SecProbe.io

VIA EDGAR AND EMAIL Division of Corporate Finance Securities and Exchange Commission Orrstown Financial Services, Inc. Form 10-K for the Fiscal Year Ended December 31, 2011 Form 10-Q for the Quarter Ended June 30, 2012 File No. 001-34292

Dear Ms. Blume and Mr. Thomas:

This letter is in response to your follow-up comment letter dated October 4, 2012, pertaining to our response letter to your original comment letter dated August 23, 2012, regarding the Annual Report on Form 10-K of Orrstown Financial Services, Inc. (the “Company”) filed March 15, 2012, and the Quarterly Report on Form 10-Q filed August 9, 2012, in which you requested certain explanatory information. For your convenience, the comments from your letter are repeated below in italics. The Company’s responses are shown after each comment.

Because of the commercially sensitive nature of information contained herein, this submission is accompanied by a request for confidential treatment for selected portions of this letter and the exhibits thereto. We have filed a separate letter with the Office of Freedom of Information and Privacy Act (the “FOIA Office”) in connection with the confidential treatment request, pursuant to Rule 83 of the Commission’s Rules on Information and Requests [17 C.F.R. § 200.83] (“Rule 83”). For the Staff’s reference, we have enclosed a copy of our letter to the FOIA Office (the “Request”) with this copy of the correspondence marked to show the portions redacted from the version filed via EDGAR and for which the Company is requesting confidential treatment.

In accordance with Rule 83, the Company requests confidential treatment of (a) the marked portions (the “Confidential Information”) of this response letter (this “Letter”), (b) the exhibits accompanying this Letter, and (c) the accompanying Request letter (collectively, the “Confidential Material”). Please promptly inform the undersigned of any request for disclosure of the Confidential Material made pursuant

Confidential Treatment Requested by Orrstown Financial Services, Inc.

AI-001

to the Freedom of Information and Privacy Act or otherwise so that the undersigned may substantiate the foregoing request for confidential treatment in accordance with Rule 83.1

In accordance with Rule 83, this Letter has also been clearly marked with the legend “Confidential Treatment Requested by Orrstown Financial Services, Inc.” and each page is marked for the record with the identifying numbers and code “AI-001” through “AI-0086.”

Pursuant to Rule 83, a copy of the Request (but not this Letter) also is being delivered to the Commission’s FOIA Office.

Comment

1.

We note your response to prior comment two from our letter dated August 23, 2012. Please provide us with the following additional information regarding your deferred tax asset valuation analysis at December 31, 2011, March 31, 2012 and June 30, 2012:

·

Tell us how you determined the company was not in a cumulative pretax loss position at December 31, 2011. Tell us your conclusions with respect to March 31, 2012 and June 30, 2012.

·

Tell us the specific positive and negative evidence you considered when determining a valuation allowance was not needed at December 31, 2011, March 31, 2012 and June 30, 2012. In addition, tell us the weight given to each piece of evidence and explain how you determined each weight is commensurate with the extent to which it can be objectively verified.

·

Provide us with your detailed projections regarding future taxable income. In regard to any projections and assumptions utilized, provide us with specific evidence to support the assumptions such as the number of years in the projections, estimated growth rates, net interest margins considered, estimated loan loss provision rates as well as revenue and expense growth rates utilized.

Response to Comment

In connection with our evaluation of the necessity of establishing a valuation allowance against our deferred tax asset as of December 31, 2011, March 31, 2012 and June 30, 2012, and most recently, September 30, 2012, the Company considered specific negative and positive evidence in making our evaluation, as outlined below.

1 The designated contact person for this request ("Contact Person") is John J. Spidi, Esq, Spidi & Fisch, PC, 1227 25th Street, N.W., Suite 200 West, Washington, D.C. 20037, telephone (202) 434-4670, Facsimile: (202) 434-4661. All questions related to this Request should be forwarded to the Contact Person, who also should be provided with timely notice prior to releasing any Confidential Material.

Confidential Treatment Requested by Orrstown Financial Services, Inc.

AI-002

Negative evidence

·

A book net loss, excluding the impact of goodwill impairment charge, of $12,968,000 for the year ended December 31, 2011.

·

A declining balance sheet and a trend of investing in assets yielding lower interest margins that began in the first quarter of 2012 in an attempt by Orrstown Bank (“the Bank”) to preserve its capital so it could continue to exceed well capitalized status and its risk adjusted capital ratios.

·

In March 2012, the Company and the Bank entered into a Written Agreement with the Federal Reserve Bank of Philadelphia and the Bank entered into a Consent Order with the Pennsylvania Department of Banking (collectively, the "Regulatory Orders"). These formal agreements require the Company and the Bank to discontinue a number of practices and to take a number of actions, which may continue to result in elevated noninterest expenses and depressed earnings as we try to work through the issues identified.

·

In the second quarter of 2012, a class action lawsuit was filed against the Company. Although the insurance carrier indicated that it will cover losses and legal expenses, the deductible amount is $250,000. In addition to the out-of-pocket costs, it is anticipated that defense of the suit will take additional management time and/or resources.

·

At December 31, 2011, the Company was not in a cumulative pre-tax loss position excluding non-recurring goodwill charge for the previous 36 month period. However, at March 31, 2012, June 30, 2012 and September 30, 2012, cumulative 36 month pre-tax losses, adjusted for the non-recurring goodwill charge, as illustrated in the table following this bullet point. In addition, at September 30, 2012, we have updated our forecasted amount of losses through December 31, 2012 in the table below.

36 Months Ended

(in thousands)

12/31/2011

3/31/2012

6/30/2012

9/30/2012

12/31/2012 f

Cumulative 36 month pre-tax income (loss)

$ (2,353)

$ (19,502)

$ (41,180)

$ (48,611)

[ ***

Plus: Goodwill impairment *

19,447

19,447

19,447

19,447

***

Cumulative 36 month pre-tax income (loss)

adjusted for nonrecurring expenses

$ 17,094

$ (55)

$ (21,733)

$ (29,164)

***]2

* ASC 740-10-30-22 allows for unusual, infrequent or extraordinary items to be included in the evaluation as

2 The Company is requesting that the information contained in this request No. 1 related to financial projections be treated as confidential and that the Securities and Exchange Commission provide timely notice to the Contact Person prior to its release.

Confidential Treatment Requested by Orrstown Financial Services, Inc.

AI-003

aberration rather than a continuing condition. Amount represents the pre-tax goodwill charge; with after tax charge being $18,996,000.

f = forecasted amounts

·

Continued uncertain economic conditions, in which there is discussion of the fiscal cliff, home sales remaining below historical levels, despite showing some improvement during 2012, elevated unemployment, and the possibility of another recession.

Positive Evidence

·

A long history of profitable operations; during which the Company had been profitable since its formation in 1987, and the Bank posted profits at least back to 1981 – over thirty years of profitable operations prior to the abnormal credit environment experienced in 2011-2012.

·

In connection with our Regulatory Orders, the Company was required to submit a capital plan to the Pennsylvania Department of Banking and the Federal Reserve Bank of Philadelphia, which included specific benchmark capital ratios to be met at each quarter (the “Capital Plan”). The Capital Plan was completed and submitted in July 2012. [***]3

·

Prior to our miss in earnings in 2011, that was the direct result of the deterioration in asset quality, which carried over to 2012 in our initial forecast; the Company had been successful in budgeting earnings in the past. As noted in Exhibit 6, from 2000 – 2010, the Company’s pre-tax income, excluding securities gains, was generally within + or - 10% of its forecast, with one exception in 2009, and during this time, it’s average actual results were within 0.3% of budget on average. It should be noted that in 2010, following the 2009 exception noted above, the Company’s actual pre-tax income, excluding securities gains, were within $205 thousand or 1.1% of budget.

·

[***]4

·

Stabilization in our risk management process, including the re-engineering of processes involved in loan origination, credit administration and loan work out. As a result of improvements made, it is anticipated that we will be able to weather any remaining uncertainty in economic and market conditions, [***]5

3 The Company is requesting that the information contained in this request No. 2 related to financial projections be treated as confidential and that the Securities and Exchange Commission provide timely notice to the Contact Person prior to its release.

4 The Company is requesting that the information contained in this request No. 3 related to loan portfolio rating process be treated as confidential and that the Securities and Exchange Commission provide timely notice to the contact person prior to its release.

5 The Company is requesting that the information contained in this request No. 4 related to financial projections be treated as confidential and that the Securities and Exchange Commission provide timely notice to the Contact Person prior to its release.

Confidential Treatment Requested by Orrstown Financial Services, Inc.

AI-004

The table below shows various key ratios for the period 2008-2010 (normal operating period), 2011 -2012 (abnormal credit environment which is highlighted in yellow) and for the projection period 2013 – 2015 to demonstrate that the assumptions used for our most recent forecast (October 2012) are reasonable in a normal business cycle.

Confidential Treatment Requested by Orrstown Financial Services, Inc.

AI-005

(Dollars in thousands)

As of or for the Year Ending December 31,

2012f

2013f

2014f

2015f

Summary of Operations:

Net income (loss) excluding goodwill

$

13,103

$

13,373

$

16,581

$

(31,964

)

$

[***]

$

[***]

$

[***]

$

[***]

Goodwill impairment charge, net

-

-

-

(18,996

)

Net income (loss) excluding goodwill

impairment charge

13,103

13,373

16,581

(12,968

)

[***]

[***]

[***]

[***]

Net interest income

32,905

36,570

45,735

49,607

[***]

[***]

[***]

[***]

Provision for loan losses

1,450

4,865

8,925

58,575

[***]

[***]

[***]

[***]

Noninterest income, excluding security gains

15,322

15,549

19,340

20,396

[***]

[***]

[***]

[***]

Pct. increase (decrease) in noninterest income

1.5

%

24.4

%

5.5

%

[***]

%

[***]

[***]

%

[***]

%

Noninterest expenses, excluding goodwill impairment

28,165

31,492

36,735

41,032

[***]

[***]

[***]

[***]

Pct.increase (decrease) in noninterest expense

11.8

%

16.6

%

11.7

%

[***]

%

[***]

[***]

%

[***]

%

Balance Sheet:

Total assets

1,051,783

1,196,432

1,511,722

1,444,097

[***]

[***]

[***]

[***]

Pct.increase (decrease) in total assets

13.8

%

26.4

%

-4.5

%

[***]

%

[***]

[***]

%

[***]

%

Gross loans

820,468

881,074

966,986

967,993

[***]

[***]

[***]

[***]

Pct.increase (decrease) in total loans

7.4

%

9.8

%

0.1

%

[***]

%

[***]

[***]

%

[***]

%

Allowance for loan losses

7,140

11,067

16,020

43,715

[***]

[***]

[***]

[***]

Total deposits

757,368

915,170

1,188,377

1,216,902

[***]

[***]

[***]

[***]

Pct.increase (decrease) in total loans

20.8

%

29.9

%

2.4

%

[***]

%

[***]

[***]

%

[***]

%

Performance ratios:

Return on tangible equity

17.02

%

15.73

%

13.19

%

-9.17

%

[***]

%

[***]

[***]

%

[***]

%

Return on tangible assets

1.43

%

1.23

%

1.23

%

-0.86

%

[***]

%

[***]

[***]

%

[***]

%

Net interest margin

3.93

%

3.66

%

3.73

%

3.66

%

[***]

%

[***]

[***]

%

[***]

%

Efficiency ratio

56.70

%

58.90

%

54.90

%

55.20

%

[***]

%

[***]

[***]

%

[***]

%

Asset quality ratios:

Allowance for loan losses to total loans

0.87

%

1.26

%

1.66

%

4.52

%

[***]

%

[***]

[***]

%

[***]

%

Net charge-offs to average loans

0.06

%

0.11

%

0.44

%

3.11

%

[***]

%

[***]

[***]

%

[***]

%

6 The Company is requesting that the information contained in this request No. 5 related to financial projections be treated as confidential and that the Securities and Exchange Commission provide timely notice to the Contact Person prior to its release.

Confidential Treatment Requested by Orrstown Financial Services, Inc.

AI-006

The assumptions used in our most recent forecast (October 2012) appear reasonable and slightly below (conservative) the results achieved in a normal operating environment. The most relevant risks to the projections would be interest rate and credit quality. From an interest rate standpoint, net interest income is expected to increase, as we are able to reduce our classified assets and reinvest the funds. Net interest margin increases slowly during the planning horizon. The provision for loan losses does decline over the planning horizon, as our 2011 and 2012 provisions were dramatically impacted by our historical charge-offs and their related impact on impairment reserves on loans collectively evaluated for impairment. As we had provided significant charges for impaired loans during the past two years, it results in an increase in the allowance for loan losses to total loans. As the Company feels it has worked through many of its problem loans, and has re-engineered its loan origination, credit administration and loan workout processes, it anticipates that it will not be providing for losses as heavily in the future. However, the allowance for loan losses as a percent of total loans will remain (conservative) above those levels prior to the abnormal credit period.

Our conclusions as to the reasons why a valuation allowance was not required at December 31, 2011, March 31, 2012 and June 30, 2012 are further discussed in Comment #2.

Comment

2.

We note the Company considered several of the taxable income sources listed in ASC 740-10-30-18 to determine the deferred tax asset was fully realizable at December 31, 2011, March 31, 2012, and June 30, 2012. Please provide us with a table that quantifies and sufficiently describes each of these taxable income sources for each of the above referenced periods. Explain how you determined future realization of each item, included how you concluded sufficient taxable income existed from the carry back or carry forward period available under the tax law.

Response to Comment

As allowed by ASC 730-10-30-18, management considered the following sources of taxable income under the tax law to realize its deferred tax benefit for deductible temporary differences and carry forwards at each quarter end, in most objective to least objecti