•Net income of $9.8 million and diluted earnings per share of $0.94 for the three months ended June 30, 2023 compared to net income of $9.2 million and diluted earnings per share of $0.87 for the three months ended March 31, 2023 and net income of $8.9 million and diluted earnings per share of $0.83 for the three months ended June 30, 2022;

•Second quarter of 2023 return on average assets of 1.32% and return on average equity of 16.27% compared to return on average assets of 1.27% and return on average equity of 15.88% during the first quarter of 2023;

•Net interest margin, on a tax equivalent basis, was 3.83% in the second quarter of 2023 as compared to 3.94% in the first quarter of 2023 and 3.68% for the three months ended June 30, 2022; increased funding costs have led to modest margin compression;

•Non-interest income increased by $1.1 million to $7.2 million for the three months ended June 30, 2023 from $6.1 million for the three months ended March 31, 2023 primarily due to a $1.2 million gain on the sale of the Bank's Path Valley branch;

•Non-interest expense of $20.7 million for the three months ended June 30, 2023 was $0.5 million higher than the prior linked quarter due to severance charges of $0.5 million;

•Second quarter deposit growth was $7.2 million, despite the sale of deposits totaling $18.7 million from the Bank's Path Valley branch; deposits that are uninsured and not collateralized were 16% of total deposits at June 30, 2023 compared to 19% of total deposits at March 31, 2023;

•Second quarter commercial loan growth, excluding SBA PPP loan forgiveness activity, was $20.3 million, or 5% annualized; year-to-date commercial loan growth of $83.5 million, or 10% annualized;

•Tangible book value per share was $21.19 at June 30, 2023 compared to $20.50 at March 31, 2023. The tangible common equity ratio improved from 7.3% at March 31, 2023 to 7.5% at June 30, 2023;

•The Company repurchased 76,330 shares of its common stock at an average price of $18.58 per share during the second quarter of 2023;

•The Board of Directors declared a cash dividend of $0.20 per common share, payable August 15, 2023, to shareholders of record as of August 8, 2023.

SHIPPENSBURG, PA (July 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 June 30, 2023. Net income totaled $9.8 million for the three months ended June 30, 2023, compared to $9.2 million for the three months ended March 31, 2023 and $8.9 million for the three months ended June 30, 2022. Diluted earnings per share totaled $0.94 for the three months ended June 30, 2023, compared to $0.87 for the three months ended March 31, 2023 and $0.83 for the three months ended June 30, 2022.

“Orrstown delivered another quarter of earnings growth despite headwinds from rising interest rates and the inverted yield curve. Due to disciplined pricing of both loans and deposits, our net interest margin remained strong at 3.83% for the second quarter of 2023. Deposit stability has enabled the Bank to maintain access to significant funding sources as core deposits represent 86% of total deposits and our loan-to-deposit ratio was 89% at June 30, 2023,” commented Thomas R. Quinn, Jr., President and Chief Executive Officer.

“Looking forward, we expect to continue to build capital through earnings as we grow prudently, while simultaneously seizing opportunities to maximize shareholder value. As we move further away from the recent disruptions in the banking industry, we are mindful of the lessons learned and remain focused on meeting the needs of our clients to ensure confidence in Orrstown and the industry as a whole. We believe that our continued focus on financial performance and client relationships enhances our prospects for long-term success," Quinn added.

Balance Sheet

Loans held for investment, which includes SBA PPP loans, increased by $26.9 million from March 31, 2023 to June 30, 2023, or 5% annualized. Commercial loans, excluding SBA PPP loan forgiveness activity, increased by $20.3 million, or 5% annualized, from March 31, 2023 to June 30, 2023. SBA PPP loans, net of deferred fees and costs, declined by $3.6 million to $7.2 million at June 30, 2023 from $10.8 million at March 31, 2023 due to forgiveness and payment activity. The first lien residential mortgage portfolio increased by $8.8 million, or 15% annualized, in the three months ended June 30, 2023.

Investment securities, which are all available-for-sale, decreased by $11.9 million to $521.2 million at June 30, 2023 compared to $533.1 million at March 31, 2023. Paydowns totaled $7.8 million during the second quarter of 2023. Net unrealized losses on investment securities increased by $2.8 million during the second quarter primarily due to higher interest rates at June 30, 2023. The overall duration of the Company's investment securities portfolio is 4.6 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 June 30, 2023, highlighting their concentrations, credit ratings and credit enhancement levels.

Deposits increased by $7.2 million, totaling approximately $2.5 billion at both June 30, 2023 and March 31, 2023. In the second quarter of 2023, time deposits increased by $43.4 million, or 58% annualized, and interest-bearing demand deposits increased by $33.0 million, or 13% annualized. These increases were partially offset by decreases in noninterest-bearing demand deposits of $28.7 million, or 23% annualized, money market deposits of $23.7 million, or 19% annualized, and savings deposits of $16.8 million, or 30% annualized. The increase in time deposits was attributable to promotional offerings of up to 18-month terms. The declines in the noninterest-bearing, money market and savings deposit categories were primarily the result of clients seeking higher-yielding products, including reciprocal deposits. At June 30, 2023, deposits that are uninsured and not collateralized totaled $409.1 million, or 16%, of total deposits compared to $474.2 million, or 19%, of total deposits at March 31, 2023. The Bank's loan-to-deposit ratio of 89% at June 30, 2023 was only modestly higher than 88% at March 31, 2023.

The Bank completed the previously announced sale of its Path Valley branch on May 12, 2023. This sale included deposits of approximately $18.7 million, which were sold at a premium of 6.0%, as well as the building and land.

The Bank actively manages its liquidity position through its various sources of funding to meet the credit needs of its clients. FHLB advances and other borrowings decreased by $25.6 million to $136.7 million at June 30, 2023 compared to $162.3 million at March 31, 2023. The Bank repaid some overnight borrowings and FHLB advances during the second quarter of 2023 based on available liquidity from deposits and paydowns on investment securities. The Bank had available alternative funding sources, such as the FHLB advances and other wholesale options, of approximately $1.0 billion at June 30, 2023.

Income Statement

Net interest income was $26.4 million for the three months ended June 30, 2023 compared to $26.3 million for the three months ended March 31, 2023. The net interest margin, on a tax equivalent basis, remained strong, but decreased to 3.83% in the second quarter of 2023 from 3.94% in the first quarter of 2023. The decrease in net interest margin was primarily the result of increased funding costs due to competitive pressures on deposits and higher cost borrowings.

Interest income on loans increased by $2.5 million to $31.2 million for the three months ended June 30, 2023 compared to $28.7 million for the three months ended March 31, 2023. Loan growth and higher interest rates on loans were the primary drivers of this increase. Interest income on loans for the three months ended June 30, 2023 included prepayment fee income of $0.2 million, an increase of $0.1 million from the three months ended March 31, 2023, which resulted in an increase of two basis points in net interest margin.

Interest income on investment securities increased by $0.2 million to $5.4 million for the three months ended June 30, 2023 from $5.2 million for the first quarter of 2023. The increase reflects higher yields on adjustable-rate securities.

Interest expense increased by $2.5 million to $10.5 million for the three months ended June 30, 2023 compared to $8.0 million for the three months ended March 31, 2023 due primarily to increasing deposit and borrowing rates for both existing and new balances. In addition, average interest-bearing deposits increased by $43.3 million and average borrowings increased by $25.5 million during the three months ended June 30, 2023.

The allowance for credit losses remained at approximately $28.4 million at both June 30, 2023 and March 31, 2023. The allowance for credit losses to total loans was 1.27% at June 30, 2023 compared to 1.28% at March 31, 2023. The Company recorded a provision for credit losses of $0.4 million for the three months ended June 30, 2023 compared to $0.7 million for the three months ended March 31, 2023. Classified loans decreased by $7.7 million to $26.3 million at June 30, 2023 from $34.0 million at March 31, 2023 primarily due to net upgrades and repayments within this category. Special mention loans increased by $13.2 million from $32.3 million at March 31, 2023 to $45.5 million at June 30, 2023 due to net downgrades partially offset by repayments. The risk rating downgrades to Special Mention consisted of five clients spread across various commercial loan classes; however, other commercial loans in these categories do not reflect similar risk characteristics that led to these downgrades. Non-accrual loans decreased by $0.1 million to $21.1 million at June 30, 2023 from $21.2 million at March 31, 2023. The nonaccrual loans to total loans metric improved to 0.94% at June 30, 2023 from 0.96% at March 31, 2023. Net charge-offs were $0.4 million for the three months ended June 30, 2023 compared to net recoveries of $0.1 million for the three months ended March 31, 2023. 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 June 30, 2023, the Company had $236.7 million in loans related to office space compared to $236.2 million at March 31, 2023. Management believes that the office space portfolio is well-diversified and includes only limited exposure to properties located in major metro markets (approximately 3% of the total commercial real estate loan balance as of June 30, 2023).

Noninterest income increased by $1.1 million to $7.2 million in the three months ended June 30, 2023 compared to $6.1 million in the three months ended March 31, 2023.

Other income in the three months ended June 30, 2023 includes a gain of $1.2 million from the sale of the Bank's Path Valley branch.

Mortgage banking income decreased by $0.4 million from $0.5 million in the first quarter of 2023 to $0.1 million in the second quarter of 2023. Market conditions and elevated interest rates continued to hinder mortgage production during the second 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 $5.1 million in the second quarter of 2023 compared to $9.6 million in the first quarter of 2023 and $22.6 million in the second quarter of 2022. During the three months ended June 30, 2023, mortgage interest rates increased, which resulted in a decline to the fair value mark of the Bank's held-for-sale loans of $0.1 million compared to an increase in the fair value mark of $0.3 million during the three months ended March 31, 2023.

During the second quarter of 2023, the Company recorded swap fee income of $0.2 million for the three months ended June 30, 2023 compared to none in the three months ended March 31, 2023. Swap fee income fluctuates based on market conditions and client demand.

Noninterest expenses increased by $0.4 million to $20.7 million in the three months ended June 30, 2023 from $20.3 million in the three months ended March 31, 2023.

Salaries and benefits expense increased by $0.9 million to $13.1 million for the three months ended March 31, 2023 compared to $12.2 million for the three months ended March 31, 2023. The increase was attributed primarily to higher healthcare costs of $0.5 million from increased claim volumes and employee severance costs of $0.5 million.

Advertising and bank promotions expense increased by $0.5 million to $0.9 million in the three months ended June 30, 2023 from $0.4 million for the three months ended March 31, 2023 due to $0.5 million in contributions to tax credit programs during the second quarter of 2023. Taxes other than income decreased by $0.5 million to less than $0.1 million in the three months ended June 30, 2023 compared to $0.5 million in the three months ended March 31, 2023. This decrease reflects the tax credits recognized on the contributions during the second quarter of 2023.

Professional fees decreased $0.2 million to $0.5 million in the three months ended June 30, 2023 from $0.7 million in the three months ended March 31, 2023 due to a decrease in legal costs, primarily due to the prior settlement of litigation, and consulting fees.

Other operating expenses decreased by $0.2 million to $2.0 million during the second quarter of 2023 compared to $2.2 million during the first quarter of 2023. This decrease included a reduction of $0.2 million in mark-to-market losses on derivatives not designated as hedging instruments for the three months ended June 30, 2023 compared to the three months ended March 31, 2023. The remaining fluctuation is attributable to normal business operations.

The Company's effective tax rate for the second quarter of 2023 was 20.6% compared to 19.6% for the first quarter of 2023. The Company's effective tax rate for the three months ended June 30, 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 increases in taxable income and the disallowed portion of interest expense against earnings in association with the Bank's tax-exempt investments under the Tax Equity and Fiscal Responsibility Act of 1982.

Capital

Shareholders’ equity totaled $245.6 million at June 30, 2023, an increase of $5.4 million from $240.2 million at March 31, 2023. The increase was primarily attributable to net income of $9.8 million, partially offset by dividends paid of $2.2 million, other comprehensive losses of $1.4 million, and share repurchase costs of $1.2 million. Other comprehensive losses increased during the second quarter of 2023 due to after-tax declines of $2.2 million in net unrealized losses on investment securities partially offset by net unrealized gains on cash flow hedges of $0.8 million.

Tangible book value per share(1) increased to $21.19 per share at June 30, 2023 from $20.50 per share at March 31, 2023 primarily due to the increase in shareholders' equity.

The Company's tangible common equity ratio increased to 7.5% at June 30, 2023 from 7.3% at March 31, 2023 primarily due to an increase in tangible equity from net income. The Company's total risk-based capital ratio was 13.0% at June 30, 2023, up from 12.8% at March 31, 2023. The Company's Tier 1 leverage ratio increased from 8.5% at March 31, 2023 to 8.6% at June 30, 2023. At June 30, 2023, all four capital ratios applicable to the Company were above regulatory minimum levels to be deemed “well capitalized” under current bank regulatory guidelines. 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 August 15, 2023, to shareholders of record as of August 8, 2023.

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

(1) This balance includes $7.2 million, $10.8 million, $13.8 million, $17.0 million and $30.2 million of SBA PPP loans, net of deferred fees and costs, at June 30, 2023, March 31, 2023, December 31, 2022, September 30, 2022 and June 30, 2022, respectively.

(2) The balance at June 30, 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.

As a result of acquisitions, the Company has intangible assets consisting of goodwill and core deposit and other intangible assets, which totaled $21.3 million and $21.8 million at June 30, 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 June 30, 2023: