Orrstown Financial Services, Inc. Reports Second Quarter 2021 Results and Announces Increased Quarterly Dividend

Shippensburg, Pennsylvania, UNITED STATES


  • Net income of $8.8 million for the quarter; diluted second quarter 2021 EPS of $0.79 per share versus $0.92 per share in the first quarter of 2021 and $0.58 per share in the second quarter of 2020
  • The Board of Directors declared a cash dividend of $0.19 per common share, payable August 9, 2021, to shareholders of record as of August 2, 2021, an increase from $0.18 per common share in the first quarter of 2021
  • Commercial loan growth for the quarter, excluding Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans, was 24% annualized as loan demand was robust late in the second quarter of 2021; momentum continues with a strong commercial pipeline
  • Provision expense of $0.6 million was recorded in the second quarter of 2021 as compared to a provision reversal of $1.0 million in the first quarter of 2021; commercial loan production drove the increase; the provision included $0.8 million and $1.0 million of COVID-19 reserve reductions for the three months ended June 30, 2021 and March 31, 2021, respectively
  • Noninterest expenses improved to $17.0 million in the second quarter of 2021 as compared to $17.8 million in the first quarter of 2021; the efficiency ratio was stable at 60% for first and second quarters of 2021
  • Noninterest income was $6.7 million in the second quarter of 2021 as compared to $7.5 million in the first quarter of 2021; the first quarter included a $0.6 million reduction of the mortgage servicing rights valuation reserve
  • Return on average assets totaled 1.2% in the second quarter of 2021 compared to 1.4% in the first quarter of 2021; second quarter provision increase caused the reduction
  • Tangible book value per share(1) increased to $21.61 at June 20, 2021 from $20.59 at March 31, 2021 and $19.93 at December 31, 2020
  • Net interest margin declined to 3.24% in the second quarter of 2021 from 3.38% in the first quarter of 2021 due primarily to increased liquidity that resulted from SBA PPP forgiveness
  • The SBA PPP portfolio averaged $471.2 million in the three months ended June 30, 2021 as compared to $463.0 million in the three months ended March 31, 2021
  • Deposits declined by $53.0 million, or 8% annualized, from the first quarter of 2021 as a result of the usage of stimulus and PPP funds; average deposits per branch remained strong at $97 million for the second quarter of 2021
  • Cost of deposits fell by six basis points in the quarter due to late first quarter rate adjustments and changes in mix

(1) Non-GAAP measure. See Appendix B for additional information.

SHIPPENSBURG, Pa., July 20, 2021 (GLOBE NEWSWIRE) -- Orrstown Financial Services, Inc. ("Orrstown" or the “Company”) (NASDAQ: ORRF), the parent company of Orrstown Bank (the “Bank”), announced earnings for the three months ended June 30, 2021. Net income totaled $8.8 million for the three months ended June 30, 2021, compared with $10.2 million for the three months ended March 31, 2021 and $6.4 million in the three months ended June 30, 2020. Diluted earnings per share totaled $0.79 for the three months ended June 30, 2021, compared with $0.92 in the three months ended March 31, 2021 and $0.58 in the three months ended June 30, 2020.

Thomas R. Quinn, Jr., President & CEO, commented, “With another quarter of strong earnings and growing optimism for sustained future earnings, Orrstown's Board saw an opportunity to further enhance shareholder value and approved an increase to its quarterly dividend. Orrstown strives to serve its community, employees and shareholders in the best way possible and this action along with the Company's efforts in the past 15 months solidifies that message. After tirelessly devoting the past several quarters to SBA PPP efforts, our seasoned lending team quickly pivoted to commercial loan production. While we continue to service the needs of our PPP clients as we help them navigate through the forgiveness process, our primary focus has returned to growing our core business. The commercial loan pipeline is robust and we expect to see excellent production through the second half of the year. Orrstown continues to take advantage of market disruption which has resulted in both new client relationships and new talent that fits with our strategic vision and core values.”

Mr. Quinn continued, “With the economy re-opened and COVID-19 mandates lifted, our commercial lenders have been enabled to do what they do best, which is interacting with clients and driving new business opportunities. Recruitment will be the key to increasing mortgage banking revenue and replenishing the mortgage loan portfolio. As the profit boost from PPP activity wanes through 2022, our focus remains on replacing that income over the long-term. With interest rates expected to remain at historical lows in the near term, we plan to maintain discipline with our commercial lending and seek appropriate opportunities to utilize excess liquidity that fit within our relationship model and drive long-term growth.”

DISCUSSION OF RESULTS

Balance Sheet

Loans

Loans held for investment, which includes SBA PPP loans, declined by $99.6 million from March 31, 2021 to June 30, 2021, or 20% annualized, due to SBA PPP forgiveness and consumer loan reductions, partially offset by net commercial loan production. SBA PPP loans, net of deferred fees and costs, declined during the quarter by $148.7 million to $355.6 million at June 30, 2021 from $504.3 million at March 31, 2021. Commercial loans, excluding SBA PPP loans, increased by $68.8 million, or 24% annualized, from March 31, 2021 to June 30, 2021 resulting from strong commercial loan production. Loans held for investment are down by $34.3 million, or 2%, from December 31, 2020 to June 30, 2021. Loan demand has increased and is expected to continue for the remainder of the year as the COVID-19 related restrictions were lifted in the second quarter of 2021.

We expect most of the 2020 SBA PPP loan balances to be forgiven by the end of 2021. The SBA PPP loan originations in 2021 totaled $231.7 million at June 30, 2021. A number of the 2021 loans began to achieve forgiveness in the second quarter of 2021 and it is expected most of these 2021 originations will be forgiven by the end of 2022. Net deferred fees of $11.2 million remain at June 30, 2021, the majority of which is expected to be earned by the end of 2022.

Residential mortgage loans declined by $13.3 million, or 24% annualized in the three months ended June 30, 2021. In addition to experiencing an overall decline in mortgage volume, the low interest rate environment has reduced the Company's appetite for portfolio mortgage loans. Despite this decline, overall loan growth in 2021, excluding SBA PPP, is expected to be mid-single digits with commercial lending growth exceeding 10%.

Deposits

Deposits declined by $53.0 million, or 8% annualized, but remained at $2.5 billion at June 30, 2021 compared to March 31, 2021. This decline is attributed to deposit customers' utilization of stimulus funds received in the first quarter of 2021, as well as usage of SBA PPP funds. Non-interest bearing demand deposits declined by $19.0 million in the second quarter of 2021, or 14% annualized, and interest bearing checking deposits declined by $28.9 million, or 12% annualized. This decline was partially offset by money market and savings account growth of $19.3 million, or 12% annualized, from March 31, 2021 to June 30, 2021. Certificates of deposit declined by $24.3 million from March 31, 2021 to June 30, 2021, or 25% annualized. Deposits are up by $137.2 million, or 6%, from December 31, 2020 to June 30, 2021 due primarily to SBA PPP loan fundings. Deposit balances are expected to continue to gradually decline over time as clients access their remaining PPP funds and deploy their excess liquidity, which contributed to the Bank's loan-to-deposit ratio of 78% at June 30, 2021. On a longer term basis, the Bank will continue to target a loan-to-deposit ratio of 90%.

Other

Investment securities increased by $42.1 million to $460.1 million at June 30, 2021 as compared to $418.0 million at March 31, 2021, due primarily to purchases of agency backed securities and municipal bonds. Longer term, the Bank will continue to seek to deploy excess liquidity to relationship lending strategies to maximize its net interest margin as rates rise. See Appendix C for a summary of the current investment portfolio that highlights the concentrations, quality and credit enhancement levels for the portfolio.

Income Statement

Net Interest Income and Margin

Net interest income remained consistent at $21.9 million for the three months ended June 30, 2021 compared to the three months ended March 31, 2021. The net interest margin declined to 3.24% in the second quarter of 2021 from 3.38% in the first quarter of 2021. The margin reduction was primarily a result of an increase in excess cash (17 basis points) and lower purchase accounting accretion (6 basis points), partially offset by a 13 basis point increase in yield on SBA PPP loans.

SBA PPP loans had an average outstanding balance of $471.2 million and yielded approximately 4.4% in the three months ended June 30, 2021. This yield increased from approximately 3.9% in the first quarter of 2021 due to the realization of fees on $197.5 million of SBA PPP loans forgiven in the second quarter of 2021 compared to $80.3 million forgiven in the first quarter of 2021. Net deferred SBA PPP fees of $3.8 million were earned in the second quarter of 2021.

Repricing actions by management at the end of the first quarter of 2021 led to a deposit cost reduction of six basis points in the second quarter of 2021 to 0.17%, which is down from 0.23% in the first quarter of 2021 and 0.60% in the second quarter of 2020.

Excess liquidity that has resulted from SBA PPP forgiveness and an inflow of deposit funds from the SBA PPP and government stimulus programs is expected to continue to negatively impact the margin in the short term as there is little spread on its earnings. We expect that this excess liquidity will exit the banking system in the future as our clients utilize these funds. Our objective of emphasizing balance sheet mix is expected to lead to a higher net interest margin over the long-term. These efforts may mute growth in assets, but should lead to growth in net interest income, earnings and return on assets. It is anticipated that the net interest margin will remain under pressure in 2021 due to excess liquidity combined with low interest rates anticipated for the remainder of the year, coupled with an asset sensitive balance sheet. We believe that our efforts on balance sheet mix enhancement, SBA PPP lending and fee income generation will be effective to manage through the currently challenging external environment.

Provision for Loan Losses

We continue to see favorable asset quality trends including most loans that we placed on payment deferral in 2020 having resumed paying status. The allowance for loan losses totaled $19.4 million at June 30, 2021, compared with $19.0 million at March 31, 2021. Total classified loans decreased by $3.7 million, or 11%, to $28.7 million from March 31, 2021 to June 30, 2021. As of June 30, 2021, the Bank had active COVID-19 related deferred loans totaling $3.9 million, or 0.25% of its total loan portfolio, excluding PPP loans. This compared to $7.5 million, or 0.49% of total loans, excluding PPP loans, at March 31, 2021 and $239.3 million, or 15.1% of total loans, excluding PPP loans, at June 30, 2020.

Net charge offs were $0.2 million, or 0.01% of total non-SBA PPP loans, for both the June 30, 2021 and March 31, 2021 quarters. Nonperforming loans totaled $9.9 million at both June 30, 2021 and March 31, 2021, which was 0.51% of gross loans at June 30, 2021 and 0.48% of gross loans at March 31, 2021. The ratio of the allowance for loan losses to nonperforming loans was 195% at June 30, 2021 compared to 192% at March 31, 2021. The allowance to non-SBA guaranteed loans(1) remained steady at 1.2% as of June 30, 2021 and March 31, 2021. Management believes the allowance for loan losses to be adequate based on current asset quality metrics.

Strong commercial loan growth and some charge-off activity resulted in provision expense of $0.6 million in the three months ended June 30, 2021 despite generally positive trends and sustained performance in the asset quality of the loan portfolio. This compares to a provision reversal of $1.0 million recorded in the three months ended March 31, 2021 and $1.9 million of provision expense recorded in the three months ended June 30, 2020. While there remains uncertainty in the external environment regarding the relative strength of the economy, management determined that a release of a portion of its COVID-19 qualitative reserve is appropriate. This was due to the satisfactory performance of borrowers in the commercial portfolio and consideration of the amount of deferrals that have resumed making regular monthly payments. Accordingly, the qualitative factor within the allowance designated for the impact of COVID-19 was lowered by $0.8 million from March 31, 2021 to $1.0 million at June 30, 2021.

The combination of active client relationship consultation, loan payment deferrals, increased risk management focus on higher risk loan concentrations (primarily hotels and restaurants) and significant client participation in the SBA PPP have contributed to the favorable delinquency and charge-off trends we experienced during the pandemic.

(1) Non-GAAP measure. See Appendix B for additional information.

Noninterest Income

Noninterest income totaled $6.7 million in the three months ended June 30, 2021 compared with $7.5 million in the three months ended March 31, 2021 and $7.2 million in the three months ended June 30, 2020. Management continues to focus on opportunities to enhance fee income to offset potential net interest margin compression.

Total wealth management income for the three months ended June 30, 2021 grew to $2.9 million, as compared to $2.7 million for the three months ended March 31, 2021 and $2.3 million in the second quarter of 2020. Strong market conditions continue to drive wealth management income along with the addition of new clients.

Mortgage banking income declined by $1.0 million from the first quarter of 2021 to $1.2 million in the second quarter of 2021, partially due to a $0.5 million reduction in the fair value of the mortgages held for sale and interest rate lock commitments compared a reduction of $0.1 million in the first quarter of 2021. This was driven by declining production volume. Also, the second quarter of 2021 included a mortgage servicing valuation allowance reduction of $0.1 million as compared to $0.6 million in the first quarter of 2021. Mortgage loans sold totaled $51.8 million in the second quarter of 2021 compared with $57.3 million in the first quarter of 2021 and $49.5 million in the second quarter of 2020. As of June 30, 2021, the Bank services $480.4 million of loans for others, which is up by $16.4 million from March 31, 2021. On a year-to-date basis, mortgage activity has been strong. Mortgage banking income was $3.4 million for the six months ended June 30, 2021 as compared to $1.9 million for the six months ended June 30, 2020.

Debit card interchange income totaled $1.1 million in the second quarter of 2021, which is up $0.1 million from the prior quarter and up $0.2 million from the second quarter of 2020. Rising spending activity from the re-opening of the economy from COVID-19 and government stimulus payments drove this increase.

Noninterest Expenses

Noninterest expenses declined by $0.8 million to $17.0 million in the three months ended June 30, 2021 from the three months ended March 31, 2021. The decrease is due primarily to a $0.4 million reduction in the Bank's unfunded commitment reserve in the three months ended June 30, 2021 as compared to an increase of $0.3 million in the same reserve for the three months ended March 31, 2021. There were also declines in occupancy, advertising and professional services due to normal fluctuations. Market disruption continues to present opportunities to add experienced lenders and other valuable contributors to the organization. As these opportunities arise to facilitate the Company's growth, it could lead to increased expenses.

Income Taxes

The Company's effective tax rate for the second quarter of 2021 was 19.3% compared with 19.1% for the first quarter of 2021. The Company's effective tax rate is less than the 21% federal statutory rate due to tax-exempt income, including interest earned on tax-exempt loans and securities and income from life insurance policies, as well as tax credits. The change in the effective rate reflects an increase in projected income for the full 2021 year.

Capital

Shareholders’ equity totaled $265.9 million at June 30, 2021, an increase of $11.5 million from $254.4 million at March 31, 2021. The increase was primarily attributable to net income and accumulated other comprehensive income from investment gains recorded in the three months ended June 30, 2021 offset by dividends paid in the period. Tangible book value per share grew from $19.93 per share at December 31, 2020 to $21.61 per share at June 30, 2021, an increase of 8%.

The Company's tangible common equity ratio increased to 8.4% at June 30, 2021 from 7.8% at March 31, 2021. The Company's Tier 1 leverage ratio was 8.0% at June 30, 2021 and 8.1% at March 31, 2021. The Company's total risk-based capital ratio decreased from 16.2% at March 31, 2021 to 15.6% at June 30, 2021. A balance sheet shift to higher risk assets, including commercial loans, drove this reduction. As the balance of SBA PPP loans starts to decline, the Bank's tier 1 leverage ratio is expected to gradually increase if the cash position remains stable or reduced. The ratio is still well above that required to be considered "well-capitalized" under applicable regulatory requirements. As a result of the Company's performance in the first half of 2021 and a strong capital position, the Board of Directors approved a quarterly dividend increase from $0.18 per share to $0.19 per share. The dividend payout ratio totaled 24% for the three months ended June 30, 2021. The Company continues to believe that capital is adequate at this time to support the risks inherent in the balance sheet, as well as growth requirements.

Investor Relations Contact:Media Contact:
Matthew C. Schultheis, CFALuke Bernstein
Director Strategic Planning and Investor RelationsCorporate Communications Officer
Phone (717) 510-7127Phone (717) 510-7107


ORRSTOWN FINANCIAL SERVICES, INC.       
FINANCIAL HIGHLIGHTS (Unaudited)       
        
        
 Three Months Ended Six Months Ended
 June 30, June 30, June 30, June 30,
(Dollars in thousands, except per share amounts)2021 2020 2021 2020
        
Profitability for the period:       
Net interest income$21,901  $20,798  $43,756  $39,060 
Provision for loan losses625  1,900  (375) 2,825 
Noninterest income6,664  7,193  14,208  14,267 
Noninterest expenses17,033  18,431  34,816  36,735 
Income before income taxes10,907  7,660  23,523  13,767 
Income tax expense2,131  1,301  4,540  2,340 
Net income available to common shareholders$8,776  $6,359  $18,983  $11,427 
        
Financial ratios:       
Return on average assets (1)1.20% 0.94% 1.33% 0.90%
Return on average equity (1)13.56% 11.82% 15.04% 10.36%
Net interest margin (1)3.24% 3.37% 3.31% 3.39%
Efficiency ratio59.6% 65.8% 60.1% 68.9%
Income per common share:       
Basic$0.80  $0.58  $1.73  $1.04 
Diluted$0.79  $0.58  $1.71  $1.04 
        
Average equity to average assets8.83% 7.94% 8.84% 8.69%
        
(1) Annualized.       


ORRSTOWN FINANCIAL SERVICES, INC.   
FINANCIAL HIGHLIGHTS (Unaudited)   
(continued)   
 June 30, December 31,
 2021 2020
At period-end:   
Total assets$2,912,717  $2,750,572 
Total deposits2,494,100  2,356,880 
Loans, net of allowance for loan losses1,926,002  1,959,539 
Loans held-for-sale, at fair value8,092  11,734 
Securities available for sale450,402  466,465 
Borrowings80,709  77,511 
Subordinated notes31,932  31,903 
Shareholders' equity265,938  246,249 
    
Credit quality and capital ratios (1):   
Allowance for loan losses to total loans1.00% 1.02%
Total nonaccrual loans to total loans0.51% 0.52%
Nonperforming assets to total assets0.34% 0.37%
Allowance for loan losses to nonaccrual loans195% 195%
Total risk-based capital:   
Orrstown Financial Services, Inc.15.6% 15.6%
Orrstown Bank14.7% 14.7%
Tier 1 risk-based capital:   
Orrstown Financial Services, Inc.12.8% 12.5%
Orrstown Bank13.5% 13.5%
Tier 1 common equity risk-based capital:   
Orrstown Financial Services, Inc.12.8% 12.5%
Orrstown Bank13.5% 13.5%
Tier 1 leverage capital:   
Orrstown Financial Services, Inc.8.0% 8.1%
Orrstown Bank8.5% 8.7%
    
Book value per common share$23.61  $21.98 
    
(1) Capital ratios are estimated, subject to regulatory filings   


ORRSTOWN FINANCIAL SERVICES, INC.   
CONSOLIDATED BALANCE SHEETS (Unaudited)   
    
(Dollars in thousands, except per share amounts)June 30, 2021 December 31, 2020
Assets   
Cash and due from banks$27,623  $26,203 
Interest-bearing deposits with banks309,139  99,055 
Cash and cash equivalents336,762  125,258 
Restricted investments in bank stocks9,691  10,563 
Securities available for sale (amortized cost of $440,411 and $460,999 at June 30, 2021 and December 31, 2020, respectively)450,402  466,465 
Loans held for sale, at fair value8,092  11,734 
Loans1,945,383  1,979,690 
Less: Allowance for loan losses(19,381) (20,151)
Net loans1,926,002  1,959,539 
Premises and equipment, net34,529  35,149 
Cash surrender value of life insurance69,375  68,554 
Goodwill18,724  18,724 
Other intangible assets, net4,800  5,458 
Accrued interest receivable7,930  8,927 
Other assets46,410  40,201 
Total assets$2,912,717  $2,750,572 
Liabilities   
Deposits:   
Noninterest-bearing$529,137  $456,778 
Interest-bearing1,964,963  1,900,102 
Total deposits2,494,100  2,356,880 
Securities sold under agreements to repurchase22,872  19,466 
FHLB advances and other57,837  58,045 
Subordinated notes31,932  31,903 
Accrued interest and other liabilities40,038  38,029 
Total liabilities2,646,779  2,504,323 
Shareholders’ Equity   
Preferred stock, $1.25 par value per share; 500,000 shares authorized; no shares issued or outstanding   
Common stock, no par value—$0.05205 stated value per share 50,000,000 shares authorized; 11,265,510 shares issued and 11,262,751 outstanding at June 30, 2021; 11,257,046 shares issued and 11,201,317 outstanding at December 31, 2020586  586 
Additional paid—in capital188,772  189,066 
Retained earnings69,052  54,099 
Accumulated other comprehensive income7,578  3,346 
Treasury stock— 2,759 and 55,729 shares, at cost at June 30, 2021 and December 31, 2020, respectively(50) (848)
Total shareholders’ equity265,938  246,249 
Total liabilities and shareholders’ equity$2,912,717  $2,750,572 


ORRSTOWN FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
         
  Three Months Ended Six Months Ended
  June 30, June 30, June 30, June 30,
(In thousands, except per share amounts) 2021 2020 2021 2020
Interest income        
Loans $21,323  $21,794  $42,834  $41,960 
Investment securities - taxable 1,614  2,795  3,493  6,233 
Investment securities - tax-exempt 638  420  1,138  704 
Short-term investments 81  13  120  92 
Total interest income 23,656  25,022  47,585  48,989 
Interest expense        
Deposits 1,081  3,310  2,473  7,664 
Securities sold under agreements to repurchase 8  152  17  184 
FHLB advances and other 164  260  335  1,078 
Subordinated notes 502  502  1,004  1,003 
Total interest expense 1,755  4,224  3,829  9,929 
Net interest income 21,901  20,798  43,756  39,060 
Provision for loan losses 625  1,900  (375) 2,825 
Net interest income after provision for loan losses 21,276  18,898  44,131  36,235 
Noninterest income        
Service charges 880  719  1,765  1,706 
Interchange income 1,064  819  2,019  1,607 
Swap fee income 15  232  68  432 
Wealth management income 2,930  2,295  5,653  4,654 
Mortgage banking activities 1,162  1,609  3,351  1,941 
Gains on sale of portfolio loans   925    2,803 
Investment securities gains (losses) 11  9  156  (31)
Other income 602  585  1,196  1,155 
Total noninterest income 6,664  7,193  14,208  14,267 
Noninterest expenses        
Salaries and employee benefits 10,212  10,063  20,409  21,657 
Occupancy, furniture and equipment 2,400  2,326  4,918  4,615 
Data processing, telephone, and communication 1,032  791  2,051  1,662 
Advertising and bank promotions 274  167  699  956 
FDIC insurance 158  214  352  261 
Professional services 579  1,021  1,300  1,737 
Taxes other than income 462  449  913  451 
Intangible asset amortization 324  404  658  867 
Insurance claim recovery       (486)
Other operating expenses 1,592  2,996  3,516  5,015 
Total noninterest expenses 17,033  18,431  34,816  36,735 
Income before income tax expense 10,907  7,660  23,523  13,767 
Income tax expense 2,131  1,301  4,540  2,340 
Net income $8,776  $6,359  $18,983  $11,427 
         
Share information:        
Basic earnings per share $0.80  $0.58  $1.73  $1.04 
Diluted earnings per share $0.79  $0.58  $1.71  $1.04 
Weighted average shares - basic 10,975  10,916  10,975  10,937 
Weighted average shares - diluted 11,112  10,993  11,093  11,027 


ORRSTOWN FINANCIAL SERVICES, INC.    
ANALYSIS OF NET INTEREST INCOME    
Average Balances and Interest Rates, Taxable-Equivalent Basis (Unaudited)  
 Three Months Ended
 6/30/2021 03/31/21 12/31/20 09/30/20 6/30/2020
   Taxable- Taxable-   Taxable- Taxable-   Taxable- Taxable-   Taxable- Taxable-   Taxable- Taxable-
 (Dollars in thousands)Average Equivalent Equivalent Average Equivalent Equivalent Average Equivalent Equivalent Average Equivalent Equivalent Average Equivalent Equivalent
Balance Interest Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate Balance Interest Rate
Assets                             
Federal funds sold & interest-bearing bank balances$290,039 $81  0.11% $145,595 $39  0.11% $48,019 $14  0.12% $31,087 $9  0.12% $27,949 $13  0.18%
Investment securities (1)438,110 2,421  2.22  468,273 2,512  2.18  486,613 2,643  2.16  496,107 2,673  2.14  493,847 3,327  2.71 
Loans (1)(2)(3)2,014,600 21,375  4.26  2,033,219 21,574  4.30  2,015,749 23,960  4.73  2,054,193 21,741  4.21  1,988,114 21,912  4.43 
Total interest-earning assets2,742,749 23,877  3.49  2,647,087 24,125  3.70  2,550,381 26,617  4.15  2,581,387 24,423  3.76  2,509,910 25,252  4.05 
Other assets188,810     182,737     182,764     190,119     200,684    
Total$2,931,559     $2,829,824     $2,733,145     $2,771,506     $2,710,594    
Liabilities and Shareholders' Equity                             
Interest-bearing demand deposits$1,394,384 292  0.08  $1,334,219 438  0.13  $1,283,024 655  0.20  $1,213,208 939  0.31  $1,154,434 1,259  0.44 
Savings deposits200,439 50  0.10  183,576 45  0.10  172,068 52  0.12  168,377 67  0.16  160,738 63  0.16 
Time deposits382,467 739  0.78  397,271 909  0.93  411,395 1,155  1.12  432,438 1,477  1.36  462,664 1,988  1.73 
Securities sold under agreements to repurchase22,417 8  0.14  21,452 9  0.17  20,055 13  0.26  21,145 20  0.38  21,582 24  0.45 
FHLB advances and other57,896 164  1.14  58,000 171  1.20  135,558 320  0.94  219,567 394  0.71  175,336 388  0.89 
Subordinated notes31,924 502  6.29  31,909 502  6.29  31,895 502  6.29  31,881 501  6.28  31,867 502  6.33 
Total interest-bearing liabilities2,089,527 1,755  0.34  2,026,427 2,074  0.42  2,053,995 2,697  0.52  2,086,616 3,398  0.65  2,006,621 4,224  0.85 
Noninterest-bearing demand deposits545,617     516,849     406,454     417,939     452,253    
Other37,561     36,244     36,216     37,330     36,511    
Total Liabilities2,672,705     2,579,520     2,496,665     2,541,885     2,495,385    
Shareholders' Equity258,854     250,304     236,480     229,621     215,209    
Total$2,931,559     $2,829,824     $2,733,145     $2,771,506     $2,710,594    
Taxable-equivalent net interest income / net interest spread  22,122  3.15%   22,051  3.28%   23,920  3.63%   21,025  3.12%   21,028  3.20%
Taxable-equivalent net interest margin    3.24%     3.38%     3.73%     3.24%     3.37%
Taxable-equivalent adjustment  (221)     (196)     (192)     (207)     (230)  
Net interest income  $21,901      $21,855      $23,728      $20,818      $20,798   
Ratio of average interest-earning assets to average interest-bearing liabilities    131%     131%     124%     124%     125%
                              
NOTES:                             
(1) Yields and interest income on tax-exempt assets have been computed on a taxable-equivalent basis assuming a 21% tax rate.
(2) Average balances include nonaccrual loans.
(3) Interest income on loans includes prepayment and late fees, where applicable, prior periods have been adjusted to include these fees.
 


ORRSTOWN FINANCIAL SERVICES, INC.      
ANALYSIS OF NET INTEREST INCOME    
Average Balances and Interest Rates, Taxable-Equivalent Basis (Unaudited)  
 Six Months Ended
 June 30, 2021 June 30, 2020
   Taxable- Taxable-   Taxable- Taxable-
 Average Equivalent Equivalent Average Equivalent Equivalent
(Dollars in thousands)Balance Interest Rate Balance Interest Rate
Assets           
Federal funds sold & interest-bearing bank balances$218,216 $120  0.11% $25,409 $92  0.73%
Investment securities (1)453,108 4,933  2.20  497,418 7,124  2.88 
Loans (1)(2)(3)2,023,858 42,949  4.28  1,820,830 42,199  4.66 
Total interest-earning assets2,695,182 48,002  3.59  2,343,657 49,415  4.24 
Other assets185,791     194,543    
Total$2,880,973     $2,538,200    
Liabilities and Shareholders' Equity           
Interest-bearing demand deposits$1,364,483 728  0.11  $1,063,460 3,161  0.60 
Savings deposits192,039 96  0.10  155,966 127  0.16 
Time deposits389,828 1,649  0.85  483,014 4,376  1.82 
Securities sold under agreements to repurchase21,937 17  0.16  15,499 52  0.67 
FHLB advances and other57,948 335  1.17  181,372 1,210  1.34 
Subordinated notes31,916 1,004  6.29  31,860 1,003  6.29 
Total interest-bearing liabilities2,058,151 3,829  0.38  1,931,171 9,929  1.03 
Noninterest-bearing demand deposits531,313     351,208    
Other36,906     35,139    
Total Liabilities2,626,370     2,317,518    
Shareholders' Equity254,603     220,682    
Total$2,880,973     $2,538,200    
Taxable-equivalent net interest income / net interest spread  44,173  3.22%   39,486  3.21%
Taxable-equivalent net interest margin    3.31%     3.39%
Taxable-equivalent adjustment  (417)     (426)  
Net interest income  $43,756      $39,060   
Ratio of average interest-earning assets to average interest-bearing liabilities    131%     121%
            
NOTES TO ANALYSIS OF NET INTEREST INCOME:        
(1) Yields and interest income on tax-exempt assets have been computed on a taxable-equivalent basis assuming a 21% tax rate.
(2) Average balances include nonaccrual loans.
(3) Interest income on loans includes prepayment and late fees, where applicable, prior periods have been adjusted to include these fees.


ORRSTOWN FINANCIAL SERVICES, INC.    
HISTORICAL TRENDS IN QUARTERLY FINANCIAL DATA (Unaudited)    
          
(In thousands, except per share amounts )June 30,
2021
 March 31,
2021
 December 31,
2020
 September 30,
2020
 June 30,
2020
Profitability for the quarter:         
Net interest income$21,901  $21,855  $23,729  $20,818  $20,798 
Provision for loan losses625  (1,000) 300  2,200  1,900 
Noninterest income6,664  7,544  7,181  6,861  7,193 
Noninterest expenses17,033  17,783  18,080  19,265  18,431 
Income before income taxes10,907  12,616  12,530  6,214  7,660 
Income tax expense2,131  2,409  2,471  1,237  1,301 
Net income$8,776  $10,207  $10,059  $4,977  $6,359 
          
Financial ratios:         
Return on average assets (1)1.20% 1.44% 1.47% 0.72% 0.94%
Return on average equity (1)13.56% 16.31% 17.01% 8.67% 11.82%
Net interest margin (1)3.24% 3.38% 3.73% 3.24% 3.37%
Efficiency ratio59.6% 60.5% 58.5% 69.6% 65.8%
          
Per share information :         
Income per common share:         
Basic$0.80  $0.93  $0.92  $0.45  $0.58 
Diluted$0.79  $0.92  $0.91  $0.45  $0.58 
Book value$23.61  $22.62  $21.98  $20.78  $20.13 
Tangible book value (2)$21.61  $20.59  $19.93  $18.70  $18.03 
Cash dividends paid$0.18  $0.18  $0.17  $0.17  $0.17 
Average basic shares10,975  10,975  10,953  10,941  10,916 
Average diluted shares11,112  11,074  11,057  11,025  10,993 
 
(1) Annualized.
(2) Non-GAAP based financial measure. Please refer to Appendix B - Supplemental Reporting of Non-GAAP Measures and GAAP to Non-GAAP Reconciliations for a discussion of our use of non-GAAP based financial measures, including tables reconciling GAAP and non-GAAP financial measures appearing herein.
          


ORRSTOWN FINANCIAL SERVICES, INC.        
HISTORICAL TRENDS IN QUARTERLY FINANCIAL DATA (Unaudited)    
(continued)         
 June 30,
2021
 March 31,
2021
 December 31,
2020
 September 30,
2020
 June 30,
2020
Noninterest income:         
Service charges$880 $885 $999 $852  $719
Interchange income1,064 955 916 900  819
Loan swap referral fees15 53 320 95  232
Wealth management income2,930 2,723 2,615 2,464  2,295
Mortgage banking activities1,162 2,189 1,348 1,985  1,609
Other income602 594 955 578  1,510
Investment securities gains (losses)11 145 28 (13) 9
Total noninterest income$6,664 $7,544 $7,181 $6,861  $7,193
          
Noninterest expenses:         
Salaries and employee benefits$10,212 $10,197 $10,998 $10,695  $10,063
Occupancy, furniture and equipment2,400 2,518 2,467 2,434  2,326
Data processing, telephone, and communication1,032 1,019 954 958  791
Advertising and bank promotions274 425 507 197  167
FDIC insurance158 194 195 230  214
Professional services579 721 780 603  1,021
Taxes other than income462 451 240 453  449
Intangible asset amortization324 334 345 357  404
Merger related and branch consolidation expenses   1,310  
Other operating expenses1,592 1,924 1,594 2,028  2,996
Total noninterest expenses$17,033 $17,783 $18,080 $19,265  $18,431
          
 


ORRSTOWN FINANCIAL SERVICES, INC.        
HISTORICAL TRENDS IN QUARTERLY FINANCIAL DATA (Unaudited)      
(continued)         
 June 30,
2021
 March 31,
2021
 December 31,
2020
 September 30,
2020
 June 30,
2020
Balance Sheet at quarter end:         
Cash and cash equivalents$336,762  $326,245  $125,258  $87,307  $52,290 
Restricted investments in bank stocks9,691  10,307  10,563  12,646  16,256 
Securities available for sale450,402  407,690  466,465  478,288  483,936 
Loans held for sale, at fair value8,092  11,449  11,734  12,804  13,594 
Loans:         
Commercial real estate:         
   Owner occupied191,595  177,934  174,908  166,623  164,442 
   Non-owner occupied471,541  415,219  409,567  403,138  390,980 
   Multi-family112,420  111,757  113,635  110,153  111,016 
   Non-owner occupied residential99,631  101,381  114,505  111,958  116,531 
Commercial and industrial (1)599,123  750,831  647,368  690,330  665,312 
Acquisition and development:         
   1-4 family residential construction9,686  12,138  9,486  9,627  7,966 
   Commercial and land development55,330  45,229  51,826  37,850  50,220 
Municipal14,452  19,238  20,523  28,867  34,276 
   Total commercial loans1,553,778  1,633,727  1,541,818  1,558,546  1,540,743 
Residential mortgage:         
   First lien211,918  225,247  244,321  273,149  295,736 
   Home equity – term8,321  9,183  10,169  11,108  11,944 
   Home equity – lines of credit149,601  153,169  157,021  158,106  160,842 
Installment and other loans21,765  23,695  26,361  28,961  32,052 
 Total loans1,945,383  2,045,021  1,979,690  2,029,870  2,041,317 
 Allowance for loan losses(19,381) (18,967) (20,151) (19,725) (17,517)
 Net loans held-for-investment1,926,002  2,026,054  1,959,539  2,010,145  2,023,800 
Goodwill18,724  18,724  18,724  18,724  18,724 
Other intangible assets, net4,800  5,124  5,458  5,803  6,160 
Total assets2,912,717  2,963,534  2,750,572  2,781,667  2,772,796 
Total deposits2,494,100  2,547,089  2,356,880  2,279,483  2,251,731 
Borrowings80,709  80,736  77,511  200,818  226,520 
Subordinated notes31,932  31,918  31,903  31,889  31,875 
Total shareholders' equity265,938  254,448  246,249  232,847  225,638 

(1) This balance includes $355.6 million, $504.3 million, $403.3 million, $458.1 million and $447.2 million of SBA PPP loans, net of deferred fees and costs, at June 30, 2021, March 31, 2021, December 31, 2020, September 30, 2020, and June 30, 2020, respectively.

ORRSTOWN FINANCIAL SERVICES, INC.        
HISTORICAL TRENDS IN QUARTERLY FINANCIAL DATA (Unaudited)      
(continued)         
 June 30,
2021
 March 31,
2021
 December 31,
2020
 September 30,
2020
 June 30,
2020
Capital and credit quality measures (1):         
Total risk-based capital:         
Orrstown Financial Services, Inc15.6% 16.2% 15.6% 15.0% 14.5%
Orrstown Bank14.7% 15.3% 14.7% 14.3% 13.9%
Tier 1 risk-based capital:         
Orrstown Financial Services, Inc12.8% 13.2% 12.5% 12.0% 11.7%
Orrstown Bank13.5% 14.1% 13.5% 13.1% 12.8%
Tier 1 common equity risk-based capital:         
Orrstown Financial Services, Inc12.8% 13.2% 12.5% 12.0% 11.7%
Orrstown Bank13.5% 14.1% 13.5% 13.1% 12.8%
Tier 1 leverage capital:         
Orrstown Financial Services, Inc8.0% 8.1% 8.1% 7.8% 7.6%
Orrstown Bank8.5% 8.6% 8.7% 8.5% 8.4%
          
Average equity to average assets8.83% 8.85% 8.65% 8.29% 7.94%
Allowance for loan losses to total loans1.00% 0.93% 1.02% 0.97% 0.86%
Total nonaccrual loans to total loans0.51% 0.48% 0.52% 0.39% 0.36%
Nonperforming assets to total assets0.34% 0.33% 0.37% 0.28% 0.27%
Allowance for loan losses to nonaccrual loans195% 192% 195% 250% 237%
          
Other information:         
Net charge-offs (recoveries)$211  $184  $(126) $(8) $186 
Classified loans28,731  32,408  33,147  36,408  33,376 
Nonperforming and other risk assets:         
Nonaccrual loans9,941  9,895  10,310  7,899  7,404 
Other real estate owned        17 
Total nonperforming assets9,941  9,895  10,310  7,899  7,421 
Restructured loans still accruing852  921  934  945  960 
Loans past due 90 days or more and still accruing (2)212  196  554  520  909 
  Total nonperforming and other risk assets$11,005  $11,012  $11,798  $9,364  $9,290 
 
(1) Capital ratios are estimated, subject to regulatory filings.
(2) Includes $196 thousand, $179 thousand, $515 thousand, $520 thousand and $594 thousand of purchased credit impaired loans at June 30, 2021, March 31, 2021, December 31, 2020, September 30, 2020, and June 30, 2020, respectively.

Appendix A- Supplemental Reporting of Unusual Items

The following table presents unusual items that impacted each period shown. These items are presented to enable investors to better understand the magnitude of certain significant items on reported GAAP results in the context of the Company's growth and acquisition activities.

 Three Months Ended Year To Date
 6/30/2021 3/31/21 12/31/20 9/30/20 6/30/2020 6/30/2021 6/30/2020
(In thousands)             
Pretax Items             
Branch consolidation expenses$ $ $ $1,310  $ $ $ 
Net securities gains (losses)11 145 28 (13) 9 156 (31)
Gain on swap termination  226      
Earnings on life insurance proceeds  58      
Gains on sale of portfolio loans     925  2,803 
Accretion - recoveries on purchased credit impaired loans23 256 779 294  1,021 278 1,232 
Insurance claim receivable recovery       486 

Appendix B- Supplemental Reporting of Non-GAAP Measures and GAAP to Non-GAAP Reconciliations

As a result of acquisitions, the Company has intangible assets consisting of goodwill and core deposit and other intangible assets totaling $23.5 million and $24.2 million at June 30, 2021 and December 31, 2020, respectively. Additionally, the Company incurred approximately $1.3 million in charges associated with branch consolidation efforts during the three months ended September 30, 2020.

Management believes providing certain “non-GAAP” financial information will assist investors in their understanding of the effect of acquisition activity on reported results, particularly to overcome comparability issues related to the influence of intangibles (principally goodwill) created in acquisitions. Management also believes providing certain other “non-GAAP” financial information will assist investors in their understanding of the effect on recent financial results of non-recurring charges associated with increasing operational efficiencies for the long-term, and provide investors with clarity on its allowance for loan losses to total loans ratio. The Company believes that excluding SBA PPP loans, due to its credit enhancement, from loans held for investment is useful to investors due to the size and effect on the total and ratio.

Tangible book value per common share and allowance to non-SBA guaranteed loans, as used by the Company in this earnings release, are determined by methods other than in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"). While we believe this information is a useful supplement to GAAP based measures presented in this earnings release, readers are cautioned that this non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for financial measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of our results and financial condition as reported under GAAP, nor are such measures necessarily comparable to non-GAAP performance measures that may be presented by other companies. This supplemental presentation should not be construed as an inference that our future results will be unaffected by similar adjustments to be determined in accordance with GAAP.

The following tables present the computation of each non-GAAP based measure:

(dollars in thousands, except per share information)

Tangible Book Value per Common Share June 30,
2021
 March 31,
2021
 December 31,
2020
 September 30,
2020
 June 30,
2020
Shareholders' equity $265,938  $254,448  $246,249  $232,847  $225,638 
Less: Goodwill 18,724  18,724  18,724  18,724  18,724 
Other intangible assets 4,800  5,124  5,458  5,803  6,160 
Related tax effect (1,008) (1,076) (1,146) (1,219) (1,294)
Tangible common equity (non-GAAP) $243,422  $231,676  $223,213  $209,539  $202,048 
           
Common shares outstanding 11,263  11,251  11,201  11,204  11,209 
           
Book value per share (most directly comparable GAAP based measure) $23.61  $22.62  $21.98  $20.78  $20.13 
Intangible assets per share 2.00  2.03  2.05  2.08  2.10 
Tangible book value per share (non-GAAP) $21.61  $20.59  $19.93  $18.70  $18.03 


Allowance to Non-SBA Guaranteed Loans:   
    
 June 30, 2021 March 31, 2021
Allowance for loan losses$19,381  $18,967 
Gross loans1,945,383  2,045,021 
less: SBA guaranteed loans(356,905) (506,296)
Non-SBA guaranteed loans$1,588,478  $1,538,725 
    
Allowance to non-SBA guaranteed loans1.2% 1.2%

Appendix C- Investment Portfolio Concentrations

The following table summarizes the credit ratings and collateral associated with the Company's investment portfolio, excluding equity securities, at June 30, 2021:

(dollars in thousands)

SectorPortfolio Mix Amortized Book Fair Value Credit Enhancement AAA AA A BBB NR Collateral Type
Unsecured ABS1% $4,044  $4,086  53% % % % % 100% Unsecured Consumer Debt
Student Loan ABS2% 9,945  9,882  26  % % % % 100% Seasoned Student Loans
Federal Family Education Loan ABS41% 176,220  176,388  6  71% 16% 13% % % Federal Family Education Loan (1)
PACE Loan ABS1% 4,525  4,644  6  100% % % % % PACE Loans
Non-Agency RMBS3% 14,013  14,642  47  100% % % % % Reverse Mortgages (2)
Municipal - General Obligation19% 83,541  89,179    2% 90% 8% % %  
Municipal - Revenue15% 66,344  70,237    % 70% 15% % 15%  
SBA ReRemic2% 9,783  9,772    % 100% % % % SBA Guarantee (3)
Agency MBS16% 71,597  71,173    % 100% % % % Residential Mortgages (3)
Bank CDs% 249  249    % % % % 100% FDIC Insured CD
 100% $440,261  $450,252    33% 52% 9% % 6%  
                    
(1) Minimum of 97% guaranteed by U.S. government
(2) Reverse mortgages fund over time and credit enhancement is estimated based on prior experience
(3) 100% guaranteed by U.S. government agencies
                    
Note : Ratings in table are the lowest of the three rating agencies (Standard & Poors, Moody's & Fitch). Standard & Poors rates U.S. government obligations at AA+
Note: S&P rates US government obligations at AA+

About the Company

With $2.9 billion in assets, Orrstown Financial Services, Inc. and its wholly-owned subsidiary, Orrstown Bank, provide a wide range of consumer and business financial services in Berks, Cumberland, Dauphin, Franklin, Lancaster, Perry, and York Counties, Pennsylvania and Anne Arundel, Baltimore, Howard, and Washington Counties, Maryland, as well as Baltimore City, Maryland. Orrstown Bank is an Equal Housing Lender and its deposits are insured up to the legal maximum by the FDIC. Orrstown Financial Services, Inc.’s common stock is traded on Nasdaq (ORRF). For more information about Orrstown Financial Services, Inc. and Orrstown Bank, visit www.orrstown.com

Cautionary Note Regarding Forward-looking Statements:

This press release contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements reflect the current views of the Company's management with respect to, among other things, future events and the Company's financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “project,” “forecast,” “goal,” “target,” “would” and “outlook,” or the negative variations of those words or other comparable words of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about the Company's industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company's control. Accordingly, the Company cautions you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements and there can be no assurances that the Company will be able to continue to successfully execute on its strategic growth plan into Dauphin, Lancaster, York and Berks counties, Pennsylvania, and the greater Baltimore market in Maryland, with newer markets continuing to be receptive to our community banking model; to take advantage of market disruption; to experience sustained growth in loans and deposits or maintain the momentum experienced to date from these actions. In addition to risks and uncertainties related to the COVID-19 pandemic (including those related to variants, such as the delta variant) and resulting governmental and societal responses, factors which could cause the actual results of the Company's operations to differ materially from expectations include, but are not limited to: ineffectiveness of the Company's strategic growth plan due to changes in current or future market conditions; the effects of competition and how it may impact our community banking model, including industry consolidation and development of competing financial products and services; the integration of the Company's strategic acquisitions; the inability to fully achieve expected savings, efficiencies or synergies from mergers and acquisitions, or taking longer than estimated for such savings, efficiencies and synergies to be realized; changes in laws and regulations; interest rate movements; changes in credit quality; inability to raise capital, if necessary, under favorable conditions; volatility in the securities markets; deteriorating economic conditions; expenses associated with pending litigation and legal proceedings; the failure of the SBA to honor its guarantee of loans issued under the SBA PPP; the timing of the repayment of SBA PPP loans and the impact it has on fee recognition; our ability to convert new relationships gained through the SBA PPP efforts to full banking relationships; and other risks and uncertainties, including those set forth under the heading "Risk Factors" in the Company's 2020 Annual Report on Form 10-K and subsequent filings with the Securities and Exchange Commission. The foregoing list of factors is not exhaustive.

If one or more events related to these or other risks or uncertainties materializes, or if the Company's underlying assumptions prove to be incorrect, actual results may differ materially from what the Company anticipates. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and the Company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New risks and uncertainties arise from time to time, and it is not possible for the Company to predict those events or how they may affect it. In addition, the Company cannot assess the impact of each factor on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements, expressed or implied, included in this press release are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that the Company or persons acting on the Company's behalf may issue.

The review period for subsequent events extends up to and includes 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.