investment securities increased by $15.8 million from $508.6 million for the nine months ended September 30, 2022 to $524.4 million for the same period in 2023 primarily due to investment purchases, partially offset by paydowns. Average interest-bearing liabilities increased by $239.4 million to $2.2 billion for the nine months ended September 30, 2023 from $2.0 billion for the nine months ended September 30, 2022. The competition for deposits increased in the latter part of 2022 and continued throughout 2023, which was coupled with clients utilizing their funds at a higher frequency. Therefore, additional liquidity was needed to meet the credit demands of clients, which resulted in an increase in average borrowings.
The yield on loans increased by 116 basis points to 5.59% for the nine months ended September 30, 2023 compared to 4.43% for the nine months ended September 30, 2022. Taxable-equivalent interest income earned on loans increased by $26.3 million year-over-year due to an increase in the average balance of commercial loans, excluding SBA PPP loan forgiveness activity, home equity loans and residential mortgages and from the impact of the rising interest rate environment. The increase in interest income from loan growth and higher interest rates was partially offset by the decrease of $5.7 million in interest
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income from SBA PPP loans due to significantly less forgiveness activity during the nine months ended September 30, 2023 compared to the same period in 2022.
The average balance of commercial loans, excluding SBA PPP loan forgiveness activity, increased by $165.2 million from $1.6 billion for the nine months ended September 30, 2022 to $1.8 billion for the nine months ended September 30, 2023. SBA PPP loans, net of deferred fees and costs, averaged $83.8 million for the nine months ended September 30, 2022 compared to $9.6 million for the nine months ended September 30, 2023. This decrease was due to forgiveness of SBA PPP loans. Average residential mortgage loans increased by $36.5 million from $204.4 million during the nine months ended September 30, 2022 to $240.9 million during the nine months ended September 30, 2023, primarily due to adjustable-rate and jumbo mortgage loans originated for the portfolio. Average home equity loans increased by $16.9 million from $171.9 million for the nine months ended September 30, 2022 to $188.8 million for the nine months ended September 30, 2023. Average installment and other consumer loans decreased by $6.7 million from $27.2 million for the nine months ended September 30, 2022 to $20.5 million for the nine months ended September 30, 2023.
For the nine months ended September 30, 2023, interest income on loans includes $174 thousand of interest and net deferred fee income associated with SBA PPP loans compared to $5.9 million of such interest and fee income for the nine months ended September 30, 2022. Prepayment income on commercial loans decreased by $25 thousand from $652 thousand for the nine months ended September 30, 2022 to $627 thousand for the nine months ended September 30, 2023. Accretion of purchase accounting adjustments included in interest income was $603 thousand and $966 thousand for the nine months ended September 30, 2023 and 2022, respectively. The decrease in accretion was partially due to a decline in accelerated accretion from acquired loan payoffs or significant loan repayments. The nine months ended September 30, 2023 and 2022 included $212 thousand and $647 thousand, respectively, of accelerated accretion.
Interest income on investment securities on a tax-equivalent basis increased by $6.2 million to $16.5 million for the nine months ended September 30, 2023 from $10.3 million for the nine months ended September 30, 2022, with the taxable equivalent yield increasing from 2.70% for the nine months ended September 30, 2022 to 4.21% for the nine months ended September 30, 2023. The 151 basis point increase reflected the higher interest rate environment since March 2022, as well as higher balances from purchases. The average balance of investment securities increased by $15.8 million to $524.4 million for the nine months ended September 30, 2023 from $508.6 million for the nine months ended September 30, 2022.
The average balance of federal funds sold and interest-bearing bank balances decreased by $80.6 million from $122.5 million for the nine months ended September 30, 2022 to $41.9 million for the same period in 2023, due primarily to the deployment of cash into loans and investment securities. However, the related interest income on a tax-equivalent basis increased by $813 thousand to $1.3 million for the nine months ended September 30, 2023 from $536 thousand for the nine months ended September 30, 2022. This increase was the result of multiple Federal Funds rate increases by the FOMC since March 2022.
Interest expense on interest-bearing liabilities increased by $26.6 million year-over-year due to the increase in the cost of interest-bearing liabilities by 157 basis points from 0.30% for the nine months ended September 30, 2022 to 1.87% for the nine months ended September 30, 2023 as funding costs increased from higher market interest rates, competitive pressures and an increase in higher cost borrowings. In addition, the average balance of interest-bearing deposits increased by $131.2 million to $2.0 billion for the nine months ended September 30, 2023 from $1.9 billion for the nine months ended September 30, 2022. Average interest-bearing demand deposits increased by $100.4 million and average time deposits increased $40.4 million as clients sought higher-yielding products during the rising interest rate environment.
Interest expense on borrowings increased by $3.9 million to $5.6 million for the nine months ended September 30, 2023 from $1.7 million for the nine months ended September 30, 2022, as the cost of borrowings increased by 77 basis points to 4.43% for the nine months ended September 30, 2023 from 3.66% for the nine months ended September 30, 2022. Average borrowings increased by $108.1 million from $60.4 million for the nine months ended September 30, 2022 to $168.5 million for the nine months ended September 30, 2023, as the Bank opted to borrow funds to provide additional liquidity to meet the credit needs of its clients.
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Provision for Credit Losses
The Company recorded a provision for credit losses of $1.3 million for the nine months ended September 30, 2023 compared to $3.6 million for the same period in 2022. On January 1, 2023, the Company adopted the new accounting standard, referred to as CECL, which transitioned from the incurred loss model based on historical loss experience and economic and market conditions to the expected loss model. The CECL standard reflects expected credit losses over the expected life of the financial assets and commitments, primarily based on the discounted cash flow methodology for the majority of the loan segments, which applies the probability of default and loss given default factors to future cash flows, and adjusts to the net present value to derive the required reserve. Macroeconomic conditions are incorporated into the model for unemployment and gross domestic product, in addition to model assumptions for discount rate and prepayment and curtailment speeds.
For the nine months ended September 30, 2023, the provision for credit losses was driven by the increase of $101.2 million in commercial loans, excluding SBA PPP loan forgiveness activity, and an increase in the Delinquency and Classified Loan Trends qualitative factor for the commercial & industrial and owner-occupied commercial real estate loan classes and an increase in the Economic Conditions qualitative factor for consumer loans. The changes in these qualitative factors were based on a recent trend of increases in loans downgraded within the previously noted loan classes and growing concerns surrounding the economic conditions related to consumer debt levels, the impact of inflationary pressures and the reinstatement of student loan repayments, which could impact consumer loans. In addition, the provision for credit losses is impacted by the change in expected loss rates under CECL. Favorable published trends in unemployment and GDP rates, which are used in correlation with historical charge-offs to predict defaults and losses, resulted in a decrease to the required ACL. The ALL to total loan ratio increased from 1.18% at September 30, 2022 to an ACL to total loan ratio of 1.25% at September 30, 2023, which increase is primarily due to the cumulative effect adjustment recorded in connection with the adoption of CECL. The provision expense recorded in the nine months ended September 30, 2022 was due to commercial loan growth, excluding SBA PPP loan forgiveness activity, of $243.3 million.
Net charge-offs for the nine months ended September 30, 2023 totaled $587 thousand, compared to net charge-offs of $46 thousand for the nine months ended September 30, 2022. The increase in net charge-offs was due primarily to two commercial and industrial relationships with partial charge-offs totaling $656 thousand during 2023. Nonaccrual loans were 0.98% of gross loans at September 30, 2023, compared with 0.25% of gross loans at September 30, 2022. Nonaccrual loans increased by $17.0 million from September 30, 2022 to September 30, 2023, primarily due to one commercial and land development CTP loan being downgraded to substandard and placed on non-accrual status in the fourth quarter of 2022. While the loan had not been past due, management determined that it was appropriate to place the loan on non-accrual status due to other relevant factors. At this time, management believes that the value of the underlying collateral is sufficient to cover any potential losses on this loan. Management does not believe that this credit is indicative of overall stress in the loan portfolio. During the second quarter of 2023, the project underlying this CTP loan received its certificate of occupancy, which resulted in the recharacterization of the loan from commercial and land development to owner-occupied. The CTP loan had a current outstanding balance of $14.3 million and $15.4 million at September 30, 2023 and December 31, 2022, respectively.
Additional information is included in the "Credit Risk Management" section herein.
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Noninterest Income
The following table compares noninterest income for the nine months ended September 30, 2023 and 2022:

| Nine Months Ended September 30, |  | $ Change |  | % Change
| 2023 |  | 2022 |  | 2023-2022 |  | 2023-2022
Service charges on deposit accounts | $ | 2,966 |  |  | $ | 2,861 |  |  | $ | 105 |  |  | 3.7 | %
Interchange income | 2,921 |  |  | 3,059 |  |  | (138) |  |  | (4.5) | %
Other service charges, commissions and fees | 702 |  |  | 622 |  |  | 80 |  |  | 12.9 | %
Swap fee income | 451 |  |  | 1,935 |  |  | (1,484) |  |  | (76.7) | %
Trust and investment management income | 5,668 |  |  | 5,852 |  |  | (184) |  |  | (3.1) | %
Brokerage income | 2,727 |  |  | 2,864 |  |  | (137) |  |  | (4.8) | %
Mortgage banking activities | 448 |  |  | 205 |  |  | 243 |  |  | 118.5 | %
Income from life insurance | 1,855 |  |  | 1,742 |  |  | 113 |  |  | 6.5 | %
Other income | 1,431 |  |  | 1,749 |  |  | (318) |  |  | (18.2) | %
Investment securities losses | (8) |  |  | (163) |  |  | 155 |  |  | 95.1 | %
Total noninterest income | $ | 19,161 |  |  | $ | 20,726 |  |  | $ | (1,565) |  |  | (7.6) | %

