- Net income for the quarter ended March 31, 2019 totaled $3.1 million, or $0.33 per diluted share.
- Gross loans outstanding at March 31, 2019 totaled $1.27 billion.
- Deposits totaled $1.62 billion at March 31, 2019.
- Net interest income for the quarter ended March 31, 2019 totaled $14.7 million. Net interest margin, on a taxable-equivalent basis, totaled 3.41% for the first quarter of 2019.
- As previously reported, the Board of Directors declared a cash dividend of $0.15 per common share, payable May 7, 2019, to shareholders of record as of April 30, 2019, a 15.4% increase over the dividend declared in April, 2018.
SHIPPENSBURG, Pa., April 24, 2019 (GLOBE NEWSWIRE) -- Orrstown Financial Services, Inc. (the “Company”) (NASDAQ: ORRF), the parent company of Orrstown Bank (the “Bank”) and Wheatland Advisors, Inc. ("Wheatland"), announced earnings for the quarter ended March 31, 2019. Net income totaled $3.1 million for the first quarter of 2019, compared with $3.6 million for the first quarter of 2018. Diluted earnings per share totaled $0.33 for the quarter ended March 31, 2019, compared with $0.44 for the same period in 2018. Net income in 2019 was impacted by merger related expenses and by a previously disclosed expense related to a cyber incident insurance claim dispute, as described in the Noninterest Expense section.
Thomas R. Quinn, Jr., President & CEO, commented, “First quarter results continue to reflect solid core results as well as the impact of the seamless systems integration of First Community Bank of Mercersburg. Over the next several quarters we will apply that same level of diligence to the integration and growth of the Hamilton Bank organization, while simultaneously remaining focused on our organic results.”
Earnings in the first quarter of 2019 reflected the acquisition of Mercersburg Financial Corporation ("Mercersburg"), completed on October 1, 2018, as well as continuing increased interest income from expanding interest-earning assets in a higher interest rate environment versus the first quarter of 2018, partially offset by increases in interest expense. In general, the comparability of operating results for the first quarter of 2019 with the first quarter of 2018 have been impacted by the Mercersburg acquisition.
MERGER AND ACQUISITION ACTIVITY
As previously reported, on October 23, 2018, the Company entered into an agreement and plan of merger with Hamilton Bancorp, Inc. ("Hamilton"), the holding company for Hamilton Bank, based in Towson, Maryland. At December 31, 2018, Hamilton reported $496.3 million in assets, $369.5 million in loans, $384.2 million in deposits and had 3,416,414 common shares outstanding. Pursuant to the merger agreement, at the effective time of the merger, each outstanding share of Hamilton common stock will be converted into the right to receive (1) $4.10 in cash, without interest, and (2) 0.54 shares of the Company’s common stock.
The merger has been approved by Hamilton's shareholders and is expected to close on May 1, 2019, subject to receipt of remaining regulatory approvals and the satisfaction of other customary closing conditions.
The Company incurred merger related expenses totaling $645,000 for the quarter ended March 31, 2019, representing principally legal and consulting fees for the Hamilton acquisition and system conversion expenses for the Mercersburg acquisition, which are included in noninterest expenses.
OPERATING RESULTS
Net Interest Income
Net interest income totaled $14.7 million in the first quarter of 2019, a 25.7% increase compared with $11.7 million for the first quarter of 2018. Net interest margin on a taxable-equivalent basis totaled 3.41% for the first quarter of 2019, compared with 3.26% for the first quarter of 2018 and 3.35% for the fourth quarter of 2018.
The principal contributor to year-over-year revenue growth was an increase in interest and fees on loans, as total loans grew by $221.4 million from March 31, 2018 to March 31, 2019, with approximately $94.0 million in net organic growth and approximately $127.0 million representing the balance, at March 31, 2019, of loans acquired from Mercersburg. Taxable-equivalent yields on interest-earning assets and costs of interest-bearing liabilities both increased from 2018 to 2019, reflecting the increased interest rate environment between years. Other factors impacting the comparison of taxable-equivalent yields between 2018 and 2019 included the effect of purchase accounting related to the Mercersburg acquisition and the Company's gradual increase in rates paid on interest-bearing deposits in response to market demand.
