Orrstown Financial Services, Inc. Reports Second Quarter
Orrstown Financial Services, Inc. Reports Second Quarter
  • Net income of $8.9 million and diluted earnings per share of $0.83 for the quarter ended June 30, 2022 compared to net income of $8.4 million and diluted earnings per share of $0.76 for the quarter ended March 31, 2022; earnings grew despite a significant reduction in Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) income and a higher provision for loan losses in the second quarter of 2022
  • Return on average assets of 1.25% in the second quarter of 2022 compared to 1.20% in the first quarter of 2022
  • Net interest margin on a tax equivalent basis increased to 3.68% in the second quarter of 2022 from 3.49% in the first quarter of 2022; reflects the deployment of excess liquidity into commercial loans and investments as well as the favorable impact of our asset-sensitive balance sheet in a rising interest rate environment
  • Second quarter commercial loan growth, excluding SBA PPP loans, was $125.9 million, or 34% annualized
  • Noninterest income of $7.2 million in the second quarter of 2022 compared to $7.5 million in the first quarter of 2022; swap fee income opportunities continue with commercial clients
  • Noninterest expenses decreased by $0.6 million to $18.8 million in the second quarter of 2022 from $19.4 million in the first quarter of 2022; efficiency ratio improved to 60% in the second quarter of 2022 from 64% in the first quarter of 2022
  • Provision for loan losses of $1.8 million in the second quarter of 2022 compared to $0.3 million in the first quarter of 2022; increase due to combined impact of higher loan production during the three months ended June 30, 2022 compared to the three months ended March 31, 2022 and the reduction of certain qualitative factor assumptions during the first quarter of 2022
  • The Company repurchased 407,824 shares of its common stock at an average price of $24.25 per share during the three months ended June 30, 2022
  • The Board of Directors declared a cash dividend of $0.19 per common share, payable August 8, 2022, to shareholders of record as of August 1, 2022

SHIPPENSBURG, Pa., July 19, 2022 (GLOBE NEWSWIRE) — Orrstown Financial Services, Inc. (“Orrstown” or the “Company”) (NASDAQ: ORRF), the parent company of Orrstown Bank (the “Bank”), announced earnings for the three months ended June 30, 2022. Net income totaled $8.9 million for the three months ended June 30, 2022, compared with $8.4 million for the three months ended March 31, 2022 and $8.8 million for the three months ended June 30, 2021. Diluted earnings per share totaled $0.83 for the three months ended June 30, 2022, compared with $0.76 for the three months ended March 31, 2022 and $0.79 for the three months ended June 30, 2021.

Thomas R. Quinn, Jr., President & CEO, commented, “The Orrstown growth story was accelerated with key hires and acquisitions in 2018 and 2019 and resonated throughout 2020 and 2021 with our PPP success and significant loan production. This has led to strong profitability in 2022. In the second quarter of 2022, despite a $1.6 million reduction in PPP-related interest income and a $1.5 million increase in provision for loan losses, our net income and earnings per share grew on a linked quarter basis. This occurred as a result of the growth in the loan portfolio since 2020, strategic balance sheet management efforts and expense reductions. We have also benefited from three interest rate increases so far in 2022 and any future increases are expected to further enhance our net interest margin.”

Mr. Quinn added, “Our focus for the second half of 2022 is on navigating through an uncertain economic environment to enhance shareholder value. We will continue to adjust our balance sheet strategy while considering economic data in an effort to counteract the impact of a potential downturn. While we have experienced strong headwinds in mortgage banking, our wealth management team continues to generate steady earnings despite a steep market decline. We continue to seek opportunities to maintain or improve non-interest income from swaps and other relationship-based fees. Orrstown also plans to continue to make investments in technology to enhance its digital platform. Despite the uncertainty of the operating environment, we believe that Orrstown is well positioned for success.”

DISCUSSION OF RESULTS

Balance Sheet

Loans

Excluding SBA PPP loans, total loans increased by $131.7 million from March 31, 2022 to June 30, 2022, or 29% annualized. SBA PPP loans, net of deferred fees and costs, declined by $92.3 million to $30.2 million at June 30, 2022 from $122.5 million at March 31, 2022 due to forgiveness activity. Commercial loans, excluding SBA PPP loans, increased by $125.9 million, or 34% annualized, from March 31, 2022 to June 30, 2022. Loans held for investment, which includes SBA PPP loans, increased by $39.3 million from March 31, 2022 to June 30, 2022, or 8% annualized, as the impact of SBA PPP loan forgiveness was offset by net commercial and home equity loan production.

The remaining gross balance of SBA PPP loans is $30.9 million at June 30, 2022. Net deferred SBA PPP fees of $0.7 million remain at June 30, 2022, substantially all of which are expected to be earned by the end of 2022.

The consumer portfolio grew by $5.7 million, or 6% annualized, in the three months ended June 30, 2022. Home equity lines of credit increased by $6.5 million, or 16% annualized, in the three months ended June 30, 2022.

Investment Securities

Investment securities decreased by $17.3 million to $519.2 million at June 30, 2022 compared to $536.5 million at March 31, 2022. During the second quarter of 2022, the Bank purchased municipal securities totaling $10.8 million and mortgage-backed securities totaling $15.8 million. These purchases were offset by net unrealized losses of $18.6 million, which resulted from market interest rate increases, the call of a non-agency collateralized mortgage obligation (“CMO”) security of $13.5 million and normal paydown activity. With the rise in interest rates, the Company purchased certain investment securities, which have enhanced interest income, while still maintaining an acceptable interest rate risk profile. See Appendix B for a summary of the Bank’s investment securities at June 30, 2022, highlighting the concentrations, credit ratings and credit enhancement levels of the investment securities portfolio at such date.

Deposits

Deposits decreased by $67.4 million, or 11% annualized, totaling approximately $2.5 billion at both June 30, 2022 and March 31, 2022. In the second quarter of 2022, interest-bearing demand deposits decreased by $46.3 million, or 19% annualized, certificates of deposits decreased by $21.4 million, or 30% annualized, and money market and savings deposits decreased by $11.1 million, or 6% annualized, in each case from March 31, 2022. These decreases were partially offset by an increase in non-interest bearing demand deposits of $11.5 million, or 8% annualized. The decrease in deposits resulted primarily from seasonality from public fund balances and certificate of deposit runoff. The Bank’s loan-to-deposit ratio was 81% at June 30, 2022, an increase of 3% from March 31, 2022 due to the combination of loan growth and lower deposit balances.

Net Interest Income and Margin

Net interest income increased by $1.5 million to $24.1 million for the three months ended June 30, 2022 compared to $22.6 million for the three months ended March 31, 2022. Net interest margin on a tax equivalent basis increased to 3.68% in the second quarter of 2022 from 3.49% in the first quarter of 2022. The increase in net interest margin was primarily a result of the investment of cash into higher yielding commercial loans and investment securities and the rising interest rates that positively impacted interest-earning assets.

Interest income on loans, for the three months ended June 30, 2022, included prepayment fee income of $0.4 million, an increase of $0.3 million, compared to $0.1 million for the three months ended March 31, 2022.

Interest income recognized on SBA PPP loans totaled $1.9 million in the three months ended June 30, 2022 compared to $3.5 million in the three months ended March 31, 2022. The SBA PPP loan portfolio averaged $72.5 million in the three months ended June 30, 2022 compared to $155.3 million in the three months ended March 31, 2022, which reflects continued forgiveness from the SBA.

Average cash and cash equivalents decreased from $199.8 million in the three months ended March 31, 2022 to $131.4 million in the three months ended June 30, 2022. The decrease reflects the deployment of excess cash balances into commercial loans and investment securities, as well as a decrease in deposits.

Provision for Loan Losses

The Company recorded a provision for loan losses of $1.8 million for the three months ended June 30, 2022 compared to $0.3 million for the three months ended March 31, 2022 due to increased loan production during the second quarter of 2022 compared to the first quarter of 2022, and the reduction of certain qualitative factor assumptions for the three months ended March 31, 2022. Net charge-offs were $4 thousand for the three months ended June 30, 2022 compared to net recoveries of $28 thousand for the three months ended March 31, 2022. The allowance for loan losses totaled $23.3 million at June 30, 2022, compared with $21.5 million at March 31, 2022, and the allowance for loan losses to total loans increased to 1.15% at June 30, 2022 from 1.09% from March 31, 2022.

Asset quality metrics strengthened further in the second quarter of 2022. Classified loans decreased by $3.7 million, or 16%, to $19.6 million at June 30, 2022 from $23.4 million at March 31, 2022 due primarily to risk rating upgrades. Nonperforming loans remained relatively flat at 0.27% and 0.28% of gross loans at June 30, 2022 and March 31, 2022, respectively. As a result of the increase in the allowance for loan losses, the ratio of the allowance for loan losses to nonaccrual loans increased to 432% at June 30, 2022 from 390% at March 31, 2022. The allowance for loan losses to non-SBA guaranteed loans(1) remained at 1.2% at June 30, 2022 and March 31, 2022. Management believes the allowance for loan losses to be adequate based on current asset quality metrics and economic conditions.

Noninterest Income

Noninterest income totaled $7.2 million in the three months ended June 30, 2022 compared with $7.5 million in the three months ended March 31, 2022.

Swap fee income remained strong at $0.8 million for the three months ended June 30, 2022 compared to $1.0 million for the three months ended March 31, 2022.

Mortgage banking income decreased by $0.2 million from $0.7 million in the first quarter of 2022 to $0.5 million in the second quarter of 2022. Market conditions during the first half of 2022, including low housing inventory and a rising interest rate environment, caused a further decline in residential mortgage loan production and corresponding reductions in the residential mortgage loan pipeline and secondary market sales during the three months ended June 30, 2022,. These changes resulted in a decrease in the gain on sale of residential mortgage loans of $0.3 million compared to the first quarter of 2022. Mortgage loans sold totaled $22.6 million in the second quarter of 2022 compared with $31.9 million in the first quarter of 2022.

Other income decreased by $0.2 million to $0.8 million for the three months ended June 30, 2022 from $1.0 million during the three months ended March 31, 2022. The second quarter included a gain on the sale of an SBA loan of $35 thousand compared to a gain on the sale of an SBA loan of $271 thousand in the three months ended March 31, 2022.

For the three months ended June 30, 2022, net losses on investment securities decreased by $146 thousand to $3 thousand from the first quarter of 2022. During the three months ended March 31, 2022, there was an impairment charge of $171 thousand on a non-agency CMO, which was subsequently called in the three months ended June 30, 2022.

Noninterest Expenses

Noninterest expenses decreased by $0.6 million to $18.8 million in the three months ended June 30, 2022 from $19.4 million in the three months ended March 31, 2022.

Advertising and bank promotions increased by $0.5 million to $0.9 million for the three months ended June 30, 2022 from $0.4 million for the three months ended March 31, 2022 due to $0.5 million in contributions to the Pennsylvania Educational Improvement Tax Credit Program. The related tax credit on these contributions caused taxes other than income to decrease by $0.5 million to $0.1 million for the second quarter of 2022 from $0.6 million for the first quarter of 2022.

Other expenses decreased by $0.4 million from $2.1 million for the three months ended March 31, 2022 to $1.7 million for the three months ended June 30, 2022 due to a decline in loan-related costs incurred by the Bank of $0.3 million and improvement in the market value of derivatives of $0.1 million. FDIC insurance expense decreased from $0.3 million during the first quarter of 2022 to $0.2 million for the second quarter of 2022 due to a decline in both the assessment base and rate for the Bank.

(1) Non-GAAP measure. See Appendix A for additional information.

Income Taxes

The Company’s effective tax rate for the second quarter of 2022 was 17.4% compared with 19.4% for the first quarter of 2022. The Company’s effective tax rate for the three months ended June 30, 2022 is less than the 21% federal statutory rate due to tax-exempt income, including interest earned on tax-exempt loans and securities and income from life insurance policies, as well as tax credits. The lower effective tax rate in the second quarter of 2022 resulted from an increase in non-taxable investment securities and loans, which lowered projected taxable income for the full year.

Capital

Shareholders’ equity totaled $237.5 million at June 30, 2022, a decrease of $17.3 million from $254.8 million at March 31, 2022. The decrease was primarily attributable to a decrease of $14.7 million in accumulated other comprehensive income due primarily to an increase in unrealized losses on available-for-sale securities resulting from higher market interest rates, share repurchases of $9.9 million, and dividends paid of $2.1 million, partially offset by net income of $8.9 million for the three months ended June 30, 2022. Tangible book value per share(1) decreased by 3.8% from $21.03 per share at March 31, 2022 to $20.23 per share at June 30, 2022 as a result of the decrease in shareholders’ equity from the increase in unrealized losses on available-for-sale securities and share repurchases.

The Company’s tangible common equity ratio decreased to 7.7% at June 30, 2022 from 8.1% at March 31, 2022 due primarily to the decrease in tangible equity from share repurchases and the unrealized losses on available-for-sale securities. The Company’s Tier 1 leverage ratio decreased to 8.5% at June 30, 2022 from 8.8% at March 31, 2022 due to the impact of share repurchases on shareholders’ equity and the increase in average assets caused primarily by an increase in average deposits over that period. The Company’s total risk-based capital ratio decreased to 13.5% at June 30, 2022 from 14.3% at March 31, 2022 due to deployment of cash into commercial loans, a decrease in capital from the share repurchases and an increase in deferred tax assets resulting from the increase in unrealized losses on available-for-sale securities.

The Board of Directors approved a quarterly dividend of $0.19 per share, payable August 8, 2022, to shareholders of record as of August 1, 2022. The dividend payout ratio totaled 23% for the three months ended June 30, 2022 compared to 25% for the three months ended March 31, 2022. At this time, the Company continues to believe that capital is adequate to support the risks inherent in the balance sheet, as well as growth requirements.

(1) Non-GAAP measure. See Appendix A for additional information.

Investor Relations Contact:  
Neelesh Kalani
Executive Vice President, Chief Financial Officer
Phone (717) 510-7097

               
ORRSTOWN FINANCIAL SERVICES, INC.              
FINANCIAL HIGHLIGHTS (Unaudited)              
               
  Three Months Ended   Six Months Ended
  June 30,   June 30,   June 30,   June 30,
(Dollars in thousands, except per share amounts)   2022       2021       2022       2021  
               
Profitability for the period:              
Net interest income $ 24,118     $ 21,901     $ 46,691     $ 43,756  
Provision for loan losses   1,775       625       2,075       (375 )
Noninterest income   7,194       6,664       14,668       14,208  
Noninterest expenses   18,794       17,033       38,158       34,816  
Income before income taxes   10,743       10,907       21,126       23,523  
Income tax expense   1,872       2,131       3,887       4,540  
Net income available to common shareholders $ 8,871     $ 8,776     $ 17,239     $ 18,983  
               
Financial ratios:              
Return on average assets (1)   1.25 %     1.20 %     1.22 %     1.33 %
Return on average equity (1)   14.42 %     13.56 %     13.51 %     15.04 %
Net interest margin (1)   3.68 %     3.24 %     3.59 %     3.31 %
Efficiency ratio   60.0 %     59.6 %     62.2 %     60.1 %
Income per common share:              
Basic $ 0.84     $ 0.80     $ 1.61     $ 1.73  
Diluted $ 0.83     $ 0.79     $ 1.59     $ 1.71  
               
Average equity to average assets   8.64 %     8.83 %     9.05 %     8.84 %
               
(1) Annualized.              
ORRSTOWN FINANCIAL SERVICES, INC.      
FINANCIAL HIGHLIGHTS (Unaudited)      
(continued)      
  June 30,   December 31,
    2022       2021  
At period-end:      
Total assets $ 2,824,201     $ 2,834,565  
Total deposits   2,478,616       2,464,929  
Loans, net of allowance for loan losses   1,994,350       1,958,806  
Loans held-for-sale, at fair value   7,824       8,868  
Securities available for sale   512,698       472,438  
Borrowings   25,965       25,197  
Subordinated notes   31,994       31,963  
Shareholders’ equity   237,527       271,656  
       
Credit quality and capital ratios (1):      
Allowance for loan losses to total loans   1.15 %     1.07 %
Total nonaccrual loans to total loans   0.27 %     0.33 %
Nonperforming assets to total assets   0.19 %     0.23 %
Allowance for loan losses to nonaccrual loans   432 %     328 %
Total risk-based capital:      
Orrstown Financial Services, Inc.   13.5 %     15.0 %
Orrstown Bank   13.3 %     14.0 %
Tier 1 risk-based capital:      
Orrstown Financial Services, Inc.   10.9 %     12.2 %
Orrstown Bank   12.2 %     12.9 %
Tier 1 common equity risk-based capital:      
Orrstown Financial Services, Inc.   10.9 %     12.2 %
Orrstown Bank   12.2 %     12.9 %
Tier 1 leverage capital:      
Orrstown Financial Services, Inc.   8.5 %     8.5 %
Orrstown Bank   9.5 %     8.9 %
       
Book value per common share $ 22.25     $ 24.29  
       
(1) Capital ratios are estimated, subject to regulatory filings      
ORRSTOWN FINANCIAL SERVICES, INC.        
CONSOLIDATED BALANCE SHEETS (Unaudited)        
         
(Dollars in thousands, except per share amounts)   June 30, 2022   December 31, 2021
Assets        
Cash and due from banks   $ 25,825     $ 21,217  
Interest-bearing deposits with banks     86,081       187,493  
Cash and cash equivalents     111,906       208,710  
Restricted investments in bank stocks     6,500       7,252  
Securities available for sale (amortized cost of $549,876 and $466,806 at June 30, 2022 and December 31, 2021, respectively)     512,698       472,438  
Loans held for sale, at fair value     7,824       8,868  
Loans     2,017,629       1,979,986  
Less: Allowance for loan losses     (23,279 )     (21,180 )
Net loans     1,994,350       1,958,806  
Premises and equipment, net     33,429       34,045  
Cash surrender value of life insurance     70,912       70,217  
Goodwill     18,724       18,724  
Other intangible assets, net     3,610       4,183  
Accrued interest receivable     8,425       8,234  
Other assets     55,823       43,088  
Total assets   $ 2,824,201     $ 2,834,565  
Liabilities        
Deposits:        
Noninterest-bearing   $ 569,231     $ 553,238  
Interest-bearing     1,909,385       1,911,691  
Total deposits     2,478,616       2,464,929  
Securities sold under agreements to repurchase     24,287       23,301  
FHLB advances and other     1,678       1,896  
Subordinated notes     31,994       31,963  
Accrued interest and other liabilities     50,099       40,820  
Total liabilities     2,586,674       2,562,909  
Shareholders’ Equity        
Preferred stock, $1.25 par value per share; 500,000 shares authorized; no shares issued or outstanding            
Common stock, no par value—$0.05205 stated value per share 50,000,000 shares authorized; 11,236,558 shares issued and 10,675,679 outstanding at June 30, 2022; 11,258,167 shares issued and 11,183,050 outstanding at December 31, 2021     585       586  
Additional paid—in capital     188,178       189,689  
Retained earnings     91,723       78,700  
Accumulated other comprehensive (loss) income     (29,370 )     4,449  
Treasury stock— 560,879 and 75,117 shares, at cost at June 30, 2022 and December 31, 2021, respectively     (13,589 )     (1,768 )
Total shareholders’ equity     237,527       271,656  
Total liabilities and shareholders’ equity   $ 2,824,201     $ 2,834,565  
ORRSTOWN FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,   June 30,   June 30,
(In thousands, except per share amounts)     2022       2021       2022       2021  
Interest income                
Loans   $ 22,027     $ 21,323     $ 43,396     $ 42,834  
Investment securities – taxable     1,957       1,614       3,555       3,493  
Investment securities – tax-exempt     1,131       638       1,853       1,138  
Short-term investments     235       81       336       120  
Total interest income     25,350       23,656       49,140       47,585  
Interest expense                
Deposits     701       1,081       1,386       2,473  
Securities sold under agreements to repurchase     7       8       14       17  
FHLB advances and other     21       164       43       335  
Subordinated notes     503       502       1,006       1,004  
Total interest expense     1,232       1,755       2,449       3,829  
Net interest income     24,118       21,901       46,691       43,756  
Provision for loan losses     1,775       625       2,075       (375 )
Net interest income after provision for loan losses     22,343       21,276       44,616       44,131  
Noninterest income                
Service charges     1,194       880       2,267       1,765  
Interchange income     1,064       1,064       2,045       2,019  
Swap fee income     785       15       1,738       68  
Wealth management income     2,894       2,930       5,763       5,653  
Mortgage banking activities     498       1,162       1,219       3,351  
Investment securities (losses) gains     (3 )     11       (149 )     156  
Other income     762       602       1,785       1,196  
Total noninterest income     7,194       6,664       14,668       14,208  
Noninterest expenses                
Salaries and employee benefits     11,312       10,212       22,649       20,409  
Occupancy, furniture and equipment     2,423       2,400       4,990       4,918  
Data processing     1,165       1,032       2,218       2,051  
Advertising and bank promotions     881       274       1,236       699  
FDIC insurance     190       158       473       352  
Professional services     722       579       1,530       1,300  
Taxes other than income     108       462       672       913  
Intangible asset amortization     281       324       573       658  
Other operating expenses     1,712       1,592       3,817       3,516  
Total noninterest expenses     18,794       17,033       38,158       34,816  
Income before income tax expense     10,743       10,907       21,126       23,523  
Income tax expense     1,872       2,131       3,887       4,540  
Net income   $ 8,871     $ 8,776     $ 17,239     $ 18,983  
                 
Share information:                
Basic earnings per share   $ 0.84     $ 0.80     $ 1.61     $ 1.73  
Diluted earnings per share   $ 0.83     $ 0.79     $ 1.59     $ 1.71  
Weighted average shares – basic     10,610       10,975       10,735       10,975  
Weighted average shares – diluted     10,744       11,112       10,875       11,093  
ORRSTOWN FINANCIAL SERVICES, INC.        
ANALYSIS OF NET INTEREST INCOME        
Average Balances and Interest Rates, Taxable-Equivalent Basis (Unaudited)    
  Three Months Ended
  6/30/2022   3/31/2022   12/31/2021   9/30/2021   6/30/2021
      Taxable-   Taxable-       Taxable-   Taxable-       Taxable-   Taxable-       Taxable-   Taxable-       Taxable-   Taxable-
  Average   Equivalent   Equivalent   Average   Equivalent   Equivalent   Average   Equivalent   Equivalent   Average   Equivalent   Equivalent   Average   Equivalent   Equivalent
(Dollars in thousands) Balance   Interest   Rate   Balance   Interest   Rate   Balance   Interest   Rate   Balance   Interest   Rate   Balance   Interest   Rate
Assets                                                          
Federal funds sold & interest-bearing bank balances $ 131,449   $ 235     0.72 %   $ 199,788   $ 101     0.20 %   $ 250,336   $ 98     0.16 %   $ 347,242   $ 135     0.15 %   $ 290,039   $ 81     0.11 %
Investment securities (1)   523,940     3,388     2.59       472,195     2,512     2.13       477,217     2,506     2.08       464,417     2,339     2.00       438,110     2,421     2.22  
Loans (1)(2)(3)   2,008,283     22,090     4.41       1,974,804     21,429     4.39       1,975,014     21,559     4.33       1,919,926     19,945     4.12       2,014,600     21,375     4.26  
Total interest-earning assets   2,663,672     25,713     3.87       2,646,787     24,042     3.67       2,702,567     24,163     3.55       2,731,585     22,419     3.26       2,742,749     23,877     3.49  
Other assets   192,561             184,300             187,622             195,089             188,810        
Total $ 2,856,233           $ 2,831,087           $ 2,890,189           $ 2,926,674           $ 2,931,559        
Liabilities and Shareholders’ Equity                                                
Interest-bearing demand deposits $ 1,420,051     301     0.09     $ 1,398,182     256     0.07     $ 1,430,845     273     0.08     $ 1,411,243     286     0.08     $ 1,394,384     292     0.08  
Savings deposits   236,916     63     0.11       227,676     57     0.10       215,957     55     0.10       209,112     53     0.10       200,439     50     0.10  
Time deposits   275,408     337     0.49       298,618     372     0.51       313,148     461     0.58       349,215     598     0.68       382,467     739     0.78  
Total interest-bearing deposits   1,932,375     701     0.15       1,924,476     685     0.14       1,959,950     789     0.16       1,969,570     937     0.19       1,977,290     1,081     0.22  
Securities sold under agreements to repurchase   24,045     7     0.11       23,530     7     0.12       24,069     7     0.12       23,578     8     0.13       22,417     8     0.14  
FHLB advances and other   1,741     21     4.74       1,850     22     4.74       1,956     23     4.70       45,071     123     1.09       57,896     164     1.14  
Subordinated notes   31,985     503     6.29       31,969     503     6.29       31,954     503     6.29       31,938     503     6.29       31,924     502     6.29  
Total interest-bearing liabilities   1,990,146     1,232     0.25       1,981,825     1,217     0.25       2,017,929     1,322     0.26       2,070,157     1,571     0.30       2,089,527     1,755     0.34  
Noninterest-bearing demand deposits   572,171             540,139             559,882             548,923             545,617        
Other   47,190             40,919             42,380             38,409             37,561        
Total Liabilities   2,609,507             2,562,883             2,620,191             2,657,489             2,672,705        
Shareholders’ Equity   246,726             268,204             269,998             269,185             258,854        
Total $ 2,856,233           $ 2,831,087           $ 2,890,189           $ 2,926,674           $ 2,931,559        
Taxable-equivalent net interest income / net interest spread       24,481     3.62 %         22,825     3.42 %         22,841     3.29 %         20,848     2.96 %         22,122     3.15 %
Taxable-equivalent net interest margin         3.68 %           3.49 %           3.35 %           3.03 %           3.24 %
Taxable-equivalent adjustment       (363 )             (252 )             (243 )             (228 )             (221 )    
Net interest income     $ 24,118             $ 22,573             $ 22,598             $ 20,620             $ 21,901      
Ratio of average interest-earning assets to average interest-bearing liabilities         134 %           134 %           134 %           132 %           131 %
                                                           
                                                           
NOTES:                               
(1) Yields and interest income on tax-exempt assets have been computed on a taxable-equivalent basis assuming a 21% tax rate.
(2) Average balances include nonaccrual loans.
(3) Interest income on loans includes prepayment and late fees, where applicable
ORRSTOWN FINANCIAL SERVICES, INC.            
ANALYSIS OF NET INTEREST INCOME        
Average Balances and Interest Rates, Taxable-Equivalent Basis (Unaudited)    
  Six Months Ended
  June 30, 2022   June 30, 2021
      Taxable-   Taxable-       Taxable-   Taxable-
  Average   Equivalent   Equivalent   Average   Equivalent   Equivalent
(Dollars in thousands) Balance   Interest   Rate   Balance   Interest   Rate
Assets                      
Federal funds sold & interest-bearing bank balances $ 165,430     $ 336     0.41 %   $ 218,216     $ 120     0.11 %
Investment securities (1)   498,210       5,900     2.37       453,108       4,933     2.20  
Loans (1)(2)(3)   1,991,636       43,519     4.40       2,023,858       42,949     4.28  
Total interest-earning assets   2,655,276       49,755     3.77       2,695,182       48,002     3.59  
Other assets   188,454               185,791          
Total $ 2,843,730             $ 2,880,973          
Liabilities and Shareholders’ Equity                      
Interest-bearing demand deposits $ 1,409,177       557     0.08     $ 1,364,483       728     0.11  
Savings deposits   232,322       120     0.10       192,039       96     0.10  
Time deposits   286,949       709     0.50       389,828       1,649     0.85  
Total interest-bearing deposits   1,928,448       1,386     0.14       1,946,350       2,473     0.26  
Securities sold under agreements to repurchase   23,789       14     0.12       21,937       17     0.16  
FHLB advances and other   1,795       43     4.74       57,948       335     1.17  
Subordinated notes   31,977       1,006     6.29       31,916       1,004     6.29  
Total interest-bearing liabilities   1,986,009       2,448     0.25       2,058,151       3,829     0.38  
Noninterest-bearing demand deposits   556,243               531,313          
Other   44,072               36,906          
Total Liabilities   2,586,324               2,626,370          
Shareholders’ Equity   257,406               254,603          
Total $ 2,843,730             $ 2,880,973          
Taxable-equivalent net interest income / net interest spread       47,307     3.52 %         44,173     3.22 %
Taxable-equivalent net interest margin         3.59 %           3.31 %
Taxable-equivalent adjustment       (615 )             (417 )    
Net interest income     $ 46,692             $ 43,756      
Ratio of average interest-earning assets to average interest-bearing liabilities         134 %           131 %
                       
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 balances include nonaccrual loans.
(3) Interest income on loans includes prepayment and late fees, where applicable
ORRSTOWN FINANCIAL SERVICES, INC.        
HISTORICAL TRENDS IN QUARTERLY FINANCIAL DATA (Unaudited)        
                   
(In thousands, except per share amounts ) June 30,
2022
  March 31,
2022
  December 31,
2021
  September 30,
2021
  June 30,
2021
Profitability for the quarter:                  
Net interest income $ 24,118     $ 22,573     $ 22,598     $ 20,620     $ 21,901  
Provision for loan losses   1,775       300       1,100       365       625  
Noninterest income   7,194       7,474       7,293       7,651       6,664  
Noninterest expenses   18,794       19,364       20,290       19,035       17,033  
Income before income taxes   10,743       10,383       8,501       8,871       10,907  
Income tax expense   1,872       2,015       1,795       1,679       2,131  
Net income $ 8,871     $ 8,368     $ 6,706     $ 7,192     $ 8,776  
                   
Financial ratios:                  
Return on average assets (1)   1.25 %     1.20 %     0.93 %     0.98 %     1.20 %
Return on average equity (1)   14.42 %     12.65 %     9.93 %     10.69 %     13.56 %
Net interest margin (1)   3.68 %     3.49 %     3.35 %     3.03 %     3.24 %
Efficiency ratio   60.0 %     64.4 %     67.9 %     67.3 %     59.6 %
                   
Per share information:                  
Income per common share:                  
    Basic $ 0.84     $ 0.77     $ 0.61     $ 0.66     $ 0.80  
    Diluted   0.83       0.76       0.60       0.65       0.79  
Book value   22.25       23.00       24.29       23.97       23.61  
Tangible book value (2)   20.23       21.03       22.32       21.98       21.61  
Cash dividends paid   0.19       0.19       0.19       0.19       0.18  
                   
Average basic shares   10,610       10,860       10,939       10,979       10,975  
Average diluted shares   10,744       11,007       11,113       11,122       11,112  
 
(1) Annualized.
(2) Non-GAAP based financial measure. Please refer to Appendix A – Supplemental Reporting of Non-GAAP Measures and GAAP to Non-GAAP Reconciliations for a discussion of our use of non-GAAP based financial measures, including tables reconciling GAAP and non-GAAP financial measures appearing herein.
ORRSTOWN FINANCIAL SERVICES, INC.                
HISTORICAL TRENDS IN QUARTERLY FINANCIAL DATA (Unaudited)        
(continued)                  
  June 30,
2022
  March 31,
2022
  December 31,
2021
  September 30,
2021
  June 30,
2021
Noninterest income:                  
Service charges $ 1,194     $ 1,073     $ 935     $ 993     $ 880  
Interchange income   1,064       981       1,080       1,030       1,064  
Swap fee income   785       953       158       67       15  
Wealth management income   2,894       2,869       2,897       2,917       2,930  
Mortgage banking activities   498       721       1,225       1,333       1,162  
Other income   762       1,023       995       832       602  
Investment securities (losses) gains   (3 )     (146 )     3       479       11  
Total noninterest income $ 7,194     $ 7,474     $ 7,293     $ 7,651     $ 6,664  
                   
Noninterest expenses:                  
Salaries and employee benefits $ 11,312     $ 11,337     $ 12,095     $ 11,498     $ 10,212  
Occupancy, furniture and equipment   2,423       2,567       2,554       2,374       2,400  
Data processing   1,165       1,053       1,020       990       1,032  
Advertising and bank promotions   881       355       744       735       274  
FDIC insurance   190       283       246       218       158  
Professional services   722       808       693       562       579  
Taxes other than income   108       564       392       16       462  
Intangible asset amortization   281       292       303       314       324  
Other operating expenses   1,712       2,105       2,243       2,328       1,592  
Total noninterest expenses $ 18,794     $ 19,364     $ 20,290     $ 19,035     $ 17,033  
ORRSTOWN FINANCIAL SERVICES, INC.                
HISTORICAL TRENDS IN QUARTERLY FINANCIAL DATA (Unaudited)            
(continued)                  
  June 30,
2022
  March 31,
2022
  December 31,
2021
  September 30,
2021
  June 30,
2021
Balance Sheet at quarter end:                  
Cash and cash equivalents $ 111,906     $ 214,238     $ 208,710     $ 311,415     $ 336,762  
Restricted investments in bank stocks   6,500       6,791       7,252       7,051       9,691  
Securities available for sale   512,698       529,730       472,438       445,018       450,402  
Loans held for sale, at fair value   7,824       7,403       8,868       6,412       8,092  
Loans:                  
Commercial real estate:                  
Owner occupied   287,825       256,526       238,668       196,585       191,595  
Non-owner occupied   559,309       558,999       551,783       509,703       471,541  
Multi-family   116,110       93,158       93,255       112,002       112,420  
Non-owner occupied residential   109,141       102,269       106,112       100,088       99,631  
Commercial and industrial (1)   379,729       443,170       485,728       540,205       599,123  
Acquisition and development:                  
1-4 family residential construction   22,650       15,115       12,279       12,246       9,686  
Commercial and land development   134,947       105,204       93,925       71,784       55,330  
Municipal   12,957       14,626       14,989       13,631       14,452  
   Total commercial loans   1,622,668       1,589,067       1,596,739       1,556,244       1,553,778  
Residential mortgage:                  
First lien   202,787       203,231       198,831       203,360       211,918  
Home equity – term   5,996       5,820       6,081       7,079       8,321  
Home equity – lines of credit   171,269       164,818       160,705       154,004       149,601  
Installment and other loans   14,909       15,371       17,630       19,077       21,765  
Total loans   2,017,629       1,978,307       1,979,986       1,939,764       1,945,383  
Allowance for loan losses   (23,279 )     (21,508 )     (21,180 )     (19,965 )     (19,381 )
Net loans held-for-investment   1,994,350       1,956,799       1,958,806       1,919,799       1,926,002  
Goodwill   18,724       18,724       18,724       18,724       18,724  
Other intangible assets, net   3,610       3,891       4,183       4,486       4,800  
Total assets   2,824,201       2,900,537       2,834,565       2,870,182       2,912,717  
Total deposits   2,478,616       2,545,992       2,464,929       2,502,108       2,494,100  
Borrowings   25,965       26,412       25,197       29,598       80,709  
Subordinated notes   31,994       31,978       31,963       31,948       31,932  
Total shareholders’ equity   237,527       254,804       271,656       268,569       265,938  
                                       
(1) This balance includes $30.2 million, $122.5 million, $189.9 million, $259.9 million and $355.6 million of SBA PPP loans, net of deferred fees and costs, at June 30, 2022, March 31, 2022, December 31, 2021, September 30, 2021 and June 30, 2021, respectively.
ORRSTOWN FINANCIAL SERVICES, INC.                
HISTORICAL TRENDS IN QUARTERLY FINANCIAL DATA (Unaudited)            
(continued)                  
  June 30,
2022
  March 31,
2022
  December 31,
2021
  September 30,
2021
  June 30,
2021
Capital and credit quality measures (1):                  
Total risk-based capital:                  
Orrstown Financial Services, Inc   13.5 %     14.3 %     15.0 %     15.6 %     15.6 %
Orrstown Bank   13.3 %     13.8 %     14.0 %     14.7 %     14.6 %
Tier 1 risk-based capital:                  
Orrstown Financial Services, Inc   10.9 %     11.7 %     12.2 %     12.8 %     12.7 %
Orrstown Bank   12.2 %     12.7 %     12.9 %     13.5 %     13.5 %
Tier 1 common equity risk-based capital:                  
Orrstown Financial Services, Inc   10.9 %     11.7 %     12.2 %     12.8 %     12.7 %
Orrstown Bank   12.2 %     12.7 %     12.9 %     13.5 %     13.5 %
Tier 1 leverage capital:                  
Orrstown Financial Services, Inc   8.5 %     8.8 %     8.5 %     8.3 %     8.0 %
Orrstown Bank   9.5 %     9.5 %     8.9 %     8.7 %     8.5 %
                   
Average equity to average assets   8.64 %     9.47 %     9.34 %     9.20 %     8.83 %
Allowance for loan losses to total loans   1.15 %     1.09 %     1.07 %     1.03 %     1.00 %
Total nonaccrual loans to total loans   0.27 %     0.28 %     0.33 %     0.47 %     0.51 %
Nonperforming assets to total assets   0.19 %     0.19 %     0.23 %     0.32 %     0.34 %
Allowance for loan losses to nonaccrual loans   432 %     390 %     328 %     219 %     195 %
                   
Other information:                  
Net charge-offs (recoveries) $ 4     $ (28 )   $ (115 )   $ (219 )   $ 211  
Classified loans   19,682       23,421       23,050       26,910       28,731  
Nonperforming and other risk assets:                  
Nonaccrual loans   5,387       5,510       6,449       9,116       9,941  
Other real estate owned                            
Total nonperforming assets   5,387       5,510       6,449       9,116       9,941  
Restructured loans still accruing   568       575       804       839       852  
Loans past due 90 days or more and still accruing (2)   322       238       1,201       362       212  
Total nonperforming and other risk assets $ 6,277     $ 6,323     $ 8,454     $ 10,317     $ 11,005  
 
(1) Capital ratios are estimated, subject to regulatory filings.
(2) Includes $0.3 million, $0.2 million, $0.3 million, $0.4 million and $0.2 million of purchased credit impaired loans at June 30, 2022, March 31, 2022, December 31, 2021, September 30, 2021, and June 30, 2021, respectively. As of December 31, 2021, there was one loan for $0.9 million, which was in the process of collection and guaranteed by the SBA, and was subsequently collected during the first quarter of 2022.

Appendix A- Supplemental Reporting of Non-GAAP Measures and GAAP to Non-GAAP Reconciliations

As a result of acquisitions, the Company has intangible assets consisting of goodwill and core deposit and other intangible assets, which totaled $22.3 million and $22.9 million at June 30, 2022 and December 31, 2021, respectively.

Management believes providing certain “non-GAAP” financial information will assist investors in their understanding of the effect of acquisition activity on reported results, particularly to overcome comparability issues related to the influence of intangibles (principally goodwill) created in acquisitions. Management also believes providing certain other “non-GAAP” financial information will provide investors with clarity on its allowance for loan losses to total loans ratio. The Company believes that excluding SBA guaranteed loans, due to their credit enhancement, from loans held for investment is useful to investors due to the size and effect on the total and ratio.

Tangible book value per common share and allowance for loan losses to non-SBA guaranteed loans, as used by the Company in this earnings release, are determined by methods other than in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). While we believe this information is a useful supplement to GAAP based measures presented in this earnings release, 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 following tables present the computation of each non-GAAP based measure:

(dollars in thousands, except per share information)

Tangible Book Value per Common Share   June 30,
2022
  March 31,
2022
  December 31,
2021
  September 30,
2021
  June 30,
2021
Shareholders’ equity   $ 237,527     $ 254,804     $ 271,656     $ 268,569     $ 265,938  
Less: Goodwill     18,724       18,724       18,724       18,724       18,724  
Other intangible assets     3,610       3,891       4,183       4,486       4,800  
Related tax effect     (758 )     (817 )     (878 )     (942 )     (1,008 )
Tangible common equity (non-GAAP)   $ 215,951     $ 233,006     $ 249,627     $ 246,301     $ 243,422  
                     
Common shares outstanding     10,676       11,079       11,183       11,205       11,263  
                     
Book value per share (most directly comparable GAAP based measure)   $ 22.25     $ 23.00     $ 24.29     $ 23.97     $ 23.61  
Intangible assets per share     2.02       1.97       1.97       1.99       2.00  
Tangible book value per share (non-GAAP)   $ 20.23     $ 21.03     $ 22.32     $ 21.98     $ 21.61  
Allowance for Loan Losses to Non-SBA Guaranteed Loans:      
  June 30, 2022   March 31, 2022
Allowance for loan losses $ 23,279     $ 21,508  
Gross loans   2,017,629       1,978,307  
less: SBA guaranteed loans   (32,599 )     (124,545 )
Non-SBA guaranteed loans $ 1,985,030     $ 1,853,762  
       
Allowance for loan losses to non-SBA guaranteed loans   1.2 %     1.2 %

Appendix B- Investment Portfolio Concentrations

The following table summarizes the credit ratings and collateral associated with the Company’s investment security portfolio, excluding equity securities, at June 30, 2022:

(dollars in thousands)

Sector Portfolio
Mix
  Amortized
Book
  Fair
Value
  Credit
Enhancement
  AAA   AA   A   BBB   NR   Collateral Type
Unsecured ABS 1 %   $ 5,684     $ 5,664     32 %   %   %   %   %   100 %   Unsecured Consumer Debt
Student Loan ABS 2       7,717       7,558     26                     100     Seasoned Student Loans
Federal Family Education Loan ABS 17       94,462       90,719     7     86     14                 Federal Family Education Loan (1)
PACE Loan ABS 1       3,153       3,025     6     100                     PACE Loans (4)
Non-Agency RMBS 3       17,520       16,221     11     61                 39     Reverse Mortgages (2)
Municipal – General Obligation 22       122,863       114,009         5     90     5              
Municipal – Revenue 24       132,281       119,518             83     12         5      
SBA ReRemic (5) 1       6,469       6,367             100                 SBA Guarantee (3)
Agency MBS 25       139,251       131,249             100                 Residential Mortgages (3)
U.S. Treasury securities 4       20,077       17,969             100                  
Bank CDs       249       249                         100     FDIC Insured CD
  100 %   $ 549,726     $ 512,548         18 %   73 %   4 %   %   5 %    
                                       
(1) Minimum of 17% guaranteed by U.S. government
(2) Reverse mortgages fund over time and credit enhancement is estimated based on prior experience
(3) 77% guaranteed by U.S. government agencies
(4) PACE acronym represents Property Assessed Clean Energy loans
(5) SBA ReRemic acronym represents Re-Securitization of Real Estate Mortgage Investment Conduits
                                       
Note : Ratings in table are the lowest of the three rating agencies (Standard & Poor’s, Moody’s & Fitch). Standard & Poor’s rates U.S. government obligations at AA+

About the Company

With $2.8 billion in assets, Orrstown Financial Services, Inc. and its wholly-owned subsidiary, Orrstown Bank, provide a wide range of consumer and business financial services in Berks, Cumberland, Dauphin, Franklin, Lancaster, Perry, and York Counties, Pennsylvania and Anne Arundel, Baltimore, Howard, and Washington Counties, Maryland, as well as Baltimore City, Maryland. Orrstown Bank is an Equal Housing Lender and its deposits are insured up to the legal maximum by the FDIC. Orrstown Financial Services, Inc.’s common stock is traded on Nasdaq (ORRF). For more information about Orrstown Financial Services, Inc. and Orrstown Bank, visit www.orrstown.com.

Cautionary Note Regarding Forward-Looking Statements:

This press release contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. 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. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about the Company’s industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company’s control. Forward-looking statements are statements that include projections, predictions, expectations, estimates or beliefs about events or results or otherwise are not statements of historical factors, 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, 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, successful merger and acquisition activity and continued reductions in risk assets or mitigate losses in the future. In addition to risks and uncertainties related to the COVID-19 pandemic (including those related to variants) and resulting governmental and societal responses, factors which could cause the actual results of the Company’s operations to differ materially from expectations include, but are not limited to: 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; the integration of the Company’s strategic acquisitions; the inability to fully achieve expected savings, efficiencies or synergies from mergers and acquisitions, or taking longer than estimated for such savings, efficiencies and synergies to be realized; changes in laws and regulations; interest rate movements; changes in credit quality; inability to raise capital, if necessary, under favorable conditions; volatility in the securities markets; the demand for our products and services; deteriorating economic conditions; geopolitical tensions; operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics; expenses associated with pending litigation and legal proceedings; the failure of the SBA to honor its guarantee of loans issued under the SBA PPP; the timing of the repayment of SBA PPP loans and the impact it has on fee recognition; our ability to convert new relationships gained through the SBA PPP efforts to full banking relationships; and other risks and uncertainties, including those detailed in our Annual Report on Form 10-K for the year ended December 31, 2021, 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. The foregoing list of factors is not exhaustive.

If one or more events related to these or other risks or uncertainties materializes, or if the Company’s underlying assumptions prove to be incorrect, actual results may differ materially from what the Company anticipates. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and the Company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New risks and uncertainties arise from time to time, and it is not possible for the Company to predict those events or how they may affect it. In addition, the Company cannot assess the impact of each factor on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements, expressed or implied, included in this press release are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that the Company or persons acting on the Company’s behalf may issue.

The review period for subsequent events extends up to and includes the filing date of a public company’s financial statements, when filed with the Securities and Exchange Commission. Accordingly, the consolidated financial information presented in this announcement is subject to change.

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