•Net income of $7.6 million and diluted earnings per share of $0.73 for the three months ended December 31, 2023 compared to net income of $9.0 million and diluted earnings per share of $0.87 for the three months ended September 30, 2023; net income of $35.7 million and diluted earnings per share of $3.42 for the year ended December 31, 2023 compared to net income of $22.0 million and diluted earnings per share of $2.06 for the year ended December 31, 2022;

•On December 12, 2023, the Company and Codorus Valley Bancorp, Inc. ("Codorus Valley") announced that they have entered into a merger agreement pursuant to which Codorus Valley will be merged with and into the Company in a merger of equals transaction. Excluding the impact of $1.1 million in merger-related expenses, net income and diluted earnings per share, respectively, were $8.6 million(1) and $0.83(1) for the fourth quarter of 2023 and $36.6 million(1) and $3.51(1) for the year ended December 31, 2023; excluding the impact from the 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;

•Net interest margin, on a tax equivalent basis, was 3.71% in the fourth quarter of 2023 as compared to 3.73% in the third quarter of 2023;

•Return on average equity for the year ended December 31, 2023 was 14.66% compared to 9.02% for the year ended December 31, 2022; excluding the aforementioned significant transactions in both 2023 and 2022, return on average equity was 15.06% for the year ended December 31, 2023 compared to 14.25% for the year ended December 31, 2022;

•Fourth quarter loan growth was $31.5 million, or 6% annualized; full year loan growth was $147.1 million, or 7%;

•Fourth quarter deposit growth was $12.4 million; excluding the sale of deposits totaling $18.7 million from the Bank's Path Valley branch in the second quarter, full year deposit growth was $101.3 million;

•Non-interest income increased by $0.6 million to $6.5 million for the three months ended December 31, 2023 from $5.9 million for the three months ended September 30, 2023;

•Non-interest expenses, inclusive of $1.1 million of merger-related expenses, increased by $2.0 million from $20.4 million for the three months ended September 30, 2023 to $22.4 million for the three months ended December 31, 2023;

•Tangible common equity ratio increased to 8.0% at December 31, 2023 from 7.3% at September 30, 2023 and 7.1% at December 31, 2022; the fourth quarter of 2023 includes an improvement of $17.5 million, net of taxes, in net unrealized losses on investment securities;

•Tangible book value per common share(1) improved to $23.03 per share at December 31, 2023 compared to $20.94 per share at September 30, 2023 and $19.47 at December 31, 2022;

•The Board of Directors declared a cash dividend of $0.20 per common share, payable February 13, 2024, to shareholders of record as of February 6, 2024.

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

SHIPPENSBURG, PA (January 23, 2024) -- 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, 2023. Net income totaled $7.6 million for the three months ended December 31, 2023, compared to $9.0 million for the three months ended September 30, 2023 and $9.6 million for the three months ended December 31, 2022. Diluted earnings per share totaled $0.73 for the three months ended December 31, 2023, compared to $0.87 for the three months ended September 30, 2023 and $0.91 for the three months ended December 31, 2022. For the fourth quarter of 2023, excluding the impact from the merger-related expenses, net income and diluted earnings per share were $8.6 million(1) and $0.83(1), respectively.

Net income totaled $35.7 million and $22.0 million for the years ended December 31, 2023 and 2022, respectively. Diluted earnings per share totaled $3.42 for the year ended December 31, 2023, compared to diluted earnings per share of $2.06 for the year ended December 31, 2022. Excluding the impact from the merger-related expenses, net income and diluted earnings per share were $36.6 million(1) and $3.51(1) for the year ended December 31, 2023, respectively. For the year ended December 31, 2022, net income and diluted earnings per share were $34.8 million(1) and $3.25(1), respectively, excluding the restructuring charge and legal settlement.

"Orrstown’s strong fourth quarter reflects the team’s tremendous efforts for the past several years, which led us to the Company’s strongest earnings on record in 2023. We believe that our relationship banking model and hands-on approach enabled us to have a successful year while navigating through the many headwinds facing the industry in 2023. Loan production and deposit gathering continue to be steady, which has helped us maintain a healthy net interest margin and limit margin compression. While enhancing fee income continues to be challenging, our wealth management group has successfully grown income throughout the year. Our capital ratios continue to improve through earnings generation, which puts us in a good position for the next exciting phase in Orrstown’s growth cycle. We look forward to taking the momentum we have built and joining, in the near future, our successful partner in Codorus Valley Bancorp to create an even stronger institution," commented Thomas R. Quinn, Jr., President and Chief Executive Officer.

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

Balance Sheet

Loans held for investment increased by $31.5 million from September 30, 2023 to December 31, 2023, or 6% annualized. Commercial loans increased by $16.6 million, or 4% annualized, from September 30, 2023 to December 31, 2023. The residential mortgage portfolio increased by $15.5 million, or 14% annualized, in the three months ended December 31, 2023 as there has been increased production of adjustable-rate mortgages, which have been retained in portfolio. Since December 31, 2022, loans held for investment increased by $147.1 million, or 7%, to $2.3 billion at December 31, 2023. During 2023, commercial loans increased by $110.2 million, or 6% and residential mortgages increased by $39.2, or 9%. These increases were partially offset by a decrease of $2.3 million, or 19%, in installment and other consumer loans.

Investment securities, all of which are classified as available-for-sale, increased by $18.3 million to $513.5 million at December 31, 2023 compared to $495.2 million at September 30, 2023. During the fourth quarter of 2023, net unrealized losses on investment securities declined by $22.5 million, net purchases totaled $4.0 million and paydowns were $7.5 million. The improvement in net unrealized losses was primarily due to lower market interest rates. Net unrealized losses on investment securities totaled $35.6 million and $49.6 million at December 31, 2023 and 2022, respectively. The overall duration of the Company's investment securities portfolio is 4.3 years at December 31, 2023. See Appendix B for a summary of the Bank's investment securities at December 31, 2023, highlighting their concentrations, credit ratings and credit enhancement levels.

During the fourth quarter of 2023, deposits increased by $12.4 million, totaling approximately $2.6 billion at December 31, 2023 compared to $2.5 billion at September 30, 2023. In the fourth quarter of 2023, money market deposits increased by $33.4 million, or 26% annualized and time deposits rose by $29.2 million, or 31% annualized. These increases were partially offset by decreases in interest-bearing demand deposits of $36.5 million, or 14% annualized, savings deposits of $9.2 million, or 5% annualized, and non-interest bearing deposits of $4.5 million, or 4% annualized. The increase in time deposits was attributable to promotional offerings of up to 18-month terms. The declines in the noninterest-bearing deposits, interest bearing demand deposits and savings deposits were primarily due to clients shifting to higher-yielding products within the Bank. At December 31, 2023, deposits that are uninsured and not collateralized totaled $442.7 million, or 17%, of total deposits compared to $387.5 million, or 15%, of total deposits at September 30, 2023. The Bank's loan-to-deposit ratio was 90% at December 31, 2023 compared to 89% at September 30, 2023.

The Bank actively manages its liquidity position through its various sources of funding to meet the needs of its clients. FHLB advances and other borrowings decreased by $27.9 million to $147.3 million at December 31, 2023 compared to $175.2 million at September 30, 2023. The Bank repaid some overnight borrowings and FHLB advances during the fourth quarter of 2023 based on available liquidity from deposits and paydowns on investment securities. The Bank seeks to maintain sufficient liquidity to ensure client needs can be addressed on a timely basis. The Bank had available alternative funding sources, such as the FHLB advances and other wholesale options, of approximately $1.0 billion at December 31, 2023.

Income Statement

Net interest income was $26.0 million for the three months ended December 31, 2023 compared to $26.2 million for the three months ended September 30, 2023. The net interest margin, on a tax equivalent basis, declined to 3.71% in the fourth quarter of 2023 from 3.73% in the third quarter of 2023. While the net interest margin decreased only slightly, funding costs increased due to the rise in money market deposits and time deposit balances.

