ORRSTOWN FINANCIAL SERVICES INC

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 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.

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 March 31, 2025, the Company had total assets of $5.4 billion, total liabilities of $4.9 billion and total shareholders’ equity of $532.9 million as reported in the unaudited consolidated balance sheet.

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, 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.

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: interest rate changes or volatility; 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; the effects of competition and how it may impact our community banking model, including industry consolidation and development of competing financial products a…

Excerpt shortened here; the source contains the full paragraph.

Previous 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.

Current wording

Preliminary real GDP contracted by 0.3% on an annualized basis for the first quarter of 2025, compared to an increase of 2.4% for the fourth quarter of 2024 and an increase of 1.4% during the first quarter of 2024. This was the first quarterly decline since the first quarter of 2022. The contraction was primarily driven by a surge in imports and a decrease in government spending, partially offset by increases in investment, consumer spending and exports. There are growing concerns regarding the potential impact of wide-ranging tariffs on the U.S. economy and the potential of a recession. The personal consumption expenditures ("PCE") price index increased by 2.3% in the first quarter of 2025 compared to an increase of 2.4% for fourth quarter of 2024 and 3.4% for the first quarter of 2024. Excluding food and energy prices, the PCE price index increased by 2.6% in the first quarter of 2025 compared to 2.6% in the fourth quarter of 2024 and 3.7% in the first quarter of 2024.

Previous 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.

Current wording

The national unemployment rate was 4.2% in March 2025 compared to 4.1% in December 2024 and 3.8% in March 2024. Within the Company's geographic footprint, the unemployment rate in Pennsylvania was 3.8% in March 2025 compared to 3.7% in December 2024 and 3.4% in March 2024. The unemployment rate increased in Maryland from 2.5% in March 2024 to 3.0% in March 2025; however, it remains 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, social assistance, retail trade, transportation and warehousing during the first quarter of 2025.

Previous wording

At September 30, 2024, the 10-year Treasury bond yield was 3.81%, a decrease from 3.88% at December 31, 2023 and 4.59% at September 30, 2023 which was attributed to the FOMC's decision to reduce the Federal Funds rate by 50 basis points in September 2024. The decrease was based on the progress towards the FOMC's 2.0% inflation target and the unemployment rate remaining low despite recent slowing in job gains.

Current wording

At March 31, 2025, the 10-year Treasury bond yield was 4.23%, a decrease from 4.58% at December 31, 2024 and 4.62% at March 31, 2024 which was attributed to the FOMC's decision to reduce the Federal Funds rate by 75 basis points in 2024. The decrease was based on the progress towards the FOMC's 2.0% inflation target and the unemployment rate remaining low despite recent slowing in job gains.

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, income tax methodologies and accounting for business combinations.

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 business combinations, accounting for credit losses and accounting for income taxes.

Previous 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.

Current wording

Net income totaled $18.1 million for the three months ended March 31, 2025 compared to $8.5 million for the same period in 2024. Diluted earnings per share for the three months ended March 31, 2025 totaled $0.93 compared to $0.81 for the three months ended March 31, 2024. The net accretion impact of purchase accounting marks on loans, securities, deposits and borrowings was $6.9 million for the three months ended March 31, 2025, For the three months ended March 31, 2025 and 2024, the Company incurred merger-related expenses of $1.6 million and $672 thousand, respectively, which were included in non-interest expenses of the unaudited condensed consolidated statements of income. Excluding these non-recurring expenses, net income and diluted earnings per common share totaled $19.3 million and $1.00, respectively, for the three months ended March 31, 2025. For the three months ended March 31, 2024, excluding these non-recurring expenses, net income and diluted earnings per common share totaled $9.2 million and $0.88, respectively. 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 $13.7 million and $136 thousand for the three months ended September 30, 2024 and 2023, respectively.

Current wording

The provision for credit losses on loans and off-balance sheet reserves totaled a recovery of $554 thousand and expense of $298 thousand for the three months ended March 31, 2025 and 2024, respectively.

