ORRF 10-K & 10-Q changes, risk factors and insider trading
Orrstown Financial Services Inc. · Nasdaq · State Commercial Banks · CIK 826154 · All filings on SEC.gov
At a glance
What changed in the latest 10-K
Risk Factors
New heading “Inflation can have an adverse impact on our business and on our customers.”
New heading “Changes in U.S. trade policies, including the imposition of tariffs and retaliatory tariffs, may adversely affect our business, financial condition, and results of operations.”
New heading “We are subject to a variety of risks in connection with any sale of loans we may conduct.”
New heading “We cannot guarantee that our allocation of capital to various alternatives, including share repurchase programs, will enhance long-term shareholder value.”
Removed heading “We may continue to incur substantial costs related to the Codorus Valley Merger and the integration of Codorus Valley, and these costs may be greater than anticipated due to unexpected events.”
Removed heading “We may fail to realize the anticipated benefits of the Codorus Valley Merger.”
Removed heading “Our future results following our recently completed Codorus Valley Merger may suffer if the combined company does not effectively manage its expanded operations.”
Largest changes
“Changes in U.S. trade policies, including the imposition of tariffs and retaliatory tariffs, may adversely affect our business, financial condition, and results of operations.”see in full comparison
“Inflation can have an adverse impact on our business and on our customers.”see in full comparison
“Our business plan calls for us to execute a variety of strategies to allocate and deploy any excess capital including, but not limited to, continued organic balance sheet growth and diversification, implementation of share repurchase programs, and payment of regular cash dividends. If we are unable to effectively and timely deploy capital through these strategies, it may constrain growth in earnings and return on equity and thereby diminish potential growth in shareholder value. …”see in full comparison
“We routinely sell newly originated residential mortgage loans and may also sell other loans or loans portfolios. We may make certain representations and warranties to the purchaser concerning the loans sold and the procedures under which those loans have been originated and serviced. If any of these representations and warranties are invalid, we may be required to refund premiums, indemnify the purchaser for any related costs or losses, or it may be required to repurchase part or all of the affected loans. …”see in full comparison
“We may continue to incur substantial costs related to the Codorus Valley Merger and the integration of Codorus Valley, and these costs may be greater than anticipated due to unexpected events.”see in full comparison
“Our future results following our recently completed Codorus Valley Merger may suffer if the combined company does not effectively manage its expanded operations.”see in full comparison
Full comparison: every changed paragraph (34)
Our operations are sensitive to general business and economic conditions in the U.S. The economy in the U.S. and globally has experienced volatility in recent years and may continue to experience such volatility for the foreseeable future. Unfavorable or uncertain economic conditions can be caused by declines in economic growth, business activity, or investor or business confidence; limitations on the availability of or increases in the cost of credit and capital; increases in inflation or interest rates; uncertainties regarding fiscal and monetary policies; the timing and impact of changing governmental policies, including changes in guidance and interpretation by regulatory authorities; changes in trade policies by the U.S. or other countries, such as tariffs or retaliatory tariffs such as those proposed or imposed by the U.S. Administrationcountries; supply chain disruptions; consumer spending; employment levels; labor shortages; challenging labor market conditions; wage stagnation; federal government shutdowns; energy prices; home prices; commercial property values; bankruptcies and a default by a significant market participant or class of counterparties; natural disasters; climate change; epidemics; future pandemics; terrorist attacks; acts of war; or a combination of these or other factors.
If our assessment of and expectations concerning the above-mentioned factors differ from actual developments, we may be required to increase our ACL, which could have an adverse effect on our financial condition, results of operations and our regulatory capital. In addition, our regulators, as an integral part of their examination process, periodically review the ACL and may require us to increase the ACL by recognizing additional provisions for credit losses charged to income, or to charge-off loans, which, net of any recoveries, would decrease the ACL on loans. Any such additional provisions for credit losses or charge-offs could have a material adverse effect on our financial condition and results of operations.
Our business strategy includes making loans secured by commercial real estate. These types of loans generally have higher risk-adjusted returns and shorter maturities than other loans. Loans secured by commercial real estate properties are generally for larger amounts and may involve a greater degree of risk than other loans. Payments on loans secured by these properties are often dependent on the income produced by the underlying properties which, in turn, depends on the successful operation and management of the properties and the businesses that operate within them. Accordingly, repayment of these loans is subject to conditions in the real estate market or the local economy. Additionally, the COVID-19advent pandemicof remote work on a hybrid or full-time basis has had a potentially long-term negative impact on certain commercial real estate assets due to the risk that tenants may reduce the office space they lease as some portion of the workforce continues to work remotely on a hybrid or full-time basis.lease. In challenging economic conditions and as a result of changing demand for office space, these loans represent higher risk and could result in internal risk rating downgrades and an increase in our total net charge-offs, requiring us to increase our ACL, which could have a material adverse effect on our financial condition or results of operations. While we seek to minimize these risks in a variety of ways, there can be no assurance that these measures will protect against credit-related losses.
On September 30, 2025, the Company redeemed its $32.5 million outstanding 6.0% fixed-to-floating rate subordinated notes due December 30, 2028. At redemption, the variable interest rate of three-month CME term SOFR rate, plus a spread adjustment of 0.26161% and a margin of 3.16%, on the subordinated debt was 7.72%. During the year ended December 31, 2025 and 2024, amortization expense of the debt issuance costs totaled $335 thousand and $81 thousand, respectively.
In the Merger, 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 had 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%, which was 8.06% at December 31, 2025. 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 trust preferred debt issued through CVB Statutory Trust No. I has 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 and the trust preferred debt issued through CVB Statutory Trust No. II has a variable rate of three-month CME term SOFR rate, plus a spread adjustment 0.26161% and a margin of 1.54% through maturity. For the year ended December 31, 2025 and 2024, the cost of the trust preferred debt, excluding the fair value mark, was 6.24%. An increase in the interest rate on our subordinated debt and trust preferred debt could have a material adverse effect on our results of operations.
Our subordinated notes, issued in December 2018, had a 6.0% fixed interest rate through December 30, 2023, after which the interest rate converted to 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 on December 30, 2028. At December 31, 2024, the interest rate on our subordinated debt was 8.03%. In connection with the completion of the Codorus Valley Merger, on July 1, 2024, we assumed Codorus Valley’s obligations with respect to its outstanding subordinated notes and trust preferred debt, consisting of 4.50% fixed to floating rate notes due December 9, 2030 with an aggregate principal amount not in excess of $31.0 million, floating rate junior subordinated deferrable interest debentures (CVB Statutory Trust No. I) due December 15, 2034 in an aggregate principal amount not in excess of $3.1 million and junior subordinated debt securities (CVB Statutory Trust No. II) due July 7, 2036 in an aggregate principal amount not in excess of $7.2 million. The assumption of subordinated notes from the Merger 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 trust preferred debt issued through CVB Statutory Trust No. I has variable rate of three-month CME term SOFR rate, plus a spread adjustment of 0.26161% and a margin of 2.02% through maturity and the trust preferred debt issued through CVB Statutory Trust No. II has a variable rate of three-month CME term SOFR rate, plus a spread adjustment 0.26161% and a margin of 1.54% through maturity. At December 31, 2024, the interest rates on our trust preferred debt were 6.64% for CVB Statutory Trust No. I and 6.46% for CVB Statutory Trust No. II. An increase in the interest rate on our subordinated debt and trust preferred debt could have a material adverse effect on our results of operations.
Inflation can have an adverse impact on our business and on our customers.
The future rate of inflation and other economic factors remain uncertain, and the FRB may decrease or increase interest rates slower or faster than anticipated. If inflation increases and interest rates rise, the value of our investment securities, particularly those with longer maturities, will decrease, although this effect is less pronounced for floating rate instruments. Prolonged periods of inflation also may impact our profitability by negatively impacting our costs and expenses, including increasing funding costs and expenses related to talent acquisition and retention, and negatively impacting the demand for our products and services. Moreover, our customers are also affected by inflation and the rising costs of goods and services used in their households and businesses, which could have a negative impact on their ability to repay their loans. Adverse changes in inflation and interest rates could negatively impact consumer and business confidence, and adversely affect the economy as well as our business, results of operations, and financial condition.
Changes in U.S. trade policies, including the imposition of tariffs and retaliatory tariffs, may adversely affect our business, financial condition, and results of operations.
There have been significant changes to U.S. trade policies, including tariffs affecting many countries, and there continues to be significant discussion regarding other potential changes to U.S. trade policies, treaties, and tariffs, including the potential for additional tariffs. In addition, retaliatory tariffs have been imposed and additional retaliatory tariffs are likely. Tariffs, retaliatory tariffs or other trade restrictions on products and materials that our customers import or export could cause the prices of our customers’ products to increase, which could reduce demand for such products. Any of these effects could adversely affect the ability of our customers to pay their loans or result in changes to our customers’ borrowing patterns that could have a negative effect on our business and results of operations.
We face significant competitionoperate in originatinga loans,highly attractingcompetitive depositsenvironment andthat providing other financial services fromincludes financial and non-financial services firms, including traditional banks and credit unions,banks, online banks, mortgage banking companies, wealth management companies, financial technology companiescompanies, and others.investment Somemanagement and wealth advisory firms, including commercial banks and trust companies, investment advisory firms, mutual fund companies, and stock brokerage firms. These companies compete on the basis of, among other factors, size, location, quality and type of our competitors enjoy advantages, including greater financial resourcesproducts and higherservices lendingoffered, limits,price, more expansive marketing campaigns, bettertechnology, brand recognition, aand widerreputation. geographicEmerging presence,technologies, more accessible branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives,such as wellartificial asintelligence lower(including originationmachine learning and operatinggenerative costs.artificial Emergingintelligence) technologiesand quantum computing, have the potential to further intensify competition and accelerate disruption in the financial services industry. In recent years, non-financial services firms, such as financial technology companies, have beenbegun offeringto offer services traditionally provided by financial institutions. These firms attempt to use technology and mobile platforms to enhance the ability of companies and individuals to borrow, save and invest money. We may also experience the emerging competition for deposits from tokenized deposits and stablecoins. Many of these non-financial services competitors have fewer regulatory constraints and may have lower cost structures than we do. Our abilitylong-term to compete successfullysuccess depends on a number of factors, including our ability to develop and execute strategic plans and initiatives; to develop competitive products and technologies; and to attract, retain and develop a highly skilled employee workforce. IfWe wemay not be as timely or successful in assessing the evolving competitive landscape and developing or introducing new products and services as our competitors. Our business may be negatively impacted if we, or our third-party providers, do not timely develop and apply emerging technologies, or if our initiatives in these areas are notdeficient ableor fail. Our, or our third-party providers’, inability, or resistance to competetimely successfully,innovate weor couldadapt beoperations, placedproducts atand aservices competitiveto disadvantage,evolving whichregulatory and market environments, industry standards and consumer preferences could result in theservice lossdisruptions, of clients and market share, andharm our business, and adversely affect our results of operations and financial condition could suffer.reputation.
The introduction of new products and services can involve significant time and resources, including to obtain regulatory approvals. Substantial risks and uncertainties are associated with the introduction of new products and services, including technical and control requirements that may need to be developed and implemented, rapid technological change in the industry, our ability to access technical and other information from our clients, the significant and ongoing investments required to bring new products and services to market in a timely manner at competitive prices and the preparation of marketing, sales and other materials that fully and accurately describe the product or service and its underlying risks. Our failure to manage these risks and uncertainties would also expose us to enhanced risk of operational lapses which may result in the recognition of financial statement liabilities. Regulatory and internal control requirements, capital requirements, competitive alternatives, vendor relationships and shifting market preferences may also determine if such initiatives can be brought to market in a manner that is timely and attractive to our clients. Products and services relying on internet and mobile technologies may expose us to fraud and cybersecurity risks. Implementation of certain new technologies, such as those related to artificial intelligence, automation and algorithms, may have unintended consequences due to their limitations, potential manipulation, or our failure to use them effectively. Failure to successfully manage these risks in the development and implementation of new products or services could have a material adverse effect on our business and reputation, as well as on our consolidated results of operations and financial condition.
