- Net income totaled $6.9 million, or $0.62 per diluted share.
- Hamilton conversion successfully completed on August 18, 2019; merger related expenses totaled $471,000 in the third quarter and $8.0 million year to date in 2019.
- Total loans decreased $8.6 million in the third quarter; loan growth absent the Hamilton acquisition totaled $7.5 million, or 2.4% annualized for the third quarter.
- Total deposits decreased $92.1 million in the third quarter; deposit growth absent the Hamilton acquisition and brokered deposit reductions totaled $30.6 million, or 8.2% annualized for the third quarter.
- The implementation of a plan to consolidate 5 branch locations and reduce 50,000 square feet of excess office space has commenced.
- The Board of Directors declared a cash dividend of $0.15 per common share, payable November 12, 2019, to shareholders of record as of November 4, 2019, a 15.4% increase over the dividend declared in October, 2018.
SHIPPENSBURG, Pa., Oct. 23, 2019 (GLOBE NEWSWIRE) -- Orrstown Financial Services, Inc. ("Orrstown" or the “Company”) (NASDAQ: ORRF), the parent company of Orrstown Bank (the “Bank”) and Wheatland Advisors, Inc. ("Wheatland"), announced earnings for the three and nine months ended September 30, 2019. Net income, including the impact of merger related expenses, totaled $6.9 million for the third quarter of 2019, compared with $4.0 million for the third quarter of 2018. Net income, including the impact of merger related expenses, for the nine months ended September 30, 2019 totaled $12.7 million, compared with $11.7 million for the same period in 2018. Diluted earnings per share totaled $0.62 and $1.23 for the quarter and nine months ended September 30, 2019, compared with $0.49 and $1.41 for the same periods in 2018. Earnings in 2019 were impacted by the acquisition of Mercersburg Financial Corporation ("Mercersburg"), completed on October 1, 2018 and Hamilton Bancorp, Inc., ("Hamilton") completed on May 1, 2019.
Thomas R. Quinn, Jr., President & CEO, commented, “In the third quarter of 2019, we continued to execute successfully on our strategic growth plans. Our dedicated team of associates completed the conversion of Hamilton’s systems onto Orrstown’s systems in August. We hired experienced commercial lenders in our Maryland and Capital Regions, and subsequent to the quarter’s end, we announced our brand ambassador for the Maryland Region, Jonathan Ogden, Hall of Fame football player for the Baltimore Ravens. Despite what we view as a favorable outlook for future growth and returns, we are not immune from near-term headwinds. An increase in economic uncertainty and an adverse interest rate environment are challenges to overcome, and we are taking action to assure continued success. Late in the third quarter, we terminated some brokered deposits and borrowings to reduce cash build. Combined with anticipated loan and deposit growth from recent hires, we look for this to favorably shift loan and deposit mix, aiding in defending our margin. We remain focused on growing fee income in mortgage banking, loan swap referral fees, wealth management, and other fee based business in this low rate environment. We are attuned to changing client appetites for service delivery at Orrstown and the industry as a whole, and are announcing the consolidation of five branches while serving our clients through an improved online banking platform with increased functionality and enhanced ATMs. Additionally, we are reducing excess office space; though we expect little impact on expenses from this action, it will allow us to focus on our clients more than physical plant. We continue to be laser focused on efficiency and automation efforts as we build a scalable organization that is well positioned for future growth and enhanced profitability.”
MERGER AND ACQUISITION ACTIVITY
The Company incurred merger related expenses totaling $471,000 and $8.0 million for the quarter and nine months ended September 30, 2019, representing principally data processing contract termination costs, employee contract termination costs and legal and consulting fees for the Hamilton acquisition and system conversion expenses for both the Mercersburg and Hamilton acquisitions, all of which are included in noninterest expenses.
OPERATING RESULTS
| Results for the third quarter of 2019 were impacted by the following items: |
| • Merger related expenses totaling $471,000, or $0.03 per diluted share, net of tax; |
| • Securities gains totaling $2.3 million, or $0.17 per diluted share, net of tax; and |
| • Accelerated the payoff of brokered deposits and borrowings due to accelerated payoffs in the Hamilton loan portfolio, which negatively impacted net interest income by $223,000, or $0.02 per diluted share. |
Net Interest Income
Net interest income totaled $17.9 million in the third quarter of 2019, a 41.1% increase compared with $12.7 million for the third quarter of 2018. Net interest income totaled $51.0 million for the nine months ended September 30, 2019, a 38.9% increase compared with $36.7 million for the same period in 2018. Net interest margin on a taxable-equivalent basis totaled 3.27% for the third quarter of 2019, compared with 3.28% for the third quarter of 2018. Net interest margin on a taxable-equivalent basis totaled 3.43% for the nine months ended September 30, 2019, compared with 3.29% for the same period in 2018.
