•Net income of $9.2 million and diluted earnings per share of $0.87 for the three months ended March 31, 2023 compared to net income of $9.6 million and diluted earnings per share of $0.91 for the three months ended December 31, 2022 and net income of $8.4 million and diluted earnings per share of $0.76 for the three months ended March 31, 2022;

•First quarter 2023 return on average assets of 1.27% and return on average equity of 15.88%;

•Tangible book value per share was $20.50 at March 31, 2023 compared to $19.47 at December 31, 2022. Tangible common equity improved from 7.1% at December 31, 2022 to 7.3% at March 31, 2023; capital impact of $13.0 million legal settlement expense and $3.2 million restructuring expense recorded in the third quarter of 2022 has been fully recovered;

•First quarter deposit growth was $39.4 million, or 6% annualized; deposits that are uninsured and not collateralized totaled $474.2 million, or 19%, of total deposits at March 31, 2023; deposit outflows outside of ordinary course were minimal;

•Net unrealized losses on securities available-for-sale improved by $8.8 million during the first quarter of 2023; net unrealized losses were 7% of the amortized cost of the investment security portfolio at March 31, 2023;

•Net interest margin, on a tax equivalent basis, was 3.94% in the first quarter of 2023 as compared to 4.14% in the fourth quarter of 2022 and 3.49% for the three months ended March 31, 2022; an increase in funding costs was the primary driver of the first quarter 2023 decrease; higher prepayment fees in the fourth quarter accounted for five basis points of the current quarter decrease;

•First quarter commercial loan growth, excluding SBA PPP loan forgiveness activity, was $63.2 million, or 15% annualized, as some expected fourth quarter closings were completed in the first quarter of 2023; the pace of loan production is expected to moderate for the remainder of 2023;

•Provision for credit losses was $0.7 million in the first quarter of 2023 under the new current expected credit loss ("CECL") standard compared to $0.6 million in the fourth quarter of 2022 under the incurred loss model; asset quality metrics remain strong despite growing economic uncertainty;

•The Company repurchased 54,262 shares of its common stock at an average price of $21.65 per share during the first quarter of 2023;

•The Board of Directors declared a cash dividend of $0.20 per common share, payable May 16, 2023, to shareholders of record as of May 9, 2023.

SHIPPENSBURG, PA (April 25, 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 ended March 31, 2023. Net income totaled $9.2 million for the three months ended March 31, 2023, compared to $9.6 million for the three months ended December 31, 2022 and $8.4 million for the three months ended March 31, 2022. Diluted earnings per share totaled $0.87 for the three months ended March 31, 2023, compared to $0.91 for the three months ended December 31, 2022 and $0.76 for the three months ended March 31, 2022.

“Despite widespread challenges in the banking industry, Orrstown’s dedication to the communities we serve, combined with the trust our clients have shown in us, resulted in another successful quarter. Strong commercial loan growth and net interest margin helped the Company generate higher than expected net income and return metrics. While we expect the pace of loan growth to slow in the near term as we assess the economic and credit environment and anticipate some further margin compression, we remain confident that we are positioned to generate solid earnings going forward,” commented Thomas R. Quinn, Jr., President and Chief Executive Officer.

“Community banks have demonstrated their resilience even during the recent market disruption the industry has experienced since March when an already competitive deposit environment was further fueled by concerns about the banking sector," Quinn added.

"Thanks in large part to our proactive client outreach and emphasis on our stability, we experienced modest deposit growth in a difficult deposit-gathering environment. Our capital position remains strong, and our balance sheet is closely monitored to ensure appropriate interest rate risk management. There is a new set of challenges ahead and we will continue to take a measured approach to drive client satisfaction and maximize shareholder value.”

Balance Sheet

Loans held for investment, which includes SBA PPP loans, increased by $56.3 million from December 31, 2022 to March 31, 2023, or 11% annualized. Commercial loans, excluding SBA PPP loan forgiveness activity, increased by $63.2 million, or 15% annualized, from December 31, 2022 to March 31, 2023. SBA PPP loans, net of deferred fees and costs, declined by $3.0 million to $10.8 million at March 31, 2023 from $13.8 million at December 31, 2022 due to forgiveness and payment activity. Net deferred SBA PPP fees of $0.2 million remain at March 31, 2023. The first lien residential mortgage portfolio declined by $2.8 million, or 5% annualized, in the three months ended March 31, 2023.

Investment securities, which are all available-for-sale, increased by $8.7 million to $533.1 million at March 31, 2023 compared to $524.4 million at December 31, 2022. Net unrealized losses on investment securities declined by $8.8 million primarily due to the further inversion of the yield curve. During the first quarter of 2023, the Bank purchased investment securities totaling $9.5 million. These purchases were offset by normal paydown activity of $11.1 million. In addition, Federal Home Loan Bank ("FHLB") stock increased $2.2 million due to an increase in borrowings during the first quarter of 2023. The overall duration of the Company's investment securities portfolio is 4.8 years. 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 Bank's investment portfolio is appropriately aligned with the rest of the balance sheet to protect against significant and unexpected charges against earnings and capital. See Appendix B for a summary of the Bank's investment securities at March 31, 2023, highlighting their concentrations, credit ratings and credit enhancement levels.

Deposits increased by $39.4 million, or 6% annualized, totaling approximately $2.5 billion at both March 31, 2023 and December 31, 2022. In the first quarter of 2023, time deposits increased by $51.6 million, or 83% annualized, money market deposits increased by $4.1 million, or 3% annualized, and interest-bearing demand deposits increased by $2.8 million, or 1% annualized. These increases were partially offset by a decrease in savings deposits of $11.7 million, or 21% annualized, and a decrease in noninterest-bearing demand deposits of $7.4 million, or 6% annualized. The increase in time deposits was attributable to promotional offerings of up to 18-month terms. The decline in the savings and noninterest-bearing deposit categories was primarily the result of clients seeking higher-yielding products. During the first quarter of 2023, the Bank was successful at retaining many of those deposits and driving inflows from new clients as well. At March 31, 2023, deposits that are uninsured and not collateralized totaled $474.2 million, or 19%, of total deposits. Alternative solutions, such as reciprocal deposit products, have been offered to clients concerned about uninsured deposits. The Bank's loan-to-deposit ratio was only modestly higher at 88% at March 31, 2023 from 87% at December 31, 2022.

The previously announced sale of the Bank's Path Valley branch is expected to be completed in the second quarter of 2023. It is expected that an estimated $27.5 million in deposits will be sold at a premium of 6.0%.

FHLB advances and other borrowings increased by $56.2 million to $162.3 million at March 31, 2023 compared to $106.1 million at December 31, 2022. The increase in borrowings during the first quarter of 2023 includes fixed-rate advances from the FHLB totaling $40.0 million. With the continued strength in loan fundings and increased competition for deposits, the Bank elected to replace some of its overnight borrowings with lower cost term advances. The Bank tested its various sources of funding during the first quarter of 2023 to ensure accessibility. The availability of alternative funding sources, such as the FHLB advances and other wholesale options, exceeded $1.0 billion at March 31, 2023.

Income Statement

Net interest income decreased by $1.2 million to $26.3 million for the three months ended March 31, 2023 compared to $27.5 million for the three months ended December 31, 2022. The net interest margin, on a tax equivalent basis, remained strong, but decreased to 3.94% in the first quarter of 2023 from 4.14% in the fourth quarter of 2022. The decrease in net interest margin was primarily the result of increased funding costs due to competitive pressures and an increase in higher cost borrowings.

Interest income on loans increased by $1.7 million to $28.7 million for the three months ended March 31, 2023 compared to $27.0 million for the three months ended December 31, 2022. Loan growth and higher interest rates on loans were the primary drivers of this increase. Interest income on loans for the three months ended March 31, 2023 included prepayment fee income of $0.1 million, a decrease of $0.3 million, from $0.4 million for the three months ended December 31, 2022, which resulted in a decrease of five basis points in net interest margin.

Interest income on investment securities increased by $0.3 million to $5.2 million for the three months ended March 31, 2023 from $4.9 million for the fourth quarter of 2022. The increase reflects higher yields on adjustable rate securities.

Interest expense increased by $3.4 million to $8.0 million for the three months ended March 31, 2023 compared to $4.6 million for the three months ended December 31, 2022 due primarily to increasing deposit and borrowing rates for both existing and new balances. In addition, average interest-bearing deposits increased by $56.4 million and average borrowings increased by $53.8 million during the three months ended March 31, 2023.

The allowance for credit losses increased by $3.2 million to $28.4 million at March 31, 2023, compared to $25.2 million at December 31, 2022. The allowance for credit losses to total loans was 1.28% at March 31, 2023 compared to 1.17% at December 31, 2022. On January 1, 2023, the Company adopted Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326) ("ASU 2016-13"), the current expected credit losses accounting standard commonly referred to as "CECL," resulting in a cumulative-effect adjustment that increased the allowance for credit losses by $2.4 million. The Company recorded a provision for credit losses of $0.7 million for the three months ended March 31, 2023 under the CECL model compared to $0.6 million for the three months ended December 31, 2022 under the incurred loss model. Asset quality metrics remain strong despite growing economic uncertainty. Net recoveries were less than $0.1 million for the three months ended March 31, 2023 compared to net charge-offs of $0.1 million for the three months ended December 31, 2022. Non-accruals increased by $0.6 million to $21.2 million at March 31, 2023 from $20.6 million at December 31, 2022 primarily due to additions of $1.5 million, inclusive of $0.9 million transferred to non-accrual due to the treatment of purchased credit deteriorated loans at the individual asset level under CECL, partially offset by payments of $0.7 million, partial charge-offs of $0.1 million and loans returned to accrual status of $0.1 million. Management believes the allowance for credit losses to be adequate based on current asset quality metrics and economic conditions.

Management regularly analyzes the commercial real estate portfolio, which includes the review of occupancy, cash flows, expenses and expiring leases, as well as the location of the real estate. At March 31, 2023, the Company had $236.2 million in loans related to office space. Management believes that the office space portfolio is well-diversified and includes only limited exposure to properties located in major metro markets (less than 3% of the total commercial real estate loan balance as of March 31, 2023). In addition, management recently completed stress testing on commercial real estate loans totaling $1.0 million or greater. The average loan-to-value ratio was less than 60% for the tested loans. The results of this stress testing, for which projected cash flows were reduced by 30%, indicated that the average projected cash flows are sufficient for borrowers to meet covenant requirements.

Noninterest income decreased by $0.1 million to $6.1 million in the three months ended March 31, 2023 compared to $6.2 million in the three months ended December 31, 2022.

Wealth management income increased by $0.2 million to $2.7 million during the first quarter of 2023 from $2.5 million during the fourth quarter of 2022 due to slight improvement in market conditions in the stock and bond markets.

Mortgage banking income increased by $0.3 million from $0.2 million in the fourth quarter of 2022 to $0.5 million in the first quarter of 2023. Market conditions and elevated interest rates continued to hinder mortgage production during the first quarter of 2023. Due to the current mortgage interest rates, clients have shifted from conventional fixed-rate mortgages to adjustable-rate products, which has reduced the residential mortgage loan pipeline for sale in the secondary market. Mortgage loans sold totaled $9.6 million in the first quarter of 2023 compared to $8.6 million in the fourth quarter of 2022 and $31.9 million in the first quarter of 2022.

During the three months ended March 31, 2023, mortgage interest rates declined, which resulted in an improvement to the fair value mark of the Bank's held-for-sale loans of $0.3 million.

During the first quarter of 2023, the Company did not execute any customer interest rate swaps. As a result, swap fee income decreased by $0.7 million for the three months ended March 31, 2023 compared to the three months ended December 31, 2022. Swap fee income fluctuates based on market conditions and client demand.

Noninterest expenses decreased by $0.9 million to $20.3 million in the three months ended March 31, 2023 from $21.2 million in the three months ended December 31, 2022.

Salaries and benefits expense decreased by $0.5 million to $12.2 million for the three months ended March 31, 2023 compared to $12.7 million for the three months ended December 31, 2022. The decrease was attributed primarily to performance-based bonuses recognized during the fourth quarter of 2022, partially offset by an increase in employee benefit costs and employment taxes in the first quarter of 2023 as these costs typically are higher early in the year.

Advertising and bank promotions expense decreased by $0.4 million to $0.4 million in the three months ended March 31, 2023 from $0.8 million for the three months ended December 31, 2022 due to $0.4 million in contributions to tax credit programs during the fourth quarter of 2022. Taxes other than income increased by $0.3 million to $0.5 million in the three months ended March 31, 2023 compared to $0.2 million in the three months ended December 31, 2022. This increase reflects the tax credits recognized on the contributions during the fourth quarter of 2022.

Other operating expenses decreased by $0.4 million to $2.2 million during the first quarter of 2023 compared to $2.6 million during the fourth quarter of 2022. This decrease included a reduction in client fraud losses of $0.1 million. Included in this balance is $0.2 million of mark-to-market losses on derivatives not designated as hedging instruments for the three months ended March 31, 2023 and December 31, 2022 at $0.2 million. The remaining fluctuation is attributable to normal business operations.

The Company's effective tax rate for the first quarter of 2023 was 19.6% compared to 19.0% for the fourth quarter of 2022. The Company's effective tax rate for the three months ended March 31, 2023 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 increase in the effective tax rate was primarily due to an increase in taxable income as the effective tax rate in 2022 included the impact from the restructuring charge and legal settlement. In addition, as interest expense increases, the portion that is disallowed as a deduction against earnings, in association with the Bank's tax-exempt investments under the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), also increases.

Capital

Shareholders’ equity totaled $240.2 million at March 31, 2023, an increase of $11.3 million from $228.9 million at December 31, 2022. The increase was primarily attributable to net income of $9.2 million and other comprehensive income of $7.1 million, partially offset by dividends paid of $2.1 million for the three months ended March 31, 2023 and the cumulative-effect adjustment from the adoption of CECL that decreased retained earnings by $2.0 million. Other comprehensive income increased due to after-tax declines of $6.8 million and $0.3 million in net unrealized losses on investment securities and cash flow hedges, respectively.

Tangible book value per share(1) increased to $20.50 per share at March 31, 2023 from $19.47 per share at December 31, 2022 primarily as a result of the increase in shareholders' equity. Recently, tangible book value per share was as low as $18.34 per share at September 30, 2022 after the Company recorded litigation and restructuring-related charges. Tangible book value per share increased in part due to improvement in other comprehensive income, which increased from $14.1 million in after-tax net unrealized losses during the third quarter of 2022 to after-tax net unrealized gains of $6.8 million during the first quarter of 2023.

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

The Company's tangible common equity ratio increased to 7.3% at March 31, 2023 from 7.1% at December 31, 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 12.8% at March 31, 2023 up from 12.7% at December 31, 2022. The Company's Tier 1 leverage ratio remained at 8.5% at March 31, 2023 and December 31, 2022. At March 31, 2023, all four capital ratios applicable to the Company were above regulatory minimum levels to be deemed “well capitalized” under current bank regulatory guidelines. 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.

The Board of Directors approved a cash dividend of $0.20 per share, payable on May 16, 2023, to shareholders of record as of May 9, 2023.

(1) This balance includes $10.8 million, $13.8 million, $17.0 million, $30.2 million and $122.5 million of SBA PPP loans, net of deferred fees and costs, at March 31, 2023, December 31, 2022, September 30, 2022, June 30, 2022 and March 31, 2022, respectively.

(2) The balance at March 31, 2023 includes $2.4 million in a one-time cumulative-effect adjustment that increased the allowance for credit losses from the adoption of the new CECL standard.

(3) This balance includes deposits of approximately $27.5 million expected to be conveyed in the Path Valley branch sale at March 31, 2023, which is comprised of $21.5 million in interest-bearing deposits and $6.0 million in non-interest bearing deposits. At December 31, 2022, $31.7 million in deposits were expected to be conveyed in the branch sale, consisting of $24.3 million in interest-bearing deposits and $7.4 million in non-interest bearing deposits.

As a result of acquisitions, the Company has intangible assets consisting of goodwill and core deposit and other intangible assets, which totaled $21.6 million and $21.8 million at March 31, 2023 and December 31, 2022, 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.

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 March 31, 2023: