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 the Company and should be read in conjunction with our Consolidated Financial Statements and notes thereto included in this Annual Report on Form 10-K. Certain prior period amounts presented in this discussion and analysis have been reclassified to conform to current period classifications. These reclassifications did not have a material impact on the Company's consolidated financial condition, results of operations or statement of consolidated cash flows.

Current wording

The following discussion and analysis is intended to assist readers in understanding the consolidated financial condition and results of operations of the Company and should be read in conjunction with our Consolidated Financial Statements and notes thereto included in this Annual Report on Form 10-K. Certain prior period amounts presented in this discussion and analysis have been reclassified to conform to current period classifications. These reclassifications did not have a material impact on the Company's consolidated balance sheets, statements of income or statement of consolidated cash flows.

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 December 31, 2024, the Company had total assets of $5.4 billion, total liabilities of $4.9 billion and total shareholders' equity of $516.7 million as reported in the consolidated balance sheets.

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 December 31, 2025, the Company had total assets of $5.5 billion, total liabilities of $5.0 billion and total shareholders' equity of $591.5 million as reported in the consolidated balance sheets.

Previous wording

The Company acquired Codorus Valley and its wholly-owned bank subsidiary PeoplesBank, A Codorus Valley Company on July 1, 2024. The merger and acquisition method of accounting was used to account for the transaction with the Company as the acquirer. The Company recorded the assets and liabilities of Codorus Valley at their respective fair values as of July 1, 2024. The transaction was valued at $233.4 million and expanded the Bank’s footprint into the York, Pennsylvania market while increasing its market penetration in its existing markets. The Bank has 38 full-service branches and seven limited purpose branches.

Current wording

The Company acquired Codorus Valley and its wholly-owned bank subsidiary PeoplesBank, A Codorus Valley Company on July 1, 2024. The merger and acquisition method of accounting was used to account for the transaction with the Company as the acquirer. The Company recorded the assets and liabilities of Codorus Valley at their respective fair values as of July 1, 2024. The transaction was valued at $233.4 million and expanded the Bank’s footprint into the York, Pennsylvania market while increasing its market penetration in its existing markets.

Previous wording

The Company incurred merger-related expenses of $22.7 million, a provision for legal settlement of $478 thousand and restructuring expenses of $296 thousand for the year ended December 31, 2024. For the year ended December 31, 2023, the Company incurred merger-related expenses of $1.1 million. The merger-related and other non-recurring expenses are included in non-interest expenses in the consolidated statements of income under Part II, Item 8, "Financial Statements and Supplemental Data."

Current wording

The Company incurred merger-related expenses of $2.6 million for the year ended December 31, 2025. For the year ended December 31, 2024, the Company incurred merger-related expenses of $22.7 million, a provision for non-PCD loans of $15.5 million, expenses for the retirement of an executive of $4.8 million and a provision for legal settlement of $478 thousand. The merger-related and other non-recurring expenses are included in non-interest expenses in the consolidated statements of income under Part II, Item 8, "Financial Statements and Supplemental Data."

Previous wording

The ACL for loans collectively evaluated is measured using a lifetime expected loss rate model that considers historical loss performance and past events in addition to forecasts of future economic conditions. Based on management's analysis, adjustments may be applied for additional factors impacting the risk of loss in the loan portfolio beyond the quantitatively calculated reserve on collectively evaluated loans. As the quantitative reserve calculation incorporates historical conditions, management may consider an additional or reduced reserve is warranted through qualitative risk factors based on current and expected conditions. Management uses the best available information to complete these evaluations; however, future adjustments to the ACL may be necessary if conditions significantly differ from the assumptions used in making the evaluations.

Current wording

The ACL for loans collectively evaluated is measured using a lifetime expected loss rate model that considers historical loss performance and past events in addition to forecasts of future economic conditions. Based on management's analysis, adjustments may be applied for additional factors impacting the risk of loss in the loan portfolio beyond the quantitatively calculated reserve on collectively evaluated loans. As the quantitative reserve calculation incorporates historical conditions, management may consider if an additional or reduced reserve is warranted and make adjustments through qualitative risk factors based on current and expected conditions. Management uses the best available information to complete these evaluations; however, future adjustments to the ACL may be necessary if conditions significantly differ from the assumptions used in making the evaluations.

Previous wording

Utilizing a third-party vendor, the ACL for loans collectively evaluated is measured using a lifetime expected loss rate model under the vendor's neutral scenario that considers historical loss performance and past events in addition to forecasts of future economic conditions. The Company elected to use the DCF methodology for the quantitative analysis for the majority of its loan segments, which applies the probability of default to future cash flows, using a loss driver model and loss given default factors, and then adjusts to the net present value to derive the required reserve. The probability of default estimates are derived through the application of reasonable and supportable economic forecasts to the regression models, which incorporates the Company's and peer loss-rate data, unemployment rate and GDP and can be obtained from the Federal Reserve Economic Database. The reasonable and supportable forecasts of the selected economic metrics are then input into the regression model to calculate an expected default rate. The expected default rates are then applied to expected loan balances estimated through the consideration of contractual repayment terms and expected prepayments. The prepayment and curtailment assumptions adjust the contractual terms of the loan to arrive at the expected cash flows, which are obtained from the third-party vendor. The model incorporates an annualized prepayment rate and a twelve-month rate for curtailment based on a "statistical tendency to repay." Changes in the prepayment and curtailment speeds that vary from the current model inputs could result in an inaccurate of expected credit losses. The development and validation of credit models also included determining the length of the reasonable and supportable forecast and regression period and utilizing national peer group historical loss rates, which a four-quarter forecast period followed by a four-quarter straight-line reversion period were applied.

Current wording

The ACL for loans collectively evaluated is measured using a lifetime expected loss rate model under the vendor's neutral scenario that considers historical loss performance and past events in addition to forecasts of future economic conditions. The Company elected to use the DCF methodology for the quantitative analysis for the majority of its loan segments, which applies the probability of default to future cash flows, using a loss driver model and loss given default factors, and then adjusts to the net present value to derive the required reserve. The probability of default estimates are derived through the application of reasonable and supportable economic forecasts to the regression models, which incorporates the Company's and peer loss-rate data, unemployment rate and GDP and can be obtained from the Federal Reserve Economic Database. The reasonable and supportable forecasts of the selected economic metrics are then input into the regression model to calculate an expected default rate. The expected default rates are then applied to expected loan balances estimated through the consideration of contractual repayment terms and expected prepayments. The prepayment and curtailment assumptions adjust the contractual terms of the loan to arrive at the expected cash flows. The model incorporates an annualized prepayment rate and a twelve-month rate for curtailment based on a "statistical tendency to repay." Changes in the prepayment and curtailment speeds that vary from the current model inputs could result in inaccurate expected credit losses. The development and validation of credit models also included determining the length of the reasonable and supportable forecast and regression period and utilizing national peer group historical loss rates, which a four-quarter forecast period followed by a four-quarter straight-line reversion period were applied.

Previous wording

Preliminary real GDP was 2.3% on an annualized basis for the fourth quarter of 2024, which was a decrease from 3.1% for the third quarter of 2024 and from 3.4% during the fourth quarter of 2023. The decline from the third quarter of 2024 was due to a decline in investments and exports despite an increase in consumer spending. 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 2.4% in the fourth quarter of 2024 compared to an increase of 1.5% for third quarter of 2024 and 1.9% for the fourth quarter of 2023. Excluding food and energy prices, the PCE price index increased by 2.7% in the fourth quarter of 2024 compared to 2.2% in the third quarter of 2024 and 2.0% in the fourth quarter of 2023.

Current wording

The personal consumption expenditures ("PCE") price index increased by 2.9% in the fourth quarter of 2025 compared to an increase of 2.4% for the fourth quarter of 2024. Excluding food and energy prices, the PCE price index increased by 2.7% in the fourth quarter of 2025 and in the fourth quarter of 2024.

Previous wording

The national unemployment rate was 4.1% in December 2024 compared to 3.8% in December 2023. Within the Company's geographic footprint, the unemployment rate in Pennsylvania was 3.7% in December 2024 compared to 3.4% in December 2023. The unemployment rate in Maryland increased from 2.7% in December 2023 to 3.1% in December 2024. Despite the increases in both states since December 2023, the unemployment rates in Pennsylvania and Maryland both remain 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.

Current wording

The national unemployment rate was 4.3% in December 2025 compared to 3.8% in December 2024. Within the Company's geographic footprint, the unemployment rate in Pennsylvania was 3.7% in December 2025 compared to 4.2% in December 2024. The unemployment rate in Maryland increased from 2.7% in December 2024 to 4.2% in December 2025. Despite the increases in both states since December 2024, the unemployment rates in Pennsylvania and Maryland both remain 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.

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 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.

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, the interest rate environment, geopolitical tensions, uncertainty related to the impact of tariffs and the shutdown of the U.S. government, the scope and timing of changes to fiscal, regulatory and trade policies.

Previous wording

As the Company’s balance sheet consists primarily of financial instruments, interest income and interest expense are greatly influenced by the level of interest rates and the slope of the yield curve, as well as the mix of assets and funding. The Company has been able to grow its net interest income by $50.4 million from 2023 to 2024, which is attributed to the Merger that was completed on July 1, 2024 and continued success with the balance of organic commercial loan growth and pricing. Competition for quality lending opportunities and deposits remains intense, which, together with a flat yield curve and changing economic environment, will continue to challenge the Company's ability to grow its net interest margin and to manage its overhead expenses.

Current wording

As the Company’s balance sheet consists primarily of financial instruments, interest income and interest expense are greatly influenced by the level of interest rates and the slope of the yield curve, as well as the mix of assets and funding. The Company has been able to grow its net interest income by $44.5 million from 2024 to 2025, which is attributed to the Merger that was completed on July 1, 2024 and continued success with the balance of loan growth and pricing of interest-earning assets and liabilities. Competition for quality lending opportunities and deposits remains intense, which, together with an inverted yield curve and changing economic environment, will continue to challenge the Company's ability to grow its net interest margin and to manage its overhead expenses.

Previous wording

Net income totaled $22.1 million, $35.7 million and $22.0 million for 2024, 2023 and 2022, respectively. Diluted earnings per share totaled $1.48, $3.42 and $2.06 for 2024, 2023 and 2022, respectively. For the year ended December 31, 2024, the Company incurred merger-related expenses of $22.7 million, provision for credit losses on acquired non-PCD loans of $15.5 million, retirement expenses for an executive of $4.8 million and a provision for legal settlement of $478 thousand, which were included in non-interest expenses of the consolidated statements of income. Excluding these non-recurring expenses, net income and diluted earnings per share totaled $56.1 million and $3.76, respectively, for the year ended December 31, 2024. Net income was $36.6 million and diluted earnings per share was $3.51 for the year ended December 31, 2023 excluding $1.1 million of merger-related expenses for the year ended December 31, 2023. The Company recorded a gain of $1.2 million from the sale of the Bank's Path Valley branch during the year ended December 31, 2023. Net income was $34.8 million and diluted earnings per share was $3.25 for the year ended December 31, 2022, excluding the financial impact of a legal settlement and restructuring expenses. See “Supplemental Reporting of Non-GAAP Measures.”