Provision for Loan Losses
The provision for loan losses totaled $400,000 in the first quarter of 2019, compared with $200,000 for the same period in 2018. Net loan charge-offs experienced in the first quarter of 2019 and the Company's organic loan portfolio growth, taking into account favorable historical charge-off statistics and generally stable economic and market conditions for the last several years, were key factors included in the quantitative and qualitative considerations used by management in the determination of the provision expense required to maintain an adequate allowance for loan losses.
Additional loan portfolio growth and changes in historical charge-off statistics are factors that may result in the need for a determination of additional provisions for loan losses in future quarters.
Noninterest Income
Noninterest income, excluding securities gains, total $4.9 million for both quarters ended March 31 in 2019 and 2018.
Total trust, investment management and brokerage income was comparable year-over-year and included increased estate fees in 2019 offset by fluctuations in customer volumes and market conditions.
Mortgage banking income for the first quarter of 2019 decreased $167,000 year-over-year and continued to reflect a lower number of transactions due to the reduced inventory of saleable homes and also decreased refinancing activity due to higher mortgage rates than a year ago.
Net investment securities gains totaled $339,000 for the quarter ended March 31, 2019, compared with $816,000 for same period in 2018. At times, the Company may impact earnings through realized gains or losses on securities as opportunities become available to reposition part of its investment portfolio under asset/liability management strategies or to improve responsiveness of the portfolio to interest rate conditions, while also considering funding requirements of anticipated lending activity.
Noninterest Expenses
Noninterest expenses totaled $16.2 million for the quarter ended March 31, 2019, compared with $13.1 million for the quarter ended March 31, 2018. In addition to the previously noted merger related expenses, the following line items reflected notable changes between periods.
Salaries and employee benefits totaled $8.7 million for the quarter ended March 31, 2019, compared with $8.1 million for the same period in 2018, principally reflecting employees added in the Mercersburg acquisition in the fourth quarter of 2018 and a higher level of expense year-over-year for additional employees as a result of the Company's new branches and overall expansion efforts, annual merit increases, and incremental expense for additional share-based compensation awards granted in 2019. In 2019, overall costs associated with the Company's self-insured group health plan were higher than in 2018 due to an increased number of employees and fluctuations in claims experience.
Occupancy, furniture and equipment costs for the quarter ended March 31, 2019 increased $307,000 year-over-year, reflecting Mercersburg branches acquired and the Company's expanded presence in Lancaster County, Pennsylvania, with two branch banking locations added in the third and fourth quarters of 2018 and two in the first quarter of 2019.
Intangible asset amortization increased $184 thousand in comparing the quarter ended March 31, 2019 to 2018 due to the core deposit intangible recorded in the Mercersburg acquisition.
Noninterest expenses in the first quarter of 2019 includes an expense to write off an insurance claim receivable from a cyber security incident reported in 2018. Orrstown Bank was the victim of a phishing attack in October 2017, and, upon discovery of the attack in the third quarter of 2018, the Company apprised its cyber insurance carrier of the incident. The Bank engaged third party cyber security experts and other professionals, including a credit notification and monitoring services provider, and incurred approximately $765,000 in fees and expenses related to the incident. Orrstown notified its carrier of its response efforts and expected to receive an insurance reimbursement of approximately $615,000 for the cyber incident claim, which amount was carried as a receivable on the Company’s consolidated balance sheet. The Company believes that its policy provided coverage for the expenses related to the incident but the Company was notified by its carrier that the claim had been denied in its entirety. While the Company believes that the basis for the carrier's denial is improper and intends to assert its rights to coverage of the expenses, there can be no assurance that the Company’s position regarding coverage will prevail or, if it does prevail, that the coverage will be sufficient to reimburse the Company for the entire amount of the receivable. Pending resolution of its insurance claim, the Company recorded a pretax expense of $615,000, or approximately $0.05 per diluted share, in its first quarter results for 2019.