Our business may be negatively impacted by riskrisks associated with acquisitions.
We intend to pursue a growth plan consistent with our business strategy, including growth by acquisition, as well as leveraging our existing branch network. On July 1, 2024, we completed the Codorus Valley Merger. We may wish to seek to acquire other companies in the future. Our business may be negatively impacted by certain risks inherent with the acquisition of Codorus Valley or other future acquisitions.companies. Some of these risks include the following:
We may continue to incur substantial costs related to the Codorus Valley Merger and the integration of Codorus Valley, and these costs may be greater than anticipated due to unexpected events.
We have incurred and expect to incur a number of non-recurring costs associated with the Codorus Valley Merger, including facilities and systems consolidation costs and employment-related costs. We may also incur additional costs to maintain employee morale and to retain key employees. There are a large number of processes, policies, procedures, operations, technologies and systems that will need to be integrated, including purchasing, accounting and finance, payroll, compliance, treasury management, branch operations, vendor management, risk management, lines of business, pricing and benefits. There are many factors beyond our control that could affect the total amount or the timing of the integration costs. Moreover, many of the additional costs that will be incurred are, by their nature, difficult to estimate accurately. These integration costs may result in the combined company taking additional charges against earnings, and the amount and timing of such charges are uncertain at present. There can be no assurances that the expected benefits and efficiencies related to the Codorus Valley Merger will be realized to offset these transaction and integration costs over time.
We may fail to realize the anticipated benefits of the Codorus Valley Merger.
The success of Codorus Valley Merger will depend on, among other things, the ability to realize the anticipated cost savings. To realize the anticipated benefits and cost savings from the Codorus Valley Merger, we must successfully integrate and combine our businesses in a manner that permits those cost savings to be realized without adversely affecting current revenues and future growth. If we are not able to successfully achieve these objectives, the anticipated benefits of the Codorus Valley Merger may not be realized fully or at all or may take longer to realize than expected. In addition, the actual cost savings of the Codorus Valley Merger could be less than anticipated, and integration may result in additional and unforeseen expenses.
An inability to realize the full extent of the anticipated benefits of the Codorus Valley Merger, as well as any delays encountered in the integration process, could have an adverse effect upon the revenues, levels of expenses and operating results of the combined company following the completion of the Codorus Valley Merger, which may adversely affect the value of the common stock of the combined company following the completion of the Codorus Valley Merger.
Our future results following our recently completed Codorus Valley Merger may suffer if the combined company does not effectively manage its expanded operations.
The size of our business increased significantly as a result of the Codorus Valley Merger. Our future success will depend, in part, upon our ability to manage this expanded business, which may pose challenges for management, including challenges related to the management and monitoring of new operations and associated increased costs and complexity. We may also face increased scrutiny from governmental authorities as a result of the increased size of our business. There can be no assurances that we will be successful or that we will realize the expected operating efficiencies, revenue enhancement or other benefits currently anticipated from the Codorus Valley Merger.
Overdraft fee practices of banks have recently come under increased regulatory scrutiny and been the subject of litigation. This increased scrutiny and litigation have prompted many larger banks to reform their overdraft fee practices or cease charging overdraft fees altogether. Reforming, reducing or eliminating overdraft fees could materially adversely affect our fee income and results of operations. Pending or future legal proceeding,proceedings, regarding our overdraft fee practices,practice, may result in judgments, settlements, fines, penalties, defense costs, or other results adverse to us, which could materially adversely affect our business, financial condition or results of operations, or cause serious reputational harm to us.
Federal regulations establish minimum capital requirements for insured depository institutions, including minimum risk-based capital and leverage ratios, and define “capital” for calculating these ratios. The minimum capital requirements are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The regulations also establish a “capital conservation buffer” of 2.5%, which if complied with will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. TheIf applicationwe ofare unable to meet these capital requirements or these requirements are increased, we could, among other things, requirebe usrequired to maintain higher capital, resulting in lower returns on equity, and we maycould be required to obtain additional capital or be subject to adverse regulatory actions, including limitations on our ability to pay dividends or repurchase shares, if we are unable to comply with such requirements.shares.
We are subject to a variety of risks in connection with any sale of loans we may conduct.
We routinely sell newly originated residential mortgage loans and may also sell other loans or loans portfolios. We may make certain representations and warranties to the purchaser concerning the loans sold and the procedures under which those loans have been originated and serviced. If any of these representations and warranties are invalid, we may be required to refund premiums, indemnify the purchaser for any related costs or losses, or it may be required to repurchase part or all of the affected loans. We may also be required to repurchase loans as a result of borrower fraud or in the event of early payment default by the borrower on a loan it has sold. Demand for our loans in the secondary markets could also be affected by these risks, which could lead to a reduction in related business activities.
Although we maintain a liquid asset portfolio and have implemented strategies to maintain sufficient and diverse sources of funding to accommodate planned, as well as unanticipated, changes in assets, liabilities, and off-balance sheet commitments under various economic conditions, a substantial, unexpected, or prolonged change in the level or cost of liquidity could have a material adverse effect on us. If the cost effectiveness or the availability of supply in these credit markets is reduced for a prolonged period of time, our funding needs may require us to access funding and manage liquidity by other means. These alternatives may include generating client deposits, reliance on brokered deposits or certificates of deposits, extending the maturity of wholesale borrowings, borrowing under certain secured borrowing arrangements, using relationships developed with a variety of fixed income investors, securitizing or selling loans, and further managing loan growth and investment opportunities. These alternative means of funding may result in an increase to the overall cost of funds and may not be available under stressed conditions, which would cause us to liquidate a portion of our liquid asset portfolio to meet any funding needs. In the event of additional liquidity is needed, we have access to liquidity from the FHLB, the FRB discount window and other sources.
At December 31, 2024,2025, we have combined borrowing capacity from the FHLB and FRB of approximately $1.7 billion. Accessing these sources of liquidity may impose additional borrowing costs on us.
Deposits are a stable source of funding for which costs are typically lower than other financing options. We compete with banks and other financial institutionsinstitutions, in addition to emerging competition from tokenized deposits and stablecoins, for deposits, as well as institutions offering uninsured investment alternatives, including money market funds and Treasury Bill alternatives. Our competitors may offer higher interest rates than we do, which could decrease the deposits that we attract or require us to increase our rates to retain existing deposits or obtain new deposits. Bank failures could negatively impact depositor confidence in us or the banking industry and cause our deposits to decline. Funding costs may increase if we lose deposits and are forced to replace them with more expensive sources of funding, if clients shift their deposits into higher cost products or if we need to raise interest rates to avoid losing deposits. Higher funding costs reduce our net interest margin and net income. Increased deposit competition could materially adversely affect our ability to fund lending operations. As a result, we may need to seek other sources of funds that could increase our cost of funds.
In July 2025, the Guiding and Establishing National Innovation for U.S. Stablecoins Act ("GENIUS Act") was signed into law. The GENIUS Act created a comprehensive federal regulatory framework for payment stablecoins in the U.S., which could create increased competition with respect to our deposit products, depending on interest from consumers and businesses.
We must maintain sufficient funds to respond to the needs of depositors and borrowers. To manage liquidity, we draw upon a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments.
We must maintain sufficient funds to respond to the needs of depositors and borrowers. To manage liquidity, we draw upon a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. These sources may include Federal Home Loan BankFHLB advances, proceeds from the sale of investments and loans, and liquidity resources at the holding company. Our ability to manage liquidity will be severely constrained if we are unable to maintain access to funding or if adequate financing is not available to accommodate future growth at acceptable costs. In addition, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, operating margins and profitability would be adversely affected. Turbulence in the capital and credit markets may adversely affect our liquidity and financial condition and the willingness of certain counterparties and clients to do business with us. Our ability to borrow from other financial institutions or to access the debt or equity capital markets on favorable terms or at all could be adversely affected by disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations.
We cannot guarantee that our allocation of capital to various alternatives, including share repurchase programs, will enhance long-term shareholder value.
Our business plan calls for us to execute a variety of strategies to allocate and deploy any excess capital including, but not limited to, continued organic balance sheet growth and diversification, implementation of share repurchase programs, and payment of regular cash dividends. If we are unable to effectively and timely deploy capital through these strategies, it may constrain growth in earnings and return on equity and thereby diminish potential growth in shareholder value. On June 20, 2025, our Board of Directors authorized a share repurchase program pursuant to which we may repurchase up to 500,000 shares of our outstanding common stock in accordance with all applicable securities laws and regulations. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities.
Management's Discussion & Analysis (MD&A)
Largest changes
“In 2025, the provision for credit losses was based on the increase in loans, primarily within commercial real estate loans, which was offset by decreases in the qualitative factors. During the first quarter of 2025, a qualitative factor was added at a minor level for Other External Factors for all loan classes due to the uncertainty created within the global and domestic markets from changes in U.S. economic policy, including the recently implemented tariffs. During the second quarter of 2025, this qualitative factor was removed for all loan classes as the impact from the changes in U.S. …”see in full comparison
“On January 1, 2023, the Company adopted the new accounting standard, referred to as CECL, which transitioned from the incurred loss model based on historical loss experience and economic and market conditions to the expected loss model. The CECL standard reflects expected credit losses over the expected life of the financial assets and commitments, primarily based on the DCF methodology for the majority of the loan segments, which applies the probability of default and loss given default factors to future cash flows, and adjusts to the net present value to derive the required reserve. …”see in full comparison
“In 2024, the provision expense recorded was due to commercial loan growth offset by changes to qualitative factors during 2024; specifically the Economic Conditions qualitative factor was reduced and the Other External Factors qualitative factor is no longer assigned to the impacted loan segments. These changes were based on improved economic factors, as well as concerns subsiding from the prior year about liquidity conditions within the banking industry. …”see in full comparison
see in full comparisonAsTheaCompanyresultincurred merger-related expenses ofacquisitions,$2.6 million for the year ended December 31, 2025. For the year ended December 31, 2024, the Companyhadincurredintangiblemerger-relatedassets consistingexpenses ofgoodwill$22.7andmillion,coreadepositprovisionandforothernon-PCDintangibleloansassetsoftotaling$15.5$115.9million, expenses for the retirement of an executive of $4.8 million and$21.1amillionprovisionatforDecemberlegal31,settlement2024ofand$4782023, respectively.thousand. During the year ended December 31,2024 and2023, the Company incurred merger-related expenses of$22.7 million and$1.1million, respectively, in connection with the Merger. In addition, the Company incurred $20.7 million in other non-recurring expenses during the year ended December 31, 2024. During the year ended December 31, 2022, the Company incurred $3.2 million and $13.0 million in restructuring charges and a provision for legal settlement, respectively.million.
“At December 31, 2023, AFS securities totaled $513.5 million, an increase of $209 thousand, from $513.7 million at December 31, 2022. During 2023, the Company purchased investment securities totaling $45.6 million, which included $19.8 million of U.S. Treasury securities, $15.3 million of agency MBS and CMO securities, $8.9 million of non-agency CMO securities and $972 thousand of asset-backed securities. During 2023, the Company sold three U.S. …”see in full comparison
“The Company recorded a provision for credit losses of $17.4 million, $1.7 million and $4.2 million in 2024, 2023 and 2022, respectively. On January 1, 2023, the Company adopted the new accounting standard, referred to as CECL, which transitioned from the incurred loss model based on historical loss experience and economic and market conditions to the expected loss model. …”see in full comparison
Full comparison: every changed paragraph (163)
The following discussion and analysis is intended to assist readers in understanding the consolidated financial condition and results of operations of the Company and should be read in conjunction with our Consolidated Financial Statements and notes thereto included in this Annual Report on Form 10-K. Certain prior period amounts presented in this discussion and analysis have been reclassified to conform to current period classifications. These reclassifications did not have a material impact on the Company's consolidated financialbalance condition,sheets, resultsstatements of operationsincome or statement of consolidated cash flows.
The Company acquired Codorus Valley and its wholly-owned bank subsidiary PeoplesBank, A Codorus Valley Company on July 1, 2024. The merger and acquisition method of accounting was used to account for the transaction with the Company as the acquirer. The Company recorded the assets and liabilities of Codorus Valley at their respective fair values as of July 1, 2024. The transaction was valued at $233.4 million and expanded the Bank’s footprint into the York, Pennsylvania market while increasing its market penetration in its existing markets. The Bank has 38 full-service branches and seven limited purpose branches.
The Company incurred merger-related expenses of $2.6 million for the year ended December 31, 2025. For the year ended December 31, 2024, the Company incurred merger-related expenses of $22.7 million, a provision for non-PCD loans of $15.5 million, expenses for the retirement of an executive of $4.8 million and a provision for legal settlement of $478 thousand and restructuring expenses of $296 thousand for the year ended December 31, 2024. For the year ended December 31, 2023, the Company incurred merger-related expenses of $1.1 million.thousand. The merger-related and other non-recurring expenses are included in non-interest expenses in the consolidated statements of income under Part II, Item 8, "Financial Statements and Supplemental Data."
The ACL for loans collectively evaluated is measured using a lifetime expected loss rate model that considers historical loss performance and past events in addition to forecasts of future economic conditions. Based on management's analysis, adjustments may be applied for additional factors impacting the risk of loss in the loan portfolio beyond the quantitatively calculated reserve on collectively evaluated loans. As the quantitative reserve calculation incorporates historical conditions, management may consider if an additional or reduced reserve is warranted and make adjustments through qualitative risk factors based on current and expected conditions. Management uses the best available information to complete these evaluations; however, future adjustments to the ACL may be necessary if conditions significantly differ from the assumptions used in making the evaluations.
Utilizing a third-party vendor, theThe ACL for loans collectively evaluated is measured using a lifetime expected loss rate model under the vendor's neutral scenario that considers historical loss performance and past events in addition to forecasts of future economic conditions. The Company elected to use the DCF methodology for the quantitative analysis for the majority of its loan segments, which applies the probability of default to future cash flows, using a loss driver model and loss given default factors, and then adjusts to the net present value to derive the required reserve. The probability of default estimates are derived through the application of reasonable and supportable economic forecasts to the regression models, which incorporates the Company's and peer loss-rate data, unemployment rate and GDP and can be obtained from the Federal Reserve Economic Database. The reasonable and supportable forecasts of the selected economic metrics are then input into the regression model to calculate an expected default rate. The expected default rates are then applied to expected loan balances estimated through the consideration of contractual repayment terms and expected prepayments. The prepayment and curtailment assumptions adjust the contractual terms of the loan to arrive at the expected cash flows, which are obtained from the third-party vendor.flows. The model incorporates an annualized prepayment rate and a twelve-month rate for curtailment based on a "statistical tendency to repay." Changes in the prepayment and curtailment speeds that vary from the current model inputs could result in an inaccurate of expected credit losses. The development and validation of credit models also included determining the length of the reasonable and supportable forecast and regression period and utilizing national peer group historical loss rates, which a four-quarter forecast period followed by a four-quarter straight-line reversion period were applied.
Preliminary real GDP increased at a rate of 1.4% on an annualized basis for the fourth quarter of 2025, which was a decrease from 2.3% during the fourth quarter of 2024. The increase during the fourth quarter of 2025 was primarily due to consumer spending despite consumer spending declining compared to the third quarter of 2025 and fourth quarter of 2024. Similarly, the rate during the fourth quarter of 2025 was impacted by the rise in investment, which includes business spending, housing and business inventories; however, the rate of increase had decelerated compared to the aforementioned comparative periods. Key contributors to investment presently are intellectual property and information processing equipment. An offsetting factor influencing the GDP rate was the federal government shutdown.
The personal consumption expenditures ("PCE") price index increased by 2.9% in the fourth quarter of 2025 compared to an increase of 2.4% for the fourth quarter of 2024. Excluding food and energy prices, the PCE price index increased by 2.7% in the fourth quarter of 2025 and in the fourth quarter of 2024.
Preliminary real GDP was 2.3% on an annualized basis for the fourth quarter of 2024, which was a decrease from 3.1% for the third quarter of 2024 and from 3.4% during the fourth quarter of 2023. The decline from the third quarter of 2024 was due to a decline in investments and exports despite an increase in consumer spending. Fluctuations in real GDP in recent periods, due to inflation, credit conditions and geopolitical tensions, continue to create uncertainty in the current economic environment. The personal consumption expenditures ("PCE") price index increased by 2.4% in the fourth quarter of 2024 compared to an increase of 1.5% for third quarter of 2024 and 1.9% for the fourth quarter of 2023. Excluding food and energy prices, the PCE price index increased by 2.7% in the fourth quarter of 2024 compared to 2.2% in the third quarter of 2024 and 2.0% in the fourth quarter of 2023.
The national unemployment rate was 4.1%4.3% in December 20242025 compared to 3.8% in December 2023.2024. Within the Company's geographic footprint, the unemployment rate in Pennsylvania was 3.7% in December 20242025 compared to 3.4%4.2% in December 2023.2024. The unemployment rate in Maryland increased from 2.7% in December 20232024 to 3.1%4.2% in December 2024.2025. Despite the increases in both states since December 2023,2024, the unemployment rates in Pennsylvania and Maryland both remain significantly below the national level. These state-wide unemployment rates are consistent with those experienced by the counties in which the Company operates branches and other corporate offices.
AtFollowing Decembera 31,25 basis point increase in July 2023, the Federal Funds rate remained unchanged until September 2024, the 10-year Treasury bond yield was 4.58%, an increase from 3.88% at December 31, 2023. In addition,when the FOMC reducedcut the Federal Funds rate by 50 basis pointspoints. inThe SeptemberFOMC 2024subsequently andimplemented additional rate cuts of 25 basis points in December 2024.2024, TheSeptember decrease2025, wasOctober 2025 and December 2025. These changes were based on the progress towards the FOMC's 2.0%assessment inflationof target andinflation, the unemployment rate remainingand lowjobs despite recent slowing in job gains.report.
At December 31, 2025, the 10-year Treasury bond yield was 4.14%, a decrease from 4.58% at December 31, 2024. Contributing factors for the decrease include recent FOMC rate cuts, cooling inflationary pressures, geopolitical tensions and economic uncertainties.
On July 4, 2025, H.R. 1, referred to as the One Big Beautiful Bill Act (the "Act"), was enacted into law. The Act includes tax reform provisions, including making permanent certain business tax provisions of the U.S. Tax Cuts and Jobs Act. The provisions of the Act did not have a material impact on our results of operations and financial condition for the year ended December 31, 2025.
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.tensions, Ituncertainty isrelated possible that estimates made into the financial statements could be materially and adversely impacted in the near term as a resultimpact of these conditions, including expected credit losses on loanstariffs and the fair valueshutdown of financialthe instrumentsU.S. thatgovernment, arethe carriedscope atand fairtiming value.of changes to fiscal, regulatory and trade policies.
As the Company’s balance sheet consists primarily of financial instruments, interest income and interest expense are greatly influenced by the level of interest rates and the slope of the yield curve, as well as the mix of assets and funding. The Company has been able to grow its net interest income by $50.4$44.5 million from 20232024 to 2024,2025, which is attributed to the Merger that was completed on July 1, 2024 and continued success with the balance of organic commercial loan growth and pricing.pricing of interest-earning assets and liabilities. Competition for quality lending opportunities and deposits remains intense, which, together with aan flatinverted yield curve and changing economic environment, will continue to challenge the Company's ability to grow its net interest margin and to manage its overhead expenses.
Net income totaled $80.9 million, $22.1 million,million and $35.7 million and $22.0 million for 2024,2025, 20232024 and 2022,2023, respectively. Diluted earnings per share totaled $1.48,$4.18, $1.48 and $3.42 and $2.06 for 2024,2025, 20232024 and 2022,2023, respectively. For the year ended December 31, 2024,2025, the Company incurred merger-related expenses of $22.7$2.6 million, provision for credit losses on acquired non-PCD loans of $15.5 million, retirement expenses for an executive of $4.8 million and a provision for legal settlement of $478 thousand, which were included in non-interest expenses of the consolidated statements of income. Excluding these non-recurring expenses, net income and diluted earnings per share totaled $56.1$82.9 million and $3.76,$4.28, respectively, for the year ended December 31, 2024.2025. Net income was $56.1 million and diluted earnings per share was $3.76 for the year ended December 31, 2024 excluding merger-related expenses of $22.7 million, a provision for non-PCD loans of $15.5 million, expenses for the retirement of an executive of $4.8 million and a provision for legal settlement of $478 thousand. Net income was $36.6 million and diluted earnings per share was $3.51 for the year ended December 31, 2023 excluding $1.1 million of merger-related expenses for the year ended December 31, 2023.expenses. The Company recorded a gain of $1.2 million from the sale of the Bank's Path Valley branch during the year ended December 31, 2023. Net income was $34.8 million and diluted earnings per share was $3.25 for the year ended December 31, 2022, excluding the financial impact of a legal settlement and restructuring expenses. See “Supplemental Reporting of Non-GAAP Measures.”
Net interest income totaled $199.8 million, $155.3 million,million and $104.9 million and $99.6 million for 2024,2025, 20232024 and 2022,2023, respectively. The increase in net interest income reflected the deployment of cash into higher yielding commercial loans and investment securities and the impact of the rising interest rates on interest-earning asset yields, partially offset by the impact of an increase in cost of funds and increases in interest-bearing liabilities. In addition, the increaseincreases in interest income during 2025 and 2024 reflectsreflect the impact of the Merger, including net accretion of purchase accounting marks on loans, investment securities, deposits and borrowings.
The provision for credit losses on loans totaled $126 thousand, $17.4 million,million and $1.7 million and $4.2 million in 2024,2025, 20232024 and 2022,2023, respectively. For the year ended December 31, 2024, the provision for credit losses increased primarily due to $15.5 million of reserves on acquired non-PCD loans as a result of the Merger. During the first quarter of 2023, the Company adopted the new accounting standard for CECL, which resulted in the change from the incurred loss model based on historical loss experience to the expected loss model, which reflects the projected credit losses over the expected life of financial assets and commitments.
Noninterest income totaled $52.3 million, $37.4 million,million and $25.7 million and $27.0 million for 2024,2025, 20232024 and 2022,2023, respectively. The increase of $11.7$14.9 million from 2024 to 2025 was primarily due to an increase in wealth management income of $5.3 million and increases in service charges and interchange income of $5.1 million, partially driven by the Merger, in addition to an increase of $1.5 million in income from life insurance policies and an increase of $1.3 million in swap fees. The remainder of the increase is across several line items and is due primarily to the Merger. The increase in noninterest income of $11.8 million from 2023 to 2024 was primarily due to an increase in wealth management income of $5.0 million and increases in service charges and interchange income of $2.8$3.4 million, partially driven by the Merger. The remainder of the increase is across several line items primarily due to the Merger. These increase in 2024 compared to 2023 werewas partially offset by the gain of $1.2 million recorded to other income from the sale of the Path Valley branch for the year ended December 31, 2023. The decrease in noninterest income of $1.3 million from 2022 to 2023 was primarily due to a decrease of $1.6 million in swap fee income, partially offset by an increase in in mortgage banking activities of $184 thousand and the before mentioned gain on sale of the Path Valley branch in 2023. Other income in 2022 included realized gains on the Company's investment in a non-housing limited partnership of $1.1 million.