Current wording

Net income totaled $80.9 million, $22.1 million and $35.7 million for 2025, 2024 and 2023, respectively. Diluted earnings per share totaled $4.18, $1.48 and $3.42 for 2025, 2024 and 2023, respectively. For the year ended December 31, 2025, the Company incurred merger-related expenses of $2.6 million, which were included in non-interest expenses of the consolidated statements of income. Excluding these non-recurring expenses, net income and diluted earnings per share totaled $82.9 million and $4.28, respectively, for the year ended December 31, 2025. Net income was $56.1 million and diluted earnings per share was $3.76 for the year ended December 31, 2024 excluding merger-related expenses of $22.7 million, a provision for non-PCD loans of $15.5 million, expenses for the retirement of an executive of $4.8 million and a provision for legal settlement of $478 thousand. Net income was $36.6 million and diluted earnings per share was $3.51 for the year ended December 31, 2023 excluding $1.1 million of merger-related expenses. The Company recorded a gain of $1.2 million from the sale of the Bank's Path Valley branch during the year ended December 31, 2023. See “Supplemental Reporting of Non-GAAP Measures.”

Previous wording

Net interest income totaled $155.3 million, $104.9 million and $99.6 million for 2024, 2023 and 2022, respectively. The increase in net interest income reflected the deployment of cash into higher yielding commercial loans and investment securities and the impact of the rising interest rates on interest-earning asset yields, partially offset by the impact of an increase in cost of funds and increases in interest-bearing liabilities. In addition, the increase in interest income during 2024 reflects the impact of the Merger, including net accretion of purchase accounting marks on loans, deposits and borrowings.

Current wording

Net interest income totaled $199.8 million, $155.3 million and $104.9 million for 2025, 2024 and 2023, respectively. The increase in net interest income reflected the deployment of cash into higher yielding commercial loans and investment securities and the impact of the rising interest rates on interest-earning asset yields, partially offset by the impact of an increase in cost of funds and increases in interest-bearing liabilities. In addition, the increases in interest income during 2025 and 2024 reflect the impact of the Merger, including net accretion of purchase accounting marks on loans, investment securities, deposits and borrowings.

Previous wording

The provision for credit losses on loans totaled $17.4 million, $1.7 million and $4.2 million in 2024, 2023 and 2022, respectively. For the year ended December 31, 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. During the first quarter of 2023, the Company adopted the new accounting standard for CECL, which resulted in the change from the incurred loss model based on historical loss experience to the expected loss model, which reflects the projected credit losses over the expected life of financial assets and commitments.

Current wording

The provision for credit losses on loans totaled $126 thousand, $17.4 million and $1.7 million in 2025, 2024 and 2023, respectively. For the year ended December 31, 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. During the first quarter of 2023, the Company adopted the new accounting standard for CECL, which resulted in the change from the incurred loss model based on historical loss experience to the expected loss model, which reflects the projected credit losses over the expected life of financial assets and commitments.

Previous wording

Noninterest income totaled $37.4 million, $25.7 million and $27.0 million for 2024, 2023 and 2022, respectively. The increase of $11.7 million from 2023 to 2024 was primarily due to an increase in wealth management income of $5.0 million and increases in service charges and interchange income of $2.8 million, partially driven by the Merger. The remainder of the increase is across several line items primarily due to the Merger. These increase in 2024 compared to 2023 were partially offset by the gain of $1.2 million recorded to other income from the sale of the Path Valley branch for the year ended December 31, 2023. The decrease in noninterest income of $1.3 million from 2022 to 2023 was primarily due to a decrease of $1.6 million in swap fee income, partially offset by an increase in in mortgage banking activities of $184 thousand and the before mentioned gain on sale of the Path Valley branch in 2023. Other income in 2022 included realized gains on the Company's investment in a non-housing limited partnership of $1.1 million.

Current wording

Noninterest income totaled $52.3 million, $37.4 million and $25.7 million for 2025, 2024 and 2023, respectively. The increase of $14.9 million from 2024 to 2025 was primarily due to an increase in wealth management income of $5.3 million and increases in service charges and interchange income of $5.1 million, partially driven by the Merger, in addition to an increase of $1.5 million in income from life insurance policies and an increase of $1.3 million in swap fees. The remainder of the increase is across several line items and is due primarily to the Merger. The increase in noninterest income of $11.8 million from 2023 to 2024 was primarily due to an increase in wealth management income of $5.0 million and increases in service charges and interchange income of $3.4 million, partially driven by the Merger. The increase in 2024 compared to 2023 was partially offset by the gain of $1.2 million recorded to other income from the sale of the Path Valley branch for the year ended December 31, 2023.

Previous wording

The FRB influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Starting in March 2022, the FOMC increased the Federal Funds rate by 425 basis points during 2022 and 100 basis points during 2023 as an attempt to combat the impact of inflation, the rising consumer price index, supply chain disruptions, the state of the labor market and geopolitical tensions. In the second half of 2024, the FOMC reduced the Federal Funds rate by 75 basis points based on the progress towards the 2.0% inflation target and the state of unemployment.