Interest income on loans increased by $1.2 million to $34.1 million for the three months ended December 31, 2023 compared to $32.9 million for the three months ended September 30, 2023. Loan growth and a full quarter impact from the third quarter 2023 fed funds rate increase were the primary drivers of this increase. Interest income on loans for the three months ended December 31, 2023 included prepayment fee income of $0.2 million, a decrease of $0.2 million from the three months ended September 30, 2023, which resulted in a decrease of two basis points in net interest margin.

Interest income on investment securities was $5.9 million for the three months ended December 31, 2023 compared to $5.5 million in the third quarter of 2023. The additional investment income was driven by increasing yields on adjustable-rate securities from the prior quarter fed funds rate increase.

Interest expense increased by $1.5 million to $14.0 million for the three months ended December 31, 2023 compared to $12.5 million for the three months ended September 30, 2023 due primarily to higher average deposit balances and an increase in deposit rates. Average interest-bearing deposits increased by $24.3 million during the three months ended December 31, 2023.

The Company recorded a provision for credit losses of $0.4 million for the three months ended December 31, 2023 compared to $0.1 million for the three months ended September 30, 2023. The allowance for credit losses increased by $0.4 million to $28.7 million at December 31, 2023 compared to $28.3 million at September 30, 2023. The allowance for credit losses was impacted primarily by loan growth of $31.5 million during the fourth quarter of 2023 as well as slight downward revisions to economic assumptions utilized in the model. The allowance for credit losses to total loans was 1.25% at both December 31, 2023 and September 30, 2023. Net recoveries were an inconsequential amount for the three months ended December 31, 2023 compared to net charge-offs of $0.2 million for the three months ended September 30, 2023. Special mention loans decreased by $7.6 million from $31.8 million at September 30, 2023 to $24.2 million at December 31, 2023 due to net downgrades to classified status of $5.9 million and repayments of $1.1 million. Classified loans increased by $21.4 million to $55.0 million at December 31, 2023 from $33.6 million at September 30, 2023. The increase in classified loans was primarily due to downgrades to five commercial loans, spread within commercial real estate and commercial and industrial loan segments, totaling $23.0 million. The increase in classified loans was partially offset by repayments within this category totaling $2.3 million. Non-accrual loans increased by $3.2 million to $25.5 million at December 31, 2023 from $22.3 million at September 30, 2023 primarily due to five loans to one client within the residential real estate segments. 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 December 31, 2023, the Company had $236.4 million in loans related to office space, which had a weighted average loan-to-value ratio of 56% and a weighted average debt coverage ratio of 1.77x, compared to $244.7 million at September 30, 2023. Management believes that the office space portfolio is well-diversified and includes only limited exposure to properties located in major metro markets (approximately 2% of the total commercial real estate loan balance as of December 31, 2023).

Noninterest income increased by $0.6 million to $6.5 million in the three months ended December 31, 2023 compared to $5.9 million in the three months ended September 30, 2023.

During the fourth quarter of 2023, the Company recorded swap fee income of $0.6 million compared to $0.3 million in the three months ended September 30, 2023. Swap fee income fluctuates based on market conditions and client demand.

Mortgage banking income increased by $0.3 million from a loss of $0.1 million in the third quarter of 2023 to income of $0.2 million in the fourth quarter of 2023. During the three months ended December 31, 2023, the fair value mark of the Bank's held-for-sale loans declined by $0.3 million to a decrease of $0.1 million compared to a decrease of $0.4 million during the three months ended September 30, 2023.

Market conditions and elevated interest rates continued to hinder mortgage production during the fourth quarter of 2023.

Noninterest expenses increased by $2.0 million to $22.4 million in the three months ended December 31, 2023 from $20.4 million in the three months ended September 30, 2023.

During the fourth quarter of 2023, the Company announced it has entered into an agreement to merge with Codorus Valley. For the three months ended December 31, 2023, merger-related expenses totaled $1.1 million inclusive of due diligence costs, legal expenses and a fairness opinion. The Company expects to incur additional merger-related expenses due to the pending completion of this merger of equals.

Salaries and benefits expense was $12.8 million for the three months ended December 31, 2023 compared to $12.9 million for the three months ended September 30, 2023. The decrease was primarily attributed to a decline of $0.1 million in employee benefit costs.

Advertising and bank promotions expense increased by $0.2 million to $0.5 million in the three months ended December 31, 2023 from $0.3 million for the three months ended September 30, 2023 due to $0.3 million in contributions to tax credit programs during the fourth quarter of 2023. Taxes other than income decreased by $0.2 million to $0.2 million in the three months ended December 31, 2023 compared to $0.4 million in the three months ended September 30, 2023. This decrease reflects the tax credits recognized on the contributions during the fourth quarter of 2023.

Professional services expense decreased by $0.3 million to $0.7 million in the three months ended December 31, 2023 from $1.0 million in the three months ended September 30, 2023 due primarily to a reduction in consulting costs as certain technology improvements and compliance enhancements were completed.

Other operating expenses increased by $1.1 million to $2.6 million during the fourth quarter of 2023 compared to $1.5 million during the third quarter of 2023. This increase included an increase of $0.8 million in credit value adjustments on derivatives for the three months ended December 31, 2023 compared to the three months ended September 30, 2023. The remaining fluctuation is attributable to normal business operations.

The Company's effective tax rate for the fourth quarter of 2023 was 21.2% compared to 21.9% for the third quarter of 2023. The effective tax rate was 20.8% for the year ended December 31, 2023 compared to 17.2% for the year ended December 31, 2022. The nondeductible merger-related costs increased the effective tax rate by 0.3% for the year ended December 31, 2023. Similarly, the nondeductible merger-related costs increased the effective tax rate by 1.4% for the fourth quarter of 2023.

The Company's effective tax rate for the three months ended December 31, 2023 is greater than the 21% federal statutory rate primarily due to an increase in state taxes in addition to 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, partially offset by tax-exempt income, including interest earned on tax-exempt loans and securities and income from life insurance policies and tax credits. The lower effective tax rate in 2022 was partially caused by the impact of the restructuring charge for branch closures and other expense savings initiatives and a provision for legal settlement. The Company regularly analyzes its projected taxable income and makes adjustments to the provision for income taxes accordingly.

Capital

Shareholders’ equity totaled $265.1 million at December 31, 2023, an increase of $22.0 million from $243.1 million at September 30, 2023. The increase was primarily attributable to other comprehensive income of $15.9 million and net income of $7.6 million partially offset by dividends paid of $2.1 million. Other comprehensive income generated during the fourth quarter of 2023 was due to after-tax net unrealized gains on investment securities of $17.5 million partially offset by net unrealized losses on cash flow hedges of $1.6 million.

Tangible book value per share(1) increased to $23.03 per share at December 31, 2023 from $20.94 per share at September 30, 2023 and $19.47 per share at December 31, 2022 due to the increase in shareholders' equity.

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

The Company's tangible common equity ratio increased to 8.0% at December 31, 2023 from 7.3% at September 30, 2023 and 7.1% at December 31, 2022, primarily due to an increase in tangible equity from an improvement in net unrealized losses on investment securities as well as earnings. The Company's total risk-based capital ratio was 13.0% at both December 31, 2023 and September 30, 2023. The Company's Tier 1 leverage ratio increased from 8.7% at September 30, 2023 to 8.9% at December 31, 2023. At December 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. 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 $5.7 million, $6.2 million, $7.2 million, $10.8 million and $13.8 million of Small Business Administration Paycheck Protection Program loans, net of deferred fees and costs, at December 31, 2023, September 30, 2023, June 30, 2023, March 31, 2023 and December 31, 2022, respectively.

(2) The balance 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 on January 1, 2023.

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.

As a result of acquisitions, the Company has intangible assets consisting of goodwill and core deposit and other intangible assets, which totaled $21.1 million and $21.8 million at December 31, 2023 and December 31, 2022, respectively. In addition, during the three and twelve months ended December 31, 2023, the Company incurred $1.1 million in merger-related expenses. Additionally, the Company incurred $3.2 million and $13.0 million in restructuring charges and a provision for legal settlement, respectively, during the year ended December 31, 2022.

Tangible book value per common share and the impact of the merger-related expenses, 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: