ORRSTOWN FINANCIAL SERVICES INC

Previous wording

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, 2023, included in our Annual Report on Form 10-K filed with the SEC on March 14, 2024. 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.

Current wording

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, 2023, included in our Annual Report on Form 10-K filed with the SEC on March 14, 2024. 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. All dollar amounts presented in the tables, except per share amounts, are in thousands.

Previous 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.

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 September 30, 2024, the Company had total assets of $5.5 billion, total liabilities of $5.0 billion and total shareholders’ equity of $516.2 million.

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; 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.

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, 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 how it may impact our community banking model, …

Excerpt shortened here; the source contains the full paragraph.

Previous 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.

Current wording

Preliminary real GDP was 2.8% on an annualized basis for the third quarter of 2024, which was a decrease from 3.0% for the second quarter of 2024 and a decrease from 4.9% during the third quarter of 2023. The decline from the second quarter of 2024 was due to a decrease in residential fixed investment, including residential structures and equipment, and private inventory investment. 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 1.5% in the third quarter of 2024 compared to an increase of 2.5% for second quarter of 2024 and 2.9% for the third quarter of 2023. Excluding food and energy prices, the PCE price index increased by 2.2% in the third quarter of 2024 compared to 2.8% in the second quarter of 2024 and 2.4% in the third quarter of 2023.

Previous 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.

Current wording

The national unemployment rate was 4.1% in both October and June 2024 compared to 3.8% in September 2023. Within the Company's geographic footprint, the unemployment rate in Pennsylvania was 3.4% in September 2024 and 2023. The unemployment rate increased in Maryland from 1.6% in September 2023 to 2.9% in September 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 third quarter of 2024.

Previous wording

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.

Current wording

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 possible 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.

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 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.

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, income tax methodologies and accounting for business combinations.

Previous 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.

Current wording

Net loss totaled $7.9 million for the three months ended September 30, 2024 compared to net income of $9.0 million for the same period in 2023. Diluted loss per share for the three months ended September 30, 2024 totaled $0.41 compared to diluted earnings per share of $0.87 for the three months ended September 30, 2023. For the three months ended September 30, 2024, the Company incurred merger-related expenses of $17.0 million, provision for credit losses on acquired non-PCD loans of $15.5 million and retirement expenses for one executive of $4.8 million, which were included in non-interest expenses of the unaudited condensed consolidated statements of operations. Excluding these non-recurring expenses, net income and diluted earnings per share totaled $21.4 million and $1.11, respectively, for the three months ended September 30, 2024.

Previous 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.

Current wording

The provision for credit losses on loans and off-balance sheet reserves totaled $13.7 million and $136 thousand for the three months ended September 30, 2024 and 2023, respectively.

Previous 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.

Current wording

Income tax benefit was $2.0 million and income tax expense was $2.5 million for the three months ended September 30, 2024 and 2023, respectively. The Company's effective tax rate was 20.1% for the three months ended September 30, 2024 compared to 21.9% for the three months ended September 30, 2023.

Previous wording

Taxable-equivalent net interest margin decreased by 29 basis points to 3.54% for the three months ended June 30, 2024 from 3.83% for the three months ended June 30, 2023. The taxable-equivalent yield on interest-earning assets increased by 50 basis points from 5.34% for the three months ended June 30, 2023 to 5.84% for the three 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 91 basis points in the cost of interest-bearing liabilities from 1.90% to 2.81% due to increased funding costs on deposits from higher market interest rates and competitive pressures.

Current wording

Taxable-equivalent net interest margin increased by 41 basis points to 4.14% for the three months ended September 30, 2024 from 3.73% for the three months ended September 30, 2023. The taxable-equivalent yield on interest-earning assets increased by 114 basis points from 5.47% for the three months ended September 30, 2023 to 6.61% for the three months ended September 30, 2024, due primarily to the accretion recognized on fair value marks to loans and securities assumed in the Merger. This increase in yield on interest earning assets was partially offset by an increase of 88 basis points in the cost of interest-bearing liabilities from 2.19% to 3.07%due primarily to increased funding costs on deposits from higher market interest rates and competitive pressures and an increase in the interest rate on Orrstown Financial Services, Inc.'s subordinated notes, which converted from a fixed rate to a floating rate on December 30, 2023.