During the third quarter, we experienced a net $9 million reduction in loans outstanding due to repayments totaling $16 million from the acquired Hamilton loan portfolio. The focus on the successful Hamilton system conversion while simultaneously recruiting and onboarding a team of experienced lenders in the Maryland Region resulted in a slowdown in loan origination activity in Maryland. We also experienced a seasonal increase in government deposits, which increased the average cash on the balance sheet in the quarter. Due to the short-term increase in cash, we took steps to reduce brokered deposits in an effort to reduce cash to our normal target of $25 million or less. The excess cash held on the balance sheet, totaling approximately $70 million, during the third quarter negatively impacted the net interest margin by 11 basis points.
The principal contributor to year-over-year revenue growth was an increase in interest and fees on loans, as total loans grew by $508.2 million from September 30, 2018 to September 30, 2019, with approximately $82.2 million in net organic growth and approximately $425.9 million representing the balance, at September 30, 2019, of loans acquired from Mercersburg and Hamilton. Taxable-equivalent yields on interest-earning assets and costs of interest-bearing liabilities both increased from 2018 to 2019, reflecting changes in the interest rate environment between years. The FOMC increased the Fed Funds target rate 25 basis points in both September and December 2018 and decreased it 25 basis points in both July and September 2019. The effect of purchase accounting related to the Mercersburg and Hamilton acquisitions also influenced the comparison of taxable-equivalent yields between 2018 and 2019. In addition, the Company began gradually increasing rates paid on interest-bearing deposits in the second half of 2018 in response to market conditions and continued to do so in 2019.
Provision for Loan Losses
Asset quality trends continue to be solid with a low level of charge-offs and low nonperforming loans. The provision for loan losses totaled $300,000 in the third quarter for 2019, compared with $200,000 for the same period in 2018. For the nine months ended September 30, the provision for loan losses in 2019 totaled $900,000, compared with $600,000 in 2018.
Net recoveries in the quarter ended September 30, 2019 totaled $49,000, equating to (0.01)% annualized as compared with net charge-offs totaling $23,000, or 0.01% annualized, in the previous quarter. Nonperforming loans to loans totaled 0.44% of loans at September 30, 2019, compared with 0.27% of loans at June 30, 2019. Loans outstanding decreased in the quarter with net recoveries, but there was a $2.5 million increase in nonperforming loans which required additional reserves. Overall, asset quality continues to be solid and the allowance for loan losses to nonperforming loans ratio ended the quarter at 213.7%.
The allowance for loan losses totaled $14.8 million at September 30, 2019, compared with $14.0 million at December 31, 2018 and $13.8 million at September 30, 2018. Management believes the allowance for loan losses to total loans ratio remains adequate at 0.93% at September 30, 2019. At September 30, 2018, the allowance for loan losses to total loans ratio totaled 1.27%. The principal factors impacting a comparison with September 30, 2019, were loans acquired in the Mercersburg and Hamilton transactions 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.
Noninterest Income
Noninterest income for the quarter ended September 30, 2019, excluding securities gains, totaled $6.5 million, an 18.1% increase, compared with $5.5 million in 2018. For the nine months ended September 30, noninterest income in 2019, excluding securities gains, totaled $17.2 million, an 8.5% increase, compared with $15.8 million in 2018.
Total trust, investment management and brokerage income for the quarter and nine months ended September 30, 2019, increased $423,000 and $652,000 year over year and included the effect of increased revenue from additional advisors and increased estate fees in 2019.
Mortgage banking income for the quarter and nine months ended September 30, 2019 decreased $112,000 and $306,000 year over year. In the third quarter of 2019, a $205,000 impairment charge due to decreasing interest rates was recognized on mortgage servicing rights. Loans sold in the quarter totaled $34.4 million and $74.0 million year to date compared with $27.6 million and $73.2 million in the previous year.
Income from bank owned life insurance for the quarter and nine months ended September 30, 2019 decreased $54,000 and increased $404,000 year over year. The Company recognized death benefit proceeds income totaling $255,000 in the second quarter of 2019 and $242,000 in the third quarter of 2018. The remainder of the net changes reflects additional life insurance policies acquired in the Mercersburg and Hamilton acquisitions.
In the third quarter of 2019, the Company recognized $629,000 for loan swap referral fees under a program in which it refers qualified commercial borrowers to a third party, which enters into an interest rate swap agreement with the borrower. The rate swap provides the borrower with the economic equivalent of a fixed-rate loan while allowing the Company to receive a variable rate of interest. Income from this program will vary from quarter to quarter depending on demand from qualified borrowers with a preference to enter into swap agreements with the third party.
Net investment securities gains totaled $2.3 million and $4.7 million for the quarter and nine months ended September 30, 2019, compared with $29,000 and $891,000 for same periods 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 $18.2 million and $57.7 million for the quarter and nine months ended September 30, 2019, compared with $13.3 million and $39.7 million for the quarter and nine months ended September 30, 2018. In addition to the previously noted merger related expenses, the following line items reflected notable changes between periods.
Salaries and employee benefits totaled $10.5 million and $28.1 million for the quarter and nine months ended September 30, 2019, compared with $7.6 million and $23.5 million for the same periods in 2018, principally reflecting employees added in the Mercersburg acquisition in the fourth quarter of 2018 and the Hamilton acquisition in May, 2019. In addition, a higher level of expense was incurred year-over-year for additional employees for the Company's new branches and overall expansion efforts, annual merit increases, and incremental expense for additional share-based compensation awards granted in 2019, net of the benefit of forfeitures. 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 and nine months ended September 30, 2019 increased $620,000 and $1.4 million year over year, reflecting Mercersburg and Hamilton branches acquired. The Company's expanded presence in Lancaster County, Pennsylvania, also contributed to the increase, with two branch banking locations added in the second half of 2018 and two in the first quarter of 2019.
FDIC insurance expense decreased $178,000 and $110,000 year over year for the quarter and nine months ended September 30, 2019. The decrease reflects credits received in the third quarter that offset the Bank's second quarter 2019 FDIC assessment. The FDIC's assessment regulations provide that, for banks with consolidated total assets under $10 billion, after the reserve ratio reaches 1.38 percent (and provided that it remains at least 1.38%), the FDIC will automatically apply credits to reduce regular deposit insurance assessments up to the full amount of their assessments or the full amount of their credits, whichever is less. The reserve ratio reached 1.40% on June 30, 2019. Therefore, credits were first applied during the third quarter of 2019. If the reserve ratio remains at least 1.38%, the Company estimates it will receive credits that will offset its third quarter 2019 assessment and partially offset its fourth quarter 2019 assessment.
Intangible asset amortization for the quarter and nine months ended September 30, 2019 increased $462,000 and $1,024,000 year over year, due principally to amortization of core deposit intangibles recorded in the Mercersburg and Hamilton acquisitions.
As previously reported, noninterest expenses in the first quarter of 2019 included a $615,000 pretax expense, or approximately $0.05 per diluted share net of tax, to write off an insurance claim receivable from a 2018 cyber security incident.
Income Taxes
Income tax expense totaled $1.3 million and $1.7 million for the quarter and nine months ended September 30, 2019, compared with $644,000 and $1.5 million for the same periods in 2018. The effective tax rate for the nine months ended September 30, 2019 was 11.7%, compared with 11.5% for the nine months ended September 30, 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. The Company recorded a tax benefit of $185,000, or approximately $0.02 per diluted share, in the first quarter of 2019, related to a favorable tax law clarification concerning the treatment of life insurance assets of an acquired entity. In the second quarter of 2019, the Company recorded a tax benefit of $334,000, or approximately $0.03 per diluted share, related to an increase in its deferred state income tax asset for the effect of the state tax rate change resulting from the Hamilton acquisition. These tax benefit items had the effect of lowering the effective tax rate for the nine months ended September 30, 2019, by approximately 3.6%.
FINANCIAL CONDITION
The following table presents loan balances, by loan class within segments, at September 30, 2019, December 31, 2018 and September 30, 2018.
| (Dollars in thousands) | September 30, 2019 | December 31, 2018 | September 30, 2018 | |||||
| Commercial real estate: | ||||||||
| Owner occupied | $ | 171,327 | $ | 129,650 | $ | 119,056 | ||
| Non-owner occupied | 310,334 | 252,794 | 249,529 | |||||
| Multi-family | 108,751 | 78,933 | 75,314 | |||||
| Non-owner occupied residential | 120,395 | 100,367 | 84,598 | |||||
| Acquisition and development: | ||||||||
| 1-4 family residential construction | 12,257 | 7,385 | 10,217 | |||||
| Commercial and land development | 38,494 | 42,051 | 33,735 | |||||
| Commercial and industrial | 215,734 | 160,964 | 127,011 | |||||
| Municipal | 47,920 | 50,982 | 39,429 | |||||
| Residential mortgage: | ||||||||
| First lien | 353,811 | 235,296 | 167,178 | |||||
| Home equity – term | 15,175 | 12,208 | 10,513 | |||||
| Home equity – lines of credit | 159,930 | 143,616 | 135,578 | |||||
| Installment and other loans | 38,977 | 33,411 | 32,783 | |||||
| $ | 1,593,105 | $ | 1,247,657 | $ | 1,084,941 | |||
Loans grew $345.4 million, from $1.25 billion at December 31, 2018 to $1.59 billion at September 30, 2019. Balances at September 30, 2019 include approximately $314.0 million acquired from Hamilton. The Hamilton acquisition increased the Company's loan portfolio principally in the residential mortgage - first lien, commercial real estate - owner occupied and non-owner occupied, and commercial and industrial classes.
Deposits grew $364.7 million from $1.56 billion at December 31, 2018 to $1.92 billion at September 30, 2019, with a reduction in brokered deposits totaling approximately $91.0 million during the period. The Hamilton acquisition accounted for approximately 80% of growth in deposits since year end, which contributed to the early payoff of brokered deposits. The remainder of the growth was organic, as the Company continued to increase both noninterest-bearing and interest-bearing deposit relationships from its cash management offerings.
Shareholders’ Equity
Shareholders’ equity totaled $223.5 million at September 30, 2019, an increase of $50.1 million from $173.4 million at December 31, 2018. The increase was attributable to the issuance of shares of the Company's common stock in connection with the acquisition of Hamilton and growth in retained earnings, and an improvement in accumulated other comprehensive income (loss) from changes in net unrealized gains and losses in securities available for sale.
Branch Consolidation
Orrstown Bank has experienced significant growth in recent years and is poised for further growth in the future. Our ongoing efforts target serving our local communities, investing in new technologies to support changes in client preferences, growing the Bank and optimizing returns for shareholders. As part of these efforts, we anticipate that the bank will finalize approvals for the consolidation of 5 Pennsylvania branches, that average less than $20 million per location, into other larger Orrstown Bank branches, as well as the sale of an operations center. We expect that these efforts will improve the profitability of the remaining branch locations and eliminate close to 50,000 square feet of excess back office space.
The following Pennsylvania branches will be closing effective January 31, 2020 at the end of the business day:
- 403 North Market Street, Duncannon;
- 1 South Carlisle Street, New Bloomfield;
- 18 Newport Plaza, Newport;
- 454 Loudon Road, Mercersburg; and
- 92 Path Valley Road, Fort Loudon.
We anticipate that one time charges associated with the branch consolidations and operations center sale will be in the range of $800,000 to $1.2 million in the fourth quarter of 2019 and thereafter cost savings will be in the range of $1.5 million to $2.0 million annually, beginning in the second quarter of 2020. Subject to regulatory approval, it is anticipated that the consolidations will be completed in the first quarter of 2020. The sale of the operations center is anticipated to be completed in the fourth quarter of 2019 and approximately one third of the space will be leased back to the Bank. While this sale does not materially impact future earnings and does not result in a material gain or loss, it is part of our ongoing efforts to minimize excess space and complexity, thus allowing management to focus on future growth initiatives.
| Investor Relations Contact: | Media Contact: |
| Matthew C. Schultheis | Luke Bernstein |
| Director Strategic Planning and Investor Relations | Corporate Communications Officer |
| Phone (717) 510-7127 | Phone (717) 510-7107 |
| ORRSTOWN FINANCIAL SERVICES, INC. | |||||||||||||||
| Operating Highlights (Unaudited) | |||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||
| September 30, | September 30, | September 30, | September 30, | ||||||||||||
| (Dollars in thousands, except per share information) | 2019 | 2018 | 2019 | 2018 | |||||||||||
| Net income | $ | 6,901 | $ | 4,016 | $ | 12,690 | $ | 11,653 | |||||||
| Diluted earnings per share | $ | 0.62 | $ | 0.49 | $ | 1.23 | $ | 1.41 | |||||||
| Cash dividends per share | $ | 0.15 | $ | 0.13 | $ | 0.45 | $ | 0.38 | |||||||
| Weighted-average shares outstanding - diluted | 11,094 | 8,271 | 10,318 | 8,274 | |||||||||||
| Return on average assets | 1.15 | % | 0.94 | % | 0.77 | % | 0.95 | % | |||||||
| Return on average equity | 12.37 | % | 10.97 | % | 8.47 | % | 10.89 | % | |||||||
| Net interest income | $ | 17,920 | $ | 12,704 | $ | 51,041 | $ | 36,741 | |||||||
| Net interest margin | 3.27 | % | 3.28 | % | 3.43 | % | 3.29 | % | |||||||
| Net interest margin (excluding the impact of purchase accounting) (1) | 3.08 | % | 3.28 | % | 3.24 | % | 3.29 | % | |||||||
| ORRSTOWN FINANCIAL SERVICES, INC. | |||||||||||
| Balance Sheet Highlights (Unaudited) | |||||||||||
| September 30, | December 31, | September 30, | |||||||||
| (Dollars in thousands, except per share information) | 2019 | 2018 | 2018 | ||||||||
| Assets | $ | 2,313,677 | $ | 1,934,388 | $ | 1,720,755 | |||||
| Loans, gross | 1,593,105 | 1,247,657 | 1,084,941 | ||||||||
