On April 6, 2011, Orrstown's stock closed at 29.28, its high for the year. On Monday this week, it closed at 7.82, a drop of 73 percent.
In July, Orrstown reported what it later called its first-ever quarterly loss, totaling $10.6 million. In October, the Shippensburg-based bank announced it was suspending its dividend indefinitely at the direction of its federal regulator.
In January, Orrstown reported losses for 2011 of $23 million, making it the only major publicly traded midstate-based bank to lose money that year. On March 12, it revised the loss upward to $32 million.
Ten days later, Orrstown announced it had signed a consent order with the state Department of Banking and a written agreement with the Federal Reserve Bank of Philadelphia. The order and agreement call on Orrstown to strengthen its board oversight and risk management and prune its portfolio of bad loans.
"They have huge challenges ahead," said Peter Labella, president of FMA Advisory Inc., a wealth management firm based in Harrisburg.
Orrstown declined to comment to the Business Journal until after its first-quarter earnings release and May 1 annual meeting, spokesman Mark Bayer said. However, the bank's managers have issued several public statements indicating their recognition of the need for a turnaround.
"We are not satisfied with our results and know you deserve better," President and CEO Thomas Quinn wrote in a letter to shareholders introducing Orrstown Financial's 2011 annual report.
Founded in 1919, Orrstown has long enjoyed a sterling reputation as a prudent small-town bank, local bankers and analysts said. For its first 60 years, it operated a single location, according to a company history. Its sole acquisition was PerryCounty's First National Bank of Newport in 2007.
In April 2009, it went public, trading on the Nasdaq exchange under the ticker symbol ORRF. Today it has assets of $1.45 billion and 21 offices in a footprint that stretches along Interstate 81 from Camp Hill to Hagerstown, Md.
Quinn has been Orrstown Bank's president since May 2009. He succeeded Ken Shoemaker, who led the bank for more than 20 years and remains on Orrstown Financial's board. Shoemaker will step down next month, though he will remain the bank's president emeritus.
In his letter to shareholders, Quinn cited commercial loans, particularly commercial real estate loans, as the source of Orrstown's troubles. The company took a one-time goodwill impairment charge of $19.4 million, he noted.
Analyst Matt Schultheis follows Orrstown for Boenning & Scattergood, a Philadelphia-area investment banking and finance firm. He said he suspects the bank kept lending money for real estate projects in 2007-09, after other banks pulled back during the recession.
At the time, Orrstown was engaged in a push to expand its market up and down Interstate 81, northeast toward Carlisle and southwest toward Hagerstown, he said.
Orrstown's "total risk assets," a category that includes nonperforming loans and those restructured to help borrowers, increased from $18.4 million in December 2010 to $113.8 million in December 2011, according to Orrstown's annual financial filings with the Securities and Exchange Commission.
Orrstown's fourth-quarter call reports for 2010 and 2011, as filed with the Federal Deposit Insurance Corp., show sharp year-on-year jumps in most categories of nonperforming loans. Nonperforming construction and land development loans went from $93,000 to $18 million. Bad residential mortgages surged from $443,000 to $28.4 million. Nonperforming loans secured by commercial properties went from $2.1 million to $18.1 million.
Nonperforming commercial and industrial loans did drop from $9.5 million in 2010 to $405,000 in 2011. However, Orrstown reported $9.5 million in charge-offs for that category in 2011, along with charge-offs of $9.1 million on construction and land development loans, $2.5 million on residential mortgages and $3.4 million on loans secured by commercial properties, the call report said.
It's hard not to lose money when land development loans go bad, said George Millward, a managing director at bank consulting firm The Kafafian Group.
"Basically, what you have is expensive dirt," he said.
If infrastructure has been put in, that's even more money gone, he said.
"It seems to me from what I'm seeing they're handling this fairly aggressively," recognizing losses and moving on, Schultheis said. However, some of that is being forced on Orrstown by regulators, he said.
In its quarterly statements, Orrstown alludes to a small number of lending relationships that soured. Those remain undisclosed, with one exception: Orrstown said last summer it was writing off its entire $8.6 million loan to bankrupt Camp Hill-based construction lending firm Yorktown Funding Inc.
Yorktown Funding funneled money from several midstate banks into housing construction in, among other places,Florida'sLee County, center of a major speculative building boom and bust. For a while, Orrstown planned to underwrite Yorktown Funding II, a successor to Yorktown Funding owned and operated by the same businessmen but reversed course last summer.
The Philadelphia Fed and state Department of Banking required Orrstown to obtain independent consultants to go over its loans and lending practices. The consultants are to evaluate all senior managers for competence. In addition, the state's consent order calls for an equivalent review to be conducted on board members.
"That's not uncommon, but it's probably not as prevalent" as demands that managers be evaluated, said John Soffronoff of ICS Risk Advisors, a New York-based consulting firm that advises banks on regulatory compliance and risk management.
Can Orrstown overcome its problems? The board and management are "committed to restoring the Company's performance to historic levels," the annual report said.
Labella said he's not certain Orrstown can return to health on its own.
"I would think it would be very difficult to overcome the challenges," he said.
One top executive at a midstate bank, who asked not to be named, said he expects Orrstown to be sold.
"The odds of Orrstown surviving are slim to none," he said.
However, finding a purchaser would be difficult, Schultheis said. Banks want to buy institutions without significant loan problems, he said.
The next couple of quarters will be crucial for Orrstown, Schultheis said. If the bank can clear the bulk of its bad loans off its books, and no fresh concerns turn up, that will be an encouraging sign, he said.
"I can point to banks that had the same type of issues that are doing really well today," he said.