Previous wording

Average residential mortgage loans increased by $39.0 million from $237.7 million during the three months ended June 30, 2023 to $276.7 million during the three months ended June 30, 2024, primarily due to mortgages originated for the portfolio. Average home equity loans increased by $9.0 million from $188.1 million for the three months ended June 30, 2023 to $197.1 million for the three months ended June 30, 2024. Average installment and other consumer loans decreased by $4.1 million from $20.3 million for the three months ended June 30, 2023 to $16.2 million for the three months ended June 30, 2024.

Current wording

The average balance of commercial loans increased by $1.4 billion to $3.2 billion for the three months ended September 30, 2024 from $1.8 billion the three months ended September 30, 2023. Average residential mortgage loans increased by $203.6 million from $251.4 million during the three months ended September 30, 2023 to $455.0 million during the three months ended September 30, 2024. Average home equity loans increased by $110.1 million from $191.4 million for the three months ended September 30, 2023 to $301.5 million for the three months ended September 30, 2024. Average installment and other consumer loans increased by $14.5 million from $19.7 million for the three months ended September 30, 2023 to $34.2 million for the three months ended September 30, 2024.

Previous wording

Accretion of purchase accounting adjustments included in interest income was $152 thousand and $215 thousand for the three months ended June 30, 2024 and 2023, respectively. The decrease in accretion was primarily due to a decline in accelerated accretion from acquired loan payoffs or significant loan repayments. Accelerated accretion totaled $72 thousand and $138 thousand for the three months ended June 30, 2024 and 2023, respectively. For the three months ended June 30, 2024, interest income on loans included $12 thousand of interest and net deferred fee income associated with SBA PPP loans compared to $66 thousand of such interest and fee income for the three months ended June 30, 2023.

Current wording

Accretion of purchase accounting adjustments on loans included in interest income was $7.3 million and $149 thousand for the three months ended September 30, 2024 and 2023, respectively. The increase in accretion was due to recognition of fair value marks from the Merger. Accelerated accretion totaled $2.2 million and $30 thousand for the three months ended September 30, 2024 and 2023, respectively. Prepayment fee income on loans increased from $353 thousand for the three months ended September 30, 2023 to $620 thousand for the three months ended September 30, 2024.

Previous 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.

Current wording

Interest income on investment securities on a tax-equivalent basis increased by $4.6 million to $10.1 million for the three months ended September 30, 2024 from $5.5 million for the three months ended September 30, 2023, with the taxable equivalent yield increasing from 4.26% for the three months ended September 30, 2023 to 4.77% for the three months ended September 30, 2024. The 51 basis point increase primarily reflected the impact from the higher interest rates as well as the recognition of discounts recorded on securities assumed from the Merger. Accretion on acquired investment securities was $870 thousand for the three months ended September 30, 2024. The average balance of investment securities increased by $328.5 million to $849.7 million for the three months ended September 30, 2024 from $521.2 million for the three months ended September 30, 2023 due primarily to the Merger.

Previous 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.

Current wording

Interest income on federal funds sold and interest-bearing bank balances on a tax-equivalent basis increased by $1.8 million to $2.5 million for the three months ended September 30, 2024 from $633 thousand for the three months ended September 30, 2023. The average balance of federal funds sold and interest-bearing bank balances increased by $126.7 million from $57.8 million for the three months ended September 30, 2023 to $184.5 million. The Federal Funds rate had remained unchanged from the prior rate increase of 25 basis points in July 2023 until the FOMC cut the Federal Fund rate by 50 basis points in September 2024.

Previous 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.

Current wording

Interest expense on interest-bearing liabilities increased by $18.8 million from $12.5 million for the three months ended September 30, 2023 to $31.3 million for the three months ended September 30, 2024. The cost of interest-bearing liabilities increased by 88 basis points from 2.19% for the three months ended September 30, 2023 to 3.07% for the three months ended September 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 $1.8 billion to $3.9 billion for the three months ended September 30, 2024 from $2.1 billion for the three months ended September 30, 2023. For the three months ended September 30, 2024, average interest-bearing demand deposits increased by $1.0 billion, average time deposits increased by $657.4 million and average saving deposits increased by $92.5 million compared to the prior period. Amortization of fair value marks on acquired time deposits was $1.4 million for the three months ended September 30, 2024.

Previous wording

The Company recorded a provision for credit losses of $812 thousand for the three months ended June 30, 2024 compared to $399 thousand for the same period in 2023. For the three months ended June 30, 2024, the provision for credit losses increased primarily due to loan growth and the slowing in prepayment speed assumptions within the quantitative model based on current economic conditions. The impact of these factors was partially offset by a decrease in the Economic Conditions qualitative factor for the residential mortgage segment based on the stabilization in real estate collateral valuations and housing demand and overall portfolio performance, which is reflected in the provision for credit losses noted above. This resulted in a decrease to the ACL of $228 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 was 1.27% at both June 30, 2023 and June 30, 2024. For the three months ended June 30, 2023, the provision for credit losses was driven by an increase in commercial 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. The change in this qualitative factor was based on a recent trend of increases in loans downgraded to the special mention risk rating, which is reflected in the provision for credit losses noted above. In addition, the provision for credit losses was impacted by the change in expected loss rates under CECL. Favorable published trends in unemployment and GDP rates impacted the extent of provisioning required in the second quarter of 2023.

Current wording

The Company recorded a provision for credit losses of $13.7 million for the three months ended September 30, 2024 compared to $136 thousand for the same period in 2023. For the three months ended September 30, 2024, the provision for credit losses increased primarily due to $15.5 million of reserves on acquired non-PCD loans as a result of the Merger, partially offset by a provision reversal of $1.8 million due to changes in qualitative factors, a change in the peer group utilized for the calculation and a reduction of $434 thousand in the required reserve for unfunded commitments. The change in qualitative factors included a reduction in the Economic Conditions qualitative factor and removal of the Other External Factors qualitative factor. The ACL to total loan ratio was 1.25% at both September 30, 2023 and September 30, 2024. For the three months ended September 30, 2023, the provision for credit losses was driven by an increase in commercial 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. The change in this qualitative factor was based on a recent trend of increases in loans downgraded to the special mention risk rating, which is reflected in the provision for credit losses noted above. In addition, the provision for credit losses was impacted by the change in expected loss rates under CECL. Favorable published trends in unemployment and GDP rates impacted the extent of provisioning required in the third quarter of 2023.

Previous 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.

Current wording

•Wealth management income, which includes trust and investment management income and brokerage income, continues to grow due to strong market performance and growth in managed assets, both organically and through the acquisition of two registered investment advisory firms since September 2023 with total assets under management of $151 million.

Previous wording

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

Current wording

•Swap fee income increased by $250 thousand as swap fee income will fluctuate based on market conditions and client demand.

Previous wording

•Mortgage banking income increased by $257 thousand. Mortgage loans sold totaled $8.4 million in the second quarter of 2024 compared to $5.1 million in the second quarter of 2023. In addition, the fair value mark on the mortgage loans held-for-sale increased by $151 thousand from a negative fair value mark of $138 thousand for the three months ended June 30, 2023 to a positive fair value mark of $13 thousand for the three months ended June 30, 2024.

Current wording

•Mortgage banking income increased by $633 thousand. Mortgage loans sold totaled $10.0 million in the third quarter of 2024 compared to $5.2 million in the third quarter of 2023. In addition, the fair value mark on the mortgage loans held-for-sale increased by $411 thousand from a negative fair value mark of $369 thousand for the three months ended September 30, 2023 to a positive fair value mark of $42 thousand for the three months ended September 30, 2024.

Previous wording

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

Current wording

•Other operating expenses increased by $2.2 million, partially due to an increase in credit valuation adjustments on derivatives of $780 thousand. The remaining change is attributed to the impact of the merger and normal business operations.

Previous 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.