Noninterest income decreased by $1.5 million from $20.7 million for the nine months ended September 30, 2022 to $19.2 million for the nine months ended September 30, 2023. The following were significant factors in this decrease:
•Swap fee income decreased $1.5 million during the nine months ended September 30, 2023, as swap fee income will fluctuate based on market conditions and client demand.
•Mortgage banking income increased by $243 thousand due to a decline in the fair value losses of $1.2 million from a fair value mark of $1.4 million during the nine months ended September 30, 2022 compared to $182 thousand during the nine months ended September 30, 2023. This change in the fair value mark was due to the significant increase in mortgage interest rates during 2022 compared to current year, and was partially offset by a reduction in sales volume between these periods. Market conditions and elevated interest rates also continue to hinder mortgage production. Most mortgage production remains in adjustable-rate products, which are held in portfolio in 2023. Mortgage loans sold totaled $19.9 million during the nine months ended September 30, 2023 compared to $67.6 million during the nine months ended September 30, 2022.
•Other income decreased by $318 thousand due to the distribution of $964 thousand from investments in non-housing limited partnerships, gains on the sales of two SBA loans totaling $306 thousand and tax credits of $102 thousand recognized from the Bank's investment in solar renewable energy partnerships during the nine months ended September 30, 2022 partially offset by a gain of $1.1 million from the sale of the Bank's Path Valley branch during the nine months ended September 30, 2023.
•Investment securities losses declined by $155 thousand due primarily to a loss of $171 thousand during 2022 recorded on one non-agency CMO security, which was called at a price below par. The loss was partially offset by a gain of $22 thousand from the sale of one security with a principal balance of $3.1 million during the nine months ended September 30, 2022.
•Other line items within noninterest income showed fluctuations attributable to normal business operations.
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Noninterest Expenses
The following table compares noninterest expenses for the nine months ended September 30, 2023 and 2022:

| Nine Months Ended September 30, |  | $ Change |  | % Change
| 2023 |  | 2022 |  | 2023-2022 |  | 2023-2022
Salaries and employee benefits | $ | 38,135 |  |  | $ | 35,354 |  |  | $ | 2,781 |  |  | 7.9 | %
Occupancy | 3,249 |  |  | 3,586 |  |  | (337) |  |  | (9.4) | %
Furniture and equipment | 3,810 |  |  | 3,784 |  |  | 26 |  |  | 0.7 | %
Data processing | 3,666 |  |  | 3,410 |  |  | 256 |  |  | 7.5 | %
Automated teller machine and interchange fees | 920 |  |  | 952 |  |  | (32) |  |  | (3.4) | %
Advertising and bank promotions | 1,656 |  |  | 1,514 |  |  | 142 |  |  | 9.4 | %
FDIC insurance | 1,500 |  |  | 767 |  |  | 733 |  |  | 95.6 | %
Professional services | 2,203 |  |  | 2,417 |  |  | (214) |  |  | (8.9) | %
Directors' compensation | 667 |  |  | 674 |  |  | (7) |  |  | (1.0) | %
Taxes other than income | 847 |  |  | 1,160 |  |  | (313) |  |  | (27.0) | %
Intangible asset amortization | 717 |  |  | 845 |  |  | (128) |  |  | (15.1) | %
Provision for legal settlement | — |  |  | 13,000 |  |  | (13,000) |  |  | 100.0 | %
Restructuring expenses | — |  |  | 3,155 |  |  | (3,155) |  |  | 100.0 | %
Other operating expenses | 4,081 |  |  | 3,952 |  |  | 129 |  |  | 3.3 | %
Total noninterest expenses | $ | 61,451 |  |  | $ | 74,570 |  |  | $ | (13,119) |  |  | (17.6) | %

Noninterest expense decreased by $13.1 million from $74.6 million for the nine months ended September 30, 2022 to $61.5 million for the nine months ended September 30, 2023. The following were significant factors in this decrease:
•Salaries and employee benefits expense increased by $2.8 million due primarily to staff additions that filled vacancies, merit and share-based compensation expense increases, higher employee benefit costs from increased claims volume and employee severance costs.
•Occupancy expenses decreased by $337 thousand due primarily to operating efficiencies from branch closures in 2022.
•Data processing increased by $256 thousand due primarily to an increase in core system costs and investments in new technology as the Company focuses on the evolving needs of its clients.
•Advertising and bank promotion expense increased by $142 thousand due to an increase in digital advertising and sponsorships to continue to promote the Company.
•FDIC insurance expense increased by $733 thousand due to increases in the assessment rate caused by an annualized two-basis point increase assessed by the FDIC to increase its deposit insurance fund and increases commercial loans and total assets.
•Professional services expense decreased by $214 thousand due primarily to a reduction in legal expenses following the settlement of outstanding litigation.
•Taxes other than income decreased by $313 thousand due to a decrease in the Pennsylvania Bank Shares Tax expense, which was driven by a decrease in the Bank's total equity balance from the increase in unrealized losses on investment securities and charges in the third quarter of 2022 for a provision for legal settlement and restructuring expenses.
•The Company agreed to settle a litigation matter, which resulted in a provision for legal settlement of $13.0 million recorded in the third quarter of 2022.
•During the third quarter of 2022, the Company announced that five branch locations would be closing and staffing model adjustments would be made to drive long-term growth and improve operating efficiencies in 2023 and forward. As a result of these initiatives, the Company recorded a pre-tax restructuring charge of $3.2 million, which consisted of building and fixed asset write-offs of $1.9 million and early retirement/severance costs of $1.3 million.
•Other operating expenses increased by $129 thousand due to an increase in credit valuation adjustments on derivatives of $66 thousand and customer fraud losses of $83 thousand.
•Other line items within noninterest expenses showed fluctuations attributable to normal business operations.
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Income Tax Expense
Income tax expense totaled $7.3 million, an effective tax rate of 20.7%, for the nine months ended September 30, 2023 compared with $2.3 million and an effective tax rate of 15.7% for the nine months ended September 30, 2022. Excluding the impact of the provision for legal settlement, the effective tax rate was 18.2% for the nine months ended September 30, 2022. The Company’s effective tax rate is less than the 21% federal statutory rate due to tax-exempt income, including interest earned on tax-exempt loans and investment securities and income from life insurance policies, as well as tax credits, partially offset by disallowed interest expense and state income taxes. The increase in the effective tax rate from the nine months ended September 30, 2022 to the nine months ended September 30, 2023 was primarily due to an increase in projected taxable income for the 2023 fiscal year compared to the prior year due to the provision for legal settlement and restructuring charge. In addition, the effective tax rate for the nine months ended September 30, 2023 was increased by the portion of interest expense disallowed as a deduction against earnings under TEFRA and an increase in state taxes as a result of a greater percentage of taxable income earned in a state with a state income tax.
FINANCIAL CONDITION
Management devotes substantial time to overseeing the investment of funds in loans and investment securities, the costs of funds and the formulation of policies directed toward the profitability and management of the risks associated with these investments.
Investment Securities
The Company utilizes investment securities to manage interest rate risk, enhance income through interest and dividend income, provide liquidity and collateralize certain deposits and borrowings.
The Company has established investment policies and an asset management policy to assist in administering its investment portfolio. Decisions to purchase or sell these securities are based on economic conditions and management’s strategy to respond to changes in interest rates, liquidity, pledges to secure deposits and repurchase agreements and other factors while trying to maximize return on the investments. The Company may segregate its investment portfolio into three categories: “securities available-for-sale,” “trading securities” and “securities held-to-maturity.”
At September 30, 2023 and December 31, 2022, management classified the entire investment securities portfolio as AFS, which is accounted for at current market value with non-credit losses and gains reported in OCI, net of income taxes. On January 1, 2023, the Company adopted the new CECL standard in accordance with ASU 2016-13, which changed the accounting framework by replacing the other-than-temporary impairment assessment with the recognition of an allowance for credit losses.
The Company's investment securities portfolio includes debt investments that are subject to varying degrees of credit and market risks, which arise from general market conditions, and factors impacting specific industries, as well as news that may impact specific issues. Management monitors its debt securities, using various indicators in determining whether unrealized losses on debt securities are credit related and require an ACL. These indicators include the amount of time the security has been in an unrealized loss position, the cause and extent of the unrealized loss, and the credit quality of the issuer and underlying assets. In addition, management assesses whether it is likely the Company will have to sell the security prior to recovery, or it expects to be able to hold the security until the price recovers. The Company determined that the declines in market value were due to increases in interest rates and market movements, and not due to credit factors. The Company does not intend to sell these securities with unrealized losses and it is more likely than not that the Company will not be required to sell them before recovery of their amortized cost basis, which may be maturity. Therefore, the Company has concluded that the unrealized losses for the AFS securities do not require an ACL at September 30, 2023. Under the prior OTTI framework, the Company did not record any cumulative OTTI expense as of December 31, 2022.
At September 30, 2023, AFS securities totaled $495.2 million, a decrease of $18.5 million, from $513.7 million at December 31, 2022. During the nine months ended September 30, 2023, the Company had net purchases of $19.6 million, which included $15.3 million of agency MBS and CMO, $3.3 million of non-agency CMO and $1.0 million in asset-backed securities. The balance of investment securities included net unrealized losses of $58.1 million at September 30, 2023 compared to net unrealized losses of $49.6 million at December 31, 2022 for a change of $8.5 million. This increase in net unrealized losses was primarily due to higher treasury rates and wider credit spreads during 2023. In addition, there was $26.8 million in paydowns during 2023 contributing to the decrease. The overall duration of the Company's investment securities portfolio is 4.7 years at September 30, 2023. The Company has sufficient access to liquidity such that management does not believe it would be necessary to sell any of its investment securities at a loss to offset any unexpected deposit outflows. Management believes the structure of the Company's investment portfolio is appropriately aligned with the rest of the balance sheet to protect against
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volatile interest rate environments and to generate steady earnings.
The following table summarizes the credit ratings and collateral associated with the Company's investment portfolio, excluding equity securities, at September 30, 2023:

Sector | Portfolio Mix | Amortized Book Value | Fair Value | Credit Enhancement | AAA | AA | A | BBB | NR | Collateral / Guarantee Type
Unsecured ABS | 1 | % | $ | 4,053 |  | $ | 3,527 |  | 31 | % | — | % | — | % | — | % | — | % | 100 | % | Unsecured Consumer Debt
Student Loan ABS | 1 |  | 5,781 |  | 5,711 |  | 27 |  | — |  | — |  | — |  | — |  | 100 |  | Seasoned Student Loans
Federal Family Education Loan ABS | 18 |  | 101,486 |  | 100,566 |  | 9 |  | 7 |  | 80 |  | — |  | 13 |  | — |  | Federal Family Education Loan (1)
PACE Loan ABS | — |  | 2,362 |  | 1,983 |  | 6 |  | 100 |  | — |  | — |  | — |  | — |  | PACE Loans
Non-Agency CMBS | 4 |  | 23,349 |  | 23,110 |  | 19 |  | — |  | — |  | — |  | — |  | 100 |  |
Non-Agency RMBS | 3 |  | 16,699 |  | 12,666 |  | 14 |  | 100 |  | — |  | — |  | — |  | — |  | Reverse Mortgages (2)
Municipal - General Obligation | 19 |  | 103,818 |  | 88,804 |  |  | 10 |  | 83 |  | 7 |  | — |  | — |  |
Municipal - Revenue | 22 |  | 119,989 |  | 99,313 |  |  | — |  | 82 |  | 12 |  | — |  | 6 |  |
SBA ReRemic | 1 |  | 3,855 |  | 3,732 |  |  | — |  | 100 |  | — |  | — |  | — |  | SBA Guarantee (3)
Small Business Administration | 1 |  | 8,562 |  | 9,100 |  |  | — |  | 100 |  | — |  | — |  | — |  | SBA Guarantee (3)
Agency MBS | 26 |  | 143,088 |  | 129,387 |  |  | — |  | 100 |  | — |  | — |  | — |  | Residential Mortgages (3)
U.S. Treasury securities | 4 |  | 20,060 |  | 17,143 |  |  | — |  | 100 |  | — |  | — |  | — |  | U.S. Government Guarantee (3)
| 100 | % | $ | 553,102 |  | $ | 495,042 |  |  | 7 | % | 80 | % | 4 | % | 2 | % | 7 | % |
(1) Minimum of 97% guaranteed by U.S. government
(2) Non-agency reverse mortgages with current structural credit enhancements
(3) Guaranteed by U.S. government or U.S. government agencies
Note : Ratings in table are the lowest of the six rating agencies (Standard & Poor's, Moody's, Fitch, Morningstar, DBRS and Kroll Bond Rating Agency). Standard & Poor's rates U.S. government obligations at AA+.

Loan Portfolio
The Company offers a variety of products to meet the credit needs of its borrowers, principally commercial real estate loans, commercial and industrial loans, retail loans secured by residential properties, and, to a lesser extent, installment loans. No loans are extended to non-domestic borrowers or governments.
The risks associated with lending activities differ among loan segments and classes and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans and general economic conditions. Any of these factors may adversely impact a borrower’s ability to repay loans, and also impact the associated collateral. A further discussion on the Company's loan segments and classes and related risks and the Company's implementation of the new accounting standards for expected credit losses, referred to as CECL, and financial difficulty modifications are included in Note 1, Summary of Significant Accounting Policies, and Note 3, Loans and Allowance for Credit Losses, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information."
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The following table presents the loan portfolio, excluding residential LHFS, by segment and class at September 30, 2023 and December 31, 2022:

| September 30, 2023 |  | December 31, 2022
Commercial real estate: |  |  |
Owner occupied | $ | 376,350 |  |  | $ | 315,770 |
Non-owner occupied | 630,514 |  |  | 608,043 |
Multi-family | 143,437 |  |  | 138,832 |
Non-owner occupied residential | 100,391 |  |  | 104,604 |
Acquisition and development: |  |  |
1-4 family residential construction | 25,642 |  |  | 25,068 |
Commercial and land development | 153,279 |  |  | 158,308 |
Commercial and industrial (1) | 374,190 |  |  | 357,774 |
Municipal | 10,334 |  |  | 12,173 |
Residential mortgage: |  |  |
First lien | 248,335 |  |  | 229,849 |
Home equity - term | 5,223 |  |  | 5,505 |
Home equity - lines of credit | 188,736 |  |  | 183,241 |
Installment and other loans | 10,405 |  |  | 12,065 |
| $ | 2,266,836 |  |  | $ | 2,151,232 |

(1) This balance includes $6.2 million and $13.8 million of SBA PPP loans, net of deferred fees and costs, at September 30, 2023 and December 31, 2022, respectively.
Total loans increased by $115.6 million from December 31, 2022 to September 30, 2023. This increase is due to growth in commercial loans of $101.2 million and first lien residential mortgages held in portfolio of $18.5 million, partially offset by decrease of $7.6 million in SBA PPP loans due to loan forgiveness during the nine months ended September 30, 2023.
Asset Quality
Risk Elements
The Company’s loan portfolio is subject to varying degrees of credit risk. Credit risk is managed through the Company's underwriting standards, on-going credit reviews, and monitoring of asset quality measures. Additionally, loan portfolio diversification, which limits exposure to a single industry or borrower, and collateral requirements also mitigate the Company's risk of credit loss.
The loan portfolio consists principally of loans to borrowers in south central Pennsylvania and the greater Baltimore, Maryland region. As the majority of loans are concentrated in these geographic regions, a substantial portion of the borrowers' ability to honor their obligations may be affected by the level of economic activity in the market areas.
Nonperforming assets include nonaccrual loans and foreclosed real estate. In addition, loan modifications to borrowers experiencing financial difficulty and loans past due 90 days or more and still accruing are also deemed to be risk assets. For all loan classes, the accrual of interest income generally ceases when principal or interest is past due 90 days or more and collateral is inadequate to cover principal and interest or immediately if, in the opinion of management, full collection is unlikely. Interest will continue to accrue on loans past due 90 days or more if the collateral is adequate to cover principal and interest, and the loan is in the process of collection. Interest accrued, but not collected, as of the date of placement on nonaccrual status, is generally reversed and charged against interest income, unless fully collateralized. Subsequent payments received are either applied to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectability of principal. Loans are returned to accrual status, for all loan classes, when all the principal and interest amounts contractually due are brought current, the loans have performed in accordance with the contractual terms of the note for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is reasonably assured. Past due status is based on contract terms of the loan.
Prior to the adoption of ASU 2022-02, loans, the terms of which are modified, were classified as TDRs if a concession was granted for legal or economic reasons related to a borrower’s financial difficulties. Concessions granted under a TDR typically involved a temporary deferral of scheduled loan payments, an extension of a loan’s stated maturity date, temporary reduction in interest rates, or below market rates. If a modification occurred while the loan is on accruing status, it would continue to accrue interest under the modified terms. Nonaccrual TDRs were restored to accrual status if scheduled principal and interest payments, under the modified terms, were current for six months after modification, and the borrower continues to
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demonstrate its ability to meet the modified terms. TDRs were evaluated individually for impairment if they have been restructured during the most recent calendar year, or if they are not performing according to their modified terms.
ASU 2022-02 eliminates the TDR accounting model, and requires that the Company evaluate, based on the accounting for loan modifications, whether the borrower is experiencing financial difficulty and the modification results in a more-than-insignificant direct change in the contractual cash flows and represents a new loan or a continuation of an existing loan, which the Company refers to these loans as "financial difficulty modifications" or "FDMs."
The following table presents the Company’s risk elements and relevant asset quality ratios at September 30, 2023 and December 31, 2022. Accruing loans meeting the criteria for FDMs are reported cumulatively on a prospective basis from the adoption of ASU 2022-02.

| September 30, 2023 |  | December 31, 2022 |  |
Nonaccrual loans | $ | 22,324 |  |  | $ | 20,583 |  |  |
OREO | — |  |  | — |  |  |
Total nonperforming assets | 22,324 |  |  | 20,583 |  |  |
FDMs still accruing / TDRs still accruing | — |  |  | 682 |  |  |
Loans past due 90 days or more and still accruing (1) | 277 |  |  | 439 |  |  |
Total nonperforming and other risk assets ("total risk assets") | $ | 22,601 |  |  | $ | 21,704 |  |  |
Loans 30-89 days past due and still accruing | $ | 4,816 |  |  | $ | 7,311 |  |  |
Asset quality ratios: |  |  |  |  |
Total nonperforming loans to total loans | 0.98 | % |  | 0.96 | % |  |
Total nonperforming assets to total assets | 0.73 | % |  | 0.70 | % |  |
Total nonperforming assets to total loans and OREO | 0.98 | % |  | 0.96 | % |  |
Total risk assets to total loans and OREO | 1.00 | % |  | 1.01 | % |  |
Total risk assets to total assets | 0.74 | % |  | 0.74 | % |  |
ACL to total loans | 1.25 | % |  | 1.17 | % |  |
ACL to nonperforming loans | 126.67 | % |  | 122.32 | % |  |
ACL to nonperforming loans and FDMs still accruing / TDRs still accruing | 126.67 | % |  | 118.40 | % |  |
Net charge-offs to total average loans (2) | 0.04 | % |  | 0.01 | % |  |

(1) Includes $256 thousand and $307 thousand of PCI loans at September 30, 2023 and December 31, 2022, respectively in accordance with ASU 310-30. Upon adoption of the CECL standard, PCD loans were evaluated and reported on an individual loan level under ASU 310-20, Nonrefundable Fees and Other Assets.
(2) Annualized
Nonperforming assets include nonaccrual loans and foreclosed real estate. Risk assets, which include nonperforming assets, FDMs still accruing and loans past due 90 days or more and still accruing, totaled $22.6 million at September 30, 2023, an increase of $897 thousand from December 31, 2022. Nonaccrual loans increased by $1.7 million from December 31, 2022 to September 30, 2023 due primarily to additions of $4.1 million and transfers to non-accrual of $931 thousand due to the treatment of PCD loans at the individual asset level under CECL, partially offset by payments of $2.3 million, charge-offs of $901 thousand and loans returned to accrual status of $401 thousand. For the nine months ended September 30, 2023, the Company did not have loans meeting the FDM criteria under ASU 2022-02.
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The following table presents the amortized cost basis of nonaccrual loans, according to loan class, with and without reserves on individually evaluated loans at September 30, 2023, as compared to nonaccrual loans at December 31, 2022. There was no specific reserve on the nonaccrual loans and no significant changes in the collateral securing these loans at both September 30, 2023 and December 31, 2022.