Income Taxes
Income tax expense totaled $232,000 for the quarter ended March 31, 2019, compared with $492,000 for the same period in 2018. The effective tax rate for the year ended March 31, 2019 was 7.0%, compared with 12.0% for the year ended March 31, 2018. Generally, the Company's effective tax rate is significantly 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. In addition, in the first quarter of 2019, the Company recorded a tax benefit of approximately $185,000, or approximately $0.02 per diluted share, related to a change in tax law concerning the treatment of life insurance assets of an acquired entity. This tax benefit had the effect of lowering the effective tax rate for the first quarter of 2019 by approximately 5.5%.
FINANCIAL CONDITION
The following table presents loan balances, by loan class within segments, at March 31, 2019, December 31, 2018 and March 31, 2018.
| (Dollars in thousands) | March 31, 2019 | December 31, 2018 | March 31, 2018 | |||||
| Commercial real estate: | ||||||||
| Owner occupied | $ | 123,100 | $ | 129,650 | $ | 119,657 | ||
| Non-owner occupied | 264,869 | 252,794 | 247,097 | |||||
| Multi-family | 83,009 | 78,933 | 53,812 | |||||
| Non-owner occupied residential | 101,312 | 100,367 | 79,269 | |||||
| Acquisition and development: | ||||||||
| 1-4 family residential construction | 6,361 | 7,385 | 9,408 | |||||
| Commercial and land development | 49,784 | 42,051 | 30,003 | |||||
| Commercial and industrial | 169,651 | 160,964 | 128,076 | |||||
| Municipal | 50,599 | 50,982 | 41,679 | |||||
| Residential mortgage: | ||||||||
| First lien | 231,243 | 235,296 | 165,499 | |||||
| Home equity – term | 11,828 | 12,208 | 11,380 | |||||
| Home equity – lines of credit | 143,308 | 143,616 | 132,684 | |||||
| Installment and other loans | 30,475 | 33,411 | 25,550 | |||||
| $ | 1,265,539 | $ | 1,247,657 | $ | 1,044,114 | |||
Loans grew $17.9 million, from $1.25 billion at December 31, 2018 to $1.27 billion at March 31, 2019. Growth of $10.5 million in the commercial real estate segment (1.9%, or approximately 7.6% annualized), $6.7 million in the acquisition and development segment (13.6%, or approximately 55.0% annualized) and $8.7 million in the commercial and industrial segments (5.4%, or approximately 21.9% annualized) was partially offset by decreases in the residential mortgage and installment and other loans segments, as weaker loan demand has been experienced overall, but particularly in the residential and consumer loan categories.
Deposits grew $61.9 million (4.0%, or approximately 16.1% annualized) from $1.56 billion at December 31, 2018 to $1.62 billion at March 31, 2019, with growth principally in interest-bearing deposits. The Company continues to increase both noninterest-bearing and interest-bearing deposit relationships from its cash management offerings. The Company has experienced a gradual repricing of term and non-maturity deposits in the first quarter of 2019.
Shareholders’ Equity
Shareholders’ equity totaled $179.2 million at March 31, 2019, an increase of $5.7 million from $173.4 million at December 31, 2018. The increase was attributable to growth in retained earnings through net income, net of the impact of dividends paid, and an improvement in accumulated other comprehensive income (loss) from changes in net unrealized gains and losses in securities available for sale.
Asset Quality
The allowance for loan losses totaled $14.3 million at March 31, 2019, compared with $14.0 million at December 31, 2018. Management believes the allowance for loan losses to total loans ratio remains adequate at 1.13% at March 31, 2019. Favorable historical charge-off data and management's emphasis on loan quality have been significant contributors to the determination that the increase between periods in the allowance for loan losses is adequate for the increasing loan portfolio. At March 31, 2018, the allowance for loan losses to total loans ratio totaled 1.25%. The principal factor impacting a comparison with March 31, 2019, was loans acquired in the Mercersburg transaction that were recorded at fair value, which incorporated a credit factor, and therefore did not require an increase in the Company's allowance for loan losses.
Nonperforming and other risk assets, consisting of nonaccrual loans, other real estate owned, restructured loans still accruing and loans past due 90 days or more and still accruing, totaled $6.6 million at March 31, 2019, and $6.5 million at December 31, 2018.
Classified loans, or loans rated substandard, doubtful or loss, totaled $17.8 million at March 31, 2019 (1.4% of total loans), compared with $19.8 million (1.6% of total loans) at December 31, 2018.
| ORRSTOWN FINANCIAL SERVICES, INC. | ||||||
| Operating Highlights (Unaudited) | ||||||
| Three Months Ended | ||||||
| March 31, | March 31, | |||||
| (Dollars in thousands, except per share information) | 2019 | 2018 | ||||
| Net income | $ | 3,102 | $ | 3,625 | ||
| Diluted earnings per share | $ | 0.33 | $ | 0.44 | ||
| Adjusted diluted earnings per share (excluding intangible amortization and merger related expenses) (1) | $ | 0.41 | $ | 0.44 | ||
| Cash dividends per share | $ | 0.15 | $ | 0.12 | ||
| Return on average assets | 0.65% | 0.92% | ||||
| Return on average equity | 7.23% | 10.38% | ||||
| Net interest income | $ | 14,689 | $ | 11,684 | ||
| Net interest margin | 3.41% | 3.26% | ||||
| Net interest margin (excluding the impact of purchase accounting) (1) | 3.33% | 3.26% | ||||
| ORRSTOWN FINANCIAL SERVICES, INC. | ||||||||||
| Balance Sheet Highlights (Unaudited) | ||||||||||
| March 31, | December 31, | March 31, | ||||||||
| (Dollars in thousands, except per share information) | 2019 | 2018 | 2018 | |||||||
| Assets | $ | 1,973,283 | $ | 1,934,388 | $ | 1,635,906 | ||||
| Loans, gross | 1,265,539 | 1,247,657 | 1,044,114 | |||||||
| Allowance for loan losses | (14,283) | (14,014) | (13,000) | |||||||
| Deposits | 1,620,696 | 1,558,756 | 1,299,514 | |||||||
| Shareholders' equity | 179,167 | 173,433 | 142,556 | |||||||
| Book value per share | 18.89 | 18.39 | 16.95 | |||||||
| (1) Non-GAAP based financial measure. Please refer to Appendix A - 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. | |||||||||||||
| CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) | |||||||||||||
| March 31, | December 31, | March 31, | |||||||||||
| (Dollars in thousands) | 2019 | 2018 | 2018 | ||||||||||
| Assets | |||||||||||||
| Cash and cash equivalents | $ | 77,217 | $ | 88,815 | $ | 30,172 | |||||||
| Securities available for sale | 490,221 | 465,844 | 454,800 | ||||||||||
| Loans held for sale | 4,787 | 3,340 | 3,659 | ||||||||||
| Loans | 1,265,539 | 1,247,657 | 1,044,114 | ||||||||||
| Less: Allowance for loan losses | (14,283) | (14,014) | (13,000) | ||||||||||
| Net loans | 1,251,256 | 1,233,643 | 1,031,114 | ||||||||||
| Premises and equipment, net | 38,107 | 38,201 | 34,387 | ||||||||||
| Goodwill | 12,592 | 12,592 | 719 | ||||||||||
| Other intangible assets, net | 3,702 | 3,910 | 332 | ||||||||||
| Other assets | 95,401 | 88,043 | 80,723 | ||||||||||
| Total assets | $ | 1,973,283 | $ | 1,934,388 | $ | 1,635,906 | |||||||
| Liabilities | |||||||||||||
| Deposits: | |||||||||||||
| Noninterest-bearing | $ | 214,308 | $ | 204,843 | $ | 172,496 | |||||||
| Interest-bearing | 1,406,388 | 1,353,913 | 1,127,018 | ||||||||||
| Total deposits | 1,620,696 | 1,558,756 | 1,299,514 | ||||||||||
| Borrowings | 144,745 | 179,378 | 177,456 | ||||||||||
| Accrued interest and other liabilities | 28,675 | 22,821 | 16,380 | ||||||||||
| Total liabilities | 1,794,116 | 1,760,955 | 1,493,350 | ||||||||||
| Shareholders' Equity | |||||||||||||
| Common stock | 494 | 491 | 438 | ||||||||||
| Additional paid-in capital | 151,702 | 151,678 | 125,988 | ||||||||||
| Retained earnings | 26,161 | 24,472 | 18,667 | ||||||||||
| Accumulated other comprehensive income (loss) | 810 | (2,972) | (2,238) | ||||||||||
| Treasury stock | 0 | (236) | (299) | ||||||||||
| Total shareholders' equity | 179,167 | 173,433 | 142,556 | ||||||||||
| Total liabilities and shareholders' equity | $ | 1,973,283 | $ | 1,934,388 | $ | 1,635,906 | |||||||
| ORRSTOWN FINANCIAL SERVICES, INC. | |||||||
| CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) | |||||||
| Three Months Ended | |||||||
| March 31, | March 31, | ||||||
| (In thousands, except per share information) | 2019 | 2018 | |||||
| Interest income | |||||||
| Loans | $ | 15,059 | $ | 11,056 | |||
| Investment securities and short-term investments | 4,507 | 3,219 | |||||
| Total interest income | 19,566 | 14,275 | |||||
| Interest expense | |||||||
| Deposits | 3,694 | 1,824 | |||||
| Borrowings | 1,183 | 767 | |||||
| Total interest expense | 4,877 | 2,591 | |||||
| Net interest income | 14,689 | 11,684 | |||||
| Provision for loan losses | 400 | 200 | |||||
| Net interest income after provision for loan losses | 14,289 | 11,484 | |||||
| Noninterest income | |||||||
| Service charges on deposit accounts | 1,489 | 1,418 | |||||
| Trust, investment management and brokerage income | 2,236 | 2,226 | |||||
| Mortgage banking activities | 468 | 635 | |||||
| Other income | 695 | 607 | |||||
| Investment securities gains | 339 | 816 | |||||
| Total noninterest income | 5,227 | 5,702 | |||||
| Noninterest expenses | |||||||
| Salaries and employee benefits | 8,677 | 8,022 | |||||
| Occupancy, furniture and equipment | 2,024 | 1,717 | |||||
| Data processing | 770 | 619 | |||||
| Advertising and bank promotions | 521 | 382 | |||||
| FDIC insurance | 185 | 166 | |||||
| Professional services | 557 | 369 | |||||
| Taxes other than income | 306 | 251 | |||||
| Intangible asset amortization | 208 | 24 | |||||
| Merger related | 645 | 0 | |||||
| Insurance claim receivable write off | 615 | 0 | |||||
| Other operating expenses | 1,674 | 1,519 | |||||
| Total noninterest expenses | 16,182 | 13,069 | |||||
| Income before income tax expense | 3,334 | 4,117 | |||||
| Income tax expense | 232 | 492 | |||||
| Net income | $ | 3,102 | $ | 3,625 | |||
| Per share information: | |||||||
| Basic earnings per share | $ | 0.34 | $ | 0.45 | |||
| Diluted earnings per share | 0.33 | 0.44 | |||||
| Cash dividends per share | 0.15 | 0.12 | |||||
| Weighted-average shares outstanding - diluted | 9,326 | 8,268 | |||||
| ORRSTOWN FINANCIAL SERVICES, INC. | ||||||||||||||||||
| ANALYSIS OF NET INTEREST INCOME | ||||||||||||||||||
| Average Balances and Interest Rates, Taxable-Equivalent Basis (Unaudited) | ||||||||||||||||||
| Three Months Ended | ||||||||||||||||||
| March 31, 2019 | March 31, 2018 | |||||||||||||||||
| 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 | $ | 29,108 | $ | 173 | 2.41% | $ | 14,272 | $ | 55 | 1.56% | ||||||||
| Securities | 499,755 | 4,558 | 3.70 | 448,667 | 3,395 | 3.07 | ||||||||||||
| Loans | 1,257,654 | 15,180 | 4.90 | 1,030,817 | 11,142 | 4.38 | ||||||||||||
| Total interest-earning assets | 1,786,517 | 19,911 | 4.52 | 1,493,756 | 14,592 | 3.96 | ||||||||||||
| Other assets | 137,802 | 103,819 | ||||||||||||||||
| Total | $ | 1,924,319 | $ | 1,597,575 | ||||||||||||||
| Liabilities and Shareholders' Equity | ||||||||||||||||||
| Interest-bearing demand deposits | $ | 845,092 | 1,828 | 0.88 | $ | 717,430 | 809 | 0.46 | ||||||||||
| Savings deposits | 114,314 | 43 | 0.15 | 97,381 | 38 | 0.16 | ||||||||||||
| Time deposits | 403,095 | 1,822 | 1.83 | 281,835 | 977 | 1.41 | ||||||||||||
| Short-term borrowings | 42,124 | 243 | 2.34 | 99,774 | 363 | 1.48 | ||||||||||||
| Long-term debt | 88,076 | 443 | 2.04 | 83,776 | 404 | 1.96 | ||||||||||||
| Subordinated notes | 31,886 | 497 | 6.32 | 0 | 0 | 0.00 | ||||||||||||
| Total interest-bearing liabilities | 1,524,587 | 4,876 | 1.30 | 1,280,196 | 2,591 | 0.82 | ||||||||||||
| Noninterest-bearing demand deposits | 202,365 | 159,996 | ||||||||||||||||
| Other | 23,310 | 15,696 | ||||||||||||||||
| Total Liabilities | 1,750,262 | 1,455,888 | ||||||||||||||||
| Shareholders' Equity | 174,057 | 141,687 | ||||||||||||||||
| Total | $ | 1,924,319 | $ | 1,597,575 | ||||||||||||||
| Taxable-equivalent net interest income / net interest spread | 15,035 | 3.22% | 12,001 | 3.14% | ||||||||||||||
| Taxable-equivalent net interest margin | 3.41% | 3.26% | ||||||||||||||||
| Taxable-equivalent adjustment | (346) | (317) | ||||||||||||||||
| Net interest income | $ | 14,689 | $ | 11,684 | ||||||||||||||
| NOTES: | ||||||||||||||||||
| (1) Yields and interest income on tax-exempt assets have been computed on a taxable-equivalent basis assuming a 21% tax rate. | ||||||||||||||||||
| (2) For yield calculation purposes, nonaccruing loans are included in the average loan balance. | ||||||||||||||||||
| ORRSTOWN FINANCIAL SERVICES, INC. | ||||||||
| Nonperforming Assets / Risk Elements (Unaudited) | ||||||||
| March 31, | December 31, | March 31, | ||||||
| (Dollars in thousands) | 2019 | 2018 | 2018 | |||||
| Nonaccrual loans (cash basis) | $ | 4,743 | $ | 5,165 | $ | 9,144 | ||
| Other real estate (OREO) | 454 | 130 | 1,329 | |||||
| Total nonperforming assets | 5,197 | 5,295 | 10,473 | |||||
| Restructured loans still accruing | 1,116 | 1,132 | 1,166 | |||||
| Loans past due 90 days or more and still accruing | 295 | 57 | 0 | |||||
| Total nonperforming and other risk assets | $ | 6,608 | $ | 6,484 | $ | 11,639 | ||
| Loans 30-89 days past due (1) | $ | 5,344 | $ | 5,186 | $ | 2,081 | ||
| Asset quality ratios: | ||||||||
| Total nonperforming loans to total loans | 0.37% | 0.41% | 0.88% | |||||
| Total nonperforming assets to total assets | 0.26% | 0.27% | 0.64% | |||||
| Total nonperforming assets to total loans and OREO | 0.41% | 0.42% | 1.00% | |||||
| Total risk assets to total loans and OREO | 0.52% | 0.52% | 1.11% | |||||
| Total risk assets to total assets | 0.33% | 0.34% | 0.71% | |||||
| Allowance for loan losses to total loans | 1.13% | 1.12% | 1.25% | |||||
| Allowance for loan losses to nonperforming loans | 301.14% | 271.33% | 142.17% | |||||
| Allowance for loan losses to nonperforming and restructured loans still accruing | 243.78% | 222.55% | 126.09% | |||||
| (1) At March 31, 2019 and at December 31, 2018, includes $1.4 million (recorded at fair value) of loans 30-89 days past due acquired in October 2018 from Mercersburg. | ||||||||
| Allowance for Loan Losses Activity (Unaudited) | ||||||
| Three Months Ended | ||||||
| March 31, | March 31, | |||||
| (Dollars in thousands) | 2019 | 2018 | ||||
| Balance, beginning of period | $ | 14,014 | $ | 12,796 | ||
| Provision for loan losses | 400 | 200 | ||||
| Recoveries | 203 | 75 | ||||
| Charge-offs | (334) | (71) | ||||
| Balance, end of period | $ | 14,283 | $ | 13,000 | ||
Appendix A - 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 $16.3 million and $1.1 million at March 31, 2019 and 2018, respectively. Amortization of core deposit and other intangible assets, after tax, totaled $164,000 and $19,000 for the quarter ended March 31, 2019 and 2018, respectively.
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 and the impact of merger related expenses.
Adjusted net income and adjusted diluted net income per share (excluding intangible amortization and merger related expenses), tangible book value per share, tangible return on average tangible equity, tangible return on average tangible assets and net interest margin excluding the impact of purchase accounting, as used by the Company in this earnings release and Appendix A, are determined by methods other than in accordance with 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 U.S. Generally Accepted Accounting Principles ("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 table presents the computation of each non-GAAP based measure shown together with its most directly comparable GAAP based measure.
| At or For The Three Months Ended | ||||||
| (in thousands, except per share information) | March 31, 2019 | March 31, 2018 | ||||
| Adjusted Diluted Net Income per Share (1) | ||||||
| Net income as reported (most directly comparable GAAP based measure) | $ | 3,102 | $ | 3,625 | ||
| Amortization of core deposit and other intangible assets (2) | 164 | 19 | ||||
| Merger related expenses (2) | 535 | 0 | ||||
| Adjusted net income(1) (non-GAAP) | $ | 3,801 | $ | 3,644 | ||
| Weighted average diluted common shares outstanding (denominator) | 9,326 | 8,268 | ||||
| Diluted earnings per share as reported (most directly comparable GAAP based measure) | $ | 0.33 | $ | 0.44 | ||
| Amortization of core deposit and other intangible assets (2) | 0.02 | 0.00 | ||||
| Merger related expenses (2) | 0.06 | 0.00 | ||||
| Adjusted diluted net earnings per share (1) (non-GAAP) | $ | 0.41 | $ | 0.44 | ||
| Tangible Book Value per Common Share | ||||||
| Shareholders' equity | $ | 179,167 | $ | 142,556 | ||
| Goodwill and other intangible assets (2) | 15,517 | 987 | ||||
| Tangible common equity (non-GAAP) | $ | 163,650 | $ | 141,569 | ||
| Common shares outstanding | 9,485 | 8,412 | ||||
| Book value per share (most directly comparable GAAP based measure) | $ | 18.89 | $ | 16.95 | ||
| Intangible assets per share | 1.64 | 0.12 | ||||
| Tangible book value per share (non-GAAP) | $ | 17.25 | $ | 16.83 | ||
| At or For The Three Months Ended | ||||||
| (in thousands, except per share information) | March 31, 2019 | March 31, 2018 | ||||
| Tangible Return on Average Tangible Equity | ||||||
| Net income as reported (numerator) | $ | 3,102 | $ | 3,625 | ||
| Average equity as reported (denominator) | $ | 174,057 | $ | 141,687 | ||
| Return on average equity (most directly comparable GAAP based measure) | 7.23% | 10.38% | ||||
| Adjusted net income(1) (non-GAAP) - per above | $ | 3,801 | $ | 3,644 | ||
| Average equity as reported | $ | 174,057 | $ | 141,687 | ||
| Average goodwill | (12,592) | (719) | ||||
| Average core deposit and other intangible assets (2) | (3,008) | (273) | ||||
| Average tangible common equity (non-GAAP) | $ | 158,457 | $ | 140,695 | ||
| Tangible Return on Average Tangible Equity (non-GAAP) | 9.73% | 10.50% | ||||
| Tangible Return on Average Tangible Assets | ||||||
| Net income as reported (numerator) | $ | 3,102 | $ | 3,625 | ||
| Average assets as reported (denominator) | $ | 1,924,319 | $ | 1,597,575 | ||
| Return on average assets (most directly comparable GAAP based measure) | 0.65% | 0.92% | ||||
| Adjusted net income(1) (non-GAAP) - per above | $ | 3,801 | $ | 3,644 | ||
| Average assets as reported | $ | 1,924,319 | $ | 1,597,575 | ||
| Average goodwill | (12,592) | (719) | ||||
| Average core deposit and other intangible assets (2) | (3,008) | (273) | ||||
| Average tangible assets (non-GAAP) | $ | 1,908,719 | $ | 1,596,583 | ||
| Tangible Return on Average Tangible Assets (non-GAAP) | 0.81% | 0.93% | ||||
| Net Interest Margin (excluding the impact of purchase accounting) | ||||||
| Net interest margin as reported | 3.41% | 3.26% | ||||
| Adjustment for purchase accounting: | ||||||
| Total interest-earning assets (loans) | (0.08)% | 0.00% | ||||
| Net Interest Margin (excluding the impact of purchase accounting) (non-GAAP) | 3.33% | 3.26% | ||||
| (1) Excluding intangible amortization and merger related expenses | ||||||
| (2) Net of related tax effect. | ||||||
About the Company
With nearly $2.0 billion in assets, Orrstown Financial Services, Inc. and its wholly-owned subsidiaries, Orrstown Bank and Wheatland Advisors, Inc., provide a wide range of consumer and business financial services through banking and financial advisory offices in Berks, Cumberland, Dauphin, Franklin, Lancaster, Perry and York Counties, Pennsylvania and Washington County, 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. For more information about Wheatland Advisors, Inc., visit www.wheatlandadvisors.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 successfully consummate the Hamilton acquisition; continue to successfully execute on our 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; and to experience sustained growth in loans and deposits or maintain the momentum experienced to date from these actions. 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; volatilities in the securities markets; deteriorating economic conditions; expenses associated with pending litigation and legal proceedings; and other risks and uncertainties, including those set forth under the heading "Risk Factors" in the Company's 2018 Annual Report on Form 10-K and subsequent filings. The foregoing list of factors is not exhaustive.
If one or more events related to these or other risks or uncertainties materialize, 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.
Contact:
David P. Boyle
Executive Vice President & CFO
Phone 717.530.2294
77 East King Street | Shippensburg PA