| Allowance for loan losses | (14,809 | ) | (14,014 | ) | (13,812 | ) | |||||
| Deposits | 1,923,454 | 1,558,756 | 1,429,170 | ||||||||
| Shareholders' equity | 223,493 | 173,433 | 145,557 | ||||||||
| Book value per share | 20.00 | 18.39 | 17.36 | ||||||||
| Tangible book value per common share (1) | 17.67 | 16.73 | 17.25 | ||||||||
| (1) 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. | |||||||||||||
| CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) | |||||||||||||
| September 30, | December 31, | September 30, | |||||||||||
| (Dollars in thousands) | 2019 | 2018 | 2018 | ||||||||||
| Assets | |||||||||||||
| Cash and cash equivalents | $ | 50,923 | $ | 88,815 | $ | 41,017 | |||||||
| Securities available for sale | 481,120 | 465,844 | 489,356 | ||||||||||
| Loans held for sale | 7,610 | 3,340 | 4,765 | ||||||||||
| Loans | 1,593,105 | 1,247,657 | 1,084,941 | ||||||||||
| Less: Allowance for loan losses | (14,809 | ) | (14,014 | ) | (13,812 | ) | |||||||
| Net loans | 1,578,296 | 1,233,643 | 1,071,129 | ||||||||||
| Premises and equipment, net | 43,031 | 38,201 | 35,922 | ||||||||||
| Goodwill | 19,925 | 12,592 | 719 | ||||||||||
| Other intangible assets, net | 7,654 | 3,910 | 284 | ||||||||||
| Other assets | 125,118 | 88,043 | 77,563 | ||||||||||
| Total assets | $ | 2,313,677 | $ | 1,934,388 | $ | 1,720,755 | |||||||
| Liabilities | |||||||||||||
| Deposits: | |||||||||||||
| Noninterest-bearing | $ | 246,773 | $ | 204,843 | $ | 187,721 | |||||||
| Interest-bearing | 1,676,681 | 1,353,913 | 1,241,449 | ||||||||||
| Total deposits | 1,923,454 | 1,558,756 | 1,429,170 | ||||||||||
| Borrowings | 131,604 | 179,378 | 128,896 | ||||||||||
| Accrued interest and other liabilities | 35,126 | 22,821 | 17,132 | ||||||||||
| Total liabilities | 2,090,184 | 1,760,955 | 1,575,198 | ||||||||||
| Shareholders' Equity | |||||||||||||
| Common stock | 584 | 491 | 437 | ||||||||||
| Additional paid-in capital | 188,582 | 151,678 | 126,260 | ||||||||||
| Retained earnings | 32,690 | 24,472 | 24,529 | ||||||||||
| Accumulated other comprehensive income (loss) | 2,675 | (2,972 | ) | (5,472 | ) | ||||||||
| Treasury stock | (1,038 | ) | (236 | ) | (197 | ) | |||||||
| Total shareholders' equity | 223,493 | 173,433 | 145,557 | ||||||||||
| Total liabilities and shareholders' equity | $ | 2,313,677 | $ | 1,934,388 | $ | 1,720,755 | |||||||
| ORRSTOWN FINANCIAL SERVICES, INC. | |||||||||||||
| CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) | |||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||
| September 30, | September 30, | September 30, | September 30, | ||||||||||
| (In thousands, except per share information) | 2019 | 2018 | 2019 | 2018 | |||||||||
| Interest income | |||||||||||||
| Loans | $ | 19,999 | $ | 12,281 | $ | 54,611 | $ | 35,068 | |||||
| Investment securities - taxable | 3,787 | 2,922 | 10,958 | 7,754 | |||||||||
| Investment securities - tax-exempt | 309 | 955 | 1,783 | 2,834 | |||||||||
| Short-term investments | 561 | 68 | 1,237 | 169 | |||||||||
| Total interest income | 24,656 | 16,226 | 68,589 | 45,825 | |||||||||
| Interest expense | |||||||||||||
| Deposits | 5,774 | 2,780 | 14,338 | 6,765 | |||||||||
| Short-term borrowings | 39 | 332 | 316 | 1,097 | |||||||||
| Long-term debt | 433 | 410 | 1,408 | 1,222 | |||||||||
| Subordinated notes | 490 | 0 | 1,486 | 0 | |||||||||
| Total interest expense | 6,736 | 3,522 | 17,548 | 9,084 | |||||||||
| Net interest income | 17,920 | 12,704 | 51,041 | 36,741 | |||||||||
| Provision for loan losses | 300 | 200 | 900 | 600 | |||||||||
| Net interest income after provision for loan losses | 17,620 | 12,504 | 50,141 | 36,141 | |||||||||
| Noninterest income | |||||||||||||
| Service charges on deposit accounts | 1,761 | 1,524 | 4,930 | 4,405 | |||||||||
| Other service charges, commissions and fees | 372 | 492 | 959 | 1,430 | |||||||||
| Loan swap referral fees | 629 | 0 | 629 | 0 | |||||||||
| Trust and investment management income | 1,892 | 1,668 | 5,399 | 5,037 | |||||||||
| Brokerage income | 654 | 455 | 1,804 | 1,514 | |||||||||
| Mortgage banking activities | 623 | 735 | 1,743 | 2,049 | |||||||||
| Income from life insurance | 479 | 533 | 1,505 | 1,101 | |||||||||
| Other income | 44 | 56 | 188 | 272 | |||||||||
| Investment securities gains | 2,328 | 29 | 4,731 | 891 | |||||||||
| Total noninterest income | 8,782 | 5,492 | 21,888 | 16,699 | |||||||||
| Noninterest expenses | |||||||||||||
| Salaries and employee benefits | 10,489 | 7,610 | 28,088 | 23,487 | |||||||||
| Occupancy | 1,133 | 775 | 3,200 | 2,252 | |||||||||
| Furniture and equipment | 1,252 | 990 | 3,415 | 2,977 | |||||||||
| Data processing | 830 | 661 | 2,658 | 1,875 | |||||||||
| Telephone and communication | 198 | 181 | 612 | 542 | |||||||||
| Automated teller and interchange fees | 270 | 187 | 744 | 548 | |||||||||
| Advertising and bank promotions | 279 | 279 | 1,348 | 898 | |||||||||
| FDIC insurance | (9 | ) | 169 | 397 | 507 | ||||||||
| Legal fees | 189 | 215 | 362 | 364 | |||||||||
| Other professional services | 625 | 361 | 1,716 | 1,140 | |||||||||
| Directors' compensation | 228 | 207 | 725 | 663 | |||||||||
| Real estate owned | 22 | 18 | 36 | 96 | |||||||||
| Taxes other than income | 306 | 259 | 926 | 761 | |||||||||
| Intangible asset amortization | 486 | 24 | 1,096 | 72 | |||||||||
| Merger related | 471 | 319 | 7,976 | 473 | |||||||||
| Insurance claim receivable write off | 0 | 0 | 615 | 0 | |||||||||
| Other operating expenses | 1,392 | 1,081 | 3,743 | 3,022 | |||||||||
| Total noninterest expenses | 18,161 | 13,336 | 57,657 | 39,677 | |||||||||
| Income before income tax expense | 8,241 | 4,660 | 14,372 | 13,163 | |||||||||
| Income tax expense | 1,340 | 644 | 1,682 | 1,510 | |||||||||
| Net income | $ | 6,901 | $ | 4,016 | $ | 12,690 | $ | 11,653 | |||||
| Per share information: | |||||||||||||
| Basic earnings per share | $ | 0.63 | $ | 0.50 | $ | 1.25 | $ | 1.44 | |||||
| Diluted earnings per share | 0.62 | 0.49 | 1.23 | 1.41 | |||||||||
| ORRSTOWN FINANCIAL SERVICES, INC. | |||||||||||||||||||
| ANALYSIS OF NET INTEREST INCOME | |||||||||||||||||||
| Average Balances and Interest Rates, Taxable-Equivalent Basis (Unaudited) | |||||||||||||||||||
| Three Months Ended | |||||||||||||||||||
| September 30, 2019 | September 30, 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 | $ | 96,212 | $ | 561 | 2.31 | % | $ | 13,058 | $ | 68 | 2.07 | % | |||||||
| Securities (1) | 496,482 | 4,177 | 3.34 | 490,750 | 4,131 | 3.34 | |||||||||||||
| Loans (1)(2) | 1,604,491 | 20,126 | 4.98 | 1,074,106 | 12,376 | 4.57 | |||||||||||||
| Total interest-earning assets | 2,197,185 | 24,864 | 4.49 | 1,577,914 | 16,575 | 4.17 | |||||||||||||
| Other assets | 193,946 | 108,976 | |||||||||||||||||
| Total | $ | 2,391,131 | $ | 1,686,890 | |||||||||||||||
| Liabilities and Shareholders' Equity | |||||||||||||||||||
| Interest-bearing demand deposits | $ | 954,824 | 2,185 | 0.91 | $ | 759,789 | $ | 1,377 | 0.72 | ||||||||||
| Savings deposits | 151,692 | 81 | 0.21 | 97,527 | 38 | 0.15 | |||||||||||||
| Time deposits (3) | 658,587 | 3,508 | 2.11 | 328,321 | 1,365 | 1.65 | |||||||||||||
| Short-term borrowings | 10,497 | 39 | 1.48 | 63,617 | 332 | 2.07 | |||||||||||||
| Long-term debt | 74,524 | 433 | 2.30 | 83,596 | 410 | 1.95 | |||||||||||||
| Subordinated notes | 31,826 | 490 | 6.10 | 0 | 0 | 0.00 | |||||||||||||
| Total interest-bearing liabilities | 1,881,950 | 6,736 | 1.42 | 1,332,850 | 3,522 | 1.05 | |||||||||||||
| Noninterest-bearing demand deposits | 252,211 | 191,533 | |||||||||||||||||
| Other | 35,720 | 17,323 | |||||||||||||||||
| Total Liabilities | 2,169,881 | 1,541,706 | |||||||||||||||||
| Shareholders' Equity | 221,250 | 145,184 | |||||||||||||||||
| Total | $ | 2,391,131 | $ | 1,686,890 | |||||||||||||||
| Taxable-equivalent net interest income / net interest spread | 18,128 | 3.07 | % | 13,053 | 3.12 | % | |||||||||||||
| Taxable-equivalent net interest margin | 3.27 | % | 3.28 | % | |||||||||||||||
| Taxable-equivalent adjustment | (208 | ) | (349 | ) | |||||||||||||||
| Net interest income | $ | 17,920 | $ | 12,704 | |||||||||||||||
| 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. | |||||||||||||||||||
| (3) For the three months ended September 30, 2019, expenses associated with the early redemption of brokered time deposits totaled $215,000, and increased the cost of funds by 13 basis points. | |||||||||||||||||||
| ORRSTOWN FINANCIAL SERVICES, INC. | |||||||||||||||||||
| ANALYSIS OF NET INTEREST INCOME | |||||||||||||||||||
| Average Balances and Interest Rates, Taxable-Equivalent Basis (Unaudited) | |||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||
| September 30, 2019 | September 30, 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 | $ | 70,300 | $ | 1,237 | 2.35 | % | $ | 12,169 | $ | 169 | 1.86 | % | |||||||
| Securities (1) | 497,669 | 13,214 | 3.55 | 470,290 | 11,341 | 3.22 | |||||||||||||
| Loans (1)(2) | 1,454,468 | 54,983 | 5.05 | 1,053,654 | 35,343 | 4.48 | |||||||||||||
| Total interest-earning assets | 2,022,437 | 69,434 | 4.59 | 1,536,113 | 46,853 | 4.08 | |||||||||||||
| Other assets | 169,308 | 106,979 | |||||||||||||||||
| Total | $ | 2,191,745 | $ | 1,643,092 | |||||||||||||||
| Liabilities and Shareholders' Equity | |||||||||||||||||||
| Interest-bearing demand deposits | $ | 907,911 | 6,053 | 0.89 | $ | 739,616 | 3,191 | 0.58 | |||||||||||
| Savings deposits | 137,493 | 206 | 0.20 | 98,105 | 115 | 0.16 | |||||||||||||
| Time deposits (3) | 546,717 | 8,079 | 1.98 | 303,749 | 3,459 | 1.52 | |||||||||||||
| Short-term borrowings | 20,622 | 316 | 2.05 | 83,485 | 1,097 | 1.76 | |||||||||||||
| Long-term debt | 86,537 | 1,408 | 2.18 | 83,686 | 1,222 | 1.95 | |||||||||||||
| Subordinated notes | 31,843 | 1,486 | 6.24 | 0 | 0 | 0.00 | |||||||||||||
| Total interest-bearing liabilities | 1,731,123 | 17,548 | 1.36 | 1,308,641 | 9,084 | 0.93 | |||||||||||||
| Noninterest-bearing demand deposits | 230,056 | 174,896 | |||||||||||||||||
| Other | 30,286 | 16,480 | |||||||||||||||||
| Total Liabilities | 1,991,465 | 1,500,017 | |||||||||||||||||
| Shareholders' Equity | 200,280 | 143,075 | |||||||||||||||||
| Total | $ | 2,191,745 | $ | 1,643,092 | |||||||||||||||
| Taxable-equivalent net interest income / net interest spread | 51,886 | 3.23 | % | 37,769 | 3.15 | % | |||||||||||||
| Taxable-equivalent net interest margin | 3.43 | % | 3.29 | % | |||||||||||||||
| Taxable-equivalent adjustment | (845 | ) | (1,028 | ) | |||||||||||||||
| Net interest income | $ | 51,041 | $ | 36,741 | |||||||||||||||
| 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. | |||||||||||||||||||
| (3) For the nine months ended September 30, 2019, expenses associated with the early redemption of brokered time deposits totaled $215,000, and increased the cost of funds by 5 basis points. | |||||||||||||||||||
| ORRSTOWN FINANCIAL SERVICES, INC. | |||||||||||||||
| Nonperforming Assets / Risk Elements (Unaudited) | |||||||||||||||
| September 30, | June 30, | December 31, | September 30, | ||||||||||||
| (Dollars in thousands) | 2019 | 2019 | 2018 | 2018 | |||||||||||
| Nonaccrual loans (cash basis) | $ | 6,931 | $ | 4,387 | $ | 5,165 | $ | 5,458 | |||||||
| Other real estate (OREO) | 642 | 735 | 130 | 286 | |||||||||||
| Total nonperforming assets | 7,573 | 5,122 | 5,295 | 5,744 | |||||||||||
| Restructured loans still accruing | 1,042 | 1,104 | 1,132 | 1,143 | |||||||||||
| Loans past due 90 days or more and still accruing | 2,982 | 1,661 | 57 | 0 | |||||||||||
| Total nonperforming and other risk assets | $ | 11,597 | $ | 7,887 | $ | 6,484 | $ | 6,887 | |||||||
| Loans 30-89 days past due (1) | $ | 5,287 | $ | 5,428 | $ | 5,186 | $ | 1,681 | |||||||
| Acquired loans 30-89 days past due included above | $ | 2,420 | $ | 2,495 | $ | 1,417 | $ | 0 | |||||||
| Asset quality ratios: | |||||||||||||||
| Total nonperforming loans to total loans | 0.44 | % | 0.27 | % | 0.41 | % | 0.50 | % | |||||||
| Total nonperforming assets to total assets | 0.33 | % | 0.21 | % | 0.27 | % | 0.33 | % | |||||||
| Total nonperforming assets to total loans and OREO | 0.48 | % | 0.32 | % | 0.42 | % | 0.53 | % | |||||||
| Total risk assets to total loans and OREO | 0.73 | % | 0.49 | % | 0.52 | % | 0.63 | % | |||||||
| Total risk assets to total assets | 0.50 | % | 0.33 | % | 0.34 | % | 0.40 | % | |||||||
| Allowance for loan losses to total loans | 0.93 | % | 0.90 | % | 1.12 | % | 1.27 | % | |||||||
| Allowance for loan losses to nonperforming loans | 213.66 | % | 329.61 | % | 271.33 | % | 253.06 | % | |||||||
| Allowance for loan losses to nonperforming and restructured loans still accruing | 185.74 | % | 263.34 | % | 222.55 | % | 209.24 | % | |||||||
| Allowance for Loan Losses Activity (Unaudited) | |||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||
| September 30, | September 30, | September 30, | September 30, | ||||||||||||
| (Dollars in thousands) | 2019 | 2018 | 2019 | 2018 | |||||||||||
| Balance, beginning of period | $ | 14,460 | $ | 13,437 | $ | 14,014 | $ | 12,796 | |||||||
| Provision for loan losses | 300 | 200 | 900 | 600 | |||||||||||
| Recoveries | 172 | 334 | 476 | 779 | |||||||||||
| Charge-offs | (123 | ) | (159 | ) | (581 | ) | (363 | ) | |||||||
| Balance, end of period | $ | 14,809 | $ | 13,812 | $ | 14,809 | $ | 13,812 | |||||||
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 | Nine Months Ended | ||||||||||||||
| 9/30/2019 | 9/30/2018 | 9/30/2019 | 9/30/2018 | ||||||||||||
| (In thousands) | |||||||||||||||
| Pretax Items | |||||||||||||||
| Merger related expenses | $ | (471 | ) | $ | (319 | ) | $ | (7,976 | ) | $ | (473 | ) | |||
| Net securities gains | 2,328 | 29 | 4,731 | 891 | |||||||||||
| Accelerated payoff of brokered deposits and borrowings penalty | 223 | 0 | 223 | 0 | |||||||||||
| Life insurance proceeds | 0 | 242 | 255 | 242 | |||||||||||
| Restricted stock forfeiture expense benefit | 0 | 262 | 350 | 262 | |||||||||||
| Accretion – recoveries on purchased credit impaired loans | 21 | 0 | 736 | 0 | |||||||||||
| Insurance claim receivable write-off | 0 | 0 | 615 | 0 | |||||||||||
| Income Tax Expense Items | |||||||||||||||
| Tax benefit from state deferred tax asset rate change | 0 | 0 | 334 | 0 | |||||||||||
| Tax benefit from acquired life insurance assets | 0 | 0 | 185 | 0 | |||||||||||
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 $27.6 million and $16.5 million at September 30, 2019 and December 31, 2018.
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.
Tangible book value per share and net interest margin excluding the impact of purchase accounting, 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 table presents the computation of each non-GAAP based measure shown together with its most directly comparable GAAP based measure.
| (in thousands, except per share information) | |||||||||||||||
| Tangible Book Value per Common Share | September 30, 2019 | December 31, 2018 | September 30, 2018 | ||||||||||||
| Shareholders' equity | $ | 223,493 | $ | 173,433 | $ | 145,557 | |||||||||
| Goodwill and other intangible assets, net of related tax effect | 25,972 | 15,698 | 943 | ||||||||||||
| Tangible common equity (non-GAAP) | $ | 197,521 | $ | 157,735 | $ | 144,614 | |||||||||
| Common shares outstanding | 11,175 | 9,430 | 8,386 | ||||||||||||
| Book value per share (most directly comparable GAAP based measure) | $ | 20.00 | $ | 18.39 | $ | 17.36 | |||||||||
| Intangible assets per share | 2.33 | 1.66 | 0.11 | ||||||||||||
| Tangible book value per share (non-GAAP) | $ | 17.67 | $ | 16.73 | $ | 17.25 | |||||||||
| For The Three Months Ended | For The Nine Months Ended | ||||||||||||||
| September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | ||||||||||||
| Net Interest Margin (excluding the impact of purchase accounting) | |||||||||||||||
| Net interest margin as reported | 3.27 | % | 3.28 | % | 3.43 | % | 3.29 | % | |||||||
| Adjustment for purchase accounting: | |||||||||||||||
| Total interest-earning assets (loans) | 0.19 | % | 0.00 | % | 0.19 | % | 0.00 | % | |||||||
| Net interest margin (excluding the impact of purchase accounting) (non-GAAP) | 3.08 | % | 3.28 | % | 3.24 | % | 3.29 | % | |||||||
About the Company
With over $2.3 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 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. 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 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.