| September 30, 2023 |  |  |  |  |  | December 31, 2022
| Nonaccrual loans with a related ACL |  | Nonaccrual loans with no related ACL |  | Total nonaccrual loans |  | Loans Past Due 90+ Accruing |  |  |  |  |  | Total nonaccrual loans |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied | $ | — |  |  | $ | 16,800 |  |  | $ | 16,800 |  |  | $ | — |  |  |  |  |  |  | $ | 2,767 |  |  |
Non-owner occupied | — |  |  | 252 |  |  | 252 |  |  | — |  |  |  |  |  |  | — |  |  |
Multi-family | — |  |  | — |  |  | — |  |  | — |  |  |  |  |  |  | — |  |  |
Non-owner occupied residential | — |  |  | 288 |  |  | 288 |  |  | — |  |  |  |  |  |  | 81 |  |  |
Acquisition and development: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential construction | — |  |  | — |  |  | — |  |  | — |  |  |  |  |  |  | — |  |  |
Commercial and land development | — |  |  | 1,417 |  |  | 1,417 |  |  | — |  |  |  |  |  |  | 15,426 |  |  |
Commercial and industrial | — |  |  | 662 |  |  | 662 |  |  | — |  |  |  |  |  |  | 31 |  |  |
Municipal | — |  |  | — |  |  | — |  |  | — |  |  |  |  |  |  | — |  |  |
Residential mortgage: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
First lien | — |  |  | 2,025 |  |  | 2,025 |  |  | 277 |  |  |  |  |  |  | 1,838 |  |  |
Home equity – term | — |  |  | 3 |  |  | 3 |  |  | — |  |  |  |  |  |  | 5 |  |  |
Home equity – lines of credit | — |  |  | 849 |  |  | 849 |  |  | — |  |  |  |  |  |  | 395 |  |  |
Installment and other loans | 4 |  |  | 24 |  |  | 28 |  |  | — |  |  |  |  |  |  | 40 |  |  |
Total | $ | 4 |  |  | $ | 22,320 |  |  | $ | 22,324 |  |  | $ | 277 |  |  |  |  |  |  | $ | 20,583 |  |  |

During the second quarter of 2023, the underlying project for a CTP loan on nonaccrual status received its certificate of occupancy, which resulted in the recharacterization of the loan from commercial and land development to owner-occupied commercial real estate. The CTP loan had a current outstanding balance of $14.3 million and $15.4 million at September 30, 2023 and December 31, 2022, respectively.
The information presented above in the nonaccrual loan table and the collateral-dependent table are not required for periods prior to the adoption of CECL. The following table, which excludes accruing PCI loans, presents the most comparable required information at December 31, 2022, which summarizes impaired loans by segment and class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required at December 31, 2022. The recorded investment in loans excludes accrued interest receivable. Related allowances established generally pertain to those loans in which loan forbearance agreements were in the process of being negotiated or updated appraisals were pending, and any partial charge-off will be recorded when final information is received.

|  |  | December 31, 2022
|  |  |  |  |  |  | Nonaccrual Loans |  | Restructured Loans Still Accruing |  | Total
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |
Owner occupied |  |  |  |  |  |  | $ | 2,767 |  |  | $ | — |  |  | $ | 2,767 |
Non-owner occupied residential |  |  |  |  |  |  | 81 |  |  | — |  |  | 81 |
Acquisition and development: |  |  |  |  |  |  |  |  |  |  |
Commercial and land development |  |  |  |  |  |  | 15,426 |  |  | — |  |  | 15,426 |
Commercial and industrial |  |  |  |  |  |  | 31 |  |  | — |  |  | 31 |
Residential mortgage: |  |  |  |  |  |  |  |  |  |  |
First lien |  |  |  |  |  |  | 1,838 |  |  | 682 |  |  | 2,520 |
Home equity - term |  |  |  |  |  |  | 5 |  |  | — |  |  | 5 |
Home equity - lines of credit |  |  |  |  |  |  | 395 |  |  | — |  |  | 395 |
Installment and other loans |  |  |  |  |  |  | 40 |  |  | — |  |  | 40 |
|  |  |  |  |  |  | $ | 20,583 |  |  | $ | 682 |  |  | $ | 21,265 |

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The following table presents our exposure to relationships that are individually evaluated for impairment and the partial charge-offs taken to date and specific reserves established on those relationships at September 30, 2023 and December 31, 2022. Accruing PCI loans are excluded loans individually evaluated for impairment at December 31, 2022. Prior to the adoption of CECL, acquired loans that met the criteria for impairment or nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the client is contractually delinquent if the Company expects to fully collect the new carrying value (i.e., fair value) of the loans. As such, the Company may no longer consider the loan to be nonperforming in accordance with guidance in ASU 310-30. Upon adoption of CECL, the Company elected to account for its PCD loans under ASC 310-20, which required that acquired loans be analyzed on an individual asset level. The impact of this election resulted in loans reported as nonaccrual and individually evaluated for credit expected losses under the CECL methodology.

| # of Relationships |  | Individually Evaluated Loans |  | Partial Charge-offs to Date |  | Specific Reserves
September 30, 2023 |  |  |  |  |  |  |
Relationships greater than $1,000,000 | 3 |  |  | $ | 17,911 |  |  | $ | — |  |  | $ | — |
Relationships greater than $500,000 but less than $1,000,000 | 1 |  |  | 631 |  |  | 388 |  |  | — |
Relationships greater than $250,000 but less than $500,000 | 1 |  |  | 252 |  |  | — |  |  | — |
Relationships less than $250,000 | 69 |  |  | 3,704 |  |  | 214 |  |  | 32 |
| 74 |  |  | $ | 22,498 |  |  | $ | 602 |  |  | $ | 32 |
December 31, 2022 |  |  |  |  |  |  |
Relationships greater than $1,000,000 | 2 |  |  | $ | 17,774 |  |  | $ | — |  |  | $ | — |
Relationships greater than $500,000 but less than $1,000,000 | — |  |  | — |  |  | — |  |  | — |
Relationships greater than $250,000 but less than $500,000 | 1 |  |  | 260 |  |  | — |  |  | — |
Relationships less than $250,000 | 60 |  |  | 3,231 |  |  | 320 |  |  | 28 |
| 63 |  |  | $ | 21,265 |  |  | $ | 320 |  |  | $ | 28 |

The Company takes partial charge-offs on collateral-dependent loans when carrying value exceeds estimated fair value, as determined by the most recent appraisal adjusted for current (within the quarter) conditions, less costs to dispose. Impairment reserves remain in place if updated appraisals are pending, and represent management’s estimate of potential loss.
Internal loan reviews are completed annually on all commercial relationships, secured by commercial real estate, with a committed loan balance in excess of $1.0 million, which includes confirmation of risk rating by an independent credit officer. In addition, all commercial relationships greater than $500 thousand rated Substandard, Doubtful or Loss are reviewed and corresponding risk ratings are reaffirmed by the Bank's Problem Loan Committee, with subsequent reporting to the Management ERM Committee.
In its individually evaluated loan 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, 2023. However, over time, additional information may result in increased reserve allocations or, alternatively, it may be deemed that the reserve allocations exceed those that are needed.
Credit Risk Management
Allowance for Credit Losses
The Company maintains the ACL at a level deemed adequate by management for expected credit losses. As disclosed in Note 1 and Note 3, on January 1, 2023 the Company implemented CECL and increased the ACL, previously the ALL, with a cumulative-effect adjustment to the ACL of $2.4 million. In addition, the Company recorded a cumulative-effect adjustment to the ACL for off-balance sheet exposures of $100 thousand. The Company’s ACL is calculated quarterly, with any adjustment recorded to the provision for credit losses in the consolidated statement of income. A comprehensive analysis of the ACL is performed by the Company on a quarterly basis. Management evaluates the adequacy of the ACL utilizing a defined methodology to determine if it properly addresses the current and expected risks in the loan portfolio, which considers the performance of borrowers and specific evaluation of individually evaluated loans, including historical loss experiences, trends in delinquencies, nonperforming loans and other risk assets, and the qualitative factors. Risk factors are continuously reviewed
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and adjusted, as needed, by management when conditions support a change. Management believes its approach properly addresses relevant accounting and bank regulatory guidance for loans both collectively and individually evaluated. The results of the comprehensive analysis, including recommended changes, are governed by the Company's Reserve Adequacy Committee, whose members were also a part of the Company's CECL Committee.
The ACL is evaluated based on a review of the collectability of loans in light of historical experience; the nature and volume of the loan portfolio; adverse situations that may affect a borrower’s ability to repay; estimated value of any underlying collateral; and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A description of the methodology for establishing the allowance and provision for credit losses and related procedures in establishing the appropriate level of reserve is included in Note 1, Summary of Significant Accounting Policies, and Note 3, Loans and Allowance for Credit Losses, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information."
The following table presents the amortized cost basis of the loan portfolio, by year of origination, loan class, and credit quality, as of September 30, 2023. For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan and payment activity, which residential mortgage and installment and other consumer loans are presented below based on payment performance: performing or nonperforming. During the second and third quarters of 2023, commercial and land development loans totaling $46.6 million and $9.1 million, respectively, were recharacterized to a permanent commercial real estate class upon the completion of construction or receiving a certificate of occupancy.