Noninterest expenses totaled $149.4 million, $148.3 million and $83.8 million for 2025, 2024 and 2023, respectively. The increase of $1.1 million from 2024 to 2025 was due to increases across several line items due to the impact from the Merger, partially offset by the decrease of $20.1 million in merger-related expenses. The Company incurred merger-related expenses of $2.6 million for the year ended December 31, 2025. For the year ended December 31, 2024, the Company incurred merger-related expenses of $22.7 million, a provision for non-PCD loans of $15.5 million, expenses for the retirement of an executive of $4.8 million and a provision for legal settlement of $478 thousand, collectively the "non-recurring expenses". The increase of $64.5 million in non-interest expenses from 2023 to 2024 included $43.4 million in the aforementioned non-recurring expenses.
Noninterest expenses totaled $148.3 million, $83.8 million and $95.8 million for 2024, 2023 and 2022, respectively. The increase of $64.5 million from 2023 to 2024 includes non-recurring expenses of $43.4 million. The remainder of the increase is across several line items primarily due to impact from the Merger. The decrease of $11.9 million in non-interest expenses from 2022 to 2023 was due to a legal settlement of $13.0 million and a restructuring charge of $3.2 million during 2022, partially offset by an increase of $3.0 million in salaries and employee benefits expenses and merger-related expenses of $1.1 million during 2023.
Income tax expense totaled $21.8 million, $5.8 million,million and $9.4 million and $4.6 million for 2024,2025, 20232024 and 2022,2023, or an effective tax rate of 20.7%,21.2%, 20.7% and 20.8% and 17.2% respectively. The Company’s effective tax rate is less than the 21% federal statutory rate due to tax-exempt income, including interest earned on tax-exempt loans and investment securities and income from life insurance policies and tax credits.
The FRB influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Starting in March 2022, the FOMC increased the Federal Funds rate by 425 basis points during 2022 and 100 basis points during 2023 as an attempt to combat the impact of inflation, the rising consumer price index, supply chain disruptions, the state of the labor market and geopolitical tensions. InFollowing a 25 basis point increase in July 2023, the secondFederal halfFunds ofrate remained unchanged until September 2024, when the FOMC reducedcut the Federal Funds rate by 7550 basis points. The FOMC subsequently implemented additional rate cuts of 25 basis points in December 2024, September 2025, October 2025 and December 2025. These changes were based on the progressFOMC's towardsassessment of inflation, the 2.0%unemployment inflation targetrate and thejobs state of unemployment.report.
Core deposits are deposits that are stable, lower cost and generally reprice more slowly than other deposits when interest rates change. Core deposits, which exclude certificates of deposit, are typically funds of local clients who also have a borrowing or other relationship with the Bank. The Company is primarily funded by core deposits, withincluding noninterest-bearing demand depositsdeposits, which have historically beingserved as a foundational, low-cost source of funds. DuringIn 2022,addition to the lower-cost funding base had a positive impact onof the Bank's net interest income and net interest margin in the rising interest rate environment. However, as the Federal Funds rate continued to increase,environment, the competition for deposits also increased in the latter part of 2022 and continued throughout 20242025 with clients utilizing their funds at a higher frequency and additional liquidity was needed to meet the demands of our clients. InDuring addition,that decreases in demand deposits and savings deposits were primarily due totimeframe, clients shiftingshifted their deposits to higher-yielding products within the Bank, including time deposits with promotional offerings of up to 18-month terms. From late 2024 to 2025, there has been reduction of these higher yielding promotional balances due to maturities.
The following table presents changes in net interest income on a taxable-equivalent basis forbetween 2024 and 2023years by rate and volume components.components:
2025 versus 2024
Net interest income increased by $44.5 million from $155.3 million in 2024 to $199.8 million in 2025. Interest income on loans increased by $46.3 million, from $210.3 million in 2024 to $256.6 million in 2025. Interest income on investment securities increased by $10.3 million, from $30.9 million in 2024 to $41.2 million in 2025. Total interest expense increased by $10.3 million from $93.7 million in 2024 to $103.9 million in 2025. Interest expense on deposits increased by $8.1 million from $84.2 million in 2024 to $92.3 million in 2025, and interest expense on borrowed funds increased by $2.2 million from $9.4 million in 2024 to $11.6 million in 2025.
Net interest income on a taxable-equivalent basis increased by $45.1 million from $156.9 million in 2024 to $202.0 million in 2025. The Company’s net interest spread increased by ten basis points from 3.36% in 2024 to 3.46% in 2025 primarily due to a decrease in cost of funds.
Taxable-equivalent net interest margin increased by 12 basis points to 4.04% in 2025 from 3.92% in 2024. Net interest income benefited from a decrease of 24 basis points in the cost of interest-bearing liabilities from 2.91% in 2024 to 2.67% in 2025, reflecting the impact of deposit rate reductions over that time period and the runoff of higher rate time deposits and money market balances, partially offset by the impact of the accelerated amortization of remaining debt issuance costs from the redemption of subordinated notes. During 2025 and 2024, amortization expense of the debt issuance costs totaled $335 thousand and $81 thousand, respectively. The taxable-equivalent yield on interest-earning assets decreased by 13 basis points to 6.13% in 2025 from 6.26% in 2024, which was primarily due to the decline in the Fed Funds rate since late 2024.
The yield on loans decreased by 15 basis points to 6.53% in 2025 from 6.68% in 2024 primarily due to the decline in market interest rates. Taxable-equivalent interest income earned on loans increased by $46.5 million from $211.0 million in 2024 to $257.5 million in 2025 primarily due to an increase in the average balances, which was partially attributed to the acquired loans from the Merger, and from the accretion recognized on fair value marks to loans.
Average loans increased by $795.3 million from $3.2 billion during 2024 to $3.9 billion during 2025. The average balance of commercial loans increased by $613.3 million from $2.5 billion during 2024 to $3.1 billion during 2025. Average residential mortgage loans increased by $118.1 million from $367.4 million for 2024 to $485.5 million for 2025. Average home equity loans increased by $47.8 million from $247.4 million for 2024 to $295.2 million for 2025. Average installment and other consumer loans increased by $16.1 million from $27.2 million for 2024 to $43.3 million for 2025.
Accretion of purchase accounting adjustments on loans included in interest income was $21.5 million during 2025 compared to $15.2 million in 2024. Accelerated accretion totaled $5.2 million during 2025 compared to $5.4 million during 2024. Prepayment income on commercial loans increased from $1.1 million during 2024 to $1.5 million during 2025. The recognition of interest income previously applied to principal of $1.6 million from the payoff of a commercial real estate loan on nonaccrual status contributed four basis points to the Company's net interest margin during 2024.
Interest income on investment securities on a tax-equivalent basis increased by $10.8 million to $42.6 million for 2025 from $31.8 million for 2024, with the taxable equivalent yield increasing from 4.60% for 2024 to 4.66% for 2025. The increase of six basis points reflects the increase in average balances and the increase in accretion of the discount recorded on investment securities assumed from the Merger, partially offset by a decline in the market interest rates. Average investment securities increased by $223.2 million from $690.2 million in 2024 to $913.4 million during 2025 due to the investment securities assumed from the Merger and purchases during 2025. Investment security purchases totaled $272.3 million, partially offset by sales of $83.8 million during 2025. Accretion on acquired investment securities was $3.2 million in 2025 compared to $1.5 million in 2024.
Interest income on federal funds sold and interest-bearing bank balances on a tax-equivalent basis decreased by $1.8 million to $5.9 million for 2025 from $7.8 million for 2024. The average balance of federal funds sold and interest-bearing bank balances decreased by $14.6 million from $150.5 million for 2024 to $135.9 million for 2025, which was impacted by the decrease in deposits. The FOMC cut the Federal Funds rate by 75 basis points since September 2025.
Interest expense increased by $10.3 million to $103.9 million in 2025 from $93.7 million in 2024; however, the cost of interest-bearing liabilities decreased by 24 basis points from 2.91% in 2024 to 2.67% in 2025, reflecting the impact of deposit rate reductions implemented during 2025 and runoff of higher rate time deposits and money market balances, partially offset by the accelerated amortization of the remaining debt issuance costs from the redemption of subordinated notes. Average interest-bearing liabilities increased by $678.3 million from $3.2 billion in 2024 to $3.9 billion during 2025 primarily due to the impact of the Merger.
Interest expense on deposits increased by $8.1 million from $84.2 million in 2024 to $92.3 million in 2025. The average balance of interest-bearing deposits increased by $622.9 million from $3.0 billion in 2024 to $3.7 billion in 2025. Average interest-bearing demand and money market deposits increased by $387.7 million to $2.5 billion in 2025 compared to $2.1 billion in 2024. Average time deposits increased by $191.1 million to $923.5 million in 2025 from $732.4 million in 2024, which resulted in increased interest expense on time deposits of $8.5 million. Average savings deposits increased by $44.1 million to $267.3 million in 2025 from $223.2 million in 2024. The average cost of time deposits decreased by 60 basis points from 4.44% in 2024 to 3.84% in 2025 due to continued run-off in higher yielding promotional balances and replacement at lower rates. Amortization expense of fair value marks on acquired time deposits was $913 thousand in 2025 compared to $2.1 million in 2024.
Interest expense on borrowings increased by $2.1 million to $11.6 million in 2025 from $9.4 million in 2024 despite the cost of borrowings decreasing by five basis points from 4.08% in 2024 to 4.03% in 2025. Average borrowings increased by $55.4 million from $188.7 million in 2024 to $244.1 million in 2025, which included an increase of $35.8 million in average FHLB advances and other borrowings and an increase of $10.4 million in average subordinated notes and trust preferred debt. The increase in FHLB advances was due to utilization of long-term advances and overnight borrowings 2025 as lending and investing activities increased. The average balance in subordinated notes and trust preferred debt is due to the assumption of subordinated debt of $31.0 million and trust preferred debt of $10.3 million from the Merger, partially offset by the impact from the redemption of Orrstown's subordinated notes on September 30, 2025. During 2025 and 2024, amortization expense of the debt issuance costs totaled $335 thousand and $81 thousand, respectively.
The subordinated notes assumed from the Merger had 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%, which was 8.06% at December 31, 2025. The trust preferred debt has a variable rate of three-month CME term SOFR rate plus a spread adjustment and margin. For 2025 and 2024, the average cost of the trust preferred debt, excluding the fair value mark, was 6.24% and 7.08%, respectively. Amortization of fair value marks on acquired borrowings was $607 thousand and $294 thousand in 2025 and 2024, respectively.
Interest expense on borrowings increased by $1.9 million to $9.4 million in 2024 from $7.5 million in 2023 despite the cost of borrowings decreasing by 24 basis points from 4.32% in 2023 to 4.08% in 2024. Average borrowings increased by $18.8 million from $169.9 million in 2023 to $188.7 million in 2024, which included $50.4 million in average subordinated notes and trust preferred debt for the year ended December 31, 2024, an increase of $18.3 million, from $32.1 million for the year ended December 31, 2023. This increase is due to the assumption of subordinated debt of $31.0 million and trust preferred debt of $10.3 million from the Merger. The interest rate increased on Orrstown Financial Services, Inc.'s outstanding subordinated notes of $32.5 million, which converted from a fixed rate of 6.00% to a floating rate of 8.78% on December 30, 2023. The interest rate on the Company's subordinated notes at December 31, 2024 was 8.03%. The subordinated notes assumed from the Merger havehad a fixed rate of interest equal to 4.50% until December 30, 2025. The trust preferred debt issuances have a variable rate of three-month CME term SOFR, plus a spread adjustment and margin. Amortization expense of fair value marks on acquired borrowings was $294 thousand for the year ended December 31, 2024.
2023 versus 2022
Net interest income increased by $5.3 million from $99.6 million in 2022 to $104.9 million in 2023. Similarly, net interest income on a taxable-equivalent basis for 2023 increased by $5.3 million compared with 2022. The Company’s net interest spread decreased by 31 basis points from 3.70% in 2022 to 3.39% in 2023 primarily due to the increase in the cost of funds.
Interest income on loans increased by $33.1 million, from $93.5 million in 2022 to $126.6 million in 2023, and interest income on investment securities increased by $7.1 million, from $14.4 million in 2022 to $21.5 million in 2023. Total interest expense increased by $36.0 million from $9.0 million in 2022 to $45.0 million in 2023. Interest expense on deposits increased by $31.2 million from $6.3 million in 2022 to $37.5 million in 2023, and interest expense on borrowed funds increased by $4.9 million to $2.6 million in 2022 to $7.5 million in 2023.
Taxable-equivalent net interest margin decreased by one basis point to 3.80% in 2023 from 3.81% in 2022. The taxable-equivalent yield on interest-earning assets increased by 125 basis points to 5.40% in 2023 from 4.15% in 2022, reflecting both the deployment of cash into higher yielding loans and investment securities and the impact of elevated interest rates on these interest-earning assets. The increase in yield was partially offset by an increase of 157 basis points in the cost of interest-bearing liabilities from 0.45% in 2022 to 2.02% in 2023 due to increased funding costs from higher market interest rates, competitive pressures and an increase in higher cost borrowings.
Average loans increased by $197.2 million from $2.0 billion during 2022 to $2.2 billion during 2023. Average investment securities increased by $10.9 million from $509.6 million in 2022 to $520.5 million during 2023 due to net investment purchases and a decrease in unrealized losses from 2022. Average interest-bearing liabilities increased by $241.3 million from $2.0 billion in 2022 to $2.2 billion during 2023. The competition for deposits increased in the latter part of 2022 and continued throughout 2023, which was coupled with clients utilizing their funds at a higher frequency. Therefore, additional liquidity was needed to meet demands of our clients, which resulted in an increase in higher cost borrowings.
The yield on loans increased by 109 basis points to 5.68% in 2023 from 4.59% in 2022. Taxable-equivalent interest income earned on loans increased by $33.3 million from $93.8 million in 2022 to $127.1 million in 2023 primarily due to an increase in the average balances of commercial, residential mortgage and home equity loans and from the impact of the rising rate environment. The increase in interest income from loan growth and higher rates was partially offset by a decrease in interest income from SBA PPP loans due to a lower amount of forgiveness activity during 2023 compared to 2022.
The average balance of commercial loans, excluding SBA PPP loans, increased by $211.9 million from $1.6 billion during 2022 to $1.8 billion during 2023. SBA PPP loans, net of deferred fees and costs, averaged $8.8 million during 2023, a decrease of $58.3 million from an average of $67.1 million in 2022. This decrease was due to forgiveness of SBA PPP loans since 2022. Average residential mortgage loans increased by $35.7 million from $211.0 million for 2022 to $246.7 million for 2023 due primarily to adjustable-rate and jumbo mortgage loans originated for the portfolio. Average home equity loans increased by $14.1 million from $175.5 million for 2022 to $189.6 million for 2023. Average installment and other consumer loans decreased by $6.3 million from $26.3 million for 2022 to $20.0 million for 2023.
For 2023, interest income on loans included $192 thousand of interest and net deferred fee income associated with the SBA PPP loans compared to $6.1 million for 2022. Accretion of purchase accounting adjustments included in interest income was $748 thousand during 2023 compared to $1.1 million in 2022. The decrease in accretion was due to a decline in accelerated accretion from acquired loan payoffs or significant payments from the prior year. During 2023, accelerated accretion was $269 thousand compared to $724 thousand in 2022. Prepayment income on commercial loans decreased from $1.0 million during 2022 to $826 thousand during 2023.
Interest income on investment securities on a tax-equivalent basis increased by $7.0 million to $22.4 million for 2023 from $15.4 million for 2022, with the taxable equivalent yield increasing by 128 basis points from 3.03% for 2022 to 4.31% for 2023. The increase reflects the impact from higher interest rates since March 2022 and the impact of investment security purchases at higher yields. The average balance of investment securities was impacted by purchases of $45.6 million and unrealized gains of $14.0 million, which were partially offset by investment security sales totaling $22.0 million during 2023.
The average balance of federal funds sold and interest-bearing bank balances decreased by $57.9 million from $98.8 million for 2022 to $40.9 million for 2023, due primarily to the deployment of cash into loans and investment securities. The related interest income increased by $1.0 million to $1.8 million for 2023 from $774 thousand for 2022. This increase was caused by 525 basis points of Fed Funds rate increases by the FOMC since March 2022.
Interest expense on deposits increased by $31.2 million from $6.3 million in 2022 to $37.5 million in 2023. The average balance of interest-bearing deposits increased by $141.4 million from $1.9 billion in 2022 to $2.1 billion 2023 and the cost of funds increased by 149 basis points from 0.33% in 2022 to 1.82% in 2023. Average time deposits increased by $64.9 million in 2023, which the change in volume increased interest expense on time deposits by $401 thousand. The cost of time deposits increased by 233 basis points from 0.62% in 2022 to 2.95% in 2023 as clients sought higher-yielding products during the rising interest rate environment, including the Bank's promotional offerings for time deposits with terms up to 18-months. Average interest-bearing demand deposits increased by $111.0 million in 2023. Interest expense for interest-bearing demand deposits increased by $22.6 million, with the cost of funds increasing by 147 basis points from 0.30% in 2022 to 1.77% in 2023 as a result of deposit rate increases during 2023.
Interest expense on borrowings increased by $4.9 million to $7.5 million in 2023 from $2.6 million in 2022, as the cost of borrowings increased by 31 basis points from 4.01% in 2022 to 4.32% in 2023. Average borrowings increased by $108.0 million from $15.7 million in 2022 to $123.7 million in 2023, as the Bank opted to borrow funds to provide additional liquidity to meet the credit needs of its clients. On December 31, 2023, the Company's subordinated notes converted from a fixed rate at 6.0% to a variable rate of three-month CME term SOFR rate plus 3.16%, or 8.78%.
The ACL to total loan ratio was 1.19%, 1.24% and 1.25% at December 31, 2025, 2024 and 2023, respectively. The Company recorded a provision for credit losses on loans of $126 thousand, $17.4 million and $1.7 million in 2025, 2024 and 2023, respectively. The recoveries of credit losses on unfunded commitments of $100 thousand, $862 thousand and zero were recorded for the years ended December 31, 2025, 2024 and 2023, respectively.
In 2025, the provision for credit losses was based on the increase in loans, primarily within commercial real estate loans, which was offset by decreases in the qualitative factors. During the first quarter of 2025, a qualitative factor was added at a minor level for Other External Factors for all loan classes due to the uncertainty created within the global and domestic markets from changes in U.S. economic policy, including the recently implemented tariffs. During the second quarter of 2025, this qualitative factor was removed for all loan classes as the impact from the changes in U.S. economic policy was then reflected in the macroeconomic conditions within quantitative ACL model. In addition, the Economic Conditions qualitative factor was added at a minor level and the Delinquency and Classified Loan Trends qualitative factor was added at a moderate level for the residential senior liens loan class and the Delinquency and Classified Loan Trends qualitative factor was added at a moderate level for the home equity loan class. The adjustment to the Economic Conditions qualitative factor was based on the prepayment speeds slowing in part due to market interest rates cuts, and the adjustment to Delinquency and Classified Loan Trends was based on recent delinquency volume and downgrades within the aforementioned loan classes. There were no changes to the qualitative factors during the third quarter of 2025. During the fourth quarter of 2025, a qualitative factor was added at a minor level for Delinquency and Classified Loan Trends for the acquisition and development loan class due to the delinquency level and downgrades in risk rating. In addition, the qualitative factor for Concentrations of Credit and Changes in Credit Concentrations was reduced from a moderate to minor level for the non-owner occupied commercial real estate loan class as the concentration level as the percentage of total risk-based capital reduced below the federal banking agencies' guidance level of 300%.
The Company recorded a provision for credit losses of $17.4 million, $1.7 million and $4.2 million in 2024, 2023 and 2022, respectively. On January 1, 2023, the Company adopted the new accounting standard, referred to as CECL, which transitioned from the incurred loss model based on historical loss experience and economic and market conditions to the expected loss model. The CECL standard reflects expected credit losses over the expected life of the financial assets and commitments, primarily based on the DCF methodology for the majority of the loan segments, which applies the probability of default and loss given default factors to future cash flows, and adjusts to the net present value to derive the required reserve. Macroeconomic conditions are incorporated into the model for unemployment and gross domestic product, in addition to model assumptions for discount rate and prepayment and curtailment speeds.
The ACL to total loan ratio decreased from 1.25% at December 31, 2023 to 1.24% at December 31, 2024. In 2024, the provision for credit losses increased primarily due to $15.5 million of reserves on acquired non-PCD loans, which was partially offset by a reversal of the provision for credit losses for off-balance sheet credit exposures of $862 thousand. The remaining provision expense recorded for the year ended December 31, 2024 was due to commercial loan growth, partially offset by changes to qualitative factors during 2024; specificallyspecifically, the Economic Conditions qualitative factor was reduced and the Other External Factors qualitative factor is no longer assigned to the impacted loan segments. These changes were based on improved economic factors, as well as concerns subsiding from the prior year about liquidity conditions within the banking industry. The Economic Conditions qualitative factor for the residential mortgage loan segment was removed and there was a decrease in the Collateral Valuation Trends qualitative factor from a moderate to low level in the ACL model for the residential mortgage and installment and other loan segments. These changes were based on the stabilization in real estate collateral valuation, housing demand and overall portfolio performance. In 2023 and 2022, the provision for credit losses was driven primarily by increases in commercial loans, excluding SBA PPP loan forgiveness activity, of $118.3 million and $299.9 million, respectively, in addition to the overall increase in expected loss rates under CECL. During 2023, the Delinquency and Classified Loan Trends qualitative factor was increased for the commercial & industrial and owner-occupied commercial real estate loan classes, which was based on a trend of increases in loans downgraded to the special mention or classified risk rating. All other qualitative factors were unchanged from levels at adoption of CECL. During 2022, qualitative factors were unchanged, except for a reduction in the National and Local Economic Conditions factor, which reduced the provision by $726 thousand.
On January 1, 2023, the Company adopted the new accounting standard, referred to as CECL, which transitioned from the incurred loss model based on historical loss experience and economic and market conditions to the expected loss model. The CECL standard reflects expected credit losses over the expected life of the financial assets and commitments, primarily based on the DCF methodology for the majority of the loan segments, which applies the probability of default and loss given default factors to future cash flows, and adjusts to the net present value to derive the required reserve. Macroeconomic conditions are incorporated into the model for unemployment and gross domestic product, in addition to model assumptions for discount rate and prepayment and curtailment speeds. In 2023, the provision for credit losses was driven primarily by increases in commercial loans, excluding SBA PPP loan forgiveness activity, of $118.3 million, in addition to the overall increase in expected loss rates under CECL. During 2023, the Delinquency and Classified Loan Trends qualitative factor was increased for the commercial & industrial and owner-occupied commercial real estate loan classes, which was based on a trend of increases in loans downgraded to the special mention or classified risk rating. All other qualitative factors were unchanged from levels at adoption of CECL.
Net charge-offs totaled $1.1 million in 2025, $3.3 million in 2024 and $581 thousand in 2023. Nonaccrual loans were 0.70% of gross loans at December 31, 2025, compared with 0.61% at December 31, 2024 and 1.11% at December 31, 2023. See further discussion in the “Asset Quality” and “Credit Risk Management” sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Net charge-offs totaled $3.3 million in 2024, compared to net charge-offs of $581 thousand in 2023. The increase in net charge-offs was due primarily to a charge-off of $2.4 million for one commercial and industrial relationship and charge-offs of $595 thousand associated with a loan sale. Nonaccrual loans were 0.61% of gross loans at December 31, 2024, compared with 1.11% of gross loans at December 31, 2023. Nonaccrual loans decreased by $1.4 million from $25.5 million at December 31, 2023 to $24.1 million at December 31, 2024 due to the payoffs of two commercial real estate loans with outstanding balances totaling $15.0 million and a sale of mostly commercial and industrial loans on nonaccrual status of $2.6 million, mostly offset by acquired loans on nonaccrual status of $12.8 million from the Merger and other additions in commercial and industrial and CRE loans. See further discussion in the “Asset Quality” and “Credit Risk Management” sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
2025 versus 2024
Noninterest income increased by $14.9 million from 2024 to 2025. The primary driver of the overall increase was the impact of the Merger, which was effective on July 1, 2024. The following were other significant factors in the increase:
•Swap fee income increased by $1.3 million due to higher swap volume.
