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Orrstown Financial Services, Inc. Reports First Quarter 2020 diluted EPS of $0.46 and Announces Quarterly Dividend of $0.17 per Share

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Orrstown Financial Services, Inc. Reports First Quarter 2020 diluted EPS of $0.46 and Announces Quarterly Dividend of $0.17 per Share
  • Announced initiatives in March 2020 to assist clients, employees and communities affected by COVID-19

  • Began to see impact of COVID-19 in Q1 with provision for loan losses of $0.9 million, mortgage servicing impairment of $0.5 million, wealth management fee pressure and a reduction in commercial loan closings due to project delays

  • Initiated proactive risk mitigation efforts, which included contacting existing clients representing over 70% of the commercial loan portfolio, completing loan deferral arrangements for clients with balances totaling $35.7 million through March 31, 2020 and actively participating in the Small Business Administration Paycheck Protection Program (the “SBA PPP”) in April 2020

  • In April 2020, expected closings of SBA PPP loans total approximately $370 million with approximately $9 million of processing fees to be earned primarily over Q2 and Q3

  • Classified loans fell by $10.3 million to $30.5 million at March 31, 2020 from $40.8 million at December 31, 2019; non-performing loans to total loans fell by 18 basis points to 0.47% at March 31, 2020 as compared to 0.65% at December 31, 2019; net recoveries of $0.2 million were recorded in the three months ended March 31, 2020

  • Due to the hiring of commercial relationship managers in the second half of 2019, commercial loan growth was strong for a second quarter in a row, at 15% annualized, after 20% annualized growth in the fourth quarter of 2019; however, the impact of COVID-19 will make it difficult to maintain that growth throughout the remainder of 2020

  • Annualized gross loan growth of 3.0%, despite sales of portfolio loans and high payoffs in the mortgage portfolio due to heavy refinance activity

  • With market uncertainty, deposits grew by $54.3 million, or 16% annualized, in checking, money market and savings accounts; continued planned runoff of an additional $25 million of brokered and subscription deposits

  • With rapidly falling interest rates and an asset sensitive balance sheet, margin management was active, resulting in a four basis point expansion in the net interest margin to 3.41% for the three months ended March 31, 2020 as compared to 3.37% for the three months ended December 31, 2019

  • Repriced deposits quickly, leading to a nine basis point reduction in the cost of deposits, replaced maturing funding with lower cost alternatives, and new origination loan spreads were widened

  • Noninterest income totaled $7.1 million, or 28% of revenues, for the three months ended March 31, 2020, negatively impacted by seasonal reductions in many fee categories and the COVID-19 event, which was more than offset by $1.9 million of gains from the sale of acquired classified loans and an acquired recreational vehicle portfolio

  • Announced that the annual shareholder meeting will be held virtually on April 28, 2020 at 9:00 AM

  • Declared a cash dividend of $0.17 per common share, payable May 11, 2020, to shareholders of record as of May 4, 2020, maintaining the dividend declared in the previous quarter

SHIPPENSBURG, Pa., April 21, 2020 (GLOBE NEWSWIRE) -- Orrstown Financial Services, Inc. ("Orrstown" or the “Company”) (ORRF), the parent company of Orrstown Bank (the “Bank”) and Wheatland Advisors, Inc., announced earnings for the three months ended March 31, 2020. Net income totaled $5.1 million for the first quarter of 2020, compared with $4.2 million for the fourth quarter of 2019 and $3.1 million in the first quarter of 2019. Diluted earnings per share totaled $0.46 for the three months ended March 31, 2020, compared with $0.38 for the three months ended December 31, 2019 and $0.33 for the three months ended March 31, 2019.

Thomas R. Quinn, Jr., President & CEO, commented, “The first quarter saw a progression of our strategy, which carried on even as the COVID-19 pandemic changed how Orrstown conducts business. Commercial loans grew as recent hires of commercial lenders brought high quality relationships to the Bank. Additionally, through two loan sales, we further aligned our existing portfolio with our risk tolerances. However, as the quarter passed, the disruptive impact of the COVID-19 outbreak became more and more evident. We pivoted to providing service through electronic channels. We engaged in direct outreach to clients to assess their needs and provide assistance where needed.

Though the SBA Paycheck Protection Program was not introduced until second quarter 2020, work done in the first quarter of 2020 and before laid the foundation for successful implementation at Orrstown. Investments in 2019 in Baltimore and Harrisburg, as well as our 2015 expansion into Lancaster while maintaining our focus in our historic Cumberland Valley footprint, allowed us to accept almost 1,500 applications. Many of these represent new relationships to the Bank, for which our intention is to bring the whole relationship to Orrstown over time; however, the associated loans will all be underwritten with the same prudence as our existing portfolio. We look forward to returning to business as usual, as do our clients, employees, and shareholders, just as soon as it is safe to do so.”

COVID-19 Response Efforts

Orrstown has implemented the following steps to mitigate the potential spread of this virus, and to help our clients during this challenging time:

  • Temporarily closed all branch lobbies for transaction purposes; drive thru lanes remain open.

  • Encouraged clients to utilize the Bank’s online, mobile, and telephone banking services, as well as night drops and ATMs.

  • Implemented a by-appointment only process, where we will meet with clients face-to-face for critical and essential needs that cannot be serviced remotely or via a drive-up, such as a loan settlement or safe deposit box access request.

  • Waived Orrstown fees on all foreign ATM transactions from March 18, 2020 through May 15, 2020.

  • Waived late fees on all loan payments for 60 days.

  • Designated loan experts available to work with clients to assist them during this challenging time.

  • Implemented a work-from-home policy for employees whose primary responsibilities can be completed in this manner.

  • Enhanced staffing levels at our Client Service Center to manage our increased call volume.

  • Instituted additional preventative measures by providing guidance to all employees on hygiene and social distancing.

  • Educated clients and consumers to explore programs provided by the U.S. Small Business Administration (“SBA”).

  • Changed Annual Meeting to a Virtual Meeting.

Loss Mitigation Efforts / Loan Concentration

Management initiated numerous proactive efforts to prepare for the difficult economic environment that is imminent, including contacting most commercial loan clients, initiating a loan payment deferral program for consumers and business clients of up to six months, actively participating in the SBA PPP, performing stress testing of higher risk concentrations in the loan portfolio and tighter underwriting for new loans. Due to the change in the external environment, management increased the qualitative factors for certain loan segments in the Bank’s allowance for loan loss analysis, which resulted in the recording of $0.9 million of provision for loan losses in the quarter. At March 31, 2020, eight consumer clients with loans totaling $0.8 million were granted payment deferrals while 22 clients with commercial loans totaling $34.9 million also had payment deferrals. Subsequently, as of April 20, 2020, additional consumer and commercial deferrals were granted totaling $12.1 million and $101.4 million respectively. These conversations are on-going and we expect more deferrals to be granted in the second quarter of 2020.

The Bank is also actively consulting with clients on the benefits of the many government lending programs currently available, with the most interest expressed in the SBA PPP. To date, the Bank has taken almost 1,500 applications and expects to close approximately $370 million of these loans in April 2020. These loans are fully guaranteed by the SBA and forgivable if certain conditions are met by the borrower, including the client using 75% of the loan for payroll.

The combination of active client relationship consultation, loan payment deferrals, increased risk management focus on higher risk loan concentrations and significant client participation in the SBA PPP is expected to help offset potential future period losses. Due to the current economic environment, we do expect charge offs to increase in the coming quarters, but more time is needed to fully understand the magnitude and length of the pending economic downturn and its impact on our loan portfolio.

Below is a summary of select loan concentrations as a percentage of total loans and the Bank’s total risk-based capital as of March 31, 2020:

As a Percentage of

Category

Total Loans

Risk-based Capital

Office

10.1

%

70.8

%

Multifamily residential

6.7

47.3

Strip Center / Retail

3.1

21.7

Commercial Construction

2.9

20.4

Hotel / Motel

2.8

19.6

Warehouses

2.3

16.4

Restaurants & Bars

1.5

10.8

Storage Units

1.5

10.7

Residential Construction

0.8

5.5

DISCUSSION OF RESULTS

Balance Sheet

Loans
Due to the significant addition of commercial relationship managers in the second half of 2019, commercial loans grew $39.9 million, or 15% annualized, in the quarter ended March 31, 2020, despite the aforementioned classified loan sale. This follows the fourth quarter 2019 growth of 20% annualized, or $52.7 million. As previously disclosed, the Bank intends to focus growth efforts in relationship commercial lending. We expect that growth will slow in the coming quarters as the team focuses more effort on managing its existing clients given the change in the economic environment. Home equity loans were relatively flat at $178.7 million at March 31, 2020 as first mortgage refinance activity reduced home equity loan balances as many clients consolidated debt. Mortgage loan originations grew with the fall in interest rates, but the Bank continues to sell most of its loan production in the secondary market. First lien residential mortgages fell $11.6 million, or 14% annualized, in the three months ended March 31, 2020 as the Bank continues to execute its balance sheet mix optimization strategy. Installment loans fell by $15.1 million in the three months ended March 31, 2020 due to the sale of $11.0 million of acquired RV loans for risk management purposes, plus normal amortization. Overall, period end gross loans grew by $12.6 million, or 3% annualized, in the first quarter of 2020 as compared with December 31, 2019, as the mix continues to shift away from lower margin consumer loans to relationship commercial loans.

Deposits
Given the market uncertainty, the Bank saw a notable inflow of deposits into checking, money market and savings accounts. Total core (non-maturity) deposits increased $54.3 million in the first quarter, or 16% annualized, to $1.42 billion. Time deposits, net of brokered and subscription accounts, fell $7.7 million in the quarter, or 6% annualized. Planned reductions in brokered deposits and subscription service deposits continued with $23.8 million of runoff. The loan to deposit ratio remained stable at 86% at March 31, 2020 as net loans grew by $11.5 million and deposits increased $21.8 million. The Bank will selectively use brokered channels as needed and is targeting a 90-95% loan to deposit ratio over the long term.

Other
Borrowings fell by $5.9 million to $212.0 million in the three months ended March 31, 2020; however, the Bank shifted strategies with regard to borrowings due to the decrease in interest rates. Initially, maturing long-term borrowings and brokered CDs were replaced with overnight borrowings. This led to an initial reduction in the cost of borrowings as rates fell. After rates fell significantly, the Bank extended the duration of $100.0 million of borrowings for a weighted average term of six years at a cost of funds of 0.54%.

During the three months ended March 31, 2020, securities available for sale decreased by $11.3 million as $26.7 million of purchases were offset by $20.5 million of principal repayments and a $17.3 million reduction in the fair value of investments. Due to bond market turmoil in the quarter, spreads widened in many segments of the investment portfolio as liquidity in the market was temporarily constrained. Many funds liquidated holdings and buying demand was limited, thereby putting pressure on prices. Given the strength of the investment counterparty or deal credit enhancement for asset-backed securities, this reduction in fair value is likely to be temporary. In addition, the Bank has the ability and intent to hold these bonds to maturity, so no other than temporary impairment charges were recorded. As the Bank continues to execute its plan to grow relationship loans, it will look to reduce its investment portfolio concentration to fund some of this loan growth through investment repayments. Total asset growth was limited at $4.2 million for the three months ended March 31, 2020 and we expect limited total balance sheet growth in 2020 as the Company reinvests lower margin investments and mortgages into relationship commercial and consumer loans.

Income Statement

Net Interest Income and Margin
The Bank actively managed its balance sheet to optimize its net interest margin, given the rapid decline in interest rates. The Bank focused on shifting borrowings short and repricing non-maturity deposits quickly to preserve the margin for the near term to offset the reductions in variable rate loan and investment yield reductions. Adding to the margin stability was the continued balance sheet mix shift as commercial loans grew by $39.9 million, mortgage loans fell by $11.6 million, brokered and subscription service deposits fell by $23.8 million and core deposit balances rose by $54.3 million from December 31, 2019 to March 31, 2020. As a result of these efforts, net interest income totaled $18.3 million in the first quarter of 2020 compared with $17.9 million in the fourth quarter of 2019. Average interest-earning assets rose by $44.8 million in the three months ended March 31, 2020 due primarily to average commercial loan growth of $64.5 million over the same period. The net interest margin increased by four basis points in the three months ended March 31, 2020 to 3.41% as the earning asset yield fell by five basis points while the cost of interest-bearing liabilities fell by nine basis points.

