ORRSTOWN FINANCIAL SERVICES INC - FORM 8-K - EX-99 - EXHIBIT 99 - PRESS RELEASE

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8-K - FORM 8-K 7-26-12 ORRSTOWN FINANCIAL SERVICES, INC. - ORRSTOWN FINANCIAL SERVICES INC	f8k_072612-0489.htm

FOR IMMEDIATE RELEASE:

Contact:

Thomas R. Quinn, Jr.

President & CEO

Phone 717.530.2648

77 East King Street | Shippensburg PA

Orrstown Financial Services, Inc. Reports Second Quarter Operating Results; Continued
Improvement in Asset Quality

SHIPPENSBURG, PA (July 26, 2012) Orrstown Financial Services, Inc. (the “Company”) (NASDAQ: ORRF) announced today a net loss for the quarter ended June 30, 2012 of $9.9 million, compared to a net loss in the second quarter of 2011 of $10.6 million. Risk assets declined $25.0 million or 28.3% during the second quarter of 2012, following a reduction of $25.4 million in the first quarter of 2012 or 22.4%. Nonaccrual loans at June 30, 2012 of $56.9 million represented a reduction of $26.8 million or 32.0% from December 31, 2011’s balance of $83.7 million. The Company’s focus on asset quality remediation, including loan workouts and sales of non-performing assets, has driven this significant improvement over year end 2011.

Diluted (loss) per share amounted to ($1.23) for the quarter ended June 30, 2012, as compared to ($1.33) for the second quarter of 2011.

Thomas R. Quinn, Jr., President & CEO, commented, “Our results for the second quarter of 2012 continue to reflect our problem asset remediation efforts. We are diligently resolving problem loan issues and in the second quarter we completed the sale of sixty-five commercial real estate loans with a carrying balance of $28.6 million. This sale allowed the Company to reduce its ratio of total risk assets to total assets by more than 3%, from 7.88% at December 31, 2011 to 4.77% as of June 30, 2012. As a result of this loan sale and other credit quality improvement efforts, we have decreased total risk assets by $50.4 million or 44.3% year-to-date.”

Quinn continued, “Although the net impact of our asset improvement continues to depress earnings, we are strengthening our balance sheet and better positioning the Bank for the future. We continue to satisfy the quantitative tests to be deemed well capitalized by regulatory standards, and are working closely with our primary regulators to restore the Bank to more historical performance levels.”

OPERATING RESULTS

Net loss for the six months ended June 30, 2012, was $18.1 million, compared to a net loss of $6.8 million for the same period in 2011, resulting in diluted (loss) per share of ($2.25) and ($0.85) for the periods, respectively. As a result of the loss for the first six months of 2012 and 2011, the Company’s return on assets and return on tangible equity ratios were negative.

Net Interest Income

Net interest income totaled $9.5 million for the three months ended June 30, 2012, a $3.3 million, or 25.5%, decrease compared to the $12.8 million earned in the same period in 2011. For the six months ended June 30, 2012, net interest income totaled $20.4 million, a decrease of $4.8 million from the $25.2 million earned in 2011. The decline in net interest income is a result of both a decline in the average interest rate earned as well as a decrease in the volume of interest earning assets. The net interest margin for the three months ended June 30, 2012, was 2.96%, compared to

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3.71% for the same period in 2011. On a year-to-date basis, 2012’s net interest margin was 3.16% compared to 3.70% in 2011. The increase in the level of loans on nonaccrual status, combined with the low interest rate environment in which proceeds from asset sales and maturities have been reinvested, has put pressure on the Company’s net interest margin. Also contributing to the decrease in net interest income was the $71.3 million decline in average interest earning assets to $1.36 billion for the six months ended June 30, 2012 from an average of $1.43 billion for the first six months of 2011. During the past year, the Company has been able to effectively manage its cost of funds, which declined to 0.73% for the six months ended June 30 2012, an improvement over the cost of funds of 0.92% for the same period in 2011.

Provision for Loan Losses

The provision for loan losses for the three months ended June 30, 2012, totaled $23.0 million, an increase over the second quarter of 2011’s provision of $ 21.2 million. On a year-to-date basis, the provision for loan losses was $42.2 million for the six months ended June 30, 2012, compared to $24.4 million in 2011. The Company’s net charge offs during the six months ended June 30, 2012 were $49.7 million, compared to $13.2 million in 2011. In 2012 the Company began charging off all specific reserves provided on impaired against the allowance for loan losses. This elevated level of charge offs significantly increased our two-year average historical loss factors, leading to additional general reserves required on non-criticized loans.

See further discussion in the “Asset Quality” section below.

Noninterest Income

Noninterest income, excluding securities gains, totaled $4.4.million for the three months ended June 30 2012, compared to $4.7 million for the same period in 2011. For the six months ended June 30, 2012, noninterest income, excluding securities gains totaled $8.4 million, compared to $9.4 million in 2011. The Company sold its merchant processing business in the third quarter of 2011, which contributed $285 thousand and $540 thousand in revenues for the three and six months ended June 30, 2011, respectively.

Securities gains totaled $2.6 million and $4.8 million for the three and six months ended June 30, 2012, respectively, compared to $469 thousand and $848 thousand for the same periods in 2011. Asset/liability management strategies, interest rate conditions, as well as maintaining capital levels factored into the decision to take elevated levels of security gains in the year-over-year period.

Noninterest expenses

Noninterest expenses amounted to $10.7 million for the three months ended June 30, 2012 compared to $9.7 million for the corresponding prior year period. On a year-to-date basis, noninterest expenses totaled $21.6 million for the six months ended June 30, 2012, compared to $19.2 million in 2011. Asset quality and regulatory matters have contributed significantly to the increase in noninterest expenses. Collection and problem loan expenses totaled $579 thousand and $1.3 million, respectively, for the three and six months ended June 30 2012, compared to $177 thousand and $331 thousand, respectively, in 2011. Real estate owned expenses, which include write-downs of properties to fair value less costs to dispose, increased $60 thousand and $398 thousand for the three and six months ended June 30, 2012 compared to 2011. Professional service fees, including loan review assistance, legal fees and accounting expenses, have increased $205 thousand from $546 thousand in the second quarter of 2011 to $751 thousand in the same period in 2012. Similarly, for the six months ended June 30, 2012, professional service fees totaled $1.6 million, compared to $868 thousand in 2011. The increased complexity of the business, as well as complying with regulatory orders received in the first quarter of 2012, have led to additional assistance required from professional service providers. The increase in these expense categories demonstrates the Company’s continuing efforts to address the issues it currently faces in a diligent and expedient manner.

As a result of the increase in noninterest expense, combined with declining net interest income, the Company’s efficiency ratio for the first six months of 2012 increased to 70.1%, compared to 52.6% reported in the same period in 2011. The efficiency ratio expresses noninterest expense as a percentage of tax equivalent net interest income and noninterest income, excluding securities gains. As the Company continues to address its asset quality issues and regulatory concerns, it anticipates the efficiency ratio will remain elevated in comparison to prior year’s results.

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FINANCIAL CONDITION

Assets decreased $203 million to $1.33 billion at June 30, 2012 from June 30, 2011. The Company has implemented a strategy designed to slow loan growth and reduce its risk weighted asset levels in order to maintain capital ratios at levels that exceed well capitalized limits. At June 30, 2012, loans, net of the allowance for loan losses, have declined by $170.2 million from June 30, 2011, with the net payoffs temporarily invested in interest bearing deposits with banks.

The decline in deposits of $115.8 million as of June 30, 2012 compared to June 30, 2011 is also part of the balance sheet deleveraging strategy designed to focus on core deposits and reduce levels of wholesale and institutional deposits.

Shareholders’ Equity

Shareholders’ equity totaled $107.6 million at June 30, 2012, a decrease of $45.8 million, or 29.9%, from $153.4 million at June 30, 2011. This decrease was primarily the result of the net loss posted for the period coupled with a decline in accumulated other comprehensive income. Despite the decline in shareholders’ equity, the Company’s regulatory capital ratios continue to exceed all regulatory minimums to be considered well capitalized, including Tier-1 Leverage ratio of 6.71%, Tier-1 Risk-based capital ratio of 10.40%, and Total Risk-based capital ratio of 11.68%.

Asset Quality

During the second quarter of 2011, the Company began to experience deterioration in asset quality as a result of the continued softness in economic conditions and collateral values. In the second quarter of 2012, the Company continued to actively identify and monitor nonperforming assets and other risk assets, and aggressively took actions to remediate these issues. Risk assets, defined as nonaccrual loans, restructured loans, loans past due 90 days or more and still accruing, and real estate owned, totaled $63.4 million at June 30, 2012 which was an increase of $8.9 million over the second quarter of 2011, but was an improvement of $50.4 million from December 31, 2011.

Nonaccrual loans at June 30, 2012 totaled $56.9 million, an increase of $42.2 million from June 30, 2011, but a decrease of $26.8 million from December 31, 2011’s balance of $83.7 million. The Company’s focus on asset quality remediation, including loan workouts, additional information gathered from borrowers or additional structural enhancements, and sales of non-performing assets to third parties has driven this significant improvement over year end 2011. This net decrease in nonaccrual loans for the six months ended June 30, 2012 was the result of $50.1 million in loans charged off, $35.4 million in proceeds received from loans sales and net pay downs, $4.7 million of loans returned to accrual status, and $1.6 million of loans foreclosed on and transferred to real estate owned, offset by $65.0 million being moved to nonaccrual status during the period, including $19.4 million previously classified as accruing restructured loans.

During the first six months of 2012, the Company received payments/payoffs on restructured loans totaling $4.37 million, and charged-off $1.5 million in connection with loan workouts. The remainder of the decline, or $19.3 million, was the result of restructured loans migrating to nonaccrual status either due to missed payments or the Company’s determination that the borrowers would not be able to keep their payments current for a sustainable period of time.

The allowance for loan losses totaled $36.2 million at June 30, 2012, a $9.0 million increase from June 30, 2011. As of June 30, 2012, the allowance for loan losses to total loans was 4.32% compared to 2.72% as of June 30, 2011, and the allowance for loan losses to nonaccrual loans and restructured loans still accruing increased to 60.65% at June 30, 2012 from 54.86% at June 30 2011. The increase in the coverage ratios reflect lower levels of risk assets, particularly the significant decrease in non-performing assets discussed above.

The Company strives to reduce its level of nonaccruing loans and other risk elements and has increased the number of personnel in its loan workout and credit review departments, including temporarily moving certain lending staff to the loan workout department to manage lending relationships with borrowers experiencing financial difficulties. Through increased resources allocated to credit related issues, the Company believes it can continue to mitigate its risk of loss, and to reduce its level of nonaccrual and classified loans.

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Summary of Financial Highlights:

(Dollars in thousands, except per share data)	June 30, 2012		June 30, 2011		% Change

For Quarter Ended:
Net income (loss)	$	(9,914)	$	(10,623)		(6.7%)
Diluted earnings (loss) per share	$	(1.23)	$	(1.33)		(7.5%)
Dividends per share	$	0.00	$	0.23		(100.0%)
Return on average assets		(2.81%)		(2.77%)
Return on average equity		(33.81%)		(26.03%)
Return on average tangible assets (1)		(2.80%)		(2.80%)
Return on average tangible equity (1)		(33.97%)		(29.69%)
Net interest income		9,546		12,810		(25.5%)
Net interest margin		2.96%		3.71%

	June 30, 2012		June 30, 2011		% Change

For Six Months Ended:
Net income (loss)	$	(18,132)	$	(6,796)		166.8%
Diluted earnings (loss) per share	$	(2.25)	$	(0.85)		164.7%
Dividends per share	$	0.00	$	0.46		(100.0%)
Return on average assets		(2.55%)		(0.90%)
Return on average equity		(29.63%)		(8.44%)
Return on average tangible assets (1)		(2.54%)		(0.90%)
Return on average tangible equity (1)		(29.76%)		(9.57%)
Net interest income	$	20,388	$	25,198		(19.1%)
Net interest margin		3.16%		3.70%

Balance Sheet Highlights:	June 30, 2012		June 30, 2011		% Change
Assets	$	1,328,475	$	1,531,290		(13.2%)
Loans, gross		842,805		1,003,978		(16.1%)
Allowance for loan losses		36,235		27,212		33.2%
Deposits		1,144,384		1,260,206		(9.2%)
Shareholders' equity		107,629		153,441		(29.9%)
Tangible equity (1)		106,693		132,848		(19.7%)

(1) Supplemental Reporting of Non-GAAP-based Financial Measures

Return on average tangible assets and return on average tangible equity are other non-GAAP-based financial measures calculated using non-GAAP-based amounts. The most directly comparable GAAP-based measures are return on average assets and return on average equity, which are calculated using GAAP-based amounts. The Company calculates the return on average tangible assets and equity by excluding the balance of intangible assets and their related amortization expense, net of tax, from the calculation of return on average assets and equity. Management uses the return on average tangible assets and equity to assess the Company’s core operating results and believes that this is a better measure of our operating performance, as it is based on the Company's tangible assets and capital. Further, we believe that by excluding the impact of purchase accounting adjustments it allows for a more meaningful comparison with the Company's peers, particularly those that may not have acquired other companies. Lastly, the exclusion of goodwill and intangible assets is consistent with the treatment by bank regulatory agencies, which exclude these amounts from the calculation of risk-based capital ratios. However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures. A reconciliation of return on average assets and equity to return on average tangible assets and equity, respectively, is set forth below.

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	June 30,		June 30,
For Quarter Ended:	2012		2011

Return on average assets (GAAP basis)		(2.81%)		(2.77%)
Effect of excluding average intangible
assets and related amortization, net of tax		0.01%		(0.03%)
Return on average tangible assets		(2.80%)		(2.80%)

Return on average equity (GAAP basis)		(33.81%)		(26.03%)
Effect of excluding average intangible
assets and related amortization, net of tax		(0.16%)		(3.66%)
Return on average tangible equity		(33.97%)		(29.69%)

	June 30,		June 30,
	2012		2011

For Six Months Ended:
Return on average assets (GAAP basis)		(2.55%)		(0.90%)
Effect of excluding average intangible
assets and related amortization, net of tax		0.01%		0.00%
Return on average tangible assets		(2.54%)		(0.90%)

Return on average equity (GAAP basis)		(29.63%)		(8.44%)
Effect of excluding average intangible
assets and related amortization, net of tax		(0.13%)		(1.13%)
Return on average tangible equity		(29.76%)		(9.57%)

Tangible equity is a non-GAAP financial measure calculated using non-GAAP based amounts. The most directly comparable GAAP based measure is shareholders’ equity. In order to calculate tangible equity, Company management subtracts intangible assets from shareholders’ equity. A reconciliation of tangible equity to shareholders’ equity is set forth below.

	June 30,		December 31,		June 30,
(Dollars in thousands)	2012		2011		2011

Shareholders' equity	$	107,629	$	128,197	$	153,441
Less: intangible assets		936		1,041		20,593
Tangible equity	$	106,693	$	127,156	$	132,848

This release references tax-equivalent net interest income which is a non-GAAP financial measure. Tax-equivalent net interest income is derived from GAAP interest income and net interest income using an assumed tax rate of 35%. We believe the presentation of net interest income on a tax–equivalent basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice.

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The following reconciles net interest income to net interest income on a fully taxable equivalent basis:

	June 30,		June 30,
(Dollars in thousands)	2012		2011

For Quarter Ended:
Net interest income	$	9,546	$	12,810
Effect of tax exempt income		583		718
Net interest income, tax equivalent basis	$	10,129	$	13,528

	June 30,		June 30,
(Dollars in thousands)	2012		2011

For Six Months Ended:
Net interest income	$	20,388	$	25,198
Effect of tax exempt income		1,235		1,404
Net interest income, tax equivalent basis	$	21,623	$	26,602

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ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited)			(Audited)*			(Unaudited)
	June 30,			December 31,			June 30,
(Dollars in thousands, Except per Share Data)	2012			2011			2011
Assets
Cash and due from banks	$	15,798		$	19,630		$	14,470
Federal funds sold		0			0			2,230
Cash and cash equivalents		15,798			19,630			16,700

Short-term investments		0			0			2,728
Interest bearing deposits with banks		109,725			90,039			3,585
Restricted investments in bank stock		11,495			11,758			9,331
Securities available for sale		283,078			310,365			421,073

Loans held for sale		4,825			2,553			4,945
Loans		837,980			965,440			999,033
Less: Allowance for loan losses		(36,235	)		(43,715	)		(27,212	)
Net Loans		806,570			924,278			976,766

Premises and equipment, net		26,983			27,183			27,340
Cash surrender value of life insurance		24,579			24,147			23,670
Goodwill and intangible assets		936			1,041			20,593
Accrued interest receivable		3,593			4,548			5,685
Other assets		45,718			31,108			23,819
Total assets	$	1,328,475		$	1,444,097		$	1,531,290

Liabilities
Deposits:
Non-interest bearing	$	118,062		$	111,930		$	112,495
Interest bearing		1,026,322			1,104,972			1,147,711
Total deposits		1,144,384			1,216,902			1,260,206

Short-term borrowings		27,493			35,013			62,878
Long-term debt		38,142			53,798			44,753
Accrued interest and other liabilities		10,827			10,187			10,012
Total liabilities		1,220,846			1,315,900			1,377,849

Shareholders' Equity
Preferred Stock, $1.25 par value per share; 500,000 shares authorized;
no shares issued or outstanding		0			0			0
Common stock, no par value - $ 0.05205 stated value per share
50,000,000 shares authorized; 8,066,073, 8,055,787
and 8,014,722 shares issued; 8,065,261; 8,054,975
and 8,013,910 shares outstanding		420			419			417
Additional paid - in capital		122,616			122,514			121,962
Retained earnings (accumulated deficit)		(16,937	)		1,195			28,207
Accumulated other comprehensive income		1,550			4,089			2,875
Treasury stock - common, 812shares, at cost		(20	)		(20	)		(20	)
Total shareholders' equity		107,629			128,197			153,441
Total liabilities and shareholders' equity	$	1,328,475		$	1,444,097		$	1,531,290

*The consolidated balance sheet at December 31, 2011 has been derived from audited financial statements at that date.

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ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended
	June 30,			June 30,
(Dollars in thousands, Except per Share Data)	2012			2011
Interest and dividend income
Interest and fees on loans	$	10,044		$	12,383
Interest and dividends on investment securities
Taxable		1,029			2,364
Tax-exempt		474			769
Short-term investments		82			21
Total interest and dividend income		11,629			15,537

Interest expense
Interest on deposits		1,862			2,359
Interest on short-term borrowings		41			95
Interest on long-term debt		180			273
Total interest expense		2,083			2,727

Net interest income		9,546			12,810
Provision for loan losses		23,000			21,230
Net interest income after provision for loan losses		(13,454	)		(8,420	)

Noninterest Income
Service charges on deposit accounts		1,543			1,645
Other service charges, commissions and fees		284			327
Trust department income		1,116			1,034
Brokerage income		421			484
Mortgage banking activities		727			636
Earnings on life insurance		250			250
Merchant processing revenue		0			285
Other income		91			79
Investment securities gains		2,595			469
Total noninterest income		7,027			5,209

Noninterest Expense
Salaries and employee benefits		4,977			4,176
Occupancy expense		513			477
Furniture and equipment		727			692
Data processing		134			349
Telephone		182			165
Advertising and bank promotions		308			296
FDIC Insurance		710			762
Professional services		751			546
Taxes other than income		230			205
Collection & problem loan		579			177
Real estate owned expense		100			40
Intangible asset amortization		52			53
Other operating expenses		1,470			1,784
Total noninterest expense		10,733			9,722
Income (loss) before income tax (benefit)		(17,160	)		(12,933	)
Income tax expense (benefit)		(7,246	)		(2,310	)
Net income (loss)	$	(9,914	)	$	(10,623	)

Per share information:
Basic earnings (loss) per share	$	(1.23	)	$	(1.33	)
Diluted earnings (loss) per share		(1.23	)		(1.33	)
Dividends per share		0.00			0.23
Average shares and common stock equivalents outstanding		8,064,549			7,999,650

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ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Six Months Ended
	June 30,			June 30,
(Dollars in thousands, Except per Share Data)	2012			2011
Interest and dividend income
Interest and fees on loans	$	21,150		$	24,818
Interest and dividends on investment securities
Taxable		2,337			4,459
Tax-exempt		1,088			1,540
Short-term investments		143			45
Total interest and dividend income		24,718			30,862

Interest expense
Interest on deposits		3,840			4,884
Interest on short-term borrowings		93			218
Interest on long-term debt		397			562
Total interest expense		4,330			5,664

Net interest income		20,388			25,198
Provision for loan losses		42,200			24,425
Net interest income after provision for loan losses		(21,812	)		773

Noninterest Income
Service charges on deposit accounts		3,062			3,130
Other service charges, commissions and fees		598			697
Trust department income		2,252			2,046
Brokerage income		784			888
Mortgage banking activities		1,212			1,332
Earnings on life insurance		498			580
Merchant processing revenue		0			540
Other income (loss)		(14	)		224
Investment securities gains		4,826			848
Total noninterest income		13,218			10,285

Noninterest Expense
Salaries and employee benefits		9,634			9,008
Occupancy expense		1,027			1,039
Furniture and equipment		1,405			1,373
Data processing		263			661
Telephone		342			341
Advertising and bank promotions		681			554
FDIC Insurance		1,231			1,312
Professional services		1,552			868
Taxes other than income		464			410
Collection & problem loan		1,297			331
Real estate owned expense		476			78
Intangible asset amortization		105			105
Other operating expenses		3,139			3,081
Total noninterest expense		21,616			19,161
Income (loss) before income tax (benefit)		(30,210	)		(8,103	)
Income tax expense (benefit)		(12,078	)		(1,307	)
Net income (loss)	$	(18,132	)	$	(6,796	)

Per share information:
Basic earnings (loss) per share	$	(2.25	)	$	(0.85	)
Diluted earnings (loss) per share		(2.25	)		(0.85	)
Dividends per share		0.00			0.460
Average shares and common stock equivalents outstanding		8,059,860			8,012,784

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ANALYSIS OF NET INTEREST INCOME
Average Balances and Interest Rates, Taxable Equivalent Basis

	Three Months Ended
	June 30, 2012								June 30, 2011
			Tax			Tax					Tax			Tax
	Average		Equivalent			Equivalent			Average		Equivalent			Equivalent
(Dollars in thousands)	Balance		Interest			Rate			Balance		Interest			Rate
Assets
Federal funds sold
& interest bearing
bank balances	$	126,942	$	82			0.25	%	$	29,556	$	21			0.28	%
Securities		337,180		1,758			2.09			406,048		3,547			3.50
Loans		880,371		10,372			4.62			1,013,111		12,687			4.96
Total interest-earning
assets		1,344,493		12,212			3.58			1,448,715		16,255			4.47
Other assets		75,104								88,585
Total	$	1,419,597							$	1,537,300

Liabilities and Shareholders' Equity
Interest bearing
demand deposits	$	514,762	$	356			0.26		$	466,086	$	416			0.36
Savings deposits		74,938		31			0.17			71,806		36			0.20
Time deposits		495,844		1,475			1.20			596,138		1,907			1.28
Short term borrowings		42,738		41			0.42			72,943		95			0.52
Long term debt		47,675		180			1.52			44,936		273			2.43
Total interest bearing
liabilities		1,175,957		2,083			0.70			1,251,909		2,727			0.87
Non-interest bearing
demand deposits		116,838								111,957
Other		8,856								9,753
Total Liabilities		1,301,651								1,373,619
Shareholders' Equity		117,946								163,681
Total	$	1,419,597					0.63	%	$	1,537,300					0.76	%
Net interest income (FTE)/
net interest spread				10,129			2.88	%			$	13,528			3.60	%
Net interest margin							2.96	%							3.71	%
Tax-equivalent adjustment				(583	)							(718	)
Net interest income			$	9,546							$	12,810

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ANALYSIS OF NET INTEREST INCOME
Average Balances and Interest Rates, Taxable Equivalent Basis

	Six Months Ended
	June 30, 2012								June 30, 2011
			Tax			Tax					Tax			Tax
	Average		Equivalent			Equivalent			Average		Equivalent			Equivalent
(Dollars in thousands)	Balance		Interest			Rate			Balance		Interest			Rate
Assets
Federal funds sold
& interest bearing
bank balances	$	109,772	$	143			0.25	%	$	23,749	$	45			0.38	%
Securities		335,913		4,011			2.39			415,787		6,828			3.29
Loans		917,219		21,799			4.75			994,729		25,393			5.10
Total interest-earning
assets		1,362,904		25,953			3.81			1,434,265		32,266			4.50
Other assets		67,252								90,422
Total	$	1,430,156							$	1,524,687

Liabilities and Shareholders' Equity
Interest bearing
demand deposits	$	528,217	$	760			0.27		$	443,289	$	865			0.39
Savings deposits		74,479		62			0.17			69,735		74			0.21
Time deposits		486,867		3,018			1.24			597,975		3,945			1.33
Short term borrowings		45,354		93			0.41			84,489		218			0.52
Long term debt		49,376		397			1.42			47,467		562			2.38
Total interest bearing
liabilities		1,184,293		4,330			0.73			1,242,955		5,664			0.92
Non-interest bearing
demand deposits		113,233								109,551
Other		9,558								9,801
Total Liabilities		1,307,084								1,362,307
Shareholders' Equity		123,072								162,380
Total	$	1,430,156					0.65	%	$	1,524,687					0.80	%
Net interest income (FTE)/
net interest spread				21,623			3.08	%			$	26,602			3.58	%
Net interest margin							3.16	%							3.70	%
Tax-equivalent adjustment				(1,235	)							(1,404	)
Net interest income			$	20,388							$	25,198

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Nonperforming Assets / Risk Elements

	June 30,			December 31,			June 30,
(Dollars in Thousands)	2012			2011			2011
Nonaccrual loans (cash basis)	$	56,917		$	83,697		$	14,762
Other real estate (OREO)		2,337			2,165			1,240
Total nonperforming assets		59,254			85,862			16,002
Restructured loans still accruing		2,831			27,917			34,844
Loans past due 90 days or more and still accruing		1,275			0			3,617
Total risk assets	$	63,360		$	113,779		$	54,463

Loans 30-89 days past due		6,219			6,723			11,021

Asset quality ratios:
Total nonaccrual loans to loans		6.79	%		8.67	%		1.48	%
Total nonperforming assets to assets		4.46	%		5.95	%		1.05	%
Total nonperforming assets to total loans and OREO		7.05	%		8.87	%		1.60	%
Total risk assets to total loans and OREO		7.54	%		11.76	%		5.44	%
Total risk assets to total assets		4.77	%		7.88	%		3.56	%

Allowance for loan losses to total loans		4.32	%		4.53	%		2.72	%
Allowance for loan losses to nonaccrual loans		63.66	%		52.23	%		184.34	%
Allowance for loan losses to nonaccrual and
restructured loans still accruing		60.65	%		39.17	%		54.86	%

Roll Forward of Allowance for Loan Losses

	Quarter Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
(Dollars in Thousands)	2012			2011			2012			2011

Balance at beginning of period	$	28,156		$	18,398		$	43,715		$	16,020
Provision for loan losses		23,000			21,230			42,200			24,425
Recoveries		1,774			16			2,298			23
Loans charged-off		(16,695	)		(12,432	)		(51,978	)		(13,256	)
Balance at end of period	$	36,235		$	27,212		$	36,235		$	27,212

About the Company:

With $1.3 billion in assets, Orrstown Financial Services, Inc. and its wholly-owned subsidiary, Orrstown Bank, provide a full range of consumer and business financial services through twenty-one banking offices and two remote service facilities located in Cumberland, Franklin and Perry Counties, Pennsylvania and Washington County, Maryland. Orrstown Financial Services, Inc.’s stock is traded on the NASDAQ Capital Market under the symbol ORRF.

Safe Harbor Statement:

This news release may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results and trends could differ materially from those set forth in such statements due to various risks, uncertainties and other factors. Such risks, uncertainties and other factors that could cause actual results and

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experience to differ from those projected include, but are not limited to, the following: ineffectiveness of the Company's business strategy due to changes in current or future market conditions; the effects of competition, including industry consolidation and development of competing financial products and services; changes in laws and regulations, including the recent Dodd-Frank Wall Street Reform and Consumer Protection Act; interest rate movements; changes in credit quality; inability to raise capital under favorable conditions, volatilities in the securities markets; and deteriorating economic conditions, and other risks and uncertainties, including those detailed in Orrstown Financial Services, Inc.'s filings with the Securities and Exchange Commission. The statements are valid only as of the date hereof and Orrstown Financial Services, Inc. disclaims any obligation to update this information.

The review period for subsequent events extends up to and including the filing date of a public company’s financial statements, when filed with the Securities and Exchange Commission. Accordingly, the consolidated financial information presented in this announcement is subject to change.

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