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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2024


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-34292

ORRSTOWN FINANCIAL SERVICES, INC.

(Exact Name of Registrant as Specified in its Charter)

Pennsylvania

23-2530374

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

4750 Lindle Road

Harrisburg

Pennsylvania

17111

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s Telephone Number, Including Area Code:

(717)

532-6114

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

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, no par value

ORRF

Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

☒

Non-accelerated filer

Smaller reporting company

☒

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.). Yes ☐ No x

Number of shares outstanding of the registrant’s Common Stock as of November 5, 2024: 19,386,041.

Table of Contents

ORRSTOWN FINANCIAL SERVICES, INC.

INDEX


		Page
Part I – FINANCIAL INFORMATION

	Glossary of Defined Terms	3

Item 1.	Financial Statements	4

	Condensed Consolidated Balance Sheets (Unaudited)	4

	Condensed Consolidated Statements of Operations (Unaudited)	5

	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)	7

	Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)	8

	Condensed Consolidated Statements of Cash Flows (Unaudited)	10

	Notes to Condensed Consolidated Financial Statements (Unaudited)	12

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	55

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	85

Item 4.	Controls and Procedures	86

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	87

Item 1A.	Risk Factors	87

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	87

Item 3.	Defaults upon Senior Securities	87

Item 4.	Mine Safety Disclosures	87

Item 5.	Other Information	87

Item 6.	Exhibits	88

SIGNATURES		89

Table of Contents

Glossary of Defined Terms

The following terms may be used throughout this Report, including the unaudited condensed consolidated financial statements and related notes.


Term			Definition

ACL			Allowance for credit losses

AFS			Available-for-sale
AOCI			Accumulated other comprehensive income (loss)
ASC			Accounting Standards Codification
ASU			Accounting Standards Update
Bank			Orrstown Bank, the commercial banking subsidiary of Orrstown Financial Services, Inc.

CECL			Current expected credit losses

CMO			Collateralized mortgage obligation
Codorus Valley or CVB			Codorus Valley Bancorp, Inc.


DCF			Discounted cash flow


ERM			Enterprise Risk Management
Exchange Act			Securities Exchange Act of 1934, as amended
FASB			Financial Accounting Standards Board
FDIC			Federal Deposit Insurance Corporation
FDM			Financial difficulty modification
FHLB			Federal Home Loan Bank
FOMC			Federal Open Market Committee
FRB			Board of Governors of the Federal Reserve System
GAAP			Accounting principles generally accepted in the United States of America
GDP			Gross Domestic Product
GSE			U.S. government-sponsored enterprise

IEL			Individually evaluated loan
IRC			Internal Revenue Code of 1986, as amended
LHFS			Loans held for sale

MBS			Mortgage-backed securities

MSR			Mortgage servicing right

OCI			Other comprehensive income (loss)

OREO			Other real estate owned (foreclosed real estate)



2011 Plan			2011 Orrstown Financial Services, Inc. Incentive Stock Plan
PACE			Property Assessed Clean Energy loans
PCD loans			Purchased credit deteriorated loans

PCE			Personal Consumption Expenditures



ReRemic			Re-securitization of Real Estate Mortgage Investment Conduits
ROU			Right of use (leases)
SBA			U.S. Small Business Administration
SEC			Securities and Exchange Commission
Securities Act			Securities Act of 1933, as amended
SOFR			Secured Overnight Financing Rate
TDR			Troubled debt restructuring
Unless the context otherwise requires, the terms “Orrstown,” “we,” “us,” “our,” and “Company” refer to Orrstown Financial Services, Inc. and its subsidiaries.

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC.


(Dollars in thousands, except per share amounts)	September 30, 2024		December 31, 2023
Assets
Cash and due from banks	$	65,064	$	32,586
Interest-bearing deposits with banks	171,716		32,575

Cash and cash equivalents	236,780		65,161
Restricted investments in bank stocks	20,247		11,992
Securities available for sale (amortized cost of $845,869 and $549,089 at September 30, 2024 and December 31, 2023, respectively)	826,828		513,519
Loans held for sale, at fair value	3,561		5,816
Loans	3,981,437		2,298,313
Less: Allowance for credit losses	(49,630)		(28,702)
Net loans	3,931,807		2,269,611
Premises and equipment, net	49,839		29,393
Cash surrender value of life insurance	142,895		73,204
Goodwill	70,655		18,724
Other intangible assets, net	46,144		2,414
Accrued interest receivable	20,562		13,630
Deferred tax assets, net	38,517		22,017
Other assets	82,754		38,759
Total assets	$	5,470,589	$	3,064,240
Liabilities
Deposits:
Noninterest-bearing	$	815,404	$	430,959
Interest-bearing	3,835,449		2,127,855

Total deposits	4,650,853		2,558,814
Securities sold under agreements to repurchase and federal funds purchased	21,932		9,785
FHLB advances and other borrowings	115,378		137,500
Subordinated notes and trust preferred debt	68,510		32,093
Other liabilities	97,710		60,992
Total liabilities	4,954,383		2,799,184

Commitments and contingencies

Shareholders’ Equity
Preferred stock, $1.25 par value per share; 500,000 shares authorized; no shares issued or outstanding	—		—
Common stock, no par value—$0.05205 stated value per share; 50,000,000 shares authorized; 19,729,307 shares issued and 19,373,354 outstanding at September 30, 2024; 11,204,599 shares issued and 10,612,390 outstanding at December 31, 2023	1,027		583
Additional paid - in capital	422,177		189,027
Retained earnings	117,311		117,667
Accumulated other comprehensive loss	(15,888)		(28,476)
Treasury stock—355,953 and 592,209 shares, at cost at September 30, 2024 and December 31, 2023, respectively	(8,421)		(13,745)
Total shareholders’ equity	516,206		265,056
Total liabilities and shareholders’ equity	$	5,470,589	$	3,064,240

The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

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Condensed Consolidated Statements of Operations (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC.


	Three Months Ended				Nine Months Ended
(Dollars in thousands, except per share amounts)	September 30, 2024		September 30, 2023		September 30, 2024		September 30, 2023
Interest income
Loans	$	70,647	$	32,738	$	142,417	$	92,685
Investment securities - taxable	9,005		4,459		18,588		13,244
Investment securities - tax-exempt	883		861		2,641		2,591
Short-term investments	2,452		633		5,272		1,349
Total interest income	82,987		38,691		168,918		109,869
Interest expense
Deposits	28,603		10,582		57,384		25,392
Securities sold under agreements to repurchase and federal funds purchased	96		31		148		84
FHLB advances and other borrowings	1,154		1,354		3,780		3,992
Subordinated notes and trust preferred debt	1,437		505		2,925		1,513
Total interest expense	31,290		12,472		64,237		30,981
Net interest income	51,697		26,219		104,681		78,888
Provision for credit losses	13,681		136		14,791		1,264

Net interest income after provision for credit losses	38,016		26,083		89,890		77,624
Noninterest income
Service charges on deposit accounts	1,801		1,020		3,824		2,966
Interchange income	1,779		963		3,651		2,921
Other service charges, commissions and fees	559		240		1,019		702
Swap fee income	505		255		1,079		451
Trust and investment management income	3,760		1,853		7,916		5,668
Brokerage income	1,277		973		3,535		2,727
Mortgage banking activities	491		(142)		1,318		448

Income from life insurance	1,289		620		2,569		1,855
Investment securities gains (losses)	271		2		254		(8)
Other income	654		141		1,023		1,431
Total noninterest income	12,386		5,925		26,188		19,161
Noninterest expenses
Salaries and employee benefits	27,190		12,885		54,137		38,135
Occupancy	1,818		1,089		4,197		3,249
Furniture and equipment	2,515		1,371		5,480		3,810
Data processing	2,046		1,248		4,548		3,666

Automated teller and interchange fees	784		314		1,476		920
Advertising and bank promotions	537		332		1,709		1,656
FDIC insurance	862		477		1,722		1,500

Professional services	1,119		965		2,551		2,203
Directors' compensation	123		199		646		667


Taxes other than income	503		387		1,046		847
Intangible asset amortization	2,464		228		2,904		717

Merger-related expenses	16,977		—		18,784		—

Restructuring expenses	257		—		257		—

Other operating expenses	3,104		952		5,950		4,081
Total noninterest expenses	60,299		20,447		105,407		61,451
continued

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	Three Months Ended				Nine Months Ended
	September 30, 2024		September 30, 2023		September 30, 2024		September 30, 2023
(Loss) income before income tax (benefit) expense	(9,897)		11,561		10,671		35,334
Income tax (benefit) expense	(1,994)		2,535		2,305		7,314
Net (loss) income	$	(7,903)	$	9,026	$	8,366	$	28,020

Per share information:
Basic (loss) earnings per share	$	(0.41)	$	0.87	$	0.63	$	2.71
Diluted (loss) earnings per share	(0.41)		0.87		0.62		2.68
Dividends paid per share	0.23		0.20		0.63		0.60

The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

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Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC.


	Three Months Ended				Nine Months Ended
(Dollars in thousands)	September 30, 2024		September 30, 2023		September 30, 2024		September 30, 2023
Net (loss) income	$	(7,903)	$	9,026	$	8,366	$	28,020
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities available for sale arising during the period	18,479		(14,448)		16,710		(8,510)
Reclassification adjustment for gains on securities available for sale realized in net income	(181)		—		(181)		—
Net unrealized gains (losses) on securities available for sale	18,298		(14,448)		16,529		(8,510)
Tax effect	(4,087)		3,179		(3,692)		1,872
Total other comprehensive income (loss), net of tax and reclassification adjustments on securities available for sale	14,211		(11,269)		12,837		(6,638)
Unrealized (losses) gains on interest rate swaps used in cash flow hedges	(2,182)		1,439		(320)		2,831
Reclassification adjustment for losses realized in net income	—		—		—		—
Net unrealized (losses) gains on interest rate swaps used in cash flow hedges	(2,182)		1,439		(320)		2,831
Tax effect	487		(317)		71		(623)
Total other comprehensive (loss) income, net of tax and reclassification adjustments on interest rate swaps used in cash flow hedges	(1,695)		1,122		(249)		2,208
Total other comprehensive income (loss), net of tax and reclassification adjustments	12,516		(10,147)		12,588		(4,430)
Total comprehensive income (loss)	$	4,613	$	(1,121)	$	20,954	$	23,590

The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

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Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC.


	Three Months Ended September 30, 2024
(Dollars in thousands, except per share amounts)	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total Shareholders’ Equity


















Balance, July 1, 2024	$	583	$	187,694	$	129,670	$	(28,404)	$	(11,167)	$	278,376
Net loss	—		—		(7,903)		—		—		(7,903)

Total other comprehensive income, net of taxes	—		—		—		12,516		—		12,516
Cash dividends ($0.23 per share)	—		—		(4,456)		—		—		(4,456)
Issuance of common stock (8,532,038 common shares) to acquire Codorus Valley Bancorp, Inc.	444		233,013		—		—		—		233,457
Share-based compensation plans:
4,000 net common shares acquired and 125,091 net treasury shares issued, including compensation expense totaling $5,657	—		1,470		—		—		2,746		4,216

Balance, September 30, 2024	$	1,027	$	422,177	$	117,311	$	(15,888)	$	(8,421)	$	516,206











	Nine Months Ended September 30, 2024
(Dollars in thousands, except per share amounts)	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total Shareholders’ Equity
Balance, January 1, 2024	$	583	$	189,027	$	117,667	$	(28,476)	$	(13,745)	$	265,056

Net income	—		—		8,366		—		—		8,366

Total other comprehensive income, net of taxes	—		—		—		12,588		—		12,588
Cash dividends ($0.63 per share)	—		—		(8,722)		—		—		(8,722)
Issuance of common stock (8,532,038 common shares) to acquire Codorus Valley Bancorp, Inc.	444		232,983		—		—		—		233,427
Share-based compensation plans:
7,330 net common shares acquired and 236,256 net treasury shares issued, including compensation expense totaling $7,488	—		167		—		—		5,324		5,491

Balance, September 30, 2024	$	1,027	$	422,177	$	117,311	$	(15,888)	$	(8,421)	$	516,206

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	Three Months Ended September 30, 2023
(Dollars in thousands, except per share amounts)	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total Shareholders’ Equity































Balance, July 1, 2023	$	583	$	187,859	$	105,239	$	(34,196)	$	(13,844)	$	245,641
Net income	—		—		9,026		—		—		9,026

Total other comprehensive loss, net of taxes	—		—		—		(10,147)		—		(10,147)
Cash dividends ($0.20 per share)	—		—		(2,121)		—		—		(2,121)

Share-based compensation plans:
1,600 net common shares acquired and 3,446 net treasury shares issued, including compensation expense totaling $1,228	—		599		—		—		82		681

Balance, September 30, 2023	$	583	$	188,458	$	112,144	$	(44,343)	$	(13,762)	$	243,080











	Nine Months Ended September 30, 2023
(Dollars in thousands, except per share amounts)	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total Shareholders’ Equity
Balance, January 1, 2023	$	584	$	189,264	$	92,473	$	(39,913)	$	(13,512)	$	228,896
Cumulative effect of change in accounting principle - CECL (Note 4)	—		—		(1,984)		—		—		(1,984)
Net income	—		—		28,020		—		—		28,020

Total other comprehensive loss, net of taxes	—		—		—		(4,430)		—		(4,430)
Cash dividends ($0.60 per share)	—		—		(6,365)		—		—		(6,365)

Share-based compensation plans:
22,762 net common shares acquired and 35,380 net treasury shares acquired, including compensation expense totaling $1,763	(1)		(806)		—		—		(250)		(1,057)

Balance, September 30, 2023	$	583	$	188,458	$	112,144	$	(44,343)	$	(13,762)	$	243,080

The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

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Condensed Consolidated Statements of Cash Flows (Unaudited)

ORRSTOWN FINANCIAL SERVICES, INC.


	Nine Months Ended
(Dollars in thousands)	September 30, 2024		September 30, 2023
Cash flows from operating activities
Net income	$	8,366	$	28,020
Adjustments to reconcile net income to net cash provided by operating activities:
Net (discount accretion) premium amortization	(5,526)		1,534
Depreciation and amortization expense	5,793		3,194

Provision for credit losses	14,791		1,264

Share-based compensation	7,488		1,763
Gains on sales of loans originated for sale	(667)		(214)
Fair value adjustments on loans held for sale	(95)		182
Mortgage loans originated for sale	(29,372)		(14,924)
Proceeds from sales of loans originated for sale	32,389		19,388

Net gain on sale of OREO and premises held for sale	—		(436)

Net loss on disposal of premises and equipment	400		242
Deferred income tax expense	38		339
Investment securities (gains) losses	(254)		8


Return on investments in limited partnerships	(49)		(27)
Net gains (losses) on derivatives	1,316		(87)

Income from life insurance	(2,569)		(1,855)
Premium on branch sale	—		(1,102)
(Increase) decrease in accrued interest receivable and other assets	(12,583)		2,171
Increase (decrease) in accrued interest payable and other liabilities	6,398		(9,975)
Other, net	735		520
Net cash provided by operating activities	26,599		30,005
Cash flows from investing activities
Proceeds from sales of AFS securities	162,669		19,900
Maturities, repayments and calls of AFS securities	57,921		27,456
Purchases of AFS securities	(190,293)		(39,387)
Net cash received from merger	45,280		—
Net purchases of restricted investments in bank stocks	(7,087)		(2,345)

Net increase in loans	(28,837)		(115,681)
Proceeds from sales of portfolio loans	1,727		—
Investment in limited partnerships	(6,891)		(858)
Purchases of bank premises and equipment	(463)		(1,771)

Proceeds from disposal of OREO and premises held for sale	—		2,536
Proceeds from disposal of premises and equipment	—		43
Net cash paid in branch sale	—		(17,641)

Purchases of bank owned life insurance	(5,000)		—
Death benefit proceeds from life insurance contracts	—		342
Other	(374)		(72)
Net cash provided by (used in) investing activities	28,652		(127,478)
continued

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	Nine Months Ended
	September 30, 2024		September 30, 2023
Cash flows from financing activities
Net increase in deposits	145,397		88,924
Net (increase) decrease in borrowings with original maturities less than 90 days	(18,296)		13,306
Proceeds from FHLB advances with original maturities greater than 90 days	—		40,000
Payments on FHLB advances with original maturities greater than 90 days	—		(1,455)






Dividends paid	(8,722)		(6,365)

Acquisition of treasury stock	—		(2,579)
Shares repurchased as treasury stock for employee taxes associated with restricted stock vesting	(2,393)		(378)
Proceeds from issuance of employee stock purchase plan shares	267		136
Other	115		—
Net cash provided by financing activities	116,368		131,589
Net increase in cash and cash equivalents	171,619		34,116
Cash and cash equivalents at beginning of period	65,161		60,823
Cash and cash equivalents at end of period	$	236,780	$	94,939



	Nine Months Ended
	September 30, 2024		September 30, 2023
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	63,206	$	29,655
Income taxes	6,825		4,750
Supplemental schedule of noncash activities:

OREO acquired in settlement of loans	—		85
Premise and equipment transferred to held for sale	1,925		—
Lease liabilities arising from obtaining ROU assets	—		2,416
Noncash transactions related to merger:
Assets acquired	2,154,283		—
Liabilities assumed	2,018,067		—

The Notes to Unaudited Condensed Consolidated Financial Statements are an integral part of these statements.

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Notes to Condensed Consolidated Financial Statements (Unaudited)

(All dollar amounts presented in the tables, except per share amounts, are in thousands)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

See the Glossary of Defined Terms at the beginning of this Report for terms used throughout the unaudited condensed consolidated financial statements and related notes of this Form 10-Q.

Nature of Operations – Orrstown Financial Services, Inc. is a financial holding company that operates Orrstown Bank, a commercial bank providing banking and financial advisory services in Berks, Cumberland, Dauphin, Franklin, Lancaster, Perry and York Counties, Pennsylvania, and in Anne Arundel, Baltimore, Harford, Howard and Washington Counties, Maryland. The Company operates in the community banking segment and engages in lending activities, including commercial, residential, commercial mortgages, construction, municipal, and various forms of consumer lending, and deposit services, including checking, savings, time, and money market deposits. The Company’s lending area also includes adjacent counties in Pennsylvania and Maryland, as well as Loudon County, Virginia and Berkeley, Jefferson and Morgan Counties, West Virginia. The Company also provides fiduciary services, investment advisory, insurance and brokerage services. The Company and the Bank are subject to regulation by certain federal and state agencies and undergo periodic examinations by such regulatory authorities.

Basis of Presentation – The accompanying unaudited condensed consolidated financial statements include the accounts of Orrstown Financial Services, Inc. and its wholly owned subsidiary, the Bank. The Company has prepared these unaudited condensed consolidated financial statements in accordance with GAAP for interim financial information, SEC rules that permit reduced disclosure for interim periods, and Article 10 of Regulation S-X. In the opinion of management, all adjustments (all of which are of a normal recurring nature) that are necessary for a fair statement are reflected in the unaudited condensed consolidated financial statements. There have been no material changes to the Company's significant accounting policies for the three and nine months ended September 30, 2024. The December 31, 2023 consolidated balance sheet information contained in this Quarterly Report on Form 10-Q was derived from the Company's 2023 audited consolidated financial statements. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements, including the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. Operating results for the three and nine months ended September 30, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024. All significant intercompany transactions and accounts have been eliminated.

The Company's management has evaluated all activity of the Company and concluded that subsequent events are properly reflected in the Company's unaudited condensed consolidated financial statements and notes as required by GAAP.

To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

Acquisition Accounting

The Company accounts for its mergers and acquisitions using the acquisition method of accounting under the provisions of the FASB ASC Topic 805, Business Combinations ("805"). Under ASC 805, all of the assets acquired and liabilities assumed in a business combination are recognized at their acquisition-date fair value, while transaction costs and restructuring costs associated with the business combination are expensed as incurred. The determination of fair values involves significant judgment regarding methods and assumptions, including discount rates, future expected cash flows, market conditions and other future events. The excess of the merger consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill. The results of operations of the acquired entity are included in the consolidated statements of operations from the acquisition date. In accordance with business combination accounting guidance, the Company's review of the fair values of the assets and liabilities acquired is ongoing, which management will continue to evaluate these fair values for up to one year following the merger date of July 1, 2024. Adjustments would be recorded to goodwill during the current reporting period.

Allowance for Credit Losses - Loans

On January 1, 2023, the Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), the current expected credit losses accounting standard commonly referred to as "CECL," which replaced the incurred loss model with the lifetime expected loss model. The CECL methodology requires an organization to measure all expected credit losses over the contractual term for financial assets measured at amortized cost, including loan receivables and held-to-maturity securities, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

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The CECL methodology also applies to off-balance sheet credit exposures not accounted for as insurance (e.g., loan commitments, standby letters of credit, financial guarantees and other similar instruments), net investments in leases recognized by a lessor in accordance with ASC Topic 842 on leases and AFS debt securities.

The Company calculates credit losses over the estimated life of the applicable financial assets using the DCF methodology for the quantitative analysis for the majority of its loan segments, which applies the probability of default and loss given default factors to future cash flows, and then adjusts to the net present value to derive the required reserve. Reasonable and supportable macroeconomic conditions include unemployment and GDP. Model assumptions include the discount rate, prepayments and curtailments. The validation of credit models also included determining the length of the reasonable and supportable forecast and regression period and utilizing national peer group historical loss rates. For the consumer loan segments, the remaining life methodology is applied as a practical expedient based on the risk characteristics.

The ACL represents the amount that, in management's judgment, appropriately reflects credit losses inherent in the loan portfolio at the balance sheet date. Loans deemed to be uncollectible are charged against the ACL on loans and subsequent recoveries, if any, are credited to the ACL on loans when received. Changes to the ACL are recorded through the provision for credit losses on loans in the unaudited condensed consolidated statements of operations.

The ACL is maintained at a level considered appropriate to absorb credit losses over the expected life of the loan. The ACL for expected credit losses is determined based on a quantitative assessment of two categories of loans: collectively evaluated loans and individually evaluated loans. In addition, the ACL includes a qualitative component which adjusts the CECL model results for risk factors that are not considered within the CECL model but are relevant in assessing the expected credit losses within the loan classes.

The ACL on loans is measured on a collective basis when similar risk characteristics exist within the Company's loan segments between commercial and consumer. For purposes of estimating the Company’s ACL, management generally evaluates collectively evaluated loans by federal call code, which represents the loan classes based upon U.S. regulatory loan classification rules, in order to group loans with similar risk characteristics. Each of these loan segments are broken down into multiple loan classes, which are characterized by loan type, collateral type, risk attributions and the manner in which management monitors the performance of the borrower. The risks associated with lending activities differ and are subject to the impact of change in interest rates, market conditions and the impact of economic conditions on the collateral securing the loans, and general economic conditions. The commercial loan segment includes commercial real estate, acquisition and development, commercial and industrial and municipal loan classes. The consumer loan segment includes residential mortgage, installment and other consumer loans.

Loans collectively evaluated includes loans on accrual status, except for loans previously restructured that do not share similar risk characteristics, which are individually evaluated. The ACL for loans collectively evaluated is measured using a lifetime expected loss rate model that considers historical loss performance and past events in addition to forecasts of future economic conditions. The Company elected to use the DCF methodology for the quantitative analysis for the majority of its loan segments, which applies the probability of default 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. The reasonable and supportable forecasts of the selected economic metrics are then input into the regression model to calculate an expected default rate. The expected default rates are then applied to expected loan balances estimated through the consideration of contractual repayment terms and expected prepayments. The prepayment and curtailment assumptions adjust the contractual terms of the loan to arrive at the expected cash flows. The development and validation of credit models also included determining the length of the reasonable and supportable forecast and regression period and utilizing national peer group historical loss rates. Management selected the national unemployment rate and GDP as the drivers of the quantitative portion of collectively evaluated reserves on loan classes reliant upon the DCF methodology. For the consumer loan segment, the quantitative reserve was calculated using the remaining life methodology where the average historical bank-specific and peer loss rates are applied to expected loan balances over an estimated remaining life of loans. The estimated remaining life is calculated using historical bank-specific loan attrition data.

Loans that do not share similar risk characteristics are evaluated on an individual basis and are excluded from the collective evaluation for the ACL. Loans identified to be individually evaluated under CECL include loans on nonaccrual status and may include accruing loans that do not share similar risk characteristics to other accruing loans collectively evaluated. A specific reserve analysis is applied to the individually evaluated loans, which considers collateral value, an observable market price or the present value of expected future cash flows. A specific reserve may be assigned if the measured value of the loan using one of the before mentioned methods is less than the current carrying value of the loans.

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A loan is considered collateral-dependent when the Company determines foreclosure is probable or the borrower is experiencing financial difficulty and the Company expects repayment to be provided substantially through the operation or sale of the collateral. Collateral could be in the form of real estate, equipment or business assets. An ACL may result for a collateral-dependent loan if the fair value of the underlying collateral, as of the reporting date, adjusted for expected costs to repair or sell, was less than the amortized cost basis of the loan. If repayment of the loan is instead dependent only on the operation, rather than the sale of the collateral, the measure of the ACL does not incorporate estimated costs to sell. For loans evaluated on the basis of projected future principal and interest cash flows, the Company discounts the expected cash flows at the effective interest rate of the loan. An ACL will result if the present value of expected cash flows is less than the amortized cost basis of the loan.

Based on management's analysis, adjustments may be applied for additional factors impacting the risk of loss in the loan portfolio beyond the quantitatively calculated reserve on collectively evaluated loans. As the quantitative reserve calculation incorporates historical conditions, management may consider an additional or reduced reserve is warranted through qualitative risk factors based on current and expected conditions. These qualitative risk factors include significant or unexpected changes in:

•Lending policies, procedures, underwriting standards and recovery practices;

•Nature and volume of loans;

•Concentrations of credit;

•Collateral valuation trends;

•Delinquency and classified loan trends;

•Experience, ability and depth of management and lending staff;

•Quality of loan review system; and

•Economic conditions and other external factors.

For PCD loans, the nonaccrual status is determined in the same manner as for other loans. In accordance with the CECL standard, the Company accounts for its PCD loans under ASC 310-20, Receivables - Nonrefundable Fees and Other Assets ("ASC 310-20"). These loans are initially recorded at fair value and include credit and interest rate marks associated with acquisition accounting adjustments. Purchase premiums or discounts are subsequently amortized as an adjustment to yield over the estimated contractual lives of the loans. Under ASC 310-20, the acquired loans are evaluated on an individual asset level, and not maintained in pools and accounted for as units of accounts, which would permit treating each pool as a single asset.

From its merger with Codorus Valley, the Company evaluated and classified the acquired loans as PCD if the loans had experienced more-than-insignificant credit deterioration since origination or as non-PCD if the loans had not experienced a more-than-insignificant amount of credit deterioration since origination. PCD loans included loans on nonaccrual status, past due 60 days or greater at any time since loan origination or having a risk rating of watch, special mention, substandard, doubtful or loss based on the Company's internal risk rating system. At acquisition, the fair value of the PCD loans is recorded to the ACL, but not as a charge to the provision for credit losses in the consolidated statements of operations. The initial allowance is instead established by grossing up the amortized cost of the PCD loan. Subsequent to the acquisition, changes in the expected credit losses on PCD loans are recorded to the provision for credit losses. The ACL for non-PCD loans is recorded to the provision for credit losses in the same period as the acquisition.

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 requires that the Company evaluate, based on the guidance for 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 whether the modifications represent terms that would result in a new loan or a continuation of an existing loan. The Company refers to these loans as "financial difficulty modifications" or "FDMs." This change requires all loan modifications to be accounted for under the general loan modification guidance in ASC 310-20, Receivables – Nonrefundable Fees and Other Costs, and subjects entities to new disclosure requirements on loan modifications to borrowers experiencing financial difficulty. If a modification occurs while the loan is on accrual status, it will continue to accrue interest under the modified terms. After the initial modification and recognition of a FDM, the Company will monitor the performance of the borrower. If no subsequent qualifying modifications are made to the FDM, the loan does not require disclosure in the current period's disclosures after the one-year period has elapsed.

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.

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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.

See Note 4, Loans and Allowance for Credit Losses, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information," for a description of the Company’s loan classes and differing levels of associated credit risk.

Allowance for Credit Losses on AFS Securities

Under CECL, the Company is required to conduct an impairment evaluation on AFS securities to determine whether the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security before recovery. If these situations apply, the guidance continues to require the Company to reduce the security's amortized cost basis down to its fair value through earnings. The Company also evaluates the unrealized losses on AFS securities to determine if a security's decline in fair value below its amortized cost basis is due to credit factors. The evaluation is based upon factors such as the creditworthiness of the underlying borrowers, performance of the underlying collateral, if applicable, and the level of credit support in the security structure. Management also evaluates other factors and circumstances that may be indicative of a decline in the fair value of the security due to a credit factor. This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost and near-term prospects of the issuer. If this assessment indicates that a credit loss exists, the present value of the expected cash flows of the security is compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost, an ACL is recorded for the credit loss, which is limited by the amount that the fair value is less than the amortized cost basis. Any additional amount of loss would be due to non-credit factors and is recorded in AOCI, net of taxes. If a credit loss is recognized in earnings, subsequent improvements to the expectation of collectability will be recognized through the ACL. If the fair value of the security increases above its amortized cost, the unrealized gain will be recorded in AOCI, net of taxes, on the unaudited condensed consolidated statements of financial condition. Accrued interest receivable on AFS securities is excluded from the estimate of credit losses.

See Note 3, Investment Securities, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information," for a description of the Company’s investment securities and impairment evaluation.

Recent Accounting Pronouncements

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The updated guidance requires enhanced disclosures for significant expenses by reportable operating segments. The significant expense categories would be those regularly provided to the Company's chief operating decision-maker ("CODM") and included in an operating segment's measures of profit or loss. Other required disclosures include the composition of other segment items, the title and position of the CODM and an explanation on how the CODM evaluates and uses the reportable segment's performance. This guidance for segment reporting is effective for fiscal years beginning after December 15, 2023 and interim periods with fiscal years beginning after December 15, 2024, with early adoption permitted. The Company will adopt the new standard for the annual reporting period beginning January 1, 2024 and for interim periods beginning January 1, 2025. The Company is not currently required to report segment information and, as such, does not anticipate that the updated guidance will have a significant impact on its consolidated financial statements; however, adoption of this standard could result in additional disclosures.

In December 2023, the Financial Accounting Standards Board issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which will require updates to the disclosures of the income tax rate reconciliation and income taxes paid. The income tax rate reconciliation will require expanded disclosure, using percentages and reporting currency amounts, to include specific categories, including state and local income tax, net of the federal income tax effect, tax credits and nontaxable and nondeductible items, with additional qualitative explanations of individually significant reconciling items. The amount of income taxes paid will require disaggregation by jurisdictional categories: federal, state and foreign. This guidance for income tax disclosures is effective for fiscal years beginning after December 15, 2024. The Company is currently evaluating the updated guidance; however, management does not expect it will have a significant impact on its consolidated financial statements.

In March 2024, the SEC adopted the final rule under SEC Release No. 33-11275, “The Enhancement and Standardization of Climate-Related Disclosures for Investors”. This rule will require registrants to disclose certain climate-related information in registration statements and annual reports. The disclosure requirements will apply to the Company's fiscal year beginning January 1, 2026.

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The Company is currently evaluating the final rule to determine its impact on the Company's consolidated financial statements and disclosures.

NOTE 2. MERGER

On July 1, 2024, Orrstown completed the previously announced merger of equals (the “Merger”) with Codorus Valley, pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated as of December 12, 2023, by and between Orrstown and Codorus Valley. At the effective time of the Merger (the “Effective Time”), Codorus Valley was merged with and into Orrstown, with Orrstown as the surviving corporation, which was promptly followed by the merger of Codorus Valley’s wholly-owned bank subsidiary, PeoplesBank, A Codorus Valley Company, with and into Orrstown Bank, a wholly-owned subsidiary of Orrstown, with Orrstown Bank as the surviving bank.

Pursuant to the terms of the Merger Agreement, each share of Codorus Valley common stock, $2.50 par value per share (“Codorus Common Stock”), outstanding immediately prior to the Effective Time was canceled and converted into the right to receive 0.875 shares (the “Exchange Ratio”) of Orrstown common stock, no par value per share (“Orrstown Common Stock”), with an amount in cash, without interest, to be paid in lieu of fractional shares.

In addition, at the Effective Time, (i) each option to purchase Codorus Valley common stock issued under Codorus Valley’s 2007 Long-Term Incentive Plan, as amended, 2017 Long-Term Incentive Plan, as amended, and any other similar plan (collectively, the “Codorus Valley Equity Plans”), outstanding immediately prior to the Effective Time was automatically converted into an option to purchase a number of shares of Orrstown common stock equal to the product of the number of shares of Codorus Valley common stock subject to such stock option immediately prior to the Effective Time and the Exchange Ratio, at an exercise price per share (rounded up to the nearest whole cent) equal to (a) the exercise price per share of Codorus Valley common stock of such stock option immediately prior to the Effective Time divided by (b) the Exchange Ratio; (ii) all time-based restricted stock awards and time-based restricted stock unit awards granted under the Codorus Valley Equity Plans were vested in full; and (iii) all performance-based restricted stock awards and performance-based restricted stock unit awards granted under the Codorus Valley Equity Plans were vested in full. In addition, the 2007 Codorus Valley Bancorp, Inc. Restated Employee Stock Purchase Plan was terminated prior to the closing date of the Merger. Each outstanding share of Orrstown Common Stock remained outstanding and was unaffected by the Merger.

PeoplesBank operated 22 full-service branches and eight limited purpose branches in Pennsylvania and Maryland. Following the Merger, Orrstown operated 51 branches as of July 1, 2024. On August 5, 2024, Orrstown announced the Bank intends to close six of its branches, including three branches owned by the Bank, which the land and buildings were transferred to held-for-sale. These branch closures were completed in the fourth quarter of 2024. After these branch closures are complete, the Bank will have 38 full-service branches and seven limited purpose branches.

The total aggregate consideration delivered to holders of Codorus Valley common stock was 8,532,038 shares of Orrstown common stock. The issuance of shares of Orrstown common stock in connection with the Merger was registered under the Securities Act on a registration statement initially filed by Orrstown with the SEC on March 29, 2024 and declared effective on April 23, 2024 (the “Registration Statement”). The consideration transferred at the close of the transaction was $233.4 million based on the closing market price of Orrstown common stock of $27.36 on June 28, 2024.

The Merger accomplishes the Company’s objectives of providing increased market opportunities and expanding its branch network through a contiguous footprint in Central and Eastern Pennsylvania and the Greater Baltimore, Maryland area. Further, the Merger creates an expanded product suite based on the complementary nature of the products and customers of both companies and increases lending capacity, which will support growth of the existing client base and is expected to provide an opportunity to mitigate risks and increase potential returns.

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The following tables summarize the purchase price consideration paid for Codorus Valley and the fair value of the assets acquired and liabilities assumed recognized at the acquisition date.


(dollars are in thousands, except per share data)
Number of shares of Codorus Valley common stock outstanding	9,751,323
Per common share exchange ratio	0.875
Expected shares of Codorus Valley common stock to be issued	8,532,408
Fractional shares of common stock to be paid in cash	(370)
Number of shares of Orrstown common stock - as exchanged	8,532,038
Orrstown common stock price per common share - closing stock price as of June 28, 2024	$	27.36
Purchase price merger consideration for Codorus Valley	$	233,437

Under the acquisition method of accounting, the total merger consideration is allocated to the acquired tangible and intangible assets and assumed liabilities of Codorus Valley based on their estimated fair value as of the closing of the Merger. The excess of the merger consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill. The Company recorded goodwill of $51.9 million in connection with the Merger, which is not amortized for financial reporting purposes, but is subject to annual impairment testing.


	Codorus Valley Book Value		Fair Value Adjustment		Codorus Valley Fair Value
	July 1, 2024				July 1, 2024
Total purchase price consideration					$	233,437
Recognized amounts of identifiable assets acquired and liabilities assumed
Cash and cash equivalents	$	45,290	$	—	$	45,290
Restricted investments in bank stocks	1,168		—		1,168
Securities available for sale	331,032		(3,672)		327,360

Loans, net of allowance for credit losses ("ACL")	1,715,761		(72,368)		1,643,393
Premises and equipment, net	17,553		6,550		24,103
Cash surrender value of life insurance	62,817		—		62,817
Accrued interest receivable	8,138		79		8,217
Goodwill	2,301		(2,301)		—
Other intangible assets, net	—		46,260		46,260
Deferred income tax asset, net	16,969		3,190		20,159
Other assets	21,024		(218)		20,806
Total identifiable assets acquired	2,222,053		(22,480)		2,199,573
Deposits	1,948,467		(3,218)		1,945,249
Securities sold under agreements to repurchase	7,943		—		7,943
FHLB advances and other borrowings	1,195		(803)		392
Subordinated notes and trust preferred debt	41,195		(4,983)		36,212
Other liabilities	25,030		3,241		28,271
Total liabilities assumed	2,023,830		(5,763)		2,018,067
Total identifiable net assets	$	198,223	$	(16,717)	$	181,506
Goodwill					$	51,931

The following are descriptions of the valuation methodologies used to estimate the fair values of major categories of assets acquired and liabilities assumed from the Merger. The Company used independent valuation specialists to assist with the determination of fair values for certain acquired assets and assumed liabilities.

The Company acquired core deposit intangibles of $35.9 million and customer relationship intangible assets associated with wealth and brokerage businesses totaling $10.4 million from the Merger, both valued utilizing the income approach, which is based on the present value of the cash flows that can be expected to be generated in the future.

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The core deposit intangible and customer relationship intangible assets are amortized based on the sum-of-the-years digits method over the expected life of 10 years.

The Company increased the fair value of premises by $6.6 million with a corresponding decrease to goodwill based upon updated independent market-based appraisals for buildings, land and land improvements. The fair value adjustments will depreciated based on the estimated useful life of 40 years.

Pursuant to the Merger, the Company acquired operating lease assets and operating lease liabilities both with a fair value of $5.1 million based on the income approach, which considered the lease contracts current rental rates, escalation terms and expiration periods. The Company also acquired a finance lease asset and liability with a fair value of $392 thousand. At July 1, 2024, the Company recorded negative fair value adjustments of $1.1 million and $133 thousand to operating lease assets and finance lease assets, respectively, which are amortized over the remaining lease terms.

An adjustment of $3.2 million was recorded to reflect the fair value of the time deposits assumed, which was determined using a discounted cash flow approach that utilized a discount rate equal to current market interest rates for instruments with similar terms and maturities. The fair value adjustment for time deposits will be amortized over the remaining maturities.

Subordinated notes and trust preferred debt were valued using a discounted cash flow approach, which applied a discount rate based upon other issuances with comparable terms. Fair value adjustments of $2.4 million and $2.7 million were recorded for the subordinated notes and trust preferred debt, respectively, which will be amortized over their remaining maturities.

The Company evaluated and classified the acquired loans between non-PCD or PCD. The PCD loans include loans which experienced more-than-insignificant credit deterioration since origination. PCD loans included loans on nonaccrual status, past due 60 days or greater at any time since loan origination or having a risk rating of watch, special mention, substandard, doubtful or loss based on the Company's internal risk rating system. For PCD loans, an ACL is recorded on day 1 and added to the fair value of the loan for its amortized cost. At day 1, a provision for credit loss is not recorded on PCD loans. The following table presents details related to the fair value of acquired PCD loans at the acquisition date:


	Unpaid Principal Balance		PCD ACL		Non-Credit Discount		Fair Value of Acquired Loans
Commercial real estate	$	74,319	$	(1,321)	$	(5,531)	$	67,467
Acquisition and development	24,232		(2,535)		(781)		20,915
Commercial and industrial	33,454		(1,949)		(4,954)		26,551

Residential mortgage	16,720		(104)		(1,936)		14,679
Installment and other loans	117		(10)		(11)		96
	$	148,842	$	(5,920)	$	(13,213)	$	129,708

The following table presents selected pro forma information as if the Merger had occurred at January 1, 2023. The unaudited pro forma information includes the estimated impact of certain fair value adjustments and other merger-related activity. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been affected on the assumed dates. In addition, the unaudited pro forma information does not reflect management's estimate of any revenue-enhancing opportunities or anticipated cost savings as a result of the integration.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Net interest income	$	50,873	$	51,281	$	148,877	$	155,784
Net Income	20,856		17,792		56,456		56,088

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NOTE 3. INVESTMENT SECURITIES

At September 30, 2024 and December 31, 2023, all investment securities were classified as AFS. The following table summarizes amortized cost and fair value of investment securities, the corresponding amounts of gross unrealized gains and losses recognized in AOCI and the ACL at September 30, 2024 and December 31, 2023:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value
September 30, 2024
U.S. Treasury securities	$	20,047	$	—	$	1,674	$	—	$	18,373
U.S. Government Agencies	3,249		123		—		—		3,372

States and political subdivisions	220,909		301		15,110		—		206,100
GSE residential MBSs	149,806		3,378		2,823		—		150,361
GSE commercial MBSs	9,164		461		1		—		9,624
GSE residential CMOs	314,857		4,349		5,081		—		314,125

Non-agency CMOs	33,698		306		2,772		—		31,232


Asset-backed	92,009		552		1,093		—		91,468
Corporate debt	1,932		43		—		—		1,975
Other	198		—		—		—		198
Totals	$	845,869	$	9,513	$	28,554	$	—	$	826,828
December 31, 2023
U.S. Treasury securities	$	20,057	$	—	$	2,217	$	—	$	17,840
U.S. Government Agencies	3,994		157		—		—		4,151

States and political subdivisions	221,624		28		18,530		—		203,122
GSE residential MBSs	61,669		—		4,037		—		57,632
GSE commercial MBSs	4,387		356		—		—		4,743
GSE residential CMOs	79,284		18		6,200		—		73,102

Non-agency CMOs	48,162		316		3,809		—		44,669


Asset-backed	109,786		442		2,094		—		108,134

Other	126		—		—		—		126
Totals	$	549,089	$	1,317	$	36,887	$	—	$	513,519

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The following table summarizes investment securities with unrealized losses at September 30, 2024 and December 31, 2023, aggregated by major investment security type and the length of time in a continuous unrealized loss position.


	Less Than 12 Months					12 Months or More					Total
	# of Securities	Fair Value		Unrealized Losses		# of Securities	Fair Value		Unrealized Losses		# of Securities	Fair Value		Unrealized Losses
September 30, 2024
U.S. Treasury securities	—	$	—	$	—	3	$	18,373	$	1,674	3	$	18,373	$	1,674

States and political subdivisions	1	501		6		41	194,611		15,104		42	195,112		15,110
GSE residential MBSs	—	—		—		15	56,909		2,823		15	56,909		2,823
GSE commercial MBS	1	854		1		—	—		—		1	854		1
GSE residential CMOs	11	84,243		326		16	65,610		4,755		27	149,853		5,081
Non-agency CMOs	—	—		—		4	16,353		2,772		4	16,353		2,772



Asset-backed	4	12,512		46		9	45,628		1,047		13	58,140		1,093

Totals	17	$	98,110	$	379	88	$	397,484	$	28,175	105	$	495,594	$	28,554
December 31, 2023
U.S. Treasury securities	—	$	—	$	—	3	$	17,840	$	2,217	3	$	17,840	$	2,217


States and political subdivisions	4	2,419		53		40	199,933		18,477		44	202,352		18,530
GSE residential MBSs	—	—		—		15	57,632		4,037		15	57,632		4,037

GSE residential CMOs	4	12,710		186		14	56,765		6,014		18	69,475		6,200
Non-agency CMOs	3	11,531		83		4	16,334		3,726		7	27,865		3,809



Asset-backed	1	865		4		15	74,407		2,090		16	75,272		2,094

Totals	12	$	27,525	$	326	91	$	422,911	$	36,561	103	$	450,436	$	36,887

On a quarterly basis, the Company conducts an impairment evaluation on AFS securities to determine whether the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security before recovery. If these situations apply, the guidance requires the Company to reduce the security's amortized cost basis down to its fair value through earnings. The Company also evaluates the unrealized losses on AFS securities to determine if a security's decline in fair value below its amortized cost basis is due to credit factors. The evaluation is based upon factors such as the creditworthiness of the underlying issuers, performance of the underlying collateral, if applicable, and the level of credit support in the security structure. Management also evaluates other factors and circumstances that may be indicative of a decline in the fair value of the security due to a credit factor. This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost and near-term prospects of the issuer. If this assessment indicates that a credit loss exists, the present value of the expected cash flows of the security is compared to the amortized cost basis of the security. Under the CECL standard, if the present value of the cash flows expected to be collected is less than the amortized cost, an ACL is recorded for the credit loss, which is limited by the amount that the fair value is less than the amortized cost basis. Any additional amount of loss would be due to non-credit factors and is recorded in AOCI, net of taxes. If a credit loss is recognized in earnings, subsequent improvements to the expectation of collectability will be recognized through the ACL. If the fair value of the security increases above its amortized cost, the unrealized gain will be recorded in AOCI, net of taxes, on the unaudited condensed consolidated balance sheets.

The Company did not record an ACL on the AFS securities at September 30, 2024 and December 31, 2023. As of these periods, the Company considers the unrealized losses on the AFS securities to be related to fluctuations in market conditions, primarily interest rates, and not reflective of deterioration in credit. In addition, the Company maintains that it has the intent and ability to hold these AFS securities until the amortized cost is recovered and it is more likely than not that any of AFS securities in an unrealized loss position would not be required to be sold. At September 30, 2024 and December 31, 2023, unrealized losses were due to market uncertainty resulting from inflation and higher interest rates from the time of the security purchase.

U.S. Treasury Securities. The unrealized losses presented in the table above have been caused by an increase in rates from the time these securities were purchased. Management considers the full faith and credit of the U.S. government in determining whether declines in fair value are due to credit factors.

States and Political Subdivisions. The unrealized losses presented in the table above have been caused by a rise in interest rates from the time these securities were purchased. Management evaluates the financial performance of the issuers, including the investment rating, the state of the issuer of the security and other support in determining whether declines in fair value are due to credit factors.

GSE Residential CMOs, GSE Residential MBS and GSE Commercial MBS. The unrealized losses presented in the table above have been caused by a widening of spreads and a rise in interest rates from the time these securities were purchased. The contractual terms of these securities do not permit the issuer to settle the securities at a price less than its par value basis.

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Non-Agency CMOs. The unrealized losses presented in the table above were caused by a widening of spreads and a rise in interest rates from the time the securities were purchased. Management considers the investment rating and other credit support in its evaluation, including delinquencies and credit enhancements, in determining whether declines in fair value are due to credit factors.

Asset-backed. The unrealized losses presented in the table above were caused by a widening of spreads and a rise in interest rates from the time the securities were purchased. Management considers the investment rating and other credit support in its evaluation, including delinquencies and credit enhancements, in determining whether declines in fair value are due to credit factors.

The Company does not intend to sell the aforementioned investment 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. In addition, the unrealized losses are not credit related. Therefore, the Company has concluded that the unrealized losses for these securities do not require an ACL at September 30, 2024.

The following table summarizes amortized cost and fair value of investment securities by contractual maturity at September 30, 2024. Expected maturities may differ from contractual maturities if issuers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.


	Amortized Cost		Fair Value
Due in one year or less	$	—	$	—
Due after one year through five years	42,426		39,859
Due after five years through ten years	52,115		48,841
Due after ten years	151,794		141,318
CMOs and MBSs	507,525		505,342
Asset-backed	92,009		91,468

Totals	$	845,869	$	826,828

The following table summarizes proceeds from sales of investment securities and gross gains and gross losses for the three and nine months ended September 30, 2024 and 2023:


	Three months ended September 30,				Nine months ended September 30,
	2024		2023		2024		2023
Proceeds from sale of investment securities	$	162,669	$	19,900	$	162,669	$	19,900
Gross gains	271		2		271		2
Gross losses	—		—		17		10

During the three and nine months ended September 30, 2024, the Company recorded net investment security gains of $271 thousand and $254 thousand, respectively, from a security redemption during the third quarter of 2024 resulting in a gain of $181 thousand and mark-to-market activity on an equity security compared to net gains of $2 thousand and net losses of $8 thousand from mark-to-market activity on an equity security for the three and nine months ended September 30, 2023. During the three and nine months ended September 30, 2024, the Company sold investment securities with a principal balance of $162.7 million for no gain or loss. During the three and nine months ended September 30, 2023, the Company sold three U.S. Treasury securities with a principal balance of $19.9 million for a nominal gain. Investment securities with a fair value of $735.5 million and $439.7 million at September 30, 2024 and December 31, 2023, respectively, were pledged to secure public funds and for other purposes as required or permitted by law.

NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES

The Company’s loan portfolio is grouped into segments, which are further broken down into classes to allow management to monitor the performance by the borrower and to monitor the yield on the portfolio. The risks associated with lending activities differ among the various loan classes and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans, and general economic conditions. All of these factors may adversely impact both the borrower’s ability to repay its loans and the value of its associated collateral.

The Company has various types of commercial real estate loans, which have differing levels of credit risk. Owner-occupied commercial real estate loans are generally dependent upon the successful operation of the borrower’s business, with the cash flows generated from the business being the primary source of repayment of the loan. If the business suffers a downturn in sales or profitability, the borrower’s ability to repay the loan could be in jeopardy.

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Non-owner occupied and multi-family commercial real estate loans and non-owner occupied residential loans present a different credit risk to the Company than owner-occupied commercial real estate loans, as the repayment of the loan is dependent upon the borrower’s ability to generate a sufficient level of occupancy to produce rental income that exceeds debt service requirements and operating expenses. Lower occupancy or lease rates may result in a reduction in cash flows, which hinders the ability of the borrower to meet debt service requirements and may result in lower collateral values. The Company generally recognizes that greater risk is inherent in these credit relationships compared to owner-occupied loans mentioned above.

Acquisition and development loans consist of 1-4 family residential construction and commercial and land development loans. The risk of loss on these loans is largely dependent on the Company’s ability to assess the property’s value at the completion of the project, which should exceed the property’s construction costs. During the construction phase, a number of factors could potentially negatively impact the collateral value, including cost overruns, delays in completing the project, competition, and real estate market conditions, which may change based on the supply of similar properties in the area. In the event the collateral value at the completion of the project is not sufficient to cover the outstanding loan balance, the Company must rely upon other repayment sources, if any, including the guarantors of the project or other collateral securing the loan.

Commercial and industrial loans include advances to businesses for general commercial purposes and include permanent and short-term working capital, machinery and equipment financing, and may be either in the form of lines of credit or term loans. Although commercial and industrial loans may be unsecured to our highest-rated borrowers, the majority of these loans are secured by the borrower’s accounts receivable, inventory and machinery and equipment. In a significant number of these loans, the collateral also includes the business real estate or the business owner’s personal real estate or assets. Commercial and industrial loans present credit exposure to the Company, as they are more susceptible to risk of loss during a downturn in the economy as borrowers may have greater difficulty in meeting their debt service requirements and the value of the collateral may decline. The Company attempts to mitigate this risk through its underwriting standards, including evaluating the creditworthiness of the borrower and, to the extent available, credit ratings on the business. Additionally, monitoring of the loans through annual renewals and meetings with the borrowers is typical. However, these procedures cannot eliminate the risk of loss associated with commercial and industrial lending.

Municipal loans consist of extensions of credit to municipalities and school districts within the Company’s market area. These loans generally present a lower risk than commercial and industrial loans, as they are generally secured by the municipality’s full taxing authority, by revenue obligations, or by its ability to raise assessments on its clients for a specific utility.

The Company originates loans to its retail clients, including fixed-rate and adjustable first lien mortgage loans, with the underlying 1-4 family owner occupied residential property securing the loan. The Company’s risk exposure is minimized in these types of loans through the evaluation of the creditworthiness of the borrower, including credit scores and debt-to-income ratios, and underwriting standards, which limit the loan-to-value ratio to generally no more than 80% upon loan origination, unless the borrower obtains private mortgage insurance.

Home equity loans, including term loans and lines of credit, present a slightly higher risk to the Company than 1-4 family first liens, as these loans can be first or second liens on 1-4 family owner occupied residential property, but can have loan-to-value ratios of no greater than 85% of the value of the real estate taken as collateral. The creditworthiness of the borrower is also considered, including credit scores and debt-to-income ratios.

Installment and other loans’ credit risk is mitigated through prudent underwriting standards, including evaluation of the creditworthiness of the borrower through credit scores and debt-to-income ratios and, if secured, the collateral value of the assets. These loans can be unsecured or secured by assets the value of which may depreciate quickly or may fluctuate and may present a greater risk to the Company than 1-4 family residential loans.

