Orrstown Financial Services Inc.
11/06/2025 | Press release | Distributed by Public on 11/06/2025 07:40
Quarterly Report for Quarter Ending September 30, 2025 (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, 2024, included in our Annual Report on Form 10-K filed with the SEC on March 31, 2025. 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, 2025, the Company had total assets of $5.5 billion, total liabilities of $4.9 billion and total shareholders' equity of $571.9 million as reported in the unaudited consolidated balance sheets.
On July 1, 2024, the Company acquired Codorus Valley and its wholly-owned bank subsidiary PeoplesBank, A Codorus Valley Company.
For the three months ended September 30, 2025 and 2024, the Company had net income of $21.9 million and a net loss of $7.9 million, respectively. For the nine months ended September 30, 2025 and 2024, the Company had net income of $59.4 million and $8.4 million, respectively.
Diluted earnings per share were $1.13 for the three months ended September 30, 2025 compared to diluted loss per share of $0.41 for the three months ended September 30, 2024. Diluted earnings per share were $3.07 and $0.62 for the nine months ended September 30, 2025 and 2024, respectively.
For the three months ended September 30, 2025 and 2024, the Company incurred merger-related expenses of zero and $17.0 million, respectively. For the nine months ended September 30, 2025 and 2024, the Company incurred merger-related expenses of $2.6 million and $18.8 million, respectively. The merger-related expenses are included in non-interest expenses in the unaudited consolidated statements of operations.
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 and the U.S. federal government shutdown; 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, 2024, and our Quarterly Reports on Form 10-Q under the sections titled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in other filings made with the SEC. The statements are valid only as of the date hereof and we disclaim any obligation to update this information.
Economic Climate, Inflation and Interest Rates
Due to the limited availability of economic data from the federal government, some of the information provided below is from the second quarter of 2025.
Preliminary real GDP for the second quarter of 2025 increased by 3.8% on an annualized basis compared to an increase of 2.8% during the third quarter of 2024. The increase during the second quarter of 2025 compared to the prior periods was primarily driven by consumer spending and a decrease in imports. There continues to be concerns regarding the potential impact of wide-ranging tariffs on the U.S. economy, the impact on inflation, signs of slowing in the job labor market and the potential of a recession. The personal consumption expenditures ("PCE") price index increased by 2.1% in the second quarter of 2025 compared to an increase of 1.5% for the third quarter of 2024. Excluding food and energy prices, the PCE price index increased by 2.6% in the second quarter of 2025 compared to 2.2% in the third quarter of 2024.
The national unemployment rate was 4.3% in August 2025 compared to 4.1% in June 2025 and 4.1% in September 2024. Within the Company's geographic footprint, the unemployment rate in Pennsylvania was 4.0% in August 2025 compared to 4.0% in March 2025 and 3.4% in September 2024. The unemployment rate increased in Maryland from 2.9% in September 2024 and 3.3% in June 2025 to 3.6% in August 2025; however, it remains below the national level. These state-wide unemployment rates are consistent with those experienced by the counties in which the Company operates branches and other corporate offices. There were job gains nationally in healthcare during the third quarter of 2025.
The FOMC cut the Federal Funds rate by 50 basis points in September 2024, 25 basis points in December 2024, 25 basis points in September 2025 and 25 basis points in October 2025. The Federal Funds rate had remained unchanged from the prior rate increase of 25 basis points in July 2023. The change was based on the FOMC's assessment of inflation, the unemployment rate and jobs report.
At September 30, 2025, the 10-year Treasury bond yield was 4.16%, a decrease from 4.24% at June 30, 2025, but elevated from 3.81% at September 30, 2024.
On July 4, 2025, H.R. 1, referred to as the One Big Beautiful Bill Act (the "Act"), was enacted into law. The Act includes tax reform provisions, including making permanent certain business tax provisions of the U.S. Tax Cuts and Jobs Act. We are currently evaluating the Act's impact on our results of operations and financial condition.
The majority of the assets and liabilities of a financial institution are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. However, inflation does have an impact on the Company, particularly with respect to the growth of total assets and noninterest expenses, which tend to rise during periods of general inflation. Risks also exist due to supply and demand imbalances, the interest rate environment, geopolitical tensions, uncertainty related to the impact of tariffs and the shutdown of the U.S. government,the scope and timing of changes to fiscal, regulatory and trade policies.
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 and accounting for income taxes.
Business Combinations
The Company accounts for its mergers and acquisitions using the acquisition method of accounting under the provisions of the FASB ASC Topic 805, Business Combinations. Under ASC 805, the assets acquired, including identified intangible assets such as core deposit intangibles and customer list intangibles, and liabilities assumed in a business combination are recognized at their acquisition-date fair value, while transaction costs and restructuring costs associated with the business combination are expensed as incurred. The excess of the merger consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill.
The valuations are based upon management's assumptions of future growth rates, future attrition, discount rates and other relevant factors, which involves a significant level of estimation and uncertainty. In addition, management engaged independent third-party specialists to assist in the development of the fair values of the acquired assets and assumed liabilities. The preliminary estimates of fair values may be adjusted for a period of time subsequent to the acquisition date if new information is obtained about facts and circumstances that existed as of the merger date that, if known, would have affected the measurement of the amounts recognized as of that date. Adjustments would be recorded to goodwill during the current reporting period. Examples of the impacted acquired loans and assumed liabilities includes loans, deposits, identifiable intangible assets, borrowings and certain other assets and liabilities.
For acquired loans at the merger date, management evaluated and classified loans based upon whether the loans had experienced a more-than-insignificant amount of credit deteriorating since origination. To determine the fair value of the loans, significant estimates and assumptions were applied, including projected cash flows, discount rates, repayment speeds, credit loss severity rates, default rates and realizable collateral values. At acquisition, the allowance on PCD loans is booked directly to the ACL using the Company's existing ACL methodology, but there is no initial impact to net income. Subsequent to acquisition, future changes in estimates of expected credit losses on PCD loans are recognized as provision expense (or reversal of provision expense). The ACL for non-PCD loans is recognized as a provision for credit losses in the same reporting period as the business acquisition, using the Company's existing ACL methodology.
These critical accounting estimates are discussed in detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2024. 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, 2024.
Accounting 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. In accordance with ASU 2016-13, 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 between commercial and consumer. 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 collateral securing the loans, and general economic conditions.
The ACL for loans collectively evaluated is measured using a lifetime expected loss rate model that considers historical loss performance and past events in addition to forecasts of future economic conditions. Based on management's analysis, adjustments may be applied for additional factors impacting the risk of loss in the loan portfolio beyond the quantitatively
calculated reserve on collectively evaluated loans. As the quantitative reserve calculation incorporates historical conditions, management may consider if an additional or reduced reserve is warranted and make adjustments through qualitative risk factors based on current and expected conditions. Management uses the best available information to complete these evaluations; however, future adjustments to the ACL may be necessary if conditions significantly differ from the assumptions used in making the evaluations.
Utilizing a third-party vendor, the ACL for loans collectively evaluated is measured using a lifetime expected loss rate model. The model applies the neutral scenario, which incorporates historical loss performance and past events in addition to forecasted 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 from 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 sourced from the Federal Reserve Economic Database. The reasonable and supportable forecasts of the selected economic metrics are then input into the regression model to calculate an expected default rate. The expected default rates are then applied to expected loan balances estimated from contractual repayment terms and expected prepayments. The prepayment and curtailment assumptions adjust the contractual terms of the loan to arrive at the expected cash flows, which are obtained from the third-party vendor. The model incorporates an annualized prepayment rate and a twelve-month rate for curtailment based on a "statistical tendency to repay." Changes in the prepayment and curtailment speeds that vary from the current model inputs could result in an inaccurate forecast of expected credit losses. The development and validation of credit models also included determining the length of the reasonable and supportable forecast and regression period and utilizing national peer group historical loss rates, applying a four-quarter forecast period followed by a four-quarter straight-line reversion period.
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. Accordingly, 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 operations. 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.
RESULTS OF OPERATIONS
Three months ended September 30, 2025 compared with three months ended September 30, 2024
Summary
Net income totaled $21.9 million for the three months ended September 30, 2025 compared to net loss of $7.9 million for the same period in 2024. Diluted earnings per share for the three months ended September 30, 2025 totaled $1.13 compared to diluted loss per share of $0.41 for the three months ended September 30, 2024. The net accretion impact of purchase accounting marks on loans, securities, deposits and borrowings was $5.8 million for the three months ended September 30, 2025 compared to $6.8 million for the three months ended September 30, 2024. For the three months ended September 30, 2024, the Company incurred merger-related expenses of $17.0 million, provision for credit losses on acquired non-PCD loans of $15.5 million and retirement expenses for one executive of $4.8 million, which were included in non-interest expenses in the unaudited condensed consolidated statements of operations. The Company did not incur merger-related or other non-recurring expenses for the three months ended September 30, 2025. Excluding these non-recurring expenses, net income and diluted earnings per share totaled $21.4 million and $1.11, respectively, for the three months ended September 30, 2024. See "Supplemental Reporting of Non-GAAP Measures" for additional information.
Net interest income totaled $51.0 million for the three months ended September 30, 2025 compared to $51.7 million for the three months ended September 30, 2024.
The provision for credit losses totaled $396 thousand and $13.7 million for the three months ended September 30, 2025 and 2024, respectively. For the three months ended September 30, 2024, the provision for credit losses increased primarily due to $15.5 million of reserves on acquired non-PCD loans as a result of the Merger, partially offset by a provision reversal of $1.8 million due to changes in qualitative factors, a change in the peer group utilized for the calculation and a reduction of $434 thousand in the required reserve for unfunded commitments.
Noninterest income totaled $13.4 million for the three months ended September 30, 2025 compared to $12.4 million for the three months ended September 30, 2024. Noninterest expenses totaled $36.3 million for the three months ended September 30, 2025 compared to $60.3 million for the three months ended September 30, 2024. The decrease of $24.0 million primarily reflects the impact from the Merger.
Income tax expense was $5.8 million for the three months ended September 30, 2025 compared to an income tax benefit of $2.0 million for the three months ended September 30, 2024. The Company's effective tax rate was 21.0% for the three months ended September 30, 2025 compared to 20.1% for the three months ended September 30, 2024.
Net Interest Income
Net interest income decreased by $709 thousand from $51.7 million for the three months ended September 30, 2024 to $51.0 million for the three months ended September 30, 2025. Interest income on loans decreased by $4.8 million from $70.6 million for the three months ended September 30, 2024 to $65.8 million for the three months ended September 30, 2025. Interest income on investment securities increased by $360 thousand from $9.9 million for the three months ended September 30, 2024 to $10.2 million for the three months ended September 30, 2025. Total interest expense decreased by $5.2 million from $31.3 million for the three months ended September 30, 2024 to $26.1 million for the three months ended September 30, 2025. Interest expense on deposits decreased by $6.0 million from $28.6 million for the three months ended September 30, 2024 to $22.6 million for the three months ended September 30, 2025. Interest expense on borrowings increased by $808 thousand to $3.5 million for the three months ended September 30, 2025 compared to $2.7 million for the three months ended September 30, 2024.
The following table presents net interest income, net interest spread and net interest margin for the three months ended September 30, 2025 and 2024 on a taxable-equivalent basis:
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Three Months Ended September 30, 2025
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Three Months Ended September 30, 2024
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Average Balance |
Taxable- Equivalent Interest |
Taxable- Equivalent Rate |
Average Balance |
Taxable- Equivalent Interest |
Taxable- Equivalent Rate |
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| Assets | |||||||||||||||||||||||||||||||||||
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Federal funds sold & interest-bearing bank balances
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$ | 101,728 | $ | 1,123 | 4.38 | % | $ | 184,465 | $ | 2,452 | 5.29 | % | |||||||||||||||||||||||
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Investment securities (1)(2)
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906,399 | 10,593 | 4.67 | 849,700 | 10,123 | 4.77 | |||||||||||||||||||||||||||||
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Loans (1)(3)(4)(5)
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3,979,044 | 65,975 | 6.58 | 3,989,259 | 70,849 | 7.07 | |||||||||||||||||||||||||||||
| Total interest-earning assets | 4,987,171 | 77,691 | 6.19 | 5,023,424 | 83,424 | 6.61 | |||||||||||||||||||||||||||||
| Other assets | 433,659 | 491,719 | |||||||||||||||||||||||||||||||||
| Total | $ | 5,420,830 | $ | 5,515,143 | |||||||||||||||||||||||||||||||
| Liabilities and Shareholders' Equity | |||||||||||||||||||||||||||||||||||
| Interest-bearing demand deposits | $ | 2,450,034 | 14,145 | 2.29 | $ | 2,554,743 | 16,165 | 2.52 | |||||||||||||||||||||||||||
| Savings deposits | 264,761 | 164 | 0.25 | 283,337 | 148 | 0.21 | |||||||||||||||||||||||||||||
| Time deposits | 897,416 | 8,330 | 3.68 | 1,014,628 | 12,290 | 4.82 | |||||||||||||||||||||||||||||
| Total interest-bearing deposits | 3,612,211 | 22,639 | 2.49 | 3,852,708 | 28,603 | 2.95 | |||||||||||||||||||||||||||||
| Securities sold under agreements to repurchase and federal funds purchased | 27,772 | 107 | 1.53 | 23,075 | 96 | 1.66 | |||||||||||||||||||||||||||||
| FHLB advances and other borrowings | 168,939 | 1,791 | 4.21 | 115,388 | 1,154 | 3.98 | |||||||||||||||||||||||||||||
| Subordinated notes and trust preferred debt | 68,749 | 1,597 | 9.21 | 68,399 | 1,437 | 8.36 | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 3,877,671 | 26,134 | 2.67 | 4,059,570 | 31,290 | 3.07 | |||||||||||||||||||||||||||||
| Noninterest-bearing demand deposits | 902,128 | 807,886 | |||||||||||||||||||||||||||||||||
| Other liabilities | 89,086 | 110,017 | |||||||||||||||||||||||||||||||||
| Total liabilities | 4,868,885 | 4,977,473 | |||||||||||||||||||||||||||||||||
| Shareholders' equity | 551,945 | 537,670 | |||||||||||||||||||||||||||||||||
| Total | $ | 5,420,830 | $ | 5,515,143 | |||||||||||||||||||||||||||||||
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Taxable-equivalent net interest income / net interest spread
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51,557 | 3.52 | % | 52,134 | 3.55 | % | |||||||||||||||||||||||||||||
| Taxable-equivalent net interest margin | 4.11 | % | 4.14 | % | |||||||||||||||||||||||||||||||
| Taxable-equivalent adjustment | (569) | (437) | |||||||||||||||||||||||||||||||||
| Net interest income | $ | 50,988 | $ | 51,697 | |||||||||||||||||||||||||||||||
| 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 $5.3 million and $7.3 million for the three months ended September 30, 2025 and 2024, respectively.
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Three Months Ended September 30, 2025 Versus 2024 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 | $ | (1,103) | $ | (226) | $ | (1,329) | |||||||||||
| Taxable securities | 801 | (439) | 362 | ||||||||||||||
| Tax-exempt securities | (71) | 179 | 108 | ||||||||||||||
| Loans | (182) | (4,692) | (4,874) | ||||||||||||||
| Total interest income | (555) | (5,178) | (5,733) | ||||||||||||||
| Interest Expense | |||||||||||||||||
| Interest-bearing demand deposits | (664) | (1,356) | (2,020) | ||||||||||||||
| Savings deposits | (10) | 26 | 16 | ||||||||||||||
| Time deposits | (1,424) | (2,536) | (3,960) | ||||||||||||||
| Total interest-bearing deposits | (2,098) | (3,866) | (5,964) | ||||||||||||||
| Securities purchases under agreements to repurchase and federal funds purchased | 20 | (9) | 11 | ||||||||||||||
| FHLB advances and other borrowings | 537 | 100 | 637 | ||||||||||||||
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Subordinated notes and trust preferred debt
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7 | 153 | 160 | ||||||||||||||
| Total interest expense | (1,534) | (3,622) | (5,156) | ||||||||||||||
| Taxable-Equivalent Net Interest Income | $ | 979 | $ | (1,556) | $ | (577) | |||||||||||
Net interest income on a taxable-equivalent basis decreased by $577 thousand to $51.6 million for the three months ended September 30, 2025 from $52.1 million for the three months ended September 30, 2024. The Company's net interest spread decreased by three basis points from 3.55% for the three months ended September 30, 2024 to 3.52% for the three months ended September 30, 2025.
Taxable-equivalent net interest margin decreased by three basis points to 4.11% for the three months ended September 30, 2025 from 4.14% for the three months ended September 30, 2024. The taxable-equivalent yield on interest-earning assets decreased by 42 basis points from 6.61% for the three months ended September 30, 2024 to 6.19% for the three months ended September 30, 2025 due to the accretion recognized on fair value marks to loans and securities assumed in the Merger, the impact of which was partially offset by the impact of a decline in the Fed Funds rate since late 2024. The net accretion impact of purchase accounting marks on loans, securities, deposits and borrowings was $5.8 million, which represented 52 basis points of net interest margin during the third quarter of 2025 compared to net accretion of $6.8 million and 57 basis points of net interest margin during the third quarter of 2024. Net interest margin benefited from a decrease of 40 basis points in the cost of interest-bearing liabilities from 3.07% for the three months ended September 30, 2024 to 2.67% for the three months ended September 30, 2025, reflecting the impact of deposit rate reductions over that time period and the runoff of higher rate time deposits and money market balances partially offset by the impact of the accelerated amortization of remaining debt issuance costs totaling $298 thousand from the redemption of subordinated notes.
Average loans decreased by $10.2 million and was $4.0 billion for both the three months ended September 30, 2025 and 2024. Average investment securities increased by $56.7 million from $849.7 million for the three months ended September 30, 2024 to $906.4 million for the three months ended September 30, 2025. Average interest-bearing liabilities decreased by $181.9 million to $3.9 billion for the three months ended September 30, 2025 from $4.1 billion for the three months ended September 30, 2024.
The yield on loans decreased by 49 basis points to 6.58% for the three months ended September 30, 2025 compared to 7.07% for the three months ended September 30, 2024. Taxable-equivalent interest income earned on loans decreased by $4.9 million primarily due to a decrease in the accretion of the fair value marks on loans and a decline in market interest rates.
The average balance of commercial loans decreased by $59.2 billion to $3.1 billion for the three months ended September 30, 2025 from $3.2 billion for the three months ended September 30, 2024. Average residential mortgage loans increased by $45.5 million from $455.0 million during the three months ended September 30, 2024 to $500.5 million during the
three months ended September 30, 2025. Average home equity loans decreased by $4.3 million from $301.5 million for the three months ended September 30, 2024 to $297.2 million for the three months ended September 30, 2025. Average installment and other consumer loans increased by $7.8 million from $34.2 million for the three months ended September 30, 2024 to $42.0 million for the three months ended September 30, 2025.
Accretion of purchase accounting adjustments on loans included in interest income was $5.3 million and $7.3 million for the three months ended September 30, 2025 and 2024, respectively. Accelerated accretion on loans totaled $1.4 million and $2.2 million for the three months ended September 30, 2025 and 2024, respectively. Prepayment fee income on loans decreased from $620 thousand for the three months ended September 30, 2024 to $318 thousand for the three months ended September 30, 2025.
Interest income on investment securities on a tax-equivalent basis increased by $470 thousand to $10.6 million for the three months ended September 30, 2025 from $10.1 million for the three months ended September 30, 2024, with the taxable equivalent yield decreasing from 4.77% for the three months ended September 30, 2024 to 4.67% for the three months ended September 30, 2025. The 10 basis point decrease reflects the impact from the decrease in accretion of discounts recorded on investment securities assumed from the Merger and a decline in the market interest rates. Accretion on acquired investment securities was $806 thousand for the three months ended September 30, 2025 compared to $950 thousand for the three months ended September 30, 2024. The average balance of investment securities increased by $56.7 million to $906.4 million for the three months ended September 30, 2025 from $849.7 million for the three months ended September 30, 2024 due primarily to purchases during 2025. 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, compared to sales of $162.7 million for no gain or loss during the three months ended September 30, 2024.
Interest income on federal funds sold and interest-bearing bank balances on a tax-equivalent basis decreased by $1.4 million to $1.1 million for the three months ended September 30, 2025 from $2.5 million for the three months ended September 30, 2024. The average balance of federal funds sold and interest-bearing bank balances decreased by $82.7 million from $184.5 million for the three months ended September 30, 2024 to $101.7 million for the three months ended September 30, 2025, which was impacted by a decrease in deposits. The FOMC cut the Federal Funds rate by 50 basis points in September 2024, 25 basis points in December 2024 and 25 basis points in September 2025. The Federal Funds rate had remained unchanged from the prior rate increase of 25 basis points in July 2023.
Interest expense on interest-bearing liabilities decreased by $5.2 million from $31.3 million for the three months ended September 30, 2024 to $26.1 million for the three months ended September 30, 2025. The cost of interest-bearing liabilities decreased by 40 basis points from 3.07% for the three months ended September 30, 2024 to 2.67% for the three months ended September 30, 2025, reflecting the impact of deposit rate reductions implemented in the first quarter of 2025 and runoff of higher rate time deposits and money market balances, partially offset by the impact of the redemption of subordinated notes.
The average balance of interest-bearing deposits decreased by $240.5 million to $3.6 billion for the three months ended September 30, 2025 from $3.9 billion for the three months ended September 30, 2024. Average time deposits decreased by $117.2 million, average interest-bearing demand deposits decreased by $104.7 million and average savings deposits decreased by $18.6 million for the three months ended September 30, 2025 in relation to the comparable prior period due to continued run-off in higher yielding promotional balances.
Interest expense on borrowings was $3.5 million for the three months ended September 30, 2025 compared to $2.7 million for the three months ended September 30, 2024. The cost of borrowings was 5.22% for the three months ended September 30, 2025 compared to 5.17% for the three months ended September 30, 2024. Average borrowings increased by $58.6 million from $206.9 million for the three months ended September 30, 2024 to $265.5 million for the three months ended September 30, 2025. Average borrowings included average FHLB advances and other borrowings of $168.9 million for the three months ended September 30, 2025, an increase of $53.5 million, from an average of $115.4 million for the three months ended September 30, 2024. The increase was due to higher utilization of overnight borrowings during the third quarter of 2025 as lending and investing activities increased. 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. Amortization expense on the debt issuance costs totaled $23 thousand for the three months ended September 30, 2024.
The subordinated notes assumed from the Merger have a fixed rate of interest equal to 4.50% until December 31, 2025. The interest rate on the Company's subordinated notes was 7.72% at September 30, 2025 compared to 8.75% at September 30, 2024. The trust preferred debt has a variable rate of three-month CME term SOFR rate plus a spread adjustment and margin. For the three months ended September 30, 2025 and 2024, the cost of the trust preferred debt, excluding the fair value mark, was 6.33% and 7.42%, respectively. Amortization of fair value marks on acquired borrowings was $153 thousand and $147 thousand for the three months ended September 30, 2025 and 2024, respectively.
Provision for Credit Losses
The ACL to total loan ratio was 1.21% at September 30, 2025 and 1.25% at September 30, 2024. The Company recorded a provision for credit losses of $396 thousand for the three months ended September 30, 2025 compared to $13.7 million for the same period in 2024.
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. There was no change in the reserve for unfunded commitments during the three months ended September 30, 2025.
For the three months ended September 30, 2024, the provision for credit losses increased primarily due to $15.5 million of reserves on acquired non-PCD loans as a result of the Merger, partially offset by a provision reversal of $1.8 million due to changes in qualitative factors, a change in the peer group utilized for the calculation and a reduction of $434 thousand in the required reserve for unfunded commitments. The change in qualitative factors included a reduction in the Economic Conditions qualitative factor and removal of the Other External Factorsqualitative factor.
Net charge-offs for the three months ended September 30, 2025 totaled $189 thousand compared to net charge-offs of $269 thousand for the three months ended September 30, 2024. Nonaccrual loans were 0.66% of gross loans at September 30, 2025, compared with 0.68% of gross loans at September 30, 2024. Nonaccrual loans decreased by $874 thousand from $27.1 million at September 30, 2024 to $26.2 million at September 30, 2025. During the fourth quarter of 2024, the Company sold $2.6 million of nonaccrual loans, consisting mostly of commercial and industrial loans. During the nine months ended September 30, 2025, there were additions of $12.5 million, primarily consisting of commercial construction and land development loans, residential mortgage and in commercial real estate loans, partially offset by repayments of $9.2 million and charge offs of $1.2 million.
Additional information is included in the "Credit Risk Management" section herein.
Noninterest Income
The following table compares noninterest income for the three months ended September 30, 2025 and 2024:
|
Three Months Ended September 30,
|
$ Change | % Change | |||||||||||||||||||||
| 2025 | 2024 | 2025-2024 | 2025-2024 | ||||||||||||||||||||
| Service charges on deposit accounts | $ | 2,014 | $ | 1,801 | $ | 213 | 11.8 | % | |||||||||||||||
| Interchange income | 1,620 | 1,779 | (159) | (8.9) | % | ||||||||||||||||||
| Other service charges, commissions and fees | 983 | 559 | 424 | 75.8 | % | ||||||||||||||||||
| Swap fee income | 816 | 505 | 311 | 61.6 | % | ||||||||||||||||||
| Trust and investment management income | 3,636 | 3,760 | (124) | (3.3) | % | ||||||||||||||||||
| Brokerage income | 1,641 | 1,277 | 364 | 28.5 | % | ||||||||||||||||||
| Mortgage banking activities | 522 | 491 | 31 | 6.3 | % | ||||||||||||||||||
| Income from life insurance | 1,471 | 1,289 | 182 | 14.1 | % | ||||||||||||||||||
| Other income | 629 | 654 | (25) | (3.8) | % | ||||||||||||||||||
| Investment securities gains | 50 | 271 | (221) | (81.5) | % | ||||||||||||||||||
| Total noninterest income | $ | 13,382 | $ | 12,386 | $ | 996 | 8.0 | % | |||||||||||||||
Noninterest income increased by $1.0 million from $12.4 million for the three months ended September 30, 2024 to $13.4 million for the three months ended September 30, 2025. The following were significant components of the change in this line item:
•Service charges on deposits and other service charges, commissions and fees increased by $213 thousand and $424 thousand, respectively, due to an increase in cash management services following the Merger.
•Swap fee income increased by $311 thousand due to successful swap generation.
•Wealth management income, which includes trust and investment management income and brokerage income, increased due to improvement in market performance.
•Mortgage banking income increased by $31 thousand. Mortgage loans sold totaled $9.4 million in the third quarter of 2025 compared to $10.0 million in the third quarter of 2024.
•Income from life insurance increased by $182 thousand primarily due to death benefits received on a policy during the third quarter of 2025.
•The decrease of $221 thousand in gains on investment securities was due to a security redemption during the third quarter of 2024 which resulted in a gain of $181 thousand. The remaining difference is due to fluctuations in the Company's investment in an equity security.
Noninterest Expenses
The following table compares noninterest expenses for the three months ended September 30, 2025 and 2024:
|
Three Months Ended September 30,
|
$ Change | % Change | |||||||||||||||||||||
| 2025 | 2024 | 2025-2024 | 2025-2024 | ||||||||||||||||||||
| Salaries and employee benefits | $ | 21,439 | $ | 27,190 | $ | (5,751) | (21.2) | % | |||||||||||||||
| Occupancy | 1,907 | 1,818 | 89 | 4.9 | % | ||||||||||||||||||
| Furniture and equipment | 2,168 | 2,515 | (347) | (13.8) | % | ||||||||||||||||||
| Data processing | 1,116 | 2,046 | (930) | (45.5) | % | ||||||||||||||||||
| Automated teller machine and interchange fees | 892 | 784 | 108 | 13.8 | % | ||||||||||||||||||
| Advertising and bank promotions | 154 | 537 | (383) | (71.3) | % | ||||||||||||||||||
| FDIC insurance | 652 | 862 | (210) | (24.4) | % | ||||||||||||||||||
| Professional services | 1,703 | 1,119 | 584 | 52.2 | % | ||||||||||||||||||
| Directors' compensation | 350 | 123 | 227 | 184.6 | % | ||||||||||||||||||
| Taxes other than income | 828 | 503 | 325 | 64.6 | % | ||||||||||||||||||
| Intangible asset amortization | 2,410 | 2,464 | (54) | (2.2) | % | ||||||||||||||||||
| Merger-related expenses | - | 16,977 | (16,977) | (100.0) | % | ||||||||||||||||||
| Restructuring expenses | - | 257 | (257) | (100.0) | % | ||||||||||||||||||
| Other operating expenses | 2,678 | 3,104 | (426) | (13.7) | % | ||||||||||||||||||
| Total noninterest expenses | $ | 36,297 | $ | 60,299 | $ | (24,002) | (39.8) | % | |||||||||||||||
Noninterest expense decreased by $24.0 million from $60.3 million for the three months ended September 30, 2024 to $36.3 million for the three months ended September 30, 2025. The following were additional significant components of the change in this line item:
•Salaries and employee benefits expense decreased by $5.8 million. The third quarter of 2024 included $4.8 million associated with the retirement of an executive and other severance charges.
•Furniture and equipment expense decreased by $347 thousand due to a reduction in software maintenance and services following technology improvements implemented in prior periods.
•Data processing expenses decreased by $930 thousand. Following the Merger, the Company utilized two core processing systems during the third quarter of 2024. The system conversion occurred in November 2024.
•Automated teller machine and interchange fee expense increased by $108 thousand due to the increase in debit card activity.
•Advertising and bank promotions expense decreased by $383 thousand due to the increase in related expenses incurred following the Merger during the third quarter of 2024.
•FDIC insurance expense decreased by $210 thousand. The Company incurred charges for both Orrstown and PeoplesBank in the third quarter of 2024.
•Professional services expense increased by $584 thousand. In 2025, the Company utilized an elevated level of third-party assistance to enhance daily functions and operational processes throughout the organization.
•Directors' compensation expense increased by $227 thousand due to new restricted stock awards granted during 2025.
•Expenses associated with taxes other than income increased by $325 thousand based on the increase in estimated state shares tax expense.
•Merger-related expenses totaled $17.0 million during the third quarter of 2024. The Company did not incur merger-related expenses during the third quarter of 2025.
•Restructuring expense of $257 thousand was recorded in the third quarter of 2024 due to the announced closure of six branch locations.
•Other operating expenses decreased by $426 thousand partially due to sales tax refunds and a reduction in printing and postage charges.
Income Tax Expense
Income tax expense totaled $5.8 million, an effective tax rate of 21.0%, for the three months ended September 30, 2025 compared with an income tax benefit of $2.0 million and an effective tax rate of 20.1% for the three months ended September 30, 2024. The Company's effective tax rate is aligned with the 21% federal statutory rate due to disallowed interest expenses, partially offset by interest earned on tax-exempt loans and investment securities, income from life insurance policies and tax credits.
Nine months ended September 30, 2025 compared with nine months ended September 30, 2024
Summary
Net income totaled $59.4 million for the nine months ended September 30, 2025 compared to $8.4 million for the same period in 2024. Diluted earnings per share for the nine months ended September 30, 2025 totaled $3.07 compared to $0.62 for the nine months ended September 30, 2024. The 2025 period reflects the full year impact of the Merger completed on July 1, 2024. The net accretion impact of purchase accounting marks on loans, securities, deposits and borrowings was $17.9 million and $6.8 million for the nine months ended September 30, 2025 and 2024, respectively. For the nine months ended September 30, 2025 and 2024, the Company incurred merger-related expenses of $2.6 million and $18.8 million, respectively, which were included in non-interest expenses of the unaudited condensed consolidated statements of operations. In addition, the Company recorded a provision for credit losses on acquired non-PCD loans of $15.5 million and retirement expenses for one executive of $4.8 million during the nine months ended September 30, 2024. Excluding merger-related expenses, net income and diluted earnings per common share totaled $61.4 million and $3.17, respectively, for the nine months ended September 30, 2025. For the nine months ended September 30, 2024, excluding these non-recurring expenses, net income and diluted earnings per common share totaled $39.4 million and $2.93, respectively. See "Supplemental Reporting of Non-GAAP Measures" for additional information.
Net interest income totaled $149.3 million for the nine months ended September 30, 2025 compared to $104.7 million for the nine months ended September 30, 2024.
The provision for credit losses included a recovery of $49 thousand and expense of $14.8 million for the nine months ended September 30, 2025 and 2024, respectively. For the nine months ended September 30, 2024, the provision for credit losses increased primarily due to $15.5 million of reserves on acquired non-PCD loans as a result of the Merger, partially offset by a provision reversal of $1.8 million due to changes in qualitative factors, a change in the peer group utilized for the calculation and a reduction of $434 thousand in the required reserve for unfunded commitments.
Noninterest income totaled $37.9 million and $26.2 million for the nine months ended September 30, 2025 and 2024, respectively. Noninterest expenses totaled $112.1 million and $105.4 million for the nine months ended September 30, 2025 and 2024, respectively.
Income tax expense totaled $15.8 million and $2.3 million for the nine months ended September 30, 2025 and 2024, respectively. The Company's effective tax rate was 21.0% for the nine months ended September 30, 2025 compared to 21.6% for the nine months ended September 30, 2024.
Net Interest Income
Net interest income increased by $44.6 million from $104.7 million for the nine months ended September 30, 2024 to $149.3 million for the nine months ended September 30, 2025. Interest income on loans increased by $49.8 million from $142.4 million for the nine months ended September 30, 2024 to $192.2 million for the nine months ended September 30, 2025. Interest income on investment securities increased by $9.2 million from $21.2 million for the nine months ended September 30,
2024 to $30.4 million for the nine months ended September 30, 2025. Total interest expense increased by $14.0 million from $64.2 million for the nine months ended September 30, 2024 to $78.2 million for the nine months ended September 30, 2025. Interest expense on deposits increased by $12.4 million from $57.4 million for the nine months ended September 30, 2024 to $69.8 million for the nine months ended September 30, 2025. Interest expense on borrowings increased by $1.6 million from $6.9 million in the nine months ended September 30, 2024 to $8.5 million for the nine months ended September 30, 2025. Each of these increases was primarily affected by the Merger.
The following table presents net interest income, net interest spread and net interest margin for the nine months ended September 30, 2025 and 2024 on a taxable-equivalent basis:
| Nine Months Ended September 30, 2025 | Nine Months Ended September 30, 2024 | ||||||||||||||||||||||||||||||||||
|
Average Balance |
Taxable- Equivalent Interest |
Taxable- Equivalent Rate |
Average Balance |
Taxable- Equivalent Interest |
Taxable- Equivalent Rate |
||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||
|
Federal funds sold & interest-bearing bank balances
|
$ | 146,688 | $ | 4,904 | 4.47 | % | $ | 134,136 | $ | 5,272 | 5.25 | % | |||||||||||||||||||||||
|
Investment securities (1)(2)
|
892,033 | 31,379 | 4.69 | 636,781 | 21,931 | 4.60 | |||||||||||||||||||||||||||||
|
Loans (1)(3)(4)(5)(6)
|
3,928,159 | 192,858 | 6.56 | 2,878,171 | 142,921 | 6.63 | |||||||||||||||||||||||||||||
| Total interest-earning assets | 4,966,880 | 229,141 | 6.17 | 3,649,088 | 170,124 | 6.23 | |||||||||||||||||||||||||||||
| Other assets | 440,153 | 298,334 | |||||||||||||||||||||||||||||||||
| Total | $ | 5,407,033 | $ | 3,947,422 | |||||||||||||||||||||||||||||||
| Liabilities and Shareholders' Equity | |||||||||||||||||||||||||||||||||||
| Interest-bearing demand deposits | $ | 2,462,336 | 42,181 | 2.29 | $ | 1,927,337 | 35,475 | 2.46 | |||||||||||||||||||||||||||
| Savings deposits | 268,966 | 494 | 0.25 | 206,552 | 432 | 0.28 | |||||||||||||||||||||||||||||
| Time deposits | 927,232 | 27,079 | 3.90 | 642,959 | 21,477 | 4.46 | |||||||||||||||||||||||||||||
| Total interest-bearing deposits | 3,658,534 | 69,754 | 2.55 | 2,776,848 | 57,384 | 2.76 | |||||||||||||||||||||||||||||
| Securities sold under agreements to repurchase and federal funds purchased | 26,623 | 297 | 1.49 | 16,191 | 148 | 1.22 | |||||||||||||||||||||||||||||
| FHLB advances and other borrowings | 128,827 | 3,939 | 4.09 | 122,604 | 3,780 | 4.12 | |||||||||||||||||||||||||||||
|
Subordinated notes and trust preferred debt
|
68,799 | 4,223 | 8.21 | 44,294 | 2,925 | 8.82 | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 3,882,783 | 78,213 | 2.69 | 2,959,937 | 64,237 | 2.90 | |||||||||||||||||||||||||||||
| Noninterest-bearing demand deposits | 898,015 | 550,407 | |||||||||||||||||||||||||||||||||
| Other liabilities | 89,025 | 76,846 | |||||||||||||||||||||||||||||||||
| Total liabilities | 4,869,823 | 3,587,190 | |||||||||||||||||||||||||||||||||
| Shareholders' equity | 537,210 | 360,232 | |||||||||||||||||||||||||||||||||
| Total | $ | 5,407,033 | $ | 3,947,422 | |||||||||||||||||||||||||||||||
|
Taxable-equivalent net interest income / net interest spread
|
150,928 | 3.47 | % | 105,887 | 3.33 | % | |||||||||||||||||||||||||||||
| Taxable-equivalent net interest margin | 4.06 | % | 3.88 | % | |||||||||||||||||||||||||||||||
| Taxable-equivalent adjustment | (1,667) | (1,206) | |||||||||||||||||||||||||||||||||
| Net interest income | $ | 149,261 | $ | 104,681 | |||||||||||||||||||||||||||||||
| NOTES TO ANALYSIS OF NET INTEREST INCOME: | |||||
| (1) | Yields and interest income on tax-exempt assets have been computed on a taxable-equivalent basis assuming a 21% tax rate. | ||||
|
(2)
|
Average balance of investment securities is computed at fair value. | ||||
|
(3)
|
Average balances include nonaccrual loans. | ||||
|
(4)
|
Interest income on loans includes prepayment and late fees, where applicable. | ||||
| (5) |
Interest income on loans includes interest recovered of $1.6 million from the payoff of a commercial real estate loan on nonaccrual status during the nine months ended September 30, 2024.
|
||||
| (6) |
Interest income on loans includes accretion on purchase accounting marks of $16.7 million and $7.6 million for the nine months ended September 30, 2025 and 2024, respectively.
|
||||
The following table presents the impact of rate and volume, primarily due to the Merger, on the change in taxable-equivalent net interest income from the nine months ended September 30, 2024 compared to the nine months ended September 30, 2025:
|
Nine Months Ended September 30, 2025 Versus 2024 Increase (Decrease) Due to Change In
|
|||||||||||||||||
| Average Volume | Average Rate | Total | |||||||||||||||
| Interest Income | |||||||||||||||||
| Federal funds sold and interest-bearing bank balances | $ | 493 | $ | (861) | $ | (368) | |||||||||||
| Taxable securities | 9,474 | (345) | 9,129 | ||||||||||||||
| Tax-exempt securities | (132) | 451 | 319 | ||||||||||||||
| Loans | 52,091 | (2,154) | 49,937 | ||||||||||||||
| Total interest income | 61,926 | (2,909) | 59,017 | ||||||||||||||
| Interest Expense | |||||||||||||||||
| Interest-bearing demand deposits | 9,838 | (3,132) | 6,706 | ||||||||||||||
| Savings deposits | 130 | (68) | 62 | ||||||||||||||
| Time deposits | 9,487 | (3,885) | 5,602 | ||||||||||||||
| Total interest-bearing deposits | 19,455 | (7,085) | 12,370 | ||||||||||||||
| Securities purchases under agreements to repurchase and federal funds purchased | 95 | 54 | 149 | ||||||||||||||
| FHLB advances and other borrowings | 191 | (32) | 159 | ||||||||||||||
|
Subordinated notes and trust preferred debt
|
1,617 | (319) | 1,298 | ||||||||||||||
| Total interest expense | 21,358 | (7,382) | 13,976 | ||||||||||||||
| Taxable-Equivalent Net Interest Income | $ | 40,568 | $ | 4,474 | $ | 45,041 | |||||||||||
Net interest income on a taxable-equivalent basis increased by $45.0 million to $150.9 million for the nine months ended September 30, 2025 from $105.9 million for the nine months ended September 30, 2024. The Company's net interest spread increased by 14 basis points from 3.33% for the nine months ended September 30, 2024 to 3.47% for the nine months ended September 30, 2025.
Taxable-equivalent net interest margin increased by 18 basis points to 4.06% for the nine months ended September 30, 2025 from 3.88% for the nine months ended September 30, 2024. The taxable-equivalent yield on interest-earning assets decreased by six basis points from 6.23% for the nine months ended September 30, 2024 to 6.17% for the nine months ended September 30, 2025 due primarily to the impact of a decline in the Fed Funds rate partially offset by the accretion recognized on fair value marks to loans and securities assumed in the Merger. The recognition of interest income previously applied to principal of $1.6 million from the payoff of a commercial real estate loan on nonaccrual status contributed five basis points to the Company's net interest margin during the nine months ended September 30, 2024. The net accretion impact of purchase accounting marks on loans, securities, deposits and borrowings was $17.9 million, which represented 55 basis points of net interest margin during the nine months ended September 30, 2025 compared to $6.7 million in net accretion and 30 basis points of net interest margin during the nine months ended September 30, 2024. The increase in net interest margin also benefited from the decrease of 21 basis points in the cost of interest-bearing liabilities from 2.90% to 2.69%, reflecting the impact of deposit rate reductions over that time period and the runoff of higher rate time deposits and money market balances.
Average loans increased by $1.0 billion to $3.9 billion for the nine months ended September 30, 2025 compared to $2.9 billion for the nine months ended September 30, 2024. Average investment securities increased by $255.2 million from $636.8 million for the nine months ended September 30, 2024 to $892.0 million for the nine months ended September 30, 2025. Average interest-bearing liabilities increased by $922.8 million to $3.9 billion for the nine months ended September 30, 2025 from $3.0 billion for the nine months ended September 30, 2024.
The average yield on loans decreased by seven basis points to 6.56% for the nine months ended September 30, 2025 compared to 6.63% for the nine months ended September 30, 2024. Taxable-equivalent interest income earned on loans
increased by $49.9 million primarily due to an increase in the average balances, which was attributed to the acquired loans from the Merger and from the impact of the accretion of the fair value marks on loans partially offset by a decline in market interest rates.
The average balance of commercial loans increased by $824.1 million from $2.3 billion for the nine months ended September 30, 2024 to $3.1 billion for the nine months ended September 30, 2025. Average residential mortgage loans increased by $143.1 million from $335.5 million during the nine months ended September 30, 2024 to $478.6 million during the nine months ended September 30, 2025. Average home equity loans increased by $61.5 million from $230.5 million for the nine months ended September 30, 2024 to $292.0 million for the nine months ended September 30, 2025. Average installment and other consumer loans increased by $21.2 million from $22.7 million for the nine months ended September 30, 2024 to $43.9 million for the nine months ended September 30, 2025.
Accretion of purchase accounting adjustments on loans included in interest income was $16.7 million and $7.6 million for the nine months ended September 30, 2025 and 2024, respectively. The increase in accretion was due to the recognition of fair value marks on loans from the Merger. Accelerated accretion totaled $4.1 million and $2.3 million during the nine months ended September 30, 2025 and 2024, respectively. Prepayment income on loans increased from $878 thousand for the nine months ended September 30, 2024 to $1.1 million for the nine months ended September 30, 2025.
Interest income on investment securities on a tax-equivalent basis increased by $9.5 million to $31.4 million for the nine months ended September 30, 2025 from $21.9 million for the nine months ended September 30, 2024, with the taxable equivalent yield increasing from 4.60% for the nine months ended September 30, 2024 to 4.69% for the nine months ended September 30, 2025. The nine basis point increase reflects the impact from the accretion of discounts recorded on investment securities assumed from the Merger. Accretion on acquired investment securities was $2.4 million for the nine months ended September 30, 2025 compared to $950 thousand for the nine months ended September 30, 2024. The average balance of investment securities increased by $255.2 million to $892.0 million for the nine months ended September 30, 2025 from $636.8 million for the nine months ended September 30, 2024 due primarily to the Merger and additional investment security purchases of $147.3 million. 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, compared to sales of $162.7 million for no gain or loss during the nine months ended September 30, 2024.
Interest income on federal funds sold and interest-bearing bank balances on a tax-equivalent basis decreased by $368 thousand to $4.9 million for the nine months ended September 30, 2025 from $5.3 million for the nine months ended September 30, 2024. The average balance of federal funds sold and interest-bearing bank balances increased by $12.6 million from $134.1 million for the nine months ended September 30, 2024 to $146.7 million for the nine months ended September 30, 2025; however, the decrease in interest income was impacted by a decline in the interest rate environment. The FOMC cut the Federal Funds rate by 50 basis points in September 2024, 25 basis points in December 2024 and 25 basis points in September 2025. The Federal Funds rate had remained unchanged from the prior rate increase of 25 basis points in July 2023.
Interest expense on interest-bearing liabilities increased by $14.0 million from $64.2 million for the nine months ended September 30, 2024 to $78.2 million for the nine months ended September 30, 2025. The cost of interest-bearing liabilities decreased by 21 basis points from 2.90% for the nine months ended September 30, 2024 to 2.69% for the nine months ended September 30, 2025 reflecting the impact of deposit rate reductions implemented in the first quarter of 2025 and the runoff of higher rate time deposits and money market balances. The average balance of interest-bearing deposits increased by $881.7 million to $3.7 billion for the nine months ended September 30, 2025 from $2.8 billion for the nine months ended September 30, 2024. Average interest-bearing demand deposits increased by $535.0 million, average time deposits increased by $284.3 million and average savings deposits increased by $62.4 million for the nine months ended September 30, 2025 in relation to the comparable prior period due primarily to the impact of the Merger. Amortization of fair value marks on acquired time deposits was $845 thousand for the nine months ended September 30, 2025 compared to $1.4 million for the nine months ended September 30, 2024.
Interest expense on borrowings increased by $1.6 million to $8.5 million for the nine months ended September 30, 2025 from $6.9 million for the nine months ended September 30, 2024. The cost of borrowings increased by four basis points to 5.04% for the nine months ended September 30, 2025 from 5.00% for the nine months ended September 30, 2024. Average borrowings increased by $41.2 million from $183.1 million for the nine months ended September 30, 2024 to $224.3 million for the nine months ended September 30, 2025. Average borrowings included average FHLB advances and other borrowings of $128.8 million for the nine months ended September 30, 2025, an increase of $6.2 million, from an average of $122.6 million for the nine months ended September 30, 2024. The redemption of subordinated notes on September 30, 2025 resulted in the amortization of remaining debt issuance costs. Amortization of debt issuance costs for the nine months ended September 30, 2025 totaled $335 thousand compared to $58 thousand for the nine months ended September 30, 2024.
The subordinated notes assumed from the Merger have a fixed rate of interest equal to 4.50% until December 30, 2025. The interest rate on the Company's subordinated notes was 7.72% at September 30, 2025 compared to 8.75% at September 30, 2024. The trust preferred debt has a variable rate of three-month CME term SOFR rate, plus a spread adjustment and margin. For the nine months ended September 30, 2025 and 2024, the cost of the trust preferred debt, excluding the fair value mark, was 6.33% and 7.42%, respectively. Amortization of fair value marks on acquired borrowings was $455 thousand for the nine months ended September 30, 2025 compared to $147 thousand for the nine months ended September 30, 2024.
Provision for Credit Losses
The ACL as a percentage of the total loan portfolio was 1.21% at September 30, 2025 compared to 1.25% at September 30, 2024. The Company recorded a recovery of credit losses on loans of $49 thousand for the nine months ended September 30, 2025 compared to provision expense of $14.8 million for the same period in 2024. Included in the provision for credit losses was a recovery of credit losses for unfunded commitments of $100 thousand and $557 thousand during the nine months ended September 30, 2025 and 2024, respectively.
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 Trendsqualitative factor, at a moderate level, were added for the residential senior liens loan class. The Delinquency and Classified Loan Trendsqualitative 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 Trendswas 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.
For the nine months ended September 30, 2024, the provision for credit losses increased primarily due to $15.5 million of reserves on acquired non-PCD loans as a result of the Merger, partially offset by a provision reversal of $1.8 million due to changes in qualitative factors, a change in the peer group utilized for the calculation and a reduction of $434 thousand in the required reserve for unfunded commitments. The change in qualitative factors included a reduction in the Economic Conditions qualitative factor and removal of the Other External Factorsqualitative factor.
Net charge-offs for the nine months ended September 30, 2025 totaled $635 thousand compared to net charge-offs of $340 thousand for the nine months ended September 30, 2024. Nonaccrual loans were 0.66% of gross loans at September 30, 2025 compared with 0.68% of gross loans at September 30, 2024. Nonaccrual loans decreased by $874 thousand from $27.1 million at September 30, 2024 to $26.2 million at September 30, 2025. During the fourth quarter of 2024, the Company sold $2.6 million of nonaccrual loans, consisting mostly of commercial and industrial loans. During the nine months ended September 30, 2025, there were additions of $12.5 million, primarily consisting of commercial construction and land development loans, residential mortgage and in commercial real estate loans, partially offset by repayments of $9.2 million and charge offs of $1.2 million.
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, 2025 and 2024:
| Nine Months Ended September 30, | $ Change | % Change | |||||||||||||||||||||
| 2025 | 2024 | 2025-2024 | 2025-2024 | ||||||||||||||||||||
| Service charges on deposit accounts | $ | 5,975 | $ | 3,824 | $ | 2,151 | 56.3 | % | |||||||||||||||
| Interchange income | 4,488 | 3,651 | 837 | 22.9 | % | ||||||||||||||||||
| Other service charges, commissions and fees | 2,047 | 1,019 | 1,028 | 100.9 | % | ||||||||||||||||||
| Swap fee income | 1,879 | 1,079 | 800 | 74.1 | % | ||||||||||||||||||
| Trust and investment management income | 11,184 | 7,916 | 3,268 | 41.3 | % | ||||||||||||||||||
| Brokerage income | 4,775 | 3,535 | 1,240 | 35.1 | % | ||||||||||||||||||
| Mortgage banking activities | 1,302 | 1,318 | (16) | (1.2) | % | ||||||||||||||||||
| Income from life insurance | 4,071 | 2,569 | 1,502 | 58.5 | % | ||||||||||||||||||
| Other income | 2,129 | 1,023 | 1,106 | 108.1 | % | ||||||||||||||||||
| Investment securities gains | 71 | 254 | (183) | (72.0) | % | ||||||||||||||||||
| Total noninterest income | $ | 37,921 | $ | 26,188 | $ | 11,733 | 44.8 | % | |||||||||||||||
Noninterest income increased by $11.7 million from $26.2 million for the nine months ended September 30, 2024 to $37.9 million for the nine months ended September 30, 2025. The primary driver of the overall increase was the impact of the Merger. The following were significant components of the change in this line item:
•Service charges on deposits and other service charges, commissions and fees increased by $2.2 million and $1.0 million, respectively, due to an increase in cash management services and other deposit fees following the Merger.
•Swap fee income increased by $800 thousand due to successful swap generation.
•In addition to the impact from the Merger, wealth management income, which includes trust and investment management income and brokerage income, increased due to improvement in market performance.
•The increase of $1.5 million in income from life insurance included death benefits received on a policy during the third quarter of 2025.
•The decrease of $183 thousand in gains on investment securities was due to a security redemption during the third quarter of 2024 which resulted in a gain of $181 thousand.
Noninterest Expenses
The following table compares noninterest expenses for the nine months ended September 30, 2025 and 2024:
| Nine Months Ended September 30, | $ Change | % Change | |||||||||||||||||||||
| 2025 | 2024 | 2025-2024 | 2025-2024 | ||||||||||||||||||||
| Salaries and employee benefits | $ | 63,191 | $ | 54,137 | $ | 9,054 | 16.7 | % | |||||||||||||||
| Occupancy | 5,567 | 4,197 | 1,370 | 32.6 | % | ||||||||||||||||||
| Furniture and equipment | 7,394 | 5,480 | 1,914 | 34.9 | % | ||||||||||||||||||
| Data processing | 3,005 | 4,548 | (1,543) | (33.9) | % | ||||||||||||||||||
| Automated teller machine and interchange fees | 2,184 | 1,476 | 708 | 48.0 | % | ||||||||||||||||||
| Advertising and bank promotions | 1,730 | 1,709 | 21 | 1.2 | % | ||||||||||||||||||
| FDIC insurance | 2,150 | 1,722 | 428 | 24.9 | % | ||||||||||||||||||
| Professional services | 5,545 | 2,551 | 2,994 | 117.4 | % | ||||||||||||||||||
| Directors' compensation | 854 | 646 | 208 | 32.2 | % | ||||||||||||||||||
| Taxes other than income | 2,065 | 1,046 | 1,019 | 97.4 | % | ||||||||||||||||||
| Intangible asset amortization | 7,417 | 2,904 | 4,513 | 155.4 | % | ||||||||||||||||||
| Merger-related expenses | 2,617 | 18,784 | (16,167) | (86.1) | % | ||||||||||||||||||
| Restructuring expenses | 91 | 257 | (166) | (64.6) | % | ||||||||||||||||||
| Other operating expenses | 8,277 | 5,950 | 2,327 | 39.1 | % | ||||||||||||||||||
| Total noninterest expenses | $ | 112,087 | $ | 105,407 | $ | 6,680 | 6.3 | % | |||||||||||||||
Noninterest expense increased by $6.7 million from $105.4 million for the nine months ended September 30, 2024 to $112.1 million for the nine months ended September 30, 2025. The primary driver of the overall increase was the impact of the Merger. The following were additional significant components of the change in this line item:
•Salaries and employee benefits expense increased by $9.1 million. The third quarter of 2024 included $4.8 million associated with the retirement of an executive and other severance charges.
•Data processing expense decreased by $1.5 million due to the reduction in core system costs following a system conversion in the fourth quarter of 2024.
•Professional services expense increased by $3.0 million, partly due to the Merger, but also due to higher utilization of consultants and other third-party service providers during 2025 to enhance daily functions and operational processes throughout the organization.
•Directors' compensation expense increased by $208 thousand due to new restricted stock awards granted during 2025. Prior grants awarded to the directors vested on the Merger date.
•Expenses associated with taxes other than income increased by $1.0 million based on the increase in estimated state shares tax expense.
•Intangible asset amortization expense increased by $4.5 million due to the amortization recognized on the core deposit intangible and wealth customer relationship intangible established from the Merger.
•Merger-related expenses decreased by $16.2 million due to the timing of conversion work. The Merger costs incurred during 2025 included software conversion costs and professional fees, including external audit, associated with the conversion. The Company did not incur merger-related expenses during the third quarter of 2025.
•Restructuring expense of $91 thousand was related to the closure of six branch locations during the fourth quarter of 2024.
•Other operating expenses increased by $2.3 million partially due to an increase in credit valuation adjustments on derivatives of $684 thousand. The remaining change is attributed to the impact of the Merger and normal business operations, which included increases of $620 thousand in printing and postage charges, $479 thousand in insurance expenses and $250 thousand in telecommunication expenses.
Income Tax Expense
Income tax expense totaled $15.8 million, an effective tax rate of 21.0%, for the nine months ended September 30, 2025 compared with $2.3 million and an effective tax rate of 21.6% for the nine months ended September 30, 2024. The Company's effective tax rate is equal to the 21% federal statutory rate; however, it is impacted by interest earned on tax-exempt loans and investment securities and income from life insurance policies, partially offset by disallowed interest expense and state income taxes.
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/liability management policy to assist in administering its investment portfolio. Decisions to purchase or sell these securities are based on economic conditions and management's strategy to respond to changes in interest rates, liquidity, pledges to secure deposits and repurchase agreements and other factors while trying to maximize return on the investments. The Company may segregate its investment security portfolio into three categories: "securities available-for-sale," "trading securities" and "securities held-to-maturity." At September 30, 2025 and December 31, 2024, 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 securities. Management monitors its debt securities, using various indicators to determine whether unrealized losses on debt securities are credit related and require an ACL. These indicators include the amount of time the security has been in an unrealized loss position, the cause and extent of the unrealized loss and the credit quality of the issuer and underlying assets. In addition, management assesses whether it is likely the Company will have to sell the investment security prior to recovery, or it expects to be able to hold the investment security until the price recovers. The Company determined that the declines in market value were due to increases in interest rates and market movements, and not due to credit factors. The Company does not intend to sell these securities with unrealized losses and it is more likely than not that the Company will not be required to sell them before recovery of their amortized cost basis, which may be maturity. Therefore, the Company has concluded that the unrealized losses for the AFS securities did not require an ACL at September 30, 2025 and December 31, 2024.
At September 30, 2025, AFS securities totaled $890.4 million, an increase of $60.7 million from $829.7 million at December 31, 2024. During the nine months ended September 30, 2025, the Company purchased $147.3 million of AFS securities, consisting of agency and non-agency MBS and CMO securities and securities issued by state and political subdivisions, which were partially offset by paydowns of $59.4 million and sales of $41.6 million. The balance of investment securities included net unrealized losses of $22.4 million at September 30, 2025 compared to net unrealized losses of $35.2 million at December 31, 2024 for a decrease of $12.8 million. This decrease in net unrealized losses was primarily due to lower market rates compared to December 31, 2024. The overall duration of the Company's investment securities portfolio was 4.4 years at September 30, 2025 compared to 4.1 years at December 31, 2024. The Company has sufficient access to liquidity such that management does not believe it would be necessary to sell any of its investment securities at a loss to offset any unexpected deposit outflows. Management believes the structure of the Company's investment security portfolio is appropriately aligned with the rest of the balance sheet to protect against volatile interest rate environments, to provide a source of liquidity and to generate steady earnings.
The following table summarizes the credit ratings and collateral associated with the Company's investment security portfolio, excluding equity securities, at September 30, 2025:
| Sector | Portfolio Mix | Amortized Book Value | Fair Value | Credit Enhancement | AAA | AA | A | BBB | BB | NR | Collateral / Guarantee Type | ||||||||||||||||||||||||
| Unsecured ABS | - | % | $ | 2,700 | $ | 2,580 | 28 | % | -% | -% | -% | -% | -% | 100% | Unsecured Consumer Debt | ||||||||||||||||||||
| Student Loan ABS | - | 3,329 | 3,323 | 28 | - | - | - | - | - | 100 | Seasoned Student Loans | ||||||||||||||||||||||||
| Federal Family Education Loan ABS | 8 | 73,927 | 73,552 | 11 | - | 47 | 33 | 7 | 13 | - |
Federal Family Education Loan (1)
|
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| PACE Loan ABS | - | 1,714 | 1,574 | 7 | 100 | - | - | - | - | - | PACE Loans | ||||||||||||||||||||||||
| Non-Agency CMBS | 3 | 23,236 | 23,366 | 25 | - | - | - | - | - | 100 | |||||||||||||||||||||||||
| Non-Agency RMBS | 3 | 22,169 | 21,179 | 16 | 100 | - | - | - | - | - |
Reverse Mortgages (2)
|
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| Municipal - General Obligation | 11 | 99,301 | 92,050 | 17 | 77 | 6 | - | - | - | ||||||||||||||||||||||||||
| Municipal - Revenue | 13 | 120,030 | 108,063 | - | 82 | 12 | - | - | 6 | ||||||||||||||||||||||||||
| SBA ReRemic | - | 1,734 | 1,717 | - | 100 | - | - | - | - |
SBA Guarantee (3)
|
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| Small Business Administration | - | 3,930 | 4,001 | - | 100 | - | - | - | - |
SBA Guarantee (3)
|
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| Agency MBS | 20 | 177,918 | 178,485 | - | 100 | - | - | - | - |
Residential Mortgages (3)
|
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| Agency CMO | 40 | 360,574 | 359,449 | - | 100 | - | - | - | - | ||||||||||||||||||||||||||
| U.S. Treasury securities | 2 | 20,033 | 18,803 | - | 100 | - | - | - | - |
U.S. Government Guarantee (3)
|
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|
Corporate debt
|
- | 1,944 | 1,994 | - | - | 52 | 48 | - | - | ||||||||||||||||||||||||||
| 100 | % | $ | 912,539 | $ | 890,136 | 4% | 85% | 5% | 1% | 1% | 4% | ||||||||||||||||||||||||
|
(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."
The following table presents the loan portfolio, excluding residential LHFS, by segment and class at September 30, 2025 and December 31, 2024:
|
September 30, 2025 |
December 31, 2024 |
||||||||||
| Commercial real estate: | |||||||||||
| Owner occupied | $ | 629,481 | $ | 633,567 | |||||||
| Non-owner occupied | 1,254,959 | 1,160,238 | |||||||||
| Multi-family | 234,782 | 274,135 | |||||||||
| Non-owner occupied residential | 163,138 | 179,512 | |||||||||
| Acquisition and development: | |||||||||||
| 1-4 family residential construction | 41,141 | 47,432 | |||||||||
| Commercial and land development | 195,158 | 241,424 | |||||||||
| Agricultural | 118,596 | 125,156 | |||||||||
|
Commercial and industrial
|
479,929 | 451,384 | |||||||||
| Municipal | 28,664 | 30,044 | |||||||||
| Residential mortgage: | |||||||||||
| First lien | 476,006 | 460,297 | |||||||||
| Home equity - term | 5,800 | 5,988 | |||||||||
| Home equity - lines of credit | 311,458 | 303,561 | |||||||||
|
Other - term(1)
|
23,737 | - | |||||||||
| Installment and other loans | 16,887 | 18,476 | |||||||||
| $ | 3,979,736 | $ | 3,931,214 | ||||||||
|
(1)Other - term includes property assessed clean energy ("PACE") loans with unearned income of $571 thousand at September 30, 2025.
|
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Total loans increased by $48.5 million from December 31, 2024 to September 30, 2025. Residential mortgages increased by $47.2 million and commercial loans increased by $3.0 million from December 31, 2024 to September 30, 2025, partially offset by a decrease in installment and other loans of $1.6 million. The Company purchased property assessed clean energy ("PACE") loans during the second quarter of 2025, with a balance of $23.7 million at September 30, 2025.
Asset Quality
Risk Elements
The Company's loan portfolio is subject to varying degrees of credit risk. Credit risk is managed through the Company's underwriting standards, on-going credit reviews and monitoring of asset quality measures. Additionally, loan portfolio diversification, which limits exposure to a single industry or borrower, and collateral requirements also mitigate the Company's risk of credit loss.
The loan portfolio consists principally of loans to borrowers in south central Pennsylvania and the greater Baltimore, Maryland region. As the majority of loans are concentrated in these geographic regions, a substantial portion of the borrowers' ability to honor their obligations may be affected by the level of economic activity in these market areas.
Nonperforming assets include nonaccrual loans and foreclosed real estate. In addition, loan modifications to borrowers experiencing financial difficulty and loans past due 90 days or more and still accruing are also deemed to be risk assets. For all loan classes, the accrual of interest income on loans, including individually evaluated loans, ceases when principal or interest is past due 90 days or more and collateral is inadequate to cover principal and interest or immediately if, in the opinion of management, full collection is unlikely. Interest will continue to accrue on loans past due 90 days or more if the collateral is adequate to cover principal and interest, and the loan is in the process of collection. Interest accrued, but not collected, as of the date of placement on nonaccrual status, is generally reversed and charged against interest income, unless fully collateralized. Subsequent payments received are either applied to the outstanding principal balance or recorded as interest income, depending on management's assessment of the ultimate collectability of principal. Loans are returned to accrual status, for all loan classes, when all the principal and interest amounts contractually due are brought current, the loans have performed in accordance with the contractual terms of the note for a reasonable period of time, generally six months, and the ultimate collectability of the total contractual principal and interest is reasonably assured. Past due status is based on contract terms of the loan.
In accordance with ASU 2022-02, the Company is required to evaluate, based on the accounting for loan modifications, whether the borrower is experiencing financial difficulty and if the modification results in a more-than-insignificant direct
change in the contractual cash flows and represents a new loan or a continuation of an existing loan, which the Company refers to these loans as "financial difficulty modifications" or "FDMs."
The following table presents the Company's risk elements and relevant asset quality ratios at September 30, 2025 and December 31, 2024:
|
September 30, 2025 |
December 31, 2024 |
||||||||||
| Nonaccrual loans | $ | 26,191 | $ | 24,111 | |||||||
| OREO | - | 138 | |||||||||
| Total nonperforming assets | 26,191 | 24,249 | |||||||||
| FDMs still accruing | 1,245 | 4,897 | |||||||||
|
Loans past due 90 days or more and still accruing
|
497 | 641 | |||||||||
| Total nonperforming and other risk assets ("total risk assets") | $ | 27,933 | $ | 29,787 | |||||||
| Loans 30-89 days past due and still accruing | $ | 5,642 | $ | 35,393 | |||||||
| Asset quality ratios: | |||||||||||
| Total nonperforming loans to total loans | 0.66 | % | 0.61 | % | |||||||
| Total nonperforming assets to total assets | 0.48 | % | 0.45 | % | |||||||
| Total nonperforming assets to total loans and OREO | 0.66 | % | 0.62 | % | |||||||
| Total risk assets to total loans and OREO | 0.70 | % | 0.76 | % | |||||||
| Total risk assets to total assets | 0.51 | % | 0.55 | % | |||||||
| ACL to total loans | 1.21 | % | 1.24 | % | |||||||
| ACL to nonperforming loans | 183.67 | % | 201.94 | % | |||||||
| ACL to nonperforming loans and FDMs still accruing | 175.34 | % | 167.85 | % | |||||||
|
Net charge-offs to total average loans (1)
|
0.02 | % | 0.11 | % | |||||||
(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 $27.9 million at September 30, 2025, a decrease of $1.9 million from $29.8 million at December 31, 2024. Nonaccrual loans increased by $2.1 million from December 31, 2024 to September 30, 2025 due primarily to additions of $12.5 million, primarily consisting of commercial construction and land development loans, residential mortgage and commercial real estate loans, partially offset by repayments of $9.2 million and charge offs of $1.2 million. The change in nonaccrual loans included $4.7 million in FDM loans that were transferred to nonaccrual during the third quarter of 2025.
At September 30, 2025, the Company had $6.6 million in loan modifications meeting the FDM criteria under ASU 2022-02 compared to $9.3 million at December 31, 2024. At September 30, 2025, the FDM balance included $6.2 million in acquired loans from the Merger and new loan modifications totaling $5.8 million during the nine months ended September 30, 2025. During the nine months ended September 30, 2025, there were partial charge offs of $132 thousand and the remaining change in FDM is due to repayments. There were $5.4 million in FDM loans in nonaccrual status at September 30, 2025 compared to $4.6 million at December 31, 2024, including one relationship totaling $4.7 million, which was transferred to nonaccrual during the third quarter of 2025.
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 $18.4 million from $91.7 million at December 31, 2024 to $110.1 million at September 30, 2025 due to downgrades of $50.7 million, partially offset by repayments totaling $21.8 million, and upgrades of $10.5 million and charge-offs of $258 thousand.
Classified loans totaled $64.1 million at September 30, 2025, or 1.6% of total loans outstanding, reflecting a decrease from $76.2 million, or 2.0% of total loans outstanding, at December 31, 2024.
Non-IEL substandard loans are performing loans, which have characteristics that cause management concern over the ability of the borrower to perform under present loan repayment terms and which may result in the reporting of these loans as nonperforming, or individually evaluated, loans in the future. Generally, management feels that substandard loans that are currently performing and not considered individually evaluated result in some doubt as to the borrower's ability to continue to perform under the terms of the loan and represent potential problem loans. Non-IEL substandard loans totaled $37.7 million at September 30, 2025, a decrease of $26.7 million from $64.4 million at December 31, 2024 due primarily to repayments of $19.1 million and upgrades of $14.4 million, partially offset by downgrades of $7.4 million and charge offs totaling $505 thousand. The Substandard-IEL category increased by $2.1 million from $24.3 million at December 31, 2024 to $26.4 million at September 30, 2025, primarily due to downgrades of $12.5 million, partially offset by repayments of $10.0 million and charge-offs totaling $398 thousand.
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, 2025 and December 31, 2024. At September 30, 2025, there was a specific reserve of $5 thousand on nonaccrual loans, excluding the ACL recorded on acquired PCD loans from the Merger, compared to $7 thousand at December 31, 2024.
| September 30, 2025 | December 31, 2024 | ||||||||||||||||||||||||||||||||||||||||||||||
| 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 | $ | 5,690 | $ | 5,917 | $ | - | $ | 232 | $ | 4,046 | $ | 4,278 | $ | - | |||||||||||||||||||||||||||||||
| Non-owner occupied | - | 147 | 147 | - | - | 1,466 | 1,466 | - | |||||||||||||||||||||||||||||||||||||||
| Multi-family | - | 136 | 136 | - | - | 721 | 721 | 237 | |||||||||||||||||||||||||||||||||||||||
| Non-owner occupied residential | - | 473 | 473 | - | - | 175 | 175 | - | |||||||||||||||||||||||||||||||||||||||
| Acquisition and development: | |||||||||||||||||||||||||||||||||||||||||||||||
| Commercial and land development | 3,005 | 5,535 | 8,540 | - | 3,282 | 376 | 3,658 | - | |||||||||||||||||||||||||||||||||||||||
| Agricultural | - | 10 | 10 | - | - | 797 | 797 | - | |||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 1,313 | 840 | 2,153 | - | 2,822 | 2,678 | 5,500 | 113 | |||||||||||||||||||||||||||||||||||||||
| Residential mortgage: | |||||||||||||||||||||||||||||||||||||||||||||||
| First lien | - | 6,131 | 6,131 | 150 | - | 5,077 | 5,077 | 243 | |||||||||||||||||||||||||||||||||||||||
| Home equity - term | - | 128 | 128 | - | 36 | 34 | 70 | 18 | |||||||||||||||||||||||||||||||||||||||
| Home equity - lines of credit | - | 2,551 | 2,551 | - | - | 2,344 | 2,344 | 30 | |||||||||||||||||||||||||||||||||||||||
| Other - term | - | - | - | 347 | - | - | - | - | |||||||||||||||||||||||||||||||||||||||
| Installment and other loans | 5 | - | 5 | - | 15 | 10 | 25 | - | |||||||||||||||||||||||||||||||||||||||
| Total | $ | 4,550 | $ | 21,641 | $ | 26,191 | $ | 497 | $ | 6,387 | $ | 17,724 | $ | 24,111 | $ | 641 | |||||||||||||||||||||||||||||||
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, 2025 and December 31, 2024:
|
# of Relationships |
Individually Evaluated Loans |
Partial Charge-offs to Date |
Specific Reserves |
||||||||||||||||||||
| September 30, 2025 | |||||||||||||||||||||||
| Relationships greater than $1,000,000 | 4 | $ | 10,189 | $ | - | $ | 2,173 | ||||||||||||||||
| Relationships greater than $500,000 but less than $1,000,000 | 8 | 5,940 | 518 | 923 | |||||||||||||||||||
| Relationships greater than $250,000 but less than $500,000 | 10 | 3,173 | - | - | |||||||||||||||||||
| Relationships less than $250,000 | 111 | 7,050 | 586 | 130 | |||||||||||||||||||
| 133 | $ | 26,352 | $ | 1,104 | $ | 3,226 | |||||||||||||||||
| December 31, 2024 | |||||||||||||||||||||||
| Relationships greater than $1,000,000 | 5 | $ | 10,210 | $ | 828 | $ | 177 | ||||||||||||||||
| Relationships greater than $500,000 but less than $1,000,000 | 6 | 4,925 | 313 | 2,173 | |||||||||||||||||||
| Relationships greater than $250,000 but less than $500,000 | 9 | 2,887 | - | 155 | |||||||||||||||||||
| Relationships less than $250,000 | 121 | 6,256 | 431 | 1,439 | |||||||||||||||||||
| 141 | $ | 24,278 | $ | 1,572 | $ | 3,944 | |||||||||||||||||
The Company takes partial charge-offs on collateral-dependent loans when carrying value exceeds estimated fair value, as determined by the most recent appraisal adjusted for current (within the quarter) conditions, less costs to dispose. Specific reserves remain in place if updated appraisals are pending and represent management's estimate of potential loss.
Internal loan reviews are completed annually on all commercial relationships, secured by commercial real estate, with a committed loan balance in excess of $2.0 million, which includes confirmation of risk rating by an independent credit officer. In addition, all commercial relationships greater than $500 thousand rated Substandard, Doubtful or Loss are reviewed and corresponding risk ratings are reaffirmed by the Bank's Problem Loan Committee, with subsequent reporting to the Management ERM Committee and the Board of Directors.
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, 2025. However, over time, additional information may result in increased reserve allocations or, alternatively, it may be deemed that the reserve allocations exceed those that are needed.
Credit Risk Management
Allowance for Credit Losses
The Company maintains the ACL at a level deemed adequate by management for expected credit losses. The Company's ACL is calculated quarterly, with any adjustment recorded to the provision for credit losses in the unaudited condensed consolidated statements of operations. A comprehensive analysis of the ACL is performed by the Company on a quarterly basis. Management evaluates the adequacy of the ACL utilizing a defined methodology to determine if it properly addresses the current and expected risks in the loan portfolio, which considers the performance of borrowers and specific evaluation of individually evaluated loans, including historical loss experiences, trends in delinquencies, nonperforming loans and other risk assets, and the qualitative factors. Risk factors are continuously reviewed and adjusted, as needed, by management when conditions support a change. Management believes its approach properly addresses relevant accounting and bank regulatory guidance for loans both collectively and individually evaluated. The results of the comprehensive analysis, including recommended changes, are governed by the Company's Reserve Adequacy Committee and subsequently presented to the Enterprise Risk Management Committee.
The ACL is evaluated based on a review of the collectability of loans in light of historical experience; the nature and volume of the loan portfolio; adverse situations that may affect a borrower's ability to repay; estimated value of any underlying collateral; and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A description of the methodology for establishing the allowance and provision for credit losses and related procedures in establishing the appropriate level of reserve is included in Note 4, Loans and Allowance for Credit Losses, to the unaudited condensed consolidated financial statements under Part I, Item 1, "Financial Information."
The following table presents the activity in the ACL for the three and nine months ended September 30, 2025 and 2024:
| 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, 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 | |||||||||||||||||||||||||||||||||||||||
| September 30, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, beginning of period | $ | 18,203 | $ | 2,634 | $ | 393 | $ | 5,259 | $ | 161 | $ | 26,650 | $ | 3,023 | $ | 191 | $ | 3,214 | $ | 29,864 | |||||||||||||||||||||||||||||||||||||||
| Allowance established for acquired PCD loans | 1,321 | 2,535 | 2 | 1,947 | - | 5,805 | 105 | 10 | 115 | 5,920 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Provision for loan losses | 11,103 | 1,809 | (283) | (672) | 110 | 12,067 | 1,773 | 275 | 2,048 | 14,115 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Charge-offs | (333) | - | - | (159) | - | (492) | - | (88) | (88) | (580) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Recoveries | 4 | 12 | 1 | 163 | - | 180 | 54 | 77 | 131 | 311 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, end of period | $ | 30,298 | $ | 6,990 | $ | 113 | $ | 6,538 | $ | 271 | $ | 44,210 | $ | 4,955 | $ | 465 | $ | 5,420 | $ | 49,630 | |||||||||||||||||||||||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||||||||||||||
| September 30, 2024 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, beginning of period | $ | 17,873 | $ | 2,241 | $ | 437 | $ | 5,369 | $ | 157 | $ | 26,077 | $ | 2,424 | $ | 201 | $ | 2,625 | $ | 28,702 | |||||||||||||||||||||||||||||||||||||||
| Allowance established for acquired PCD loans | 1,321 | 2,535 | 2 | 1,947 | - | 5,805 | 105 | 10 | 115 | 5,920 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Provision for loan losses | 11,417 | 2,223 | (327) | (822) | 114 | 12,605 | 2,410 | 333 | 2,743 | 15,348 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Charge-offs | (345) | (23) | - | (219) | - | (587) | (50) | (206) | (256) | (843) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Recoveries | 32 | 14 | 1 | 263 | - | 310 | 66 | 127 | 193 | 503 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, end of period | $ | 30,298 | $ | 6,990 | $ | 113 | $ | 6,538 | $ | 271 | $ | 44,210 | $ | 4,955 | $ | 465 | $ | 5,420 | $ | 49,630 | |||||||||||||||||||||||||||||||||||||||
The ACL totaled $48.1 million at September 30, 2025, a decrease of $1.5 million from $49.6 million at September 30, 2024. The ACL as a percentage of the total loan portfolio was 1.21% at September 30, 2025 compared to 1.25% at September 30, 2024.