Current wording

The FRB influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Starting in March 2022, the FOMC increased the Federal Funds rate by 425 basis points during 2022 and 100 basis points during 2023 as an attempt to combat the impact of inflation, the rising consumer price index, supply chain disruptions, the state of the labor market and geopolitical tensions. Following a 25 basis point increase in July 2023, the Federal Funds rate remained unchanged until September 2024, when the FOMC cut the Federal Funds rate by 50 basis points. The FOMC subsequently implemented additional rate cuts of 25 basis points in December 2024, September 2025, October 2025 and December 2025. These changes were based on the FOMC's assessment of inflation, the unemployment rate and jobs report.

Previous wording

Core deposits are deposits that are stable, lower cost and generally reprice more slowly than other deposits when interest rates change. Core deposits, which exclude certificates of deposit, are typically funds of local clients who also have a borrowing or other relationship with the Bank. The Company is primarily funded by core deposits, with noninterest-bearing demand deposits historically being a source of funds. During 2022, the lower-cost funding base had a positive impact on the Bank's net interest income and net interest margin in the rising interest rate environment. However, as the Federal Funds rate continued to increase, the competition for deposits also increased in the latter part of 2022 and continued throughout 2024 with clients utilizing their funds at a higher frequency and additional liquidity was needed to meet the demands of our clients. In addition, decreases in demand deposits and savings deposits were primarily due to clients shifting to higher-yielding products within the Bank, including time deposits with promotional offerings of up to 18-month terms.

Current wording

Core deposits are deposits that are stable, lower cost and generally reprice more slowly than other deposits when interest rates change. Core deposits, which exclude certificates of deposit, are typically funds of local clients who also have a borrowing or other relationship with the Bank. The Company is primarily funded by core deposits, including noninterest-bearing demand deposits, which have historically served as a foundational, low-cost source of funds. In addition to the impact of the interest rate environment, the competition for deposits also increased in the latter part of 2022 and continued throughout 2025 with clients utilizing their funds at a higher frequency and additional liquidity was needed to meet the demands of our clients. During that timeframe, clients shifted their deposits to higher-yielding products within the Bank, including time deposits with promotional offerings of up to 18-month terms. From late 2024 to 2025, there has been reduction of these higher yielding promotional balances due to maturities.

Previous wording

The following table presents changes in net interest income on a taxable-equivalent basis for 2024 and 2023 by rate and volume components.

Current wording

The following table presents changes in net interest income on a taxable-equivalent basis between years by rate and volume components:

Previous wording

The yield on loans increased by 109 basis points to 5.68% in 2023 from 4.59% in 2022. Taxable-equivalent interest income earned on loans increased by $33.3 million from $93.8 million in 2022 to $127.1 million in 2023 primarily due to an increase in the average balances of commercial, residential mortgage and home equity loans and from the impact of the rising rate environment. The increase in interest income from loan growth and higher rates was partially offset by a decrease in interest income from SBA PPP loans due to a lower amount of forgiveness activity during 2023 compared to 2022.

Current wording

The yield on loans decreased by 15 basis points to 6.53% in 2025 from 6.68% in 2024 primarily due to the decline in market interest rates. Taxable-equivalent interest income earned on loans increased by $46.5 million from $211.0 million in 2024 to $257.5 million in 2025 primarily due to an increase in the average balances, which was partially attributed to the acquired loans from the Merger, and from the accretion recognized on fair value marks to loans.

Previous wording

The average balance of commercial loans, excluding SBA PPP loans, increased by $211.9 million from $1.6 billion during 2022 to $1.8 billion during 2023. SBA PPP loans, net of deferred fees and costs, averaged $8.8 million during 2023, a decrease of $58.3 million from an average of $67.1 million in 2022. This decrease was due to forgiveness of SBA PPP loans since 2022. Average residential mortgage loans increased by $35.7 million from $211.0 million for 2022 to $246.7 million for 2023 due primarily to adjustable-rate and jumbo mortgage loans originated for the portfolio. Average home equity loans increased by $14.1 million from $175.5 million for 2022 to $189.6 million for 2023. Average installment and other consumer loans decreased by $6.3 million from $26.3 million for 2022 to $20.0 million for 2023.

Current wording

Average loans increased by $795.3 million from $3.2 billion during 2024 to $3.9 billion during 2025. The average balance of commercial loans increased by $613.3 million from $2.5 billion during 2024 to $3.1 billion during 2025. Average residential mortgage loans increased by $118.1 million from $367.4 million for 2024 to $485.5 million for 2025. Average home equity loans increased by $47.8 million from $247.4 million for 2024 to $295.2 million for 2025. Average installment and other consumer loans increased by $16.1 million from $27.2 million for 2024 to $43.3 million for 2025.

Previous wording

2023, due primarily to the accretion recognized on fair value marks to loans and securities assumed in the Merger. The increase in yield was more than offset by an increase of 89 basis points in the cost of interest-bearing liabilities from 2.02% in 2023 to 2.91% in 2024 due primarily to increased funding costs on deposits from higher market interest rates and competitive pressures, 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, and the assumption of subordinated notes and trust preferred debt from the Merger.

Current wording

Taxable-equivalent net interest margin increased by twelve basis points to 3.92% in 2024 from 3.80% in 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 four basis points to the Company's net interest margin during the year ended December 31, 2024. The taxable-equivalent yield on interest-earning assets increased by 86 basis points to 6.26% in 2024 from 5.40% in 2023, due primarily to the accretion recognized on fair value marks to loans and securities assumed in the Merger. The increase in yield was more than offset by an increase of 89 basis points in the cost of interest-bearing liabilities from 2.02% in 2023 to 2.91% in 2024 due primarily to increased funding costs on deposits from higher market interest rates and competitive pressures, 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, and the assumption of subordinated notes and trust preferred debt from the Merger.

Previous wording

Interest expense on borrowings increased by $1.9 million to $9.4 million in 2024 from $7.5 million in 2023 despite the cost of borrowings decreasing by 24 basis points from 4.32% in 2023 to 4.08% in 2024. Average borrowings increased by $18.8 million from $169.9 million in 2023 to $188.7 million in 2024, which included $50.4 million in average subordinated notes and trust preferred debt for the year ended December 31, 2024, an increase of $18.3 million, from $32.1 million for the year ended December 31, 2023. This increase is due to the assumption of subordinated debt of $31.0 million and trust preferred debt of $10.3 million from the Merger. 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 8.78% on December 30, 2023. The interest rate on the Company's subordinated notes at December 31, 2024 was 8.03%. 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 issuances have a variable rate of three-month CME term SOFR, plus a spread adjustment and margin. Amortization expense of fair value marks on acquired borrowings was $294 thousand for the year ended December 31, 2024.

Current wording

Interest expense on borrowings increased by $1.9 million to $9.4 million in 2024 from $7.5 million in 2023 despite the cost of borrowings decreasing by 24 basis points from 4.32% in 2023 to 4.08% in 2024. Average borrowings increased by $18.8 million from $169.9 million in 2023 to $188.7 million in 2024, which included $50.4 million in average subordinated notes and trust preferred debt for the year ended December 31, 2024, an increase of $18.3 million, from $32.1 million for the year ended December 31, 2023. This increase is due to the assumption of subordinated debt of $31.0 million and trust preferred debt of $10.3 million from the Merger. 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 8.78% on December 30, 2023. The interest rate on the Company's subordinated notes at December 31, 2024 was 8.03%. The subordinated notes assumed from the Merger had a fixed rate of interest equal to 4.50% until December 30, 2025. The trust preferred debt issuances have a variable rate of three-month CME term SOFR, plus a spread adjustment and margin. Amortization expense of fair value marks on acquired borrowings was $294 thousand for the year ended December 31, 2024.

Previous wording

The ACL to total loan ratio decreased from 1.25% at December 31, 2023 to 1.24% at December 31, 2024. In 2024, the provision for credit losses increased primarily due to $15.5 million of reserves on acquired non-PCD loans, which was partially offset by a reversal of the provision for credit losses for off-balance sheet credit exposures of $862 thousand. The remaining provision expense recorded for the year ended December 31, 2024 was due to commercial loan growth, partially offset by changes to qualitative factors during 2024; specifically the Economic Conditions qualitative factor was reduced and the Other External Factors qualitative factor is no longer assigned to the impacted loan segments. These changes were based on improved economic factors, as well as concerns subsiding from the prior year about liquidity conditions within the banking industry. The Economic Conditions qualitative factor for the residential mortgage loan segment was removed and there was a decrease in the Collateral Valuation Trends qualitative factor from a moderate to low level in the ACL model for the residential mortgage and installment and other loan segments. These changes were based on the stabilization in real estate collateral valuation, housing demand and overall portfolio performance. In 2023 and 2022, the provision for credit losses was driven primarily by increases in commercial loans, excluding SBA PPP loan forgiveness activity, of $118.3 million and $299.9 million, respectively, in addition to the overall increase in expected loss rates under CECL. During 2023, the Delinquency and Classified Loan Trends qualitative factor was increased for the commercial & industrial and owner-occupied commercial real estate loan classes, which was based on a trend of increases in loans downgraded to the special mention or classified risk rating. All other qualitative factors were unchanged from levels at adoption of CECL. During 2022, qualitative factors were unchanged, except for a reduction in the National and Local Economic Conditions factor, which reduced the provision by $726 thousand.

Current wording

In 2024, the provision for credit losses increased primarily due to $15.5 million of reserves on acquired non-PCD loans, which was partially offset by a reversal of the provision for credit losses for off-balance sheet credit exposures of $862 thousand. The remaining provision expense recorded for the year ended December 31, 2024 was due to commercial loan growth, partially offset by changes to qualitative factors during 2024; specifically, the Economic Conditions qualitative factor was reduced and the Other External Factors qualitative factor is no longer assigned to the impacted loan segments. These changes were based on improved economic factors, as well as concerns subsiding from the prior year about liquidity conditions within the banking industry. The Economic Conditions qualitative factor for the residential mortgage loan segment was removed and there was a decrease in the Collateral Valuation Trends qualitative factor from a moderate to low level in the ACL model for the residential mortgage and installment and other loan segments. These changes were based on the stabilization in real estate collateral valuation, housing demand and overall portfolio performance.

Previous wording

The Company recorded a provision for credit losses of $17.4 million, $1.7 million and $4.2 million in 2024, 2023 and 2022, respectively. On January 1, 2023, the Company adopted the new accounting standard, referred to as CECL, which transitioned from the incurred loss model based on historical loss experience and economic and market conditions to the expected loss model. The CECL standard reflects expected credit losses over the expected life of the financial assets and commitments, primarily based on the DCF methodology for the majority of the loan segments, which applies the probability of default and loss given default factors to future cash flows, and adjusts to the net present value to derive the required reserve. Macroeconomic conditions are incorporated into the model for unemployment and gross domestic product, in addition to model assumptions for discount rate and prepayment and curtailment speeds.