Table of Contents

The following table presents the loan portfolio by segment and class, excluding residential LHFS, at September 30, 2024 and December 31, 2023:


	September 30, 2024		December 31, 2023
Commercial real estate:
Owner occupied	$	622,726	$	373,757
Non-owner occupied	1,164,501		694,638
Multi-family	276,296		150,675
Non-owner occupied residential	190,786		95,040
Acquisition and development:
1-4 family residential construction	56,383		24,516
Commercial and land development	262,317		115,249
Commercial and industrial	601,469		367,085
Municipal	27,960		9,812
Residential mortgage:
First lien	451,195		266,239
Home equity - term	6,508		5,078
Home equity - lines of credit	303,165		186,450
Installment and other loans	18,131		9,774
Total loans	$	3,981,437	$	2,298,313

In order to monitor ongoing risk associated with its loan portfolio and specific loans within the segments, management uses an internal grading system. The first several rating categories, representing the lowest risk to the Bank, are combined and given a “Pass” rating. Management generally follows regulatory definitions in assigning criticized ratings to loans, including "Special Mention," "Substandard," "Doubtful" or "Loss." The Special Mention category includes loans that have potential weaknesses that may, if not monitored or corrected, weaken the asset or inadequately protect the Bank's position at some future date. These assets pose elevated risk, but their weakness does not yet justify a more severe, or classified rating. Substandard loans are classified as they have a well-defined weakness, or weaknesses that jeopardize liquidation of the debt. These loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Substandard loans include loans that management may determine to be either individually evaluated, referred to as "Substandard - Individually Evaluated Loan," or collectively evaluated, referred to as "Substandard Non-Individually Evaluated Loan." A Doubtful loan has a high probability of total or substantial loss, but because of specific pending events that may strengthen the asset, its classification as Loss is deferred. Loss loans are considered uncollectible, as the borrowers are often in bankruptcy, have suspended debt repayments, or have ceased business operations. Once a loan is classified as Loss, there is little prospect of collecting the loan’s principal or interest and it is charged off.

The Company has a loan review policy and program, which is designed to identify and monitor risk in the lending function. The Management ERM Committee, comprised of executive officers, senior officers and loan department personnel, is charged with the oversight of overall credit quality and risk exposure of the Company's loan portfolio. This includes the monitoring of the lending activities of all Company personnel with respect to underwriting and processing new loans and the timely follow-up and corrective action for loans showing signs of deterioration in quality. A loan review program provides the Company with an independent review of the commercial loan portfolio on an ongoing basis. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as extended delinquencies, bankruptcy, repossession or death of the borrower occurs, which heightens awareness as to a possible credit event.

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

Table of Contents

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 and December 31, 2023. For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan and payment activity, which residential mortgage and installment and other consumer loans are presented below based on payment performance: performing or nonperforming.


	Term Loans Amortized Cost Basis by Origination Year
As of September 30, 2024	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Basis		Revolving Loans Converted to Term		Total
Commercial Real Estate:
Owner-occupied:
Risk rating
Pass	$	30,447	$	85,352	$	129,668	$	114,761	$	32,532	$	160,478	$	6,446	$	283	$	559,967
Special mention	—		2,688		313		1,348		1,831		6,670		165		—		13,015
Substandard - Non-IEL	110		2,077		17,653		7,597		8,435		8,641		94		—		44,607
Substandard - IEL	—		192		—		896		932		3,117		—		—		5,137
Total owner-occupied loans	$	30,557	$	90,309	$	147,634	$	124,602	$	43,730	$	178,906	$	6,705	$	283	$	622,726
Current period gross charge offs - owner-occupied	$	—	$	—	$	13	$	313	$	—	$	12	$	—	$	—	$	338
Non-owner occupied:
Risk rating
Pass	$	76,044	$	137,520	$	194,349	$	328,128	$	130,201	$	262,980	$	778	$	398	$	1,130,398
Special mention	—		10,108		2,981		337		8,858		3,790		—		—		26,074
Substandard - Non-IEL	—		—		1,156		—		—		4,594		—		859		6,609
Substandard - IEL	—		—		—		—		—		1,420		—		—		1,420
Total non-owner occupied loans	$	76,044	$	147,628	$	198,486	$	328,465	$	139,059	$	272,784	$	778	$	1,257	$	1,164,501
Current period gross charge offs - non-owner occupied	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Multi-family:
Risk rating
Pass	$	6,916	$	8,438	$	106,885	$	59,107	$	31,234	$	61,297	$	75	$	—	$	273,952
Special mention	—		—		1,107		—		—		—		—		—		1,107
Substandard - Non-IEL	—		—		—		—		—		237		—		—		237
Substandard - IEL	—		—		—		—		—		1,000		—		—		1,000
Total multi-family loans	$	6,916	$	8,438	$	107,992	$	59,107	$	31,234	$	62,534	$	75	$	—	$	276,296
Current period gross charge offs - multi-family	$	—	$	—	$	—	$	—	$	—	$	7	$	—	$	—	$	7
Non-owner occupied residential:
Risk rating
Pass	$	8,894	$	23,655	$	31,532	$	30,155	$	19,933	$	73,281	$	439	$	—	$	187,889
Special mention	—		—		—		147		43		526		—		—		716
Substandard - Non-IEL	—		—		52		134		—		1,431		—		—		1,617
Substandard - IEL	—		—		391		33		—		140		—		—		564
Total non-owner occupied residential loans	$	8,894	$	23,655	$	31,975	$	30,469	$	19,976	$	75,378	$	439	$	—	$	190,786
Current period gross charge offs - non-owner occupied residential	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
continued

Table of Contents


	Term Loans Amortized Cost Basis by Origination Year
As of September 30, 2024	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Basis		Revolving Loans Converted to Term		Total
Acquisition and development:
1-4 family residential construction:
Risk rating
Pass	$	32,828	$	14,652	$	5,175	$	1,152	$	940	$	946	$	—	$	242	$	55,935
Special mention	74		222		—		—		—		—		—		—		296
Substandard - Non-IEL	—		—		—		—		—		—		—		—		—
Substandard - IEL	—		—		—		152		—		—		—		—		152
Total 1-4 family residential construction loans	$	32,902	$	14,874	$	5,175	$	1,304	$	940	$	946	$	—	$	242	$	56,383
Current period gross charge offs - 1-4 family residential construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial and land development:
Risk rating
Pass	$	44,312	$	71,243	$	70,096	$	16,594	$	19,648	$	7,079	$	4,964	$	8,837	$	242,773
Special mention	2,306		2,382		4,372		994		2,123		3,437		—		—		15,614
Substandard - Non-IEL	—		275		—		—		—		—		—		—		275
Substandard - IEL	—		—		3,285		370		—		—		—		—		3,655
Total commercial and land development loans	$	46,618	$	73,900	$	77,753	$	17,958	$	21,771	$	10,516	$	4,964	$	8,837	$	262,317
Current period gross charge offs - commercial and land development	$	—	$	23	$	—	$	—	$	—	$	—	$	—	$	—	$	23
Commercial and Industrial:
Risk rating
Pass	$	71,366	$	93,138	$	87,249	$	80,565	$	28,924	$	85,851	$	105,250	$	4,138	$	556,481
Special mention	446		2,153		2,640		245		1,379		1,358		3,041		—		11,262
Substandard - Non-IEL	—		1,382		2,868		7,656		—		3,212		9,548		—		24,666
Substandard - IEL	419		3,486		190		622		2,965		1,364		14		—		9,060
Total commercial and industrial loans	$	72,231	$	100,159	$	92,947	$	89,088	$	33,268	$	91,785	$	117,853	$	4,138	$	601,469
Current period gross charge offs - commercial and industrial	$	—	$	—	$	202	$	11	$	—	$	6	$	—	$	—	$	219
Municipal:
Risk rating
Pass	$	227			$	10,388	$	3,124	$	293	$	13,928	$	—	$	—	$	27,960
Total municipal loans	$	227	$	—	$	10,388	$	3,124	$	293	$	13,928	$	—	$	—	$	27,960
Current period gross charge offs - municipal	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential mortgage:
First lien:
Payment performance
Performing	$	50,716	$	98,953	$	105,266	$	53,549	$	25,783	$	111,910	$	—	$	626	$	446,803
Nonperforming	—		312		244		487		116		3,233		—		—		4,392
Total first lien loans	$	50,716	$	99,265	$	105,510	$	54,036	$	25,899	$	115,143	$	—	$	626	$	451,195
Current period gross charge offs - first lien	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
continued

Table of Contents


	Term Loans Amortized Cost Basis by Origination Year
As of September 30, 2024	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Basis		Revolving Loans Converted to Term		Total
Home equity - term:
Payment performance
Performing	$	621	$	867	$	1,075	$	209	$	478	$	3,221	$	—	$	—	$	6,471
Nonperforming	—		—		36		—		—		1		—		—		37
Total home equity - term loans	$	621	$	867	$	1,111	$	209	$	478	$	3,222	$	—	$	—	$	6,508
Current period gross charge offs - home equity - term	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Home equity - lines of credit:
Payment performance
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	225,526	$	75,987	$	301,513
Nonperforming	—		—		—		—		—		—		1,024		628		1,652
Total residential real estate - home equity - lines of credit loans	$	—	$	—	$	—	$	—	$	—	$	—	$	226,550	$	76,615	$	303,165
Current period gross charge offs - home equity - lines of credit	$	—	$	—	$	—	$	—	$	—	$	—	$	50	$	—	$	50
Installment and other loans:
Payment performance
Performing	$	2,080	$	3,595	$	2,816	$	2,042	$	455	$	664	$	6,436	$	17	$	18,105
Nonperforming	9		3		—		—		—		14		—		—		26
Total Installment and other loans	$	2,089	$	3,598	$	2,816	$	2,042	$	455	$	678	$	6,436	$	17	$	18,131
Current period gross charge offs - installment and other	$	115	$	12	$	—	$	32	$	—	$	33	$	14	$	—	$	206


	Term Loans Amortized Cost Basis by Origination Year
As of December 31, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Basis		Revolving Loans Converted to Term		Total
Commercial Real Estate:
Owner-occupied:
Risk rating
Pass	$	50,829	$	103,192	$	69,888	$	21,232	$	21,251	$	62,634	$	4,941	$	—	$	333,967
Special mention	—		—		2,517		1,176		—		1,314		—		—		5,007
Substandard - Non-IEL	—		9,923		—		6,075		—		2,687		312		—		18,997
Substandard - IEL	—		—		—		13,366		—		2,420		—		—		15,786
Total owner-occupied loans	$	50,829	$	113,115	$	72,405	$	41,849	$	21,251	$	69,055	$	5,253	$	—	$	373,757
Current period gross charge offs - owner-occupied	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Non-owner occupied:
Risk rating
Pass	$	82,879	$	102,212	$	235,031	$	83,652	$	63,176	$	120,696	$	509	$	—	$	688,155
Special mention	—		—		—		524		—		2,112		—		—		2,636
Substandard - Non-IEL	—		—		—		—		—		2,739		—		868		3,607
Substandard - IEL	—		—		—		—		—		240		—		—		240
Total non-owner occupied loans	$	82,879	$	102,212	$	235,031	$	84,176	$	63,176	$	125,787	$	509	$	868	$	694,638
Current period gross charge offs - non-owner occupied	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
continued

Table of Contents


	Term Loans Amortized Cost Basis by Origination Year
As of December 31, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Basis		Revolving Loans Converted to Term		Total
Multi-family:
Risk rating
Pass	$	2,701	$	61,805	$	28,541	$	12,694	$	7,437	$	33,895	$	117	$	—	$	147,190
Special mention	—		—		—		—		244		2,008		—		—		2,252
Substandard - Non-IEL	—		—		—		—		—		—		—		—		—
Substandard - IEL	—		—		—		—		—		1,233		—		—		1,233
Total multi-family loans	$	2,701	$	61,805	$	28,541	$	12,694	$	7,681	$	37,136	$	117	$	—	$	150,675
Current period gross charge offs - multi-family	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Non-owner occupied residential:
Risk rating
Pass	$	10,075	$	20,473	$	16,947	$	7,974	$	6,444	$	28,319	$	1,130	$	—	$	91,362
Special mention	—		—		—		—		—		731		—		—		731
Substandard - Non-IEL	—		—		—		—		—		375		—		—		375
Substandard - IEL	2		—		192		1,461		—		917		—		—		2,572
Total non-owner occupied residential loans	$	10,077	$	20,473	$	17,139	$	9,435	$	6,444	$	30,342	$	1,130	$	—	$	95,040
Current period gross charge offs - non-owner occupied residential	$	—	$	—	$	—	$	—	$	—	$	12	$	—	$	—	$	12
Acquisition and development:
1-4 family residential construction:
Risk rating
Pass	$	18,820	$	5,400	$	—	$	—	$	—	$	—	$	—	$	—	$	24,220
Special mention	222		—		74		—		—		—		—		—		296
Substandard - Non-IEL	—		—		—		—		—		—		—		—		—
Substandard - IEL	—		—		—		—		—		—		—		—		—
Total 1-4 family residential construction loans	$	19,042	$	5,400	$	74	$	—	$	—	$	—	$	—	$	—	$	24,516
Current period gross charge offs - 1-4 family residential construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial and land development:
Risk rating
Pass	$	28,829	$	48,453	$	9,847	$	9,927	$	110	$	1,774	$	6,574	$	6,936	$	112,450
Special mention	—		—		—		1,001		—		437		—		—		1,438
Substandard - Non-IEL	—		—		—		—		—		—		—		—		—
Substandard - IEL	—		—		—		—		—		1,361		—		—		1,361
Total commercial and land development loans	$	28,829	$	48,453	$	9,847	$	10,928	$	110	$	3,572	$	6,574	$	6,936	$	115,249
Current period gross charge offs - commercial and land development	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
continued

Table of Contents


	Term Loans Amortized Cost Basis by Origination Year
As of December 31, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Basis		Revolving Loans Converted to Term		Total
Commercial and Industrial:
Risk rating
Pass	$	67,735	$	69,670	$	67,117	$	24,580	$	10,753	$	20,775	$	86,475	$	1,522	$	348,627
Special mention	—		4,251		4,364		11		552		356		2,258		—		11,792
Substandard - Non-IEL	—		—		4,682		—		5		225		1,082		—		5,994
Substandard - IEL	—		69		—		7		—		455		141		—		672
Total commercial and industrial loans	$	67,735	$	73,990	$	76,163	$	24,598	$	11,310	$	21,811	$	89,956	$	1,522	$	367,085
Current period gross charge offs - commercial and industrial	$	—	$	161	$	106	$	—	$	—	$	8	$	473	$	—	$	748
Municipal:
Risk rating
Pass	$	—	$	—	$	3,403	$	—	$	—	$	6,409	$	—	$	—	$	9,812
Total municipal loans	$	—	$	—	$	3,403	$	—	$	—	$	6,409	$	—	$	—	$	9,812
Current period gross charge offs - municipal	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential mortgage:
First lien:
Payment performance
Performing	$	43,641	$	71,311	$	34,704	$	8,056	$	7,465	$	97,943	$	—	$	638	$	263,758
Nonperforming	—		—		—		—		120		2,361		—		—		2,481
Total first lien loans	$	43,641	$	71,311	$	34,704	$	8,056	$	7,585	$	100,304	$	—	$	638	$	266,239
Current period gross charge offs - first lien	$	—	$	—	$	—	$	—	$	—	$	58	$	—	$	—	$	58
Home equity - term:
Payment performance
Performing	$	607	$	732	$	90	$	426	$	115	$	3,105	$	—	$	—	$	5,075
Nonperforming	—		—		—		—		—		3		—		—		3
Total home equity - term loans	$	607	$	732	$	90	$	426	$	115	$	3,108	$	—	$	—	$	5,078
Current period gross charge offs - home equity - term	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Home equity - lines of credit:
Payment performance
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	107,967	$	77,171	$	185,138
Nonperforming	—		—		—		—		—		—		1,296		16		1,312
Total residential real estate - home equity - lines of credit loans	$	—	$	—	$	—	$	—	$	—	$	—	$	109,263	$	77,187	$	186,450
Current period gross charge offs - home equity - lines of credit	$	—	$	—	$	—	$	—	$	—	$	—	$	40	$	—	$	40
Installment and other loans:
Payment performance
Performing	$	758	$	413	$	332	$	106	$	670	$	947	$	6,500	$	—	$	9,726
Nonperforming	3		—		—		—		33		12		—		—		48
Total Installment and other loans	$	761	$	413	$	332	$	106	$	703	$	959	$	6,500	$	—	$	9,774
Current period gross charge offs - installment and other	$	181	$	24	$	—	$	—	$	4	$	10	$	28	$	—	$	247

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For commercial real estate, acquisition and development, commercial and industrial and municipal segments, a loan is evaluated individually when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining expected credit losses, and whether the loan will be individually evaluated, include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not individually evaluated. Generally, loans that are more than 90 days past due will be individually evaluated for a specific reserve. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed to determine if the loan should be placed on nonaccrual status. Nonaccrual loans are, by definition, deemed to be individually evaluated under CECL. A specific reserve allocation for individually evaluated loans is measured on a loan-by-loan basis for commercial and construction loans by either the present value of the expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. A loan is collateral dependent if the repayment of the loan is expected to be provided solely by the underlying collateral. For loans that are experiencing financial difficulty for extended periods of time, periodic updates on fair values are obtained, which may include updated appraisals. Updated fair values are incorporated into the analysis in the next reporting period.

Loan charge-offs, which may include partial charge-offs, are taken on an individually evaluated loan that is collateral dependent if the carrying balance of the loan exceeds the appraised value of the collateral, the loan has been placed on nonaccrual status or identified as uncollectible, and it is deemed to be a confirmed loss. Typically, loans with a charge-off or partial charge-off will continue to be individually evaluated. Generally, an individually evaluated loan with a partial charge-off may continue to have a specific reserve on it after the partial charge-off, if factors warrant.

At September 30, 2024 and December 31, 2023, the Company’s individually evaluated loans were measured based on the estimated fair value of the collateral securing the loan, except for purchased auto loans on nonaccrual status and accruing loans accounted for as TDRs prior to the adoption of ASU 2022-02. For real estate loans, collateral generally consists of commercial or residential real estate, but in the case of commercial and industrial loans, it could also consist of accounts receivable, inventory, equipment or other business assets. Commercial and industrial loans may also have real estate collateral.

Updated appraisals are generally required every 18 months for classified commercial loans, secured by commercial real estate, in excess of $250 thousand. The “as is" value provided in the appraisal is often used as the fair value of the collateral in determining impairment, unless circumstances, such as subsequent improvements, approvals, or other circumstances, dictate that another value than that provided by the appraiser is more appropriate.

Generally, commercial loans secured by real estate that are evaluated individually are measured at fair value using certified real estate appraisals that had been completed within the last 18 months. Appraised values are discounted for estimated costs to sell the property and other selling considerations to arrive at the property’s fair value. In those situations in which it is determined an updated appraisal is not required for loans individually evaluated for credit expected losses, fair values are based on either an existing appraisal or a DCF analysis as determined by management. The approaches are discussed below:

•Existing appraisal – if the existing appraisal provides a strong loan-to-value ratio (generally 70% or lower) and, after consideration of market conditions and knowledge of the property and area, it is determined by the Credit Administration staff that there has not been a significant deterioration in the collateral value, the existing certified appraised value may be used. Discounts to the appraised value, as deemed appropriate for selling costs, are factored into the fair value.

•Discounted cash flows – in limited cases, DCF may be used on projects in which the collateral is liquidated to reduce the borrowings outstanding and is used to validate collateral values derived from other approaches.

Collateral on loans evaluated individually is not limited to real estate, and may consist of accounts receivable, inventory, equipment or other business assets. Estimated fair values are determined based on borrowers’ financial statements, inventory ledgers, accounts receivable aging or appraisals from individuals with knowledge in the business. Stated balances are generally discounted for the age of the financial information or the quality of the assets. In determining fair value, liquidation discounts are applied to this collateral based on existing loan evaluation policies.

The Company distinguishes substandard loans for both loans individually and collectively evaluated, as it places less emphasis on a loan’s classification, and increased reliance on whether the loan was performing in accordance with the contractual terms. A substandard classification does not automatically meet the definition of an individually evaluated loan. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual extensions of credit classified as substandard. As a result, the Company’s methodology includes an evaluation of certain accruing commercial real estate, acquisition and development, commercial and industrial and municipal loans rated substandard to be collectively evaluated for credit expected losses.

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Although the Company believes these loans meet the definition of substandard, they are generally performing and management has concluded that it is likely the Company will be able to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement.

The following table presents the amortized cost basis of nonaccrual loans, according to loan class, with and without reserves on individually evaluated loans as of September 30, 2024 and December 31, 2023. The Company did not recognize interest income on nonaccrual loans during the three and nine months ended September 30, 2024 and 2023. During the nine months ended September 30, 2024, the Company recorded interest income previously applied to principal of $1.6 million from the payoff of a commercial real estate loan, which totaled $13.4 million at December 31, 2023.


	September 30, 2024								December 31, 2023
	Nonaccrual loans with a related ACL		Nonaccrual loans with no related ACL		Total nonaccrual loans		Loans Past Due 90+ Accruing		Nonaccrual loans with a related ACL		Nonaccrual loans with no related ACL		Total nonaccrual loans		Loans Past Due 90+ Accruing
Commercial real estate:
Owner-occupied	$	232	$	4,905	$	5,137	$	252	$	—	$	15,786	$	15,786	$	—
Non-owner occupied	—		1,420		1,420		—		—		240		240		—
Multi-family	1,000		—		1,000		—		—		1,233		1,233		—
Non-owner occupied residential	—		564		564		—		—		2,572		2,572		—
Acquisition and development:
1-4 family residential construction	—		152		152		—		—		—		—		—
Commercial and land development	3,655		—		3,655		—		—		1,361		1,361		—
Commercial and industrial	2,455		6,605		9,060		—		68		604		672		—

Residential mortgage:
First lien	312		3,912		4,224		63		—		2,309		2,309		66
Home equity – term	37		—		37		22		—		3		3		—
Home equity – lines of credit	—		1,652		1,652		—		—		1,312		1,312		—
Installment and other loans	15		11		26		—		3		36		39		—
Total	$	7,706	$	19,221	$	26,927	$	337	$	71	$	25,456	$	25,527	$	66

A loan is considered to be collateral-dependent when the borrower is experiencing financial difficulty and the repayment is expected to be provided substantially through the operation or sale of collateral. At September 30, 2024 and December 31, 2023, substantially all individually evaluated loans were collateral-dependent and consisted primarily of commercial real estate, acquisition and development and residential mortgage loans, which were primarily secured by commercial or residential real estate.

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The following table presents the amortized cost basis of collateral-dependent loans by class as of September 30, 2024 and December 31, 2023:


	Type of Collateral
September 30, 2024	Business Assets		Commercial Real Estate		Equipment		Land		Residential Real Estate		Other		Total
Commercial real estate:
Owner occupied	$	—	$	5,137	$	—	$	—	$	—	$	—	$	5,137
Non-owner occupied	—		1,420		—		—		—		—		1,420
Multi-family	—		1,000		—		—		—		—		1,000
Non-owner occupied residential	—		564		—		—		—		—		564
Acquisition and development:
1-4 family residential construction	—		—		—		—		152		—		152
Commercial and land development	—		3,655		—		—		—		—		3,655
Commercial and industrial	4,270		—		4,114		679		—		—		9,063

Residential mortgage:
First lien	—		—		—		—		4,152		—		4,152
Home equity - term	—		—		—		—		37		—		37
Home equity - lines of credit	—		—		—		—		1,652		—		1,652
Installment and other loans	—		—		3		—		—		9		12
Total	$	4,270	$	11,776	$	4,117	$	679	$	5,993	$	9	$	26,844
December 31, 2023
Commercial real estate:
Owner occupied	$	—	$	15,786	$	—	$	—	$	—	$	—	$	15,786
Non-owner occupied	—		240		—		—		—		—		240
Multi-family	—		1,233		—		—		—		—		1,233
Non-owner occupied residential	—		2,572		—		—		—		—		2,572
Acquisition and development:

Commercial and land development	—		—		—		1,361		—		—		1,361
Commercial and industrial	2		76		594		—		—		—		672

Residential mortgage:
First lien	—		—		—		—		2,231		—		2,231
Home equity - term	—		—		—		—		3		—		3
Home equity - lines of credit	—		—		—		—		1,312		—		1,312
Installment and other loans	—		—		18		—		—		—		18
Total	$	2	$	19,907	$	612	$	1,361	$	3,546	$	—	$	25,428

ASU 2022-02 requires that the Company evaluate, based on the accounting for loan modifications, whether the borrower is experiencing financial difficulty and the modification results in a more-than-insignificant direct change in the contractual cash flows and represents a new loan or a continuation of an existing loan. This standard requires all loan modifications to be accounted for under the general loan modification guidance in ASC 310-20, Receivables – Nonrefundable Fees and Other Costs.

The Company may modify loans to borrowers experiencing financial difficulty by providing principal forgiveness, term extension, interest rate reduction or an other-than-insignificant payment delay. When principal forgiveness is provided, the amount of forgiveness is charged off against the ACL. The Company may also provide multiple types of modifications on an individual loan. During the nine months ended September 30, 2024, the Company extended modifications to three borrowers experiencing financial difficulty that had a more-than-insignificant direct change in the contractual cash flows of the loan. In addition, the Company acquired three FDM loans from the Merger, which were modified previously during 2024. The Company did not extend modifications to borrowers experiencing financial difficulty that had a more-than-insignificant direct change in the contractual cash flows of the loan during the nine months ended September 30, 2023. For loans previously modified to borrowers experiencing financial difficulty, there was a payoff of a loan within the Acquisition and Development segment totaling $1.3 million during the nine months ended September 30, 2024.

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In addition, there were no payment defaults in the subsequent twelve months and the Company has not committed to lend additional amounts to those borrowers.

The following tables presents the amortized cost of loans at September 30, 2024 that were both experiencing financial difficulty and modified during the three and nine months ended September 30, 2024, by loan class and by type of modification. The percentage of the amortized cost of loans that were modified to borrowers experiencing difficulty as compared to the amortized cost of loan class is also presented below. The Company has not committed to lend additional amounts to the borrowers included in the table below.


Three Months Ended September 30, 2024	Principal Forgiveness		Payment Delay		Term Extension		Interest Rate Reduction		Combination Term Extension and Principal Forgiveness		Combination Term Extension and Interest Rate Reductions		Total Class of Financing Receivable
Commercial real estate:
Owner-occupied	$	—	$	—	$	567	$	2,452	$	—	$	—	0.48	%






Commercial and industrial	—		—		—		2,080		—		—		0.35	%






Total:	—		—		567		4,532		—		—

Nine Months Ended September 30, 2024
Commercial real estate:
Owner-occupied	—		—		567		2,452		—		—		0.48	%



Acquisition and development:

Commercial and land development	—		—		4,404		—		—		—		1.68	%
Commercial and industrial	—		—		73		2,080		—		—		0.36	%






Total:	—		—		5,044		4,532		—		—

The Company monitors the performance of the modified loans to borrowers experiencing financial difficulty to determine the effectiveness of its modification efforts. The following table presents the performance of the loans modified during the nine months ended September 30, 2024, which includes loans that remain on nonaccrual status.


September 30, 2024	Current		30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total		Non-Accrual
Commercial real estate:
Owner-occupied	$	2,981	$	—	$	38	$	—	$	3,019	$	567



Acquisition and development:

Commercial and land development	4,405		—		—		—		4,405		—
Commercial and industrial	2,152		—		—		—		2,152		—






Total:	9,538		—		38		—		9,576		567

The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2024.


September 30, 2024	Principal Forgiveness		Weighted Average Interest Rate Reduction		Weighted Average Term Extension (in years)
Commercial real estate:
Owner-occupied	$	—	4.0	%	1.9



Acquisition and development:

Commercial and land development	—		—	%	1.0
Commercial and industrial	—		4.0	%	4.0

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Management further monitors the performance and credit quality of the loan portfolio by analyzing the length of time a portfolio is past due by aggregating loans based on its delinquencies. The following table presents the classes of the loan portfolio summarized by aging categories at September 30, 2024 and December 31, 2023:


	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Past Due		Loans Not Past Due		Total Loans
September 30, 2024
Commercial real estate:
Owner occupied	$	17	$	22	$	1,529	$	1,568	$	621,158	$	622,726
Non-owner occupied	1,057		—		—		1,057		1,163,444		1,164,501
Multi-family	237		—		—		237		276,059		276,296
Non-owner occupied residential	213		—		68		281		190,505		190,786
Acquisition and development:
1-4 family residential construction	—		—		152		152		56,231		56,383
Commercial and land development	—		3,556		649		4,205		258,112		262,317
Commercial and industrial	88		4,091		1,029		5,208		596,261		601,469
Municipal	—		—		—		—		27,960		27,960
Residential mortgage:
First lien	842		1,704		1,484		4,030		447,165		451,195
Home equity - term	1,705		913		745		3,363		3,145		6,508
Home equity - lines of credit	—		—		22		22		303,143		303,165
Installment and other loans	35		31		3		69		18,062		18,131
	$	4,194	$	10,317	$	5,681	$	20,192	$	3,961,245	$	3,981,437


December 31, 2023
Commercial real estate:
Owner occupied	$	13,852	$	—	$	117	$	13,969	$	359,788	$	373,757
Non-owner occupied	152		—		—		152		694,486		694,638
Multi-family	—		—		—		—		150,675		150,675
Non-owner occupied residential	—		—		192		192		94,848		95,040
Acquisition and development:
1-4 family residential construction	—		—		—		—		24,516		24,516
Commercial and land development	16		—		—		16		115,233		115,249
Commercial and industrial	27		69		625		721		366,364		367,085
Municipal	—		—		—		—		9,812		9,812
Residential mortgage:
First lien	5,433		1,058		721		7,212		259,027		266,239
Home equity - term	20		2		—		22		5,056		5,078
Home equity - lines of credit	1,801		100		839		2,740		183,710		186,450
Installment and other loans	84		28		19		131		9,643		9,774
	$	21,385	$	1,257	$	2,513	$	25,155	$	2,273,158	$	2,298,313

The Company’s ACL is calculated quarterly, with any adjustment recorded to the provision for credit losses in the consolidated statements of operations. Management calculates the quantitative portion of collectively evaluated loans for all loan categories, with the exception of the consumer loan segment, using DCF methodology. For purposes of calculating the quantitative portion of collectively evaluated reserves on the consumer loan segment, the remaining life methodology is utilized.

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For purposes of estimating the Company’s ACL, management generally evaluates collectively evaluated loans by federal call code, which represents the loan classes based upon U.S. regulatory loan classification rules, in order to group loans with similar risk characteristics.

Loans that do not share similar risk characteristics are evaluated on an individual loan basis, and are excluded from the collective evaluation for the ACL. Loans identified to be individually evaluated under CECL include loans on nonaccrual status and may include accruing loans that do not share similar risk characteristics to other accruing loans that are collectively evaluated on a loan pool basis. A specific analytical method is applied to the individually evaluated loans, which considers collateral value, an observable market price or the present value of expected future cash flows. A specific reserve is assigned if the measured value of the loan using one of the before mentioned methods is less than the current carrying value of the loan.

Based on management's analysis, adjustments may be applied for additional factors impacting the risk of loss in the loan portfolio beyond the quantitatively calculated reserve calculated on collectively evaluated loans. As the quantitative reserve calculation incorporates historical conditions, management may consider an additional or reduced reserve is warranted through qualitative risk factors based on current and expected conditions. These qualitative risk factors considered by management are comparable to legacy factors prior to the adoption of CECL and include significant or unexpected changes in:

Nature and Volume of Loans – including loan growth in the current and subsequent quarters based on the Company’s targeted growth and strategic plan, coupled with the types of loans booked based on risk management and credit culture; the number of exceptions to loan policy; and supervisory loan to value exceptions.

Concentrations of Credit and Changes within Credit Concentrations – including the composition of the Company’s overall portfolio makeup and management's evaluation related to concentration risk management and the inherent risk associated with the concentrations identified.

Lending Policies and Procedures, Underwriting Standards and Recovery Practices – including changes to credit policies and procedures, underwriting standards and perceived impact on anticipated losses, trends in the number of exceptions to loan policy, supervisory loan to value exceptions; and administration of loan recovery practices.

Delinquency and Classified Loan Trends – including delinquency percentages and internal loan ratings noted in the portfolio relative to economic conditions, severity of the delinquencies and the ratings and whether the ratios are trending upwards or downwards.

Collateral Valuation Trends – including underlying market conditions and impact on the collateral values securing the loans.

Experience, Ability and Depth of Management/Lending staff – including the level of experience of senior and middle management and the lending staff, turnover of the staff, and instances of repeat criticisms.

Quality of Loan Review System – including the level of experience of the loan review staff, in-house versus outsourced provider of review, turnover of the staff and instances of repeat criticisms from independent testing, which includes the evaluation of internal loan ratings of the portfolio.

Economic Conditions – including trends in the international, national, regional and local conditions that monitor the interest rate environment, inflationary pressures, the consumer price index, the housing price index, housing statistics, and bankruptcy rates.

Other External Factors - including regulatory and legal environment risks and competition.

All factors noted above were deemed appropriate at September 30, 2024. For the three and nine months ended September 30, 2024, 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 reports, as well as concerns subsiding from the prior year about liquidity positions within the banking industry. During the three months ended June 30, 2024, 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 applied during the three months ended March 31, 2024. These changes were based on the stabilization in real estate collateral valuations and housing demand and overall portfolio performance. All other qualitative factors were unchanged from December 31, 2023.

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The following table presents the activity in the ACL for the three and nine months ended September 30, 2024 and 2023:


	Commercial										Consumer
	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total
Three Months Ended
September 30, 2024
Balance, beginning of period	$	18,203	$	2,634	$	5,652	$	161	$	26,650	$	3,023	$	191	$	3,214	$	—	$	29,864

Allowance established for acquired PCD loans	1,321		2,535		1,949		—		5,805		105		10		115		—		5,920
Provision for credit losses	11,103		1,809		(955)		110		12,067		1,773		275		2,048		—		14,115
Charge-offs	(333)		—		(159)		—		(492)		—		(88)		(88)		—		(580)
Recoveries	4		12		164		—		180		54		77		131		—		311
Balance, end of period	$	30,298	$	6,990	$	6,651	$	271	$	44,210	$	4,955	$	465	$	5,420	$	—	$	49,630
September 30, 2023
Balance, beginning of period	$	16,996	$	2,767	$	5,854	$	167	$	25,784	$	2,307	$	292	$	2,599	$	—	$	28,383


Provision for loan losses	(173)		125		(62)		(11)		(121)		239		18		257		—		136
Charge-offs	—		—		(267)		—		(267)		—		(75)		(75)		—		(342)
Recoveries	17		1		33		—		51		31		19		50		—		101
Balance, end of period	$	16,840	$	2,893	$	5,558	$	156	$	25,447	$	2,577	$	254	$	2,831	$	—	$	28,278

Nine Months Ended
September 30, 2024
Balance, beginning of period	$	17,873	$	2,241	$	5,806	$	157	$	26,077	$	2,424	$	201	$	2,625	$	—	$	28,702

Allowance established for acquired PCD loans	1,321		2,535		1,949		—		5,805		105		10		115		—		5,920
Provision for credit losses	11,417		2,223		(1,149)		114		12,605		2,410		333		2,743		—		15,348
Charge-offs	(345)		(23)		(219)		—		(587)		(50)		(206)		(256)		—		(843)
Recoveries	32		14		264		—		310		66		127		193		—		503
Balance, end of period	$	30,298	$	6,990	$	6,651	$	271	$	44,210	$	4,955	$	465	$	5,420	$	—	$	49,630
September 30, 2023
Balance, beginning of period	$	13,558	$	3,214	$	4,505	$	24	$	21,301	$	3,444	$	188	$	3,632	$	245	$	25,178
Impact of adopting ASC 326	2,857		(214)		928		169		3,740		(1,121)		49		(1,072)		(245)		2,423

Provision for loan losses	335		(111)		790		(37)		977		163		124		287		—		1,264
Charge-offs	(12)		—		(748)		—		(760)		(98)		(198)		(296)		—		(1,056)
Recoveries	102		4		83		—		189		189		91		280		—		469
Balance, end of period	$	16,840	$	2,893	$	5,558	$	156	$	25,447	$	2,577	$	254	$	2,831	$	—	$	28,278

NOTE 5. LEASES

A lease provides the lessee the right to control the use of an identified asset for a period of time in exchange for consideration. The Company has primarily entered into operating leases for branches and office space. Most of the Company's leases contain renewal options, which the Company is reasonably certain to exercise. Including renewal options, the Company's leases range from 3 to 29 years. Operating and finance lease right-of-use assets are included in other assets, operating lease liabilities are included in other liabilities and the finance lease liability is included in other borrowings on the Company's unaudited condensed consolidated balance sheets.

The Company uses its incremental borrowing rate to determine the present value of the lease payments, as the rate implicit in the Company's leases is not readily determinable. Lease agreements that contain non-lease components are generally accounted for as a single lease component, while variable costs, such as common area maintenance expenses and property taxes, are expensed as incurred.

Pursuant to the Merger, the Company acquired operating lease assets and operating lease liabilities both with a fair value of $5.1 million. The Company also acquired a finance lease asset and liability with a fair value of $392 thousand. At July 1, 2024, the Company recorded negative fair value adjustments of $1.1 million and $133 thousand to operating lease assets and finance lease assets, respectively, which are amortized over the remaining lease terms. The weighted average remaining lease term for the acquired operating leases is 14.3 years.

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The following table summarizes the Company's operating leases at September 30, 2024 and December 31, 2023.


	September 30, 2024			December 31, 2023
Operating lease ROU assets	$	13,668		$	10,824
Operating lease ROU liabilities	14,475			11,614
Weighted-average remaining lease term (in years)	15.7			15.1
Weighted-average discount rate	4.8		%	4.4		%

The following table summarizes the Company's finance leases at September 30, 2024 and December 31, 2023.


	September 30, 2024			December 31, 2023
Financing lease assets	$	377		n/a
Weighted-average remaining lease term (in years)	5.4			0.0
Weighted-average discount rate	5.0		%	n/a

The following table presents information related to the Company's operating leases for the three and nine months ended September 30, 2024 and 2023:


	Three Months Ended				Nine Months Ended
	September 30, 2024		September 30, 2023		September 30, 2024		September 30, 2023
Cash paid for operating lease liabilities	$	471	$	319	$	1,142	$	890
Cash paid for finance lease liabilities	19		—		19		—
Operating lease expense	135		337		846		948

The following table presents expected future maturities of the Company's operating lease liabilities as of September 30, 2024:


2024	$	391
2025	1,586
2026	1,614
2027	1,650
2028	1,385
Thereafter	14,924
	21,550
Less: imputed interest	7,075
Total lease liabilities	$	14,475

NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS

At September 30, 2024 and December 31, 2023, goodwill was $70.7 million and $18.7 million, respectively. No impairment charges were recorded in the three and nine months ended September 30, 2024 and 2023.



	September 30, 2024		December 31, 2023
Balance, beginning of year	$	18,724	$	18,724
Acquired goodwill	51,931		—


Balance, end of period	$	70,655	$	18,724

Goodwill is not amortized, but is reviewed for potential impairment on at least an annual basis, with testing between annual tests if an event occurs or circumstances change that could potentially reduce the fair value of a reporting unit.

The Company conducted its last annual goodwill impairment test as of November 30, 2023 using generally accepted valuation methods. As a result of that impairment test, no goodwill impairment was identified. No changes occurred that would impact the results of that analysis through September 30, 2024.

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The following table presents changes in and components of other intangible assets for the three and nine months ended September 30, 2024 and 2023. The Company acquired core deposit intangibles of $35.9 million and customer relationship intangible assets associated with wealth and brokerage businesses totaling $10.4 million from the Merger. The core deposit intangible and customer relationship intangible assets are amortized based on the sum-of-the-years digits method over the expected life of 10 years. The Company also acquired an investment advisory business and related accounts with assets under management of $85.0 million on July 1, 2024. In connection with this acquisition, the Company recorded an intangible asset totaling $374 thousand associated with the customer list, which will be amortized based on the sum-of-the-years digits method over the expected life of seven years.

No impairment charges were recorded on other intangible assets during the three and nine months ended September 30, 2024 and September 30, 2023.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Beginning of period	$	1,974	$	2,589	$	2,414	$	3,078
Acquired core deposit intangible	35,860		—		35,860		—
Acquired customer list	10,774		289		10,774		289

Amortization expense	(2,464)		(228)		(2,904)		(717)

Balance, end of period	$	46,144	$	2,650	$	46,144	$	2,650

The following table presents the components of other identifiable intangible assets at September 30, 2024 and December 31, 2023:


	September 30, 2024				December 31, 2023
	Gross Amount		Accumulated Amortization		Gross Amount		Accumulated Amortization
Amortized intangible assets:
Core deposit intangible	$	44,250	$	8,601	$	8,390	$	6,247
Customer relationship intangibles	11,063		568		289		18


Total	$	55,313	$	9,169	$	8,679	$	6,265

The following table presents future estimated aggregate amortization expense for other identifiable intangible assets at September 30, 2024:



2024	$	2,407
2025	8,970
2026	7,877
2027	6,784
2028	5,693
Thereafter	14,413
	$	46,144

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NOTE 7. SHARE-BASED COMPENSATION PLANS

The Company maintains share-based compensation plans under the shareholder-approved 2011 Plan. The purpose of the share-based compensation plans is to provide officers, employees, and non-employee members of the Board of Directors of the Company with additional incentive to further the success of the Company, and awards may consist of grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, deferred stock units and performance shares. All employees and members of the Board of Directors of the Company and its subsidiaries are eligible to participate in the 2011 Plan. The 2011 Plan allows for the Compensation Committee of the Board of Directors to determine the type of incentive to be awarded, its term, manner of exercise, vesting and restrictions on shares. Generally, awards are nonqualified under the IRC, unless the awards are deemed to be incentive awards to employees at the Compensation Committee’s discretion.

At September 30, 2024, 1,281,920 shares of the common stock of the Company were reserved, of which 105,106 shares are available to be issued.

The following table presents a summary of nonvested restricted shares activity for the nine months ended September 30, 2024:


	Shares	Weighted Average Grant Date Fair Value
Nonvested shares, beginning of year	291,231	$	22.85
Granted	331,687	27.42
Forfeited	(13,554)	25.92
Vested	(340,369)	24.18
Nonvested shares, at period end	268,995	$	26.65

The following table presents restricted share compensation expense, with tax benefit information, and fair value of shares vested, for the three and nine months ended September 30, 2024 and 2023:


	Three months ended September 30,				Nine months ended September 30,
	2024		2023		2024		2023
Restricted share award expense	$	5,577	$	606	$	7,386	$	1,756
Restricted share award tax benefit	1,171		127		1,551		369
Fair value of shares vested	5,907		—		9,373		2,460

The unrecognized compensation expense related to the share awards totaled $4.8 million at September 30, 2024 and $3.4 million at December 31, 2023. The unrecognized compensation expense at September 30, 2024 is expected to be recognized over a weighted-average period of 1.3 years. Pursuant to the Merger, on July 1, 2024 the Company accelerated the vesting of time-based restricted stock awards totaling 198,462 shares with compensation expense of $4.0 million, which is included in merger-related expenses.

The following table presents the summary of stock option activity as of September 30, 2024. The Company assumed the stock options from the Merger. The weighted average of remaining contractual term of shares exercisable is 1.92 years.


	Shares	Weighted Average Exercise Price
Outstanding at June 30, 2024	—	$	—
Assumed from Merger	80,227	21.96
Granted	—	—
Exercised	(6,859)	18.12
Forfeited	—	—
Expired	—	—
Outstanding at end of period	73,368	22.32
Fully vested and expected to vest	73,368	22.32
Exercisable, at period end	73,368	$	22.32

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The following table presents information about stock options exercised for the three months ended September 30, 2024:


	September 30, 2024






Total intrinsic value of options exercised	$	110
Cash received from options exercised	124
Tax benefit realized from stock options exercised	6

The Company maintains an employee stock purchase plan to provide employees of the Company with an opportunity to purchase Company common stock. Eligible employees may purchase shares in an amount that does not exceed the lesser of the IRS limit of $25,000 or 10% of their annual salary at the lower of 95% of the fair market value of the shares on the semi-annual offering date, or related purchase date. The purchases occur in March and September of each year. The Company reserved 350,000 shares of its common stock to be issued under the employee stock purchase plan. At September 30, 2024, 127,727 shares were available to be issued.

The following table presents information for the employee stock purchase plan for the three and nine months ended September 30, 2024 and 2023:


	Three months ended September 30,				Nine months ended September 30,
	2024		2023		2024		2023
Shares purchased	7,569		3,446		11,419		6,449
Weighted average price of shares purchased	$	25.18	$	20.52	$	23.66	$	21.14
Compensation expense recognized	80		4		$	103	$	7

The Company issues new shares or treasury shares, depending on market conditions, in its share-based compensation plans.

NOTE 8. DEPOSITS

The following table summarizes deposits by type at September 30, 2024 and December 31, 2023. Deposits of $1.9 billion were assumed in the Merger.


	2024		2023

Noninterest-bearing demand deposits	$	815,404	$	430,959
Interest-bearing demand deposits	1,286,018		1,000,652
Money market and savings	1,542,497		720,696
Time ($250,000 or less)	834,585		330,093
Time (over $250,000)	172,349		76,414
Total	$	4,650,853	$	2,558,814

NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and also through the use of derivative financial instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company's derivative financial instruments are used as risk management tools by the Company to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investment securities and borrowings and are not used for trading or speculative purposes.

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate swaps and interest rate caps as part of its interest rate risk management strategy.

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Interest rate swaps designated as cash flow hedges involve limiting the Company's exposure to fluctuations in future cash flows through the receipt of fixed or variable amounts from a counterparty in exchange for the Company making variable-rate or fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company discontinues cash flow hedge accounting if it is probable the forecasted hedged transactions will not occur in the initially identified time period due to circumstances. Upon discontinuance, the associated gains and losses deferred in AOCI are reclassified immediately into earnings and subsequent changes in the fair value of the cash flow hedge are recognized in earnings.

At September 30, 2024, the Company had one interest rate swap designated as a cash flow hedge with a notional value of $75.0 million, which was a pay-fixed hedge with a notional value for the purpose of hedging variable cash flows associated with the Company's borrowings. At December 31, 2023, the Company had two interest rate swaps as cash flow hedges with a total notional value of $125.0 million. At September 30, 2024, the Company had one pay-float interest rate swap designated as a hedging instrument, for the purpose of hedging the variable cash flows of selected AFS securities or loans, mature with a total notional value of $50.0 million. During the three and nine months ended September 30, 2024, the Company did not enter into new interest rate swaps designated as cash flow hedges.

Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. The gain or loss on the fair value hedge, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in current earnings as the fair value changes. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability.

At September 30, 2024 and December 31, 2023, the Company had three pay-fixed interest rate swaps on certain closed portfolio loans with our commercial clients with a total notional value of $100.0 million. The commercial loans are scheduled to mature at various dates ranging from December 2026 to October 2054. The interest rate swaps are designated as fair value hedges and allow the Company to offer long-term fixed rate loans to commercial clients while mitigating the interest rate risk of a long-term asset by converting fixed rate interest payments to floating rate interest payments indexed to a synthetic U.S. SOFR rate. During the three and nine months ended September 30, 2024, the Company did not enter into new interest rate swaps designated as fair value hedges.

The Company enters into interest rate swap agreements that allow its commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. Under these agreements, the Company enters into a variable-rate loan agreement with a customer in addition to an interest rate swap agreement, which serves to effectively swap the customer’s variable-rate loan into a fixed-rate loan. In addition, the Company may enter into interest rate caps that allow its commercial loan customers to gain protection against significant interest rate increases and provide an upper limit, or cap, on the variable interest rate. The Company then enters into a corresponding swap or cap agreement with a third party in order to economically hedge its exposure through the customer agreement. The interest rate swaps and interest rate caps with both the customers and third parties are not designated as hedges and are marked through earnings. At September 30, 2024, the Company had 59 customer and 59 corresponding third-party broker interest rate derivatives not designated as a hedging instrument with an aggregate notional amount of $692.1 million compared to $444.8 million in notional amount of such derivative instruments at December 31, 2023. During the three and nine months ended September 30, 2024, the Company entered into twenty and twenty-five, respectively, new interest rate swaps with a commercial loan customer and recorded swap fee income of $504 thousand and $1.1 million, respectively. In addition, the Company acquired ten customer and ten corresponding third-party broker interest rate derivatives not designated as a hedging instrument with an aggregate notional value of $96.5 million from the Merger. The Company entered into four new interest rate swaps and recorded $255 thousand in swap fee income during the three months ended September 30, 2023 and six new interest rate swaps that resulted in swap fee income of $451 thousand during the nine months ended September 30, 2023. Swap fee income is included in noninterest income in the unaudited condensed consolidated statements of operations.

At September 30, 2024 and December 31, 2023, the Company had cash collateral of $9.4 million and $6.6 million with third parties for certain of these derivatives, respectively. At September 30, 2024 and December 31, 2023, the Company held cash collateral of $890 thousand and $4.4 million from a counterparty for these derivatives, respectively.

The Company also may enter into risk participation agreements with a financial institution counterparty for an interest rate derivative contract related to a loan in which the Company may be a participant or the agent bank. The risk participation agreement provides credit protection to the agent bank should the borrower fail to perform on its interest rate derivative contracts with the agent bank. The Company manages its credit risk on the risk participation agreement by monitoring the creditworthiness of the borrower, which is based on the same credit review process as though the Company had entered into the derivative instruments directly with the borrower. The notional amount of such risk participation agreement reflects the Company’s pro-rata share of the derivative instrument, consistent with its share of the related participated loan.

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At September 30, 2024 and December 31, 2023, the Company had six risk participation agreements with sold protection with a notional value of $47.0 million and $32.7 million, respectively, including two risk participation agreements with sold protection with a notional value of $14.1 million acquired from the Merger. In addition, the Company had five risk participations with purchased protection with a notional value of $23.8 million at September 30, 2024 compared to three risk participations with purchased protection with a notional value of $11.0 million at December 31, 2023. The Company did not enter into any risk participation agreements with sold protection during the three months ended September 30, 2024. For the nine months ended September 30, 2024, the Company entered into two risk participation agreements with purchased protection. The Company did not enter into any new risk participations during the three and nine months ended September 30, 2023.

As a part of its normal residential mortgage operations, the Company will enter into an interest rate lock commitment with a potential borrower. The Company may enter into a corresponding commitment with an investor to sell that loan at a specific price shortly after origination. In accordance with FASB ASC 820, adjustments are recorded through earnings to account for the net change in fair value of these transactions for the held for sale loan pipeline. The fair value of held for sale loans can vary based on the interest rate locked with the customer and the current market interest rate at the balance sheet date.

The following table summarizes the fair value of the Company's derivative instruments at September 30, 2024 and December 31, 2023:


	September 30, 2024					December 31, 2023
	Notional Amount		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments:
Cash flow hedge designation:
Interest rate swaps -FHLB advances	$	75,000	Other liabilities	$	(611)	$	75,000	Other assets	$	135
Interest rate swaps - AFS securities	n/a		Other liabilities	n/a		50,000		Other liabilities	(426)
Fair value hedge designation:

Interest rate swaps - commercial loans	100,000		Other liabilities	(2,255)		100,000		Other liabilities	(1,718)
Total derivatives designated as hedging instruments				$	(2,866)				$	(2,009)

Derivatives not designated as hedging instruments:
Interest rate swaps	$	340,193	Other assets	$	14,237	$	216,485	Other assets	$	11,157
Interest rate swaps	340,193		Other liabilities	(14,792)		216,485		Other liabilities	(11,253)
Purchased options – rate cap	5,837		Other assets	3		5,909		Other assets	8
Written options – rate cap	5,837		Other liabilities	(3)		5,909		Other liabilities	(8)
Risk participations - sold credit protection	47,014		Other liabilities	(166)		32,722		Other liabilities	(59)
Risk participations - purchased credit protection	23,779		Other assets	109		11,035		Other assets	28
Interest rate lock commitments with customers	6,647		Other assets	118		2,181		Other assets	55
Forward sale commitments	3,253		Other liabilities	(9)		688		Other assets	(4)
Total derivatives not designated as hedging instruments				$	(503)				$	(76)

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The following table presents the carrying amount and associated cumulative basis adjustment related to the application of fair value hedge accounting that is included in the carrying amount of hedged assets as of September 30, 2024 and 2023.


	Carrying Amounts of Hedged Assets				Cumulative Amounts of Fair Value Hedging Adjustments Included in the Carrying Amounts of the Hedged Assets
	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Commercial loans	$	100,000	$	—	$	2,260	$	—

The following tables summarize the effect of the Company's derivative financial instruments on OCI and net income for the three and nine months ended September 30, 2024 and 2023:


	Amount of (Loss) Gain Recognized in OCI on Derivative				Amount of (Loss) Gain Recognized in OCI on Derivative
	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Derivatives in cash flow hedging relationships:
Interest rate products	$	(2,182)	$	1,439	$	(320)	$	2,831


	Amount of Loss Reclassified from AOCI into Income				Amount of Loss Reclassified from AOCI into Income				Location of Loss Recognized from AOCI into Income
	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Derivatives in cash flow hedging relationships:
Interest rate products	$	—	$	—	$	—	$	—	Interest income


	Amount of (Loss) Gain Recognized in Income				Amount of (Loss) Gain Recognized in Income				Location of Gain Recognized in Income
	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Derivatives designated as hedging instruments
Fair value hedge designation:
Interest rate swaps - commercial loans (1)	$	(5)	n/a		$	3	n/a		Interest income on loans

Derivatives not designated as hedging instruments:
Interest rate products	$	(530)	$	307	$	(459)	$	188	Other operating expenses
Risk participation agreements	87		31		160		58		Other operating expenses
Interest rate lock commitments with customers	45		(52)		62		(20)		Mortgage banking activities
Forward sale commitments	(12)		—		(5)		(139)		Mortgage banking activities
Total derivatives not designated as hedging instruments	$	(410)	$	286	$	(242)	$	87
(1) Amount includes the net of the change in the fair value of the interest rate swaps hedging commercial loans and the change in the carrying value included in the hedged commercial loans.

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The following table is a summary of components for interest rate swaps designated as hedging instruments at September 30, 2024 and December 31, 2023:


	Weighted Average Pay Rate		Weighted Average Receive Rate		Weighted Average Maturity in Years
September 30, 2024
Cash flow hedge designation:
Interest rate swaps - FHLB advances	3.49	%	5.17	%	3.5

Fair value hedge designation:
Interest rate swaps - commercial loans	4.12	%	5.17	%	2.9
December 31, 2023
Cash flow hedge designation:
Interest rate swaps - FHLB advances	3.49	%	5.34	%	4.3
Interest rate swaps - AFS securities	5.34	%	3.73	%	0.7
Fair value hedge designation:
Interest rate swaps - commercial loans	4.12	%	5.34	%	3.7

NOTE 10. SHORT-TERM BORROWINGS

The Company has short-term borrowing capability from the FHLB and the FRB discount window. The following table summarizes these short-term borrowings at September 30, 2024 and December 31, 2023, and for the nine and twelve months then ended:


	September 30, 2024			December 31, 2023
Balance at period-end	$	75,000		$	97,500
Weighted average interest rate during the period	5.18		%	5.68		%
Average balance during the period	$	75,000		$	87,370
Average interest rate during the period	5.74		%	5.46		%
Maximum month-end balance during the period	$	105,000		$	120,984

At September 30, 2024 and December 31, 2023, the Company had availability under FHLB lines for its short-term borrowings totaling $75.0 million and $52.5 million, respectively.

The Company also enters into borrowing arrangements with certain of its deposit clients by agreements to repurchase ("repurchase agreements") under which the Company pledges investment securities owned and under its control as collateral against the borrowing arrangement, which generally matures within one day from the transaction date. The Company is required to hold U.S. Treasury, U.S. Agency or U.S. GSE securities as underlying securities for repurchase agreements. The following table provides additional details for repurchase agreements, which excludes federal funds purchased, at September 30, 2024 and December 31, 2023.


	September 30, 2024			December 31, 2023
Balance at period-end	$	21,932		$	9,785
Weighted average interest rate during the period	1.71		%	0.76		%
Average balance during the period	$	16,191		$	14,099
Average interest rate during the period	1.22		%	0.80		%
Maximum month-end balance during the period	$	27,446		$	17,991
Fair value of securities underlying the agreements at period-end	$	17,098		$	10,201

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NOTE 11. LONG-TERM DEBT

The following table presents components of the Company’s long-term debt at September 30, 2024 and December 31, 2023. The Company assumed a finance lease asset with a fair value of $392 thousand.


	Amount				Weighted Average Rate
	September 30, 2024		December 31, 2023		September 30, 2024		December 31, 2023
FHLB fixed rate advances maturing:
2025	$	15,000	$	15,000	4.57	%	4.57	%
2028	25,000		25,000		3.98	%	3.98	%






Total FHLB Advances	$	40,000	$	40,000	4.20	%	4.20	%

Lease obligation included in long term debt:
Finance lease liabilities	$	378	n/a

The following table presents expected future maturities of the Company's finance lease liabilities as of September 30, 2024:


2024	$	19
2025	79
2026	80
2027	80
2028	80
Thereafter	93
	431
Less: imputed interest	53
Total finance lease liabilities	$	378

The Bank is a member of the FHLB of Pittsburgh and has access to the FHLB program of overnight and term advances. Under terms of a blanket collateral agreement for advances, lines and letters of credit from the FHLB, collateral for all outstanding advances, lines and letters of credit consisted of 1-4 family mortgage loans and other real estate secured loans totaling $1.1 billion at both September 30, 2024 and December 31, 2023. The Bank had additional availability of $1.0 billion at the FHLB on September 30, 2024, based on its qualifying collateral, net of short-term borrowings and long-term debt detailed above, deposit letters of credit of $1.0 million and non-deposit letters of credit of $609 thousand at September 30, 2024. At December 31, 2023, the Bank had additional availability of $973.3 million at the FHLB and $609 thousand of non-deposit letters of credit. There were zero deposit letters of credit at December 31, 2023.

The Bank had available unsecured lines of credit, with interest based on the daily Federal Funds rate, with two correspondent banks totaling $20.0 million at September 30, 2024 and December 31, 2023. There were no borrowings under these lines of credit at September 30, 2024 and December 31, 2023.

NOTE 12. SUBORDINATED NOTES AND TRUST PREFERRED DEBT

At September 30, 2024 and December 31, 2023, unsecured subordinated notes payable outstanding totaled $63.1 million and $32.1 million, respectively, which qualified for Tier 2 capital subject to the regulatory capital phase out limitations. The notes are recorded on the consolidated balance sheets net of remaining debt issuance costs totaling $353 thousand and $407 thousand at September 30, 2024 and December 31, 2023, respectively, which are amortized over a 10-year period on an effective yield basis. The Company may, at its option, redeem the notes at any time upon the occurrence of certain events. As of September 30, 2024, the Company was in compliance with the covenants contained in the subordinated notes payable agreement.

The Company's subordinated notes of $32.1 million have a variable rate of three-month CME term SOFR rate, plus a spread adjustment of 0.26161% and a margin of 3.16%, through maturity. At September 30, 2024, the interest rate on the Company's subordinated debt was 8.75%. The Company may, at its option, redeem the notes, in whole or in part, on any interest payment date, and at any time upon the occurrence of certain events.

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As of September 30, 2024, the Company was in compliance with the covenants contained in the subordinated notes payable agreement.

The Company assumed Codorus Valley's unsecured subordinated notes that were issued in December 2020 in the amount of $31.0 million, which may be redeemed, in whole or in part, in a principal amount with integral multiples of $10.0 million, on or after December 9, 2025 and prior to the maturity date at 100% of the principal amount, plus accrued and unpaid interest. The subordinated notes mature on December 9, 2030. The subordinated notes are also redeemable in whole or in part from time to time, upon the occurrence of specific events defined within the Note Purchase Agreements. The subordinated notes have a fixed rate of interest equal to 4.50% until December 30, 2025. After that term, the variable rate of interest is equal to the three-month CME term SOFR rate plus 4.04%. At the date of the Merger, these subordinated notes were marked to fair value at $28.6 million, with a discount of $2.4 million being amortized and netted against interest expense over the stated maturity.

The Company assumed junior subordinated trust preferred debt of $10.3 million from the Merger that was fair valued at $7.6 million with a discount of $2.7 million being amortized and netted against interest expense over the state maturity. In June 2006, Codorus Valley formed CVB Statutory Trust No. II, a wholly-owned special purpose entity whose sole purpose was to facilitate a pooled trust preferred debt issuance of $7.2 million with a stated maturity of July 7, 2036 and a variable rate of three-month CME term SOFR rate, plus a spread adjustment of 0.26161% and a margin of 1.54% through maturity. In November 2004, Codorus Valley formed CVB Statutory Trust No. I to facilitate a pooled trust preferred debt issuance of $3.1 million with a stated maturity of December 15, 2034 and a variable rate of three-month CME term SOFR rate, plus a spread adjustment of 0.26161% and a margin of 2.02% through maturity. The Company owns all of the common stock of these nonbank entities, and the debentures are the sole assets of the Trusts. The accounts of both Trusts are not consolidated for financial reporting purposes in accordance with FASB ASC 810, Consolidation. For regulatory capital purposes, the trust preferred securities qualified as Tier 1 capital, but are subject to capital limitations under the risk-based capital guidelines.

The remaining maturities of subordinated notes and trust preferred debt as of September 30, 2024 and December 31, 2023, are as follows:


		Amount
		September 30, 2024		December 31, 2023
Subordinated debt maturing:
	2028	$	32,500	$	32,500
	2030	31,000		—

Trust preferred junior subordinated debt maturing:
	2034	$	3,093	$	—
	2036	7,217		—

NOTE 13. SHAREHOLDERS’ EQUITY AND REGULATORY CAPITAL

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Under the Basel Committee on Banking Supervision's capital guidelines for U.S. Banks, an entity must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The Company and the Bank have elected not to include net unrealized gains or losses included in AOCI in computing regulatory capital.

The Company and the Bank met all capital adequacy requirements to which they are subject at September 30, 2024 and December 31, 2023. Prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At September 30, 2024, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's classification.

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The following table presents capital amounts and ratios at September 30, 2024 and December 31, 2023:


	Actual				For Capital Adequacy Purposes (includes applicable capital conservation buffer)				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2024
Total risk-based capital:
Orrstown Financial Services, Inc.	$	538,286	12.4	%	$	455,725	10.5	%	n/a		n/a
Orrstown Bank	529,516		12.2	%	455,614		10.5	%	$	433,919	10.0	%
Tier 1 risk-based capital:
Orrstown Financial Services, Inc.	432,690		10.0	%	368,920		8.5	%	n/a		n/a
Orrstown Bank	478,370		11.0	%	368,831		8.5	%	347,135		8.0	%
Tier 1 common equity risk-based capital:
Orrstown Financial Services, Inc.	425,059		9.8	%	303,762		7.0	%	n/a		n/a
Orrstown Bank	478,370		11.0	%	303,743		7.0	%	282,047		6.5	%
Tier 1 leverage capital:
Orrstown Financial Services, Inc.	432,690		8.0	%	217,532		4.0	%	n/a		n/a
Orrstown Bank	478,370		8.8	%	216,278		4.0	%	270,347		5.0	%
December 31, 2023
Total risk-based capital:
Orrstown Financial Services, Inc.	$	326,878	13.0	%	$	264,019	10.5	%	n/a		n/a
Orrstown Bank	320,687		12.8	%	263,942		10.5	%	$	251,373	10.0	%
Tier 1 risk-based capital:
Orrstown Financial Services, Inc.	272,677		10.8	%	213,730		8.5	%	n/a		n/a
Orrstown Bank	292,160		11.6	%	213,667		8.5	%	201,099		8.0	%
Tier 1 common equity risk-based capital:
Orrstown Financial Services, Inc.	272,677		10.8	%	176,013		7.0	%	n/a		n/a
Orrstown Bank	292,160		11.6	%	175,961		7.0	%	163,393		6.5	%
Tier 1 leverage capital:
Orrstown Financial Services, Inc.	272,677		8.9	%	122,907		4.0	%	n/a		n/a
Orrstown Bank	292,160		9.5	%	122,907		4.0	%	153,634		5.0	%

The Company maintains a stockholder dividend reinvestment and stock purchase plan. Under the plan, shareholders may purchase additional shares of the Company’s common stock at the prevailing market prices with reinvested dividends and voluntary cash payments. The Company reserved 1,045,000 shares of its common stock to be issued under the dividend reinvestment and stock purchase plan. At September 30, 2024, approximately 665,000 shares were available to be issued under the plan.

In September 2015, the Board of Directors of the Company authorized a share repurchase program pursuant to which the Company could repurchase up to 416,000 shares of the Company's outstanding shares of common stock, in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Exchange Act, as amended. On April 19, 2021, the Board of Directors authorized the additional repurchase of up to 562,000 shares of its outstanding common stock for a total of 978,000 shares. When and if appropriate, repurchases may be made in the open market or privately negotiated transactions, depending on market conditions, regulatory requirements and other corporate considerations, as determined by management. Share repurchases may not occur and may be discontinued at any time. For the three and nine months ended September 30, 2024, the Company repurchased zero shares of its common stock. At September 30, 2024, 949,533 shares had been repurchased at a total cost of $21.2 million, or $22.36 per share. Common stock available for future repurchase totals 28,467 shares, or 0.1% of the Company's outstanding common stock at September 30, 2024.

On October 22, 2024, the Board of Directors declared a cash dividend of $0.23 per common share, which will be paid on November 12, 2024 to shareholders of record at November 5, 2024.

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NOTE 14. EARNINGS PER SHARE

The following table presents earnings per share for the three and nine months ended September 30, 2024 and 2023:


	Three Months Ended September 30,				Nine Months Ended September 30,
(shares presented in the table are in thousands)	2024		2023		2024		2023
Net (loss) income	$	(7,903)	$	9,026	$	8,366	$	28,020
Weighted average shares outstanding - basic	19,088		10,319		13,298		10,346
Dilutive effect of share-based compensation	138		86		143		94
Weighted average shares outstanding - diluted	19,226		10,405		13,441		10,440
Per share information:
Basic (loss) earnings per share	$	(0.41)	$	0.87	$	0.63	$	2.71
Diluted (loss) earnings per share	(0.41)		0.87		0.62		2.68

For the three and nine months ended September 30, 2024, there were average outstanding restricted award shares totaling zero and 517, respectively, compared to 5,262 and 8,348 shares for the three and nine months ended September 30, 2023, respectively, excluded from the computation of earnings per share because the effect was antidilutive, as the grant price exceeded the average market price. The dilutive effect of share-based compensation in each period above relates to restricted stock awards and vested stock options assumed from the Merger.

NOTE 15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its clients. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the unaudited condensed consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The following table presents these contractual, or notional, amounts at September 30, 2024 and December 31, 2023.


	Contractual or Notional Amount
	September 30, 2024		December 31, 2023
Commitments to fund:
Home equity lines of credit	$	536,884	$	337,460
1-4 family residential construction loans	87,112		40,330
Commercial real estate, construction and land development loans	238,597		132,607
Commercial, industrial and other loans	516,783		357,099
Letters of credit	48,629		24,529

Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each client’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the client. Collateral varies but may include accounts receivable, inventory, equipment, residential real estate, and income-producing commercial properties.

Standby letters of credit and financial guarantees written are conditional commitments issued by the Company to guarantee the performance of a client to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to clients. The Company holds collateral supporting those commitments when deemed necessary by management. The liability at September 30, 2024 and December 31, 2023 for guarantees under standby letters of credit issued was not considered to be material.

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The Company maintains a reserve on its off-balance sheet credit exposures, which totaled approximately $2.8 million and $1.7 million at September 30, 2024 and December 31, 2023, respectively, and is recorded in other liabilities on the unaudited condensed consolidated balance sheets. The reserve is based on management's estimate of expected losses in its off-balance sheet credit exposures. The reserve specific to unfunded loan commitments is determined by applying utilization assumptions based on historical experience and applying the expected loss rates by loan class. The change in the reserve for off-balance sheet credit exposures is recorded as a provision or reduction to expense through the provision for credit losses in the unaudited condensed consolidated statements of operations. The Company recorded a reversal in the provision for credit losses of $434 thousand and $557 thousand for off-balance sheet credit exposures for the three and nine months ended September 30, 2024. For the three and nine months ended September 30, 2023, the Company recorded expense of zero to other operating expenses in the unaudited condensed consolidated statements of operations associated with its reserve for off-balance sheet credit exposures.

NOTE 16. FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity's own assumptions about market participant assumptions based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are:

Level 1 – quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access at the measurement date.

Level 2 – significant other observable inputs other than Level 1 prices such as prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active or other inputs that are observable or can be corroborated by observable market data.

Level 3 – at least one significant unobservable input that reflects a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

The Company used the following methods and significant assumptions to estimate fair value for instruments measured on a recurring basis:

Where quoted prices are available in an active market, investment securities are classified within Level 1 of the valuation hierarchy. Level 1 investment securities include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, investment securities are classified within Level 2 and fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or DCF. Level 2 investment securities include U.S. agency securities, MBS, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, investment securities are classified within Level 3 of the valuation hierarchy. The Company’s investment securities are classified as AFS.

The fair values of interest rate swaps, interest rate caps and risk participation derivatives are determined using models that incorporate readily observable market data into a market standard methodology. This methodology nets the discounted future cash receipts and the discounted expected cash payments. The discounted variable cash receipts and payments are based on expectations of future interest rates derived from observable market interest rate curves. In addition, fair value is adjusted for the effect of nonperformance risk by incorporating credit valuation adjustments for the Company and its counterparties. These assets and liabilities are classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.

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The following table summarizes assets and liabilities measured at fair value on a recurring basis at September 30, 2024 and December 31, 2023:


	Level 1		Level 2		Level 3		Total Fair Value Measurements
September 30, 2024
Financial Assets
Investment securities:
U.S. Treasury securities	$	18,373	$	—	$	—	$	18,373
U.S. Government Agencies	—		3,372		—		3,372

States and political subdivisions	—		199,426		6,674		206,100
GSE residential MBSs	—		150,361		—		150,361
GSE commercial MBSs	—		9,624		—		9,624
GSE residential CMOs	—		314,125		—		314,125

Non-agency CMOs	—		19,807		11,425		31,232


Asset-backed	—		91,468		—		91,468
Corporate bonds	—		1,975		—		1,975
Other	198		—		—		198
Loans held for sale	—		3,561		—		3,561
Derivatives	—		14,349		118		14,467


Totals	$	18,571	$	808,068	$	18,217	$	844,856
Financial Liabilities
Derivatives	$	—	$	17,828	$	—	$	17,828


December 31, 2023
Financial Assets
Investment securities:
U.S. Treasury securities	$	17,840	$	—	$	—	$	17,840
U.S. Government Agencies	—		4,151		—		4,151

States and political subdivisions	—		197,060		6,062		203,122
GSE residential MBSs	—		57,632		—		57,632
GSE commercial MBSs	—		4,743		—		4,743
GSE residential CMOs	—		73,102		—		73,102
Non-agency CMOs	—		22,878		21,791		44,669



Asset-backed	—		108,134		—		108,134
Corporate bonds	—		—		—		—
Other	126		—		—		126
Loans held for sale	—		5,816		—		5,816
Derivatives	—		11,328		55		11,383


Totals	$	17,966	$	484,844	$	27,908	$	530,718
Financial Liabilities
Derivatives	$	—	$	13,464	$	—	$	13,464

The Company had one municipal bond and two CMOs measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at September 30, 2024 and December 31, 2023. The Level 3 valuation is based on a non-executable broker quote, which is considered a significant unobservable input. Such quotes are updated as available and may remain constant for a period of time for certain broker-quoted securities that do not move with the market or that are not interest rate sensitive as a result of their structure or overall attributes.

The Company’s residential mortgage LHFS are recorded at fair value utilizing Level 2 measurements. This fair value measurement is determined based upon third party quotes obtained on similar loans. For loans held-for-sale, for which the fair value option has been elected, the aggregate fair value was greater than the aggregate principal balance by $95 thousand as of September 30, 2024 and below the aggregate principal balance by $1.5 million as of December 31, 2023.

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The determination of the fair value of interest rate lock commitments on residential mortgages is based on agreed upon pricing with the respective investor on each loan and includes a pull through percentage. The pull through percentage represents an estimate of loans in the pipeline to be delivered to an investor versus the total loans committed for delivery. Significant changes in this input could result in a significantly higher or lower fair value measurement. As the pull through percentage is a significant unobservable input, this is deemed a Level 3 valuation input. The average pull through percentage, which is based upon historical experience, was 92% as of September 30, 2024. An increase or decrease of 5% in the pull through assumption would result in a positive or negative change of $7 thousand in the fair value of interest rate lock commitments at September 30, 2024.

The following provides details of the Level 3 fair value measurement activity for the periods ended September 30, 2024 and 2023:

Investment securities:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Balance, beginning of period	$	17,567	$	27,994	$	27,853	$	27,193


Unrealized gains (losses) included in OCI	649		(736)		731		(600)
Purchases	—		—		—		871
Net discount accretion	17		19		50		42
Principal payments and other	(134)		(225)		(428)		(454)

Calls	—		—		(10,107)		—


Balance, end of period	$	18,099	$	27,052	$	18,099	$	27,052

Interest rate lock commitments on residential mortgages:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Balance, beginning of period	$	71	$	67	$	55	$	35

Total gains (losses) included in earnings	47		(52)		63		(20)


Balance, end of period	$	118	$	15	$	118	$	15

Certain financial assets are measured at fair value on a nonrecurring basis. Adjustments to the fair value of these assets usually result from the application of lower of cost or market accounting or write-downs of individual assets. The Company used the following methods and significant assumptions to estimate fair value for these financial assets.

There were no transfers into or out of Level 3 during the three and nine months ended September 30, 2024 and 2023.

Individually Evaluated Loans

Loans individually evaluated for credit expected losses include nonaccrual loans and other loans that do not share similar risk characteristics to loans in the CECL loan pools, which have been classified as Level 3. Individually evaluated loans with an allocation to the ACL are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for credit losses on the unaudited condensed consolidated statements of operations.

The measurement of loss associated with loans evaluated individually for all loan classes was based on either the observable market price of the loan, the fair value of the collateral or DCF. For collateral-dependent loans, fair value was measured based on the value of the collateral securing the loan, less estimated costs to sell. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The value of the real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if management adjusts the appraisal value, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal, if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports (Level 3).

Changes in the fair value of individually evaluated loans still held and considered in the determination of the provision for credit losses were increases due to the acquired of $5.1 million and $4.7 million for the three and nine months ended September 30, 2024, respectively, compared to a decline of $224 thousand and an increase of $286 thousand for the three and nine months ended September 30, 2023, respectively.

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Other Real Estate Owned

OREO property acquired through foreclosure is initially recorded at the fair value of the property at the transfer date less estimated selling cost. Subsequently, OREO is carried at the lower of its carrying value or the fair value less estimated selling cost. Fair value is usually determined based upon an independent third-party appraisal of the property or occasionally upon a recent sales offer. The Company had OREO of $138 thousand at September 30, 2024 acquired in the Merger, which there have been no subsequent write-downs. The Company had no OREO balances at December 31, 2023.

Mortgage Servicing Rights

MSRs are evaluated for impairment by comparing the carrying value to the fair value, which is determined through a DCF valuation. To the extent the amortized cost of the MSRs exceeds their estimated fair values, a valuation allowance is established for such impairment. Fair value adjustments on the MSRs only occurs if there is an impairment charge. At September 30, 2024, the MSR impairment reserve was $50 thousand. There was no MSR impairment reserve at December 31, 2023. For both the three and nine months ended September 30, 2024, there was an impairment valuation allowance adjustment of $50 thousand in mortgage banking activities on the unaudited consolidated statements of operations. For the three and nine months ended September 30, 2023, there were no impairment valuation allowance adjustments in mortgage banking activities on the unaudited consolidated statements of operations.

The following table summarizes assets measured at fair value on a nonrecurring basis at September 30, 2024 and December 31, 2023:


	Level 1		Level 2		Level 3		Total Fair Value Measurements
September 30, 2024
Individually Evaluated Loans
Commercial real estate:
Owner occupied	$	—	$	—	$	1,038	$	1,038

Multi-family	—		—		762		762

Acquisition and development:

Commercial and land development	—		—		1,236		1,236
Commercial and industrial	—		—		846		846
Residential mortgage:
First lien	—		—		455		455

Home equity - lines of credit	—		—		39		39
Installment and other loans	—		—		3		3
Total individually evaluated loans	$	—	$	—	$	4,379	$	4,379






Mortgage servicing rights	$	—	$	—	$	305	$	305

December 31, 2023
Individually Evaluated Loans
Commercial real estate:
Owner occupied	$	—	$	—	$	75	$	75






Commercial and industrial	—		—		164		164
Residential mortgage:
First lien	—		—		219		219

Home equity - lines of credit	—		—		56		56

Total individually evaluated loans	$	—	$	—	$	514	$	514

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

Fair Value
Estimate

Valuation
Techniques

Unobservable Input

Range

September 30, 2024

Individually evaluated loans

4,379

Appraisal of collateral

Management adjustments on appraisals for property type and recent activity

10% - 25% discount

- Management adjustments for liquidation expenses

6.78% - 12.30% discount

Mortgage servicing rights

305

Discounted cash flows

Weighted average CPR

10.01%

- Weighted average discount rate

6.60%

December 31, 2023

Individually evaluated loans

514

Appraisal of collateral

Management adjustments on appraisals for property type and recent activity

10% - 70% discount

- Management adjustments for liquidation expenses

3.30% - 12.30% discount

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Fair values of financial instruments

GAAP requires disclosure of the fair value of financial assets and liabilities, including those that are not measured and reported at fair value on a recurring or nonrecurring basis. The following table presents carrying amounts and estimated fair values of the financial assets and liabilities at September 30, 2024 and December 31, 2023:


	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
September 30, 2024
Financial Assets
Cash and due from banks	$	65,064	$	65,064	$	65,064	$	—	$	—
Interest-bearing deposits with banks	171,716		171,716		171,716		—		—

Restricted investments in bank stock	20,247		n/a		n/a		n/a		n/a
Investment securities	826,828		826,828		18,571		790,158		18,099
Loans held for sale	3,561		3,561		—		3,561		—
Loans, net of allowance for credit losses	3,931,807		3,873,542		—		—		3,873,542

Derivatives	14,467		14,467		—		14,349		118
Accrued interest receivable	20,562		20,562		—		5,391		15,171

Financial Liabilities
Deposits	4,650,853		4,649,844		—		4,649,844		—

Securities sold under agreements to repurchase and federal funds purchased	21,932		21,932		—		21,932		—
FHLB advances and other borrowings	115,378		115,286		—		115,286		—
Subordinated notes and trust preferred debt	68,510		67,364		—		67,364		—

Derivatives	17,828		17,828		—		17,828		—
Accrued interest payable	3,591		3,591		—		3,591		—
Off-balance sheet instruments	—		—		—		—		—

December 31, 2023
Financial Assets
Cash and due from banks	$	32,586	$	32,586	$	32,586	$	—	$	—
Interest-bearing deposits with banks	32,575		32,575		32,575		—		—

Restricted investments in bank stock	11,992		n/a		n/a		n/a		n/a
Investment securities	513,519		513,519		17,966		467,700		27,853
Loans held for sale	5,816		5,816		—		5,816		—
Loans, net of allowance for loan losses	2,269,611		2,159,745		—		—		2,159,745

Derivatives	11,383		11,383		—		11,328		55
Accrued interest receivable	13,630		13,630		—		4,987		8,643

Financial Liabilities
Deposits	2,558,814		2,555,904		—		2,555,904		—

Securities sold under agreements to repurchase	9,785		9,785		—		9,785		—
FHLB advances and other borrowings	137,500		137,500		—		137,500		—
Subordinated notes	32,093		29,887		—		29,887		—

Derivatives	13,464		13,464		—		13,464		—
Accrued interest payable	2,560		2,560		—		2,560		—
Off-balance sheet instruments	—		—		—		—		—

In accordance with the Company's adoption of ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, the methods utilized to measure the fair value of financial instruments at September 30, 2024 and December 31, 2023 represent an approximation of exit price; however, an actual exit price may differ.

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NOTE 17. CONTINGENCIES

The nature of the Company’s business generates a certain amount of litigation involving matters arising out of the ordinary course of business. Except as described below, in the opinion of management, there are no legal proceedings that might have a material effect on the results of operations, liquidity, or the financial position of the Company at this time.

On March 25, 2022, a customer of the Bank filed a putative class action complaint against the Bank in the Court of Common Pleas of Cumberland County, Pennsylvania, in a case captioned Alleman, on behalf of himself and all others similarly situated, v. Orrstown Bank. The complaint alleges, among other things, that the Bank breached its account agreements by charging certain overdraft fees. The complaint seeks a refund of all allegedly improper fees, damages in an amount to be proven at trial, attorneys’ fees and costs, and an injunction against the Bank’s allegedly improper overdraft practices. This lawsuit is similar to lawsuits filed against other financial institutions pertaining to overdraft fee disclosures.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended to assist readers in understanding the consolidated financial condition and results of operations of Orrstown and should be read in conjunction with the preceding unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q, as well as with the audited consolidated financial statements and notes thereto for the year ended December 31, 2023, included in our Annual Report on Form 10-K filed with the SEC on March 14, 2024. Throughout this discussion, the yield on earning assets is stated on a fully taxable-equivalent basis and balances represent average daily balances unless otherwise stated. All dollar amounts presented in the tables, except per share amounts, are in thousands.

Overview

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.

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.

For the three months ended September 30, 2024 and 2023, the Company had a net loss of $7.9 million and net income of $9.0 million, respectively. For the nine months ended September 30, 2024 and 2023, the Company had net income of $8.4 million and $28.0 million, respectively. Diluted loss per share was $0.41 and diluted earnings per share was $0.87 for the three months ended September 30, 2024 and 2023, respectively. Diluted earnings per share was $0.62 and $2.68 for the nine months ended September 30, 2024 and 2023, respectively. For the three and nine months ended September 30, 2024, the Company incurred merger-related expenses of $17.0 million and $18.8 million, respectively. In addition, the three months ended September 30, 2024 included non-recurring charges of $15.5 million for the provision for credit losses on acquired non-PCD loans and $4.8 million for the retirement of an executive.

Cautionary Note About Forward-Looking Statements

Certain statements appearing herein, which are not historical in nature, are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, we may make other written and oral communications, from time to time, that contain such statements. Such forward-looking statements reflect the current views of the Company's management with respect to, among other things, future events and the Company's financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “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.

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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, including industry consolidation and development of competing financial products and services; changes in consumer behavior due to changing political, business and economic conditions, or legislative or regulatory initiatives; changes in laws and regulations; changes in credit quality; inability to raise capital, if necessary, under favorable conditions; volatility in the securities markets; the demand for our products and services; deteriorating economic conditions; geopolitical tensions; operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics; expenses associated with litigation and legal proceedings; the possibility that the anticipated benefits of the merger with Codorus Valley (the “Merger”) are not realized when expected or at all; the possibility that the Merger may be more expensive to complete and integrate than anticipated; the possibility that revenues following the Merger may be lower than expected; potential adverse reactions or changes to business or employee relationships, including those resulting from the completion of the Merger; the ability to complete the integration of the two companies successfully; the dilution caused by the Company’s issuance of additional shares of its capital stock in connection with the Merger; and other risks and uncertainties, including those detailed in our Annual Report on Form 10-K for the year ended December 31, 2023, and our Quarterly Reports on Form 10-Q under the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other filings made with the SEC. The statements are valid only as of the date hereof and we disclaim any obligation to update this information.

Economic Climate, Inflation and Interest Rates

Preliminary real GDP 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.

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.

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.

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.

Critical Accounting Estimates

The Company’s accounting and reporting policies are in accordance with GAAP and follow accounting and reporting guidelines prescribed by bank regulatory authorities and general practices within the financial services industry in which it operates. Our financial position and results of operations are affected by management's application of accounting policies, including estimates, and assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the balance sheet date and through the date the financial statements are filed with the SEC. Different assumptions in the application of these policies could result in material changes in the consolidated financial position and/or consolidated results of operations and related disclosures. The more critical accounting estimates include accounting for credit losses, income tax methodologies and accounting for business combinations.

Business Combinations

The Company accounts for its mergers and acquisitions using the acquisition method of accounting under the provisions of the FASB ASC Topic 805, Business Combinations. Under ASC 805, the assets acquired, including identified intangible assets such as core deposit intangibles and customer list intangibles, and liabilities assumed in a business combination are recognized at their acquisition-date fair value, while transaction costs and restructuring costs associated with the business combination are expensed as incurred.

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The excess of the merger consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill.

The valuations are based upon management’s assumptions of future growth rates, future attrition, discount rates and other relevant factors, which involves a significant level of estimation and uncertainty. In addition, management engaged independent third-party specialists to assist in the development of the fair values of the acquired assets and assumed liabilities. The preliminary estimates of fair values may be adjusted for a period of time subsequent to the acquisition date if new information is obtained about facts and circumstances that existed as of the merger date that, if known, would have affected the measurement of the amounts recognized as of that date. Adjustments would be recorded to goodwill during the current reporting period. Examples of the impacted acquired loans and assumed liabilities includes loans, deposits, identifiable intangible assets, borrowings and certain other assets and liabilities.

For acquired loans at the merger date, management evaluated and classified loans based upon whether the loans had experienced a more-than-insignificant amount of credit deteriorating since origination. To determine the fair value of the loans, significant estimates and assumptions were applied, including projected cash flows, discount rates, repayment speeds, credit loss severity rates, default rates and realizable collateral values. At acquisition, the allowance on PCD loans is booked directly to the ACL using the Company’s existing ACL methodology, but there is no initial impact to net income. Subsequent to acquisition, future changes in estimates of expected credit losses on PCD loans are recognized as provision expense (or reversal of provision expense). The ACL for non-PCD loans is recognized as a provision for credit losses in the same reporting period as the business acquisition, using the Company’s existing ACL methodology.

These critical accounting estimates are discussed in detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2023. Significant accounting policies and any changes in accounting principles and effects of new accounting pronouncements are discussed in Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data," in our Annual Report on Form 10-K for the year ended December 31, 2023.

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RESULTS OF OPERATIONS

Three months ended September 30, 2024 compared with three months ended September 30, 2023

Summary

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.

Net interest income totaled $51.7 million for the three months ended September 30, 2024 compared to $26.2 million for the three months ended September 30, 2023.

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.

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.

Noninterest expenses totaled $60.3 million for the three months ended September 30, 2024 compared to $20.4 million for the three months ended September 30, 2023. The increase of $39.9 million includes non-recurring expenses of $21.7 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.

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

Net Interest Income

Net interest income increased by $25.5 million from $26.2 million for the three months ended September 30, 2023 to $51.7 million for the three months ended September 30, 2024. Interest income on loans increased by $37.9 million, from $32.7 million for the three months ended September 30, 2023 to $70.6 million for the three months ended September 30, 2024. Interest income on investment securities increased by $4.6 million, from $5.3 million for the three months ended September 30, 2023 to $9.9 million for the three months ended September 30, 2024. Total interest expense increased by $18.8 million from $12.5 million for the three months ended September 30, 2023 to $31.3 million for the three months ended September 30, 2024. Interest expense on deposits increased by $18.0 million from $10.6 million for the three months ended September 30, 2023 to $28.6 million for the three months ended September 30, 2024. Interest expense on borrowings increased by $797 thousand to $2.7 million for the three months ended September 30, 2024 compared to $1.9 million for the three months ended September 30, 2023.

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


	Three Months Ended September 30, 2024						Three Months Ended September 30, 2023
	Average Balance		Taxable- Equivalent Interest		Taxable- Equivalent Rate		Average Balance		Taxable- Equivalent Interest		Taxable- Equivalent Rate
Assets
Federal funds sold & interest-bearing bank balances	$	184,465	$	2,452	5.29	%	$	57,778	$	633	4.35	%


Investment securities (1)(2)	849,700		10,123		4.77		521,234		5,548		4.26


Loans (1)(3)(4)	3,989,259		70,849		7.07		2,256,727		32,878		5.78
Total interest-earning assets	5,023,424		83,424		6.61		2,835,739		39,059		5.47


Other assets	491,719						200,447

Total	$	5,515,143					$	3,036,186
Liabilities and Shareholders’ Equity
Interest-bearing demand deposits	$	2,554,743	16,165		2.52		$	1,541,728	7,476		1.92
Savings deposits	283,337		148		0.21		190,817		164		0.34
Time deposits	1,014,628		12,290		4.82		357,194		2,942		3.27
Total interest-bearing deposits	3,852,708		28,603		2.95		2,089,739		10,582		2.01
Securities sold under agreements to repurchase and federal funds purchased	23,075		96		1.66		15,006		31		0.83
FHLB advances and other borrowings	115,388		1,154		3.98		128,131		1,354		4.19
Subordinated notes and trust preferred debt	68,399		1,437		8.36		32,066		505		6.29
Total interest-bearing liabilities	4,059,570		31,290		3.07		2,264,942		12,472		2.19
Noninterest-bearing demand deposits	807,886						468,628
Other liabilities	110,017						54,353
Total liabilities	4,977,473						2,787,923
Shareholders’ equity	537,670						248,263
Total	$	5,515,143					$	3,036,186
Taxable-equivalent net interest income / net interest spread			52,134		3.55	%			26,587		3.29	%
Taxable-equivalent net interest margin					4.14	%					3.73	%
Taxable-equivalent adjustment			(437)						(368)
Net interest income			$	51,697					$	26,219


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

Net interest income on a taxable-equivalent basis increased by $25.5 million to $52.1 million for the three months ended September 30, 2024 from $26.6 million for the three months ended September 30, 2023. The Company's net interest spread increased by 26 basis points from 3.29% for the three months ended September 30, 2023 to 3.55% for the three months ended September 30, 2024.

Taxable-equivalent net interest margin increased by 41 basis points to 4.14% for the three months ended September 30, 2024 from 3.73% for the three months ended September 30, 2023. The taxable-equivalent yield on interest-earning assets increased by 114 basis points from 5.47% for the three months ended September 30, 2023 to 6.61% for the three months ended September 30, 2024, due primarily to the accretion recognized on fair value marks to loans and securities assumed in the Merger.

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This increase in yield on interest earning assets was partially offset by an increase of 88 basis points in the cost of interest-bearing liabilities from 2.19% to 3.07% due primarily to increased funding costs on deposits from higher market interest rates and competitive pressures and an increase in the interest rate on Orrstown Financial Services, Inc.'s subordinated notes, which converted from a fixed rate to a floating rate on December 30, 2023.

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.

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.

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.

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.

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.

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

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

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.

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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.

Provision for Credit Losses

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

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.

Additional information is included in the "Credit Risk Management" section herein.

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Noninterest Income

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


	Three Months Ended September 30,				$ Change		% Change
	2024		2023		2024-2023		2024-2023
Service charges on deposit accounts	$	1,801	$	1,020	$	781	76.6	%
Interchange income	1,779		963		816		84.7	%
Other service charges, commissions and fees	559		240		319		132.9	%
Swap fee income	505		255		250		98.0	%
Trust and investment management income	3,760		1,853		1,907		102.9	%
Brokerage income	1,277		973		304		31.2	%
Mortgage banking activities	491		(142)		633		(445.8)	%

Income from life insurance	1,289		620		669		107.9	%
Other income	654		141		513		363.8	%
Investment securities gains	271		2		269		13,450.0	%
Total noninterest income	$	12,386	$	5,925	$	6,461	109.0	%

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:

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

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

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

•Other income increased by $513 thousand due primarily to solar tax credits of $349 thousand.

•The gain on investment securities was due to a security redemption and the mark-to-market activity on an equity security.

•Other line items within noninterest income showed fluctuations attributable to normal business operations.

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Noninterest Expenses

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


	Three Months Ended September 30,				$ Change		% Change
	2024		2023		2024-2023		2024-2023
Salaries and employee benefits	$	27,190	$	12,885	$	14,305	111.0	%
Occupancy	1,818		1,089		729		66.9	%
Furniture and equipment	2,515		1,371		1,144		83.4	%
Data processing	2,046		1,248		798		63.9	%

Automated teller machine and interchange fees	784		314		470		149.7	%
Advertising and bank promotions	537		332		205		61.7	%
FDIC insurance	862		477		385		80.7	%

Professional services	1,119		965		154		16.0	%
Directors' compensation	123		199		(76)		(38.2)	%


Taxes other than income	503		387		116		30.0	%
Intangible asset amortization	2,464		228		2,236		980.7	%

Merger-related expenses	16,977		—		16,977		100.0	%

Restructuring expenses	257		—		257		—	%

Other operating expenses	3,104		952		2,152		226.1	%
Total noninterest expenses	$	60,299	$	20,447	$	39,852	194.9	%

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:

•Merger-related expenses totaled $17.0 million, which primarily included employee separation costs, vendor contract terminations and professional fees incurred in connection with the Merger.

•Salaries and employee benefits expense includes a $4.8 million charge associated with the retirement of an executive.

•Data processing expense increased by $798 thousand due to the use of two core processing systems until the system conversion process is completed in the fourth quarter of 2024.

•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.

•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.

•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.

•Other line items within noninterest expenses showed fluctuations attributable to normal business operations.

Income Tax Expense

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.

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Nine months ended September 30, 2024 compared with nine months ended September 30, 2023

Summary

Net income totaled $8.4 million for the nine months ended September 30, 2024 compared to $28.0 million for the same period in 2023. Diluted earnings per share for the nine months ended September 30, 2024 totaled $0.62 compared to $2.68 for the nine months ended September 30, 2023. For the nine months ended September 30, 2024, the Company incurred merger-related expenses of $18.8 million, provision for credit losses on acquired non-PCD loans of $15.5 million and retirement expenses for one executive of $4.8 million, which were included in non-interest expenses of the unaudited condensed consolidated statements of operations. Excluding these non-recurring expenses, net income and diluted earnings per common share totaled $39.4 million and $2.93, respectively, for the nine months ended September 30, 2024. For the nine months ended September 30, 2023, the Company recorded a gain of $1.2 million from the sale of the Bank's Path Valley branch. See “Supplemental Reporting of Non-GAAP Measures” for additional information.

Net interest income totaled $104.7 million for the nine months ended September 30, 2024 compared to $78.9 million for the nine months ended September 30, 2023.

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

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

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.

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

Net Interest Income

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.

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


	Nine Months Ended September 30, 2024						Nine Months Ended September 30, 2023
	Average Balance		Taxable- Equivalent Interest		Taxable- Equivalent Rate		Average Balance		Taxable- Equivalent Interest		Taxable- Equivalent Rate
Assets
Federal funds sold & interest-bearing bank balances	$	134,136	$	5,272	5.25	%	$	41,861	$	1,349	4.31	%


Investment securities (1)(2)	636,781		21,931		4.60		524,365		16,523		4.21


Loans (1)(3)(4)(5)	2,878,171		142,921		6.63		2,223,701		93,051		5.59
Total interest-earning assets	3,649,088		170,124		6.23		2,789,927		110,923		5.31


Other assets	298,334						196,694

Total	$	3,947,422					$	2,986,621
Liabilities and Shareholders’ Equity
Interest-bearing demand deposits	$	1,927,337	35,475		2.46		$	1,519,013	18,611		1.64
Savings deposits	206,552		432		0.28		204,832		431		0.28
Time deposits	642,959		21,477		4.46		320,000		6,350		2.65
Total interest-bearing deposits	2,776,848		57,384		2.76		2,043,845		25,392		1.66
Securities sold under agreements to repurchase and federal funds purchased	16,191		148		1.22		14,190		84		0.79
FHLB advances and other borrowings	122,604		3,780		4.12		122,300		3,992		4.36
Subordinated notes and trust preferred debt	44,294		2,925		8.82		32,049		1,513		6.29
Total interest-bearing liabilities	2,959,937		64,237		2.90		2,212,384		30,981		1.87
Noninterest-bearing demand deposits	550,407						480,006
Other liabilities	76,846						52,618
Total liabilities	3,587,190						2,745,008
Shareholders’ equity	360,232						241,613
Total	$	3,947,422					$	2,986,621
Taxable-equivalent net interest income / net interest spread			105,887		3.33	%			79,942		3.44	%
Taxable-equivalent net interest margin					3.88	%					3.83	%
Taxable-equivalent adjustment			(1,206)						(1,054)
Net interest income			$	104,681					$	78,888


NOTES TO ANALYSIS OF NET INTEREST INCOME:
(1)			Yields and interest income on tax-exempt assets have been computed on a taxable-equivalent basis assuming a 21% tax rate.
(2)			Average balance of investment securities is computed at fair value.
(3)			Average balances include nonaccrual loans.
(4)			Interest income on loans includes prepayment and late fees, where applicable.
(5)			Interest income on loans includes interest recovered of $1.6 million from the payoff of a commercial real estate loan on nonaccrual status during the nine months ended September 30, 2024.

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

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.

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

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

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.

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

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

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.

Interest expense on interest-bearing liabilities 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. The cost of interest-bearing liabilities increased by 103 basis points from 1.87% for the nine months ended September 30, 2023 to 2.90% for the nine months ended September 30, 2024 as funding costs increased due to higher market interest rates and competitive pressures on deposit pricing.

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The average balance of interest-bearing deposits increased by $733.0 million to $2.8 billion for the nine months ended September 30, 2024 from $2.0 billion for the nine months ended September 30, 2023. Average interest-bearing demand deposits increased by $408.3 million, average time deposits increased by $323.0 million and average savings deposits increased by $1.7 million for the nine months ended September 30, 2024 in relation to the comparable prior period. Amortization of fair value marks on acquired time deposits was $1.4 million for the nine months ended September 30, 2024.

Interest expense on borrowings increased by $1.3 million to $6.9 million for the nine months ended September 30, 2024 from $5.6 million for the nine months ended September 30, 2023 as the cost of borrowings increased by 57 basis points to 5.00% for the nine months ended September 30, 2024 from 4.43% for the nine months ended September 30, 2023. Average borrowings increased by $14.5 million from $168.5 million for the nine months ended September 30, 2023 to $183.1 million for the nine months ended September 30, 2024, which included average subordinated debt and trust preferred debt of $44.3 million for the three months ended September 30, 2024, an increase of $12.3 million, from an average of $32.0 million for the three months ended September 30, 2023. The increase is due to the assumed 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 8.77% on December 30, 2023. 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 contractual interest rate on Orrstown Financial Services, Inc.'s subordinated notes was 8.75% at September 30, 2024 compared to 6.00% at September 30, 2023. Amortization of fair value marks on acquired borrowings was $152 thousand for the nine months ended September 30, 2024.

Provision for Credit Losses

The Company recorded a provision for credit losses of $14.8 million for the nine months ended September 30, 2024 compared to $1.3 million for the same period in 2023, which included a reversal of the provision for credit losses for off-balance sheet credit exposures of $557 thousand for the nine months ended September 30, 2024. The provision for credit losses increased primarily due to $15.5 million of reserves on acquired non-PCD loans. The ACL to total loan ratio remained at 1.25% at September 30, 2023 and September 30, 2024. The provision expense recorded in the nine months ended September 30, 2023 was due to commercial loan growth, an increase in the Delinquency and Classified Loan Trends qualitative factor for the commercial & industrial and owner-occupied commercial real estate loan classes and an increase in the Economic Conditions qualitative factor for consumer loans and an overall increase in expected loss rates under CECL, which was adopted on January 1, 2023.

Net charge-offs for the nine months ended September 30, 2024 totaled $340 thousand compared to net charge-offs of $587 thousand for the nine 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.

Additional information is included in the "Credit Risk Management" section herein.

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Noninterest Income

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


	Nine Months Ended September 30,				$ Change		% Change
	2024		2023		2024-2023		2024-2023
Service charges on deposit accounts	$	3,824	$	2,966	$	858	28.9	%
Interchange income	3,651		2,921		730		25.0	%
Other service charges, commissions and fees	1,019		702		317		45.2	%
Swap fee income	1,079		451		628		139.2	%
Trust and investment management income	7,916		5,668		2,248		39.7	%
Brokerage income	3,535		2,727		808		29.6	%
Mortgage banking activities	1,318		448		870		194.2	%

Income from life insurance	2,569		1,855		714		38.5	%
Other income	1,023		1,431		(408)		(28.5)	%
Investment securities losses	254		(8)		262		3,275.0	%
Total noninterest income	$	26,188	$	19,161	$	7,027	36.7	%

Noninterest income increased by $7.0 million from $19.2 million for the nine months ended September 30, 2023 to $26.2 million for the nine months ended September 30, 2024. The primary driver of the overall increase was the impact of the Merger in the nine months ended September 30, 2024. The following were significant components of the change in this line item that did not result from the Merger:

•Wealth management income increased by $3.1 million due to strong market performance and growth in managed assets, both organically and through the acquisition of two registered investment advisory firms since September 2023 with total assets under management of $151 million.

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

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

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

•The gain on investment securities was due to a security redemption and the mark-to-market activity on an equity security.

•Other line items within noninterest income showed fluctuations attributable to normal business operations.

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Noninterest Expenses

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


	Nine Months Ended September 30,				$ Change		% Change
	2024		2023		2024-2023		2024-2023
Salaries and employee benefits	$	54,137	$	38,135	$	16,002	42.0	%
Occupancy	4,197		3,249		948		29.2	%
Furniture and equipment	5,480		3,810		1,670		43.8	%
Data processing	4,548		3,666		882		24.1	%

Automated teller machine and interchange fees	1,476		920		556		60.4	%
Advertising and bank promotions	1,709		1,656		53		3.2	%
FDIC insurance	1,722		1,500		222		14.8	%

Professional services	2,551		2,203		348		15.8	%
Directors' compensation	646		667		(21)		(3.1)	%


Taxes other than income	1,046		847		199		23.5	%
Intangible asset amortization	2,904		717		2,187		305.0	%

Merger-related expenses	18,784		—		18,784		100.0	%

Restructuring expenses	257		—		257		—	%

Other operating expenses	5,950		4,081		1,869		45.8	%
Total noninterest expenses	$	105,407	$	61,451	$	43,956	71.5	%

Noninterest expense increased by $44.0 million from $61.5 million for the nine months ended September 30, 2023 to $105.4 million for the nine months ended September 30, 2024. The primary driver of the overall increase was the impact of the Merger in the nine months ended September 30, 2024. The following were additional significant components of the change in this line item:

•Merger-related expenses totaled $18.8 million, which primarily included employee separation costs, vendor contract terminations and professional fees incurred in connection with the Merger.

•Salaries and employee benefits expense includes a $4.8 million charge associated with the retirement of an executive.

•Data processing expense increased by $882 thousand due to the use of two core processing systems until the system conversion process is completed in the fourth quarter of 2024.

•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.

•Other operating expenses increased by $1.9 million partially due to an increase in credit valuation adjustments on derivatives of $545 thousand. The remaining change is attributed to the impact of the merger and normal business operations.

•Other line items within noninterest expenses showed fluctuations attributable to normal business operations.

Income Tax Expense

Income tax expense totaled $2.3 million, an effective tax rate of 21.6%, for the nine months ended September 30, 2024 compared with $7.3 million and an effective tax rate of 20.7% for the nine months ended September 30, 2023. The Company’s effective tax rate is greater than the 21% federal statutory rate due to disallowed interest expense, state income taxes and nondeductible merger-related expenses partially offset by tax-exempt income, including interest earned on tax-exempt loans and investment securities, income from life insurance policies and tax credits. The increase in the effective tax rate from the nine months ended September 30, 2023 to the nine months ended September 30, 2024 was primarily due to an increase in the portion of interest expense disallowed as a deduction against earnings under the Tax Equity and Fiscal Responsibility Act of 1982, an increase in state taxes as a result of a greater percentage of taxable income earned in a state with a state income tax and the nondeductible merger-related expenses.

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FINANCIAL CONDITION

Management devotes substantial time to overseeing the investment in and costs to fund loans and investment securities through deposits and borrowings, as well as the formulation and adherence to policies directed toward enhancing profitability and managing the risks associated with these investments.

Investment Securities

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

The Company has established investment policies and an asset/liability management policy to assist in administering its investment portfolio. Decisions to purchase or sell these securities are based on economic conditions and management’s strategy to respond to changes in interest rates, liquidity, pledges to secure deposits and repurchase agreements and other factors while trying to maximize return on the investments. The Company may segregate its investment security portfolio into three categories: “securities available-for-sale,” “trading securities” and “securities held-to-maturity.” At September 30, 2024 and December 31, 2023, management classified the entire investment securities portfolio as AFS, which is accounted for at current market value with non-credit related losses and gains reported in OCI, net of income taxes.

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.

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.

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


Sector	Portfolio Mix		Amortized Book Value		Fair Value		Credit Enhancement		AAA		AA		A		BBB		NR		Collateral / Guarantee Type
Unsecured ABS	—	%	$	3,199	$	2,975	27	%	—	%	—	%	—	%	—	%	100	%	Unsecured Consumer Debt
Student Loan ABS	1		4,348		4,283		27		—		—		—		—		100		Seasoned Student Loans
Federal Family Education Loan ABS	10		83,199		82,962		11		7		80		—		13		—		Federal Family Education Loan (1)
PACE Loan ABS	—		2,034		1,813		7		100		—		—		—		—		PACE Loans
Non-Agency CMBS	2		13,750		14,045		26		—		—		—		—		100
Non-Agency RMBS	2		16,749		14,212		16		100		—		—		—		—		Reverse Mortgages (2)
Municipal - General Obligation	12		99,779		93,395				11		82		7		—		—
Municipal - Revenue	14		121,130		112,705				—		82		12		—		6
SBA ReRemic	—		2,427		2,409				—		100		—		—		—		SBA Guarantee (3)
Small Business Administration	1		6,632		7,042				—		100		—		—		—		SBA Guarantee (3)
Agency MBS	18		154,058		154,762				—		100		—		—		—		Residential Mortgages (3)
Agency CMO	38		316,385		315,677				—		100		—		—		—
U.S. Treasury securities	2		20,047		18,373				—		100		—		—		—		U.S. Government Guarantee (3)
Corporate debt	—		1,932		1,975				—		—		52		48		—
	100	%	$	845,669	$	826,628			4	%	89	%	3	%	1	%	3	%

(1) Minimum of 97% guaranteed by U.S. government
(2) Non-agency reverse mortgages with current structural credit enhancements
(3) Guaranteed by U.S. government or U.S. government agencies



Note : Ratings in table are the lowest of the six rating agencies (Standard & Poor's, Moody's, Fitch, Morningstar, DBRS and Kroll Bond Rating Agency). Standard & Poor's rates U.S. government obligations at AA+.

Loan Portfolio

The Company offers a variety of products to meet the credit needs of its borrowers, principally commercial real estate loans, commercial and industrial loans, retail loans secured by residential properties, and, to a lesser extent, installment loans. No loans are extended to non-domestic borrowers or governments.

The risks associated with lending activities differ among loan segments and classes and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans and general economic conditions. Any of these factors may adversely impact a borrower’s ability to repay loans, and also impact the associated collateral.

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A further discussion on the Company's loan segments and classes, the related risks, ACL and FDM are included in Note 1, Summary of Significant Accounting Policies, and Note 4, Loans and Allowance for Credit Losses, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information." The following table presents the loan portfolio, excluding residential LHFS, by segment and class at September 30, 2024 and December 31, 2023: September 30, 2024 December 31, 2023 Commercial real estate: Owner occupied $ 622,726 $ 373,757 Non-owner occupied 1,164,501 694,638 Multi-family 276,296 150,675 Non-owner occupied residential 190,786 95,040 Acquisition and development: 1-4 family residential construction 56,383 24,516 Commercial and land development 262,317 115,249 Commercial and industrial 601,469 367,085 Municipal 27,960 9,812 Residential mortgage: First lien 451,195 266,239 Home equity - term 6,508 5,078 Home equity - lines of credit 303,165 186,450 Installment and other loans 18,131 9,774 $ 3,981,437 $ 2,298,313

Total loans increased by $1.7 billion from December 31, 2023 to September 30, 2024. This increase is due to $1.6 million in loans acquired in the Merger and continued portfolio growth in the commercial loans segment and residential mortgage segment during the nine months ended September 30, 2024.

Asset Quality

Risk Elements

The Company’s loan portfolio is subject to varying degrees of credit risk. Credit risk is managed through the Company's underwriting standards, on-going credit reviews and monitoring of asset quality measures. Additionally, loan portfolio diversification, which limits exposure to a single industry or borrower, and collateral requirements also mitigate the Company's risk of credit loss.

The loan portfolio consists principally of loans to borrowers in south central Pennsylvania and the greater Baltimore, Maryland region. As the majority of loans are concentrated in these geographic regions, a substantial portion of the borrowers' ability to honor their obligations may be affected by the level of economic activity in these market areas.

Nonperforming assets include nonaccrual loans and foreclosed real estate. In addition, loan modifications to borrowers experiencing financial difficulty and loans past due 90 days or more and still accruing are also deemed to be risk assets. For all loan classes, the accrual of interest income on loans, including individually evaluated loans, ceases when principal or interest is past due 90 days or more and collateral is inadequate to cover principal and interest or immediately if, in the opinion of management, full collection is unlikely. Interest will continue to accrue on loans past due 90 days or more if the collateral is adequate to cover principal and interest, and the loan is in the process of collection. Interest accrued, but not collected, as of the date of placement on nonaccrual status, is generally reversed and charged against interest income, unless fully collateralized. Subsequent payments received are either applied to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectability of principal. Loans are returned to accrual status, for all loan classes, when all the principal and interest amounts contractually due are brought current, the loans have performed in accordance with the contractual terms of the note for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is reasonably assured. Past due status is based on contract terms of the loan.

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." The following table presents the Company’s risk elements and relevant asset quality ratios at September 30, 2024 and December 31, 2023.

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September 30, 2024 December 31, 2023 Nonaccrual loans $ 26,927 $ 25,527 OREO 138 — Total nonperforming assets 27,065 25,527 FDMs still accruing 9,497 9 Loans past due 90 days or more and still accruing 337 66 Total nonperforming and other risk assets ("total risk assets") $ 36,899 $ 25,602 Loans 30-89 days past due and still accruing $ 6,189 $ 8,111 Asset quality ratios: Total nonperforming loans to total loans 0.68 % 1.11 % Total nonperforming assets to total assets 0.49 % 0.83 % Total nonperforming assets to total loans and OREO 0.68 % 1.11 % Total risk assets to total loans and OREO 0.93 % 1.11 % Total risk assets to total assets 0.67 % 0.84 % ACL to total loans 1.25 % 1.25 % ACL to nonperforming loans 184.31 % 112.44 % ACL to nonperforming loans and FDMs still accruing 136.26 % 112.40 % Net charge-offs to total average loans (1) 0.02 % 0.03 %

(1) Annualized

Nonperforming assets include nonaccrual loans and foreclosed real estate. Risk assets, which include nonperforming assets, FDMs still accruing and loans past due 90 days or more and still accruing, totaled $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.

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The following table presents the amortized cost basis of nonaccrual loans, according to loan class, with and without reserves on individually evaluated loans at September 30, 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.


	September 30, 2024								December 31, 2023
	Nonaccrual loans with a related ACL		Nonaccrual loans with no related ACL		Total nonaccrual loans		Loans Past Due 90+ Accruing		Nonaccrual loans with a related ACL		Nonaccrual loans with no related ACL		Total nonaccrual loans		Loans Past Due 90+ Accruing
Commercial real estate:
Owner-occupied	$	232	$	4,905	$	5,137	$	252	$	—	$	15,786	$	15,786	$	—
Non-owner occupied	—		1,420		1,420		—		—		240		240		—
Multi-family	1,000		—		1,000		—		—		1,233		1,233		—
Non-owner occupied residential	—		564		564		—		—		2,572		2,572		—
Acquisition and development:
1-4 family residential construction	—		152		152		—		—		—		—		—
Commercial and land development	3,655		—		3,655		—		—		1,361		1,361		—
Commercial and industrial	2,455		6,605		9,060		—		68		604		672		—

Residential mortgage:
First lien	312		3,912		4,224		63		—		2,309		2,309		66
Home equity – term	37		—		37		22		—		3		3		—
Home equity – lines of credit	—		1,652		1,652		—		—		1,312		1,312		—
Installment and other loans	15		11		26		—		3		36		39		—
Total	$	7,706	$	19,221	$	26,927	$	337	$	71	$	25,456	$	25,527	$	66

During 2024, two commercial real estate loans on nonaccrual status totaling $15.0 million were paid off.

The following table presents our exposure to relationships that are individually evaluated and the partial charge-offs taken to date and specific reserves established on those relationships at September 30, 2024 and December 31, 2023.


	# of Relationships	Individually Evaluated Loans		Partial Charge-offs to Date		Specific Reserves
September 30, 2024
Relationships greater than $1,000,000	7	$	12,688	$	—	$	3,337
Relationships greater than $500,000 but less than $1,000,000	6	5,019		313		738
Relationships greater than $250,000 but less than $500,000	9	2,971		—		469
Relationships less than $250,000	112	6,417		444		263
	134	$	27,095	$	757	$	4,807
December 31, 2023
Relationships greater than $1,000,000	4	$	20,363	$	—	$	—
Relationships greater than $500,000 but less than $1,000,000	1	616		388		—
Relationships greater than $250,000 but less than $500,000	1	257		—		—
Relationships less than $250,000	78	4,472		214		77
	84	$	25,708	$	602	$	77

The Company takes partial charge-offs on collateral-dependent loans when carrying value exceeds estimated fair value, as determined by the most recent appraisal adjusted for current (within the quarter) conditions, less costs to dispose. Specific reserves remain in place if updated appraisals are pending and represent management’s estimate of potential loss.

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

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In its individually evaluated loan analysis, the Company determines the extent of any full or partial charge-offs that may be required, or any reserves that may be needed. The determination of the Company’s charge-offs or specific reserve include an evaluation of the outstanding loan balance and the related collateral securing the credit. Through a combination of collateral securing the loans and partial charge-offs taken to date, the Company believes that it has adequately provided for the potential losses that it may incur on these relationships at September 30, 2024. However, over time, additional information may result in increased reserve allocations or, alternatively, it may be deemed that the reserve allocations exceed those that are needed.

Credit Risk Management

Allowance for Credit Losses

The Company maintains the ACL at a level deemed adequate by management for expected credit losses. As disclosed in Note 1, 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.

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."

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.


	Term Loans Amortized Cost Basis by Origination Year
As of September 30, 2024	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Basis		Revolving Loans Converted to Term		Total
Commercial Real Estate:
Owner-occupied:
Risk rating
Pass	$	30,447	$	85,352	$	129,668	$	114,761	$	32,532	$	160,478	$	6,446	$	283	$	559,967
Special mention	—		2,688		313		1,348		1,831		6,670		165		—		13,015
Substandard - Non-IEL	110		2,077		17,653		7,597		8,435		8,641		94		—		44,607
Substandard - IEL	—		192		—		896		932		3,117		—		—		5,137
Total owner-occupied loans	$	30,557	$	90,309	$	147,634	$	124,602	$	43,730	$	178,906	$	6,705	$	283	$	622,726
Current period gross charge offs - owner-occupied	$	—	$	—	$	13	$	313	$	—	$	12	$	—	$	—	$	338
continued

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	Term Loans Amortized Cost Basis by Origination Year
As of September 30, 2024	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Basis		Revolving Loans Converted to Term		Total
Non-owner occupied:
Risk rating
Pass	$	76,044	$	137,520	$	194,349	$	328,128	$	130,201	$	262,980	$	778	$	398	$	1,130,398
Special mention	—		10,108		2,981		337		8,858		3,790		—		—		26,074
Substandard - Non-IEL	—		—		1,156		—		—		4,594		—		859		6,609
Substandard - IEL	—		—		—		—		—		1,420		—		—		1,420
Total non-owner occupied loans	$	76,044	$	147,628	$	198,486	$	328,465	$	139,059	$	272,784	$	778	$	1,257	$	1,164,501
Current period gross charge offs - non-owner occupied	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Multi-family:
Risk rating
Pass	$	6,916	$	8,438	$	106,885	$	59,107	$	31,234	$	61,297	$	75	$	—	$	273,952
Special mention	—		—		1,107		—		—		—		—		—		1,107
Substandard - Non-IEL	—		—		—		—		—		237		—		—		237
Substandard - IEL	—		—		—		—		—		1,000		—		—		1,000
Total multi-family loans	$	6,916	$	8,438	$	107,992	$	59,107	$	31,234	$	62,534	$	75	$	—	$	276,296
Current period gross charge offs - multi-family	$	—	$	—	$	—	$	—	$	—	$	7	$	—	$	—	$	7
Non-owner occupied residential:
Risk rating
Pass	$	8,894	$	23,655	$	31,532	$	30,155	$	19,933	$	73,281	$	439	$	—	$	187,889
Special mention	—		—		—		147		43		526		—		—		716
Substandard - Non-IEL	—		—		52		134		—		1,431		—		—		1,617
Substandard - IEL	—		—		391		33		—		140		—		—		564
Total non-owner occupied residential loans	$	8,894	$	23,655	$	31,975	$	30,469	$	19,976	$	75,378	$	439	$	—	$	190,786
Current period gross charge offs - non-owner occupied residential	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Acquisition and development:
1-4 family residential construction:
Risk rating
Pass	$	32,828	$	14,652	$	5,175	$	1,152	$	940	$	946	$	—	$	242	$	55,935
Special mention	74		222		—		—		—		—		—		—		296
Substandard - Non-IEL	—		—		—		—		—		—		—		—		—
Substandard - IEL	—		—		—		152		—		—		—		—		152
Total 1-4 family residential construction loans	$	32,902	$	14,874	$	5,175	$	1,304	$	940	$	946	$	—	$	242	$	56,383
Current period gross charge offs - 1-4 family residential construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial and land development:
Risk rating
Pass	$	44,312	$	71,243	$	70,096	$	16,594	$	19,648	$	7,079	$	4,964	$	8,837	$	242,773
Special mention	2,306		2,382		4,372		994		2,123		3,437		—		—		15,614
Substandard - Non-IEL	—		275		—		—		—		—		—		—		275
Substandard - IEL	—		—		3,285		370		—		—		—		—		3,655
Total commercial and land development loans	$	46,618	$	73,900	$	77,753	$	17,958	$	21,771	$	10,516	$	4,964	$	8,837	$	262,317
Current period gross charge offs - commercial and land development	$	—	$	23	$	—	$	—	$	—	$	—	$	—	$	—	$	23
continued

Table of Contents


	Term Loans Amortized Cost Basis by Origination Year
As of September 30, 2024	2024		2023		2022		2021		2020		Prior		Revolving Loans Amortized Basis		Revolving Loans Converted to Term		Total
Commercial and Industrial:
Risk rating
Pass	$	71,366	$	93,138	$	87,249	$	80,565	$	28,924	$	85,851	$	105,250	$	4,138	$	556,481
Special mention	446		2,153		2,640		245		1,379		1,358		3,041		—		11,262
Substandard - Non-IEL	—		1,382		2,868		7,656		—		3,212		9,548		—		24,666
Substandard - IEL	419		3,486		190		622		2,965		1,364		14		—		9,060
Total commercial and industrial loans	$	72,231	$	100,159	$	92,947	$	89,088	$	33,268	$	91,785	$	117,853	$	4,138	$	601,469
Current period gross charge offs - commercial and industrial	$	—	$	—	$	202	$	11	$	—	$	6	$	—	$	—	$	219
Municipal:
Risk rating
Pass	$	227			$	10,388	$	3,124	$	293	$	13,928	$	—	$	—	$	27,960
Total municipal loans	$	227	$	—	$	10,388	$	3,124	$	293	$	13,928	$	—	$	—	$	27,960
Current period gross charge offs - municipal	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential mortgage:
First lien:
Payment performance
Performing	$	50,716	$	98,953	$	105,266	$	53,549	$	25,783	$	111,910	$	—	$	626	$	446,803
Nonperforming	—		312		244		487		116		3,233		—		—		4,392
Total first lien loans	$	50,716	$	99,265	$	105,510	$	54,036	$	25,899	$	115,143	$	—	$	626	$	451,195
Current period gross charge offs - first lien	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Home equity - term:
Payment performance
Performing	$	621	$	867	$	1,075	$	209	$	478	$	3,221	$	—	$	—	$	6,471
Nonperforming	—		—		36		—		—		1		—		—		37
Total home equity - term loans	$	621	$	867	$	1,111	$	209	$	478	$	3,222	$	—	$	—	$	6,508
Current period gross charge offs - home equity - term	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Home equity - lines of credit:
Payment performance
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	225,526	$	75,987	$	301,513
Nonperforming	—		—		—		—		—		—		1,024		628		1,652
Total residential real estate - home equity - lines of credit loans	$	—	$	—	$	—	$	—	$	—	$	—	$	226,550	$	76,615	$	303,165
Current period gross charge offs - home equity - lines of credit	$	—	$	—	$	—	$	—	$	—	$	—	$	50	$	—	$	50
Installment and other loans:
Payment performance
Performing	$	2,080	$	3,595	$	2,816	$	2,042	$	455	$	664	$	6,436	$	17	$	18,105
Nonperforming	9		3		—		—		—		14		—		—		26
Total Installment and other loans	$	2,089	$	3,598	$	2,816	$	2,042	$	455	$	678	$	6,436	$	17	$	18,131
Current period gross charge offs - installment and other	$	115	$	12	$	—	$	32	$	—	$	33	$	14	$	—	$	206

Table of Contents


	Term Loans Amortized Cost Basis by Origination Year
As of December 31, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Basis		Revolving Loans Converted to Term		Total
Commercial Real Estate:
Owner-occupied:
Risk rating
Pass	$	50,829	$	103,192	$	69,888	$	21,232	$	21,251	$	62,634	$	4,941	$	—	$	333,967
Special mention	—		—		2,517		1,176		—		1,314		—		—		5,007
Substandard - Non-IEL	—		9,923		—		6,075		—		2,687		312		—		18,997
Substandard - IEL	—		—		—		13,366		—		2,420		—		—		15,786
Total owner-occupied loans	$	50,829	$	113,115	$	72,405	$	41,849	$	21,251	$	69,055	$	5,253	$	—	$	373,757
Current period gross charge offs - owner-occupied	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Non-owner occupied:
Risk rating
Pass	$	82,879	$	102,212	$	235,031	$	83,652	$	63,176	$	120,696	$	509	$	—	$	688,155
Special mention	—		—		—		524		—		2,112		—		—		2,636
Substandard - Non-IEL	—		—		—		—		—		2,739		—		868		3,607
Substandard - IEL	—		—		—		—		—		240		—		—		240
Total non-owner occupied loans	$	82,879	$	102,212	$	235,031	$	84,176	$	63,176	$	125,787	$	509	$	868	$	694,638
Current period gross charge offs - non-owner occupied	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Multi-family:
Risk rating
Pass	$	2,701	$	61,805	$	28,541	$	12,694	$	7,437	$	33,895	$	117	$	—	$	147,190
Special mention	—		—		—		—		244		2,008		—		—		2,252
Substandard - Non-IEL	—		—		—		—		—		—		—		—		—
Substandard - IEL	—		—		—		—		—		1,233		—		—		1,233
Total multi-family loans	$	2,701	$	61,805	$	28,541	$	12,694	$	7,681	$	37,136	$	117	$	—	$	150,675
Current period gross charge offs - multi-family	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Non-owner occupied residential:
Risk rating
Pass	$	10,075	$	20,473	$	16,947	$	7,974	$	6,444	$	28,319	$	1,130	$	—	$	91,362
Special mention	—		—		—		—		—		731		—		—		731
Substandard - Non-IEL	—		—		—		—		—		375		—		—		375
Substandard - IEL	2		—		192		1,461		—		917		—		—		2,572
Total non-owner occupied residential loans	$	10,077	$	20,473	$	17,139	$	9,435	$	6,444	$	30,342	$	1,130	$	—	$	95,040
Current period gross charge offs - non-owner occupied residential	$	—	$	—	$	—	$	—	$	—	$	12	$	—	$	—	$	12
continued

Table of Contents


	Term Loans Amortized Cost Basis by Origination Year
As of December 31, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Basis		Revolving Loans Converted to Term		Total
Acquisition and development:
1-4 family residential construction:
Risk rating
Pass	$	18,820	$	5,400	$	—	$	—	$	—	$	—	$	—	$	—	$	24,220
Special mention	222		—		74		—		—		—		—		—		296
Substandard - Non-IEL	—		—		—		—		—		—		—		—		—
Substandard - IEL	—		—		—		—		—		—		—		—		—
Total 1-4 family residential construction loans	$	19,042	$	5,400	$	74	$	—	$	—	$	—	$	—	$	—	$	24,516
Current period gross charge offs - 1-4 family residential construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial and land development:
Risk rating
Pass	$	28,829	$	48,453	$	9,847	$	9,927	$	110	$	1,774	$	6,574	$	6,936	$	112,450
Special mention	—		—		—		1,001		—		437		—		—		1,438
Substandard - Non-IEL	—		—		—		—		—		—		—		—		—
Substandard - IEL	—		—		—		—		—		1,361		—		—		1,361
Total commercial and land development loans	$	28,829	$	48,453	$	9,847	$	10,928	$	110	$	3,572	$	6,574	$	6,936	$	115,249
Current period gross charge offs - commercial and land development	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial and Industrial:
Risk rating
Pass	$	67,735	$	69,670	$	67,117	$	24,580	$	10,753	$	20,775	$	86,475	$	1,522	$	348,627
Special mention	—		4,251		4,364		11		552		356		2,258		—		11,792
Substandard - Non-IEL	—		—		4,682		—		5		225		1,082		—		5,994
Substandard - IEL	—		69		—		7		—		455		141		—		672
Total commercial and industrial loans	$	67,735	$	73,990	$	76,163	$	24,598	$	11,310	$	21,811	$	89,956	$	1,522	$	367,085
Current period gross charge offs - commercial and industrial	$	—	$	161	$	106	$	—	$	—	$	8	$	473	$	—	$	748
Municipal:
Risk rating
Pass	$	—	$	—	$	3,403	$	—	$	—	$	6,409	$	—	$	—	$	9,812
Total municipal loans	$	—	$	—	$	3,403	$	—	$	—	$	6,409	$	—	$	—	$	9,812
Current period gross charge offs - municipal	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Residential mortgage:
First lien:
Payment performance
Performing	$	43,641	$	71,311	$	34,704	$	8,056	$	7,465	$	97,943	$	—	$	638	$	263,758
Nonperforming	—		—		—		—		120		2,361		—		—		2,481
Total first lien loans	$	43,641	$	71,311	$	34,704	$	8,056	$	7,585	$	100,304	$	—	$	638	$	266,239
Current period gross charge offs - first lien	$	—	$	—	$	—	$	—	$	—	$	58	$	—	$	—	$	58
continued

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	Term Loans Amortized Cost Basis by Origination Year
As of December 31, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Basis		Revolving Loans Converted to Term		Total
Home equity - term:
Payment performance
Performing	$	607	$	732	$	90	$	426	$	115	$	3,105	$	—	$	—	$	5,075
Nonperforming	—		—		—		—		—		3		—		—		3
Total home equity - term loans	$	607	$	732	$	90	$	426	$	115	$	3,108	$	—	$	—	$	5,078
Current period gross charge offs - home equity - term	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Home equity - lines of credit:
Payment performance
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	107,967	$	77,171	$	185,138
Nonperforming	—		—		—		—		—		—		1,296		16		1,312
Total residential real estate - home equity - lines of credit loans	$	—	$	—	$	—	$	—	$	—	$	—	$	109,263	$	77,187	$	186,450
Current period gross charge offs - home equity - lines of credit	$	—	$	—	$	—	$	—	$	—	$	—	$	40	$	—	$	40
Installment and other loans:
Payment performance
Performing	$	758	$	413	$	332	$	106	$	670	$	947	$	6,500	$	—	$	9,726
Nonperforming	3		—		—		—		33		12		—		—		48
Total Installment and other loans	$	761	$	413	$	332	$	106	$	703	$	959	$	6,500	$	—	$	9,774
Current period gross charge offs - installment and other	$	181	$	24	$	—	$	—	$	4	$	10	$	28	$	—	$	247

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.

Special Mention loans increased by $43.9 million from $24.2 million at December 31, 2023 to $68.1 million at September 30, 2024 due to acquired loans from the Merger of $51.1 million and downgrades at the Bank of $14.2 million, partially offset by repayments, including $8.6 million from two commercial and industrial clients and $3.9 million from two commercial real estate clients.

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.

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.

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The following table presents the activity in the ACL for the three and nine months ended September 30, 2024 and 2023:


	Commercial										Consumer
	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Municipal		Total		Residential Mortgage		Installment and Other		Total		Unallocated		Total
Three Months Ended
September 30, 2024
Balance, beginning of period	$	18,203	$	2,634	$	5,652	$	161	$	26,650	$	3,023	$	191	$	3,214	$	—	$	29,864

Allowance established for acquired PCD loans	1,321		2,535		1,949		—		5,805		105		10		115		—		5,920
Provision for credit losses	11,103		1,809		(955)		110		12,067		1,773		275		2,048		—		14,115
Charge-offs	(333)		—		(159)		—		(492)		—		(88)		(88)		—		(580)
Recoveries	4		12		164		—		180		54		77		131		—		311
Balance, end of period	$	30,298	$	6,990	$	6,651	$	271	$	44,210	$	4,955	$	465	$	5,420	$	—	$	49,630
September 30, 2023
Balance, beginning of period	$	16,996	$	2,767	$	5,854	$	167	$	25,784	$	2,307	$	292	$	2,599	$	—	$	28,383

Provision for loan losses	(173)		125		(62)		(11)		(121)		239		18		257		—		136
Charge-offs	—		—		(267)		—		(267)		—		(75)		(75)		—		(342)
Recoveries	17		1		33		—		51		31		19		50		—		101
Balance, end of period	$	16,840	$	2,893	$	5,558	$	156	$	25,447	$	2,577	$	254	$	2,831	$	—	$	28,278
Nine Months Ended
September 30, 2024
Balance, beginning of period	$	17,873	$	2,241	$	5,806	$	157	$	26,077	$	2,424	$	201	$	2,625	$	—	$	28,702

Allowance established for acquired PCD loans	1,321		2,535		1,949		—		5,805		105		10		115		—		5,920
Provision for credit losses	11,417		2,223		(1,149)		114		12,605		2,410		333		2,743		—		15,348
Charge-offs	(345)		(23)		(219)		—		(587)		(50)		(206)		(256)		—		(843)
Recoveries	32		14		264		—		310		66		127		193		—		503
Balance, end of period	$	30,298	$	6,990	$	6,651	$	271	$	44,210	$	4,955	$	465	$	5,420	$	—	$	49,630
September 30, 2023
Balance, beginning of period	$	13,558	$	3,214	$	4,505	$	24	$	21,301	$	3,444	$	188	$	3,632	$	245	$	25,178
Impact of adopting CECL	2,857		(214)		928		169		3,740		(1,121)		49		(1,072)		(245)		2,423
Provision for loan losses	335		(111)		790		(37)		977		163		124		287		—		1,264
Charge-offs	(12)		—		(748)		—		(760)		(98)		(198)		(296)		—		(1,056)
Recoveries	102		4		83		—		189		189		91		280		—		469
Balance, end of period	$	16,840	$	2,893	$	5,558	$	156	$	25,447	$	2,577	$	254	$	2,831	$	—	$	28,278

The ACL totaled $49.6 million at September 30, 2024, an increase of $20.9 million from December 31, 2023, resulting primarily from the provision for credit losses on non-PCD loans of $15.5 million related to the Merger, the allowance for credit losses on PCD loans from the Merger of $5.9 million, other provision for credit losses of $15,348 thousand and net charge-offs of $340 thousand during the nine months ended September 30, 2024. The ACL as a percentage of the total loan portfolio was 1.25% at both September 30, 2024 and September 30, 2023.