| Term Loans Amortized Cost Basis by Origination Year |  |  |  |  |  |
As of September 30, 2023 | 2023 |  | 2022 |  | 2021 |  | 2020 |  | 2019 |  | Prior |  | Revolving Loans Amortized Basis |  | Revolving Loans Converted to Term |  | Total
Commercial Real Estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Owner-occupied: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 46,027 |  |  | $ | 94,573 |  |  | $ | 79,707 |  |  | $ | 22,354 |  |  | $ | 21,605 |  |  | $ | 66,222 |  |  | $ | 5,372 |  |  | $ | — |  |  | $ | 335,860 |
Special mention | — |  |  | 10,007 |  |  | 2,541 |  |  | — |  |  | — |  |  | 2,398 |  |  | — |  |  | — |  |  | 14,946 |
Substandard - Non-IEL | — |  |  | — |  |  | — |  |  | 6,122 |  |  | — |  |  | 2,165 |  |  | 457 |  |  | — |  |  | 8,744 |
Substandard - IEL | — |  |  | — |  |  | — |  |  | 14,321 |  |  | — |  |  | 2,479 |  |  | — |  |  | — |  |  | 16,800 |
Total owner-occupied loans | $ | 46,027 |  |  | $ | 104,580 |  |  | $ | 82,248 |  |  | $ | 42,797 |  |  | $ | 21,605 |  |  | $ | 73,264 |  |  | $ | 5,829 |  |  | $ | — |  |  | $ | 376,350 |
Current period gross charge offs - owner-occupied | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Non-owner occupied: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 36,918 |  |  | $ | 98,722 |  |  | $ | 206,053 |  |  | $ | 85,808 |  |  | $ | 63,827 |  |  | $ | 135,331 |  |  | $ | 510 |  |  | $ | 871 |  |  | $ | 628,040 |
Special mention | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2,144 |  |  | — |  |  | — |  |  | 2,144 |
Substandard - Non-IEL | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 78 |  |  | — |  |  | — |  |  | 78 |
Substandard - IEL | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 252 |  |  | — |  |  | — |  |  | 252 |
Total non-owner occupied loans | $ | 36,918 |  |  | $ | 98,722 |  |  | $ | 206,053 |  |  | $ | 85,808 |  |  | $ | 63,827 |  |  | $ | 137,805 |  |  | $ | 510 |  |  | $ | 871 |  |  | $ | 630,514 |
Current period gross charge offs - non-owner occupied | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Multi-family: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 2,255 |  |  | $ | 59,413 |  |  | $ | 8,732 |  |  | $ | 12,765 |  |  | $ | 7,791 |  |  | $ | 50,300 |  |  | $ | 150 |  |  | $ | — |  |  | $ | 141,406 |
Special mention | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2,031 |  |  | — |  |  | — |  |  | 2,031 |
Substandard - Non-IEL | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Substandard - IEL | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total multi-family loans | $ | 2,255 |  |  | $ | 59,413 |  |  | $ | 8,732 |  |  | $ | 12,765 |  |  | $ | 7,791 |  |  | $ | 52,331 |  |  | $ | 150 |  |  | $ | — |  |  | $ | 143,437 |
Current period gross charge offs - multi-family | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |

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| Term Loans Amortized Cost Basis by Origination Year |  |  |  |  |  |
As of September 30, 2023 | 2023 |  | 2022 |  | 2021 |  | 2020 |  | 2019 |  | Prior |  | Revolving Loans Amortized Basis |  | Revolving Loans Converted to Term |  | Total
Non-owner occupied residential: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 7,137 |  |  | $ | 23,451 |  |  | $ | 18,807 |  |  | $ | 10,005 |  |  | $ | 6,775 |  |  | $ | 31,144 |  |  | $ | 1,503 |  |  | $ | — |  |  | $ | 98,822 |
Special mention | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 894 |  |  | — |  |  | — |  |  | 894 |
Substandard - Non-IEL | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 385 |  |  | — |  |  | — |  |  | 385 |
Substandard - IEL | 2 |  |  | — |  |  | 192 |  |  | — |  |  | — |  |  | 96 |  |  | — |  |  | — |  |  | 290 |
Total non-owner occupied residential loans | $ | 7,139 |  |  | $ | 23,451 |  |  | $ | 18,999 |  |  | $ | 10,005 |  |  | $ | 6,775 |  |  | $ | 32,519 |  |  | $ | 1,503 |  |  | $ | — |  |  | $ | 100,391 |
Current period gross charge offs - non-owner occupied residential | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 12 |  |  | $ | — |  |  | $ | — |  |  | $ | 12 |
Acquisition and development: |  |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential construction: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 13,111 |  |  | $ | 12,383 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 25,494 |
Special mention | — |  |  | — |  |  | 148 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 148 |
Substandard - Non-IEL | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Substandard - IEL | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total 1-4 family residential construction loans | $ | 13,111 |  |  | $ | 12,383 |  |  | $ | 148 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 25,642 |
Current period gross charge offs - 1-4 family residential construction | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Commercial and land development: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 21,879 |  |  | $ | 52,815 |  |  | $ | 50,957 |  |  | $ | 9,946 |  |  | $ | 114 |  |  | $ | 1,841 |  |  | $ | 6,655 |  |  | $ | 5,990 |  |  | $ | 150,197 |
Special mention | — |  |  | — |  |  | — |  |  | 1,223 |  |  | — |  |  | 442 |  |  | — |  |  | — |  |  | 1,665 |
Substandard - Non-IEL | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Substandard - IEL | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 1,417 |  |  | — |  |  | — |  |  | 1,417 |
Total commercial and land development loans | $ | 21,879 |  |  | $ | 52,815 |  |  | $ | 50,957 |  |  | $ | 11,169 |  |  | $ | 114 |  |  | $ | 3,700 |  |  | $ | 6,655 |  |  | $ | 5,990 |  |  | $ | 153,279 |
Current period gross charge offs - commercial and land development | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Commercial and Industrial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | 55,922 |  |  | $ | 77,312 |  |  | $ | 75,336 |  |  | $ | 25,943 |  |  | $ | 10,988 |  |  | $ | 22,123 |  |  | $ | 92,100 |  |  | $ | 2,223 |  |  | $ | 361,947 |
Special mention | — |  |  | 1,387 |  |  | 3,699 |  |  | 15 |  |  | 1,248 |  |  | 386 |  |  | 3,235 |  |  | — |  |  | 9,970 |
Substandard - Non-IEL | — |  |  | — |  |  | 1,223 |  |  | — |  |  | 9 |  |  | 287 |  |  | 92 |  |  | — |  |  | 1,611 |
Substandard - IEL | — |  |  | — |  |  | — |  |  | 8 |  |  | — |  |  | 508 |  |  | 146 |  |  | — |  |  | 662 |
Total commercial and industrial loans | $ | 55,922 |  |  | $ | 78,699 |  |  | $ | 80,258 |  |  | $ | 25,966 |  |  | $ | 12,245 |  |  | $ | 23,304 |  |  | $ | 95,573 |  |  | $ | 2,223 |  |  | $ | 374,190 |
Current period gross charge offs - commercial and industrial | $ | — |  |  | $ | 161 |  |  | $ | 106 |  |  | $ | — |  |  | $ | — |  |  | $ | 8 |  |  | $ | 473 |  |  | $ | — |  |  | $ | 748 |
Municipal: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Risk rating |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass | $ | — |  |  | $ | 4 |  |  | $ | 3,403 |  |  | $ | — |  |  | $ | — |  |  | $ | 6,927 |  |  | $ | — |  |  | $ | — |  |  | $ | 10,334 |
Total municipal loans | $ | — |  |  | $ | 4 |  |  | $ | 3,403 |  |  | $ | — |  |  | $ | — |  |  | $ | 6,927 |  |  | $ | — |  |  | $ | — |  |  | $ | 10,334 |
Current period gross charge offs - municipal | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |

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| Term Loans Amortized Cost Basis by Origination Year |  |  |  |  |  |
As of September 30, 2023 | 2023 |  | 2022 |  | 2021 |  | 2020 |  | 2019 |  | Prior |  | Revolving Loans Amortized Basis |  | Revolving Loans Converted to Term |  | Total
Residential mortgage: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
First lien: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Payment performance |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing | $ | 27,657 |  |  | $ | 65,681 |  |  | $ | 35,176 |  |  | $ | 8,071 |  |  | $ | 7,690 |  |  | $ | 100,990 |  |  | $ | — |  |  | $ | 642 |  |  | $ | 245,907 |
Nonperforming | — |  |  | — |  |  | — |  |  | — |  |  | 172 |  |  | 2,256 |  |  | — |  |  | — |  |  | 2,428 |
Total first lien loans | $ | 27,657 |  |  | $ | 65,681 |  |  | $ | 35,176 |  |  | $ | 8,071 |  |  | $ | 7,862 |  |  | $ | 103,246 |  |  | $ | — |  |  | $ | 642 |  |  | $ | 248,335 |
Current period gross charge offs - first lien | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 58 |  |  | $ | — |  |  | $ | — |  |  | $ | 58 |
Home equity - term: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Payment performance |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing | $ | 553 |  |  | $ | 750 |  |  | $ | 140 |  |  | $ | 443 |  |  | $ | 124 |  |  | $ | 3,210 |  |  | $ | — |  |  | $ | — |  |  | $ | 5,220 |
Nonperforming | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 3 |  |  | — |  |  | — |  |  | 3 |
Total home equity - term loans | $ | 553 |  |  | $ | 750 |  |  | $ | 140 |  |  | $ | 443 |  |  | $ | 124 |  |  | $ | 3,213 |  |  | $ | — |  |  | $ | — |  |  | $ | 5,223 |
Current period gross charge offs - home equity - term | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Home equity - lines of credit: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Payment performance |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 111,582 |  |  | $ | 76,259 |  |  | $ | 187,841 |
Nonperforming | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 877 |  |  | 18 |  |  | 895 |
Total residential real estate - home equity - lines of credit loans | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 112,459 |  |  | $ | 76,277 |  |  | $ | 188,736 |
Current period gross charge offs - home equity - lines of credit | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 40 |  |  | $ | — |  |  | $ | 40 |
Installment and other loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Payment performance |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Performing | $ | 718 |  |  | $ | 457 |  |  | $ | 357 |  |  | $ | 118 |  |  | $ | 861 |  |  | $ | 1,350 |  |  | $ | 6,516 |  |  | $ | — |  |  | $ | 10,377 |
Nonperforming | — |  |  | — |  |  | — |  |  | — |  |  | 19 |  |  | 5 |  |  | 4 |  |  | — |  |  | 28 |
Total Installment and other loans | $ | 718 |  |  | $ | 457 |  |  | $ | 357 |  |  | $ | 118 |  |  | $ | 880 |  |  | $ | 1,355 |  |  | $ | 6,520 |  |  | $ | — |  |  | $ | 10,405 |
Current period gross charge offs - installment and other | $ | 139 |  |  | $ | 24 |  |  | $ | — |  |  | $ | — |  |  | $ | 4 |  |  | $ | 10 |  |  | $ | 21 |  |  | $ | — |  |  | $ | 198 |

The information presented in the table above is not required for periods prior to the adoption of CECL. The following table summarizes the Company’s loan portfolio ratings based on its internal risk rating system at December 31, 2022, which presents the most comparable required information. Prior to the adoption of CECL, PCD loans were classified as PCI loans and accounted for under ASC 310-30. In accordance with the CECL standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the adoption date. At September 30, 2023, the amortized cost of the PCD loans was $8.8 million.
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| Pass |  | Special Mention |  | Non-Impaired Substandard |  | Impaired - Substandard |  | Doubtful |  | PCI Loans |  | Total
December 31, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |
Owner occupied | $ | 305,159 |  |  | $ | 2,109 |  |  | $ | 3,532 |  |  | $ | 2,767 |  |  | $ | — |  |  | $ | 2,203 |  |  | $ | 315,770 |
Non-owner occupied | 601,244 |  |  | 4,243 |  |  | 2,273 |  |  | — |  |  | — |  |  | 283 |  |  | 608,043 |
Multi-family | 130,851 |  |  | 7,739 |  |  | 242 |  |  | — |  |  | — |  |  | — |  |  | 138,832 |
Non-owner occupied residential | 102,674 |  |  | 810 |  |  | 482 |  |  | 81 |  |  | — |  |  | 557 |  |  | 104,604 |
Acquisition and development: |  |  |  |  |  |  |  |  |  |  |  |  |
1-4 family residential construction | 25,068 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 25,068 |
Commercial and land development | 142,424 |  |  | 458 |  |  | — |  |  | 15,426 |  |  | — |  |  | — |  |  | 158,308 |
Commercial and industrial | 331,103 |  |  | 17,579 |  |  | 7,013 |  |  | 31 |  |  | — |  |  | 2,048 |  |  | 357,774 |
Municipal | 12,173 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 12,173 |
Residential mortgage: |  |  |  |  |  |  |  |  |  |  |  |  |
First lien | 222,849 |  |  | — |  |  | 215 |  |  | 2,520 |  |  | — |  |  | 4,265 |  |  | 229,849 |
Home equity - term | 5,485 |  |  | — |  |  | — |  |  | 5 |  |  | — |  |  | 15 |  |  | 5,505 |
Home equity - lines of credit | 182,801 |  |  | — |  |  | 45 |  |  | 395 |  |  | — |  |  | — |  |  | 183,241 |
Installment and other loans | 12,017 |  |  | — |  |  | — |  |  | 40 |  |  | — |  |  | 8 |  |  | 12,065 |
| $ | 2,073,848 |  |  | $ | 32,938 |  |  | $ | 13,802 |  |  | $ | 21,265 |  |  | $ | — |  |  | $ | 9,379 |  |  | $ | 2,151,232 |

The Special Mention classification is intended to be a temporary classification reflective of loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Company’s position at some future date. Special Mention loans represent an elevated risk, but their weakness does not yet justify a more severe, or classified, rating. These loans require inquiry by lenders on the cause of the potential weakness and, once analyzed, the loan classification may be downgraded to Substandard or, alternatively, could be upgraded to Pass. Special Mention loans decreased by $1.1 million from $32.9 million at December 31, 2022 to $31.8 million at September 30, 2023 due to repayments of $21.7 million partially offset by net downgrades of $20.6 million. The risk rating downgrades to Special Mention consisted of six clients spread across various commercial loan classes; however, management does not believe that other commercial loans in these categories reflect similar risk characteristics that led to these downgrades. The Substandard-IEL category increased from $21.3 million to $22.5 million from December 31, 2022 to September 30, 2023, respectively, primarily due to one commercial construction and land development loan with a balance of $1.4 million.
Classified loans totaled $33.6 million at September 30, 2023, or 1.5% of total loans outstanding, reflecting a decrease from $35.1 million, or 1.6% of loans outstanding, at December 31, 2022, due to net upgrades and repayments.
Non-impaired substandard loans are performing loans, which have characteristics that cause management concern over the ability of the borrower to perform under present loan repayment terms and which may result in the reporting of these loans as nonperforming, or individually evaluated, loans in the future. Generally, management feels that substandard loans that are currently performing and not considered individually evaluated result in some doubt as to the borrower’s ability to continue to perform under the terms of the loan, and represent potential problem loans. Substandard loans not individually evaluated totaled $11.1 million at September 30, 2023, a decrease of $2.7 million compared to $13.8 million at December 31, 2022, due primarily to net upgrades and repayments across various loan classes.
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The following table presents the activity in the ACL, including the impact of adopting CECL, for the three and nine months ended September 30, 2023 and the activity in the ALL for the three and nine months ended September 30, 2022:

| Commercial |  | Consumer |  |  |  |
| Commercial Real Estate |  | Acquisition and Development |  | Commercial and Industrial |  | Municipal |  | Total |  | Residential Mortgage |  | Installment and Other |  | Total |  | Unallocated |  | Total
Three Months Ended |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
September 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance, beginning of period | $ | 16,996 |  |  | $ | 2,767 |  |  | $ | 5,854 |  |  | $ | 167 |  |  | $ | 25,784 |  |  | $ | 2,307 |  |  | $ | 292 |  |  | $ | 2,599 |  |  | $ | — |  |  | $ | 28,383 |
Provision for credit losses | (173) |  |  | 125 |  |  | (62) |  |  | (11) |  |  | (121) |  |  | 239 |  |  | 18 |  |  | 257 |  |  | — |  |  | 136 |
Charge-offs | — |  |  | — |  |  | (267) |  |  | — |  |  | (267) |  |  | — |  |  | (75) |  |  | (75) |  |  | — |  |  | (342) |
Recoveries | 17 |  |  | 1 |  |  | 33 |  |  | — |  |  | 51 |  |  | 31 |  |  | 19 |  |  | 50 |  |  | — |  |  | 101 |
Balance, end of period | $ | 16,840 |  |  | $ | 2,893 |  |  | $ | 5,558 |  |  | $ | 156 |  |  | $ | 25,447 |  |  | $ | 2,577 |  |  | $ | 254 |  |  | $ | 2,831 |  |  | $ | — |  |  | $ | 28,278 |
September 30, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance, beginning of period | $ | 12,294 |  |  | $ | 3,024 |  |  | $ | 4,471 |  |  | $ | 26 |  |  | $ | 19,815 |  |  | $ | 3,004 |  |  | $ | 223 |  |  | $ | 3,227 |  |  | $ | 237 |  |  | $ | 23,279 |
Provision for loan losses | 551 |  |  | 342 |  |  | 296 |  |  | (1) |  |  | 1,188 |  |  | 309 |  |  | (5) |  |  | 304 |  |  | 8 |  |  | 1,500 |
Charge-offs | — |  |  | — |  |  | (87) |  |  | — |  |  | (87) |  |  | — |  |  | (24) |  |  | (24) |  |  | — |  |  | (111) |
Recoveries | — |  |  | 1 |  |  | 32 |  |  | — |  |  | 33 |  |  | 2 |  |  | 6 |  |  | 8 |  |  | — |  |  | 41 |
Balance, end of period | $ | 12,845 |  |  | $ | 3,367 |  |  | $ | 4,712 |  |  | $ | 25 |  |  | $ | 20,949 |  |  | $ | 3,315 |  |  | $ | 200 |  |  | $ | 3,515 |  |  | $ | 245 |  |  | $ | 24,709 |
Nine Months Ended |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
September 30, 2023 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance, beginning of period prior to adopting CECL | $ | 13,558 |  |  | $ | 3,214 |  |  | $ | 4,505 |  |  | $ | 24 |  |  | $ | 21,301 |  |  | $ | 3,444 |  |  | $ | 188 |  |  | $ | 3,632 |  |  | $ | 245 |  |  | $ | 25,178 |
Impact of adopting CECL | 2,857 |  |  | (214) |  |  | 928 |  |  | 169 |  |  | 3,740 |  |  | (1,121) |  |  | 49 |  |  | (1,072) |  |  | (245) |  |  | 2,423 |
Provision for credit losses | 335 |  |  | (111) |  |  | 790 |  |  | (37) |  |  | 977 |  |  | 163 |  |  | 124 |  |  | 287 |  |  | — |  |  | 1,264 |
Charge-offs | (12) |  |  | — |  |  | (748) |  |  | — |  |  | (760) |  |  | (98) |  |  | (198) |  |  | (296) |  |  | — |  |  | (1,056) |
Recoveries | 102 |  |  | 4 |  |  | 83 |  |  | — |  |  | 189 |  |  | 189 |  |  | 91 |  |  | 280 |  |  | — |  |  | 469 |
Balance, end of period | $ | 16,840 |  |  | $ | 2,893 |  |  | $ | 5,558 |  |  | $ | 156 |  |  | $ | 25,447 |  |  | $ | 2,577 |  |  | $ | 254 |  |  | $ | 2,831 |  |  | $ | — |  |  | $ | 28,278 |
September 30, 2022 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance, beginning of period | $ | 12,037 |  |  | $ | 2,062 |  |  | $ | 3,814 |  |  | $ | 30 |  |  | $ | 17,943 |  |  | $ | 2,785 |  |  | $ | 215 |  |  | $ | 3,000 |  |  | $ | 237 |  |  | $ | 21,180 |
Provision for loan losses | 776 |  |  | 1,295 |  |  | 980 |  |  | (5) |  |  | 3,046 |  |  | 508 |  |  | 13 |  |  | 521 |  |  | 8 |  |  | 3,575 |
Charge-offs | — |  |  | — |  |  | (202) |  |  | — |  |  | (202) |  |  | (10) |  |  | (42) |  |  | (52) |  |  | — |  |  | (254) |
Recoveries | 32 |  |  | 10 |  |  | 120 |  |  | — |  |  | 162 |  |  | 32 |  |  | 14 |  |  | 46 |  |  | — |  |  | 208 |
Balance, end of period | $ | 12,845 |  |  | $ | 3,367 |  |  | $ | 4,712 |  |  | $ | 25 |  |  | $ | 20,949 |  |  | $ | 3,315 |  |  | $ | 200 |  |  | $ | 3,515 |  |  | $ | 245 |  |  | $ | 24,709 |

The ACL totaled $28.3 million at September 30, 2023, an increase of $3.1 million from December 31, 2022, resulting from a cumulative-effect adjustment from the adoption of CECL of $2.4 million and the provision for credit losses of $1.3 million for the nine months ended September 30, 2023, which was inclusive of net charge-offs of $587 thousand during the nine months ended September 30, 2023. At September 30, 2023, the ACL as a percentage of the total loan portfolio was 1.25% compared to 1.18% at September 30, 2022. The ACL increased in the nine months ended September 30, 2023 primarily as a result of the impact of implementing CECL, which requires the transition from an incurred loss model based on historical loss experience to an expected credit loss model based on the life of the loan.
In addition to the specific reserve allocations on individually evaluated loans noted previously, 6 loans, with aggregate outstanding principal balances of $377 thousand, had cumulative partial charge-offs to the ACL totaling $602 thousand at September 30, 2023. As updated appraisals are received on collateral-dependent loans, partial charge-offs are taken to the extent the loans’ principal balance exceeds their fair value.
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The information presented in the table below is not required for periods subsequent to the adoption of CECL. The following table summarizes the ALL allocation for loans individually and collectively evaluated for impairment by loan segment at December 31, 2022. Accruing PCI loans are excluded from loans individually evaluated for impairment.

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

Management believes the allocation of the ACL among the various loan classes adequately reflects the life expected credit losses in each loan class and is based on the methodology outlined in Note 1, Summary of Significant Accounting Policies, and Note 3, Loans and Allowance for Credit Losses, to the Consolidated Financial Statements under Part I, Item 1, "Financial Information." Management re-evaluates and makes enhancements to its reserve methodology to better reflect the risks inherent in the different segments of the portfolio, particularly in light of increased charge-offs, with noticeable differences between the different loan classes. Management believes these enhancements to the ACL methodology improve the accuracy of quantifying the expected credit losses inherent in the portfolio. Management charges actual loan losses to the reserve and bases the provision for credit losses on its overall analysis.
The recoveries on previously charged-off relationships are the result of successful loan monitoring and workout solutions. Recoveries are difficult to predict, and any additional recoveries that the Company receives will be used to replenish the ACL. Recoveries favorably impact historical charge-off factors, and contribute to changes in the loss factors used in our allowance adequacy analysis. However, as the loan portfolio continues to grow, future provisions for credit losses may be required.
Management believes the Company’s ACL is adequate based on currently available information. Future adjustments to the ACL and enhancements to the methodology may be necessary due to changes in economic conditions, regulatory guidance, or management’s assumptions as to future delinquencies or loss rates.
Deposits
Deposits grew by $70.2 million, or 3%, remaining at $2.5 billion at both September 30, 2023 and December 31, 2022. During 2023, time deposits increased by $126.3 million, or 50%, interest-bearing demand deposits increased by $50.0 million, or 5% and money market accounts increased by $3.0 million, or 1%. These increases were partially offset by decreases in noninterest-bearing demand deposits of $30.5 million, or 7%, and savings accounts of $42.7 million, or 19%. The increase in time deposits was attributable to promotional offerings of up to 18-month terms. During the nine months ended September 30, 2023, brokered money market deposits increased by $19.0 million due to purchases. The decline in the savings and noninterest-bearing deposit categories was primarily the result of clients seeking higher-yielding products. During 2023, the Bank has been successful at retaining many of those deposits and driving inflows from new clients as well. This resulted in a shift from noninterest-bearing deposits to interest-bearing. At September 30, 2023, deposits that are uninsured and not collateralized totaled $387.5 million, or 15% of total deposits.
During the fourth quarter of 2022, the Bank announced that it had entered into a Purchase and Assumption Agreement providing for the sale of its Path Valley branch, including associated deposit liabilities, building and land. The sale was completed on May 12, 2023. This sale included deposits of approximately $18.7 million comprising of $14.4 million in interest-bearing deposits and $4.3 million in noninterest-bearing deposits. which were sold at a premium of 6%. These deposits were reported at cost as deposits held for assumption in connection with the sale of a bank branch within total deposits in the unaudited condensed consolidated balance sheets. At December 31, 2022, deposits of approximately $31.3 million were
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expected to be conveyed in the branch sale, are reported within total deposits at cost and were comprised of $23.5 million in interest-bearing deposits and $7.8 million in non-interest bearing deposits.
Borrowings
In addition to deposits, the Company uses borrowing sources to meet liquidity needs and for temporary funding. Sources of short-term borrowings include the FHLB of Pittsburgh, federal funds purchased and the FRB discount window. Short-term borrowings also may include securities sold under agreements to repurchase with deposit clients, in which a client sweeps a portion of a deposit balance into a repurchase agreement, which is a secured borrowing with a pool of securities pledged against the balance.
The Company also utilizes long-term debt, consisting principally of FHLB fixed and amortizing advances, to fund its balance sheet with original maturities greater than one year. The Company evaluates its funding needs, interest rate movements, the cost of options and the availability of attractive structures when considering the timing and extent of when it enters into long-term borrowings.
FHLB advances and other borrowings increased by $51.1 million to $157.3 million at September 30, 2023 compared to $106.1 million at December 31, 2022. The increase in borrowings during 2023 includes long-term fixed-rate advances from the FHLB totaling $40.0 million. With the continued strength in loan fundings and increased competition for deposits, the Bank elected to replace some of its overnight borrowings with lower cost term advances. The Bank tested its various sources of funding during 2023 to ensure accessibility.
See Note 8, Short-Term Borrowings, and Note 9, Long-Term Borrowings, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information," for a description and terms of the Company’s borrowings and access to alternative sources of liquidity.
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 $243.1 million at September 30, 2023, an increase of $14.2 million, or 6%, from $228.9 million at December 31, 2022. The increase was primarily attributable to net income of $28.0 million, partially offset by dividends paid of $6.4 million, other comprehensive losses of $4.4 million for the nine months ended September 30, 2023 and the cumulative-effect adjustment from the adoption of CECL that decreased retained earnings by $2.0 million. Other comprehensive losses increased due to after-tax declines of $6.6 million from net unrealized losses on investment securities, partially offset by $2.2 million in net unrealized gains from cash flow hedges. The increase in net unrealized losses was primarily caused by a decline in treasury rates and wider credit spreads during 2023.
For the nine months ended September 30, 2023, total comprehensive income totaled $23.6 million, an increase of $59.1 million, from total comprehensive losses of $35.5 million for the same period in 2022 due to an increase in net income of $15.6 million between the comparative periods. Other comprehensive losses, net of taxes, decreased by $43.5 million to $4.4 million for the nine months ended September 30, 2023 compared to other comprehensive losses, net of taxes, of $47.9 million for the nine months ended September 30, 2022. Unrealized losses were higher than prior periods due to market uncertainty resulting from inflation and higher interest rates from the time of the security purchase.
At September 30, 2023, book value per common share was $22.90 per share compared to $21.45 per share at December 31, 2022. Tangible book value per share also increased from $19.47 per share at December 31, 2022 to $20.94 per share at September 30, 2023, as a result of the increase in shareholders' equity driven by earnings during 2023. See “Supplemental Reporting of Non-GAAP Measures.”
The Company routinely evaluates its capital levels in light of its risk profile to assess its capital needs. The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. At September 30, 2023 and December 31, 2022, 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.
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Note 10, Shareholders' Equity and Regulatory Capital, to the Notes to Unaudited Condensed Consolidated Financial Statements under Part I, Item 1, "Financial Information," includes a table presenting capital amounts and ratios for the Company and the Bank at September 30, 2023 and December 31, 2022.
In addition to the minimum capital ratio requirement and minimum capital ratio to be well-capitalized presented in the referenced table in Note 10, the Bank must maintain a capital conservation buffer as more fully described in the Company's Annual Report on Form 10-K for the year ended December 31, 2022, Item 1 - Business, under the topic Basel III Capital Rules. At September 30, 2023, the Bank's capital conservation buffer, based on the most restrictive Total Capital to risk weighted assets capital ratio, was 4.5%, which is greater than the 2.5% requirement.
Liquidity
The primary function of asset/liability management is to ensure adequate liquidity and manage the Company’s sensitivity to changing interest rates. Liquidity management involves the ability to meet the cash flow requirements of clients who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. The Company's primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities, the sale of mortgage loans and borrowings from the FHLB of Pittsburgh. While maturities and scheduled amortization of loans and investment securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
The Company regularly adjusts its investments in liquid assets based upon its assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and investment securities and the objectives of its asset/liability management policy. The Company's most liquid assets are cash and cash equivalents. The level of these assets depends on the Company's operating, financing, lending and investing activities during any given period. At September 30, 2023, cash and cash equivalents totaled $94.9 million, compared with $60.8 million at December 31, 2022, which increase reflects net income of $28.0 million for the nine months ended September 30, 2023, the increases in deposits and borrowings of $70.2 million and $51.9 million, respectively, and proceeds from investment securities maturities, calls and repayments, net of purchases of $10.0 million, offset primarily by the deployment of cash into higher yielding loans of $115.6 million. Unencumbered investment securities totaled $59.2 million at September 30, 2023. At September 30, 2023, the Company had $16.8 million of investment securities pledged at the FRB Discount Window, with no associated borrowings outstanding. The Company's maximum borrowing capacity from the FHLB of Pittsburgh is $1.1 billion at September 30, 2023. In addition, the Company had $30.0 million in available unsecured lines of credit with other banks at September 30, 2023. The Bank tested its various sources of funding during 2023 to ensure accessibility.
See Note 8, Short-Term Borrowings, and Note 9, Long-Term Borrowings, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information," for a description and terms of the Company’s borrowings and access to alternative sources of liquidity.
Supplemental Reporting of Non-GAAP Measures
Management believes providing certain “non-GAAP” financial information will assist investors in their understanding of the effect on recent financial results from non-recurring charges.
As a result of prior acquisitions, the Company had intangible assets consisting of goodwill and core deposit and other intangible assets totaling $21.4 million and $21.8 million at September 30, 2023 and December 31, 2022, respectively. Additionally, the Company incurred $3.2 million and $13.0 million in restructuring charges and a provision for legal settlement, respectively, during the three and nine months ended September 30, 2022.
Tangible book value per share and the impact of the legal settlement and restructuring charge on net income and diluted earnings per share, as used by the Company in this supplemental reporting presentation, is determined by methods other than in accordance with GAAP. While we believe this information is a useful supplement to GAAP-based measures presented in this Form 10-Q, readers are cautioned that this non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for financial measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of our results and financial condition as reported under GAAP, nor are such measures necessarily comparable to non-GAAP performance measures that may be presented by other companies. This supplemental presentation should not be construed as an inference that our future results will be unaffected by similar adjustments to be determined in accordance with GAAP. The increase in tangible book value per share (non-GAAP) from December 31, 2022 to September 30, 2023 is primarily due to net income of $28.0 million, partially offset dividends paid of $6.4 million and an increase in other comprehensive losses, net of taxes, of $4.4 million due to net unrealized losses on AFS securities and interest rate swaps designated as hedging instruments caused by inversion of the yield curve.
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The following table presents the computation of each non-GAAP based measure shown together with its most directly comparable GAAP-based measure.