Current wording

Income tax benefit totaled $2.0 million, an effective tax rate of 20.1%, for the three months ended September 30, 2024 compared with income tax expense of $2.5 million and an effective tax rate of 21.9% for the three months ended September 30, 2023. The Company’s effective tax rate is less than the 21% federal statutory rate due to interest earned on tax-exempt loans and investment securities, income from life insurance policies and tax credits partially offset by disallowed interest expenses and the impact of nondeductible merger-related costs. The decrease in the effective tax rate from the three months ended September 30, 2023 to the three months ended September 30, 2024 was primarily due to the impact of the Merger and fluctuation in the portion of interest expense disallowed as a deduction against earnings under the Tax Equity and Fiscal Responsibility Act of 1982.

Previous wording

Net income totaled $16.3 million for the six months ended June 30, 2024 compared to $19.0 million for the same period in 2023. Diluted earnings per share for the six months ended June 30, 2024 totaled $1.55 compared to $1.82 for the six months ended June 30, 2023. For the six months ended June 30, 2024, the Company incurred merger-related expenses of $1.8 million, which were included in non-interest expenses of the unaudited condensed consolidated statement of income. Excluding the merger-related expenses incurred during the period, net income and diluted earnings per common share totaled $17.9 million and $1.71, respectively, for the six months ended June 30, 2024. For the six 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.

Current wording

Net income totaled $8.4 million for the nine months ended September 30, 2024 compared to $28.0 million for the same period in 2023. Diluted earnings per share for the nine months ended September 30, 2024 totaled $0.62 compared to $2.68 for the nine months ended September 30, 2023. For the nine months ended September 30, 2024, the Company incurred merger-related expenses of $18.8 million, provision for credit losses on acquired non-PCD loans of $15.5 million and retirement expenses for one executive of $4.8 million, which were included in non-interest expenses of the unaudited condensed consolidated statements of operations. Excluding these non-recurring expenses, net income and diluted earnings per common share totaled $39.4 million and $2.93, respectively, for the nine months ended September 30, 2024. For the nine months ended September 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 $1.1 million for both the six months ended June 30, 2024 and 2023.

Current wording

The provision for credit losses on loans and off-balance sheet reserves totaled $14.8 million and $1.3 million for the nine months ended September 30, 2024 and 2023, respectively.

Previous wording

Noninterest income totaled $13.8 million and $13.2 million for the six months ended June 30, 2024 and 2023, respectively. The increase of $566 thousand was due to an increase in wealth management income of $845 thousand, an increase in swap fee income of $378 thousand and an increase in mortgage banking income of $237 thousand. These increases were offset by the gain of $1.2 million recorded to other income from the sale of the Path Valley branch during the second quarter of 2023.

Current wording

Noninterest income totaled $26.2 million and $19.2 million for the nine months ended September 30, 2024 and 2023, respectively. The increase of $7.0 million was primarily due to an increase in wealth management income of $3.1 million, increases in service charges and interchange income totaling $1.9 million, an increase in swap fee income of $628 thousand and an increase in mortgage banking income of $870 thousand. These increases were partially offset by the gain of $1.2 million recorded to other income from the sale of the Path Valley branch for the nine months ended September 30, 2023.

Previous wording

Noninterest expenses totaled $45.1 million and $41.0 million for the six months ended June 30, 2024 and 2023, respectively. The increase of $4.1 million is primarily due to merger-related expenses of $1.8 million and an increase in salaries and employee benefits expense of $1.7 million.

Current wording

Noninterest expenses totaled $105.4 million and $61.5 million for the nine months ended September 30, 2024 and 2023, respectively. The increase of $44.0 million is primarily due to merger-related expenses of $18.8 million and an increase of $2.2 million in intangible asset amortization. The remainder of the increase is across several line items primarily due to the Merger.

Previous wording

Income tax expense totaled $4.3 million and $4.8 million for the six months ended June 30, 2024 and 2023, respectively. The Company's effective tax rate was 20.9% for the six months ended June 30, 2024 compared to 20.1% for the six months ended June 30, 2023 due primarily to the impact of non-deductible merger-related expenses in 2024.

Current wording

Income tax expense totaled $2.3 million and $7.3 million for the nine months ended September 30, 2024 and 2023, respectively. The Company's effective tax rate was 21.6% for the nine months ended September 30, 2024 compared to 20.7% for the nine months ended September 30, 2023 due primarily to the impact of non-deductible merger-related expenses in 2024.

Previous wording

The following table presents net interest income, net interest spread and net interest margin for the six months ended June 30, 2024 and 2023 on a taxable-equivalent basis:

Current wording

The following table presents net interest income, net interest spread and net interest margin for the nine months ended September 30, 2024 and 2023 on a taxable-equivalent basis:

Previous wording

Net interest income on a taxable-equivalent basis decreased by $241 thousand to $26.5 million for the three months ended June 30, 2024 from $26.7 million for the three months ended June 30, 2023. The Company's net interest spread decreased by 42 basis points from 3.44% for the three months ended June 30, 2023 to 3.02% for the three months ended June 30, 2024 primarily due to the increase in cost of funds.

Current wording

Net interest income on a taxable-equivalent basis increased by $25.9 million to $105.9 million for the nine months ended September 30, 2024 from $79.9 million for the nine months ended September 30, 2023. The Company's net interest spread decreased by 11 basis points from 3.44% for the nine months ended September 30, 2023 to 3.33% for the nine months ended September 30, 2024 primarily due to the increase in cost of funds.

Previous 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.

Current wording

Taxable-equivalent net interest margin increased by 5 basis points to 3.88% for the nine months ended September 30, 2024 from 3.83% for the nine months ended September 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 five basis points to the Company's net interest margin during the nine months ended September 30, 2024. The taxable-equivalent yield on interest-earning assets increased by 92 basis points from 5.31% for the nine months ended September 30, 2023 to 6.23% for the nine months ended September 30, 2024, due primarily to the accretion recognized on fair value marks to loans and securities assumed in the Merger. This increase in yield on interest earning assets was more than offset by the increase of 103 basis points in the cost of interest-bearing liabilities from 1.87% to 2.90% due primarily to increased funding costs on deposits from higher market interest rates and competitive pressures and an increase in the interest rate on Orrstown Financial Services, Inc.'s subordinated notes, which converted from a fixed rate to a floating rate on December 30, 2023.

Previous 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.

Current wording

Average loans increased by $654.5 million to $2.9 billion for the nine months ended September 30, 2024 compared to $2.2 billion for the nine months ended September 30, 2023. Average investment securities increased by $112.4 million from $524.4 million for the nine months ended September 30, 2023 to $636.8 million for the nine months ended September 30, 2024. Average interest-bearing liabilities increased by $747.6 million to $3.0 billion for the nine months ended September 30, 2024 from $2.2 billion for the nine months ended September 30, 2023.

Previous 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.

Current wording

The yield on loans increased by 104 basis points to 6.63% for the nine months ended September 30, 2024 compared to 5.59% for the nine months ended September 30, 2023. Taxable-equivalent interest income earned on loans increased by $49.9 million due to higher interest rates. Accretion income on loans was $7.6 million for the nine months ended September 30, 2024 as compared to $603 thousand for the nine months ended September 30, 2023.

Previous 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.

Current wording

The average balance of commercial loans increased by $516.0 million from $1.8 billion for the nine months ended September 30, 2023 to $2.3 billion for the nine months ended September 30, 2024. Average residential mortgage loans increased by $94.6 million from $240.9 million during the nine months ended September 30, 2023 to $335.5 million during the nine months ended September 30, 2024. Average home equity loans increased by $41.7 million from $188.8 million for the nine months ended September 30, 2023 to $230.5 million for the nine months ended September 30, 2024. Average installment and other consumer loans decreased by $2.2 million from $20.5 million for the nine months ended September 30, 2023 to $22.7 million for the nine months ended September 30, 2024.

Previous 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.

