ORRSTOWN FINANCIAL SERVICES INC

Previous wording

The Company, headquartered in Shippensburg, Pennsylvania, is a one-bank holding company that has elected status as a financial holding company. The consolidated financial information presented herein reflects the Company and its wholly-owned subsidiary, the Bank. At March 31, 2024, the Company had total assets of $3.2 billion, total liabilities of $2.9 billion and total shareholders’ equity of $271.7 million.

Current wording

The Company, headquartered in Harrisburg, Pennsylvania, is a one-bank holding company that has elected status as a financial holding company. The consolidated financial information presented herein reflects the Company and its wholly-owned subsidiary, the Bank. At June 30, 2024, the Company had total assets of $3.2 billion, total liabilities of $2.9 billion and total shareholders’ equity of $278.4 million.

Previous wording

For the three months ended March 31, 2024 and 2023, the Company had net income of $8.5 million and $9.2 million, respectively. Diluted earnings per share were $0.81 and $0.87 for the three months ended March 31, 2024 and 2023, respectively. The Company is focused on limiting net interest margin compression in an elevated interest rate environment while generating prudent growth. On December 12, 2023, the Company entered into an agreement and plan to merge with Codorus Valley. For the three months ended March 31, 2024, the Company incurred merger-related expenses of $672 thousand, which were included in non-interest expenses in the unaudited condensed consolidated statements of income.

Current wording

For the three months ended June 30, 2024 and 2023, the Company had net income of $7.7 million and $9.8 million, respectively. For the six months ended June 30, 2024 and 2023, the Company had net income of $16.3 million and $19.0 million, respectively. Diluted earnings per share were $0.73 and $0.94 for the three months ended June 30, 2024 and 2023, respectively. Diluted earnings per share were $1.55 and $1.82 for the six months ended June 30, 2024 and 2023, respectively. The Company is focused on limiting net interest margin compression in an elevated interest rate environment while generating prudent growth. For the three and six months ended June 30, 2024, the Company incurred merger-related expenses of $1.1 million and $1.8 million, respectively, which were included in non-interest expenses in the unaudited condensed consolidated statements of income.

Previous wording

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,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “project,” “forecast,” “goal,” “target,” “would” and “outlook,” or the negative variations of those words or other comparable words of a future or forward-looking nature. 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 and cost savings initiatives, and continued reductions in risk assets or mitigate losses in the future. Factors which could cause the actual results to differ from those expressed or implied by the forward-looking statements include, but are not limited to, the following: general economic conditions (including inflation and concerns about liquidity) on a national basis or in the local markets in which the Company operates; ineffectiveness of the Company's strategic growth plan due to changes in current or future market conditions; changes in interest rates; failure to complete the merger with Codorus Valley or unexpected delays related to the merger or either party's inability t…

Excerpt shortened here; the source contains the full paragraph.

Current wording

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,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “project,” “forecast,” “goal,” “target,” “would” and “outlook,” or the negative variations of those words or other comparable words of a future or forward-looking nature. 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 and cost savings initiatives, and continued reductions in risk assets or mitigate losses in the future. Factors which could cause the actual results to differ from those expressed or implied by the forward-looking statements include, but are not limited to, the following: general economic conditions (including inflation and concerns about liquidity) on a national basis or in the local markets in which the Company operates; ineffectiveness of the Company's strategic growth plan due to changes in current or future market conditions; changes in interest rates; the diversion of management's attention from ongoing business operations and opportunities; the effects of competition and …

Excerpt shortened here; the source contains the full paragraph.

Previous wording

Preliminary real GDP for the first quarter of 2024 increased 1.6% on an annualized basis, which represents a decline from 3.4% during the fourth quarter of 2023 and an increase from 1.1% during the first quarter of 2023. The decrease in preliminary GDP during the first quarter of 2024 compared to the fourth quarter of 2023 reflected a reduction in consumer spending, exports and government spending partially offset by an increase in demand and spending in residential fixed investments. Fluctuations in real GDP in recent periods, due to inflation, credit conditions and geopolitical tensions, continue to create uncertainty in the current economic environment. The personal consumption expenditures ("PCE") price index increased by 3.4% in the first quarter of 2024 compared to an increase of 1.8% for fourth quarter of 2023 and 4.2% for the first quarter of 2023. Excluding food and energy prices, the PCE price index increased by 3.7% in the first quarter of 2024 compared to 2.0% in the fourth quarter of 2023 and 4.9% in the first quarter of 2023.

Current wording

Preliminary real GDP for the second quarter of 2024 increased 2.8% on an annualized basis, which represents an increase from 1.4% during the first quarter of 2024 and an increase from 2.1% during the second quarter of 2023. The increase in preliminary GDP during the second quarter of 2024 compared to the first quarter of 2024 reflected increases in consumer spending, wholesale and retail trade and nonresidential fixed investment, specifically within equipment and intellectual property. The notable drivers to the increase in consumer spending were health care, housing, utilities and recreational services and goods and purchases of motor vehicles and household equipment. Fluctuations in real GDP in recent periods, due to inflation, credit conditions and geopolitical tensions, continue to create uncertainty in the current economic environment. The personal consumption expenditures ("PCE") price index increased by 2.6% in the second quarter of 2024 compared to an increase of 3.4% for first quarter of 2024 and 3.0% for the second quarter of 2023. Excluding food and energy prices, the PCE price index increased by 2.9% in the second quarter of 2024 compared to 3.7% in the first quarter of 2024 and 4.2% in the second quarter of 2023.

Previous wording

The national unemployment rate increased slightly to 3.8% in March 2024 compared to 3.7% in December 2023 and 3.5% in March 2023. Within the Company's geographic footprint, the unemployment rate has decreased considerably in Pennsylvania from 4.2% in March 2023 to 3.4% in March 2024 and decreased in Maryland from 2.7% in March 2023 to 2.5% in March 2024. 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 were notable job gains nationally in healthcare, construction and government during the first quarter of 2024.

Current wording

The national unemployment rate increased to 4.1% in June 2024 compared to 3.8% in March 2024 and 3.6% in June 2023. Within the Company's geographic footprint, the unemployment rate decreased in Pennsylvania from 3.8% in June 2023 to 3.4% in June 2024. The unemployment rate increased in Maryland from 2.0% in June 2023 to 2.8% in June 2024; however, it remains significantly below the national level. These state-wide unemployment rates are consistent with those experienced by the counties in which the Company operates branches and other corporate offices. There were notable job gains nationally in healthcare, construction and government during the second quarter of 2024.

Previous wording

At March 31, 2024, the 10-year Treasury bond yield was 4.62%, a considerable increase from 3.88% at December 31, 2023 and 3.48% at March 31, 2023 due to current economic conditions influenced by the labor market and inflationary pressures. In an attempt to combat the impact of inflation, the current level in the consumer price index and geopolitical tensions, the FOMC has increased the Fed Funds rate by 525 basis points since March 2022. In December of 2023, the FOMC signaled its intention to reduce interest rates in 2024, contingent upon inflation settling at its 2.0% target. However, during the March 2024 meetings, the FOMC stated it is not appropriate yet to reduce the Fed Funds rate until there is greater certainty in the economic outlook and inflation trending towards the 2.0% target.

Current wording

At June 30, 2024, the 10-year Treasury bond yield was 4.36%, a considerable increase from 3.88% at December 31, 2023 and 3.81% at June 30, 2023 due to current economic conditions influenced by the labor market and inflationary pressures. In an attempt to combat the impact of inflation, the current level in the consumer price index and geopolitical tensions, the FOMC has increased the Fed Funds rate by 525 basis points since March 2022. In June of 2024, the FOMC signaled that job gains and the low unemployment rate have demonstrated progress towards its 2.0% target; however, economic concerns persist due to inflationary risks. The Fed Funds rate remains unchanged during 2024 as the FOMC does not believe it is appropriate yet to reduce the rate until there is greater certainty in the economic outlook and inflation trending towards the 2.0% target.

Previous wording

The Company’s accounting and reporting policies are in accordance with GAAP and follow accounting and reporting guidelines prescribed by bank regulatory authorities and general practices within the financial services industry in which it operates. Our financial position and results of operations are affected by management's application of accounting policies, including estimates, and assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the balance sheet date and through the date the financial statements are filed with the SEC. Different assumptions in the application of these policies could result in material changes in the consolidated financial position and/or consolidated results of operations and related disclosures. The more critical accounting estimates include accounting for credit losses and valuation methodologies. Accordingly, these critical accounting estimates are discussed in detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2023. 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, 2023.

Current wording

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 income tax methodologies. Accordingly, these critical accounting estimates are discussed in detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2023. 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, 2023.

Previous wording

Net income totaled $8.5 million for the three months ended March 31, 2024 compared to $9.2 million for the same period in 2023. Diluted earnings per share for the three months ended March 31, 2024 totaled $0.81 compared to $0.87 for the three months ended March 31, 2023. For the three months ended March 31, 2024, the Company incurred merger-related expenses of $672 thousand, which were included in non-interest expenses. Excluding the merger-related expenses incurred during the first quarter of 2024, net income and diluted earnings per share totaled $9.2 million and $0.88, respectively, for the three months ended March 31, 2024. See “Supplemental Reporting of Non-GAAP Measures” for additional information.

Current wording

Net income totaled $7.7 million for the three months ended June 30, 2024 compared to $9.8 million for the same period in 2023. Diluted earnings per share for the three months ended June 30, 2024 totaled $0.73 compared to $0.94 for the three months ended June 30, 2023. For the three months ended June 30, 2024, the Company incurred merger-related expenses of $1.1 million, which were included in non-interest expenses of the unaudited condensed consolidated statement of income. Excluding the merger-related expenses incurred during the second quarter of 2024, net income and diluted earnings per share totaled $8.7 million and $0.83, respectively, for the three months ended June 30, 2024. For the three months ended June 30, 2023, the Company recorded a gain of $1.2 million from the sale of the Bank's Path Valley branch. See “Supplemental Reporting of Non-GAAP Measures” for additional information.