Current wording

On January 1, 2023, the Company adopted the new accounting standard, referred to as CECL, which transitioned from the incurred loss model based on historical loss experience and economic and market conditions to the expected loss model. The CECL standard reflects expected credit losses over the expected life of the financial assets and commitments, primarily based on the DCF methodology for the majority of the loan segments, which applies the probability of default and loss given default factors to future cash flows, and adjusts to the net present value to derive the required reserve. Macroeconomic conditions are incorporated into the model for unemployment and gross domestic product, in addition to model assumptions for discount rate and prepayment and curtailment speeds. In 2023, the provision for credit losses was driven primarily by increases in commercial loans, excluding SBA PPP loan forgiveness activity, of $118.3 million, in addition to the overall increase in expected loss rates under CECL. During 2023, the Delinquency and Classified Loan Trends qualitative factor was increased for the commercial & industrial and owner-occupied commercial real estate loan classes, which was based on a trend of increases in loans downgraded to the special mention or classified risk rating. All other qualitative factors were unchanged from levels at adoption of CECL.

Previous wording

Net charge-offs totaled $3.3 million in 2024, compared to net charge-offs of $581 thousand in 2023. The increase in net charge-offs was due primarily to a charge-off of $2.4 million for one commercial and industrial relationship and charge-offs of $595 thousand associated with a loan sale. Nonaccrual loans were 0.61% of gross loans at December 31, 2024, compared with 1.11% of gross loans at December 31, 2023. Nonaccrual loans decreased by $1.4 million from $25.5 million at December 31, 2023 to $24.1 million at December 31, 2024 due to the payoffs of two commercial real estate loans with outstanding balances totaling $15.0 million and a sale of mostly commercial and industrial loans on nonaccrual status of $2.6 million, mostly offset by acquired loans on nonaccrual status of $12.8 million from the Merger and other additions in commercial and industrial and CRE loans. See further discussion in the “Asset Quality” and “Credit Risk Management” sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Current wording

Net charge-offs totaled $1.1 million in 2025, $3.3 million in 2024 and $581 thousand in 2023. Nonaccrual loans were 0.70% of gross loans at December 31, 2025, compared with 0.61% at December 31, 2024 and 1.11% at December 31, 2023. See further discussion in the “Asset Quality” and “Credit Risk Management” sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Previous wording

•Other income decreased by $204 thousanddue primarily toa gain of $1.2 million from the sale of the Bank's Path Valley branch during 2023, partially offset by $408 thousand of solar tax credit income recognized in 2024.

Current wording

•Other income decreased by $204 thousand due primarily to a gain of $1.2 million from the sale of the Bank's Path Valley branch during 2023, partially offset by $408 thousand of solar tax credit income recognized in 2024.

Previous wording

•The Company agreed to settle a litigation matter, which resulted in a provision for legal settlement of $13.0 million recorded in the third quarter of 2022.

Current wording

•The provision for legal settlement declined because, in 2024, the Company agreed to settle a litigation matter for $478 thousand.

Previous wording

Income tax expense totaled $5.8 million, $9.4 million and $4.6 million for 2024, 2023 and 2022, respectively. The effective tax rate for 2024 was 20.7% compared with 20.8% for 2023 and 17.2% for 2022. Generally, the Company’s effective tax rate is less than the 21% federal statutory rate due to tax-exempt income, including interest earned on tax-exempt loans and investment securities, income from life insurance policies and tax credits, partially offset by disallowed interest expense and state income taxes. Although the change in the effective tax rate was minimal year-over-year, the rate in 2024 was impacted by non-deductible merger-related expenses, which were greater than in 2023. With the rising interest rates, each year was impacted by the portion of interest expense disallowed as a deduction against earnings under the TEFRA and an increase in state taxes as a result of a greater percentage of taxable income earned in a state with a state income tax.

Current wording

Income tax expense totaled $21.8 million, $5.8 million and $9.4 million for 2025, 2024 and 2023, respectively. The effective tax rate for 2025 was 21.2% compared with 20.7% for 2024 and 20.8% for 2023. The Company’s effective tax rate is greater than the 21% federal statutory rate at December 31, 2025 primarily due to the disallowed portion of interest expense against earnings in association with the Bank's tax-exempt investments under the Tax Equity and Fiscal Responsibility Act of 1982 and an increase in non-deductible expenses. This increase in the effective tax rate was partially offset by the benefit of tax-exempt income, including interest earned on tax-exempt loans and securities and income from life insurance policies and tax credits. For 2024 and 2023, the 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 tax credits. The rate in 2025 was impacted by an increase in certain non-deductible expenses and a marginal increase in tax-exempt interest income compared to the significant increase in pre-tax income, so the relative benefit of deductions to taxable income decreased year-over-year. The rate in 2024 was impacted by non-deductible merger-related expenses, which were greater than in 2023. With the rising interest rates, each year was impacted by the portion of interest expense disallowed as a deduction against earnings under the TEFRA and an increase in state taxes as a result of a greater percentage of taxable income earned in a state with a state income tax.

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 debit 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 on the AFS securities did not require an ACL at December 31, 2024 and 2023. Under the prior OTTI framework, the Company did not record any cumulative OTTI expense at December 31, 2022.

Current wording

The Company's investment securities portfolio includes debt investments that are subject to varying degrees of credit and market risks, which arise from general market conditions, and factors impacting specific industries, as well as news that may impact specific issues. Management monitors its debt securities, using various indicators in determining whether unrealized losses on debt securities are credit-related and require an ACL. These indicators include the amount of time the security has been in an unrealized loss position, the cause and extent of the unrealized loss and the credit quality of the issuer and underlying assets. In addition, management assesses whether it is likely the Company will have to sell the investment security prior to recovery, or it expects to be able to hold the investment security until the price recovers. The Company determined that the declines in market value were due to increases in interest rates and market movements, and not due to credit factors. The Company does not intend to sell these securities with unrealized losses and it is more likely than not that the Company will not be required to sell them before recovery of their amortized cost basis, which may be maturity. Therefore, the Company has concluded that the unrealized losses on the AFS securities did not require an ACL at December 31, 2025, 2024 and 2023.

Previous wording

In addition, calls of non-agency CMO securities totaled $18.0 million and there were paydowns of $58.2 million. The balance of investment securities included net unrealized losses of $35.2 million at December 31, 2024 compared to net unrealized losses of $35.6 million at December 31, 2023 for a decrease of $361 thousand. This decrease in net unrealized losses was primarily due to lower treasury rates and narrower credit spreads compared to 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

The balance of investment securities included net unrealized losses of $19.4 million at December 31, 2025 compared to net unrealized losses of $35.2 million at December 31, 2024. The decrease of $15.8 million in net unrealized losses was primarily due to lower market rates compared to December 31, 2024. The overall duration of the Company's investment securities portfolio was 4.6 years at December 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

At December 31, 2024, AFS securities totaled $829.7 million, an increase of $316.2 million, from $513.5 million at December 31, 2023. 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. The sales resulted in no gain or loss as the securities were sold at book value due to the proximity of the sales to the closing date of the Merger. Most of the proceeds from the sales of the acquired AFS securities were reinvested. During 2024, the Company purchased investment securities totaling $227.1 million, which included $224.8 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.

Current wording

At December 31, 2024, AFS securities totaled $829.7 million, an increase of $316.2 million, from $513.5 million at December 31, 2023. 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. The sales resulted in no gain or loss as the securities were sold at book value due to the proximity of the sales to the closing date of the Merger. Most of the proceeds from the sales of the acquired AFS securities were reinvested. During 2024, the Company purchased investment securities totaling $227.1 million, which included $224.8 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. In addition, calls of non-agency CMO securities totaled $18.0 million and there were paydowns of $58.2 million. The balance of investment securities included net unrealized losses of $35.2 million at December 31, 2024 compared to net unrealized losses of $35.6 million at December 31, 2023 for a decrease of $361 thousand. This decrease in net unrealized losses was primarily due to lower treasury rates and narrower credit spreads compared to December 31, 2023.

Previous wording

The average maturity is based on the contractual terms of the debt or mortgage-backed securities, and does not factor in required repayments or anticipated prepayments. At December 31, 2024, the weighted average estimated life is 29 years for mortgage-backed and CMO securities, and 20 years for asset-backed securities, based on current interest rates and anticipated prepayment speeds. The overall duration of the Company's investment security portfolio is 4.1 years and 4.3 years at December 31, 2024 and 2023, respectively.

Current wording

The average maturity is based on the contractual terms of the debt or mortgage-backed securities and does not factor in required repayments or anticipated prepayments. At December 31, 2025, the weighted average estimated life is 27 years for mortgage-backed and CMO securities, and 19 years for asset-backed securities, based on current interest rates and anticipated prepayment speeds. The overall duration of the Company's investment security portfolio is 4.6 years and 4.1 years at December 31, 2025 and 2024, respectively, which is reflective of the duration of the Company's investment security purchases in the latter part of 2025.

Previous wording

Generally, the Bank is permitted under applicable law to make loans to single borrowers (including certain related persons and entities) in aggregate amounts of up to 15% of the sum of total capital and excess ACL not included in Tier 2 capital. The Company's policy has established an internal lending limit of $25.0 million to one borrower or a group of borrowers, except for commercial real estate loans, which the Company reduced the internal lending limit to $15.0 million on a per project basis beginning in 2024. Credit exposure may be aggregated if loans are under common control or ownership or with common guarantors, for which the internal lending limit is $50.0 million, but not permitted to exceed the regulatory lending limit. These amounts are below the Bank's regulatory lending limit of $78.7 million at December 31, 2024. No borrower had an outstanding exposure exceeding the Bank's legal lending limit at year-end.

Current wording

Generally, the Bank is permitted under applicable law to make loans to single borrowers (including certain related persons and entities) in aggregate amounts of up to 15% of the sum of total capital and excess ACL not included in Tier 2 capital. The Company's policy has established an internal lending limit of $25.0 million to one borrower or a group of borrowers, except for commercial real estate loans, which the Company reduced the internal lending limit to $15.0 million on a per project basis. Credit exposure may be aggregated if loans are under common control or ownership or with common guarantors, for which the internal lending limit is $50.0 million, but not permitted to exceed the regulatory lending limit. These amounts are below the Bank's regulatory lending limit of $86.3 million at December 31, 2025. No borrower had an outstanding exposure exceeding the Bank's legal lending limit at year-end.

Previous wording

The risks associated with lending activities differ among loan segments and classes and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans and general economic conditions. Any of these factors may adversely impact a borrower’s ability to repay loans, and also impact the associated collateral. A further discussion on the Company's loan segments and classes, related risks and methodology for the allowance for credit losses are included in Note 1, Summary of Significant Accounting Policies, and Note 4, Loans and Allowance for Credit Losses, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data."

Current wording

The risks associated with lending activities differ among loan segments and classes and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans and general economic conditions. Any of these factors may adversely impact a borrower’s ability to repay loans and also impact the associated collateral. A further discussion on the Company's loan segments and classes, the related risks, ACL and FDM are included in Note 1, Summary of Significant Accounting Policies, and Note 4, Loans and Allowance for Credit Losses, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data."

Previous wording

Total loans increased by $1.6 billion to $3.9 billion at December 31, 2024 from $2.3 billion at December 31, 2023. The increase is due to $1.6 billion in loans acquired in the Merger and continued portfolio growth in the commercial loan segment and residential mortgage segment during 2024. During December 2024, the Company sold acquired loans from the Merger with an unpaid principal balance totaling $6.0 million, inclusive of loans on nonaccrual status totaling $2.6 million. The Company recorded charge offs related to the loan sale of $595 thousand, but also recognized accretion of $1.1 million on the associated loan marks in interest income.

Current wording

The loan portfolio at December 31, 2024 increased by $1.6 billion to $3.9 billion from $2.3 billion at December 31, 2023. The increase is due to $1.6 billion in loans acquired in the Merger and continued portfolio growth in the commercial loan segment and residential mortgage segment during 2024. During December 2024, the Company sold acquired loans from the Merger with an unpaid principal balance totaling $6.0 million, inclusive of loans on nonaccrual status totaling $2.6 million. The Company recorded charge offs related to the loan sale of $595 thousand, but also recognized accretion of $1.1 million on the associated loan marks in interest income.

Previous wording

Management regularly analyzes the commercial real estate portfolio, which includes the review of occupancy, cash flows, expenses and expiring leases, as well as the location of the real estate. At December 31, 2024, the Company had $293.9 million in loans related to office space, which had a weighted average loan-to-value ratio of 51%. Management believes that the office space portfolio is well-diversified and includes only limited exposure to properties located in major metropolitan markets. The Company does not have any material exposure to office space in the District of Columbia area. In addition, the Company does not have any material exposure to government contractors.

Current wording

Management regularly analyzes the commercial real estate portfolio, which includes the review of occupancy, cash flows, expenses and expiring leases, as well as the location of the real estate. At December 31, 2025, the Company had $344.1 million in loans related to office space. Management believes that the office space portfolio is well-diversified and includes only limited exposure to properties located in major metropolitan markets. The Company does not have any material exposure to office space in the District of Columbia area. In addition, the Company does not have any material exposure to government contractors.

Previous wording

The final maturity is used in the determination of maturity of acquisition and development loans that convert from construction to permanent status. Variable rate loans shown above include semi-fixed loans that contractually will adjust with prime or another variable rate index after the interest lock period.

Current wording

The final maturity is used in the determination of maturity of acquisition and development loans that convert from construction-to-permanent status. Variable rate loans shown above include fixed-to-floating interest rate loans that contractually will adjust with prime or another variable rate index after the interest lock period.

Previous wording

On January 1, 2023, the Company adopted ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures ("ASU 2022-02"). ASU 2022-02 eliminated the TDR accounting model, and requires that the Company evaluate, based on the accounting for loan modifications, whether the borrower is experiencing financial difficulty, if the modification results in a more-than-insignificant direct change in the contractual cash flows and if the modified terms represent a new loan or a continuation of an existing loan, which the Company refers to these loans as "financial difficulty modifications" or "FDMs."

Current wording

In accordance with ASU 2022-02, the Company is required to evaluate, based on the accounting for loan modifications, whether the borrower is experiencing financial difficulty and if the modification results in a more-than-insignificant direct change in the contractual cash flows and represents a new loan or a continuation of an existing loan, which the Company refers to these loans as "financial difficulty modifications" or "FDMs."

Previous wording

(1) Includes zero, zero, $307 thousand, $214 thousand and $456 thousand, respectively, of PCI loans at December 31, 2024, 2023, 2022, 2021 and 2020 in accordance with ASU 310-30. Upon adoption of the CECL standard on January 1, 2023, PCD loans were evaluated on an individual loan level and reported on an individual loan basis under ASU 310-20, Nonrefundable Fees and Other Assets. As of December 31, 2021, there was one loan for $891 thousand, which was in the process of collection and guaranteed by the SBA, and was subsequently collected during the first quarter of 2022.

Current wording

(1) Includes zero, zero, zero, $307 thousand and $214 thousand, respectively, of PCI loans at December 31, 2025, 2024, 2023, 2022 and 2021 in accordance with ASU 310-30. Upon adoption of the CECL standard on January 1, 2023, PCD loans were evaluated on an individual loan level and reported on an individual loan basis under ASU 310-20, Nonrefundable Fees and Other Assets. As of December 31, 2021, there was one loan for $891 thousand, which was in the process of collection and guaranteed by the SBA, and was subsequently collected during the first quarter of 2022.

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 $29.8 million at December 31, 2024, an increase of $4.2 million from $25.6 million at December 31, 2023. Nonaccrual loans decreased by $1.4 million from $25.5 million at December 31, 2023 to $24.1 million at December 31, 2024 due primarily to additions in commercial and industrial 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 in addition to a sale of mostly commercial and industrial loans on nonaccrual status of $2.6 million. Nonaccrual loans totaling $12.8 million were acquired in the Merger.

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 $30.3 million at December 31, 2025, an increase of $537 thousand from $29.8 million at December 31, 2024. Nonaccrual loans increased by $3.9 million from $24.1 million at December 31, 2024 to $28.0 million at December 31, 2025. The increase in nonaccrual loans was due to additions to nonaccrual status of $17.7 million of loans primarily consisting of $11.9 million in commercial loans, $3.5 million in residential mortgages and $2.3 million in consumer loans. This increase was partially offset by repayments totaling $12.0 million and gross charge offs of $1.8 million.