Current wording

Accretion of purchase accounting adjustments included in interest income was $7.6 million and $603 thousand for the nine months ended September 30, 2024 and 2023, respectively. The increase in accretion was due to the recognition of fair value marks from the Merger. Accelerated accretion totaled $2.3 million and $212 thousand during the nine months ended September 30, 2024 and 2023, respectively. Prepayment income on commercial loans increased by from $627 thousand for the nine months ended September 30, 2023 to $878 thousand for the nine months ended September 30, 2024.

Previous wording

Interest income on investment securities on a tax-equivalent basis increased by $833 thousand to $11.8 million for the six months ended June 30, 2024 from $11.0 million for the six months ended June 30, 2023, with the taxable equivalent yield increasing from 4.19% for the six months ended June 30, 2023 to 4.47% for the six months ended June 30, 2024. The 28 basis point increase reflected the impact from the higher interest rates. The average balance of investment securities increased by $3.2 million to $529.2 million for the six months ended June 30, 2024 from $526.0 million for the six months ended June 30, 2023 due primarily to net purchase activity.

Current wording

Interest income on investment securities on a tax-equivalent basis increased by $5.4 million to $21.9 million for the nine months ended September 30, 2024 from $16.5 million for the nine months ended September 30, 2023, with the taxable equivalent yield increasing from 4.21% for the nine months ended September 30, 2023 to 4.60% for the nine months ended September 30, 2024. The 39 basis point increase reflected the impact from the higher interest rates as well as the recognition of discounts recorded on securities assumed from the Merger. Accretion on acquired investment securities was $870 thousand for the nine months ended September 30, 2024. . The average balance of investment securities increased by $112.4 million to $636.8 million for the nine months ended September 30, 2024 from $524.4 million for the nine months ended September 30, 2023 due primarily to the Merger.

Previous wording

Interest income on federal funds sold and interest-bearing bank balances on a tax-equivalent basis increased by $2.1 million to $2.8 million for the six months ended June 30, 2024 from $716 thousand for the six months ended June 30, 2023. The average balance of federal funds sold and interest-bearing bank balances increased by $74.9 million from $33.8 million for the six months ended June 30, 2023 to $108.7 million for the six months ended June 30, 2024, which resulted in an increase in interest income of $1.6 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 $507 thousand during the six months ended June 30, 2024.

Current wording

Interest income on federal funds sold and interest-bearing bank balances on a tax-equivalent basis increased by $3.9 million to $5.3 million for the nine months ended September 30, 2024 from $1.3 million for the nine months ended September 30, 2023. The average balance of federal funds sold and interest-bearing bank balances increased by $92.2 million from $41.9 million for the nine months ended September 30, 2023 to $134.1 million for the nine months ended September 30, 2024. The Federal Funds rate had remained unchanged from the prior rate increase of 25 basis points in July 2023 until the FOMC cut the Federal Fund rate by 50 basis points in September 2024.

Previous wording

The following table compares noninterest income for the six months ended June 30, 2024 and 2023:

Current wording

The following table compares noninterest income for the nine months ended September 30, 2024 and 2023:

Previous wording

•Swap fee income increased by $378 thousand as swap fee income will fluctuate based on market conditions and client demand.

Current wording

•Swap fee income increased by $628 thousand as swap fee income will fluctuate based on market conditions and client demand.

Previous wording

•Mortgage banking income increased by $237 thousand. Mortgage loans sold totaled $23.1 million in the six months ended June 30, 2024, which included a $7.2 million portfolio sold to another institution in the three months ended March 31, 2024, compared to $14.7 million in the first half of 2023.

Current wording

•Mortgage banking income increased by $870 thousand. Mortgage loans sold totaled $33.1 million in the nine months ended September 30, 2024, which included a $7.2 million portfolio sold to another institution in the three months ended March 31, 2024, compared to $19.9 million in the nine months ended September 30, 2023.

Previous wording

•Other income decreased by $921 thousand due primarily to a gain of $1.2 million from the sale of the Bank's Path Valley branch during the second quarter of 2023.

Current wording

•Other income decreased by $408 thousand due primarily toa gain of $1.2 million from the sale of the Bank's Path Valley branch during the second quarter of 2023, partially offset by $349 thousand of solar tax credit income recognized in the nine months ended September 30, 2024.