Previous wording

The provision for credit losses on loans and off-balance sheet reserves totaled $298 thousand and $729 thousand for the three months ended March 31, 2024 and 2023, respectively.

Current wording

The provision for credit losses on loans and off-balance sheet reserves totaled $812 thousand and $399 thousand for the three months ended June 30, 2024 and 2023, respectively.

Previous wording

Noninterest income totaled $6.6 million and $6.1 million for the three months ended March 31, 2024 and 2023, respectively. The increase of $552 thousand was due to an increase in wealth management income of $355 thousand and an increase in swap fee income of $199 thousand.

Current wording

Noninterest income totaled $7.2 million for both the three months ended June 30, 2024 and 2023. There was an increase of $14 thousand during the second quarter of 2024 due to an increase in wealth management income of $490 thousand and an increase in swap fee income of $179 thousand. During the second quarter of 2023, other income increased primarily due to the impact from the sale of the Path Valley branch of $1.2 million.

Previous wording

Noninterest expenses totaled $22.5 million for the three months ended March 31, 2024 compared to $20.3 million for the three months ended March 31, 2023. The increase of $2.2 million is primarily due to an increase in salaries and employee benefits expense of $1.6 million and merger-related expenses of $672 thousand.

Current wording

Noninterest expenses totaled $22.6 million for the three months ended June 30, 2024 compared to $20.7 million for the three months ended June 30, 2023. The increase of $1.9 million is primarily due to merger-related expenses of $1.1 million.

Previous wording

Income tax expense totaled $2.2 million for both the three months ended March 31, 2024 and 2023, respectively. The Company's effective tax rate was 20.6% for the three months ended March 31, 2024 compared to 19.6% for the three months ended March 31, 2023.

Current wording

Income tax expense totaled $2.1 million and $2.5 million for the three months ended June 30, 2024 and 2023, respectively. The Company's effective tax rate was 21.2% for the three months ended June 30, 2024 compared to 20.6% for the three months ended June 30, 2023.

Previous wording

Average loans increased by $127.9 million to $2.3 billion for the three months ended March 31, 2024 compared to $2.2 billion for the three months ended March 31, 2023. Average investment securities decreased by $5.8 million from $525.7 million for the three months ended March 31, 2023 to $519.9 million for the three months ended March 31, 2024. Average interest-bearing liabilities increased by $199.6 million to $2.4 billion for the three months ended March 31, 2024 from $2.2 billion for the three months ended March 31, 2023.

Current wording

Average loans increased by $91.6 million to $2.3 billion for the three months ended June 30, 2024 compared to $2.2 billion for the three months ended June 30, 2023. Average investment securities increased by $12.2 million from $526.2 million for the three months ended June 30, 2023 to $538.5 million for the three months ended June 30, 2024. Average interest-bearing liabilities increased by $237.6 million to $2.5 billion for the three months ended June 30, 2024 from $2.2 billion for the three months ended June 30, 2023.

Previous wording

The yield on loans increased by 98 basis points to 6.34% for the three months ended March 31, 2024 compared to 5.36% for the three months ended March 31, 2023. Taxable-equivalent interest income earned on loans increased by $7.5 million due to higher interest rates, which increased interest income by $5.9 million, and increases in the average balances of loans, which increased interest income by $1.6 million.

Current wording

The yield on loans increased by 54 basis points to 6.17% for the three months ended June 30, 2024 compared to 5.63% for the three months ended June 30, 2023. Taxable-equivalent interest income earned on loans increased by $4.4 million due to higher interest rates, which increased interest income by $3.1 million, and an increase in the average balances of loans resulted in an increase to interest income by $1.2 million.

Previous wording

Interest income on investment securities on a tax-equivalent basis increased by $229 thousand to $5.7 million for the three months ended March 31, 2024 from $5.5 million for the three months ended March 31, 2023, with the taxable equivalent yield increasing from 4.18% for the three months ended March 31, 2023 to 4.39% for the three months ended March 31, 2024. The 21 basis point increase reflected the impact from the higher interest rates. The average balance of investment securities decreased by $5.8 million to $519.9 million for the three months ended March 31, 2024 from $525.7 million for the three months ended March 31, 2023 due primarily to paydowns and the call of a non-agency CMO totaling $10.0 million, partially offset by purchase activity.

Current wording

Interest income on investment securities on a tax-equivalent basis increased by $604 thousand to $6.1 million for the three months ended June 30, 2024 from $5.5 million for the three months ended June 30, 2023, with the taxable equivalent yield increasing from 4.19% for the three months ended June 30, 2023 to 4.54% for the three months ended June 30, 2024. The 35 basis point increase primarily reflected the impact from the higher interest rates. The average balance of investment securities increased by $12.2 million to $538.5 million for the three months ended June 30, 2024 from $526.2 million for the three months ended June 30, 2023 due primarily to purchase activity.

Previous wording

Interest income on federal funds sold and interest-bearing bank balances on a tax-equivalent basis increased by $658 thousand to $1.0 million for the three months ended March 31, 2024 from $298 thousand for the three months ended March 31, 2023. The average balance of federal funds sold and interest-bearing bank balances increased by $44.9 million from $29.6 million for the three months ended March 31, 2023 to $74.5 million, which resulted in an increase in interest income of $455 thousand. Since March 31, 2023, the FOMC has increased the Federal Funds rate by 50 basis points, which impacted interest income by $203 thousand during the three months ended March 31, 2024.

Current wording

Interest income on federal funds sold and interest-bearing bank balances on a tax-equivalent basis increased by $1.4 million to $1.9 million for the three months ended June 30, 2024 from $418 thousand for the three months ended June 30, 2023. The average balance of federal funds sold and interest-bearing bank balances increased by $105.0 million from $37.9 million for the three months ended June 30, 2023 to $142.9 million, which resulted in an increase in interest income of $1.2 million. Since June 30, 2023, the FOMC increased the Federal Funds rate by 25 basis points, which contributed to the increase in interest income on federal funds sold and interest-bearing bank balances by $292 thousand during the three months ended June 30, 2024.

Previous wording

Interest expense on interest-bearing liabilities increased by $7.8 million from $8.0 million for the three months ended March 31, 2023 to $15.8 million for the three months ended March 31, 2024. The cost of interest-bearing liabilities increased by 120 basis points from 1.50% for the three months ended March 31, 2023 to 2.70% for the three months ended March 31, 2024 as funding costs increased due to higher market interest rates and competitive pressures on deposit pricing. The average balance of interest-bearing deposits increased by $170.4 million to $2.2 billion for the three months ended March 31, 2024 from $2.0 billion for the three months ended March 31, 2023. Average time deposits increased by $152.6 million and average interest-bearing demand deposits increased by $67.2 million for the three months ended March 31, 2024 compared to the prior period. These increases were partially offset by a decrease in average savings deposits of $49.4 million, between the three months ended March 31, 2024 and 2023 as clients sought higher-yielding products during the rising interest rate environment.

Current wording

Interest expense on interest-bearing liabilities increased by $6.7 million from $10.5 million for the three months ended June 30, 2023 to $17.2 million for the three months ended June 30, 2024. The cost of interest-bearing liabilities increased by 91 basis points from 1.90% for the three months ended June 30, 2023 to 2.81% for the three months ended June 30, 2024 as funding costs increased due to higher market interest rates and competitive pressures on deposit pricing. The average balance of interest-bearing deposits increased by $254.9 million to $2.3 billion for the three months ended June 30, 2024 from $2.0 billion for the three months ended June 30, 2023. Average time deposits increased by $155.7 million and average interest-bearing demand deposits increased by $138.3 million for the three months ended June 30, 2024 compared to the prior period due to strong deposit gathering efforts by the Bank's sales teams. These increases were partially offset by a decrease in average savings deposits of $39.1 million between the three months ended June 30, 2024 and 2023 as clients sought higher-yielding products during the rising interest rate environment.

Previous wording

Net recoveries for the three months ended March 31, 2024 totaled $42 thousand compared to net recoveries of $34 thousand for the three months ended March 31, 2023. Nonaccrual loans were 0.56% of gross loans at March 31, 2024, compared with 0.96% of gross loans at March 31, 2023. Nonaccrual loans decreased by $8.4 million from $21.3 million at March 31, 2023 to $12.9 million at March 31, 2024, primarily due to repayments of $18.0 million, including the payoff of one commercial real estate loan with a balance totaling $15.2 million at March 31, 2023, partially offset by additions of $9.4 million which include three commercial real estate clients with loans totaling $6.1 million and one commercial and industrial loan totaling $1.0 million.

Current wording

Net charge-offs for the three months ended June 30, 2024 totaled $113 thousand compared to net charge-offs of $380 thousand for the three months ended June 30, 2023. Nonaccrual loans were 0.36% of gross loans at June 30, 2024, compared with 0.94% of gross loans at June 30, 2023. Nonaccrual loans decreased by $12.7 million from $21.1 million at June 30, 2023 to $8.4 million at June 30, 2024, primarily due to the payoff of one owner-occupied commercial real estate loan with a balance of $14.8 million at June 30, 2023, partially offset by an addition of one owner-occupied commercial real estate loan with a balance of $1.2 million at June 30, 2024.

Previous wording

•Wealth management income, which includes trust and investment management income and brokerage income, increased by $355 thousand due to strong market performance and growth in managed assets.

Current wording

•Wealth management income, which includes trust and investment management income and brokerage income, increased by $490 thousand due to strong market performance and growth in managed assets.

Previous wording

•Swap fee income increased by $199 thousand during the three months ended March 31, 2024, as swap fee income will fluctuate based on market conditions and client demand.

Current wording

•Swap fee income increased by $179 thousand as swap fee income will fluctuate based on market conditions and client demand.

Previous wording

•Merger-related expenses totaled $672 thousand during the first quarter of 2024 related to the pending merger with Codorus Valley.

Current wording

•Merger-related expenses totaled $1.1 million related to the merger with Codorus Valley.

Previous wording

•Furniture and equipment expense increased by $211 thousand due primarily to an increase in software maintenance and services to support technology improvements.

Current wording

•Furniture and equipment expense increased by $315 thousand due primarily to an increase in software maintenance and services to support technology improvements.

Previous wording

•FDIC insurance expense decreased by $63 thousand due primarily to a decrease in the assessment rate caused by a decrease in the loan mix index and a decrease in nonaccrual loans.

Current wording

•FDIC insurance expense decreased by $100 thousand due primarily to a decrease in the assessment rate caused by a decrease in the loan mix index factor and a decrease in nonaccrual loans.

Previous wording

Income tax expense totaled $2.2 million, an effective tax rate of 20.6%, for the three months ended March 31, 2024 compared with $2.2 million and an effective tax rate of 19.6% for the three months ended March 31, 2023. 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, income from life insurance policies and tax credits, partially offset by disallowed interest expense and state income taxes. The increase in the effective tax rate from the three months ended March 31, 2023 to the three months ended March 31, 2024 was primarily due to an increase in the portion of interest expense disallowed as a deduction against earnings under the Tax Equity and Fiscal Responsibility Act of 1982, an increase in state taxes as a result of a greater percentage of taxable income earned in a state with a state income tax and the non-deductible merger-related expenses.

Current wording

Income tax expense totaled $2.1 million, an effective tax rate of 21.2%, for the three months ended June 30, 2024 compared with $2.5 million and an effective tax rate of 20.6% for the three months ended June 30, 2023. The Company’s effective tax rate is greater than the 21% federal statutory rate due to disallowed interest expenses and the impact of nondeductible merger-related costs, partially offset by tax-exempt income, including interest earned on tax-exempt loans and investment securities, income from life insurance policies and tax credits. The increase in the effective tax rate from the three months ended June 30, 2023 to the three months ended June 30, 2024 was primarily due to an increase in the portion of interest expense disallowed as a deduction against earnings under the Tax Equity and Fiscal Responsibility Act of 1982, an increase in state taxes as a result of a greater percentage of taxable income earned in a state with a state income tax and the non-deductible merger-related expenses.

Previous wording

Net interest income totaled $26.9 million for the three months ended March 31, 2024 compared to $26.3 million for the three months ended March 31, 2023. This increase in net interest income reflected the impact of $1.6 million of interest recovered from the payoff of a commercial real estate loan on nonaccrual status in the three months ended March 31, 2024, partially offset by the impact of an increase in cost of funds and an increase in interest-bearing liabilities.

Current wording

Net interest income totaled $53.0 million for the six months ended June 30, 2024 compared to $52.7 million for the six months ended June 30, 2023. This increase in net interest income reflected the impact of $1.6 million of interest recovered from the payoff of a commercial real estate loan on nonaccrual status in the six months ended June 30, 2024, partially offset by the impact of an increase in cost of funds and an increase in average interest-bearing liabilities.

Previous wording

Net interest income increased by $587 thousand from $26.3 million for the three months ended March 31, 2023 to $26.9 million for the three months ended March 31, 2024. Interest income on loans increased by $7.5 million, from $28.7 million to $36.2 million. Interest income on investment securities increased by $226 thousand, from $5.2 million to $5.5 million, for the three months ended March 31, 2024 compared to the same period in the prior year. Total interest expense increased by $7.8 million from $8.0 million for the three months ended March 31, 2023 to $15.8 million for the three months ended March 31, 2024. Interest expense on deposits increased by $7.3 million from $6.2 million for the three months ended March 31, 2023 to $13.5 million for the three months ended March 31, 2024. Interest expense on borrowings increased by $472 thousand from $1.8 million from the three months ended March 31, 2023 to $2.3 million for the three months ended March 31, 2024.

Current wording

Net interest income increased by $315 thousand from $52.7 million for the six months ended June 30, 2023 to $53.0 million for the six months ended June 30, 2024. Interest income on loans increased by $11.9 million, from $59.9 million to $71.8 million. Interest income on investment securities increased by $826 thousand, from $10.5 million to $11.3 million, for the six months ended June 30, 2024 compared to the same period in the prior year. Total interest expense increased by $14.4 million from $18.5 million for the six months ended June 30, 2023 to $32.9 million for the six months ended June 30, 2024. Interest expense on deposits increased by $14.0 million from $14.8 million for the six months ended June 30, 2023 to $28.8 million for the six months ended June 30, 2024. Interest expense on borrowings increased by $467 thousand from $3.7 million from the six months ended June 30, 2023 to $4.2 million for the six months ended June 30, 2024.

Previous wording

Taxable-equivalent net interest margin decreased by 17 basis points to 3.77% for the three months ended March 31, 2024 from 3.94% for the three months ended March 31, 2023. The recognition of interest income previously applied to principal of $1.6 million from the payoff of a commercial real estate loan on nonaccrual status contributed 21 basis points to the Company's net interest margin during the three months ended March 31, 2024. The taxable-equivalent yield on interest-earning assets increased by 84 basis points from 5.12% for the three months ended March 31, 2023 to 5.96% for the three months ended March 31, 2024, reflecting the benefit of both the deployment of cash into higher yielding loans and investment securities and the impact of higher interest rates on these interest-earning assets. This increase in yield on interest earning assets was more than offset by the increase of 120 basis points in the cost of interest-bearing liabilities from 1.50% to 2.70% due to increased funding costs on deposits due to higher market interest rates and competitive pressures.

Current wording

Taxable-equivalent net interest margin decreased by 23 basis points to 3.65% for the six months ended June 30, 2024 from 3.88% for the six months ended June 30, 2023. The recognition of interest income previously applied to principal of $1.6 million from the payoff of a commercial real estate loan on nonaccrual status contributed 10 basis points to the Company's net interest margin during the six months ended June 30, 2024. The taxable-equivalent yield on interest-earning assets increased by 67 basis points from 5.23% for the six months ended June 30, 2023 to 5.90% for the six months ended June 30, 2024, reflecting the benefit of both the deployment of cash into higher yielding loans and investment securities and the impact of higher interest rates on these interest-earning assets. This increase in yield on interest earning assets was more than offset by the increase of 105 basis points in the cost of interest-bearing liabilities from 1.71% to 2.76% due to increased funding costs on deposits due to higher market interest rates and competitive pressures and an increase in the interest rate on subordinated notes, which converted from a fixed rate to a floating rate on December 30, 2023.

Previous wording

The average balance of commercial loans, excluding SBA PPP loan forgiveness activity, increased by $93.5 million from $1.7 billion for the three months ended March 31, 2023 to $1.8 billion for the three months ended March 31, 2024. SBA PPP loans, net of deferred fees and costs, averaged $12.5 million for the three months ended March 31, 2023 compared to $5.6 million for the three months ended March 31, 2024. This decrease was due to forgiveness of SBA PPP loans. Average residential mortgage loans increased by $40.1 million from $233.3 million during the three months ended March 31, 2023 to $273.4 million during the three months ended March 31, 2024, primarily due to mortgages originated for the portfolio. Average home equity loans increased by $5.1 million from $186.9 million for the three months ended March 31, 2023 to $192.0 million for the three months ended March 31, 2024. Average installment and other consumer loans decreased by $4.0 million from $21.4 million for the three months ended March 31, 2023 to $17.4 million for the three months ended March 31, 2024.

Current wording

This decrease was due to forgiveness of SBA PPP loans. Average residential mortgage loans increased by $39.6 million from $235.5 million during the six months ended June 30, 2023 to $275.1 million during the six months ended June 30, 2024, primarily due to mortgages originated for the portfolio. Average home equity loans increased by $7.1 million from $187.5 million for the six months ended June 30, 2023 to $194.6 million for the six months ended June 30, 2024. Average installment and other consumer loans decreased by $4.1 million from $20.9 million for the six months ended June 30, 2023 to $16.8 million for the six months ended June 30, 2024.

Previous wording

Accretion of purchase accounting adjustments included in interest income was $147 thousand and $239 thousand for the three months ended March 31, 2024 and 2023, respectively. The decrease in accretion was partially due to a decline in accelerated accretion from acquired loan payoffs or significant loan repayments. Accelerated accretion, during the three months ended March 31, 2024 and 2023, totaled $66 thousand and $102 thousand, respectively. Prepayment income on commercial loans decreased by $15 thousand from $71 thousand for the three months ended March 31, 2023 to $56 thousand for the three months ended March 31, 2024. For the three months ended March 31, 2024, interest income on loans includes $14 thousand of interest and net deferred fee income associated with SBA PPP loans compared to $81 thousand of such interest and fee income for the three months ended March 31, 2023.

Current wording

Accretion of purchase accounting adjustments included in interest income was $147 thousand and $454 thousand for the six months ended June 30, 2024 and 2023, respectively. The decrease in accretion was primarily due to a decline in loan repayments and payoffs. Accelerated accretion totaled $138 thousand and $182 thousand during the six months ended June 30, 2024 and 2023, respectively. Prepayment income on commercial loans decreased by $17 thousand from $274 thousand for the six months ended June 30, 2023 to $257 thousand for the six months ended June 30, 2024. For the six months ended June 30, 2024, interest income on loans includes $26 thousand of interest and net deferred fee income associated with SBA PPP loans compared to $146 thousand of such interest and fee income for the six months ended June 30, 2023.

Previous wording

Interest expense on borrowings increased by $472 thousand to $2.3 million for the three months ended March 31, 2024 from $1.8 million for the three months ended March 31, 2023 as the cost of borrowings increased by 27 basis points to 4.99% for the three months ended March 31, 2024 from 4.72% for the three months ended March 31, 2023. Average borrowings increased by $29.3 million from $152.3 million for the three months ended March 31, 2023 to $181.6 million for the three months ended March 31, 2024 as the Bank opted to borrow funds to provide additional liquidity to meet the credit needs of its clients. In addition, the interest rate increased on the Company's outstanding subordinated notes, which converted from a fixed rate to a floating rate on December 30, 2023. The interest rate on the subordinated notes was 8.77% at March 31, 2024.

Current wording

Interest expense on borrowings increased by $467 thousand to $4.2 million for the six months ended June 30, 2024 from $3.7 million for the six months ended June 30, 2023 as the cost of borrowings increased by 39 basis points to 4.90% for the six months ended June 30, 2024 from 4.51% for the six months ended June 30, 2023. Average borrowings increased by $5.9 million from $165.2 million for the six months ended June 30, 2023 to $171.1 million for the six months ended June 30, 2024 as the Bank opted to borrow funds to provide additional liquidity to meet the credit needs of its clients. In addition, the interest rate increased on the Company's outstanding subordinated notes, which converted from a fixed rate to a floating rate on December 30, 2023. The contractual interest rate on the subordinated notes was 8.72% at June 30, 2024 compared to 6.00% at June 30, 2023.

Previous wording

The Company recorded a provision for credit losses of $298 thousand for the three months ended March 31, 2024 compared to $729 thousand for the same period in 2023, which included a reversal to the provision for credit losses for off-balance sheet credit exposures of $123 thousand for the three months ended March 31, 2024. For the three months ended March 31, 2024, the provision for credit losses increased primarily due to a reduction in prepayment speed assumptions within the quantitative model based on current economic conditions. This was partially offset by the impact of an improvement in the GDP forecast and a decrease in the Collateral Valuation Trends qualitative factor for the residential mortgage and installment and other loan segments based on the stabilization in real estate collateral valuations and housing demand, which lowered the reserve requirement by $522 thousand. The 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 net impact of the changes in the quantitative model increased the reserve requirement by $760 thousand. The remaining change in the ACL is due to normal fluctuations from the changes in loan balances and loss rates by loan segment. The ACL to total loan ratio decreased from 1.28% at March 31, 2023 to 1.27% at March 31, 2024. The provision expense recorded in the three months ended March 31, 2023 was due to commercial loan growth and overall increase in expected loss rates under CECL, which was adopted on January 1, 2023.

Current wording

The Company recorded a provision for credit losses of $1.1 million for the six months ended June 30, 2024 compared to $1.1 million for the same period in 2023, which included a reversal to the provision for credit losses for off-balance sheet credit exposures of $123 thousand for the six months ended June 30, 2024. For the six months ended June 30, 2024, the provision for credit losses was primarily based on loan growth and the slowing in prepayment speed assumptions within the quantitative model based on current economic conditions. This was partially offset by the impact of an improvement in the GDP forecast and decreases in certain qualitative factors. The Collateral Valuation Trends qualitative factor was reduced for the residential mortgage and installment and other loan segments and the Economic Factors qualitative factor was reduced for the residential mortgage segment based on the stabilization in real estate collateral valuations and housing demand, which is reflected in the provision for credit losses noted above. The 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 remaining change in the ACL is due to normal fluctuations from the changes in loan balances and loss rates by loan segment. The ACL to total loan ratio remained at 1.27% at June 30, 2023 and June 30, 2024. The provision expense recorded in the six months ended June 30, 2023 was due to commercial loan growth and overall increase in expected loss rates under CECL, which was adopted on January 1, 2023.

Previous wording

•Salaries and employee benefits expense increased by $1.6 million due primarily to increases in merit-based and incentive compensation.

Current wording

•Salaries and employee benefits expense increased by $1.7 million due primarily to increases in merit-based and incentive compensation.

Previous wording

•Other operating expenses decreased by $264 thousand due primarily to a decrease in credit valuation adjustments on derivatives of $292 thousand.

Current wording

•Other operating expenses decreased by $283 thousand due primarily to a decrease in credit valuation adjustments on derivatives of $236 thousand.

Previous wording

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 March 31, 2024 and December 31, 2023, management classified the entire investment securities portfolio as AFS, which is accounted for at current market value with non-credit related losses and gains reported in OCI, net of income taxes.

Current wording

The Company has established investment policies and an asset/liability 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 security portfolio into three categories: “securities available-for-sale,” “trading securities” and “securities held-to-maturity.” At June 30, 2024 and December 31, 2023, management classified the entire investment securities portfolio as AFS, which is accounted for at current market value with non-credit related losses and gains reported in OCI, net of income taxes.

Previous wording

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 did not require an ACL at March 31, 2024 and December 31, 2023.

Current wording

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 investment security prior to recovery, or it expects to be able to hold the investment 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 did not require an ACL at June 30, 2024 and December 31, 2023.

Previous wording

At March 31, 2024, AFS securities totaled $514.9 million, an increase of $1.4 million, from $513.5 million at December 31, 2023. During the three months ended March 31, 2024, the Company purchased $21.8 million of AFS securities, which included $20.3 million of agency MBS and CMO securities and $1.5 million of non-agency CMO securities. The purchases were partially offset by a call of a non-agency CMO totaling $10.0 million and paydowns of $8.1 million. The balance of investment securities included net unrealized losses of $37.2 million at March 31, 2024 compared to net unrealized losses of $35.6 million at December 31, 2023 for a change of $1.7 million. This increase in net unrealized losses was primarily due to higher treasury rates and wider credit spreads. The overall duration of the Company's investment securities portfolio was 4.4 years at March 31, 2024. 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 volatile interest rate environments and to generate steady earnings.

Current wording

At June 30, 2024, AFS securities totaled $529.1 million, an increase of $15.6 million, from $513.5 million at December 31, 2023. During the six months ended June 30, 2024, the Company purchased $50.3 million of AFS securities, which included $48.0 million of agency MBS and CMO securities, $1.5 million of non-agency CMO securities and $788 thousand of investment securities issued by state and political subdivisions. The purchases were partially offset by calls of non-agency CMO securities totaling $12.9 million and paydowns of $19.4 million. The balance of investment securities included net unrealized losses of $37.3 million at June 30, 2024 compared to net unrealized losses of $35.6 million at December 31, 2023 for an increase of $1.8 million. This increase in net unrealized losses was primarily due to higher treasury rates and wider credit spreads compared to December 31, 2023. The overall duration of the Company's investment securities portfolio was 4.2 years at June 30, 2024 compared to 4.3 years at December 31, 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 security portfolio is appropriately aligned with the rest of the balance sheet to protect against volatile interest rate environments, to provide a source of liquidity and to generate steady earnings.

Previous wording

The following table summarizes the credit ratings and collateral associated with the Company's investment portfolio, excluding equity securities, at March 31, 2024:

Current wording

The following table summarizes the credit ratings and collateral associated with the Company's investment security portfolio, excluding equity securities, at June 30, 2024:

Previous wording

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, the related risks, allowance for credit losses and financial difficulty modifications are included in Note 1, Summary of Significant Accounting Policies, and Note 4, Loans and Allowance for Credit Losses, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information."

Current wording

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, the related risks, ACL and FDM are included in Note 1, Summary of Significant Accounting Policies, and Note 4, Loans and Allowance for Credit Losses, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information."

Previous wording

Total loans increased by $4.8 million from December 31, 2023 to March 31, 2024. This increase is due to continued portfolio production in the residential mortgage segment of $7.9 million partially offset by a decrease in the commercial loans segment of $2.3 million during the three months ended March 31, 2024. During the first quarter of 2024, there were payoffs of a commercial real estate loan on nonaccrual status of $13.4 million and a special mention commercial loan of $7.2 million.

Current wording

Total loans increased by $49.3 million from December 31, 2023 to June 30, 2024. This increase is due to continued portfolio growth in the commercial loans segment of $39.6 million and residential mortgage segment of $10.8 million during the six months ended June 30, 2024. During the first half of 2024, there were payoffs of three commercial real estate loans with outstanding balances exceeding $1.0 million on nonaccrual status at December 31, 2023 totaling $14.7 million and payoffs of four other criticized loans with outstanding balances exceeding $1.0 million within the commercial and industrial and commercial loan classes totaling $12.1 million.

Previous wording

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 $13.0 million at March 31, 2024, a decrease of $12.6 million from $25.6 million at December 31, 2023. Nonaccrual loans decreased by $12.6 million from December 31, 2023 to March 31, 2024 due primarily to the payoff of one commercial real estate loan with an outstanding balance of $13.4 million at December 31, 2023. For the three months ended March 31, 2024, the Company did not have new loan modifications meeting the FDM criteria under ASU 2022-02.

Current wording

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 $8.6 million at June 30, 2024, a decrease of $17.1 million from $25.6 million at December 31, 2023. Nonaccrual loans decreased by $17.1 million from December 31, 2023 to June 30, 2024 due primarily to the payoffs of two commercial real estate loans with outstanding balances totaling $14.7 million with no charge-offs recorded on these relationships. During 2024, the Company did not have new loan modifications meeting the FDM criteria under ASU 2022-02.