What changed in the latest 10-Q
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, 2025.
No wording changes found in this section.
Full comparison: every changed paragraph (0)
Management's Discussion & Analysis (MD&A)
New heading “Six months ended June 30, 2026 compared with six months ended June 30, 2025”
New heading “Net Interest Income”
New heading “Provision for Credit Losses”
New heading “Noninterest Income”
New heading “Noninterest Expenses”
New heading “Income Tax Expense”
Largest changes
“For the six months ended June 30, 2025, the provision for credit losses was primarily impacted by the changes in certain qualitative factors as loan balances were relatively flat over that period. During the first quarter of 2025, a qualitative factor was added for Other External Factors at a minor level for all loan classes due to the uncertainty created within the global and domestic markets from changes in U.S. economic policy, including the recently implemented tariffs. …”see in full comparison
“For the three months ended March 31, 2025, the provision for credit losses was primarily impacted by the decrease in loans, partially offset by increases in certain qualitative factors. A qualitative factor was added for Other External Factors at a minor level for all loan classes due to the uncertainty created within the global and domestic markets from changes in U.S. …”see in full comparison
“For the three months ended June 30, 2026, the provision for credit losses on loans reflects loan growth of $51.7 million during the second quarter of 2026, partially offset by adjustments to certain qualitative factors as a result of improvements in the underlying criteria. The qualitative factor for Collateral Valuation Trends, which was at a minor level at March 31, 2026, was reduced to no risk level for the commercial real estate segment based on improved trends in collateral valuations as supposed by the FRB's Financial Stability Report. …”see in full comparison
“During the second quarter of 2026, the qualitative factor for Collateral Valuation Trends, which was at a minor level March 31, 2026 and December 31, 2025, was reduced to no risk level for the commercial real estate segment based on improved trends in collateral valuations as supposed by the FRB's Financial Stability Report. …”see in full comparison
“Six months ended June 30, 2026 compared with six months ended June 30, 2025”see in full comparison
“For the three months ended March 31, 2026, the provision for credit losses was impacted by loan growth of $40.6 million, refinement to the Bank's peer group and loss driver factors, in addition to a reduction in prepayment speed assumptions, within the quantitative model due to current economic conditions partially offset by an improvement in the gross domestic product forecast and changes in certain qualitative factors. …”see in full comparison
Full comparison: every changed paragraph (147)
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 MarchJune 31,30, 2026, the Company had total assets of $5.6 billion, total liabilities of $5.0 billion and total shareholders’ equity of $603.2$621.7 million as reported in the unaudited consolidated balance sheets.sheet.
For the three and six months ended MarchJune 31,30, 2026 and 2025,2026, the Company had net income of $21.8$21.2 million and $18.1$43.0 million, respectively, compared to net income of $19.4 million and $37.5 million for the three and six months ended June 30, 2025, respectively. Diluted earnings per share werewas $1.12$1.09 and $0.93$1.01 for the three months ended MarchJune 31,30, 2026 and 2025, respectively. Diluted earnings per share was $2.21 and $1.94 for the six months ended June 30, 2026 and 2025, respectively. For the three and six months ended MarchJune 31, 2026 and30, 2025, the Company incurred merger-related expenses of zero$968 thousand and $1.6$2.6 million, respectively. The Company did not incur merger-related expenses during the three and six months ended June 30, 2026. The merger-related expenses are included in non-interest expenses in the unaudited consolidated statements of income.
Preliminary real GDP increased at a rate of 1.5% on an annualized basis for the second quarter of 2026, which was a decrease from 2.1% during the first quarter of 2026 and from 3.0% during the second quarter of 2025. The decrease during the second quarter of 2026 was primarily due to an increase in imports and decrease in government spending, partially offset by an increase in consumer spending and investments. The increase in imports, which reduces GDP, was primarily impacted by capital goods, which includes industrial equipment and semiconductors. Nondefense spending declined due to an increase in sales of crude oil. The increase in consumer spending was primarily driven by nondurable goods, including personal healthcare, motor vehicles and furniture. Investment in intellectual property products continues to rise.
Preliminary real GDP increased at a rate of 2.0% on an annualized basis for the first quarter of 2026, which was an increase from 1.4% during the fourth quarter of 2025 and an increase from contraction of 0.3% during the first quarter of 2025. The increase during the first quarter of 2026 was primarily due to the rise in investment, which includes business spending and inventories, in addition to consumer spending and government spending, following the government shutdown at the end of 2025. Key contributors to investment presently are intellectual property and information processing equipment. An offsetting factor influencing the GDP rate was the increase in imports, which includes parts for information processing.
The personal consumption expenditures ("PCE") price index increased by 4.5%5.1% in the firstsecond quarter of 2026 compared to an increase of 2.9%4.6% for the fourthfirst quarter of 20252026 and 2.3%2.1% during the firstsecond quarter of 2025. Excluding food and energy prices, the PCE price index increased by 4.3%3.4% in the second quarter of 2026, 4.4% in the first quarter of 2026,2025 2.7%and 2.5% in the fourth quarter of 2025 and 2.3% in the firstsecond quarter of 2025. The increase in the PCE price index reflects the rising service sector costs and inflationary pressures. Rising costs includefrom energy prices, which have been impacted by the geopolitical conflict in the Middle East, and pass-through costs on goods impacted by tariffs. Despite the inflationary pressures, consumer demand has allowed for prices to hold.
The national unemployment rate was 4.2% in June 2026 compared to 4.3% in March 2026 comparedand to 4.4%4.1% in DecemberJune 2025. During the firstsecond quarter of 2026, there werecontinued to be job gains reported in healthcare, construction,professional transportationservices and warehousing.social assistance; however, there was a decline in employment within leisure and hospitality. Within the Company's geographic footprint, the unemployment rate in Pennsylvania was 4.1% in June 2026 compared to 4.3% in March 2026 compared to 3.7% in December 2025. The unemployment rate in Maryland increased from 4.2% in December 2025 toand 4.3% in MarchJune 2026. The unemployment rates in Pennsylvania and Maryland both remain aligned with 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.
FollowingDuring a 25 basis point increase in July 2023, the Federal Funds rate remained unchanged until September 2024, when2025, the FOMC cut the Federal Funds rate by 50 basis points. The FOMC subsequently implemented additional rate cuts of 25 basis points in December 2024, September 2025, October 2025 and December 2025.2025, reducing the target range to 3.50% to 3.75%. These changes were based on the FOMC's assessment of inflation, the unemployment rate and jobs report. There have been no rate changes in 2026.
At MarchJune 31,30, 2026, the 10-year Treasury bond yield was 4.30%,4.44%, an increase from 4.30% at March 31, 2026 and 4.14% at December 31, 2025. Contributing factors for the increase include geopolitical conflict, which has caused energy prices to rise and created concerns with inflationary pressure. DespiteThere theis recentsome FOMCbelief rate cuts,that the current geopolitical conflict could result in a pause oran increase in the Federal Funds rate.rate later in 2026.
Three months ended MarchJune 31,30, 2026 compared with three months ended MarchJune 31,30, 2025
Net income totaled $21.8$21.2 million for the three months ended MarchJune 31,30, 2026 compared to $18.1net income of $19.4 million for the same period in 2025. Diluted earnings per share for the three months ended MarchJune 31,30, 2026 totaled $1.12$1.09 compared to $0.93$1.01 for the three months ended MarchJune 31,30, 2025. For the three months ended MarchJune 31,30, 2026 and 2025, the Company incurred merger-related expenses of zero and $1.6$968 million,thousand, respectively, which were included in non-interest expenses of the unaudited condensed consolidated statements of income. For the three months ended MarchJune 31,30, 2025, excluding these non-recurring expenses, net income and diluted earnings per common share totaled $19.3$20.2 million and $1.00,$1.04, respectively. See “Supplemental Reporting of Non-GAAP Measures” for additional information.
Net interest income totaled $49.0 million for the three months ended March 31, 2026 compared to $48.8 million for the three months ended March 31, 2025.
The net provision for credit losses on loans and unfunded loan commitments included expense of $352 thousand and a recovery of $554 thousand for the three months ended March 31, 2026 and 2025, respectively.
NoninterestNet interest income totaled $15.6 million and $11.6$48.8 million for the three months ended MarchJune 31,30, 2026 andcompared 2025,to respectively.$49.5 million for the three months ended June 30, 2025.
NoninterestNet expensesprovision for credit losses on loans and unfunded loan commitments totaled $36.7$338 millionthousand and $38.2$109 millionthousand for the three months ended MarchJune 31,30, 2026 and 2025, respectively.
IncomeNoninterest tax expenseincome totaled $5.7 million and $4.7$13.8 million for the three months ended MarchJune 31,30, 2026 andcompared 2025,to respectively.$12.9 The Company's effective tax rate was 20.7%million for both the three months ended MarchJune 31, 2026 and30, 2025.
Noninterest expenses totaled $37.7 million for the three months ended June 30, 2026 compared to $37.6 million for the three months ended June 30, 2025.
Income tax expense was $3.5 million for the three months ended June 30, 2026 compared to $5.3 million for the three months ended June 30, 2025. The Company's effective tax rate was 14.2% for the three months ended June 30, 2026 compared to 21.3% for the three months ended June 30, 2025.
Net interest income increaseddecreased by $244$681 thousand from $49.5 million for the three months ended June 30, 2025 to $48.8 million for the three months ended MarchJune 31, 2025 to $49.0 million for the three months ended March 31,30, 2026. Interest income on loans decreasedincreased by $437$279 thousand from $63.4 million for the three months ended March 31, 2025 to $63.0 million for the three months ended MarchJune 31,30, 2025 to $63.3 million for the three months ended June 30, 2026. Interest income on investment securities increased by $913$464 thousand from $9.8$10.3 million for the three months ended MarchJune 31,30, 2025 to $10.7 million for the three months ended MarchJune 31,30, 2026. Total interest expense decreasedincreased by $1.4$550 millionthousand from $26.8$25.3 million for the three months ended MarchJune 31,30, 2025 to $25.4$25.9 million for the three months ended MarchJune 31,30, 2026. Interest expense on deposits decreased by $2.3$1.2 million from $24.3$22.9 million for the three months ended MarchJune 31,30, 2025 to $22.0$21.7 million for the three months ended MarchJune 31,30, 2026. Interest expense on borrowings increased by $875 thousand from $2.5$1.7 million in the three months ended March 31, 2025 to $3.4$4.2 million for the three months ended MarchJune 31,30, 2026.2026 compared to $2.5 million for the three months ended June 30, 2025.
The following table presents net interest income, net interest spread and net interest margin for the three months ended MarchJune 31,30, 2026 and 2025 on a taxable-equivalent basis:
The following table presents the impact of rate and volume on the change in taxable-equivalent net interest income for the three months ended March 31, 2025 compared to the three months ended March 31, 2026:
Net interest income on a taxable-equivalent basis increaseddecreased by $368$659 thousand to $49.6$49.4 million for the three months ended MarchJune 31,30, 2026 from $49.2$50.1 million for the three months ended MarchJune 31,30, 2025. The Company's net interest spread decreased by six21 basis points from 3.41%3.49% for the three months ended MarchJune 31,30, 2025 to 3.35%3.28% for the three months ended MarchJune 31,30, 2026.
Taxable-equivalent net interest margin decreased by 20 basis points to 3.87% for the three months ended June 30, 2026 from 4.07% for the three months ended June 30, 2025. During the three months ended June 30, 2026, the Company redeemed the subordinated notes and accelerated the amortization of the related fair value mark of $1.6 million to interest expense, which reduced net interest margin by 13 basis points. Excluding the accelerated amortization of the fair value mark on the redeemed subordinated notes, net interest margin was 4.00% in the second quarter of 2026. See “Supplemental Reporting of Non-GAAP Measures” for additional information.
Taxable-equivalent net interest margin decreased by 10 basis points to 3.90% for the three months ended March 31, 2026 from 4.00% for the three months ended March 31, 2025. The taxable-equivalent yield on interest-earning assets decreased by 2623 basis points from 6.17%6.13% for the three months ended MarchJune 31,30, 2025 to 5.91%5.90% for the three months ended MarchJune 31,30, 2026 due primarily to the impact of the decline in the Fed Funds rate during the fourth quarter of 2025 and the decrease in the net accretion income recognized on fairpurchase valueaccounting marks tofor acquired loans and securities, partially offset by the increase in average loans and investment securities. The net accretion impact of purchase accounting marks on loans, securities, deposits and borrowings was $4.7$3.2 million during the three months ended MarchJune 31,30, 2026 compared to $6.9$5.2 million in net accretion during the three months ended MarchJune 31,30, 2025. The decrease in the purchase accounting marks was primarily due to the accelerated amortization expense of the remaining fair value mark of $1.6 million on the subordinated notes redeemed on June 30, 2026. Offsetting the impact from the redeemed subordinated notes, net interest margin benefited from thea decrease of 2013 basis points in the cost of interest-bearing liabilitiesdeposits from 2.76%2.01% for the three months ended June 30, 2025 to 2.56%,1.88% for the three months ended June 30, 2026, reflecting the impact of deposit rate reductions over that time period and the runoff of higher rate time deposits and money market balances.deposits.
Average loans increased by $161.2$180.3 million from $3.9 billion for the three months ended June 30, 2025 to $4.1 billion for the three months ended MarchJune 31,30, 2026 from $3.9 billion for the three months ended March 31, 2025.2026. Average investment securities increased by $119.0$67.8 million tofrom $984.1$904.1 million for the three months ended MarchJune 31,30, 20262025 fromto $865.1$971.9 million for the three months ended MarchJune 31,30, 2025.2026. Average interest-bearing liabilities increased by $84.8$117.5 million to $4.0 billion for the three months ended MarchJune 31,30, 2026 from $3.9$3.8 billion for the three months ended MarchJune 31,30, 2025.
The average yield on loans decreased by 3027 basis points to 6.29%6.25% for the three months ended MarchJune 31,30, 2026 compared to 6.59%6.52% for the three months ended MarchJune 31,30, 2025. Taxable-equivalent interest income earned on loans decreasedincreased by $427$296 thousand primarily due to the impact of a decline in the Fed Funds rate during the fourth quarter of 2025 and the decrease in the accretion income recognized on fair value marks to acquired loans, partially offset by an increase in the average loan balances.
The average balance of commercial loans increased by $96.1$106.0 million to $3.2 billion for the three months ended June 30, 2026 from $3.1 billion for the three months ended MarchJune 31,30, 2025 to $3.2 billion for the three months ended March 31, 2026.2025. Average residential mortgage loans increased by $46.2$43.3 million from $461.8$473.0 million during the three months ended MarchJune 31,30, 2025 to $508.0$516.3 million during the three months ended MarchJune 31,30, 2026. Average home equity loans increased by $23.6$34.9 million from $288.7$290.1 million for the three months ended MarchJune 31,30, 2025 to $312.3$325.0 million for the three months ended MarchJune 31,30, 2026. Average installment and other consumer loans decreased by $4.7$3.9 million from $45.9$43.9 million for the three months ended MarchJune 31,30, 2025 to $41.2$40.0 million for the three months ended MarchJune 31,30, 2026.
Accretion of purchase accounting adjustments on loans included in interest income was $4.2$4.3 million and $6.6$4.9 million for the three months ended MarchJune 31,30, 2026 and 2025, respectively,respectively. which included acceleratedAccelerated accretion totalingon $1.0loans totaled $731 thousand and $1.3 million and $1.4 million duringfor the three months ended MarchJune 31,30, 2026 and 2025, respectively. Prepayment fee income on loans increaseddecreased from $300$507 thousand for the three months ended MarchJune 31,30, 2025 to $579$343 thousand for the three months ended MarchJune 31,30, 2026.
Interest income on investment securities on a tax-equivalent basis increased by $1.0$470 millionthousand to $11.1 million for the three months ended MarchJune 31,30, 2026 from $10.1$10.6 million for the three months ended MarchJune 31,30, 2025, with the taxable equivalent yield decreasing from 4.65%4.70% for the three months ended MarchJune 31,30, 2025 to 4.51%4.57% for the three months ended MarchJune 31,30, 2026. The 1413 basis point decrease reflects the impact from the decline in the market interest rates and the decrease in the accretion recognized on fair value marks to acquired securities. Accretion on acquired investment securities was $678$698 thousand for the three months ended MarchJune 31,30, 2026 compared to $839$795 thousand for the three months ended MarchJune 31,30, 2025. The average balance of investment securities increased by $119.0$67.8 million to $984.1$971.9 million for the three months ended MarchJune 31,30, 2026 from $865.1$904.1 million for the three months ended MarchJune 31,30, 2025 due primarily to investment security purchases. During the three months ended MarchJune 31,30, 2026 and 2025, the Company did not sell any investment securities.
Interest income on federal funds sold and interest-bearing bank balances on a tax-equivalent basis decreased by $1.6$874 millionthousand to $637$639 thousand for the three months ended MarchJune 31,30, 2026 from $2.3$1.5 million for the three months ended MarchJune 31,30, 2025. The average balance of federal funds sold and interest-bearing bank balances decreased by $133.2$66.3 million from $203.3$136.1 million for the three months ended MarchJune 31,30, 2025 to $70.1$69.8 million for the three months ended MarchJune 31,30, 2026, which was derivedimpacted fromby the increase in average loans and investment securities. This decrease was partially offset by the increase in average deposits.interest-bearing liabilities. The FOMC has cut the Federal Funds rate by 75 basis points sincefrom September 2025 to December 2025.
Interest expense on interest-bearing liabilities decreasedincreased by $1.4$550 millionthousand from $26.8$25.3 million for the three months ended MarchJune 31,30, 2025 to $25.4$25.9 million for the three months ended MarchJune 31,30, 2026. The cost of interest-bearing liabilities decreased by 20two basis points from 2.76%2.64% for the three months ended MarchJune 31,30, 2025 to 2.56%2.62% for the three months ended MarchJune 31,30, 20262026, reflecting the impact of deposit rate reductions and the runoff of higher rate time depositsdeposits, andpartially moneyoffset marketby balances.the Theincrease in the average balance of interest-bearing deposits decreasedand byFHLB $16.7advances and other borrowings and the accelerated amortization of $1.6 million andfrom totaledthe $3.7redemption billionof subordinated notes. Excluding the impact of the subordinated notes redemption, the cost of interest-bearing liabilities was 2.45% for the three months ended MarchJune 31,30, 20262026, a decrease of 17 basis points, from three2.62% months ended March 31, 2025. Average time deposits decreased by $63.7 million to $906.9 million forduring the three months ended MarchJune 31, 2026 from $970.6 million for the three months ended March 31,30, 2025. Average savings deposits decreased by $13.7 million to $259.6 million for the three months ended March 31, 2026 from $273.3 million for the three months ended March 31, 2025. Average interest-bearing demand deposits increased by $60.7 million and totaled $2.5 billion for both the three months ended March 31, 2026 and 2025. Amortization of fair value marks on acquired time deposits was $38 thousand for the three months ended March 31, 2026 compared to $452 thousand for the three months ended March 31, 2025.
Interest expense on deposits was $21.7 million for the three months ended June 30, 2026 compared to $22.9 million for the three months ended June 30, 2025. The cost of deposits was 1.88% for the three months ended June 30, 2026 compared to 2.01% for the three months ended June 30, 2025. The average balance of interest-bearing deposits increased by $91.9 million to $3.7 billion for the three months ended June 30, 2026 from $3.6 billion for the three months ended June 30, 2025. Average interest-bearing demand deposits increased by $114.2 million to $2.6 billion for the three months ended June 30, 2026 from $2.5 billion for the three months ended June 30, 2025. Average time deposits decreased by $13.7 million to $900.4 million for the three months ended June 30, 2026 from $914.1 million for the three months ended June 30, 2025. Average savings deposits decreased by $8.6 million to $260.7 million for the three months ended June 30, 2026 from $269.3 million for the three months ended June 30, 2025. Amortization of fair value marks on acquired time deposits was $25 thousand for the three months ended June 30, 2026 compared to $254 thousand for the three months ended June 30, 2025.
Interest expense on borrowings was $4.2 million for the three months ended June 30, 2026 compared to $2.5 million for the three months ended June 30, 2025. The cost of borrowings was 7.48% for the three months ended June 30, 2026 compared to 4.97% for the three months ended June 30, 2025. The redemption of subordinated notes resulted in the accelerated amortization of remaining fair value mark totaling $1.6 million for the three months ended June 30, 2026. Excluding the impact of the subordinated note redemption, the cost of borrowings was 4.57% for the three months ended June 30, 2026, a decrease of 40 basis points from 4.97% during the three months ended June 30, 2025.
Average borrowings increased by $25.5 million from $198.9 million for the three months ended June 30, 2025 to $224.4 million for the three months ended June 30, 2026. Average borrowings included average FHLB advances and other borrowings of $175.7 million for the three months ended June 30, 2026, an increase of $71.7 million, from an average of $104.1 million for the three months ended June 30, 2025. The increase was due to higher utilization of borrowings primarily to fund loan and investment growth.
The cost of the Company's subordinated notes, excluding the fair value mark, was 7.92% for the three months ended June 30, 2026 compared to 6.46% for the three months ended June 30, 2025, which was due to the interest rate on the $31.0 million subordinated notes, assumed from the Company's merger with Codorus Valley, converting to a variable rate on December 30, 2025. For the three months ended June 30, 2026 and 2025, the cost of the variable-rate trust preferred debt, excluding the fair value mark, was 5.70% and 6.30%, respectively. Amortization of fair value marks on acquired borrowings was $1.8 million and $150 thousand for the three months ended June 30, 2026 and 2025, respectively, which increased due to the redemption of the subordinated notes in 2026.
Interest expense on borrowings increased by $875 thousand to $3.4 million for the three months ended March 31, 2026 from $2.5 million for the three months ended March 31, 2025. The cost of borrowings increased by 46 basis points to 4.42% for the three months ended March 31, 2026 from 4.88% for the three months ended March 31, 2025. Average borrowings increased by $101.4 million from $207.8 million for the three months ended March 31, 2025 to $309.2 million for the three months ended March 31, 2026. Average borrowings included average FHLB advances and other borrowings of $248.4 million for the three months ended March 31, 2026, an increase of $135.5 million, from an average of $112.9 million for the three months ended March 31, 2025. The cost of the Company's subordinated notes, excluding the fair value mark, was 8.16% for the three months ended March 31, 2026 compared to 6.16% for the three months ended March 31, 2025, which was due to the interest rate converting to a variable rate on December 30, 2025. For the three months ended March 31, 2026 and 2025, the cost of the variable-rate trust preferred debt, excluding the fair value mark, was 5.72% and 6.37%, respectively. Amortization of fair value marks on acquired borrowings was $152 thousand for both the three months ended March 31, 2026 and 2025. Funding costs were elevated in the first half of the quarter in 2026 due to seasonal deposit declines, which increased borrowing balances temporarily. Significant deposit inflow in the back half of the quarter in 2026 enabled the Bank to significantly reduce its borrowing levels, but the average balance was still higher than the prior quarter.
The ACL as a percentage of theto total loan portfolioratio was 1.17%1.13% at MarchJune 31,30, 2026 comparedand to 1.23%1.22% at MarchJune 31,30, 2025. The Company recorded a net provision for credit losses on loans and unfunded loan commitments of $728$338 thousand for the three months ended MarchJune 31,30, 2026 compared to a recovery of $554$109 thousand for the same period in 2025. TheThere recoverywas ofno creditchange lossesin onthe reserve for unfunded loan commitments was $376 thousand and zero during the three months ended MarchJune 31,30, 2026 and 2025, respectively.2026.
For the three months ended March 31, 2026, the provision for credit losses was impacted by loan growth of $40.6 million, refinement to the Bank's peer group and loss driver factors, in addition to a reduction in prepayment speed assumptions, within the quantitative model due to current economic conditions partially offset by an improvement in the gross domestic product forecast and changes in certain qualitative factors. The qualitative factor for Delinquency and Classified Loan Trends was reduced from a moderate to a minor level for the commercial and industrial and commercial real estate owner-occupied loan classes. The change was based on reduced levels of delinquencies and migration to classified risk ratings over consecutive periods. The qualitative factor for the Quality of Loan Review System was reduced from a minor level to no risk level for the commercial loan classes. The change was supported by strong ratings in the Bank's risk assessment, credit administration and credit risk supervision processes, as reported in the third-party loan reviews for multiple consecutive periods. The qualitative factor for Concentrations of Credit and Changes within Credit Concentrations was removed for the commercial real estate non-owner occupied loan class, which was based on the continuous decline in the commercial real estate concentration as a percentage of total risk-based capital.
For the three months ended March 31, 2025, the provision for credit losses was primarily impacted by the decrease in loans, partially offset by increases in certain qualitative factors. A qualitative factor was added for Other External Factors at a minor level for all loan classes due to the uncertainty created within the global and domestic markets from changes in U.S. economic policy, including the recently implemented tariffs;, the Economic Conditions qualitative factor at a minor level and the Delinquency and Classified Loan Trends qualitative factor at a moderate level were added for the residential senior liens loan class; and the Delinquency and Classified Loan Trends qualitative factor at a moderate level was added for the home equity loan class. An adjustment to the Economic Conditions qualitative factor was based on current market interest rates and prepayment speeds, and the adjustment to Delinquency and Classified Loan Trends was based on delinquencies and downgrades within the aforementioned loan classes.
Net charge-offs for the three months ended MarchJune 31,30, 2026 totaled $946$1.2 thousandmillion compared to net charge-offs of $331$115 thousand for the three months ended MarchJune 31,30, 2025. The increase in net charge-offs during the second quarter of 2026 included charge-offs of $668 thousand for a commercial and land development loan and $349 thousand for a commercial and industrial loan. Nonaccrual loans were 0.74%0.58% of gross loans at MarchJune 31,30, 20262026, compared with 0.59%0.57% of gross loans at MarchJune 31,30, 2025.
For the three months ended June 30, 2026, the provision for credit losses on loans reflects loan growth of $51.7 million during the second quarter of 2026, partially offset by adjustments to certain qualitative factors as a result of improvements in the underlying criteria. The qualitative factor for Collateral Valuation Trends, which was at a minor level at March 31, 2026, was reduced to no risk level for the commercial real estate segment based on improved trends in collateral valuations as supposed by the FRB's Financial Stability Report. The qualitative factor for Concentrations of Credit and Changes within Credit Concentrations, which was at a minor level at March 31, 2026, was reduced to no risk level for the acquisition and development loan segment as the concentration as a percentage of total risk-based capital was below the Bank's risk indicator for consecutive periods. A qualitative factor for Other External Factors was increased to a minor level for all loan classes based on the potential impact to loan performance from the uncertainty stemming from the geopolitical conflict in the Middle East and inflationary pressures.
For the three months ended June 30, 2025, the provision for credit losses increased primarily due to an increase in loans of $55.4 million, partially offset by the removal of the Other External Factors qualitative factor for all loan classes during the second quarter of 2025. This qualitative factor was added at a minor level for all loan classes during the first quarter of 2025 based on the uncertainty on the impact from changes in U.S. economic policy, which included tariffs.
The following table compares noninterest income for the three months ended MarchJune 31,30, 2026 and 2025:
Noninterest income increased by $4.0$921 millionthousand from $11.6$12.9 million for the three months ended MarchJune 31,30, 2025 to $15.6$13.8 million for the three months ended MarchJune 31,30, 2026. The following were significant components of the change in this line item:
•Service charges on deposits and other service charges, commissions and fees increased by $339 thousand and $137 thousand, respectively, due to an increase in cash management services and other deposit fees.
•Swap feeInterchange income increased by $945$161 thousand due to higheran swapincrease volume.in card transactions from consumer spending activity.
•Wealth management income, which includes trust and investment management income and brokerage income, increased by $142$679 thousand due to improvement in market performance andcombined with new account generation driving an increase in managed assets.
•The increase of $2.5 million in income from life insurance was due primarily to $2.4 million of death benefits from life insurance contracts for the three months ended March 31, 2026.
The following table compares noninterest expenses for the three months ended MarchJune 31,30, 2026 and 2025:
Noninterest expenseexpenses decreasedincreased by $1.5$52 millionthousand from $38.2$37.6 million for the three months ended MarchJune 31,30, 2025 to $36.7$37.7 million for the three months ended MarchJune 31,30, 2026. The following were additional significant components of the change in this line item:
•Salaries and employee benefits expense increased by $769$865 thousand due to staff additions that filled vacancies, inthereby additionreducing touse of third-party consultants, and merit salary increases effective in merit-based compensation.May.
•Furniture and equipment expense decreased by $546$536 thousand due primarily to post-merger efficiencies created over the past year.
•Data processing expenseexpenses increased by $613$738 thousand due to investments in technology as the Company focuses on the evolving needs of its clients.
•ATMAutomated teller machine and interchange fee expense increased by $462$552 thousand due to an increase in debit card activity and costs incurred for enhanced ATM services.
•Professional services expense decreased by $605$814 thousand due to the reduced relianceuse onof consultants and other third-party service providers since the prior year.
•During the firstsecond quarter of 2025, the Company incurred merger-related expenses of $1.6$968 million,thousand, which included software conversion costs andincurred professionalin fees, including external audit, associatedconnection with the conversion.Merger.
•Other operating expenses decreased by $392 thousand primarily due to sales tax credits from the Commonwealth of Pennsylvania and a decrease in credit valuation adjustments on non-hedging derivatives of $175 thousand.
Income tax expense totaled $5.7$3.5 million, an effective tax rate of 20.7%,14.2%, for the three months ended MarchJune 31,30, 2026 compared withto $4.7income tax expense of $5.3 million and an effective tax rate of 20.7%21.3% for the three months ended MarchJune 31,30, 2025. The Company’s effective tax rate is less than the 21% federal statutory rate primarily due to the purchase of federal income tax credits, which reduced income tax expense by $1.6 million. In addition, the effective tax rate was impacted by tax-exempt income, including interest earned on tax-exempt loans and securities and non-taxable income from life insurance policies and tax credits partially offset by the disallowed portion of interest expense against earnings in association with the Bank's tax-exempt investments under the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA") and other nondeductible items.
Six months ended June 30, 2026 compared with six months ended June 30, 2025
Summary
Net income totaled $43.0 million for the six months ended June 30, 2026 compared to $37.5 million for the same period in 2025. Diluted earnings per share for the six months ended June 30, 2026 totaled $2.21 compared to $1.94 for the six months ended June 30, 2025. For the six months ended June 30, 2026 and 2025, the Company incurred merger-related expenses of zero and $2.6 million, respectively, which were included in non-interest expenses of the unaudited condensed consolidated statements of income. For the six months ended June 30, 2025, excluding these non-recurring expenses, net income and diluted earnings per common share totaled $39.5 million and $2.04, respectively. See “Supplemental Reporting of Non-GAAP Measures” for additional information.
ORRF insider buying and selling (Form 4)
Since 2026-04-11, insiders reported open-market purchases in 0 Form 4 filings and open-market sales in 2 filings (2 insiders, 2 trade dates, 5,532 shares, about $234.1K). Net open-market shares: -5,532 (purchases minus sales); net value about -$234.1K.Totals add up every open-market (code P and S) line in those filings, using the prices reported in the filings. Awards, option exercises, tax withholding and gifts are listed below but not counted.
| Trade date | Insider | Transaction | Shares | Price | Value |
|---|---|---|---|---|---|
| 2026-08-06 | Rice Michael John |
Open-market sale | 2,530 | $43.16 | $109.2K |
| 2026-07-30 | Zullinger Joel R |
Gift | 120 | $43.49 | $5.2K |
| 2026-07-27 | Doll Amy |
Open-market sale | 3,002 | $41.61 | $124.9K |
| 2026-07-24 | Doll Amy |
Option exercise | 574 | $29.92 | $17.2K |
| 2026-07-24 | Doll Amy |
Option exercise | 879 | $25.99 | $22.8K |
| 2026-07-24 | Doll Amy |
Option exercise | 1,549 | $21.23 | $32.9K |
| 2026-07-01 | Mulcahy Sean |
Shares withheld for tax | 296 | $40.83 | $12.1K |
| 2026-07-01 | Jaeger Michael |
Shares withheld for tax | 296 | $40.83 | $12.1K |
| 2026-06-01 | Quinn Thomas R Jr |
Shares withheld for tax | 10,209 | $37.13 | $379.1K |
| 2026-06-01 | Quinn Thomas R Jr |
Shares withheld for tax | 3,642 | $37.13 | $135.2K |
| 2026-05-05 | Messick John Rodney |
Grant/award | 1,500 | — | — |
| 2026-05-05 | Brobst Barbara E |
Grant/award | 1,500 | — | — |
| 2026-05-05 | Segal Eric Andrew |
Grant/award | 1,500 | — | — |
| 2026-05-05 | Rice Michael John |
Grant/award | 1,500 | — | — |
| 2026-05-05 | Brunner Brian D |
Grant/award | 1,500 | — | — |
| 2026-05-05 | Joiner Cindy Jeannette |
Grant/award | 1,500 | — | — |
| 2026-05-05 | Brown Sarah M |
Grant/award | 1,500 | — | — |
| 2026-05-05 | Alpert Matthew D |
Grant/award | 15,000 | — | — |
| 2026-05-05 | Zullinger Joel R |
Grant/award | 2,600 | — | — |
| 2026-05-05 | Giambalvo John W |
Grant/award | 1,500 | — | — |
| 2026-05-05 | Snoke Glenn W |
Grant/award | 1,500 | — | — |
| 2026-05-05 | Keller Mark K |
Grant/award | 1,500 | — | — |
| 2026-05-05 | Fainor Scott V |
Grant/award | 1,500 | — | — |
Well-known investors holding ORRF (13F)
| Investor | Quarter | Shares | Reported value | % of their 13F | Change vs prior quarter |
|---|---|---|---|---|---|
| Two Sigma Investments | 2026-06-30 | 290,058 | $11.8M | 0.01% | Reduced 4% |
| Citadel Advisors (Ken Griffin) | 2026-06-30 | 225,513 | $9.2M | 0.01% | Added 117% |
| Millennium Management (Israel Englander) | 2026-06-30 | 125,713 | $5.1M | 0.0% | Reduced 39% |
| AQR Capital Management (Cliff Asness) | 2026-06-30 | 96,219 | $3.9M | 0.0% | Added 58% |
| D. E. Shaw & Co. | 2026-06-30 | 70,827 | $2.9M | 0.0% | Reduced 6% |
| Renaissance Technologies | 2026-06-30 | 67,564 | $2.8M | 0.0% | Reduced 32% |