For the nine months ended September 30, 2023, the provision for credit losses was driven by the increase in commercial loans, the increase in the loss reserve rates under the CECL methodology and an increase in the Delinquency and Classified Loan Trends qualitative factor for the commercial & industrial and owner-occupied commercial real estate loan classes.

The Company takes partial charge-offs on collateral-dependent loans when the carrying value exceeds the estimated fair value, as determined by the most recent appraisal adjusted for current (within the quarter) conditions, less costs to dispose. Specific reserves remain in place if updated appraisals are pending and represent management's estimate of potential loss. In addition to the specific reserve allocations on individually evaluated loans noted previously, 11 loans, with aggregate outstanding principal balances of $1.2 million, had cumulative partial charge-offs to the ACL totaling $757 thousand through September 30, 2024. As updated appraisals are received on collateral-dependent loans, partial charge-offs are taken to the extent the loans’ principal balance exceeds their fair value.

Management believes the allocation of the ACL among the various loan classes adequately reflects the life expected credit losses in each loan class and is based on the methodology outlined in Note 1, Summary of Significant Accounting Policies, and Note 4, Loans and Allowance for Credit Losses, to the Consolidated Financial Statements under Part I, Item 1, "Financial Information." Management re-evaluates and makes enhancements to its reserve methodology to better reflect the risks inherent in the different segments of the portfolio, particularly in light of increased charge-offs, with noticeable differences between the different loan classes.

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Management believes these enhancements to the ACL methodology improve the accuracy of quantifying the expected credit losses inherent in the portfolio. Management charges actual loan losses to the reserve and bases the provision for credit losses on its overall analysis.

Management believes the Company’s ACL is adequate based on currently available information. Future adjustments to the ACL and enhancements to the methodology may be necessary due to changes in economic conditions, regulatory guidance, or management’s assumptions as to future delinquencies or loss rates.

Deposits

Total deposits increased by $2.1 billion to $4.7 billion at September 30, 2024 from $2.6 billion at December 31, 2023, which included $1.9 billion in deposits assumed from the Merger. Money market deposits increased by $718.4 million, time deposits increased by $600.4 million, non-interest bearing demand deposits increased by $384.4 million, interest-bearing demand deposits increased by $285.4 million and savings deposits increased by $103.4 million. These increases were primarily attributable to the Merger. Interest-bearing demand deposits can fluctuate based on seasonal public funds activity. The increase in time deposits also reflected promotional offerings of up to 18-month terms. At September 30, 2024, deposits that are uninsured and not collateralized totaled $692.6 million, or 15% of total deposits, compared to $442.7 million, or 17% of total deposits, at December 31, 2023.

Borrowings

In addition to deposits, the Company uses borrowing sources to meet liquidity needs and for temporary funding. Sources of short-term borrowings include the FHLB of Pittsburgh, federal funds purchased and the FRB discount window. Short-term borrowings also may include securities sold under agreements to repurchase with deposit clients, in which a client sweeps a portion of a deposit balance into a repurchase agreement, which is a secured borrowing with a pool of securities pledged against the balance.

The Company also utilizes long-term debt, consisting principally of FHLB fixed and amortizing advances, to fund its balance sheet with original maturities greater than one year. Prior to entering into long-term borrowings, the Company evaluates its funding needs, interest rate movements, the cost of options and the availability of attractive structures.

FHLB advances and other borrowings decreased by $22.5 million to $115.0 million at September 30, 2024 compared to $137.5 million at December 31, 2023. The Bank repaid overnight borrowings during the first quarter of 2024 based on available liquidity from deposits.

In December 2018, the Company issued unsecured subordinated notes payable totaling $32.5 million, which mature on December 30, 2028, and the proceeds of which were designated for general corporate use, including funding of cash consideration for mergers and acquisitions. The subordinated notes had a fixed interest rate of 6.0% through December 30, 2023, which then converted to a variable rate, three-month CME term SOFR rate plus 3.16%, through maturity. At September 30, 2024, the contractual interest rate on the subordinated debt was 8.75%.

The Company assumed unsecured subordinated notes of $31.0 million from the Merger. The subordinated notes have a fixed rate of interest equal to 4.50% until December 30, 2025. After that term, the variable rate of interest is equal to the three-month CME term SOFR rate plus 4.04%. The Company also assumed junior subordinated trust preferred debt of $10.3 million from the Merger, which have variable rates of three-month CME term SOFR rate, plus a spread adjustment of 0.26161% and an additional margin adjustment.

See Note 10, Short-Term Borrowings, Note 11, Long-Term Borrowings and Note 12, Subordinated Notes and Trust Preferred Debt, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information," for a description and terms of the Company’s borrowings and access to alternative sources of liquidity.

Shareholders' Equity, Capital Adequacy and Regulatory Matters

Capital management in a regulated financial services industry must properly balance return on equity to its shareholders while maintaining sufficient levels of capital and related risk-based regulatory capital ratios to satisfy statutory regulatory requirements. The Company’s capital management strategies have been developed to provide attractive rates of returns to its shareholders, while remaining “well-capitalized” under applicable banking regulations.

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Shareholders’ equity totaled $516.2 million at September 30, 2024, an increase of $251.2 million from $265.1 million at December 31, 2023. The increase was primarily attributable to the issuance of common stock of $233.4 million to acquire Codorus Valley, other comprehensive income of $12.6 million, net income of $8.4 million and the issuance of treasury shares for share-based compensation which reduced treasury stock by $5.5 million, partially offset by dividends paid of $8.7 million and for the nine months ended September 30, 2024. Other comprehensive income included an after-tax increase of $12.8 million from net unrealized gains on investment securities, partially offset by $249 thousand in net unrealized losses from cash flow hedges. For the nine months ended September 30, 2024, total comprehensive income totaled $21.0 million, a decrease of $2.6 million, from total comprehensive income of $23.6 million for the same period in 2023 due primarily to a decrease in net income of $19.7 million and an increase in after-tax net unrealized losses on cash flow hedges of $2.5 million, partially offset by a decline in after-tax net unrealized losses on investment securities of $19.5 million between the comparative periods. The decrease in net unrealized losses on investment securities was primarily caused by a decline in treasury rates and narrower credit spreads.

At September 30, 2024, book value per common share was $26.65 compared to $24.98 at December 31, 2023. Tangible book value per share decreased from $23.03 at December 31, 2023 to $21.12 at September 30, 2024, primarily as a result of the common stock issued in the Merger and purchase accounting marks recorded through shareholders' equity as a result of the Merger. See “Supplemental Reporting of Non-GAAP Measures.”

The Company routinely evaluates its capital levels in light of its risk profile to assess its capital needs. The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. At September 30, 2024 and December 31, 2023, the Bank was considered well-capitalized under applicable banking regulations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Prompt corrective action provisions are not applicable to bank holding companies, including financial holding companies.

Note 13, Shareholders' Equity and Regulatory Capital, to the Notes to Unaudited Condensed Consolidated Financial Statements under Part I, Item 1, "Financial Information," includes a table presenting capital amounts and ratios for the Company and the Bank at September 30, 2024 and December 31, 2023.

In addition to the minimum capital ratio requirement and minimum capital ratio to be well-capitalized presented in the referenced table in Note 13, the Bank must maintain a capital conservation buffer as more fully described in the Company's Annual Report on Form 10-K for the year ended December 31, 2023, Item 1 - Business, under the topic Basel III Capital Rules. At September 30, 2024, the Bank's capital conservation buffer, based on the most restrictive Total Capital to risk weighted assets capital ratio, was 4.2%, which is greater than the 2.5% requirement.

Liquidity

The primary function of asset/liability management is to ensure adequate liquidity and manage the Company’s sensitivity to changing interest rates. Liquidity management involves the ability to meet the cash flow requirements of clients who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. The Company's primary sources of funds consist of deposit inflows, loan repayments, borrowings from the FHLB of Pittsburgh and maturities and prepayments of investment securities. While maturities and scheduled amortization of loans and investment securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

The Company regularly adjusts its investments in liquid assets based upon its assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and investment securities and the objectives of its asset/liability management policy. The Company's most liquid assets are cash and cash equivalents.

At September 30, 2024, cash and cash equivalents totaled $236.8 million compared to $65.2 million at December 31, 2023, which reflects the increase in deposits of $2.1 billion and net income of $8.4 million, partially offset by the decrease in borrowings of $22.5 million for the nine months ended September 30, 2024. Unencumbered investment securities totaled $90.3 million at September 30, 2024 compared to $73.7 million at December 31, 2023. At September 30, 2024, the Company had $16.5 million of investment securities pledged at the FRB Discount Window, with no associated borrowings outstanding, compared to $17.4 million at December 31, 2023. The Company's maximum borrowing capacity from the FHLB of Pittsburgh was $1.1 billion at both September 30, 2024 and December 31, 2023, of which $118.2 million and $138.7 million in advances and letters of credit were outstanding at these same periods, respectively. In addition, the Company had $20.0 million in available unsecured lines of credit with other banks at September 30, 2024 and December 31, 2023. The Bank tested its various sources of funding during 2024 to ensure accessibility.

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Supplemental Reporting of Non-GAAP Measures

Management believes providing certain “non-GAAP” financial information will assist investors in their understanding of the effect on recent financial results from non-recurring charges.

As a result of prior acquisitions, the Company had intangible assets consisting of goodwill and core deposit and other intangible assets totaling $116.8 million and $21.1 million at September 30, 2024 and December 31, 2023, respectively. During the three and nine months ended September 30, 2024, the Company incurred merger-related expenses of $17.0 million and $18.8 million, respectively, in connection with the Merger with Codorus Valley. During the three and nine months ended September 30, 2024, the Company incurred other non-recurring charges totaling $20.3 million.

Tangible book value per share and the impact of the merger-related expenses on net income and diluted earnings per share, as used by the Company in this supplemental reporting presentation, is determined by methods other than in accordance with GAAP. While we believe this information is a useful supplement to GAAP-based measures presented in this Form 10-Q, readers are cautioned that this non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for financial measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of our results and financial condition as reported under GAAP, nor are such measures necessarily comparable to non-GAAP performance measures that may be presented by other companies. This supplemental presentation should not be construed as an inference that our future results will be unaffected by similar adjustments to be determined in accordance with GAAP.

The decrease in tangible book value per share (non-GAAP) from December 31, 2023 to September 30, 2024 is primarily due to the common stock issued to acquire Codorus Valley of $233.4 million and dividends paid of $8.7 million, partially offset by other comprehensive income, net of taxes, of $12.6 million and net income of $8.4 million. Other comprehensive income increased due to net unrealized gains on AFS securities partially offset by net unrealized losses on interest rate swaps designated as hedging instruments.

The following table presents the computation of each non-GAAP based measure shown together with its most directly comparable GAAP-based measure.


	September 30, 2024
Tangible Book Value per Common Share
Shareholders' equity (most directly comparable GAAP-based measure)	$	516,206
Less: Goodwill	70,655
Other intangible assets	46,144
Related tax effect	(9,690)
Tangible common equity (non-GAAP)	$	409,097

Common shares outstanding	19,373

Book value per share (most directly comparable GAAP based measure)	$	26.65
Intangible assets per share	5.53
Tangible book value per share (non-GAAP)	$	21.12

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Adjusted Net Income and Adjusted Diluted (Earnings Per Share
	Three Months Ended		Nine Months Ended
	September 30 2024		September 30 2023		September 30 2024		September 30 2023
Net (loss) income (most directly comparable GAAP-based measure)	$	(7,903)	$	9,026	$	8,366	$	28,020
Plus: Merger-related expenses	16,977		—		18,784		—
Plus: Executive retirement expenses	4,758		—		4,758		—
Plus: Provision for credit losses on non-PCD loans	15,504		—		15,504		—


Less: Related tax effect	(7,915)		—		(8,056)		—
Adjusted net income (non-GAAP)	$	21,421	$	9,026	$	39,356	$	28,020

Weighted average shares - diluted (most directly comparable GAAP-based measure)	19,226		10,405		13,441		10,440
Diluted (loss) earnings per share (most directly comparable GAAP-based measure)	$	(0.41)	$	0.87	$	0.62	$	2.68
Weighted average shares - diluted (non-GAAP)	19,226		10,405		13,441		10,440
Diluted earnings per share, adjusted (non-GAAP)	$	1.11	$	0.87	$	2.93	$	2.68

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk comprises exposure to interest rate risk, foreign currency exchange rate risk, commodity price risk and other relevant market rate or price risks. In the banking industry, a major risk exposure is changing interest rates. The primary objective of monitoring our interest rate sensitivity, or risk, is to provide management the tools necessary to manage the balance sheet to minimize adverse changes in net interest income as a result of changes in the direction and level of interest rates. FRB monetary control efforts, the effects of deregulation, economic uncertainty and legislative changes have been significant factors affecting the task of managing interest rate sensitivity positions in recent years.

Interest Rate Risk

Interest rate risk is the exposure to fluctuations in the Bank’s future earnings (earnings at risk) and value (value at risk) resulting from changes in interest rates. This exposure results from differences between the amounts of interest-earning assets and interest-bearing liabilities that reprice within a specified time period as a result of scheduled maturities, scheduled and unscheduled repayments, the propensity of borrowers and depositors to react to changes in their economic interests and loan contractual interest rate changes.

We attempt to manage the level of repricing and maturity mismatch through our asset/liability management process so that fluctuations in net interest income are maintained within policy limits across a range of market conditions, while satisfying liquidity and capital requirements. Management recognizes that a certain amount of interest rate risk is inherent, appropriate and necessary to ensure the Bank’s profitability. Thus, the goal of interest rate risk management is to evaluate the amount of reward for taking risk and adjusting both the size and composition of the balance sheet relative to the level of reward available for taking risk.

Management endeavors to control the exposure to changes in interest rates by understanding, reviewing and making decisions based on its risk position. The Bank primarily uses its investment securities portfolio, FHLB advances, interest rate swaps and brokered deposits to manage its interest rate risk position. Additionally, pricing, promotion and product development activities are directed in an effort to emphasize the loan and deposit term or repricing characteristics that best meet current interest rate risk objectives.

We use simulation analysis to assess earnings at risk and net present value analysis to assess value at risk. These methods allow management to regularly monitor both the direction and magnitude of our interest rate risk exposure. These analyses require numerous assumptions including, but not limited to, changes in balance sheet mix, prepayment rates on loans and investment securities, cash flows and repricing of all financial instruments, changes in volumes and pricing, future shapes of the yield curve, relationship of market interest rates to each other (basis risk), credit spread and deposit sensitivity. Assumptions are based on management’s best estimates but may not accurately reflect actual results under certain changes in interest rates due to the timing, magnitude and frequency of rate changes and changes in market conditions and management strategies, among other factors. However, the analyses are useful in quantifying risk and providing a relative gauge of our interest rate risk position over time.

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Our Asset/Liability Committee operates under management policies, approved by the Board of Directors, which define guidelines and limits on the level of risk. The committee meets regularly and reviews our interest rate risk position and monitors various liquidity ratios to ensure a satisfactory liquidity position. By utilizing our analyses, we can determine changes that may need to be made to the asset and liability mixes to mitigate the change in net interest income under various interest rate scenarios. Management continually evaluates the condition of the economy, the pattern of market interest rates and other economic data to inform the committee on the selection of investment securities. Regulatory authorities also monitor our interest rate risk position along with other liquidity ratios.

Net Interest Income Sensitivity

Simulation analysis evaluates the effect of upward and downward changes in market interest rates on future net interest income. The analysis involves changing the interest rates used in determining net interest income over the next twelve months. The resulting percentage change in net interest income in various rate scenarios is an indication of our short-term interest rate risk. The analysis assumes recent pricing trends in new loan and deposit volumes will continue while balances remain constant. Additional assumptions are applied to modify pricing under the various rate scenarios.

The simulation analysis results are presented in the table below. At September 30, 2024, the balance sheet is asset sensitive and assets are now expected to reprice faster over the next twelve months than in prior models. The change was driven by the Merger as the assets acquired are shorter term in maturity and repricing characteristics. The funding profile is characterized similarly to the original portfolio where shorter term certificate of deposit balances had grown due to the interest rate environment, but also contain significant non-maturity deposits as well. Through the consolidation of the two portfolios, we anticipate changes to the mix of the asset and liability profiles.

Economic Value

Net present value analysis provides information on the risk inherent in the balance sheet that might not be considered in the simulation analysis due to the short time horizon used in that analysis. The net present value of the balance sheet incorporates the discounted present value of expected asset cash flows minus the discounted present value of expected liability cash flows. The analysis involves changing the interest rates used in determining the expected cash flows and in discounting the cash flows. The resulting percentage change in net present value in various rate scenarios is an indication of the longer term repricing risk and options embedded in the balance sheet.

Funding cost, the level of interest rates, infrastructure cost and repricing speed will continue to be a factor in the results of the model. The behavior of the business and retail clients also varies across the rate scenarios, which is reflected in the results but will continue to be refined through the combination of the two balance sheets. To improve the comparability across periods, the Bank strives to follow best practices related to the assumption setting and maintains the size and mix of the period end balance sheet; thus, the results do not reflect actions management may take through the normal course of business that would impact results.


Net Interest Income					Economic Value
	% Change in Net Interest Income					% Change in Market Value
Change in Market Interest Rates (basis points)	September 30, 2024		December 31, 2023		Change in Market Interest Rates (basis points)	September 30, 2024		December 31, 2023
(200)	(10.5)	%	(5.9)	%	(200)	(49.5)	%	(15.6)	%
(100)	(5.2)	%	(3.6)	%	(100)	(21.3)	%	(4.3)	%
100	4.9	%	0.1	%	100	14.6	%	0.1	%
200	8.6	%	(1.0)	%	200	25.2	%	(2.2)	%

Item 4. Controls and Procedures

Based on the evaluation required by Exchange Act Rules 13a-15(b) and 15d-15(b), the Company's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of its disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e), at September 30, 2024. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at September 30, 2024.

There were no significant changes made to the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or that are reasonably likely to affect, our internal control over financial reporting during the nine months ended September 30, 2024.

Table of Contents

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Information regarding legal proceedings is included in Note 17, Contingencies, to the Consolidated Financial Statements under Part I, Item 1, "Financial Statements" and incorporated herein by reference.

Item 1A – Risk Factors

There have been no material changes from the risk factors as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds


	(a)	(b)		(c)	(d)
Period	Total number of shares (or units) purchased	Average price paid per share (or unit)		Total number of shares (or units) purchased as part of publicly announced plans or programs	Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
July 1, 2024 to July 31, 2024	—	$	—	—	28,467
August 1, 2024 to August 31, 2024	—	—		—	28,467
September 1, 2024 to September 30, 2024	—	—		—	28,467
Total	—	$	—	—

In September 2015, the Board of Directors of the Company authorized a share repurchase program pursuant to which the Company may repurchase up to 416,000 shares of the Company's outstanding shares of common stock, in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Exchange Act, as amended. On April 19, 2021, the Board of Directors authorized the additional future repurchase of up to 562,000 shares of its outstanding common stock for a total of 978,000 shares. When and if appropriate, repurchases may be made in open market or privately negotiated transactions, depending on market conditions, regulatory requirements and other corporate considerations, as determined by management. Share repurchases may not occur and may be discontinued at any time. For the three months ended September 30, 2024, the Company repurchased zero shares of its common stock. At September 30, 2024, 949,533 shares had been repurchased under the program at a total cost of $21.2 million, or $22.36 per share. Common stock available for future repurchase totals approximately 28,467 shares, or 0.1% of the Company's outstanding common stock at September 30, 2024.

Item 3 – Defaults Upon Senior Securities

Not applicable.

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 – Other Information

During the three months ended September 30, 2024, none of the Company's directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of the Company's common stock that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any "non-Rule 10b5-1 trading arrangement" as such term is defined in Item 408(c) of Regulation S-K.

Table of Contents

Item 6 – Exhibits


2.2						Agreement and Plan of Merger by and between Orrstown Financial Services, Inc. and Codorus Valley Bancorp, Inc. incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K dated and filed December 12, 2023.

3.1						Articles of Incorporation as amended, incorporated by reference to Exhibit 3.1 of the Registrant’s Report on Form 8-K filed on January 29, 2010.

3.2						By-laws as amended, incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed July 1, 2024.

4.1						Specimen Common Stock Certificate, incorporated by reference to the Registrant’s Registration Statement on Form S-3 filed February 8, 2010 (File No. 333-164780).

10.1						Retirement Agreement, dated September 25, 2024, by and between Craig L. Kauffman and both Orrstown Financial Services, Inc. and Orrstown Bank - incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed on September 25, 2024.

10.2						First Amendment, dated September 30, 2024, to the Salary Continuation Agreement by and between Orrstown Bank and Craig L. Kauffman.

31.1						Rule 13a – 14(a)/15d-14(a) Certification (Principal Executive Officer)

31.2						Rule 13a – 14(a)/15d-14(a) Certifications (Principal Financial Officer)

32.1						Section 1350 Certifications (Principal Executive Officer)

32.2						Section 1350 Certifications (Principal Financial Officer)

101.LAB						XBRL Taxonomy Extension Label Linkbase

101.PRE						XBRL Taxonomy Extension Presentation Linkbase

101.INS						XBRL Instance Document

101.SCH						XBRL Taxonomy Extension Schema

101.CAL						XBRL Taxonomy Extension Calculation Linkbase

101.DEF						XBRL Taxonomy Extension Definition Linkbase

104						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

All other exhibits for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			/s/ Thomas R. Quinn, Jr.
			Thomas R. Quinn, Jr.
			President and Chief Executive Officer
			(Principal Executive Officer)

			/s/ Neelesh Kalani
			Neelesh Kalani
			Executive Vice President and Chief Financial Officer
			(Principal Financial Officer)

			Date: November 12, 2024

EX-10.2 2 exhibit102.htm EX-10.2 Document

Exhibit 10.2

FIRST AMENDMENT TO

ORRSTOWN EMPLOYER

SALARY CONTINUATION AGREEMENT

THIS FIRST AMENDMENT (the “Amendment”) is adopted September 30, 2024, by and between Orrstown Bank (the “Employer”) and Craig L. Kauffman (the “Executive”).

The Employer and the Executive are parties to a Salary Continuation Agreement adopted July 8, 2024 (the “Agreement”) which provides deferred compensation benefits to the Executive under certain circumstances. The parties now wish to amend the Agreement to increase the Executive’s Early Termination Benefit, as agreed upon by the parties in the Retirement Agreement, dated September 25, 2024, by and between Orrstown Financial Services, Inc., the Employer, and the Executive (the “Retirement Agreement”). In the event that the Retirement Agreement does not become effective or is revoked by the Executive, this Amendment shall become null and void.

NOW, THEREFORE, the Employer and the Executive adopt the following amendment to the Agreement:

Section 2.2 of the Agreement shall be deleted and replaced with the following:

2.2 Early Termination Benefit. If Early Termination occurs, the Employer shall pay the Executive an annual benefit in the amount of One Hundred Fifty Thousand Dollars ($150,000) in lieu of any other benefit hereunder. The annual benefit will be paid for fifteen (15) years in equal monthly installments commencing the month following Normal Retirement Age.

IN WITNESS WHEREOF, the Executive and a duly authorized representative of the Employer have executed this Amendment as indicated below:

EXECUTIVE EMPLOYER

By: By:

Craig L. Kauffman Thomas R. Quinn, Jr.

President and Chief Executive Officer

EX-31.1 3 ex3112024-10qxq3.htm EX-31.1 Document

Exhibit 31.1

CERTIFICATION

I, Thomas R. Quinn, Jr., certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Orrstown Financial Services, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.


Date: November 12, 2024	By:	/s/ Thomas R. Quinn, Jr.
		Thomas R. Quinn, Jr.
		President and Chief Executive Officer
		(Principal Executive Officer)

EX-31.2 4 ex3122024-10qxq3.htm EX-31.2 Document

Exhibit 31.2

CERTIFICATION

I, Neelesh Kalani, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Orrstown Financial Services, Inc.;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: November 12, 2024	By:	/s/ Neelesh Kalani
		Neelesh Kalani
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

EX-32.1 5 ex3212024-10qxq3.htm EX-32.1 Document

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Orrstown Financial Services, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2024 as filed with the Securities and Exchange Commission on the date therein specified (the “Report”), I, Thomas R. Quinn, Jr., President and Chief Executive Officer (Principal Executive Officer) of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.


Date: November 12, 2024	By:	/s/ Thomas R. Quinn, Jr.
		Thomas R. Quinn, Jr.
		President and Chief Executive Officer
		(Principal Executive Officer)

EX-32.2 6 ex3222024-10qxq3.htm EX-32.2 Document

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Orrstown Financial Services, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2024 as filed with the Securities and Exchange Commission on the date therein specified (the “Report”), I, Neelesh Kalani, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.


Date: November 12, 2024	By:	/s/ Neelesh Kalani
		Neelesh Kalani
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)