Previous wording

Noninterest income totaled $12.4 million for the three months ended September 30, 2024 compared to $5.9 million for the three months ended September 30, 2023. There was an increase of $6.5 million during the third quarter of 2024 primarily due to higher wealth management income of $2.2 million and increases in service charges and interchange income totaling $1.9 million.

Current wording

Noninterest income totaled $11.6 million and $6.6 million for the three months ended March 31, 2025 and 2024, respectively. The increase of $5.0 million was primarily due to a merger-related increase in wealth management income of $2.3 million, increases in service charges and interchange income totaling $1.7 million and an increase in income from life insurance policies of $655 thousand.

Previous 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.

Current wording

Noninterest expenses totaled $38.2 million and $22.5 million for the three months ended March 31, 2025 and 2024, respectively. The increase of $15.7 million included an increase of $2.3 million in intangible asset amortization from intangibles generated through the Merger and an increase of $977 thousand in merger-related expenses. The remainder of the increase is across several line items due to the Merger, primarily salaries and employee benefits.

Previous 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.

Current wording

Income tax expense totaled $4.7 million and $2.2 million for the three months ended March 31, 2025 and 2024, respectively. The Company's effective tax rate was 20.7% for the three months ended March 31, 2025 compared to 20.6% for the three months ended March 31, 2024. The Company’s effective tax rate is less than the 21% federal statutory rate due to tax-exempt income, including interest earned on tax-exempt loans and investment securities and income from life insurance policies and partially offset by disallowed interest expense and state income taxes.

Previous wording

Net interest income increased by $25.8 million from $78.9 million for the nine months ended September 30, 2023 to $104.7 million for the nine months ended September 30, 2024. Interest income on loans increased by $49.8 million, from $92.7 million for the nine months ended September 30, 2024 to $142.4 million for the nine months ended September 30, 2024. Interest income on investment securities increased by $5.4 million, from $15.8 million for the nine months ended September 30, 2023 to $21.2 million for the nine months ended September 30, 2024. Total interest expense increased by $33.2 million from $31.0 million for the nine months ended September 30, 2023 to $64.2 million for the nine months ended September 30, 2024. Interest expense on deposits increased by $32.0 million from $25.4 million for the nine months ended September 30, 2023 to $57.4 million for the nine months ended September 30, 2024. Interest expense on borrowings increased by $1.3 million from $5.6 million in the nine months ended September 30, 2023 to $6.9 million for the nine months ended September 30, 2024.

Current wording

Net interest income increased by $21.9 million from $26.9 million for the three months ended March 31, 2024 to $48.8 million for the three months ended March 31, 2025. Interest income on loans increased by $27.2 million, from $36.2 million for the three months ended March 31, 2024 to $63.4 million for the three months ended March 31, 2025. Interest income on investment securities increased by $4.3 million, from $5.5 million for the three months ended March 31, 2024 to $9.8 million for the three months ended March 31, 2025. Total interest expense increased by $11.0 million from $15.8 million for the three months ended March 31, 2024 to $26.8 million for the three months ended March 31, 2025. Interest expense on deposits increased by $10.8 million from $13.5 million for the three months ended March 31, 2024 to $24.3 million for the three months ended March 31, 2025. Interest expense on borrowings increased by $245 thousand from $2.3 million in the three months ended March 31, 2024 to $2.5 million for the three months ended March 31, 2025.

Previous 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.

Current wording

Taxable-equivalent net interest margin increased by 23 basis points to 4.00% for the three months ended March 31, 2025 from 3.77% for the three months ended March 31, 2024. The taxable-equivalent yield on interest-earning assets increased by 21 basis points from 5.96% for the three months ended March 31, 2024 to 6.17% for the three months ended March 31, 2025, due primarily to the accretion recognized on fair value marks to loans and securities assumed in the Merger, the impact of which was partially offset by a decline in the Fed Funds rate. The net accretion impact of purchase accounting marks on loans, securities, deposits and borrowings was $6.9 million, which represented 51 basis points of net interest margin during the first quarter of 2025. The increase in yield on interest earning assets was partially offset by the increase of six basis points in the cost of interest-bearing liabilities from 2.70% to 2.76% due primarily to increased funding costs on deposits, subordinated notes and trust preferred debt assumed in the Merger. 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 three months ended March 31, 2024.

Previous wording

Average loans increased by $1.7 billion to $4.0 billion for the three months ended September 30, 2024 compared to $2.3 billion for the three months ended September 30, 2023. Average investment securities increased by $328.5 million from $521.2 million for the three months ended September 30, 2023 to $849.7 million for the three months ended September 30, 2024. Average interest-bearing liabilities increased by $1.8 billion to $4.1 billion for the three months ended September 30, 2024 from $2.3 billion for the three months ended September 30, 2023.

Current wording

Average loans increased by $1.6 billion to $3.9 billion for the three months ended March 31, 2025 compared to $2.3 billion for the three months ended March 31, 2024. Average investment securities increased by $345.2 million from $519.9 million for the three months ended March 31, 2024 to $865.1 million for the three months ended March 31, 2025. Average interest-bearing liabilities increased by $1.5 billion to $3.9 billion for the three months ended March 31, 2025 from $2.4 billion for the three months ended March 31, 2024.

Previous wording

The yield on loans increased by 129 basis points to 7.07% for the three months ended September 30, 2024 compared to 5.78% for the three months ended September 30, 2023. Taxable-equivalent interest income earned on loans increased by $38.0 million due to the larger loan portfolio from the Merger as well as higher interest rates. Accretion income on loans was $7.3 million for the three months ended September 30, 2024 as compared to $149 thousand for the three months ended September 30, 2023.

Current wording

The average yield on loans increased by 25 basis points to 6.59% for the three months ended March 31, 2025 compared to 6.34% for the three months ended March 31, 2024. Taxable-equivalent interest income earned on loans increased by $27.3 million primarily due to an increase in the average balances, which was attributed to the acquired loans from the Merger and from the impact of the accretion of the fair value marks on loans.

Previous 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.

Current wording

The average balance of commercial loans increased by $1.3 billion from $1.8 billion for the three months ended March 31, 2024 to $3.1 billion for the three months ended March 31, 2025. Average residential mortgage loans increased by

Previous 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.

Current wording

$188.4 million from $273.4 million during the three months ended March 31, 2024 to $461.8 million during the three months ended March 31, 2025. Average home equity loans increased by $96.7 million from $192.0 million for the three months ended March 31, 2024 to $288.7 million for the three months ended March 31, 2025. Average installment and other consumer loans increased by $28.5 million from $17.4 million for the three months ended March 31, 2024 to $45.9 million for the three months ended March 31, 2025.

Previous 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.

Current wording

Accretion of purchase accounting adjustments included in interest income was $6.6 million and $147 thousand for the three months ended March 31, 2025 and 2024, respectively. The increase in accretion was due to the recognition of fair value marks from the Merger. Accelerated accretion totaled $1.4 million and $66 thousand during the three months ended March 31, 2025 and 2024, respectively. Prepayment income on loans increased from $56 thousand for the three months ended March 31, 2024 to $300 thousand for the three months ended March 31, 2025.

Previous 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.

Current wording

Interest income on investment securities on a tax-equivalent basis increased by $4.4 million to $10.1 million for the three months ended March 31, 2025 from $5.7 million for the three months ended March 31, 2024, with the taxable equivalent yield increasing from 4.39% for the three months ended March 31, 2024 to 4.65% for the three months ended March 31, 2025. The 26 basis point increase reflects the impact from thehigher interest rates as well as the accretion of discounts recorded on investment securities assumed from the Merger. Accretion on acquired investment securities was $839 thousand for the three months ended March 31, 2025. The average balance of investment securities increased by $345.2 million to $865.1 million for the three months ended March 31, 2025 from $519.9 million for the three months ended March 31, 2024 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 $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.

Current wording

Interest income on federal funds sold and interest-bearing bank balances on a tax-equivalent basis increased by $1.3 million to $2.3 million for the three months ended March 31, 2025 from $1.0 million for the three months ended March 31, 2024. The average balance of federal funds sold and interest-bearing bank balances increased by $128.8 million from $74.5 million for the three months ended March 31, 2024 to $203.3 million for the three months ended March 31, 2025. 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 Funds rate by 50 basis points in September 2024 and 25 basis points in December 2024.

Previous wording

Interest expense on borrowings was $2.7 million for the three months ended September 30, 2024 compared to $1.9 million for the three months ended September 30, 2023. The cost of borrowings increased by 88 basis points to 5.17% for the three months ended September 30, 2024 from 4.29% for the three months ended September 30, 2023. Average borrowings increased by $31.7 million from $175.2 million for the three months ended September 30, 2023 to $206.9 million for the three months ended September 30, 2024, which included average subordinated debt and trust preferred debt of $68.4 million for the three months ended September 30, 2024, an increase of $36.3 million, from an average of $32.1 million for the three months ended September 30, 2023. This increase is due to the assumed subordinated debt of $31.0 million and trust preferred debt of $10.3 million from the Merger, net of fair value marks. The interest rate increased on Orrstown Financial Services, Inc.'s outstanding subordinated notes of $32.5 million, which converted from a fixed rate of 6.00% to a floating rate of 8.77% on December 30, 2023. The subordinated notes from the Merger have a fixed rate of interest equal to 4.50% until December 30, 2025. The trust preferred debt has a variable rate of three-month CME term SOFR rate, plus a spread adjustment and margin. The contractual interest rate on Orrstown Financial Services, Inc.'s subordinated notes was 8.75% at September 30, 2024. Amortization of fair value marks on acquired borrowings was $152 thousand for the three months ended September 30, 2024.

Current wording

Interest expense on borrowings increased by $245 thousand to $2.5 million for the three months ended March 31, 2025 from $2.3 million for the three months ended March 31, 2024. The cost of borrowings decreased by 11 basis points to 4.88% for the three months ended March 31, 2025 from 4.99% for the three months ended March 31, 2024. Average borrowings increased by $26.2 million from $181.6 million for the three months ended March 31, 2024 to $207.8 million for the three months ended March 31, 2025, which included average subordinated debt and trust preferred debt of $68.7 million for the three months ended March 31, 2025, an increase of $36.6 million, from an average of $32.1 million for the three months ended March 31, 2024. The increase is due primarily to the assumed subordinated debt of $31.0 million and trust preferred debt of $10.3 million from the Merger. The subordinated notes assumed from the Merger have a fixed rate of interest equal to 4.50% until December 30, 2025. The trust preferred debt has a variable rate of three-month CME term SOFR rate, plus a spread adjustment and margin. The interest rate on Orrstown Financial Services, Inc.'s subordinated notes was 7.75% at March 31, 2025 compared to 8.77% at March 31, 2024. Amortization of fair value marks on acquired borrowings was $152 thousand for the three months ended March 31, 2025.

Previous wording

Net charge-offs for the three months ended September 30, 2024 totaled $269 thousand compared to net charge-offs of $241 thousand for the three months ended September 30, 2023. Nonaccrual loans were 0.68% of gross loans at September 30, 2024, compared with 0.98% of gross loans at September 30, 2023. Nonaccrual loans increased by $4.8 million from $22.3 million at September 30, 2023 to $27.1 million at September 30, 2024. This reflects $12.8 million of nonaccrual loans assumed in the Merger and additions of $16.2 million at the Bank, mainly consisting of commercial and industrial and commercial real estate loans, partially offset by repayments of $24.0 million.

Current wording

Net charge-offs for the three months ended March 31, 2025 totaled $331 thousand compared to net recoveries of $42 thousand for the three months ended March 31, 2024. Nonaccrual loans were 0.59% of gross loans at March 31, 2025 compared with 0.56% of gross loans at March 31, 2024. Nonaccrual loans increased by $9.8 million from $12.9 million at March 31, 2024 to $22.7 million at March 31, 2025. This reflects $12.8 million of nonaccrual loans assumed in the Merger and other additions in commercial and industrial and commercial real estate loans, partially offset by repayments and charge offs totaling $8.2 million on nonaccrual loans from March 31, 2024.

Previous wording

Noninterest income increased by $6.5 million from $5.9 million for the three months ended September 30, 2023 to $12.4 million for the three months ended September 30, 2024. The primary driver of the overall increase was the impact of the Merger in the three months ended September 30, 2024. The following were significant components of the change in this line item that did not result from the Merger:

Current wording

Noninterest income increased by $5.0 million from $6.6 million for the three months ended March 31, 2024 to $11.6 million for the three months ended March 31, 2025. The primary driver of the overall increase was the impact of the Merger in the three months ended March 31, 2025. The following were significant components of the change in this line item that did not result from the Merger:

Previous wording

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

Current wording

•Swap fee income increased by $195 thousand as swap fee income will fluctuate based on market conditions and client demand.

Previous wording

Noninterest expense increased by $39.9 million from $20.4 million for the three months ended September 30, 2023 to $60.3 million for the three months ended September 30, 2024. The primary driver of the overall increase was the impact of the Merger in the three months ended September 30, 2024. The following were additional significant components of the change in this line item:

Current wording

Noninterest expense increased by $15.7 million from $22.5 million for the three months ended March 31, 2024 to $38.2 million for the three months ended March 31, 2025. The primary driver of the overall increase was the impact of the Merger in the three months ended March 31, 2025. The following were additional significant components of the change in this line item:

Previous wording

•Intangible asset amortization expense increased by $2.2 million due to the amortization recognized on the core deposit intangible and wealth customer relationship intangible established on July 1, 2024 as a result of the Merger.

Current wording

•Intangible asset amortization expense increased by $2.3 million due to the amortization recognized on the core deposit intangible and wealth customer relationship intangible established from the Merger.

Previous wording

•Restructuring expense of $257 thousand was recorded in the three months ended September 30, 2024 due to the announced closure of six branch locations to occur in the fourth quarter of 2024.

Current wording

•Restructuring expense of $91 thousand was recorded in the three months ended March 31, 2025, which is related to the closure of six branch locations during the fourth quarter of 2024.

Previous 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.

Current wording

•Other operating expenses increased by $1.6 million partially due to an increase in credit valuation adjustments on derivatives of $372 thousand. The remaining change is attributed to the impact of the merger and normal business operations, which included increases of $424 thousand in printing and postage charges, $248 thousand in insurance expenses, $169 thousand in telecommunication expenses, $163 thousand in loan-related expenses.

Previous wording

The Company utilizes investment securities to manage interest rate risk, enhance income through interest and dividend income and collateralize certain deposits and borrowings.

Current wording

The Company utilizes investment securities to manage interest rate risk and liquidity, enhance income through interest and dividend income and collateralize certain deposits and borrowings.

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 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 September 30, 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 securities. Management monitors its debt securities, using various indicators to determine 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 March 31, 2025 and December 31, 2024.

Previous wording

At September 30, 2024, AFS securities totaled $826.8 million, an increase of $313.3 million, from $513.5 million at December 31, 2023. During the nine months ended September 30, 2024, the Company purchased $190.3 million of AFS securities excluding AFS securities acquired in the Merger, which included $188.0 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. Pursuant to the Merger, the Company acquired AFS securities with a fair value totaling $327.1 million. To align with the Company's investment strategy and to achieve higher yielding results, $162.7 million of the acquired AFS securities were sold, which included $91.5 million of MBS and CMO's, $27.1 million of corporate debt securities, $24.4 million of securities issued by state and political subdivisions and $19.7 million of securities issued by U.S. government agencies. In addition, calls of non-agency CMO securities totaled $18.0 million and there were paydowns of $40.0 million. The balance of investment securities included net unrealized losses of $19.0 million at September 30, 2024 compared to net unrealized losses of $35.6 million at December 31, 2023 for a decrease of $16.7 million. This decrease in net unrealized losses was primarily due to lower treasury rates and narrower credit spreads compared to December 31, 2023. The overall duration of the Company's investment securities portfolio was 4.6 years at September 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.

Current wording

At March 31, 2025, AFS securities totaled $855.5 million, an increase of $25.8 million, from $829.7 million at December 31, 2024. During the three months ended March 31, 2025, the Company purchased $39.6 million of AFS securities, consisting of agency MBS and CMO securities, which were partially offset by paydowns of $18.4 million. The balance of investment securities included net unrealized losses of $31.3 million at March 31, 2025 compared to net unrealized losses of $35.2 million at December 31, 2024 for a decrease of $3.9 million. This decrease in net unrealized losses was primarily due to lower treasury rates compared to December 31, 2024. The overall duration of the Company's investment securities portfolio was 4.3 years at March 31, 2025 compared to 4.1 years at December 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 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

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 $36.9 million at September 30, 2024, an increase of $11.3 million from $25.6 million at December 31, 2023. Nonaccrual loans increased by $1.4 million from December 31, 2023 to September 30, 2024 due primarily to additions in commercial and commercial real estate loans partially offset by the payoffs of two commercial real estate loans with outstanding balances totaling $15.0 million with no charge-offs recorded on these relationships. Nonaccrual loans totaling $12.8 million were acquired in the Merger. During 2024, the Company had $11.4 million in loan modifications meeting the FDM criteria under ASU 2022-02, which included $6.4 million in acquired loans from the Merger and three new loan modifications during the third quarter of 2024 totaling $5.0 million. There were $1.9 million in FDM loans in nonaccrual status at September 30, 2024.

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 $28.4 million at March 31, 2025, a decrease of $1.4 million from $29.8 million at December 31, 2024. Nonaccrual loans decreased by $1.4 million from December 31, 2024 to March 31, 2025 due primarily to repayments of $4.2 million and charge offs of $581 thousand, partially offset by additions consisting mostly of loans in the commercial and residential mortgage segments.

Previous wording

The following table presents the amortized cost basis of nonaccrual loans, according to loan class, with and without reserves on individually evaluated loans at September 30, 2024 and December 31, 2023. At September 30, 2024, there was a specific reserve of $3 thousand on nonaccrual loans, excluding the ACL recorded on acquired PCD loans from the Merger, compared to $49 thousand at December 31, 2023.

Current wording

The following table presents the amortized cost basis of nonaccrual loans, according to loan class, with and without reserves on individually evaluated loans at March 31, 2025 and December 31, 2024. At March 31, 2025, there was a specific reserve of $15 thousand on nonaccrual loans, excluding the ACL recorded on acquired PCD loans from the Merger, compared to $7 thousand at December 31, 2024.

Previous wording

Internal loan reviews are completed annually on all commercial relationships, secured by commercial real estate, with a committed loan balance in excess of $1.0 million, which includes confirmation of risk rating by an independent credit officer. In addition, all commercial relationships greater than $500 thousand rated Substandard, Doubtful or Loss are reviewed and corresponding risk ratings are reaffirmed by the Bank's Problem Loan Committee, with subsequent reporting to the Management ERM Committee.

Current wording

Internal loan reviews are completed annually on all commercial relationships, secured by commercial real estate, with a committed loan balance in excess of $2.0 million, which includes confirmation of risk rating by an independent credit officer. In addition, all commercial relationships greater than $500 thousand rated Substandard, Doubtful or Loss are reviewed and corresponding risk ratings are reaffirmed by the Bank's Problem Loan Committee, with subsequent reporting to the Management ERM Committee and the Board of Directors.

Previous wording

The Company maintains the ACL at a level deemed adequate by management for expected credit losses. As disclosed in Note 1, Summary of Significant Accounting Policies, and Note 4, Loans and Allowance for Credit Losses, on January 1, 2023 the Company implemented CECL and increased the ACL with a cumulative-effect adjustment to the ACL of $2.4 million. In addition, the Company recorded a cumulative-effect adjustment to the ACL for off-balance sheet exposures of $100 thousand. The Company’s ACL is calculated quarterly, with any adjustment recorded to the provision for credit losses in the unaudited condensed consolidated statements of operations. A comprehensive analysis of the ACL is performed by the Company on a quarterly basis. Management evaluates the adequacy of the ACL utilizing a defined methodology to determine if it properly addresses the current and expected risks in the loan portfolio, which considers the performance of borrowers and specific evaluation of individually evaluated loans, including historical loss experiences, trends in delinquencies, nonperforming loans and other risk assets, and the qualitative factors. Risk factors are continuously reviewed and adjusted, as needed, by management when conditions support a change. Management believes its approach properly addresses relevant accounting and bank regulatory guidance for loans both collectively and individually evaluated. The results of the comprehensive analysis, including recommended changes, are governed by the Company's Reserve Adequacy Committee and subsequently presented to the Enterprise Risk Management Committee.

Current wording

The Company maintains the ACL at a level deemed adequate by management for expected credit losses. The Company’s ACL is calculated quarterly, with any adjustment recorded to the provision for credit losses in the unaudited condensed consolidated statements of income. A comprehensive analysis of the ACL is performed by the Company on a quarterly basis. Management evaluates the adequacy of the ACL utilizing a defined methodology to determine if it properly addresses the current and expected risks in the loan portfolio, which considers the performance of borrowers and specific evaluation of individually evaluated loans, including historical loss experiences, trends in delinquencies, nonperforming loans and other risk assets, and the qualitative factors. Risk factors are continuously reviewed and adjusted, as needed, by management when conditions support a change. Management believes its approach properly addresses relevant accounting and bank regulatory guidance for loans both collectively and individually evaluated. The results of the comprehensive analysis, including recommended changes, are governed by the Company's Reserve Adequacy Committee and subsequently presented to the Enterprise Risk Management Committee.

Previous wording

The ACL is evaluated based on a review of the collectability of loans in light of historical experience; the nature and volume of the loan portfolio; adverse situations that may affect a borrower’s ability to repay; estimated value of any underlying collateral; and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A description of the methodology for establishing the allowance and provision for credit losses and related procedures in establishing the appropriate level of reserve is included in Note 1, Summary of Significant Accounting Policies, and Note 4, Loans and Allowance for Credit Losses, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information."

Current wording

The ACL is evaluated based on a review of the collectability of loans in light of historical experience; the nature and volume of the loan portfolio; adverse situations that may affect a borrower’s ability to repay; estimated value of any underlying collateral; and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A description of the methodology for establishing the allowance and provision for credit losses and related procedures in establishing the appropriate level of reserve is included in Note 4, Loans and Allowance for Credit Losses, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information."

Previous wording

The following table presents the amortized cost basis of the loan portfolio, by year of origination, loan class and credit quality as of September 30, 2024. For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan and payment activity. Residential mortgage and installment and other consumer loans are presented below based on payment performance: performing or nonperforming. During 2024, commercial and land development loans totaling $20.6 million were recharacterized to a permanent commercial real estate class upon the completion of construction or receiving a certificate of occupancy. In addition, 1-4 family residential construction loans totaling $14.9 million were recharacterized to a permanent 1-4 family residential mortgage upon the completion of construction.

Current wording

The following table presents the amortized cost basis of the loan portfolio, by year of origination, loan class and credit quality as of March 31, 2025. For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan and payment activity. Residential mortgage and installment and other consumer loans are presented below based on payment performance: performing or nonperforming. During the three months ended March 31, 2025, commercial and land development loans totaling $6.1 million were recharacterized to a permanent commercial real estate class upon the completion of construction or receiving a certificate of occupancy. In addition, 1-4 family residential construction loans totaling $1.2 million were recharacterized to a permanent 1-4 family residential mortgage upon the completion of construction. During 2024, commercial and land development loans totaling $44.5 million were recharacterized to a permanent commercial real estate class upon the completion of construction or receiving a certificate of occupancy. In addition, 1-4 family residential construction loans totaling $17.1 million were recharacterized to a permanent 1-4 family residential mortgage upon the completion of construction.

Previous wording

The Special Mention classification is intended to be a temporary classification reflective of loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Company’s position at some future date. Special Mention loans represent an elevated risk, but their weakness does not yet justify a more severe, or classified, rating. These loans require inquiry by lenders on the cause of the potential weakness and, once evaluated, the loan classification may be downgraded to Substandard or, alternatively, could be upgraded to Pass.

Current wording

The Special Mention classification is intended to be a temporary classification reflective of loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Company’s position at some future date. Special mention loans represent an elevated risk, but their weakness does not yet justify a more severe, or classified, rating. These loans require inquiry by lenders on the cause of the potential weakness and, once analyzed, the loan classification may be downgraded to Substandard or, alternatively, could be upgraded to Pass.

Previous wording

Classified loans totaled $105.5 million at September 30, 2024, or 2.6% of total loans outstanding, reflecting an increase from $49.0 million, or 2.1% of total loans outstanding, at December 31, 2023.

Current wording

Classified loans totaled $76.2 million at March 31, 2025, or 2.0% of total loans outstanding, reflecting a decrease from $88.6 million, or 2.3% of total loans outstanding, at December 31, 2024.

Previous wording

Non-IEL substandard loans are performing loans, which have characteristics that cause management concern over the ability of the borrower to perform under present loan repayment terms and which may result in the reporting of these loans as nonperforming, or individually evaluated, loans in the future. Generally, management feels that substandard loans that are currently performing and not considered individually evaluated result in some doubt as to the borrower’s ability to continue to perform under the terms of the loan and represent potential problem loans. Non-IEL substandard loans totaled $78.3 million at September 30, 2024, an increase of $49.0 million, compared to $29.3 million at December 31, 2023, due primarily to acquired loans from the Merger of $35.7 million and downgrades at the Bank consisting of two commercial and industrial clients and two commercial real estate clients with loans totaling $7.6 million and $2.6 million, respectively. The Substandard-IEL category increased from $25.7 million at December 31, 2023 to $27.1 million at September 30, 2024, primarily due to acquired loans from the Merger of $12.9 million and downgrades at the Bank totaling $9.4 million consisting of two commercial and industrial clients with loans totaling $6.6 million and two commercial real estate clients with loans totaling $2.7 million, partially offset by repayments including the payoff of loans to three commercial real estate clients with an outstanding balance of $16.4 million and a residential mortgage loan of $1.6 million at December 31, 2023.

Current wording

Non-IEL substandard loans are performing loans, which have characteristics that cause management concern over the ability of the borrower to perform under present loan repayment terms and which may result in the reporting of these loans as nonperforming, or individually evaluated, loans in the future. Generally, management feels that substandard loans that are currently performing and not considered individually evaluated result in some doubt as to the borrower’s ability to continue to perform under the terms of the loan and represent potential problem loans. Non-IEL substandard loans totaled $53.3 million at March 31, 2025, a decrease of $11.1 million, compared to $64.4 million at December 31, 2024 due primarily to repayments of $13.2 million partially offset by downgrades. The Substandard-IEL category decreased from $24.3 million at December 31, 2024 to $22.9 million at March 31, 2025, primarily due to repayments of $6.2 million and charge offs totaling $472 thousand partially offset by downgrades.