(dollars and shares in thousands) |  | September 30, 2023 |  | December 31, 2022
Tangible Book Value per Common Share |  |  |  |
Shareholders' equity (most directly comparable GAAP-based measure) |  | $ | 243,080 |  |  | $ | 228,896 |
Less: Goodwill |  | 18,724 |  |  | 18,724 |
Other intangible assets |  | 2,650 |  |  | 3,078 |
Related tax effect |  | (557) |  |  | (646) |
Tangible common equity (non-GAAP) |  | $ | 222,263 |  |  | $ | 207,740 |
Common shares outstanding |  | 10,613 |  |  | 10,671 |
Book value per share (most directly comparable GAAP based measure) |  | $ | 22.90 |  |  | $ | 21.45 |
Intangible assets per share |  | 1.96 |  |  | 1.98 |
Tangible book value per share (non-GAAP) |  | $ | 20.94 |  |  | $ | 19.47 |

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk comprises exposure to interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks. In the banking industry, a major risk exposure is changing interest rates. The primary objective of monitoring our interest rate sensitivity, or risk, is to provide management the tools necessary to manage the balance sheet to minimize adverse changes in net interest income as a result of changes in the direction and level of interest rates. FRB monetary control efforts, economic uncertainty and legislative changes have been significant factors affecting the task of managing interest rate sensitivity positions in recent years.
Interest Rate Risk
Interest rate risk is the exposure to fluctuations in the Bank’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
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necessary to ensure the Bank’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 Bank primarily uses its securities portfolio, FHLB advances, interest rate swaps and brokered deposits to manage its interest rate risk position. Additionally, pricing, promotion and product development activities are directed in an effort to emphasize the loan and deposit term or repricing characteristics that best meet current interest rate risk objectives.
We use simulation analysis to assess earnings at risk and net present value analysis to assess value at risk. These methods allow management to regularly monitor both the direction and magnitude of our interest rate risk exposure. These analyses require numerous assumptions including, but not limited to, changes in balance sheet mix, prepayment rates on loans and securities, cash flows and repricing of all financial instruments, changes in volumes and pricing, future shapes of the yield curve, relationship of market interest rates to each other (basis risk), credit spread and deposit sensitivity. Assumptions are based on management’s best estimates but may not accurately reflect actual results under certain changes in interest rates due to the timing, magnitude and frequency of rate changes and changes in market conditions and management strategies, among other factors. However, the analyses are useful in quantifying risk and providing a relative gauge of our interest rate risk position over time.
Our asset/liability committee operates under management policies, approved by the Board of Directors, which define guidelines and limits on the level of risk. The committee meets regularly and reviews our interest rate risk position and monitors various liquidity ratios to ensure a satisfactory liquidity position. By utilizing our analyses, we can determine changes that may need to be made to the asset and liability mixes to mitigate the change in net interest income under various interest rate scenarios. Management continually evaluates the condition of the economy, the pattern of market interest rates and other economic data to inform the committee on the selection of investment securities. Regulatory authorities also monitor our interest rate risk position along with other liquidity ratios.
Net Interest Income Sensitivity
Simulation analysis evaluates the effect of upward and downward changes in market interest rates on future net interest income. The analysis involves changing the interest rates used in determining net interest income over the next twelve months. The resulting percentage change in net interest income in various rate scenarios is an indication of the Bank's short-term interest rate risk. The analysis assumes recent pricing trends in new loan and deposit volumes will continue while balances remain constant. Additional assumptions are applied to modify pricing under the various rate scenarios.
The simulation analysis results are presented in the table below. The decrease in net interest income in the rising interest rate scenarios at September 30, 2023 is the result of the assumption that funding costs will increase faster than the yields on interest earning assets. Results in the falling interest rate scenario project a decrease in net interest income as a result of long-term fixed rate funding added to the balance sheet in 2023. Additionally, in the September 30, 2023 model, funding pressure is not expected to abate within the first twelve months of a rates falling scenario, while the model at December 31, 2022 assumed faster repricing between those periods. The Bank is currently liability sensitive according to the model as interest bearing liabilities have been repricing faster than interest earning assets. If interest bearing liabilities reprice slower than modeled, the pressure on net interest income may be reduced.
Economic Value
Net present value analysis provides information on the risk inherent in the balance sheet that might not be considered in the simulation analysis due to the short time horizon used in that analysis. The net present value of the balance sheet incorporates the discounted present value of expected asset cash flows minus the discounted present value of expected liability cash flows. The analysis involves changing the interest rates used in determining the expected cash flows and in discounting the cash flows. The resulting percentage change in net present value in various rate scenarios is an indication of the longer term repricing risk and options embedded in the balance sheet.
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The results at September 30, 2023 and December 31, 2022 reflect the impact of the FOMC's interest rate increases in effect at the end of each period. Funding cost and repricing speed will continue to be a factor in the results of the model. The behavior of the business and retail clients also varies across the rate scenarios, which is reflected in the results. For the September 30, 2023 modeling, enhancements were implemented to provide a more granular analysis, which reflects that business and retail accounts experience different rate sensitivities and average lives. To improve the comparability across periods, the Bank strives to follow best practices related to the assumption setting and maintains the size and mix of the period end balance sheet; thus, the results do not reflect actions management may take through the normal course of business that would impact results.

Net Interest Income |  | Economic Value
|  | % Change in Net Interest Income |  |  |  | % Change in Market Value
Change in Market Interest Rates (basis points) |  | September 30, 2023 |  | December 31, 2022 |  | Change in Market Interest Rates (basis points) |  | September 30, 2023 |  | December 31, 2022
(200) |  |  | (4.1) | % |  | 4.7 | % |  | (200) |  |  | (4.4) | % |  | (27.7) | %
(100) |  |  | (1.5) | % |  | 4.8 | % |  | (100) |  |  | (0.3) | % |  | (9.3) | %
100 |  |  | (1.4) | % |  | (2.6) | % |  | 100 |  |  | (3.8) | % |  | 3.8 | %
200 |  |  | (3.5) | % |  | (6.1) | % |  | 200 |  |  | (8.2) | % |  | 4.0 | %

Item 4. Controls and Procedures
Based on the evaluation required by Exchange Act Rules 13a-15(b) and 15d-15(b), the Company's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of its disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), at September 30, 2023. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at September 30, 2023.
There were no significant changes made to the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or that are reasonably likely to affect, our internal control over financial reporting during the nine months ended September 30, 2023.
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PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
Information regarding legal proceedings is included in Note 14, Contingencies, to the Consolidated Financial Statements under Part I, Item 1, "Financial Statements" and incorporated herein by reference.
Item 1A – Risk Factors
There have been no material changes from the risk factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

| (a) |  | (b) |  | (c) |  | (d)
Period | Total number of shares (or units) purchased |  | Average price paid per share (or unit) |  | Total number of shares (or units) purchased as part of publicly announced plans or programs |  | Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
July 1, 2023 to July 31, 2023 | — |  |  | $ | — |  |  | — |  |  | 28,467 |
August 1, 2023 to August 31, 2023 | — |  |  | — |  |  | — |  |  | 28,467 |
September 1, 2023 to September 30, 2023 | — |  |  | — |  |  | — |  |  | 28,467 |
Total | — |  |  | $ | — |  |  | — |  |  |

In September 2015, the Board of Directors of the Company authorized a share repurchase program pursuant to which the Company may repurchase up to 416,000 shares of the Company's outstanding shares of common stock, in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Exchange Act, as amended. On April 19, 2021, the Board of Directors authorized the additional future repurchase of up to 562,000 shares of its outstanding common stock for a total of 978,000 shares. When and if appropriate, repurchases may be made in open market or privately negotiated transactions, depending on market conditions, regulatory requirements and other corporate considerations, as determined by management. Share repurchases may not occur and may be discontinued at any time. For the three months ended September 30, 2023, the Company repurchased zero shares of its common stock. At September 30, 2023, 949,533 shares had been repurchased under the program at a total cost of $21.2 million, or $22.36 per share. Common stock available for future repurchase totals approximately 28,467 shares, or 0.3% of the Company's outstanding common stock at September 30, 2023.
Item 3 – Defaults Upon Senior Securities
Not applicable.
Item 4 – Mine Safety Disclosures
Not applicable.
Item 5 – Other Information
During the three months ended September 30, 2023, none of the Company's directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of the Company's common stock that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any "non-Rule 10b5-1 trading arrangement" as such term is defined in Item 408(c) of Regulation S-K.
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Item 6 – Exhibits

3.1 |  |  | Articles of Incorporation as amended, incorporated by reference to Exhibit 3.1 of the Registrant’s Report on Form 8-K filed on January 29, 2010.
3.2 |  |  | By-laws as amended, incorporated by reference to Exhibit 3.2 to the Registrant’s Report on Form 8-K filed June 2, 2021.
4.1 |  |  | Specimen Common Stock Certificate, incorporated by reference to the Registrant’s Registration Statement on Form S-3 filed February 8, 2010 (File No. 333-164780).
31.1 |  |  | Rule 13a – 14(a)/15d-14(a) Certification (Principal Executive Officer)
31.2 |  |  | Rule 13a – 14(a)/15d-14(a) Certifications (Principal Financial Officer)
32.1 |  |  | Section 1350 Certifications (Principal Executive Officer)
32.2 |  |  | Section 1350 Certifications (Principal Financial Officer)
101.LAB |  | XBRL Taxonomy Extension Label Linkbase
101.PRE |  | XBRL Taxonomy Extension Presentation Linkbase
101.INS |  | XBRL Instance Document
101.SCH |  | XBRL Taxonomy Extension Schema
101.CAL |  | XBRL Taxonomy Extension Calculation Linkbase
101.DEF |  | XBRL Taxonomy Extension Definition Linkbase
104 |  | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

All other exhibits for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

| /s/ Thomas R. Quinn, Jr.
| Thomas R. Quinn, Jr.
| President and Chief Executive Officer
| (Principal Executive Officer)
| /s/ Neelesh Kalani
| Neelesh Kalani
| Executive Vice President and Chief Financial Officer
| (Principal Financial Officer)
| Date: November 8, 2023

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