•Net income of $9.6 million and diluted earnings per share of $0.91 for the three months ended December 31, 2022 compared to a net loss of $4.8 million and diluted loss per share of $0.47 for the three months ended September 30, 2022; net income of $22.0 million and diluted earnings per share of $2.06 for the year ended December 31, 2022 compared to net income of $32.9 million and diluted earnings per share of $2.96 for the year ended December 31, 2021;

•Excluding the impact from the third quarter provision for legal settlement ("legal settlement") and restructuring charge, net income and diluted earnings per share were $34.8 million(1) and $3.25(1), respectively, for the year ended December 31, 2022;

•Fourth quarter return on average assets of 1.33% and return on average equity of 17.28%;

•Net interest income increased to $27.5 million for the three months ended December 31, 2022 compared to $25.5 million for the three months ended September 30, 2022 reflecting net interest margin expansion over that period;

•Net interest margin, on a tax equivalent basis, increased to 4.14% in the fourth quarter of 2022 from 3.92% in the third quarter of 2022; net interest margin has increased as a result of loan growth and the rising interest rate environment;

•Fourth quarter commercial loan growth, excluding SBA PPP loans, was $56.6 million, or 14% annualized; full year commercial loan growth, excluding SBA PPP loans, was $299.9 million, or 21%; consumer loans increased by $9.9 million, or 9% annualized, during the fourth quarter of 2022 compared to the third quarter of 2022; full year consumer loan growth was $47.3 million, or 12%;

•Noninterest expenses decreased by $15.2 million to $21.2 million in the three months ended December 31, 2022 from $36.4 million in the three months ended September 30, 2022; excluding the impact of the restructuring charge and legal settlement, noninterest expenses were $21.2 million in the fourth quarter of 2022 compared to $20.3 million(1) during the third quarter of 2022;

•Provision for loan losses was $0.6 million in the fourth quarter of 2022 compared to $1.5 million in the third quarter of 2022;

•The Board of Directors increased the Company's quarterly cash dividend, declaring a cash dividend of $0.20 per common share, payable February 14, 2023, to shareholders of record as of February 7, 2023.

SHIPPENSBURG, PA (January 24, 2023) -- Orrstown Financial Services, Inc. ("Orrstown" or the “Company”) (NASDAQ: ORRF), the parent company of Orrstown Bank (the “Bank”), announced earnings for the three months and year ended December 31, 2022. Net income totaled $9.6 million for the three months ended December 31, 2022, compared to a net loss of $4.8 million for the three months ended September 30, 2022 and net income of $6.7 million for the three months ended December 31, 2021. Diluted earnings per share totaled $0.91 for the three months ended December 31, 2022, compared to diluted loss per share of $0.47 for the three months ended September 30, 2022 and diluted earnings per share of $0.60 for the three months ended December 31, 2021. For the third quarter of 2022, excluding the impact from the restructuring charge and legal settlement, net income and diluted earnings per share were $7.9 million(1) and $0.751), respectively.

Net income totaled $22.0 million and $32.9 million for the years ended December 31, 2022 and 2021, respectively. Diluted earnings per share totaled $2.06 for the year ended December 31, 2022, compared to diluted earnings per share of $2.96 for the year ended December 31, 2021. Excluding the impact from the restructuring charge and legal settlement, net income and diluted earnings per share were $34.8 million(1) and $3.25(1) for the year ended December 31, 2022, respectively.

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

“Despite a decline of approximately $10.7 million in SBA PPP income from 2021 to 2022, Orrstown recorded net income of $34.8 million in 2022, excluding the impact of restructuring and legal settlement charges in the third quarter, compared to $32.9 million in 2021. Our performance demonstrates the payoff from the foundation that we have built over the past several years. Orrstown’s strong earnings power and the impact of past investments were further illustrated by our fourth quarter 2022 performance as we recorded a return on average assets of 1.33% and a return on average equity of 17.3%. We expect that the strategic actions taken in the third quarter will enable us to continue on our growth trajectory into 2023. We anticipate that the expected efficiencies from these actions will begin to positively impact the Company’s performance in 2023 and that the benefits of the reinvestment of resources into our digital footprint will be seen over time,” commented Thomas R. Quinn, Jr., President and Chief Executive Officer.

“We experienced net interest margin expansion to 4.14% in the fourth quarter due to the continued strong growth in our loan portfolio as well as the impact of interest rate increases. However, we do expect some margin contraction going forward due to competitive pressures on deposit pricing and increased usage of borrowings to fund growth. We are confident in the ability of our commercial and retail teams to continue to grow our balance sheet in the challenging economic environment that is anticipated in 2023. We believe that our disciplined approach to growth positions us for continued success.”

Balance Sheet

Excluding SBA PPP loans, total loans increased by $66.5 million from September 30, 2022 to December 31, 2022, or 13% annualized. SBA PPP loans, net of deferred fees and costs, declined by $3.2 million to $13.8 million at December 31, 2022 from $17.0 million at September 30, 2022 due to forgiveness activity. Net deferred SBA PPP fees of $0.3 million remain at December 31, 2022. Commercial loans, excluding SBA PPP loans, increased by $56.6 million, or 14% annualized, from September 30, 2022 to December 31, 2022. Loans held for investment, which includes SBA PPP loans, increased by $63.3 million from September 30, 2022 to December 31, 2022, or 12% annualized, due to continued strong sales efforts.

The first lien residential mortgage portfolio grew by $8.9 million, or 16% annualized, in the three months ended December 31, 2022 from jumbo and adjustable-rate mortgage production. Home equity lines of credit increased by $3.0 million, or 7% annualized, in the three months ended December 31, 2022.

Investment securities increased by $14.3 million to $524.4 million at December 31, 2022 compared to $510.1 million at September 30, 2022. During the fourth quarter of 2022, the Bank sold municipal securities totaling $28.2 million, which were offset by purchases of higher yielding securities totaling $42.0 million. These purchases were also offset by normal paydown activity of $7.7 million. Due to changes in market interest rates, net unrealized losses on investment securities declined by $4.9 million. In addition, FHLB stock increased $4.2 million due to an increase in borrowings during the fourth quarter of 2022. See Appendix B for a summary of the Bank's investment securities at December 31, 2022, highlighting the concentrations, credit ratings and credit enhancement levels of the investment securities portfolio at such date.

Deposits decreased by $29.6 million, or 5% annualized, totaling approximately $2.5 billion at both December 31, 2022 and September 30, 2022. In the fourth quarter of 2022, noninterest-bearing demand deposits and time deposits decreased by $60.1 million, or 42% annualized, and $2.9 million, or 5% annualized, respectively. These decreases were partially offset by increases in interest-bearing demand deposits by $14.2 million, or 6% annualized, and money market and savings deposits of $19.2 million, or 11% annualized. The decrease in deposits resulted primarily from clients utilizing their funds at a higher frequency and certificate of deposit runoff. The Bank's loan-to-deposit ratio was 87% at December 31, 2022.

During the fourth quarter of 2022, the Bank announced that it had entered into a Purchase and Assumption Agreement providing for the sale of its Path Valley branch and associated deposit liabilities. Deposits held for assumption of approximately $31.7 million are reported within total deposits at cost and are comprised of $24.3 million in interest-bearing deposits and $7.4 million in non-interest bearing deposits. The transaction is expected to close in the second quarter of 2023.

FHLB advances and other borrowings increased by $104.5 million to $106.1 million at December 31, 2022 compared to $1.6 million at September 30, 2022. As utilization of excess liquidity by individuals and businesses and competition for deposits have increased, the Bank's deposit balances declined slightly during the fourth quarter of 2022. The Bank opted to borrow funds to provide additional liquidity to meet the credit needs of its clients.

Income Statement

Net interest income increased by $2.0 million to $27.5 million for the three months ended December 31, 2022 compared to $25.5 million for the three months ended September 30, 2022. The net interest margin, on a tax equivalent basis, increased to 4.14% in the fourth quarter of 2022 from 3.92% in the third quarter of 2022. The increase in net interest margin was the result of growth in, and the impact of the rising interest rates on the loan and investment securities portfolios, partially offset by an increase in the cost of funds.

Interest income on loans increased by $3.8 million to $27.0 million for the three months ended December 31, 2022 compared to $23.2 million for the three months ended September 30, 2022. Loan growth and higher interest rates were the primary drivers of this increase. Interest income on loans for the three months ended December 31, 2022 included prepayment fee income of $0.4 million, an increase of $0.3 million, from $0.1 million for the three months ended September 30, 2022.

Interest income recognized on SBA PPP loans totaled $0.2 million in the three months ended December 31, 2022 compared to $0.5 million in the three months ended September 30, 2022.

Interest income on investment securities increased by $0.6 million to $4.9 million for the three months ended December 31, 2022 from $4.3 million for the third quarter of 2022. The increase reflects the impact of rising interest rates on investments for which resets occur at various frequencies and the additional yield generated from investments purchased during the third and fourth quarters of 2022.

Interest expense on interest-bearing liabilities increased by $2.6 million to $4.6 million for the three months ended December 31, 2022 compared to $2.0 million for the three months ended September 30, 2022 due to the increase in average interest-bearing deposits and borrowings and rising interest rates.

The Company recorded a provision for loan losses of $0.6 million for the three months ended December 31, 2022 compared to $1.5 million for the three months ended September 30, 2022. Net charge-offs were $0.1 million for the three months ended December 31, 2022. The allowance for loan losses totaled $25.2 million at December 31, 2022, compared to $24.7 million at September 30, 2022. The allowance for loan losses to total loans remained relatively consistent at 1.17% at December 31, 2022 compared to 1.18% at September 30, 2022.

During the fourth quarter of 2022, the Bank downgraded one commercial construction loan with an outstanding balance of $15.4 million to substandard and placed it into non-accrual status. Although the loan is not past due, management determined that it was appropriate to place the loan on non-accrual status due to other relevant factors. At this time, management deems the value of underlying collateral sufficient to cover any potential losses on this loan. Management does not believe that this credit is indicative of overall stress in the loan portfolio. As a result of this downgrade, total nonaccrual loans to total loans increased to 0.96% at December 31, 2022 from 0.25% at September 30, 2022. Management believes the allowance for loan losses to be adequate based on current asset quality metrics and economic conditions.

Noninterest income totaled $6.2 million in the three months ended December 31, 2022 compared to $6.1 million in the three months ended September 30, 2022.

Mortgage banking income increased by $1.2 million from a loss of $1.0 million in the third quarter of 2022 to income of $0.2 million in the fourth quarter of 2022. Market conditions negatively impacted mortgage production in the second half of the year, initially resulting from low housing inventory. In the fourth quarter of 2022, while inventory improved, higher interest rates drove a further drop in mortgage demand, which caused additional declines in in the residential mortgage loan pipeline and secondary market sales during the three months ended December 31, 2022. Mortgage loans sold totaled $8.6 million in the fourth quarter of 2022 compared to $12.7 million in the third quarter of 2022 and $43.7 million in the fourth quarter of 2021.

The Company experienced marginal improvement in the fair value of held-for-sale loans during the fourth quarter of 2022 as compared to a loss of $1.4 million from a fair value reduction in the third quarter of 2022.

Swap fee income increased by $0.5 million to $0.7 million for the three months ended December 31, 2022 compared to $0.2 million for the three months ended September 30, 2022. Swap fee income fluctuates based on market conditions and client demand.

Wealth management income decreased by $0.5 million to $2.5 million during the fourth quarter of 2022 from $3.0 million during the third quarter of 2022 due to unfavorable conditions in the stock and bond markets.

Other income decreased by $1.0 million to $0.7 million for the three months ended December 31, 2022 from $1.7 million during the three months ended September 30, 2022. The third quarter of 2022 included income from distributions on investments in non-housing limited partnerships totaling $1.0 million.

Noninterest expenses decreased by $15.2 million to $21.2 million in the three months ended December 31, 2022 from $36.4 million in the three months ended September 30, 2022. During the third quarter of 2022, the Company recorded a restructuring charge of $3.2 million and a provision for legal settlement of $13.0 million. Excluding the impact from the restructuring charge and legal settlement, noninterest expenses increased by $0.9 million to $21.2 million in the fourth quarter of 2022 from $20.3 million(1) during the third quarter of 2022.

Advertising and bank promotions expense increased by $0.5 million to $0.8 million in the three months ended December 31, 2022 from $0.3 million for the three months ended September 30, 2022 due to $0.4 million in contributions to tax credit programs during the fourth quarter of 2022. Taxes other than income decreased by $0.3 million to $0.2 million in the three months ended December 31, 2022 compared to $0.5 million in the three months ended September 30, 2022. This decrease reflects the tax credits recognized on these contributions during the fourth quarter of 2022.

Other operating expenses increased $0.8 million to $2.6 million during the fourth quarter of 2022 compared to $1.8 million during the third quarter of 2022. This increase was primarily caused by an increase in mark-to-market losses on derivatives of $0.4 million and customer fraud losses of $0.2 million. The remaining fluctuation of approximately $0.2 million is attributable to normal business operations.

Salaries and benefits expense was $12.7 million for both the three months ended December 31, 2022 and September 30, 2022, which remained elevated in the latter part of 2022 due to incentive compensation increases, the filling of several vacancies, and higher healthcare costs.

The Company's effective tax rate for the fourth quarter of 2022 was 19.0% compared to 24.6% for the third quarter of 2022. The net loss incurred during the third quarter of 2022, due to the restructuring charge and legal settlement, resulted in an income tax benefit. The Company's effective tax rate for the three months ended December 31, 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 effective tax rate for the year ended December 31, 2022 is 17.2% compared to 19.6% for the year ended December 31, 2021. The decrease in the effective tax rate was primarily due to a decrease in taxable income resulting from the restructuring charge and legal settlement, an increase in tax-exempt interest income on loans and investment securities due to the rising interest rates, and additional tax credits.

Capital

Shareholders’ equity totaled $228.9 million at December 31, 2022, an increase of $11.5 million from $217.4 million at September 30, 2022. The increase was primarily attributable to net income of $9.6 million and other comprehensive income of $3.6 million, partially offset by dividends paid of $2.0 million for the three months ended December 31, 2022. Other comprehensive income increased primarily due to a decline of $3.9 million in net unrealized losses on investment securities. Tangible book value per share(1) increased from $18.34 per share at September 30, 2022 to $19.47 per share at December 31, 2022 primarily as a result of the increase in shareholders' equity.

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

The Company's tangible common equity ratio increased to 7.1% at December 31, 2022 from 6.9% at September 30, 2022 primarily due to an increase in tangible equity from net income and the decrease in unrealized losses on available-for-sale securities. The Company's total risk-based capital ratio was 12.7% at both December 31, 2022 and September 30, 2022. An increase in risk-based capital from net income was offset by an increase in risk weighted assets primarily caused by loan growth. The Company's Tier 1 leverage ratio increased to 8.5% at December 31, 2022 from 8.4% at September 30, 2022 primarily due to net income partially offset by the increase in average assets caused by loan growth. At December 31, 2022, all four capital ratios applicable to the Company were above regulatory minimum levels to be deemed “well capitalized” under current bank regulatory guidelines.

The Board of Directors approved an increase to the quarterly dividend to $0.20 per share, payable on February 14, 2023, to shareholders of record as of February 7, 2023. The dividend payout ratio totaled 21% for the three months ended December 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) This balance includes $13.8 million, $17.0 million, $30.2 million, $122.5 million and $189.9 million of SBA PPP loans, net of deferred fees and costs, at December 31, 2022, September 30, 2022, June 30, 2022, March 31, 2022 and December 31, 2021, respectively.

(2) This balance includes deposits held for assumption in connection with the sale of a bank branch of approximately $31.7 million, which is comprised of $24.3 million in interest-bearing deposits and $7.4 million in non-interest bearing deposits at December 31, 2022.

As a result of acquisitions, the Company has intangible assets consisting of goodwill and core deposit and other intangible assets, which totaled $21.8 million and $22.9 million at December 31, 2022 and December 31, 2021, respectively. Additionally, the Company incurred $3.2 million and $13.0 million in restructuring charges and a provision for legal settlement, respectively, during the three months ended September 30, 2022 and year ended December 31, 2022.

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

Tangible book value per common share and the impact of the restructuring charge and legal settlement on net income and associated ratios, 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:

The following table summarizes the credit ratings and collateral associated with the Company's investment security portfolio, excluding equity securities, at December 31, 2022: