Orrstown Financial Services, Inc. Reports Quarterly Results for the Period Ended June 30, 2026

Economic Climate, Inflation and Interest Rates

The U.S. economy saw slower growth in the second quarter of 2026, with real GDP increasing at an annualized rate of 1.5% compared to 2.1% in the first quarter. This slowdown was mainly due to an increase in imports and a decrease in government spending, partially offset by stronger consumer spending and business investment.

Inflation, as measured by the personal consumption expenditures (PCE) price index, continued to rise, increasing 5.1% in the second quarter compared to 4.6% in the first quarter. Excluding food and energy, the PCE index was up 3.4%. The higher inflation reflects rising energy and other costs, though consumer demand has allowed prices to remain elevated.

The national unemployment rate edged down to 4.2% in June 2026 from 4.3% in March. Unemployment rates in the company’s key markets of Pennsylvania and Maryland remained in line with the national level.

The Federal Reserve implemented a series of interest rate cuts in 2025, lowering the target federal funds rate to 3.50-3.75%. However, there have been no further rate changes so far in 2026. The 10-year Treasury yield has risen to 4.44% as of June 30, 2026, up from 4.14% at the end of 2025, due to concerns about inflation and geopolitical tensions.

Critical Accounting Estimates

The company’s critical accounting estimates include:

Business Combinations: When the company acquires another business, it must estimate the fair values of the acquired assets and assumed liabilities, including identifying and valuing any intangible assets. This involves significant judgment and the use of third-party specialists.

Accounting for Credit Losses: The company must estimate the allowance for credit losses (ACL) on its loan portfolio using a lifetime expected loss model. This requires forecasting future economic conditions, estimating probabilities of default, and projecting cash flows and prepayment speeds.

Accounting for Income Taxes: The company must make judgments in computing income tax expense and determining the realizability of deferred tax assets, which can be subject to interpretation by tax authorities.

Results of Operations

For the three months ended June 30, 2026, the company reported net income of $21.2 million, or $1.09 per diluted share, compared to $19.4 million, or $1.01 per share, in the same period of 2025. Excluding merger-related expenses in 2025, net income and earnings per share were $20.2 million and $1.04, respectively.

Net interest income decreased slightly to $48.8 million from $49.5 million, as higher interest income on loans and investments was offset by increased funding costs. The net interest margin declined 20 basis points to 3.87%, primarily due to the impact of redeeming subordinated debt.

The provision for credit losses was $338,000 in the second quarter of 2026 compared to $109,000 in the prior year period. Net charge-offs increased to $1.2 million from $115,000.

Noninterest income increased to $13.8 million from $12.9 million, driven by higher wealth management fees, interchange income, and other service charges. Noninterest expenses were relatively flat at $37.7 million.

The effective tax rate declined to 14.2% from 21.3% due to the utilization of tax credits.

For the first six months of 2026, net income was $43.0 million, or $2.21 per diluted share, compared to $37.5 million, or $1.94 per share, in the same period of 2025. Excluding merger-related expenses in 2025, net income and earnings per share were $39.5 million and $2.04, respectively.

Net interest income decreased slightly to $97.8 million from $98.3 million, with the net interest margin declining 15 basis points to 3.89%. The provision for credit losses was $690,000 compared to a $445,000 recovery in the prior year period.

Noninterest income increased $4.9 million to $29.4 million, while noninterest expenses decreased $1.4 million to $74.4 million. The effective tax rate was 17.6% compared to 21.0% in the first half of 2025.

Financial Condition

The company’s investment securities portfolio totaled $949.3 million at June 30, 2026, down slightly from $952.7 million at the end of 2025. The portfolio is primarily composed of agency mortgage-backed securities, municipal bonds, and non-agency mortgage-backed securities. Unrealized losses on the available-for-sale securities increased to $24.4 million due to higher market interest rates.

Total loans increased $92.3 million, or 2.3%, to $4.11 billion at June 30, 2026 from year-end 2025. Commercial loans grew $50.5 million, while residential mortgages, including home equity lines, increased $42.9 million.

Nonperforming assets, including nonaccrual loans and foreclosed real estate, declined to $24.8 million, or 0.60% of total loans and OREO, from $28.0 million, or 0.70%, at the end of 2025. Loans past due 90 days or more and still accruing decreased to $853,000 from $1.0 million.

The allowance for credit losses (ACL) totaled $46.6 million, or 1.13% of total loans, at June 30, 2026, down from $47.9 million, or 1.22%, a year earlier. Net charge-offs were $2.1 million for the first six months of 2026 compared to $446,000 in the prior year period.

Total deposits increased $91.2 million, or 2.0%, to $4.6 billion at June 30, 2026. Noninterest-bearing and interest-bearing demand deposits grew, while time deposits and savings declined as the company focused on shifting its deposit mix.

Borrowings decreased $47.8 million to $284.8 million, primarily due to the redemption of $31.0 million in subordinated notes. Shareholders’ equity increased $30.2 million to $621.7 million, driven by net income, partially offset by dividends and other comprehensive losses.

The company remains well-capitalized, with a total risk-based capital ratio of 13.6% at June 30, 2026, well above the 10.0% regulatory threshold to be considered well-capitalized.

Analysis

The company delivered solid financial results in the second quarter and first half of 2026, with higher net income and earnings per share compared to the prior year periods, excluding non-recurring merger-related expenses.

The modest decline in net interest income and margin was primarily due to the impact of redeeming higher-cost subordinated debt, as well as the continued low interest rate environment. However, the company was able to offset this through growth in loans and noninterest income.

Asset quality remains strong, with nonperforming assets and net charge-offs at low levels. The company’s allowance for credit losses provides adequate coverage for expected losses in the loan portfolio.

The company’s balance sheet is well-positioned, with ample liquidity and capital levels that exceed regulatory requirements. This provides the flexibility to continue supporting loan and deposit growth while managing interest rate risk.

Looking ahead, the company faces some economic headwinds, including elevated inflation, rising interest rates, and geopolitical uncertainty. However, the company’s diversified business model, prudent risk management, and strong financial foundation should enable it to navigate these challenges and continue delivering value to shareholders.

Overall, the company’s second quarter and first half 2026 results demonstrate its ability to generate consistent profitability and maintain a healthy financial position, even in a more challenging operating environment.