Orrstown Financial Services, Inc. — 2022 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2022, with comparisons to 2021 and 2020. Orrstown is a Pennsylvania-based, one-bank holding company serving south-central Pennsylvania and parts of Maryland, with lending in adjacent areas. Its community banking business includes commercial and consumer lending, deposits, fiduciary, investment advisory, insurance and brokerage services. Dollar amounts below are in millions unless noted.
Financial performance and condition
| Metric | 2022 | 2021 | Change / context |
|---|---|---|---|
| Total assets | $2,922.4 | $2,834.6 | Up 3.1% year over year |
| Total loans | $2,151.2 | $1,980.0 | Up $171.2; growth excluding PPP loans was 20% |
| Total deposits | $2,476.2 | $2,464.9 | Up $11.3, less than 1% |
| Net interest income | $99.6 | $87.0 | Up $12.7, or 15% |
| Tax-equivalent net interest margin | 3.81% | 3.25% | Up 56 basis points |
| Noninterest income | $27.0 | $29.2 | Down $2.2, largely from lower mortgage banking income |
| Provision for loan losses | $4.2 | $1.1 | Higher, primarily reflecting commercial loan growth |
| Noninterest expenses | $95.8 | $74.1 | Up $21.7, including legal settlement and restructuring charges |
| Net income | $22.0 | $32.9 | Down 33%; diluted EPS was $2.06 versus $2.96 |
| Operating cash flow | $36.2 | $40.8 | Cash and cash equivalents ended at $60.8, down from $208.7 |
| Shareholders’ equity | $228.9 | $271.7 | Down $42.8, chiefly due to securities-related OCI losses |
Other key metrics. Return on average equity was 9.02%, versus 12.54% in 2021. The allowance for loan losses was $25.2 million, or 1.17% of loans, compared with $21.2 million, or 1.07%. Net charge-offs were $0.2 million. The effective tax rate was 17.2%, down from 19.6%. The Bank and parent company exceeded applicable regulatory capital requirements and were above well-capitalized standards; the Bank’s capital conservation buffer was 4.3%.
Material changes versus 2021
- Higher rates and deployment of cash into loans and securities lifted net interest income and margin. The increase was partly offset by rising deposit costs; management said funding costs were expected to keep increasing into 2023.
- Noninterest income declined as mortgage banking income fell $5.5 million to $0.4 million; mortgage loans sold were $76.2 million versus $200.8 million. Higher swap fees and other income partly offset the decline.
- Reported earnings included a $13.0 million provision for a legal settlement and $3.2 million in restructuring charges. Excluding these items, management reported non-GAAP adjusted net income of $34.8 million and adjusted diluted EPS of $3.25; these are not GAAP measures.
- Commercial real estate and construction lending grew. A $15.4 million commercial construction loan was downgraded to substandard and placed on nonaccrual in the fourth quarter; total nonaccrual loans rose to $20.6 million from $6.4 million.
- Rising market rates drove the AFS securities portfolio to a $49.6 million net unrealized loss at year-end, versus a $5.6 million net unrealized gain in 2021. The losses reduced equity through OCI; management reported no OTTI and said it did not intend, and was not required, to sell the securities before recovery.
- Cash and cash equivalents fell as funds were deployed into loans and securities. Year-end short-term borrowings were $104.7 million, compared with none in 2021.
Outlook, risks and contingencies
- Outlook. The filing gives no formal earnings or revenue guidance. Management cited intense competition for loans and deposits, an inverted yield curve, likely continued deposit-cost increases and potential net interest margin compression. Interest-rate sensitivity modeling indicated that further rate increases could pressure net interest income as liabilities reprice faster than assets.
- Credit and concentration risk. Approximately 79% of the loan portfolio was commercial. The Bank’s commercial real estate loans were 319% of risk-based capital and had grown 78% over three years, levels management said require heightened risk management. The $15.4 million construction credit was considered adequately collateralized by management, but its performance and collateral remain important to monitor.
- Liquidity and market risk. The Company reported over $1.0 billion of combined FHLB and Federal Reserve borrowing capacity, subject to collateral and terms; it also had $30 million in unsecured bank lines. Deposit competition, uninsured-depositor behavior, securities values and further rate increases could affect funding costs and liquidity. The filing discussed the March 2023 failures of Silicon Valley Bank and Signature Bank as industry risks and said Orrstown had no direct exposure to those institutions as of March 14, 2023.
- Settlement and litigation. Orrstown recorded and funded $13.0 million in escrow toward a $15.0 million proposed settlement of the long-running SEPTA securities action. The court had preliminarily approved the settlement, but final approval remained pending; the agreement includes a condition allowing defendants to terminate if certain class members opt out. A separate putative class action challenges certain overdraft fees; the Bank said it believes the claims lack merit.
- Restructuring and branch sale. The Company recorded a $3.2 million pre-tax restructuring charge for planned Pennsylvania branch closures and staffing changes. It agreed to sell the Path Valley branch and approximately $31.3 million of associated deposits; closing was expected in the second quarter of 2023.
- Accounting change. Orrstown planned to adopt CECL on January 1, 2023 and estimated a one-time increase to the allowance for credit losses of $2–$4 million, with a three-year regulatory capital phase-in. Actual effects depend on model assumptions and economic forecasts.
- Debt and capital allocation. The $32.0 million subordinated notes bear a fixed 6.0% rate through December 2023, then convert to a variable benchmark plus 3.16%, with maturity in 2028. The Company paid $0.76 per share in dividends in 2022 and repurchased 584,771 shares during the year; future distributions remain subject to earnings, capital needs and regulatory limits.
Most important facts for investors to verify
- Final court approval, opt-outs and ultimate costs of the SEPTA settlement, and developments in the overdraft-fee lawsuit.
- Repayment, collateral value and risk-rating developments for the $15.4 million construction loan, alongside broader nonaccrual and criticized-loan trends.
- Deposit balances and mix, uninsured deposit exposure, borrowing usage and costs, and the ability to maintain liquidity under stress.
- Realized versus unrealized securities losses, securities pledging and liquidity needs, and any impairment or sale requirements.
- The actual CECL day-one allowance adjustment and subsequent credit-loss provisions compared with the disclosed $2–$4 million estimate.
- Execution and costs of branch closures, the Path Valley transaction, and the effect of rate changes on net interest income and deposit pricing.