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, 18 loans, with aggregate outstanding principal balances of $2.7 million, had cumulative partial charge-offs to the ACL totaling $1.1 million as of September 30, 2025. 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 lifetime 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.
Deposits
Total deposits decreased by $89.5 million and totaled $4.5 billion at September 30, 2025 compared to $4.6 billion at December 31, 2024. Time deposits, interest bearing demand deposits, money market deposits and savings deposits decreased by $69.3 million, $11.6 million, $8.4 million and $7.7 million, respectively, partially offset by an increase in non-interest bearing demand deposits of $7.4 million from December 31, 2024 to September 30, 2025. Money market deposits and time deposits were impacted by increases in brokered money market deposits of $36.9 million and brokered time deposits of $50.6 million during the third quarter of 2025. The Bank has experienced some reductions in higher yielding promotional balances, which was the primary driver of the declines in time deposit and money market accounts. The decreases in the other categories were consistent with normal cyclical activity.
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.
On September 30, 2025, the Company redeemed its $32.5 million outstanding 6.0% fixed-to-floating rate subordinated notes due December 30, 2028. During the three months ended September 30, 2025, the Company amortized the remaining debt issuance costs of $298 thousand as a result of the redemption. At September 30, 2025, the variable interest rate of three-month CME term SOFR rate, plus a spread adjustment of 0.26161% and a margin of 3.16%, on our subordinated debt was 7.72%
FHLB advances increased by $93.9 million to $208.9 million at September 30, 2025 compared to $115.0 million at December 31, 2024. The increase was due to higher utilization of overnight borrowings during the third quarter of 2025 as lending and investing activities increased and due to the subordinated note redemption. The Bank seeks to maintain sufficient liquidity to ensure client needs can be addressed in a timely basis.
The Company assumed unsecured subordinated notes of $31.0 million from the Merger. The subordinated notes have a fixed rate of interest equal to 4.50% until December 30, 2025. After that term, the variable rate of interest is equal to the three-month CME term SOFR rate plus 4.04%.
The Company also assumed junior subordinated trust preferred debt of $10.3 million from the Merger. 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. For the nine months ended September 30, 2025 and 2024, the cost of the trust preferred debt, excluding the fair value mark, was 6.33% and 7.42%, respectively.
Shareholders' Equity, Capital Adequacy and Regulatory Matters
Capital management in a regulated financial services industry must properly balance return on equity to its shareholders while maintaining sufficient levels of capital and related risk-based regulatory capital ratios to satisfy statutory regulatory requirements. The Company's capital management strategies have been developed to provide attractive rates of returns to its shareholders, while remaining "well-capitalized" under applicable banking regulations.
Shareholders' equity totaled $571.9 million at September 30, 2025, an increase of $55.3 million from $516.7 million at December 31, 2024. The increase was primarily attributable to net income of $59.4 million, other comprehensive income of $8.8 million and the issuance of treasury shares for share-based compensation which increased shareholders' equity by $2.5 million, partially offset by dividends paid of $15.4 million for the nine months ended September 30, 2025. Other comprehensive income included an after-tax increase of $9.9 million from net unrealized gains on investment securities,
partially offset by $1.1 million in net unrealized losses from cash flow hedges. For the nine months ended September 30, 2025, total comprehensive income totaled $68.1 million, an increase of $47.1 million from total comprehensive income of $21.0 million for the same period in 2024. This increase was due primarily to an increase in net income of $51.0 million and an increase in after-tax net unrealized gains on investment securities of $2.9 million, partially offset by an increase in after-tax net unrealized losses on interest rate swaps designated as cash flow hedges of $864 thousand between the comparative periods. The increase in net unrealized gains on investment securities was primarily caused by a decline in market rates.
At September 30, 2025, book value per common share was $29.33 compared to $26.65 at December 31, 2024. Tangible book value per share increased from $21.19 at December 31, 2024 to $24.12 at September 30, 2025, primarily as a result of the increase in shareholders' equity from net income. See "Supplemental Reporting of Non-GAAP Measures."
The Company routinely evaluates its capital levels in light of its risk profile to assess its capital needs. The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. At September 30, 2025 and December 31, 2024, 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, 2025 and December 31, 2024.
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, 2024, Item 1 - Business, under the topic Basel III Capital Rules. At September 30, 2025, the Parent Company's and the Bank's capital conservation buffers, based on the most restrictive Total Capital to risk weighted assets capital ratio, were 5.1% and 4.9%, which are greater than the 2.5% requirement.
Liquidity
The primary function of asset/liability management is to ensure adequate liquidity and manage the Company's sensitivity to changing interest rates. Liquidity management involves the ability to meet the cash flow requirements of clients who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. The Company's primary sources of funds consist of deposit inflows, loan repayments, borrowings from the FHLB of Pittsburgh and maturities and prepayments of investment securities. While maturities and scheduled amortization of loans and investment securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
The Company regularly adjusts its investments in liquid assets based upon its assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and investment securities and the objectives of its asset/liability management policy. The Company's most liquid assets are cash and cash equivalents.
At September 30, 2025, cash and cash equivalents totaled $184.1 million compared to $248.9 million at December 31, 2024. The decrease of $64.7 million reflects the decrease in deposits of $89.5 million, the increase in investment securities of $60.6 million, the increase in loans of $48.5 million and the redemption of subordinated notes of $31.7 million, partially offset by net income of $59.4 million and an increase in FHLB advances and other borrowings and repurchase agreements of $100.5 million for the nine months ended September 30, 2025. Unencumbered investment securities totaled $245.2 million at September 30, 2025 compared to $160.3 million at December 31, 2024. At September 30, 2025 and December 31, 2024, the Company had $15.9 million 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 $66.6 million and was $1.9 billion at both September 30, 2025 and December 31, 2024, of which $209.5 million and $116.6 million in advances and letters of credit were outstanding at these same periods, respectively. The increase was due to higher utilization of overnight borrowings during the third quarter of 2025 as lending and investing activities increased and due to the subordinated note redemption.
The Company's ability to borrow from the FHLB is dependent on having sufficient qualifying collateral, which generally consists of loans primarily secured by real estate. In addition, the Company had $20.0 million in available unsecured lines of credit with other banks at September 30, 2025 and December 31, 2024. The Bank regularly tests its various sources of funding to ensure accessibility.
Supplemental Reporting of Non-GAAP Measures
Management believes providing certain "non-GAAP" financial information will assist investors in their understanding of the effect on recent financial results from non-recurring charges.
As a result of prior acquisitions, the Company had intangible assets consisting of goodwill and core deposit and other intangible assets totaling $110.1 million and $115.9 million at September 30, 2025 and December 31, 2024, respectively. During the nine months ended September 30, 2025 and 2024, the Company incurred merger-related expenses of $2.6 million and $18.8 million, respectively, in connection with the Merger with Codorus Valley.
Tangible book value per common share and the impact of the 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, 2024 to September 30, 2025 is primarily due to net income of $59.4 million and other comprehensive income, net of taxes, of $8.8 million partially offset by dividends paid of $15.4 million. Other comprehensive income increased due to net unrealized gains on AFS securities partially offset by net unrealized losses on interest rate swaps designated as hedging instruments.
The following table presents the computation of each non-GAAP based measure shown together with its most directly comparable GAAP-based measure.
| September 30, 2025 | December 31, 2024 | |||||||||||||
| Tangible Book Value per Common Share | ||||||||||||||
| Shareholders' equity (most directly comparable GAAP-based measure) | $ | 571,936 | $ | 516,682 | ||||||||||
| Less: Goodwill | 69,751 | 68,106 | ||||||||||||
| Other intangible assets | 40,338 | 47,765 | ||||||||||||
| Related tax effect | (8,471) | (10,031) | ||||||||||||
| Tangible common equity (non-GAAP) | $ | 470,318 | $ | 410,842 | ||||||||||
| Common shares outstanding | 19,501 | 19,390 | ||||||||||||
| Book value per share (most directly comparable GAAP based measure) | $ | 29.33 | $ | 26.65 | ||||||||||
| Intangible assets per share | 5.21 | 5.46 | ||||||||||||
| Tangible book value per share (non-GAAP) | $ | 24.12 | $ | 21.19 | ||||||||||
| Adjusted Net Income (Loss) and Adjusted Diluted Earnings (Loss) Per Share | |||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
|
September 30 2025 |
September 30 2024 |
September 30 2025 |
September 30 2024 |
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| Net income (loss) (most directly comparable GAAP-based measure) | $ | 21,865 | $ | (7,903) | $ | 59,364 | $ | 8,366 | |||||||||||||||
| Plus: Merger-related expenses | - | 16,977 | 2,617 | 18,784 | |||||||||||||||||||
| Plus: Executive retirement expenses | - | 4,758 | - | 4,758 | |||||||||||||||||||
| Plus: Provision for credit losses on non-PCD loans | - | 15,504 | - | 15,504 | |||||||||||||||||||
| Less: Related tax effect | - | (7,915) | (589) | (8,056) | |||||||||||||||||||
| Adjusted net income (non-GAAP) | $ | 21,865 | $ | 21,421 | $ | 61,392 | $ | 39,356 | |||||||||||||||
| Weighted average shares - diluted (most directly comparable GAAP-based measure) | 19,364 | 19,226 | 19,345 | 13,441 | |||||||||||||||||||
| Diluted earnings (loss) per share (most directly comparable GAAP-based measure) | $ | 1.13 | $ | (0.41) | $ | 3.07 | $ | 0.62 | |||||||||||||||
| Weighted average shares - diluted (non-GAAP) | 19,364 | 19,226 | 19,345 | 13,441 | |||||||||||||||||||
| Diluted earnings per share, adjusted (non-GAAP) | $ | 1.13 | $ | 1.11 | $ | 3.17 | $ | 2.93 | |||||||||||||||
Orrstown Financial Services Inc. published this content on November 06, 2025, and is solely responsible for the information contained herein. Distributed via Edgar on November 06, 2025 at 13:41 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]