As previously disclosed, the Company has an asset sensitive balance sheet with concentrations in variable rate commercial loans and investment securities. It also has significant concentrations in core deposits with a low cost of funds. With this profile, the Bank will normally experience net interest margin pressure as interest rates fall and net interest margin expansion as rates rise. If the external environment continues to favor low interest rates, the Company will continue to focus on mix optimization to preserve margin, while also obtaining its fair share of rate sensitive fee revenues from mortgage loans to be sold in the secondary market and loan swap referral income for commercial real estate clients. The first quarter of 2020 saw record low interest rates and they are expected to stay low throughout 2020.

Provision for Loan Losses
The allowance for loan losses totaled $15.8 million at March 31, 2020, compared with $14.7 million at December 31, 2019. Total classified loans fell in the quarter by 25%, or $10.3 million. Management initiated a strategy in the first quarter of 2020 to pursue the sale or workout of classified loans. During the three months ended March 31, 2020, the Bank sold $9.2 million of a portfolio of acquired classified loans, recording a gain on sale of $1.6 million. While asset quality trends continue to exhibit low levels of charge-offs and non-performing loans, management decided to increase its qualitative reserves in anticipation of an increase in charge-offs in future periods due to the COVID-19 pandemic. The provision for loan losses totaled $0.9 million in the first quarter of 2020, compared with $0 in the fourth quarter of 2019. Management believes the allowance for loan losses to total loans ratio remains adequate at 0.95% at March 31, 2020. At December 31, 2019, the allowance for loan losses to total loans ratio totaled 0.89%.

Successful workout efforts led to net recoveries in the quarter ended March 31, 2020 of $0.2 million, as compared with net charge-offs totaling $0.2 million in the quarter ended December 31, 2019. Nonperforming loans decreased by $2.9 million to $8.0 million at March 31, 2020 from $10.9 million at December 31, 2019, due principally to a measurement period adjustment for the transfer of a $2.6 million loan from the Hamilton Bank acquisition into the purchased credit impaired pool during the three months ended March 31, 2020. Nonperforming loans totaled 0.47% of gross loans at March 31, 2020, compared with 0.65% of gross loans at December 31, 2019. Overall, asset quality continued to be solid and the allowance for loan losses to nonperforming loans ratio was 202% at March 31, 2020.

Noninterest Income
Noninterest income for the quarter ended March 31, 2020, excluding securities gains, totaled $7.1 million, compared with $7.0 million in the quarter ended December 31, 2019. The Bank completed the sale of two portfolios of loans for risk management purposes, which resulted in gains of $1.9 million in the three months ended March 31, 2020. These gains were partially offset by reduced fee revenue as the Bank began to see the negative impact of the COVID-19 pandemic during the second half of the quarter.

Total wealth management income for the quarter ended March 31, 2020 was $2.4 million, as compared to $2.5 million for the quarter ended December 31, 2019. A significant portion of the fees earned in wealth management are from fees assessed as a percentage of assets under management. With the fall in the market in the latter half of the first quarter of 2020, these fees came under pressure. If markets do not recover, growth of assets under management may be constrained. While the Bank continues to acquire new clients, fee growth from these efforts will be muted in the near term if market weakness continues.

In the first quarter of 2020, service charges totaled $1.0 million and interchange income on debit cards totaled $0.8 million, which combined, are down $0.2 million from the quarter ended December 31, 2019. These stable sources of fee revenue should grow over time as we add retail and commercial clients, but the combination of fee waivers from foreign ATMs and a reduction in economic activity due to the COVID-19 pandemic will constrain growth. Growth in these sources continues to be an area of opportunity and focus in future years.

During the three months ended March 31, 2020, the Bank sold two portfolios of loans for risk management purposes. The first was a portfolio of purchased RV loans that were acquired in the Hamilton Bank merger. A decision was made to exit this portfolio for risk management purposes and the $11.0 million portfolio was sold for a gain of $0.3 million. The second portfolio was a pool of $9.2 million in classified commercial loans primarily acquired from Hamilton Bank. The strategy was to reduce complexity and risk by selling the loans given the favorable pricing in the secondary market. The sale of these classified loans resulted in a gain on sale of $1.6 million in the three months ended March 31, 2020.

Mortgage banking income for the quarter ended March 31, 2020 fell by $1.0 million to $0.3 million. In the first quarter of 2020, a $0.5 million impairment charge was recognized on the mortgage servicing rights asset (“MSR”) due to falling interest rates. In the fourth quarter 2019, $0.2 million of the MSR impairment was recovered due to an increase in interest rates. Thus $0.7 million of the reduction in mortgage banking income was caused by volatility in the MSR valuation. Loans sold in the three months ended March 31, 2020 totaled $22.0 million compared with $32.2 million in the three months ended December 31, 2019. The mortgage market was disrupted in the quarter, which delayed closings. The Bank ended the quarter with an elevated amount of locked loans that were not closed, totaling $22.7 million. Since the Bank records gains on closed and locked loans, income was not impacted by these delays.

Loan swap referral fees totaled $0.2 million in the first quarter of 2020, a reduction of $0.4 million from the previous quarter. There were opportunities in the pipeline, scheduled to close in the first quarter of 2020, that did not occur primarily due to the impact of the COVID-19 pandemic. These fees for interest rate hedge referral income are related to commercial real estate lending. With the market turmoil, many commercial real estate projects were put on hold or cancelled. This fee revenue will fluctuate from quarter to quarter, but we expect to continue to see client demand to convert to fixed loan interest rates in this current rate environment once markets stabilize.

Noninterest Expenses
Noninterest expenses totaled $18.3 million in the first quarter of 2020 compared with $19.7 million in the fourth quarter of 2019. The fourth quarter of 2019 results included $1.0 million of branch consolidation expenses.

Salaries and employee benefits totaled $11.6 million in the first quarter of 2020 as compared with $11.4 million in the previous quarter. The normal seasonal first quarter increase in payroll taxes led to a $0.3 million increase. Overtime increased with the complexities related to the COVID-19 pandemic leading to a $0.2 million increase in salary expense in the three months ended March 31, 2020. Bonuses and incentives, which were elevated in the fourth quarter of 2019 due primarily to new hiring efforts, normalized as expected in the first quarter of 2020 and fell by $0.6 million. Health insurance expenses remained above average under the Company's self-insured group health plan, but fell $0.2 million in the three months ended March 31, 2020.

Occupancy expense decreased by $0.1 million from the three months ended December 31, 2019 to the three months ended March 31, 2020 due primarily to savings from the consolidation of five branches in the first quarter of 2020. Professional fees fell by $0.2 million in the three months ended March 31, 2020 as many projects from 2019 ended prior to year-end. First quarter 2020 advertising and bank promotions expense increased by $0.2 million from the previous quarter due to an increase in charitable contributions. The Company received certain tax credits associated with a portion of these increased contributions related to Pennsylvania’s Educational Improvement Tax Credit program, which allowed the Company to reduce its Pennsylvania bank shares tax expense, included in taxes other than income, by $0.1 million in the first quarter of 2020 to $0.

FDIC insurance expense reflects credits received in the first quarter of 2020, similar to those received in the third and fourth quarters of 2019, under the FDIC's regulations to provide credits to banks with consolidated assets under $10 billion, when the reserve ratio reaches 1.38%. The Company exhausted its credits in the first quarter of 2020 and expects FDIC insurance expense to return to customary levels in the second quarter of 2020.

Capital

At March 31, 2020, the Company had a tier 1 leverage ratio of 8.5%, total risk-based capital ratio of 14.0% and tier 1 risk-based capital ratio of 11.2%. The Bank’s capital ratios remain solid with the tier 1 leverage ratio of 9.4%, total risk-based capital ratio of 13.4% and tier 1 risk-based capital ratio of 12.5% at March 31, 2020. Shareholders’ equity totaled $210.6 million at March 31, 2020, a decrease of $12.7 million from $223.2 million at December 31, 2019. The decrease was primarily attributable to an increase in accumulated other comprehensive loss from changes in net unrealized gains and losses in securities available for sale, which fell by $13.6 million from December 31, 2019 to March 31, 2020 due to declining interest rates. The Company repurchased 71,955 shares in the first quarter of 2020 at a weighted average price of $16.27, thus reducing equity by $1.2 million. This repurchase program was suspended on March 21, 2020 due to the COVID-19 pandemic. The Bank intends to utilize the new Paycheck Protection Program Liquidity Facility (the “PPPLF”) to fund the growth in loan closings expected for the SBA PPP in the second quarter of 2020. SBA loans are 100% guaranteed by the SBA and, therefore, do not impact risk-based capital. We also intend on pledging the SBA PPP loans to the PPPLF, which would reduce or eliminate the leverage capital impact, depending on how much is actually borrowed.

Investor Relations Contact:

Media Contact:

Matthew C. Schultheis, CFA

Luke Bernstein

Director Strategic Planning and Investor Relations

Corporate Communications Officer

Phone (717) 510-7127

Phone (717) 510-7107


ORRSTOWN FINANCIAL SERVICES, INC.

FINANCIAL HIGHLIGHTS (Unaudited)

Three Months Ended

March 31,

March 31,

(Dollars in thousands, except per share amounts)

2020

2019

Profitability for the period:

Net interest income

$

18,262

$

14,760

Provision for loan losses

925

400

Noninterest income

7,074

5,135

Noninterest expenses

18,304

16,161

Income before income taxes

6,107

3,334

Income tax expense

1,039

232

Net income available to common shareholders

$

5,068

$

3,102

Financial ratios:

Return on average assets (1)

0.86

%

0.65

%

Return on average equity (1)

8.96

%

7.23

%

Net interest margin (1)

3.41

%

3.41

%

Efficiency ratio

72.2

%

81.2

%

Income per common share:

Basic

$

0.46

$

0.34

Diluted

$

0.46

$

0.33

Average equity to average assets

9.56

%

9.05

%

(1) Quarterly ratios are annualized.


ORRSTOWN FINANCIAL SERVICES, INC.

FINANCIAL HIGHLIGHTS (Unaudited)

(continued)

March 31,

December 31,

2020

2019

At period-end:

Total assets

$

2,387,488

$

2,383,274

Total deposits

1,897,296

1,875,522

Loans, net of allowance for loan losses

1,641,145

1,629,675

Loans held-for-sale, at fair value

7,900

9,364

Securities available for sale

479,599

490,885

Borrowings

212,034

217,936

Subordinated notes

31,861

31,847

Shareholders' equity

210,570

223,249

Credit quality and capital ratios (1):

Allowance for loan losses to total loans

0.95

%

0.89

%

Total nonaccrual loans to total loans

0.47

%

0.65

%

Nonperforming assets to total assets

0.34

%

0.46

%

Allowance for loan losses to nonaccrual loans

202

%

138

%

Total risk-based capital:

Orrstown Financial Services, Inc.

14.0

%

14.1

%

Orrstown Bank

13.4

%

13.4

%

Tier 1 risk-based capital:

Orrstown Financial Services, Inc.

11.2

%

11.3

%

Orrstown Bank

12.5

%

12.5

%

Tier 1 common equity risk-based capital:

Orrstown Financial Services, Inc.

11.2

%

11.3

%

Orrstown Bank

12.5

%

12.5

%

Tier 1 leverage capital:

Orrstown Financial Services, Inc.

8.5

%

8.6

%

Orrstown Bank

9.4

%

9.4

%

Book value per common share

$

18.81

$

19.93

(1) Capital ratios are estimated, subject to regulatory filings


ORRSTOWN FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands, except per share amounts)

March 31, 2020

December 31, 2019

Assets

Cash and due from banks

$

33,974

$

25,969

Interest-bearing deposits with banks

23,163

29,994

Cash and cash equivalents

57,137

55,963

Restricted investments in bank stocks

15,823

16,184

Securities available for sale (amortized cost of $497,454 and $491,492 at March 31, 2020 and December 31, 2019, respectively)

479,599

490,885

Loans held for sale, at fair value

7,900

9,364

Loans

1,656,948

1,644,330

Less: Allowance for loan losses

(15,803

)

(14,655

)

Net loans

1,641,145

1,629,675

Premises and equipment, net

37,098

37,524

Cash surrender value of life insurance

64,016

63,613

Goodwill

20,142

19,925

Other intangible assets, net

6,717

7,180

Accrued interest receivable

6,697

6,040

Other assets

51,214

46,921

Total assets

$

2,387,488

$

2,383,274

Liabilities

Deposits:

Noninterest-bearing

$

263,502

$

249,450

Interest-bearing

1,633,794

1,626,072

Total deposits

1,897,296

1,875,522

Short-term borrowings

189,065

154,869

Long-term debt

22,969

63,067

Subordinated notes

31,861

31,847

Accrued interest and other liabilities

35,727

34,720

Total liabilities

2,176,918

2,160,025

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; 11,268,679 shares issued and 11,196,724 outstanding at March 31, 2020; 11,220,604 shares issued and 11,199,874 outstanding at December 31, 2019

586

584

Additional paid—in capital

187,843

188,365

Retained earnings

38,408

35,246

Accumulated other comprehensive loss

(15,097

)

(480

)

Treasury stock— 71,955 and 20,730 shares, at cost at March 31, 2020 and December 31, 2019, respectively

(1,170

)

(466

)

Total shareholders’ equity

210,570

223,249

Total liabilities and shareholders’ equity

$

2,387,488

$

2,383,274


ORRSTOWN FINANCIAL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

Three Months Ended

March 31,

March 31,

(In thousands, except per share amounts)

2020

2019

Interest income

Loans

$

20,166

$

15,151

Investment securities - taxable

3,438

3,492

Investment securities - tax-exempt

284

842

Short-term investments

79

173

Total interest income

23,967

19,658

Interest expense

Deposits

4,354

3,715

Short-term borrowings

562

243

Long-term debt

288

443

Subordinated notes

501

497

Total interest expense

5,705

4,898

Net interest income

18,262

14,760

Provision for loan losses

925

400

Net interest income after provision for loan losses

17,337

14,360

Noninterest income

Service charges

987

902

Interchange Income

788

736

Loan swap referral fees

200

Wealth management income

2,359

2,236

Mortgage banking activities

332

468

Other income

2,448

454

Investment securities (losses) gains

(40

)

339

Total noninterest income

7,074

5,135

Noninterest expenses

Salaries and employee benefits

11,594

8,677

Occupancy, furniture and equipment

2,289

2,024

Data processing, telephone, and communication

871

770

Advertising and bank promotions

789

521

FDIC insurance

47

185

Professional services

716

557

Taxes other than income

306

Intangible asset amortization

463

208

Merger related and branch consolidation expenses

645

Insurance claim receivable (recovery) write-off

(486

)

615

Other operating expenses

2,021

1,653

Total noninterest expenses

18,304

16,161

Income before income tax expense

6,107

3,334

Income tax expense

1,039

232

Net income

$

5,068

$

3,102

Share information:

Basic earnings per share

$

0.46

$

0.34

Diluted earnings per share

$

0.46

$

0.33

Weighted average shares - basic

10,959

9,160

Weighted average shares - diluted

11,062

9,326

ORRSTOWN FINANCIAL SERVICES, INC.
ANALYSIS OF NET INTEREST INCOME
Average Balances and Interest Rates, Taxable-Equivalent Basis (Unaudited)

Three Months Ended

3/31/2020

12/31/19

09/30/19

06/30/19

3/31/2019

(Dollars in thousands)

Average Balance

Taxable-Equivalent Interest

Taxable-Equivalent Rate

Average Balance

Taxable-Equivalent Interest

Taxable-Equivalent Rate

Average Balance

Taxable-Equivalent Interest

Taxable-Equivalent Rate

Average Balance

Taxable-Equivalent Interest

Taxable-Equivalent Rate

Average Balance

Taxable-Equivalent Interest

Taxable-Equivalent Rate

Assets

Federal funds sold & interest-bearing bank balances

$

23,368

$

79

1.37

%

$

21,895

$

102

1.84

%

$

96,212

$

561

2.31

%

$

84,843

$

503

2.38

%

$

29,108

$

173

2.41

%

Securities (1)

500,488

3,797

3.05

504,072

3,916

3.08

496,482

4,177

3.34

496,803

4,479

3.62

499,755

4,558

3.70

Loans (1)(2)(3)

1,653,547

20,288

4.93

1,606,608

20,207

4.99

1,604,491

20,306

5.02

1,497,445

19,782

5.30

1,257,654

15,273

4.93

Total interest-earning assets

2,177,403

24,164

4.46

2,132,575

24,225

4.51

2,197,185

25,044

4.52

2,079,091

24,764

4.78

1,786,517

20,004

4.54

Other assets

188,400

191,585

193,946

175,566

137,802

Total

$

2,365,803

$

2,324,160

$

2,391,131

$

2,254,657

$

1,924,319

Liabilities and Shareholders' Equity

Interest-bearing demand deposits

$

972,487

1,903

0.79

$

955,975

2,136

0.89

$

954,824

2,206

0.92

$

922,612

2,062

0.90

$

845,092

1,850

0.89

Savings deposits

151,194

55

0.15

142,524

55

0.15

151,692

81

0.21

146,063

81

0.22

114,314

43

0.15

Time deposits (4)

503,364

2,396

1.91

559,486

2,717

1.93

658,587

3,508

2.11

575,660

2,749

1.92

403,095

1,822

1.83

Short-term borrowings

147,645

562

1.53

65,767

307

1.85

10,497

39

1.48

9,594

34

1.41

42,124

243

2.34

Long-term debt

49,179

288

2.36

63,122

371

2.33

74,524

433

2.30

97,161

532

2.19

88,076

443

2.04

Subordinated notes

31,853

501

6.32

31,839

501

6.23

31,826

490

6.10

31,819

499

6.28

31,886

497

6.32

Total interest-bearing liabilities

1,855,722

5,705

1.24

1,818,713

6,087

1.33

1,881,950

6,757

1.42

1,782,909

5,957

1.34

1,524,587

4,898

1.30

Noninterest-bearing demand deposits

250,163

247,107

252,211

235,046

202,365

Other

33,763

35,282

35,720

31,692

23,310

Total Liabilities

2,139,648

2,101,102

2,169,881

2,049,647

1,750,262

Shareholders' Equity

226,155

223,058

221,250

205,010

174,057

Total

$

2,365,803

$

2,324,160

$

2,391,131

$

2,254,657

$

1,924,319

Taxable-equivalent net interest income / net interest spread

18,459

3.22

%

18,138

3.18

%

18,287

3.10

%

18,807

3.44

%

15,106

3.24

%

Taxable-equivalent net interest margin

3.41

%

3.37

%

3.30

%

3.63

%

3.43

%

Taxable-equivalent adjustment

(197

)

(197

)

(208

)

(292

)

(346

)

Net interest income

$

18,262

$

17,941

$

18,079

$

18,515

$

14,760

Ratio of average interest-earning assets to average interest-bearing liabilities

117

%

117

%

117

%

117

%

117

%


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.

(4) For the three months ended September 30, 2019, expenses associated with the early redemption of brokered time deposits totaled $0.2 million, and increased the cost of funds by 13 basis points.

ORRSTOWN FINANCIAL SERVICES, INC.
HISTORICAL TRENDS IN QUARTERLY FINANCIAL DATA (Unaudited)

(In thousands, except per share amounts)

March 31,
2020

December 31,
2019

September 30,
2019

June 30,
2019

March 31,
2019

Profitability for the quarter:

Net interest income

$

18,262

$

17,941

$

18,079

$

18,515

$

14,760

Provision for loan losses

925

300

200

400

Noninterest income

7,074

7,028

8,602

7,774

5,135

Noninterest expenses

18,304

19,707

18,140

23,292

16,161

Income before income taxes

6,107

5,262

8,241

2,797

3,334

Income tax expense

1,039

1,028

1,340

110

232

Net income

$

5,068

$

4,234

$

6,901

$

2,687

$

3,102

Financial ratios:

Return on average assets (1)

0.86

%

0.72

%

1.15

%

0.48

%

0.65

%

Return on average equity (1)

8.96

%

7.53

%

12.37

%

5.26

%

7.23

%

Net interest margin (1)

3.41

%

3.37

%

3.30

%

3.63

%

null