Orrstown Financial Services Inc.
11/09/2026 | Press release | Distributed by Public on 11/09/2026 15:42
Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to assist readers in understanding the consolidated financial condition and results of operations of Orrstown and should be read in conjunction with the preceding unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q, as well as with the audited consolidated financial statements and notes thereto for the year ended December 31, 2025, included in our Annual Report on Form 10-K filed with the SEC on March 12, 2026. Throughout this discussion, the yield on earning assets is stated on a fully taxable-equivalent basis and balances represent average daily balances unless otherwise stated. All dollar amounts presented in the tables, except per share amounts, are in thousands.
Overview
The Company, headquartered in Harrisburg, Pennsylvania, is a one-bank holding company that has elected status as a financial holding company. The consolidated financial information presented herein reflects the Company and its wholly-owned subsidiary, the Bank. At September 30, 2026, the Company had total assets of $5.7 billion, total liabilities of $5.1 billion and total shareholders' equity of $605.2 million as reported in the unaudited condensed consolidated balance sheet.
For the three and nine months ended September 30, 2026, the Company had net income of $22.8 million and $65.8 million, respectively, compared to net income of $21.9 million and $59.4 million for the three and nine months ended September 30, 2025, respectively. Diluted earnings per share was $1.17 and $1.13 for the three months ended September 30, 2026 and 2025, respectively. Diluted earnings per share was $3.38 and $3.07 for the nine months ended September 30, 2026 and 2025, respectively. For the three and nine months ended September 30, 2025, the Company incurred merger-related expenses of zero and $2.6 million, respectively. The Company did not incur merger-related expenses during the three and nine months ended September 30, 2026. The merger-related expenses are included in noninterest expenses in the unaudited condensed consolidated statements of income.
Cautionary Note About Forward-Looking Statements
Certain statements appearing herein, which are not historical in nature, are forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, we may make other written and oral communications, from time to time, that contain such statements. Such forward-looking statements reflect the current views of the Company's management with respect to, among other things, future events and the Company's financial performance. These statements are often, but not always, made through the use of words or phrases such as "may," "should," "could," "predict," "potential," "believe," "will likely result," "expect," "continue," "will," "anticipate," "seek," "estimate," "intend," "plan," "project," "forecast," "goal," "target," "would" and "outlook," or the negative variations of those words or other comparable words of a future or forward-looking nature. Forward-looking statements are statements that include projections, predictions, expectations, estimates or beliefs about events or results or otherwise are not statements of historical facts, many of which, by their nature, are inherently uncertain and beyond the Company's control, and include, but are not limited to, statements related to new business development, new loan opportunities, growth in the balance sheet and fee-based revenue lines of business, merger and acquisition activity, cost savings initiatives, reducing risk assets, and mitigating losses in the future. Accordingly, the Company cautions you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements and there can be no assurances that the Company will achieve the desired level of new business development and new loans, growth in the balance sheet and fee-based revenue lines of business, cost savings initiatives, and continued reductions in risk assets or mitigate losses in the future. Factors which could cause the actual results to differ from those expressed or implied by the forward-looking statements include, but are not limited to, the following: interest rate changes or volatility; general economic conditions (including inflation and concerns about liquidity) on a national basis or in the local markets in which the Company operates; ineffectiveness of the Company's strategic growth plan due to changes in current or future market conditions; the effects of competition and how it may impact our community banking model, including industry consolidation and development of competing financial products and services; changes in consumer behavior due to changing political, business and economic conditions, or legislative or regulatory initiatives; changes in, and evolving interpretations of, existing and future laws and regulations; changes in credit quality; inability to raise capital, if necessary, under favorable conditions; volatility in the securities markets; the demand for our products and services; deteriorating economic conditions; the impact of tariffs; geopolitical tensions; operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics; expenses associated with litigation and legal proceedings; and other risks and uncertainties, including those detailed in our Annual Report on Form 10-K for the year ended December 31, 2025, and our Quarterly Reports on Form 10-Q under the sections titled "Risk Factors" and
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"Management's Discussion and Analysis of Financial Condition and Results of Operations" and in other filings made with the SEC. The statements are valid only as of the date hereof and we disclaim any obligation to update this information.
Economic Climate, Inflation and Interest Rates
Preliminary real GDP increased at a rate of 3.4% on an annualized basis for the third quarter of 2026, which was an increase from 2.2% during the second quarter of 2026 and a decrease from 4.4% during the third quarter of 2025. The increase during the third quarter of 2026 compared to the second quarter of 2026 was primarily due to increases in consumer and government spending, in addition to investments in private inventory and equipment, partially offset by a decline in exports. Within equipment, the primary drivers to the increase were within computers and peripheral equipment. Consumer spending was led by increases in healthcare services. Nondefense spending was impacted by the sale activity of crude oil.
The personal consumption expenditures ("PCE") price index increased by 2.1% in the third quarter of 2026 compared to an increase of 5.0% for the second quarter of 2026 and 2.8% during the third quarter of 2025. Excluding food and energy prices, the PCE price index increased by 2.5% in the third quarter of 2026, 3.3% in the second quarter of 2026 and 2.9% in the third quarter of 2025. The increases in the PCE price index reflect the rising costs from 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 September and June 2026 compared to 4.3% in September 2025. During the third quarter of 2026, there continued to be job gains in most labor categories. Within the Company's geographic footprint, the unemployment rate in Pennsylvania was 3.6% in September 2026 compared to 4.1% in June 2026 and 4.4% in September 2025. The Maryland unemployment rate was 3.9% in September 2026 compared to 4.3% in June 2026 and 4.3% in September 2025. These state-wide unemployment rates are consistent with those experienced by the counties in which the Company operates branches and other corporate offices.
At September 30, 2026, the 10-year Treasury bond yield was 5.29%, an increase from 4.44% at June 30, 2026 and 4.14% at December 31, 2025. Treasury yields were influenced by a variety of factors during the period, including inflation expectations, monetary policy expectations, energy prices and geopolitical developments.
During 2025, the FOMC implemented rate cuts of 25 basis points in September 2025, October 2025 and December 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. In September 2026, the FOMC increased the rate by 25 basis points, which raised the target range to 3.75% to 4.00%, to contend with elevated inflation.
The majority of the assets and liabilities of a financial institution are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an impact on the Company, particularly with respect to the growth of total assets and noninterest expenses, which tend to rise during periods of general inflation. Risks also exist due to supply and demand imbalances, the interest rate environment, geopolitical tensions, uncertainty related to the impact of tariffs, the scope and timing of changes to fiscal, regulatory and trade policies.
Critical Accounting Estimates
The Company's accounting and reporting policies are in accordance with GAAP and follow accounting and reporting guidelines prescribed by bank regulatory authorities and general practices within the financial services industry in which it operates. Our financial position and results of operations are affected by management's application of accounting policies, including estimates, and assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the balance sheet date and through the date the financial statements are filed with the SEC. Different assumptions in the application of these policies could result in material changes in the consolidated financial position and/or consolidated results of operations and related disclosures. The more critical accounting estimates include accounting for business combinations, accounting for credit losses on loans and accounting for income taxes.
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Business Combinations
The Company accounts for its mergers and acquisitions using the acquisition method of accounting under the provisions of FASB ASC Topic 805 ("ASC 805"), Business Combinations. Under ASC 805, the assets acquired, including identified intangible assets such as core deposit intangibles and customer relationship intangibles, and liabilities assumed in a business combination are recognized at their acquisition-date fair value, while transaction costs and restructuring costs associated with the business combination are expensed as incurred. The excess of the merger consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill.
The valuations are based upon management's assumptions of future growth rates, future attrition, discount rates and other relevant factors, which involve a significant level of estimation and uncertainty. In addition, management engaged independent third-party specialists to assist in the development of the fair values of the acquired assets and assumed liabilities. The preliminary estimates of fair values may be adjusted for a period of time subsequent to the acquisition date if new information is obtained about facts and circumstances that existed as of the merger date that, if known, would have affected the measurement of the amounts recognized as of that date. Adjustments would be recorded to goodwill during the current reporting period. Examples of the impacted acquired loans and assumed liabilities include loans, deposits, identifiable intangible assets, borrowings and certain other assets and liabilities. For the Merger, the measurement period to finalize the fair values of the acquired assets and assumed liabilities ended on June 30, 2025. No further adjustments to the fair values were recorded subsequent to twelve months following the Merger date.
For acquired loans at the merger date, management evaluated and classified loans based upon whether the loans had experienced a more-than-insignificant amount of credit deteriorating since origination. To determine the fair value of the loans, significant estimates and assumptions were applied, including projected cash flows, discount rates, repayment speeds, credit loss severity rates, default rates and realizable collateral values. At acquisition, the allowance on PCD loans is booked directly to the ACL using the Company's existing ACL methodology, but there is no initial impact to net income. Subsequent to acquisition, future changes in estimates of expected credit losses on PCD loans are recognized as provision expense (or reversal of provision expense). The ACL for non-PCD loans is recognized as a provision for credit losses in the same reporting period as the business acquisition, using the Company's existing ACL methodology.
These critical accounting estimates are discussed in detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2025. Significant accounting policies and any changes in accounting principles and effects of new accounting pronouncements are discussed in Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements under Part II, Item 8, "Financial Statements and Supplementary Data," in our Annual Report on Form 10-K for the year ended December 31, 2025.
Allowance for Credit Losses - Loans
The ACL represents the amount that, in management's judgment, appropriately reflects credit losses inherent in the loan portfolio at the balance sheet date. A provision for credit losses is recorded to adjust the level of the ACL as determined by management. The CECL methodology requires an organization to measure all expected credit losses over the contractual term for financial assets measured at amortized cost based on historical credit loss experience, current conditions, and reasonable and supportable forecasts.
Determining the ACL inherently involves a high degree of subjectivity and requires the Company to make significant estimates of current credit risks and trends, all of which may undergo material changes, including expected probabilities of default, expected loss given default, the timing of expected future cash flows including the impact from unexpected changes in prepayment speeds, estimated losses based on historical credit loss experience and forecasted economic conditions. To the extent actual results differ from management's estimates, additional provisions for credit losses may be required that could adversely impact results of operations and regulatory capital in future periods.
The ACL is maintained at a level considered appropriate to absorb credit losses over the expected life of the loan. The ACL for expected credit losses is determined based on a quantitative assessment of two categories of loans: collectively evaluated loans and individually evaluated loans. In addition, the ACL also includes a qualitative component, which adjusts the CECL model results for risk factors that are not considered within the CECL model, but are relevant in assessing the expected credit losses within the loan classes.
The ACL on loans is measured on a collective basis when similar risk characteristics exist within the Company's loan segments. Each of these loan segments are broken down into multiple loan classes, which are characterized by loan type, collateral type, risk attributions and the manner in which management monitors the performance of the borrower. The risks associated with lending activities differ and are subject to the impact of changes in interest rates, market conditions, the
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collateral securing the loans, and general economic conditions. Any of these factors may adversely impact a borrower's ability to repay loans, and also impact the associated collateral.
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.
The ACL for loans collectively evaluated is measured using a lifetime expected loss rate model under the vendor's neutral scenario that considers historical loss performance and past events in addition to forecasts of future economic conditions. The Company elected to use the DCF methodology for the quantitative analysis for the majority of its loan segments, which applies the probability of default to future cash flows, using a loss driver model and loss given default factors, and then adjusts to the net present value to derive the required reserve. The probability of default estimates are derived through the application of reasonable and supportable economic forecasts to the regression models, which incorporates the Company's and peer loss-rate data, unemployment rate and GDP and can be obtained from the Federal Reserve Economic Database. The reasonable and supportable forecasts of the selected economic metrics are then input into the regression model to calculate an expected default rate. The expected default rates are then applied to loan balances estimated through the consideration of contractual repayment terms and expected prepayments. The prepayment and curtailment assumptions adjust the contractual terms of the loan to arrive at the expected cash flows. The model incorporates an annualized prepayment rate and a twelve-month rate for curtailment based on a "statistical tendency to repay." Changes in the prepayment and curtailment speeds that vary from the current model inputs could result in inaccurate expected credit losses. The development and validation of credit models also included determining the length of the reasonable and supportable forecast and regression period and utilizing national peer group historical loss rates, which a four-quarter forecast period followed by a four-quarter straight-line reversion period were applied. The regression period is the historical timeframe used to establish a statistical relationship between macroeconomic factors and historical loan losses.
Management incorporates the national unemployment rate and GDP as the drivers of the quantitative portion of collectively evaluated reserves on loan classes reliant upon the DCF methodology, primarily as a result of high correlation coefficients identified in regression modeling, which represents a significant judgment in determining the ACL; however, changes in the macroeconomic forecast could significantly impact the calculated ACL. For the consumer loan segment, the quantitative reserve was calculated using the remaining life methodology where the average historical bank-specific and peer loss rates are applied to expected loan balances over an estimated remaining life of loans. The estimated remaining life is calculated using historical bank-specific loan attrition data.
See Note 1, Summary of Significant Accounting Policies, and Note 4, Loans and Allowance for Credit Losses, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information."
Accounting for Income Taxes
The Company is subject to federal and state income taxes in the jurisdictions in which it operates. Due to the complexity of the tax laws, management may make judgments in computing income tax expense, which are subject to varying interpretations by management and the taxing authorities, and could result in changes upon final determination. Income tax expense is based upon income before taxes, adjusted for the effect of certain tax-exempt income, non-deductible expenses and credits. Temporary differences may occur as a result of certain income and expense items being reported in different periods for financial reporting and tax purposes. Deferred taxes are calculated, using the applicable enacted marginal tax rate, based on the differences between the tax basis and carrying value of the asset or liability on the financial statement. The Company recognizes, when applicable, interest and penalties related to unrecognized tax benefits in income tax expense in the consolidated statements of income. Under FASB ASC 740, Income Taxes, the Company must apply a more likely than not probability threshold on its tax positions before a financial statement benefit is recognized. A valuation allowance would be recognized if any deferred tax assets were determined to be more likely than not unrecoverable.
Readers of the Company's consolidated financial statements should be aware that the estimates and assumptions used may need to be updated in future financial presentations for changes in circumstances, business or economic conditions, in order to fairly represent the condition of the Company at that time.
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RESULTS OF OPERATIONS
Three months ended September 30, 2026 compared with three months ended September 30, 2025
Summary
Net income totaled $22.8 million for the three months ended September 30, 2026 compared to net income of $21.9 million for the same period in 2025. Diluted earnings per share for the three months ended September 30, 2026 totaled $1.17 compared to $1.13 for the three months ended September 30, 2025.
Net interest income totaled $53.3 million for the three months ended September 30, 2026 compared to $51.0 million for the three months ended September 30, 2025. Net provision for credit losses on loans and unfunded loan commitments totaled $1.0 million and $396 thousand for the three months ended September 30, 2026 and 2025, respectively. Noninterest income totaled $13.4 million for both the three months ended September 30, 2026 and 2025. Noninterest expenses totaled $37.3 million for the three months ended September 30, 2026 compared to $36.3 million for the three months ended September 30, 2025.
Income tax expense was $5.5 million for the three months ended September 30, 2026 compared to $5.8 million for the three months ended September 30, 2025. The Company's effective tax rate was 19.4% for the three months ended September 30, 2026 compared to 21.0% for the three months ended September 30, 2025.
Net Interest Income
Net interest income increased by $2.3 million from $51.0 million for the three months ended September 30, 2025 to $53.3 million for the three months ended September 30, 2026. Interest income on loans increased by $703 thousand from $65.8 million for the three months ended September 30, 2025 to $66.5 million for the three months ended September 30, 2026. Interest income on investment securities increased by $467 thousand from $10.2 million for the three months ended September 30, 2025 to $10.7 million for the three months ended September 30, 2026. Total interest expense decreased by $1.7 million from $26.1 million for the three months ended September 30, 2025 to $24.4 million for the three months ended September 30, 2026. Interest expense on deposits decreased by $1.3 million from $22.6 million for the three months ended September 30, 2025 to $21.3 million for the three months ended September 30, 2026. Interest expense on borrowings decreased by $348 thousand to $3.1 million for the three months ended September 30, 2026 compared to $3.5 million for the three months ended September 30, 2025.
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The following table presents net interest income, net interest spread and net interest margin for the three months ended September 30, 2026 and 2025 on a taxable-equivalent basis:
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Three Months Ended September 30, 2026
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Three Months Ended September 30, 2025
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Average Balance |
Taxable- Equivalent Interest |
Taxable- Equivalent Rate |
Average Balance |
Taxable- Equivalent Interest |
Taxable- Equivalent Rate |
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| Assets | |||||||||||||||||||||||||||||||||||
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Federal funds sold & interest-bearing bank balances
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$ | 62,164 | $ | 567 | 3.62 | % | $ | 101,728 | $ | 1,123 | 4.38 | % | |||||||||||||||||||||||
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Investment securities (1)(2)
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973,344 | 11,064 | 4.54 | 906,399 | 10,593 | 4.67 | |||||||||||||||||||||||||||||
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Loans (1)(3)(4)(5)
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4,167,877 | 66,679 | 6.35 | 3,979,044 | 65,975 | 6.58 | |||||||||||||||||||||||||||||
| Total interest-earning assets | 5,203,385 | 78,310 | 5.98 | 4,987,171 | 77,691 | 6.19 | |||||||||||||||||||||||||||||
| Other assets | 436,997 | 433,659 | |||||||||||||||||||||||||||||||||
| Total | $ | 5,640,382 | $ | 5,420,830 | |||||||||||||||||||||||||||||||
| Liabilities and Shareholders' Equity | |||||||||||||||||||||||||||||||||||
| Interest-bearing demand deposits | $ | 2,593,059 | 13,681 | 2.09 | $ | 2,450,034 | 14,145 | 2.29 | |||||||||||||||||||||||||||
| Savings deposits | 254,541 | 126 | 0.20 | 264,761 | 164 | 0.25 | |||||||||||||||||||||||||||||
| Time deposits | 863,559 | 7,462 | 3.43 | 897,416 | 8,330 | 3.68 | |||||||||||||||||||||||||||||
| Total interest-bearing deposits | 3,711,159 | 21,269 | 2.27 | 3,612,211 | 22,639 | 2.49 | |||||||||||||||||||||||||||||
| Securities sold under agreements to repurchase and federal funds purchased | 2,535 | 6 | 0.85 | 27,772 | 107 | 1.53 | |||||||||||||||||||||||||||||
| FHLB advances and other borrowings | 306,346 | 2,931 | 3.80 | 168,939 | 1,791 | 4.21 | |||||||||||||||||||||||||||||
| Subordinated notes and trust preferred debt | 8,069 | 210 | 10.29 | 68,749 | 1,597 | 9.21 | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 4,028,109 | 24,416 | 2.40 | 3,877,671 | 26,134 | 2.67 | |||||||||||||||||||||||||||||
| Noninterest-bearing demand deposits | 910,748 | 902,128 | |||||||||||||||||||||||||||||||||
| Other liabilities | 82,378 | 89,086 | |||||||||||||||||||||||||||||||||
| Total liabilities | 5,021,235 | 4,868,885 | |||||||||||||||||||||||||||||||||
| Shareholders' equity | 619,147 | 551,945 | |||||||||||||||||||||||||||||||||
| Total | $ | 5,640,382 | $ | 5,420,830 | |||||||||||||||||||||||||||||||
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Taxable-equivalent net interest income / net interest spread
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53,894 | 3.58 | % | 51,557 | 3.52 | % | |||||||||||||||||||||||||||||
| Taxable-equivalent net interest margin | 4.12 | % | 4.11 | % | |||||||||||||||||||||||||||||||
| Taxable-equivalent adjustment | (574) | (569) | |||||||||||||||||||||||||||||||||
| Net interest income | $ | 53,320 | $ | 50,988 | |||||||||||||||||||||||||||||||
| NOTES TO ANALYSIS OF NET INTEREST INCOME: | |||||
| (1) | Yields and interest income on tax-exempt assets have been computed on a taxable-equivalent basis assuming a 21% tax rate. | ||||
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(2)
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Average balance of investment securities is computed at fair value. | ||||
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(3)
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Average balances include nonaccrual loans. | ||||
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(4)
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Interest income on loans includes prepayment and late fees, where applicable. | ||||
| (5) |
Interest income on loans includes accretion on purchase accounting marks of $3.9 million and $5.3 million for the three months ended September 30, 2026 and 2025, respectively.
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Three Months Ended September 30, 2026 Versus 2025 Increase (Decrease) Due to Change In
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| (in thousands) | Average Volume | Average Rate | Total | ||||||||||||||
| Interest Income | |||||||||||||||||
| Federal funds sold and interest-bearing bank balances | $ | (437) | $ | (119) | $ | (556) | |||||||||||
| Taxable securities | 734 | (199) | 535 | ||||||||||||||
| Tax-exempt securities | 54 | (118) | (64) | ||||||||||||||
| Loans | 3,131 | (2,427) | 704 | ||||||||||||||
| Total interest income | 3,482 | (2,863) | 619 | ||||||||||||||
| Interest Expense | |||||||||||||||||
| Interest-bearing demand deposits | 826 | (1,290) | (464) | ||||||||||||||
| Savings deposits | (6) | (32) | (38) | ||||||||||||||
| Time deposits | (314) | (554) | (868) | ||||||||||||||
| Total interest-bearing deposits | 506 | (1,876) | (1,370) | ||||||||||||||
| Securities sold under agreements to repurchase and federal funds purchased | (97) | (4) | (101) | ||||||||||||||
| FHLB advances and other borrowings | 1,457 | (317) | 1,140 | ||||||||||||||
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Subordinated notes and trust preferred debt
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(1,410) | 23 | (1,387) | ||||||||||||||
| Total interest expense | 456 | (2,174) | (1,718) | ||||||||||||||
| Taxable-Equivalent Net Interest Income | $ | 3,026 | $ | (689) | $ | 2,337 | |||||||||||
Net interest income on a taxable-equivalent basis increased by $2.3 million to $53.9 million for the three months ended September 30, 2026 from $51.6 million for the three months ended September 30, 2025. The Company's net interest spread increased by six basis points from 3.52% for the three months ended September 30, 2025 to 3.58% for the three months ended September 30, 2026.
Taxable-equivalent net interest margin increased by one basis point to 4.12% for the three months ended September 30, 2026 from 4.11% for the three months ended September 30, 2025. The taxable-equivalent yield on interest-earning assets decreased by 21 basis points from 6.19% for the three months ended September 30, 2025 to 5.98% for the three months ended September 30, 2026 due primarily to the three reductions in the Fed Funds rate from September 2025 through December 2025. The net accretion impact of purchase accounting marks on loans, securities, deposits and borrowings was $4.6 million during the three months ended September 30, 2026 compared to $5.8 million during the three months ended September 30, 2025. The cost of interest-bearing liabilities decreased by 27 basis points from 2.67% for the three months ended September 30, 2025 to 2.40% for the three months ended September 30, 2026 due primarily to the Fed Funds rate reductions. Net interest margin benefited from a decrease of 16 basis points in the cost of deposits from 1.99% for the three months ended September 30, 2025 to 1.83% for the three months ended September 30, 2026, reflecting the impact of deposit rate reductions over that time period and the runoff of higher rate time deposits. On June 30, 2026, the Company redeemed its subordinated notes and did not incur interest expense on such notes during the third quarter of 2026. For the three months ended September 30, 2025, interest expense on such notes, inclusive of amortization expense on debt issuance costs and fair value marks, totaled $1.4 million.
Average loans increased by $188.8 million from $4.0 billion for the three months ended September 30, 2025 to $4.2 billion for the three months ended September 30, 2026. Average investment securities increased by $66.9 million from $906.4 million for the three months ended September 30, 2025 to $973.3 million for the three months ended September 30, 2026. Average interest-bearing liabilities increased by $150.4 million to $4.0 billion for the three months ended September 30, 2026 from $3.9 billion for the three months ended September 30, 2025.
The yield on loans decreased by 23 basis points to 6.35% for the three months ended September 30, 2026 compared to 6.58% for the three months ended September 30, 2025 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.
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The average balance of commercial loans increased by $108.2 million to $3.2 billion for the three months ended September 30, 2026 from $3.1 billion for the three months ended September 30, 2025. Average residential mortgage loans increased by $29.1 million from $500.5 million during the three months ended September 30, 2025 to $529.6 million during the three months ended September 30, 2026. Average home equity loans increased by $54.1 million from $297.2 million for the three months ended September 30, 2025 to $351.3 million for the three months ended September 30, 2026, which includes purchases of home equity lines of credit during the third quarter of 2026. Average installment and other consumer loans decreased by $2.6 million from $42.0 million for the three months ended September 30, 2025 to $39.4 million for the three months ended September 30, 2026.
Accretion of purchase accounting adjustments on loans included in interest income was $3.9 million and $5.3 million for the three months ended September 30, 2026 and 2025, respectively. Accelerated accretion on loans totaled $1.2 million and $1.4 million for the three months ended September 30, 2026 and 2025, respectively. Prepayment fee income on loans increased from $318 thousand for the three months ended September 30, 2025 to $677 thousand for the three months ended September 30, 2026.
Interest income on investment securities on a tax-equivalent basis increased by $471 thousand to $11.1 million for the three months ended September 30, 2026 from $10.6 million for the three months ended September 30, 2025, with the taxable equivalent yield decreasing from 4.67% for the three months ended September 30, 2025 to 4.54% for the three months ended September 30, 2026. The 13 basis point decrease reflects the impact from the decline in market interest rates. Accretion on acquired investment securities was $785 thousand for the three months ended September 30, 2026 compared to $806 thousand for the three months ended September 30, 2025. The average balance of investment securities increased by $66.9 million to $973.3 million for the three months ended September 30, 2026 from $906.4 million for the three months ended September 30, 2025 due primarily to investment security purchases. During the three months ended September 30, 2026, the Company did not sell any investment securities. During the three months ended September 30, 2025, the Company sold $41.6 million in GSE residential MBS securities, which resulted in a gain of $44 thousand.
Interest income on federal funds sold and interest-bearing bank balances on a tax-equivalent basis decreased by $556 thousand to $567 thousand for the three months ended September 30, 2026 from $1.1 million for the three months ended September 30, 2025. The average balance of federal funds sold and interest-bearing bank balances decreased by $39.6 million from $101.7 million for the three months ended September 30, 2025 to $62.2 million for the three months ended September 30, 2026, which was impacted by the increase in average loans and investment securities. This decrease was partially offset by the increase in average interest-bearing liabilities. The FOMC had cut the Federal Funds rate by 75 basis points from September 2025 to December 2025, followed by an increase in the rate of 25 basis points in September 2026.
Interest expense on interest-bearing liabilities decreased by $1.7 million from $26.1 million for the three months ended September 30, 2025 to $24.4 million for the three months ended September 30, 2026. The cost of interest-bearing liabilities decreased by 27 basis points from 2.67% for the three months ended September 30, 2025 to 2.40% for the three months ended September 30, 2026, reflecting the impact of deposit rate reductions and the runoff of higher rate time deposits, in addition to the subordinated notes redemption on June 30, 2026, partially offset by the increase in the average balance of interest-bearing deposits and FHLB advances.
Interest expense on deposits was $21.3 million for the three months ended September 30, 2026 compared to $22.6 million for the three months ended September 30, 2025. The cost of deposits was 1.83% for the three months ended September 30, 2026 compared to 1.99% for the three months ended September 30, 2025. The average balance of interest-bearing deposits increased by $98.9 million to $3.7 billion for the three months ended September 30, 2026 from $3.6 billion for the three months ended September 30, 2025. Average interest-bearing demand deposits increased by $143.0 million to $2.6 billion for the three months ended September 30, 2026 from $2.5 billion for the three months ended September 30, 2025. Average time deposits decreased by $33.8 million to $863.6 million for the three months ended September 30, 2026 from $897.4 million for the three months ended September 30, 2025. Average savings deposits decreased by $10.3 million to $254.5 million for the three months ended September 30, 2026 from $264.8 million for the three months ended September 30, 2025. Amortization of fair value marks on acquired time deposits was $18 thousand for the three months ended September 30, 2026 compared to $138 thousand for the three months ended September 30, 2025.
Interest expense on borrowings was $3.1 million for the three months ended September 30, 2026 compared to $3.5 million for the three months ended September 30, 2025. The cost of borrowings was 3.94% for the three months ended September 30, 2026 compared to 5.22% for the three months ended September 30, 2025. Average borrowings increased by $51.4 million from $265.5 million for the three months ended September 30, 2025 to $316.9 million for the three months ended September 30, 2026. Average borrowings included average FHLB advances and other borrowings of $306.3 million for the three months ended September 30, 2026, an increase of $137.4 million, from an average of $168.9 million for the three months ended September 30, 2025. The increase was due to higher utilization of borrowings primarily to fund loan growth. Average
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subordinated notes and trust preferred debt decreased by $60.6 million to $8.1 million for the three months ended September 30, 2026 from $68.7 million during the three months ended September 30, 2025.
At September 30, 2026, subordinated notes payable totaled zero. On June 30, 2026, the Company redeemed the $31.0 million outstanding 4.50% fixed-to-floating rate subordinated notes due December 9, 2030, which were assumed in the Merger. Previously, on September 30, 2025, the Company redeemed its $32.5 million outstanding 6.0% fixed-to-floating subordinated notes due December 30, 2028. The Company did not incur interest expense on subordinated notes during the three months ended September 30, 2026. The redemption of subordinated notes on September 30, 2025 resulted in the amortization of remaining debt issuance costs totaling $298 thousand for the three months ended September 30, 2025. The cost of the Company's subordinated notes was impacted by 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. Amortization of fair value marks on acquired borrowings was $60 thousand and $153 thousand for the three months ended September 30, 2026 and 2025, respectively, which decreased due to the redemption of the subordinated notes.
Provision for Credit Losses
The ACL to total loan ratio was 1.11% at September 30, 2026 and 1.21% at September 30, 2025. The Company recorded a provision for credit losses on loans of $1.1 million for the three months ended September 30, 2026 compared to $396 thousand for the same period in 2025. There was a decrease of $84 thousand in the reserve for unfunded loan commitments during the three months ended September 30, 2026. There was no change in the reserve for unfunded loan commitments during the three months ended September 30, 2025.
The provision expense for the three months ended September 30, 2026 was due to loan growth of $95.3 million, net charge-offs and updates to our qualitative factors, partially offset by favorable GDP forecast and macroeconomic conditions.
Net charge-offs for the three months ended September 30, 2026 and 2025 totaled $1.0 million and $189 thousand, respectively. The gross charge-offs totaling $1.1 million during the third quarter of 2026 included charge-offs of $744 thousand between two commercial and industrial loans and a charge off of $234 thousand for one owner-occupied commercial real estate loan. Nonaccrual loans were 0.54% of gross loans at September 30, 2026, compared with 0.66% of gross loans at September 30, 2025.
The qualitative factor for Economic Conditions, which was at a minor level at June 30, 2026, was elevated during the third quarter of 2026 to a moderate risk level for all loan segments based on impact from the geopolitical conflict in the Middle East and inflationary pressures. The qualitative factor for Other External Factors, previously added at June 30, 2026, was subsequently removed during the third quarter of 2026. The qualitative factor for Delinquency and Classified Loan Trends was reduced to a minor level for the residential mortgage loan segment and removed for the acquisition and development loan segment based on sustained stabilization in credit quality. The qualitative factor for Collateral Valuation Trends, which was at a minor level at March 31, 2026, was reduced during the second quarter of 2026 to no risk level for the commercial real estate segment based on improved trends in collateral valuations as supported 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 during the second quarter of 2026 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.
For the three months ended September 30, 2025, the provision for credit losses increased primarily due to an increase in loans, primarily within commercial real estate loans. There was no change in qualitative factors during the third quarter of 2025.
Additional information is included in the "Credit Risk Management" section herein.
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Noninterest Income
The following table compares noninterest income for the three months ended September 30, 2026 and 2025:
|
Three Months Ended September 30,
|
$ Change | % Change | |||||||||||||||||||||
| 2026 | 2025 | 2026-2025 | 2026-2025 | ||||||||||||||||||||
| Service charges on deposit accounts | $ | 2,186 | $ | 2,014 | $ | 172 | 8.5 | % | |||||||||||||||
| Interchange income | 1,597 | 1,620 | (23) | (1.4) | % | ||||||||||||||||||
| Other service charges, commissions and fees | 730 | 983 | (253) | (25.7) | % | ||||||||||||||||||
| Swap fee income | 436 | 816 | (380) | (46.6) | % | ||||||||||||||||||
| Trust and investment management income | 3,870 | 3,636 | 234 | 6.4 | % | ||||||||||||||||||
| Brokerage income | 2,098 | 1,641 | 457 | 27.8 | % | ||||||||||||||||||
| Mortgage banking activities | 212 | 522 | (310) | (59.4) | % | ||||||||||||||||||
| Income from life insurance | 1,410 | 1,471 | (61) | (4.1) | % | ||||||||||||||||||
| Other income | 824 | 629 | 195 | 31.0 | % | ||||||||||||||||||
| Investment securities gains | 15 | 50 | (35) | (70.0) | % | ||||||||||||||||||
| Total noninterest income | $ | 13,378 | $ | 13,382 | $ | (4) | - | % | |||||||||||||||
Noninterest income was $13.4 million for both the three months ended September 30, 2026 and 2025. The following were significant components which changed in this line item:
•Wealth management income, which includes trust and investment management income and brokerage income, increased by $691 thousand due to market growth and new production.
•Swap fee income decreased by $380 thousand. Swap fee income will fluctuate based on market conditions and client demand.
•Mortgage banking income decreased by $310 thousand due to a reduction in loan sale activity and a decrease in the fair value adjustment of loans held-for-sale and interest rate lock commitments due to rising market interest rates in the three months ended September 30, 2026.
•Other line items within noninterest income showed fluctuations attributable to normal business operations.
Noninterest Expenses
The following table compares noninterest expenses for the three months ended September 30, 2026 and 2025:
|
Three Months Ended September 30,
|
$ Change | % Change | |||||||||||||||||||||
| 2026 | 2025 | 2026-2025 | 2026-2025 | ||||||||||||||||||||
| Salaries and employee benefits | $ | 22,400 | $ | 21,439 | $ | 961 | 4.5 | % | |||||||||||||||
| Occupancy | 2,092 | 1,907 | 185 | 9.7 | % | ||||||||||||||||||
| Furniture and equipment | 2,017 | 2,168 | (151) | (7.0) | % | ||||||||||||||||||
| Data processing | 1,752 | 1,116 | 636 | 57.0 | % | ||||||||||||||||||
| Automated teller machine and interchange fees | 1,106 | 892 | 214 | 24.0 | % | ||||||||||||||||||
| Advertising and bank promotions | 423 | 154 | 269 | 174.7 | % | ||||||||||||||||||
| FDIC insurance | 627 | 652 | (25) | (3.8) | % | ||||||||||||||||||
| Professional services | 1,015 | 1,703 | (688) | (40.4) | % | ||||||||||||||||||
| Directors' compensation | 377 | 350 | 27 | 7.7 | % | ||||||||||||||||||
| Taxes other than income | 1,022 | 828 | 194 | 23.4 | % | ||||||||||||||||||
| Intangible asset amortization | 2,115 | 2,410 | (295) | (12.2) | % | ||||||||||||||||||
| Other operating expenses | 2,388 | 2,678 | (290) | (10.8) | % | ||||||||||||||||||
| Total noninterest expenses | $ | 37,334 | $ | 36,297 | $ | 1,037 | 2.9 | % | |||||||||||||||
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Noninterest expenses increased by $1.0 million from $36.3 million for the three months ended September 30, 2025 to $37.3 million for the three months ended September 30, 2026. The following were additional significant components of the change in this line item:
•Salaries and employee benefits expense increased by $961 thousand due to staff additions that filled vacancies, thereby reducing use of third-party consultants, and merit salary increases effective in May of 2026.
•Data processing expenses increased by $636 thousand due to investments in technology as the Company focuses on the evolving needs of its clients.
•Advertising and bank promotions expense increased by $269 thousand driven by marketing campaigns designed to expand brand awareness and support growth within our footprint.
•Automated teller machine and interchange fee expense increased by $214 thousand due to an increase in costs incurred for enhanced ATM services.
•Professional services expense decreased by $688 thousand. The Company continues to focus on reducing third-party utilization.
•Other operating expenses decreased by $290 thousand due primarily to the decrease in credit valuation adjustments on non-hedging derivatives.
•Other line items within noninterest expense showed fluctuations attributable to normal business operations.
Income Tax Expense
Income tax expense totaled $5.5 million, an effective tax rate of 19.4%, for the three months ended September 30, 2026 compared to income tax expense of $5.8 million and an effective tax rate of 21.0% for the three months ended September 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 $356 thousand during the three months ended September 30, 2026. 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.
Nine months ended September 30, 2026 compared with nine months ended September 30, 2025
Summary
Net income totaled $65.8 million for the nine months ended September 30, 2026 compared to $59.4 million for the same period in 2025. Diluted earnings per share for the nine months ended September 30, 2026 totaled $3.38 compared to $3.07 for the nine months ended September 30, 2025. For the nine months ended September 30, 2026 and 2025, the Company incurred merger-related expenses of zero and $2.6 million, respectively, which were included in noninterest expenses of the unaudited condensed consolidated statements of income. For the nine months ended September 30, 2025, excluding these non-recurring expenses, net income and diluted earnings per common share totaled $61.4 million and $3.17, respectively. See "Supplemental Reporting of Non-GAAP Measures" for additional information.
Net interest income totaled $151.2 million for the nine months ended September 30, 2026 compared to $149.3 million for the nine months ended September 30, 2025. Net provision for credit losses on loans and unfunded loan commitments included an expense of $1.7 million and a net recovery of $49 thousand for the nine months ended September 30, 2026 and 2025, respectively. Noninterest income totaled $42.8 million and $37.9 million for the nine months ended September 30, 2026 and 2025, respectively. Noninterest expenses totaled $111.7 million and $112.1 million for the nine months ended September 30, 2026 and 2025, respectively.
Income tax expense totaled $14.7 million and $15.8 million for the nine months ended September 30, 2026 and 2025, respectively. The Company's effective tax rate was 18.3% for the nine months ended September 30, 2026 compared to 21.0% for the nine months ended September 30, 2025.
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Net Interest Income
Net interest income increased by $1.9 million from $149.3 million for the nine months ended September 30, 2025 to $151.2 million for the nine months ended September 30, 2026. Interest income on loans increased by $545 thousand from $192.2 million for the nine months ended September 30, 2025 to $192.8 million for the nine months ended September 30, 2026. Interest income on investment securities increased by $1.8 million from $30.4 million for the nine months ended September 30, 2025 to $32.2 million for the nine months ended September 30, 2026. Total interest expense decreased by $2.6 million from $78.2 million for the nine months ended September 30, 2025 to $75.6 million for the nine months ended September 30, 2026. Interest expense on deposits decreased by $4.9 million from $69.8 million for the nine months ended September 30, 2025 to $64.9 million for the nine months ended September 30, 2026. Interest expense on borrowings increased by $2.2 million from $8.5 million in the nine months ended September 30, 2025 to $10.7 million for the nine months ended September 30, 2026.
The following table presents net interest income, net interest spread and net interest margin for the nine months ended September 30, 2026 and 2025 on a taxable-equivalent basis:
| Nine Months Ended September 30, 2026 | Nine Months Ended September 30, 2025 | ||||||||||||||||||||||||||||||||||
|
Average Balance |
Taxable- Equivalent Interest |
Taxable- Equivalent Rate |
Average Balance |
Taxable- Equivalent Interest |
Taxable- Equivalent Rate |
||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||
|
Federal funds sold & interest-bearing bank balances
|
$ | 67,316 | $ | 1,843 | 3.66 | % | $ | 146,688 | $ | 4,904 | 4.47 | % | |||||||||||||||||||||||
|
Investment securities (1)(2)
|
976,406 | 33,238 | 4.54 | 892,033 | 31,379 | 4.69 | |||||||||||||||||||||||||||||
|
Loans (1)(3)(4)(5)
|
4,105,041 | 193,435 | 6.30 | 3,928,159 | 192,858 | 6.56 | |||||||||||||||||||||||||||||
| Total interest-earning assets | 5,148,763 | 228,516 | 5.93 | 4,966,880 | 229,141 | 6.17 | |||||||||||||||||||||||||||||
| Other assets | 428,944 | 440,153 | |||||||||||||||||||||||||||||||||
| Total | $ | 5,577,707 | $ | 5,407,033 | |||||||||||||||||||||||||||||||
| Liabilities and Shareholders' Equity | |||||||||||||||||||||||||||||||||||
| Interest-bearing demand deposits | $ | 2,568,637 | 41,105 | 2.14 | $ | 2,462,336 | 42,181 | 2.29 | |||||||||||||||||||||||||||
| Savings deposits | 258,261 | 398 | 0.21 | 268,966 | 494 | 0.25 | |||||||||||||||||||||||||||||
| Time deposits | 890,123 | 23,439 | 3.52 | 927,232 | 27,079 | 3.90 | |||||||||||||||||||||||||||||
| Total interest-bearing deposits | 3,717,021 | 64,942 | 2.34 | 3,658,534 | 69,754 | 2.55 | |||||||||||||||||||||||||||||
| Securities sold under agreements to repurchase and federal funds purchased | 12,667 | 132 | 1.39 | 26,623 | 297 | 1.49 | |||||||||||||||||||||||||||||
| FHLB advances and other borrowings | 243,691 | 6,921 | 3.80 | 128,827 | 3,939 | 4.09 | |||||||||||||||||||||||||||||
|
Subordinated notes and trust preferred debt (6)
|
27,196 | 3,651 | 17.95 | 68,799 | 4,223 | 8.21 | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 4,000,575 | 75,646 | 2.53 | 3,882,783 | 78,213 | 2.69 | |||||||||||||||||||||||||||||
| Noninterest-bearing demand deposits | 883,735 | 898,015 | |||||||||||||||||||||||||||||||||
| Other liabilities | 84,466 | 89,025 | |||||||||||||||||||||||||||||||||
| Total liabilities | 4,968,776 | 4,869,823 | |||||||||||||||||||||||||||||||||
| Shareholders' equity | 608,931 | 537,210 | |||||||||||||||||||||||||||||||||
| Total | $ | 5,577,707 | $ | 5,407,033 | |||||||||||||||||||||||||||||||
|
Taxable-equivalent net interest income / net interest spread
|
152,870 | 3.40 | % | 150,928 | 3.47 | % | |||||||||||||||||||||||||||||
| Taxable-equivalent net interest margin | 3.97 | % | 4.06 | % | |||||||||||||||||||||||||||||||
| Taxable-equivalent adjustment | (1,714) | (1,667) | |||||||||||||||||||||||||||||||||
| Net interest income | $ | 151,156 | $ | 149,261 | |||||||||||||||||||||||||||||||
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| NOTES TO ANALYSIS OF NET INTEREST INCOME: | |||||
| (1) | Yields and interest income on tax-exempt assets have been computed on a taxable-equivalent basis assuming a 21% tax rate. | ||||
|
(2)
|
Average balance of investment securities is computed at fair value. | ||||
|
(3)
|
Average balances include nonaccrual loans. | ||||
|
(4)
|
Interest income on loans includes prepayment and late fees, where applicable. | ||||
| (5) |
Interest income on loans includes accretion on purchase accounting marks of $12.4 million and $16.7 million for the nine months ended September 30, 2026 and 2025, respectively.
|
||||
|
(6)
|
Interest expense includes accelerated amortization of the fair value mark from the redeemed subordinated notes of $1.6 million for the nine months ended September 30, 2026.
|
||||
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The following table presents the impact of rate and volume on the change in taxable-equivalent net interest income for the nine months ended September 30, 2025 compared to the nine months ended September 30, 2026:
|
Nine Months Ended September 30, 2026 Versus 2025 Increase (Decrease) Due to Change In
|
|||||||||||||||||
| Average Volume | Average Rate | Total | |||||||||||||||
| Interest Income | |||||||||||||||||
| Federal funds sold and interest-bearing bank balances | $ | (2,654) | $ | (407) | $ | (3,061) | |||||||||||
| Taxable securities | 2,892 | (951) | 1,941 | ||||||||||||||
| Tax-exempt securities | 117 | (199) | (82) | ||||||||||||||
| Loans | 8,684 | (8,107) | 577 | ||||||||||||||
| Total interest income | 9,039 | (9,664) | (625) | ||||||||||||||
| Interest Expense | |||||||||||||||||
| Interest-bearing demand deposits | 1,821 | (2,897) | (1,076) | ||||||||||||||
| Savings deposits | (20) | (76) | (96) | ||||||||||||||
| Time deposits | (1,084) | (2,556) | (3,640) | ||||||||||||||
| Total interest-bearing deposits | 717 | (5,529) | (4,812) | ||||||||||||||
| Securities sold under agreements to repurchase and federal funds purchased | (156) | (9) | (165) | ||||||||||||||
| FHLB advances and other borrowings | 3,512 | (530) | 2,982 | ||||||||||||||
|
Subordinated notes and trust preferred debt
|
(2,554) | 1,982 | (572) | ||||||||||||||
| Total interest expense | 1,519 | (4,086) | (2,567) | ||||||||||||||
| Taxable-Equivalent Net Interest Income | $ | 7,520 | $ | (5,578) | $ | 1,942 | |||||||||||
Net interest income on a taxable-equivalent basis increased by $2.0 million to $152.9 million for the nine months ended September 30, 2026 from $150.9 million for the nine months ended September 30, 2025. The Company's net interest spread decreased by seven basis points from 3.47% for the nine months ended September 30, 2025 to 3.40% for the nine months ended September 30, 2026.
Taxable-equivalent net interest margin decreased by nine basis points to 3.97% for the nine months ended September 30, 2026 from 4.06% for the nine months ended September 30, 2025. During the nine months ended September 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 four basis points. Excluding the accelerated amortization of the fair value mark on the redeemed subordinated notes, net interest margin was 4.01% for the nine months ended September 30, 2026. See "Supplemental Reporting of Non-GAAP Measures" for additional information.
The taxable-equivalent yield on interest-earning assets decreased by 24 basis points from 6.17% for the nine months ended September 30, 2025 to 5.93% for the nine months ended September 30, 2026 due primarily to the impact of the three declines in the Fed Funds rate from September 2025 to December 2025. The net accretion impact of purchase accounting marks on loans, securities, deposits and borrowings was $12.5 million during the nine months ended September 30, 2026 compared to $17.9 million during the nine months ended September 30, 2025. The cost of interest-bearing liabilities decreased by 16 basis points from 2.69% for the nine months ended September 30, 2025 to 2.53% for the nine months ended September 30, 2026 due primarily to the Fed Funds rate reductions. The net interest margin benefited from the decrease of 16 basis points in the cost of deposits from 2.05% for the nine months ended September 30, 2025 to 1.89% for the nine months ended September 30, 2026, reflecting the impact of deposit rate reductions over that time period and the runoff of higher rate time deposits. The decrease was also due to the accelerated amortization of the fair value mark of $1.6 million on the subordinated notes redeemed on June 30, 2026.
Average loans increased by $176.9 million to $4.1 billion for the nine months ended September 30, 2026 from $3.9 billion for the nine months ended September 30, 2025. Average investment securities increased by $84.4 million to $976.4 million for the nine months ended September 30, 2026 from $892.0 million for the nine months ended September 30, 2025. Average interest-bearing liabilities increased by $117.8 million to $4.0 billion for the nine months ended September 30, 2026 from $3.9 billion for the nine months ended September 30, 2025.
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The average yield on loans decreased by 26 basis points to 6.30% for the nine months ended September 30, 2026 compared to 6.56% for the nine months ended September 30, 2025 primarily due to the impact of a decline in the Fed Funds rate 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 $103.5 million from $3.1 billion for the nine months ended September 30, 2025 to $3.2 billion for the nine months ended September 30, 2026. Average residential mortgage loans increased by $39.4 million from $478.6 million during the nine months ended September 30, 2025 to $518.0 million during the nine months ended September 30, 2026. Average home equity loans increased by $37.7 million from $292.0 million for the nine months ended September 30, 2025 to $329.7 million for the nine months ended September 30, 2026, which includes purchases of home equity lines of credit during the third quarter of 2026. Average installment and other consumer loans decreased by $3.7 million from $43.9 million for the nine months ended September 30, 2025 to $40.2 million for the nine months ended September 30, 2026.
Accretion of purchase accounting adjustments on loans included in interest income was $12.4 million and $16.7 million for the nine months ended September 30, 2026 and 2025, respectively, which included accelerated accretion totaling $3.0 million and $4.1 million during the nine months ended September 30, 2026 and 2025, respectively. Prepayment fee income on loans increased from $1.1 million for the nine months ended September 30, 2025 to $1.6 million for the nine months ended September 30, 2026.
Interest income on investment securities on a tax-equivalent basis increased by $1.8 million to $33.2 million for the nine months ended September 30, 2026 from $31.4 million for the nine months ended September 30, 2025, with the taxable equivalent yield decreasing from 4.69% for the nine months ended September 30, 2025 to 4.54% for the nine months ended September 30, 2026. The 15 basis point decrease primarily reflects the impact from the decline in the market interest rates. Accretion on acquired investment securities was $2.2 million for the nine months ended September 30, 2026 compared to $2.4 million for the nine months ended September 30, 2025. The average balance of investment securities increased by $84.4 million to $976.4 million for the nine months ended September 30, 2026 from $892.0 million for the nine months ended September 30, 2025 due primarily to investment security purchases. During the nine months ended September 30, 2026, the Company did not sell any investment securities. During the nine months ended September 30, 2025, the Company sold $41.6 million in GSE residential MBS securities, which resulted in a gain of $44 thousand.
Interest income on federal funds sold and interest-bearing bank balances on a tax-equivalent basis decreased by $3.1 million to $1.8 million for the nine months ended September 30, 2026 from $4.9 million for the nine months ended September 30, 2025. The average balance of federal funds sold and interest-bearing bank balances decreased by $79.4 million from $146.7 million for the nine months ended September 30, 2025 to $67.3 million for the nine months ended September 30, 2026, which was impacted by the increase in average loans and investment securities. This decrease was partially offset by the increase in average interest-bearing liabilities. The FOMC had cut the Federal Funds rate by 75 basis points from September 2025 to December 2025, followed by an increase of 25 basis points in the rate in September 2026.
Interest expense on interest-bearing liabilities decreased by $2.6 million from $78.2 million for the nine months ended September 30, 2025 to $75.6 million for the nine months ended September 30, 2026. The cost of interest-bearing liabilities decreased by 16 basis points from 2.69% for the nine months ended September 30, 2025 to 2.53% for the nine months ended September 30, 2026 reflecting the impact of deposit rate reductions and the runoff of higher rate time deposits, in addition to the subordinated notes redemptions, partially offset by the increase in the average balance of interest-bearing deposits and FHLB advances.
Interest expense on deposits was $64.9 million for the nine months ended September 30, 2026 compared to $69.8 million for the nine months ended September 30, 2025. The cost of deposits was 1.89% for the nine months ended September 30, 2026 compared to 2.05% for the nine months ended September 30, 2025. Average interest-bearing demand deposits increased by $106.3 million and totaled $2.6 billion for the nine months ended September 30, 2026 compared to $2.5 billion for the nine months ended September 30, 2025. The average balance of interest-bearing deposits increased by $58.5 million and totaled $3.7 billion for both the nine months ended September 30, 2026 and 2025. Average time deposits decreased by $37.1 million to $890.1 million for the nine months ended September 30, 2026 from $927.2 million for the nine months ended September 30, 2025. Average savings deposits decreased by $10.7 million to $258.3 million for the nine months ended September 30, 2026 from $269.0 million for the nine months ended September 30, 2025. Amortization of fair value marks on acquired time deposits was $81 thousand for the nine months ended September 30, 2026 compared to $845 thousand for the nine months ended September 30, 2025.
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Interest expense on borrowings increased by $2.2 million to $10.7 million for the nine months ended September 30, 2026 from $8.5 million for the nine months ended September 30, 2025. The cost of borrowings was 5.05% for the nine months ended September 30, 2026 compared to 5.04% for the nine months ended September 30, 2025.
Average borrowings increased by $59.3 million from $224.3 million for the nine months ended September 30, 2025 to $283.6 million for the nine months ended September 30, 2026. Average borrowings included average FHLB advances and other borrowings of $243.7 million for the nine months ended September 30, 2026, an increase of $114.9 million, from an average of $128.8 million for the nine months ended September 30, 2025. The increase was due to higher utilization of borrowings primarily to fund loan growth. Average subordinated notes and trust preferred debt decreased by $41.6 million to $27.2 million for the nine months ended September 30, 2026 from $68.8 million during the nine months ended September 30, 2025.
At September 30, 2026, subordinated notes payable totaled zero. On June 30, 2026, the Company redeemed the $31.0 million outstanding 4.50% fixed-to-floating rate subordinated notes due December 9, 2030, which were assumed in the Merger. Previously, on September 30, 2025, the Company redeemed its $32.5 million outstanding 6.0% fixed-to-floating subordinated notes due December 30, 2028. The redemption of subordinated notes on June 30, 2026 resulted in the accelerated amortization of the remaining fair value mark totaling $1.6 million, which increased the cost of borrowings by 60 basis points during the nine months ended September 30, 2026. The amortization of the remaining unamortized debt issuance costs of $335 thousand from the redemption of subordinated notes on September 30, 2025 increased the cost of borrowings by 17 basis points during the nine months ended September 30, 2025. Amortization of fair value marks on acquired borrowings was $2.0 million and $455 thousand for the nine months ended September 30, 2026 and 2025, respectively, which increased due to the redemption of the subordinated notes in 2026.
Provision for Credit Losses
The ACL to total loan ratio was 1.11% at September 30, 2026 compared to 1.21% at September 30, 2025. The Company recorded a provision for credit losses on loans of $2.2 million for the nine months ended September 30, 2026 compared to a recovery of $51 thousand for the same period in 2025. The recovery of credit losses on unfunded loan commitments was $460 thousand and $100 thousand during the nine months ended September 30, 2026 and 2025, respectively.
The provision expense for the three months ended September 30, 2026 was due to loan growth of $187.7 million, net charge-offs and updates to our qualitative factors, partially offset by favorable GDP forecast and macroeconomic conditions.
Net charge-offs for the nine months ended September 30, 2026 and 2025 totaled $3.1 million and $635 thousand, respectively. The gross charge-offs totaling $3.3 million during the nine months ended September 30, 2026 included charge-offs of $2.0 million from commercial and industrial loans, $668 thousand for a commercial and land development loan and $234 thousand for one owner-occupied commercial real estate loan. Nonaccrual loans were 0.54% of gross loans at September 30, 2026 compared with 0.66% of gross loans at September 30, 2025.
During the first quarter of 2026, the provision for credit losses was impacted by an update 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, which were partially offset by an improvement in the gross domestic product forecast.
The qualitative factor for Economic Conditions, which was at a minor level at June 30, 2026, was elevated during the third quarter of 2026 to a moderate risk level for all loan segments based on impact from the geopolitical conflict in the Middle East and inflationary pressures. The qualitative factor for Other External Factors, previously added at June 30, 2026, was subsequently removed during the third quarter of 2026. The qualitative factor for Delinquency and Classified Loan Trends was reduced to a minor level for the residential mortgage loan segment and removed for the acquisition and development loan segment based on sustained stabilization in credit quality.
During the second quarter of 2026, the qualitative factor for Collateral Valuation Trends, which was at a minor level as of 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 supported 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.
During the first quarter of 2026, 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
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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 nine months ended September 30, 2025, the provision for credit losses was primarily impacted by the changes in certain qualitative factors and loan growth of $48.5 million. 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. 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. The Delinquency and Classified Loan Trends qualitative factor was added for the home equity loan class at a moderate level. The addition of the Economic Conditions qualitative factor was based on current market interest rates and prepayment speeds, and the addition of the Delinquency and Classified Loan Trends was based on delinquencies and downgrades within the aforementioned loan classes. During the second quarter of 2025, the Other External Factors 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 the quantitative ACL model. There was no change in qualitative factors during the third quarter of 2025.
Additional information is included in the "Credit Risk Management" section herein.
Noninterest Income
The following table compares noninterest income for the nine months ended September 30, 2026 and 2025:
| Nine Months Ended September 30, | $ Change | % Change | |||||||||||||||||||||
| 2026 | 2025 | 2026-2025 | 2026-2025 | ||||||||||||||||||||
| Service charges on deposit accounts | $ | 6,507 | $ | 5,975 | $ | 532 | 8.9 | % | |||||||||||||||
| Interchange income | 4,712 | 4,488 | 224 | 5.0 | % | ||||||||||||||||||
| Other service charges, commissions and fees | 2,014 | 2,047 | (33) | (1.6) | % | ||||||||||||||||||
| Swap fee income | 2,426 | 1,879 | 547 | 29.1 | % | ||||||||||||||||||
| Trust and investment management income | 11,686 | 11,184 | 502 | 4.5 | % | ||||||||||||||||||
| Brokerage income | 5,785 | 4,775 | 1,010 | 21.2 | % | ||||||||||||||||||
| Mortgage banking activities | 974 | 1,302 | (328) | (25.2) | % | ||||||||||||||||||
| Income from life insurance | 6,547 | 4,071 | 2,476 | 60.8 | % | ||||||||||||||||||
| Other income | 2,070 | 2,129 | (59) | (2.8) | % | ||||||||||||||||||
| Investment securities gains | 70 | 71 | (1) | (1.4) | % | ||||||||||||||||||
| Total noninterest income | $ | 42,791 | $ | 37,921 | $ | 4,870 | 12.8 | % | |||||||||||||||
Noninterest income increased by $4.9 million from $37.9 million for the nine months ended September 30, 2025 to $42.8 million for the nine months ended September 30, 2026. The following were significant components of the change in this line item:
•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 recognized during the first quarter of 2026.
•Wealth management income, which includes trust and investment management income and brokerage income, increased by $1.5 million due to market growth and new production.
•Service charges on deposits increased by $532 thousand due to an increase in cash management services and other deposit fees.
•Swap fee income increased by $547 thousand due to higher swap volume. Swap fee income will fluctuate based on market conditions and client demand.
•Mortgage banking activities decreased by $328 thousand due to a reduction in loan sale activity and a decrease in the fair value adjustment of loans held-for-sale and interest rate lock commitments due to rising market interest rates in the nine months ended September 30, 2026.
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•Other line items within noninterest income showed fluctuations attributable to normal business operations.
Noninterest Expenses
The following table compares noninterest expenses for the nine months ended September 30, 2026 and 2025:
| Nine Months Ended September 30, | $ Change | % Change | |||||||||||||||||||||
| 2026 | 2025 | 2026-2025 | 2026-2025 | ||||||||||||||||||||
| Salaries and employee benefits | $ | 65,786 | $ | 63,191 | $ | 2,595 | 4.1 | % | |||||||||||||||
| Occupancy | 6,056 | 5,567 | 489 | 8.8 | % | ||||||||||||||||||
| Furniture and equipment | 6,161 | 7,394 | (1,233) | (16.7) | % | ||||||||||||||||||
| Data processing | 4,992 | 3,005 | 1,987 | 66.1 | % | ||||||||||||||||||
| Automated teller machine and interchange fees | 3,412 | 2,184 | 1,228 | 56.2 | % | ||||||||||||||||||
| Advertising and bank promotions | 2,232 | 1,730 | 502 | 29.0 | % | ||||||||||||||||||
| FDIC insurance | 1,810 | 2,150 | (340) | (15.8) | % | ||||||||||||||||||
| Professional services | 3,438 | 5,545 | (2,107) | (38.0) | % | ||||||||||||||||||
| Directors' compensation | 1,180 | 854 | 326 | 38.2 | % | ||||||||||||||||||
| Taxes other than income | 2,439 | 2,065 | 374 | 18.1 | % | ||||||||||||||||||
| Intangible asset amortization | 6,533 | 7,417 | (884) | (11.9) | % | ||||||||||||||||||
| Merger-related expenses | - | 2,617 | (2,617) | (100.0) | % | ||||||||||||||||||
| Restructuring expenses | - | 91 | (91) | (100.0) | % | ||||||||||||||||||
| Other operating expenses | 7,689 | 8,277 | (588) | (7.1) | % | ||||||||||||||||||
| Total noninterest expenses | $ | 111,728 | $ | 112,087 | $ | (359) | (0.3) | % | |||||||||||||||
Noninterest expenses decreased by $359 thousand from $112.1 million for the nine months ended September 30, 2025 to $111.7 million for the nine months ended September 30, 2026. The following were additional significant components of the change in this line item:
•During the first half of 2025, the Company incurred merger-related expenses of $2.6 million, which included software conversion costs and professional fees, including audit fees, incurred in connection with the Merger.
•Professional services expense decreased by $2.1 million. The Company continues to focus on reducing third-party utilization.
•Furniture and equipment expense decreased by $1.2 million due primarily to post-Merger efficiencies.
•FDIC insurance expense decreased by $340 thousand due primarily to a decrease in the assessment rate caused by improvements in profitability and the capital adequacy factors.
•Other operating expenses decreased by $588 thousand primarily due to a decrease in credit valuation adjustments on non-hedging derivatives of $1.0 million, partially offset by a decrease in the sales tax credits received from the Commonwealth of Pennsylvania. During the nine months ended September 30, 2026, the Bank received sales tax credits of $368 thousand, a decrease of $305 thousand, compared to $673 thousand received during the nine months ended September 30, 2025.
•Salaries and employee benefits expense increased by $2.6 million due to staff additions that filled vacancies, thereby reducing use of third-party consultants, in addition to increases in merit-based compensation effective in May.
•Data processing expense increased by $2.0 million due to investments in technology as the Company focuses on the evolving needs of its clients.
•ATM and interchange fee expense increased by $1.2 million due to an increase in debit card activity and costs incurred for enhanced ATM services.
•Advertising and bank promotions expense increased by $502 thousand driven by marketing campaigns designed to expand brand awareness and support growth within our footprint.
•Other line items within noninterest expense showed fluctuations attributable to normal business operations.
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Income Tax Expense
Income tax expense totaled $14.7 million, an effective tax rate of 18.3%, for the nine months ended September 30, 2026 compared with $15.8 million and an effective tax rate of 21.0% for the nine months ended September 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 $2.0 million. In addition, the effective tax rate is 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 TEFRA and other nondeductible items.
FINANCIAL CONDITION
Management devotes substantial time to overseeing the investment in and costs to fund loans and investment securities through deposits and borrowings, as well as the formulation and adherence to policies directed toward enhancing profitability and managing the risks associated with these investments.
Investment Securities
The Company utilizes investment securities to manage interest rate risk and liquidity, enhance income through interest and dividend income and collateralize certain deposits and borrowings.
The Company has established investment policies and an asset management policy to assist in administering its investment portfolio. Decisions to purchase or sell these securities are based on economic conditions and management's strategy to respond to changes in interest rates, liquidity, pledges to secure deposits and repurchase agreements and other factors while trying to maximize return on the investments. The Company may segregate its investment security portfolio into three categories: "securities held-to-maturity," "trading securities" and "securities available-for-sale." At September 30, 2026 and December 31, 2025, management classified the entire investment securities portfolio as AFS, which is accounted for at current market value with non-credit related losses and gains reported in OCI, net of income taxes.
The Company's investment securities portfolio includes debt investments that are subject to varying degrees of credit and market risks, which arise from general market conditions, and factors impacting specific industries, as well as news that may impact specific issues. Management monitors its debt securities, using various indicators in determining whether unrealized losses on debt securities are credit-related and require an ACL. These indicators include the amount of time the security has been in an unrealized loss position, the cause and extent of the unrealized loss and the credit quality of the issuer and underlying assets. In addition, management assesses whether it is likely the Company will have to sell the investment security prior to recovery, or it expects to be able to hold the investment security until the price recovers. The Company determined that the declines in market value were due to increases in interest rates and market movements, and not due to credit factors. The Company does not intend to sell these securities with unrealized losses and it is more likely than not that the Company will not be required to sell them before recovery of their amortized cost basis, which may be maturity. Therefore, the Company has concluded that the unrealized losses on the AFS securities did not require an ACL at September 30, 2026 and December 31, 2025.
At September 30, 2026, AFS securities totaled $919.4 million, a decrease of $33.3 million from $952.7 million at December 31, 2025. During the nine months ended September 30, 2026, paydowns totaled $75.8 million. Net unrealized losses increased by $46.6 million to $66.0 million at September 30, 2026 compared to net unrealized losses of $19.4 million at December 31, 2025 due to higher market interest rates and widening of spreads. During the nine months ended September 30, 2026, the Bank purchased $86.4 million of investment securities, consisting of $54.6 million agency mortgage backed securities and collateralized mortgage obligations, $30.7 million of non-agency collateralized mortgage obligations and $1.1 million of securities issued by state and political subdivisions. The remaining change in investment securities is due to net accretion of $4.3 million and calls and maturities totaling $1.6 million recorded on the investment securities. The overall duration of the Company's investment securities portfolio was 4.2 years at September 30, 2026 compared to 4.6 years at December 31, 2025. The Company has sufficient access to liquidity such that management does not believe it would be necessary to sell any of its investment securities at a loss to offset any unexpected deposit outflows. Management believes the structure of the Company's investment security portfolio is appropriately aligned with the rest of the balance sheet to protect against volatile interest rate environments, to provide a source of liquidity and to generate steady earnings.
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The following table summarizes the credit ratings and collateral associated with the Company's investment security portfolio, excluding equity securities, at September 30, 2026:
| Sector | Portfolio Mix | Amortized Book Value | Fair Value | AAA | AA | A | BBB | BB | NR | Collateral / Guarantee Type | ||||||||||||||||||||||
| Unsecured ABS | - | % | $ | 2,203 | $ | 2,173 | -% | -% | -% | -% | -% | 100% | Unsecured Consumer Debt | |||||||||||||||||||
| Student Loan ABS | - | 2,342 | 2,343 | - | - | - | - | - | 100 | Seasoned Student Loans | ||||||||||||||||||||||
| Federal Family Education Loan ABS | 7 | 64,907 | 64,722 | 4 | 74 | - | 9 | 13 | - |
Federal Family Education Loan (1)
|
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| PACE Loan ABS | - | 1,450 | 1,274 | 100 | - | - | - | - | - | PACE Loans | ||||||||||||||||||||||
| Non-Agency CMBS | 4 | 38,629 | 37,415 | - | - | - | - | - | 100 | |||||||||||||||||||||||
| Non-Agency RMBS | 4 | 39,198 | 37,370 | 94 | 6 | - | - | - | - |
Reverse Mortgages (2)
|
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| Municipal - General Obligation | 10 | 98,818 | 86,644 | 17 | 78 | 5 | - | - | - | |||||||||||||||||||||||
| Municipal - Revenue | 12 | 118,983 | 100,673 | - | 75 | 19 | - | - | 6 | |||||||||||||||||||||||
| SBA ReRemic | - | 1,105 | 1,094 | - | 100 | - | - | - | - |
SBA Guarantee (3)
|
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| Small Business Administration | - | 2,433 | 2,488 | - | 100 | - | - | - | - |
SBA Guarantee (3)
|
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| Agency MBS | 26 | 252,259 | 234,756 | - | 100 | - | - | - | - |
Residential Mortgages (3)
|
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| Agency CMO | 35 | 346,837 | 333,056 | - | 100 | - | - | - | - | |||||||||||||||||||||||
| U.S. Treasury securities | 2 | 15,010 | 14,166 | - | 100 | - | - | - | - |
U.S. Government Guarantee (3)
|
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|
Corporate debt
|
- | 957 | 961 | - | - | - | 100 | - | - | |||||||||||||||||||||||
| 100 | % | $ | 985,131 | $ | 919,135 | 6% | 84% | 3% | 1% | 1% | 5% | |||||||||||||||||||||
|
(1) Minimum of 97% guaranteed by U.S. government
|
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|
(2) Non-agency reverse mortgages with current structural credit enhancements
|
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|
(3) Guaranteed by U.S. government or U.S. government agencies
|
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| Note : Ratings in table are the lowest of the six rating agencies (Standard & Poor's, Moody's, Fitch, Morningstar, DBRS and Kroll Bond Rating Agency). Standard & Poor's rates U.S. government obligations at AA+. | ||||||||||||||||||||||||||||||||
Loan Portfolio
The Company offers a variety of products to meet the credit needs of its borrowers, principally commercial real estate loans, commercial and industrial loans, retail loans secured by residential properties, and, to a lesser extent, installment loans. No loans are extended to non-domestic borrowers or governments.
The risks associated with lending activities differ among loan segments and classes and are subject to the impact of changes in interest rates, market conditions of collateral securing the loans and general economic conditions. Any of these factors may adversely impact a borrower's ability to repay loans, and also impact the associated collateral. A further discussion on the Company's loan segments and classes, the related risks, ACL and FDM are included in Note 1, Summary of Significant Accounting Policies, and Note 4, Loans and Allowance for Credit Losses, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information."
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The following table presents the loan portfolio, excluding residential LHFS, by segment and class at September 30, 2026 and December 31, 2025:
|
September 30, 2026 |
December 31, 2025 |
||||||||||
| Commercial real estate: | |||||||||||
| Owner occupied | $ | 680,146 | $ | 644,713 | |||||||
| Non-owner occupied | 1,306,387 | 1,260,198 | |||||||||
| Multi-family | 246,026 | 236,703 | |||||||||
| Non-owner occupied residential | 145,716 | 155,749 | |||||||||
| Acquisition and development: | |||||||||||
| 1-4 family residential construction | 54,370 | 41,489 | |||||||||
| Commercial and land development | 178,823 | 198,234 | |||||||||
| Agricultural | 91,094 | 121,417 | |||||||||
|
Commercial and industrial
|
532,125 | 489,371 | |||||||||
| Municipal | 34,348 | 25,302 | |||||||||
| Residential mortgage: | |||||||||||
| First lien | 518,321 | 478,870 | |||||||||
| Home equity - term | 5,298 | 5,972 | |||||||||
|
Home equity - lines of credit(1)
|
376,096 | 321,438 | |||||||||
|
Other - term(2)
|
20,424 | 22,906 | |||||||||
| Installment and other loans | 19,199 | 18,331 | |||||||||
| $ | 4,208,373 | $ | 4,020,693 | ||||||||
|
(1) Home equity lines of credit include purchases with unearned premium of $733 thousand and zero at September 30, 2026 and December 31, 2025, respectively.
|
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|
(2) Other - term includes PACE loans with unearned premium of $325 thousand and $505 thousand at September 30, 2026 and December 31, 2025, respectively.
|
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Total loans increased by $187.7 million from December 31, 2025 to September 30, 2026. Commercial loans increased by $95.9 million from December 31, 2025 to September 30, 2026. Home equity lines of credit increased by $54.7 million, which includes purchases of $15.5 million. First lien residential mortgages increased by $39.5 million.
Asset Quality
Risk Elements
The Company's loan portfolio is subject to varying degrees of credit risk. Credit risk is managed through the Company's underwriting standards, on-going credit reviews and monitoring of asset quality measures. Additionally, loan portfolio diversification, which limits exposure to a single industry or borrower, and collateral requirements also mitigate the Company's risk of credit loss.
The loan portfolio consists principally of loans to borrowers in south central Pennsylvania and the greater Baltimore, Maryland region. As the majority of loans are concentrated in these geographic regions, a substantial portion of the borrowers' ability to honor their obligations may be affected by the level of economic activity in these market areas.
Nonperforming assets include nonaccrual loans and foreclosed real estate. In addition, loan modifications to borrowers experiencing financial difficulty and loans past due 90 days or more and still accruing are also deemed to be risk assets. For all loan classes, the accrual of interest income on loans, including individually evaluated loans, ceases when principal or interest is past due 90 days or more and collateral is inadequate to cover principal and interest or immediately if, in the opinion of management, full collection is unlikely. Interest will continue to accrue on loans past due 90 days or more if the collateral is adequate to cover principal and interest, and the loan is in the process of collection. Interest accrued, but not collected, as of the date of placement on nonaccrual status, is generally reversed and charged against interest income, unless fully collateralized. Subsequent payments received are either applied to the outstanding principal balance or recorded as interest income, depending on management's assessment of the ultimate collectability of principal. Loans are returned to accrual status, for all loan classes, when all the principal and interest amounts contractually due are brought current, the loans have performed in accordance with the contractual terms of the note for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is reasonably assured. Past due status is based on contract terms of the loan.
The Company is required to evaluate, based on the accounting for loan modifications, whether the borrower is experiencing financial difficulty and if the modification results in a more-than-insignificant direct change in the contractual
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cash flows and represents a new loan or a continuation of an existing loan, which the Company refers to these loans as "financial difficulty modifications" or "FDMs."
The following table presents the Company's risk elements and relevant asset quality ratios at September 30, 2026 and December 31, 2025:
|
September 30, 2026 |
December 31, 2025 |
||||||||||
| Nonaccrual loans | $ | 22,919 | $ | 28,031 | |||||||
| OREO | - | - | |||||||||
| Total nonperforming assets | 22,919 | 28,031 | |||||||||
| FDMs still accruing | 1,629 | 1,253 | |||||||||
|
Loans past due 90 days or more and still accruing
|
591 | 1,040 | |||||||||
| Total nonperforming and other risk assets ("total risk assets") | $ | 25,139 | $ | 30,324 | |||||||
| Loans 30-89 days past due and still accruing | $ | 4,548 | $ | 19,069 | |||||||
| Asset quality ratios: | |||||||||||
| Total nonperforming loans to total loans | 0.54 | % | 0.70 | % | |||||||
| Total nonperforming assets to total assets | 0.40 | % | 0.51 | % | |||||||
| Total nonperforming assets to total loans and OREO | 0.54 | % | 0.70 | % | |||||||
| Total risk assets to total loans and OREO | 0.60 | % | 0.75 | % | |||||||
| Total risk assets to total assets | 0.44 | % | 0.55 | % | |||||||
| ACL to total loans | 1.11 | % | 1.19 | % | |||||||
| ACL to nonperforming loans | 204.09 | % | 170.10 | % | |||||||
| ACL to nonperforming loans and FDMs still accruing | 190.55 | % | 162.82 | % | |||||||
|
Net charge-offs to total average loans (1)
|
0.10 | % | 0.03 | % | |||||||
(1) Annualized
Nonperforming assets include nonaccrual loans and foreclosed real estate. Risk assets, which include nonperforming assets, FDMs still accruing and loans past due 90 days or more and still accruing, totaled $25.1 million at September 30, 2026, a decrease of $5.2 million from $30.3 million at December 31, 2025. Nonaccrual loans decreased by $5.1 million from December 31, 2025 to September 30, 2026 due primarily to repayments of $6.1 million, net charge offs of $3.1 million and upgrades to accrual status of $1.4 million, partially offset by transfers to nonaccrual status of $5.5 million. During the nine months ended September 30, 2026, two loans totaling $1.1 million were transferred into OREO, which included a commercial real estate property of $847 thousand and a residential mortgage loan of $208 thousand. The properties were sold during the third quarter of 2026.
At September 30, 2026, the Company had $6.5 million in loan modifications meeting the FDM criteria compared to $6.3 million at December 31, 2025. There were $5.9 million and $5.0 million in FDM loans, modified in the prior twelve months, in nonaccrual status at September 30, 2026 and December 31, 2025, respectively. During the nine months ended September 30, 2026, the Company extended modifications totaling $6.5 million to six borrowers experiencing financial difficulty that had a more-than-insignificant direct change in the contractual cash flows of the loan.
To monitor ongoing risk associated with its loan portfolio and specific loans within the segments, management uses an internal grading system. The first several rating categories, representing the lowest risk to the Bank, are combined and given a "Pass" rating. Management generally follows regulatory definitions in assigning criticized ratings to loans, including "Special Mention," "Substandard," "Doubtful" or "Loss."
Special Mention loans increased by $33.2 million from $108.3 million at December 31, 2025 to $141.5 million at September 30, 2026. During the nine months ended September 30, 2026, there were net downgrades of $51.2 million partially offset by repayments of $18.0 million. Classified loans totaled $45.2 million at September 30, 2026, or 1.1% of total loans outstanding, reflecting a decrease from $58.4 million, or 1.5% of total loans outstanding, at December 31, 2025.
Non-IEL substandard loans are performing loans, which have characteristics that cause management concern over the ability of the borrower to perform under present loan repayment terms and which may result in the reporting of these loans as nonperforming, or individually evaluated, loans in the future. Generally, management feels that substandard loans that are currently performing and not considered individually evaluated result in some doubt as to the borrower's ability to continue to
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perform under the terms of the loan and represent potential problem loans. Non-IEL substandard loans totaled $22.1 million at September 30, 2026, a decrease of $8.1 million from $30.2 million at December 31, 2025 due primarily to repayments of $5.9 million and net upgrades of $2.1 million. The Substandard-IEL category decreased by $5.1 million from $28.2 million at December 31, 2025 to $23.1 million at September 30, 2026, primarily due to repayments of $10.1 million and charge offs of $3.1 million, partially offset by net downgrades of $8.1 million.
The following table presents the amortized cost basis of nonaccrual loans, according to loan class, with and without reserves on individually evaluated loans at September 30, 2026 and December 31, 2025. At September 30, 2026 and December 31, 2025, there was a nominal specific reserve on a nonaccrual loan, excluding the ACL recorded on acquired PCD loans.
| September 30, 2026 | December 31, 2025 | ||||||||||||||||||||||||||||||||||||||||||||||
| Nonaccrual loans with a related ACL | Nonaccrual loans with no related ACL | Total nonaccrual loans | Loans Past Due 90+ Accruing | Nonaccrual loans with a related ACL | Nonaccrual loans with no related ACL | Total nonaccrual loans | Loans Past Due 90+ Accruing | ||||||||||||||||||||||||||||||||||||||||
| Commercial real estate: | |||||||||||||||||||||||||||||||||||||||||||||||
| Owner-occupied | $ | 227 | $ | 1,997 | $ | 2,224 | $ | - | $ | 227 | $ | 4,901 | $ | 5,128 | $ | 68 | |||||||||||||||||||||||||||||||
| Non-owner occupied | - | 387 | 387 | - | - | 445 | 445 | - | |||||||||||||||||||||||||||||||||||||||
| Multi-family | - | 123 | 123 | - | 133 | - | 133 | - | |||||||||||||||||||||||||||||||||||||||
| Non-owner occupied residential | - | 262 | 262 | - | - | 455 | 455 | - | |||||||||||||||||||||||||||||||||||||||
| Acquisition and development: | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial and land development | 2,246 | 4,730 | 6,976 | - | 3,005 | 5,239 | 8,244 | - | |||||||||||||||||||||||||||||||||||||||
| Agricultural | - | 5 | 5 | - | - | 9 | 9 | - | |||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 93 | 2,687 | 2,780 | - | 1,197 | 2,663 | 3,860 | - | |||||||||||||||||||||||||||||||||||||||
| Residential mortgage: | |||||||||||||||||||||||||||||||||||||||||||||||
| First lien | - | 6,648 | 6,648 | 327 | - | 6,100 | 6,100 | 431 | |||||||||||||||||||||||||||||||||||||||
| Home equity - term | - | 129 | 129 | - | - | 182 | 182 | - | |||||||||||||||||||||||||||||||||||||||
| Home equity - lines of credit | - | 3,382 | 3,382 | - | - | 3,473 | 3,473 | 190 | |||||||||||||||||||||||||||||||||||||||
| Other - term | - | - | - | 264 | - | - | - | 346 | |||||||||||||||||||||||||||||||||||||||
| Installment and other loans | - | 3 | 3 | - | 2 | - | 2 | 5 | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 2,566 | $ | 20,353 | $ | 22,919 | $ | 591 | $ | 4,564 | $ | 23,467 | $ | 28,031 | $ | 1,040 | |||||||||||||||||||||||||||||||
The following table presents our exposure to relationships that are individually evaluated and the partial charge-offs taken to date and specific reserves established on those relationships at September 30, 2026 and December 31, 2025:
|
# of Relationships |
Individually Evaluated Loans |
Partial Charge-offs to Date |
Specific Reserves |
||||||||||||||||||||
| September 30, 2026 | |||||||||||||||||||||||
| Relationships greater than $1,000,000 | 3 | $ | 7,814 | $ | 1,724 | $ | 2,167 | ||||||||||||||||
| Relationships greater than $500,000 but less than $1,000,000 | 3 | 2,004 | 205 | - | |||||||||||||||||||
| Relationships greater than $250,000 but less than $500,000 | 14 | 4,910 | 234 | - | |||||||||||||||||||
| Relationships less than $250,000 | 137 | 8,345 | 1,088 | 125 | |||||||||||||||||||
| 157 | $ | 23,073 | $ | 3,251 | $ | 2,292 | |||||||||||||||||
| December 31, 2025 | |||||||||||||||||||||||
| Relationships greater than $1,000,000 | 4 | $ | 10,573 | $ | 471 | $ | 2,173 | ||||||||||||||||
| Relationships greater than $500,000 but less than $1,000,000 | 9 | 6,601 | 518 | 832 | |||||||||||||||||||
| Relationships greater than $250,000 but less than $500,000 | 10 | 3,371 | - | - | |||||||||||||||||||
| Relationships less than $250,000 | 124 | 7,645 | 539 | 127 | |||||||||||||||||||
| 147 | $ | 28,190 | $ | 1,528 | $ | 3,132 | |||||||||||||||||
The Company takes partial charge-offs on collateral-dependent loans when carrying value exceeds estimated fair value, as determined by the most recent appraisal adjusted for current (within the quarter) conditions, less costs to dispose. Specific reserves remain in place if updated appraisals are pending and represent management's estimate of potential loss.
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Internal loan reviews are completed annually on all commercial relationships, secured by commercial real estate, with a committed loan balance in excess of $2.0 million, which includes confirmation of risk rating by an independent credit officer. In addition, all commercial relationships greater than $500 thousand rated Substandard, Doubtful or Loss are reviewed and corresponding risk ratings are reaffirmed by the Bank's Problem Loan Committee, with subsequent reporting to the Management ERM Committee and the Board ERM Committee.
In its individually evaluated loan analysis, the Company determines the extent of any full or partial charge-offs that may be required, or any reserves that may be needed. The determination of the Company's charge-offs or specific reserves include an evaluation of the outstanding loan balance and the related collateral securing the credit. Through a combination of collateral securing the loans and partial charge-offs taken to date, the Company believes that it has adequately provided for the potential losses that it may incur on these relationships at September 30, 2026. However, over time, additional information may result in increased reserve allocations or, alternatively, it may be deemed that the reserve allocations exceed those that are needed.
Credit Risk Management
Allowance for Credit Losses on Loans
The Company maintains the ACL at a level deemed adequate by management for expected credit losses. The Company's ACL is calculated quarterly, with any adjustment recorded to the provision for credit losses in the unaudited condensed consolidated statements of income. A comprehensive analysis of the ACL is performed by the Company on a quarterly basis. Management evaluates the adequacy of the ACL utilizing a defined methodology to determine if it properly addresses the current and expected risks in the loan portfolio, which considers the performance of borrowers and specific evaluation of individually evaluated loans, including historical loss experiences, trends in delinquencies, nonperforming loans and other risk assets, and the qualitative factors. Risk factors are regularly reviewed and adjusted, as needed, by management when conditions support a change. Management believes its approach properly addresses relevant accounting and bank regulatory guidance for loans both collectively and individually evaluated. The results of the comprehensive analysis, including recommended changes, are governed by the Company's Reserve Adequacy Committee and subsequently presented to the Board and Management ERM Committees.
The ACL is evaluated based on a review of the collectability of loans in light of historical experience; the nature and volume of the loan portfolio; adverse situations that may affect a borrower's ability to repay; estimated value of any underlying collateral; and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A description of the methodology for establishing the allowance and provision for credit losses and related procedures in establishing the appropriate level of reserve is included in Note 4, Loans and Allowance for Credit Losses, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information."
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The following table presents the activity in the ACL for the three and nine months ended September 30, 2026 and 2025:
| Commercial | Consumer | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Commercial Real Estate |
Acquisition and Development |
Agricultural |
Commercial and Industrial |
Municipal | Total |
Residential Mortgage |
Installment and Other |
Total | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2026 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, beginning of period | $ | 25,279 | $ | 5,431 | $ | 200 | $ | 6,105 | $ | 422 | $ | 37,437 | $ | 8,670 | $ | 525 | $ | 9,195 | $ | 46,632 | |||||||||||||||||||||||||||||||||||||||
| Provision for credit losses | 562 | (739) | (8) | 1,281 | 14 | 1,110 | (49) | 65 | 16 | 1,126 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Charge-offs | (234) | - | - | (744) | - | (978) | - | (90) | (90) | (1,068) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Recoveries | - | - | - | 35 | - | 35 | 9 | 41 | 50 | 85 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, end of period | $ | 25,607 | $ | 4,692 | $ | 192 | $ | 6,677 | $ | 436 | $ | 37,604 | $ | 8,630 | $ | 541 | $ | 9,171 | $ | 46,775 | |||||||||||||||||||||||||||||||||||||||
| September 30, 2025 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, beginning of period | $ | 26,163 | $ | 5,585 | $ | 160 | $ | 7,484 | $ | 385 | $ | 39,777 | $ | 7,603 | $ | 518 | $ | 8,121 | $ | 47,898 | |||||||||||||||||||||||||||||||||||||||
| Provision for credit losses | 656 | (106) | (26) | (567) | (10) | (53) | 234 | 215 | 449 | 396 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Charge-offs | (154) | - | - | (29) | - | (183) | (134) | (201) | (335) | (518) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Recoveries | 7 | - | - | 255 | - | 262 | 9 | 58 | 67 | 329 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, end of period | $ | 26,672 | $ | 5,479 | $ | 134 | $ | 7,143 | $ | 375 | $ | 39,803 | $ | 7,712 | $ | 590 | $ | 8,302 | $ | 48,105 | |||||||||||||||||||||||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2026 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, beginning of period | $ | 25,552 | $ | 6,179 | $ | 127 | $ | 7,114 | $ | 328 | $ | 39,300 | $ | 7,708 | $ | 673 | $ | 8,381 | $ | 47,681 | |||||||||||||||||||||||||||||||||||||||
| Provision for credit losses | 306 | (734) | 65 | 1,433 | 108 | 1,178 | 919 | 95 | 1,014 | 2,192 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Charge-offs | (271) | (753) | - | (1,963) | - | (2,987) | (21) | (332) | (353) | (3,340) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Recoveries | 20 | - | - | 93 | - | 113 | 24 | 105 | 129 | 242 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, end of period | $ | 25,607 | $ | 4,692 | $ | 192 | $ | 6,677 | $ | 436 | $ | 37,604 | $ | 8,630 | $ | 541 | $ | 9,171 | $ | 46,775 | |||||||||||||||||||||||||||||||||||||||
| September 30, 2025 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, beginning of period | $ | 29,551 | $ | 6,601 | $ | 110 | $ | 6,190 | $ | 320 | $ | 42,772 | $ | 5,240 | $ | 677 | $ | 5,917 | $ | 48,689 | |||||||||||||||||||||||||||||||||||||||
| Provision for credit losses | (2,554) | (1,124) | 55 | 698 | 55 | (2,870) | 2,455 | 466 | 2,921 | 51 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Charge-offs | (340) | - | (31) | (741) | - | (1,112) | (134) | (669) | (803) | (1,915) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Recoveries | 15 | 2 | - | 996 | - | 1,013 | 151 | 116 | 267 | 1,280 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, end of period | $ | 26,672 | $ | 5,479 | $ | 134 | $ | 7,143 | $ | 375 | $ | 39,803 | $ | 7,712 | $ | 590 | $ | 8,302 | $ | 48,105 | |||||||||||||||||||||||||||||||||||||||
The ACL totaled $46.8 million at September 30, 2026, a decrease of $1.3 million from $48.1 million at September 30, 2025. The ACL as a percentage of the total loan portfolio was 1.11% at September 30, 2026 compared to 1.21% at September 30, 2025.
The Company takes partial charge-offs on collateral-dependent loans when carrying value exceeds estimated fair value, as determined by the most recent appraisal adjusted for current (within the quarter) conditions, less costs to dispose. Specific reserves remain in place if updated appraisals are pending, and represent management's estimate of potential loss. In addition to the specific reserve allocations on individually evaluated loans noted previously, 19 loans, with aggregate outstanding principal balances of $5.7 million, had cumulative partial charge-offs to the ACL totaling $3.3 million as of September 30, 2026. As updated appraisals are received on collateral-dependent loans, partial charge-offs are taken to the extent the loans' principal balance exceeds their fair value.
Management believes the allocation of the ACL among the various loan classes adequately reflects the life expected credit losses in each loan class and is based on the methodology outlined in Note 1, Summary of Significant Accounting Policies, and Note 4, Loans and Allowance for Credit Losses, to the Consolidated Financial Statements under Part I, Item 1, "Financial Information." Management re-evaluates and makes enhancements to its reserve methodology to better reflect the risks inherent in the different segments of the portfolio, particularly in light of increased charge-offs, with noticeable differences between the different loan classes. Management believes these enhancements to the ACL methodology improve the accuracy of quantifying the expected credit losses inherent in the portfolio. Management charges actual loan losses to the reserve and bases the provision for credit losses on its overall analysis.
Management believes the Company's ACL is adequate based on currently available information. Future adjustments to the ACL and enhancements to the methodology may be necessary due to changes in economic conditions, regulatory guidance, or management's assumptions as to future delinquencies or loss rates.
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Deposits
Total deposits increased by $53.1 million and totaled $4.6 billion at September 30, 2026 compared to $4.5 billion at December 31, 2025. Money market deposits, noninterest bearing demand deposits and interest-bearing demand deposits increased by $65.4 million, $25.2 million and $23.4 million, respectively, from December 31, 2025 to September 30, 2026. Time deposits and savings deposits decreased by $46.4 million and $14.4 million, respectively, from December 31, 2025 to September 30, 2026. During the nine months ended September 30, 2026, brokered money market deposits and time deposits increased by $25.1 million and $21.4 million, respectively.
Borrowings
In addition to deposits, the Company uses borrowing sources to meet liquidity needs and for temporary funding. Sources of short-term borrowings include the FHLB of Pittsburgh, federal funds purchased and the FRB discount window. Short-term borrowings also may include securities sold under agreements to repurchase with deposit clients, in which a client sweeps a portion of a deposit balance into a repurchase agreement, which is a secured borrowing with a pool of securities pledged against the balance.
The Company also utilizes long-term debt, consisting principally of FHLB fixed and amortizing advances, to fund its balance sheet with original maturities greater than one year. Prior to entering into long-term borrowings, the Company evaluates its funding needs, interest rate movements, the cost of options and the availability of attractive structures.
FHLB advances increased by $142.6 million to $417.0 million at September 30, 2026 compared to $274.4 million at December 31, 2025. The Bank seeks to maintain sufficient liquidity to ensure client needs can be addressed in a timely basis.
On June 30, 2026, the Company redeemed its $31.0 million outstanding 4.50% fixed-to-floating rate subordinated notes, which were assumed in the Merger. The subordinated notes had a fixed rate of interest equal to 4.50% until December 30, 2025. After that date, the variable rate of interest equaled the three-month CME term SOFR rate plus 4.04%. At December 31, 2025, the interest rate on the subordinated notes was 8.06%. At redemption on June 30, 2026, the interest rate on the subordinated notes was 7.72%.
The Company also has junior subordinated trust preferred debt of $10.3 million. In June 2006, Codorus Valley formed CVB Statutory Trust No. II, a wholly-owned special purpose entity whose sole purpose was to facilitate a pooled trust preferred debt issuance of $7.2 million with a stated maturity of July 7, 2036 and a variable rate of three-month CME term SOFR rate, plus a spread adjustment of 0.26161% and a margin of 1.54% through maturity. In November 2004, Codorus Valley formed CVB Statutory Trust No. I to facilitate a pooled trust preferred debt issuance of $3.1 million with a stated maturity of December 15, 2034 and a variable rate of three-month CME term SOFR rate, plus a spread adjustment of 0.26161% and a margin of 2.02% through maturity.
Shareholders' Equity, Capital Adequacy and Regulatory Matters
Capital management in a regulated financial services industry must properly balance return on equity to its shareholders while maintaining sufficient levels of capital and related risk-based regulatory capital ratios to satisfy statutory regulatory requirements. The Company's capital management strategies have been developed to provide attractive rates of returns to its shareholders, while the Bank remaining "well-capitalized" under applicable banking regulations.
Shareholders' equity totaled $605.2 million at September 30, 2026, an increase of $13.7 million from $591.5 million at December 31, 2025. The increase was primarily attributable to net income of $65.8 million and share-based compensation activity of $2.6 million, partially offset by dividends paid of $17.6 million and other comprehensive losses of $37.1 million for the nine months ended September 30, 2026. Other comprehensive losses included an after-tax increase of $36.1 million from net unrealized losses on investment securities and $1.0 million in net unrealized losses from interest rate swaps designated as cash flow hedges. For the nine months ended September 30, 2026, total comprehensive income totaled $28.7 million, a decrease of $39.4 million from total comprehensive income of $68.1 million for the same period in 2025. The decrease was due primarily to an increase in after-tax net unrealized losses on investment securities of $46.0 million, partially offset by an increase in net income of $6.4 million and a decrease in after-tax net unrealized losses on interest rate swaps designated as cash flow hedges of $111 thousand, between the comparative periods. The increase in net unrealized losses on investment securities was primarily caused by an increase in market rates and widening of spreads during 2026.
At September 30, 2026, book value per common share was $30.77 compared to $30.32 at December 31, 2025. Tangible book value per share increased from $25.21 at December 31, 2025 to $25.96 at September 30, 2026. See "Supplemental Reporting of Non-GAAP Measures."
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The Company routinely evaluates its capital levels in light of its risk profile to assess its capital needs. The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. At September 30, 2026 and December 31, 2025, the Bank was considered well-capitalized under applicable banking regulations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Prompt corrective action provisions are not applicable to bank holding companies, including financial holding companies.
Note 11, Shareholders' Equity and Regulatory Capital, to the Notes to Unaudited Condensed Consolidated Financial Statements under Part I, Item 1, "Financial Information," includes a table presenting capital amounts and ratios for the Company and the Bank at September 30, 2026 and December 31, 2025.
In addition to the minimum capital ratio requirement and minimum capital ratio to be well-capitalized presented in the referenced table in Note 11, the Bank must maintain a capital conservation buffer as more fully described in the Company's Annual Report on Form 10-K for the year ended December 31, 2025, Item 1 - Business, under the topic Basel III Capital Rules. At September 30, 2026, the Company's and the Bank's capital conservation buffers, based on the most restrictive Total Capital to risk weighted assets capital ratio, were 5.3% and 5.2%, respectively, which are above the regulatory requirement of 2.50%.
Liquidity
The primary function of asset/liability management is to ensure adequate liquidity and manage the Company's sensitivity to changing interest rates. Liquidity management involves the ability to meet the cash flow requirements of clients who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. The Company's primary sources of funds consist of deposit inflows, loan repayments, borrowings from the FHLB of Pittsburgh and maturities and prepayments of investment securities. While maturities and scheduled amortization of loans and investment securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
The Company regularly adjusts its investments in liquid assets based upon its assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and investment securities and the objectives of its asset/liability management policy. The Company's most liquid assets are cash and cash equivalents.
At September 30, 2026, cash and cash equivalents totaled $125.6 million compared to $149.8 million at December 31, 2025. The decrease of $24.2 million primarily reflects the increase in loans of $187.7 million, partially offset by the increase in total borrowings, excluding the amortization of the fair value marks on the subordinated notes, of $87.4 million, net income of $65.8 million and an increase in deposits of $53.1 million for the nine months ended September 30, 2026.
Unencumbered debt securities totaled $257.0 million at September 30, 2026 compared to $396.2 million at December 31, 2025. At September 30, 2026 and December 31, 2025, the Company had $147.3 million and $88.8 million, respectively, of investment securities pledged at the FRB Discount Window, with no associated borrowings outstanding. The Company's maximum borrowing capacity from the FHLB of Pittsburgh increased by $94.9 million and was $2.1 billion at September 30, 2026 and $2.0 billion at December 31, 2025, of which $417.0 million and $275.0 million in FHLB advances and letters of credit were outstanding at these same periods, respectively.
The Company's ability to borrow from the FHLB is dependent on having sufficient qualifying collateral, which consists of loans primarily secured by real estate. In addition, the Company had $10.0 million in available unsecured lines of credit with other banks at both September 30, 2026 and December 31, 2025. The Bank regularly tests its various sources of funding to ensure accessibility.
Supplemental Reporting of Non-GAAP Measures
Management believes providing certain "non-GAAP" information will assist investors in their understanding of the effect on recent financial results from non-recurring charges.
As a result of prior acquisitions, the Company had intangible assets consisting of goodwill and core deposit and other intangible assets totaling $101.2 million and $107.7 million at September 30, 2026 and December 31, 2025, respectively. The Company did not incur merger-related expenses during the three and nine months ended September 30, 2026. For the three and nine months ended September 30, 2025, the Company incurred merger-related expenses of zero and $2.6 million, respectively.
On June 30, 2026, the Company redeemed its $31.0 million outstanding 4.50% fixed-to-floating rate subordinated notes, which were assumed from the Company's merger with Codorus Valley. During the nine months ended September 30, 2026, the
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Company amortized the remaining fair value mark of $1.6 million to interest expense as a result of the redemption, which reduced net interest margin.
Tangible book value per common share and the impact of the accelerated amortization of fair value marks on net interest margin and merger-related expenses on net income and associated ratios, as used by the Company in this supplemental reporting presentation, are determined by methods other than in accordance with GAAP. While the Company's management believes this information is a useful supplement to the GAAP-based measures reported in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, readers are cautioned that this non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for financial measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of our results and financial condition as reported under GAAP, nor are such measures necessarily comparable to non-GAAP performance measures that may be presented by other companies. This supplemental presentation should not be construed as an inference that our future results will be unaffected by similar adjustments to be determined in accordance with GAAP.
The increase in tangible book value per share (non-GAAP) from December 31, 2025 to September 30, 2026 is primarily due to net income of $65.8 million, partially offset by dividends paid of $17.6 million and other comprehensive loss, net of taxes, of $37.1 million. Other comprehensive loss increased due to net unrealized losses on AFS securities.
The following table presents the computation of each non-GAAP based measure shown together with its most directly comparable GAAP-based measure.
| September 30, 2026 | December 31, 2025 | |||||||||||||
| Tangible Book Value per Common Share | ||||||||||||||
| Shareholders' equity (most directly comparable GAAP-based measure) | $ | 605,200 | $ | 591,535 | ||||||||||
| Less: Goodwill | 69,751 | 69,751 | ||||||||||||
| Other intangible assets | 31,457 | 37,990 | ||||||||||||
| Related tax effect | (6,606) | (7,978) | ||||||||||||
| Tangible common equity (non-GAAP) | $ | 510,598 | $ | 491,772 | ||||||||||
| Common shares outstanding | 19,671 | 19,507 | ||||||||||||
| Book value per share (most directly comparable GAAP based measure) | $ | 30.77 | $ | 30.32 | ||||||||||
| Intangible assets per share | 4.81 | 5.11 | ||||||||||||
| Tangible book value per share (non-GAAP) | $ | 25.96 | $ | 25.21 | ||||||||||
| Adjusted Net Income and Adjusted Diluted Earnings Per Share | ||||||||||||||
| Nine Months Ended | ||||||||||||||
|
September 30 2026 |
September 30 2025 |
|||||||||||||
| Net income (most directly comparable GAAP-based measure) | $ | 65,782 | $ | 59,364 | ||||||||||
| Plus: Merger-related expenses | - | 2,617 | ||||||||||||
| Less: Related tax effect | - | (589) | ||||||||||||
| Adjusted net income (non-GAAP) | $ | 65,782 | $ | 61,392 | ||||||||||
| Weighted average shares - diluted (most directly comparable GAAP-based measure) | 19,449 | 19,345 | ||||||||||||
| Diluted earnings per share (most directly comparable GAAP-based measure) | $ | 3.38 | $ | 3.07 | ||||||||||
| Weighted average shares - diluted (non-GAAP) | 19,449 | 19,345 | ||||||||||||
| Diluted earnings per share, adjusted (non-GAAP) | n/a | $ | 3.17 | |||||||||||
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| Nine Months Ended September 30, 2026 | |||||||||||||||||||||||||||||||||||
| Average Balance - most directly comparable GAAP-based measure |
Taxable-Equivalent Interest - most directly comparable GAAP-based measure |
Less: accelerated amortization on fair value mark from subordinated notes redemption |
Adjusted Taxable-Equivalent Interest - Non-GAAP |
Taxable-Equivalent Rate - most directly comparable GAAP-based measure |
Adjusted Taxable-Equivalent Rate - Non-GAAP |
||||||||||||||||||||||||||||||
| Total interest-earning assets | $ | 5,148,763 | $ | 228,516 | $ | - | $ | 228,516 | 5.93 | % | 5.93 | % | |||||||||||||||||||||||
| Total interest-bearing liabilities | $ | 4,000,575 | $ | 75,646 | $ | (1,624) | $ | 74,022 | 2.53 | % | 2.47 | % | |||||||||||||||||||||||
| Taxable-equivalent net interest income / net interest spread | $ | 152,870 | $ | 1,624 | $ | 154,494 | 3.40 | % | 3.46 | % | |||||||||||||||||||||||||
| Taxable-equivalent net interest margin | 3.97 | % | 4.01 | % | |||||||||||||||||||||||||||||||
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Orrstown Financial Services Inc. published this content on November 09, 2026, and is solely responsible for the information contained herein. Distributed via EDGAR on November 09, 2026 at 21:43 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]