- Net income of $9.0 million and diluted earnings per share of $0.87 for the three months ended September 30, 2023 compared to net income of $9.8 million and diluted earnings per share of $0.94 for the three months ended June 30, 2023;
- Net interest margin, on a tax equivalent basis, was 3.73% in the third quarter of 2023 as compared to 3.83% in the second quarter of 2023;
- Return on average assets of 1.18% and return on average equity of 14.42% for the third quarter of 2023 compared to return on average assets of 1.32% and return on average equity of 16.27% during the second quarter of 2023;
- Third quarter total loan growth was $32.4 million, or 6% annualized; year-to-date total loan growth was $115.6 million, or 7% annualized;
- Third quarter deposit growth was $23.6 million; deposits that are uninsured and not collateralized were 15% of total deposits at September 30, 2023 compared to 16% of total deposits at June 30, 2023;
- Non-interest expenses decreased by $0.3 million from $20.7 million for the three months ended June 30, 2023 to $20.4 million for the three months ended September 30, 2023;
- Non-interest income decreased by $1.3 million to $5.9 million for the three months ended September 30, 2023 from $7.2 million for the three months ended June 30, 2023; this was almost entirely due to the $1.2 million gain on the sale of the Bank's Path Valley branch in the second quarter of 2023;
- Tangible common equity(1) ratio declined from 7.5% at June 30, 2023 to 7.3% at September 30, 2023 reflecting an increase of $11.2 million, net of taxes, in net unrealized losses on investment securities;
- The Board of Directors declared a cash dividend of $0.20 per common share, payable November 14, 2023, to shareholders of record as of November 7, 2023.
(1) Non-GAAP measure. See Appendix A for additional information.
SHIPPENSBURG, Pa., Oct. 24, 2023 (GLOBE NEWSWIRE) -- Orrstown Financial Services, Inc. (“Orrstown” or the “Company”) ( ORRF), the parent company of Orrstown Bank (the “Bank”), announced earnings for the three months ended September 30, 2023. Net income totaled $9.0 million for the three months ended September 30, 2023, compared to $9.8 million for the three months ended June 30, 2023 and a net loss of $4.8 million for the three months ended September 30, 2022, which included a restructuring charge for branch closures and other expense savings initiatives and a provision for legal settlement totaling $12.8 million, net of tax. Diluted earnings per share totaled $0.87 for the three months ended September 30, 2023, compared to $0.94 for the three months ended June 30, 2023 and diluted loss per share of $0.47 for the three months ended September 30, 2022.
“We are pleased with our third quarter results as Orrstown continues to generate strong earnings in a challenging environment. We remain focused on delivering strong earnings and building our long-term capital base through prudent balance sheet growth. While net interest margin compression has continued, the impact of higher funding costs has been controlled through disciplined loan and deposit pricing during the nine months ended September 30, 2023. Deposits continue to grow modestly as a result of our relationship-based approach. The Bank has diversified sources of non-interest income, which have allowed us to offset the impact of a difficult wealth and mortgage market. We believe we are well-positioned for future growth,” commented Thomas R. Quinn, Jr., President and Chief Executive Officer.
DISCUSSION OF RESULTS
Balance Sheet
Loans
Loans held for investment, which includes SBA PPP loans of $6.2 million at September 30, 2023, increased by $32.4 million from June 30, 2023 to September 30, 2023, or 6% annualized. Commercial loans, excluding SBA PPP loan forgiveness activity, increased by $17.7 million, or 4% annualized, from June 30, 2023 to September 30, 2023. The residential mortgage portfolio increased by $16.2 million, or 15% annualized, in the three months ended September 30, 2023 as there has been increased production of adjustable-rate mortgages, which have been retained in portfolio.
Investment Securities
Investment securities, which are all available-for-sale, decreased by $13.4 million to $495.2 million at September 30, 2023 compared to $508.6 million at June 30, 2023. During the third quarter of 2023, net purchases totaled $10.0 million, net unrealized losses increased by $14.4 million and paydowns were $7.8 million. The increase in net unrealized losses was primarily due to higher market interest rates. The overall duration of the Company's investment securities portfolio is 4.7 years at September 30, 2023. The Company has sufficient access to liquidity such that management does not believe it would be necessary to sell any of its investment securities at a loss to offset any unexpected deposit outflows. See Appendix B for a summary of the Bank's investment securities at September 30, 2023, highlighting their concentrations, credit ratings and credit enhancement levels.
Deposits
Deposits increased by $23.6 million, totaling approximately $2.5 billion at both September 30, 2023 and June 30, 2023. In the third quarter of 2023, time deposits increased by $31.4 million, or 36% annualized, money market deposits rose by $22.7 million, or 18% annualized, and interest-bearing demand deposits increased by $14.2 million, or 6% annualized. These increases were partially offset by decreases in noninterest-bearing demand deposits of $30.4 million, or 26% annualized, and savings deposits of $14.3 million, or 29% annualized. The increase in time deposits was attributable to promotional offerings of up to 18-month terms. The declines in the noninterest-bearing and savings deposit categories were primarily the result of clients seeking higher-yielding products, including reciprocal deposits, with the Bank. At September 30, 2023, deposits that are uninsured and not collateralized totaled $387.5 million, or 15%, of total deposits compared to $409.1 million, or 16%, of total deposits at June 30, 2023. The Bank's loan-to-deposit ratio was 89% at both September 30, 2023 and June 30, 2023.
Borrowings
The Bank actively manages its liquidity position through its various sources of funding to meet the credit needs of its clients. FHLB advances and other borrowings increased by $20.5 million to $157.2 million at September 30, 2023 compared to $136.7 million at June 30, 2023. The Bank seeks to maintain sufficient liquidity to ensure client needs can be addressed on a timely basis. The Bank had available alternative funding sources, such as the FHLB advances and other wholesale options, of approximately $1.0 billion at September 30, 2023.
Income Statement
Net Interest Income and Margin
Net interest income was $26.2 million for the three months ended September 30, 2023 compared to $26.4 million for the three months ended June 30, 2023. The net interest margin, on a tax equivalent basis, declined to 3.73% in the third quarter of 2023 from 3.83% in the second quarter of 2023. Net interest margin decreased primarily because funding costs continued to increase at a pace faster than assets repriced.
Interest income on loans increased by $1.7 million to $32.9 million for the three months ended September 30, 2023 compared to $31.2 million for the three months ended June 30, 2023. Loan growth and higher interest rates were the primary drivers of this increase. Interest income on loans for the three months ended September 30, 2023 included prepayment fee income of $0.4 million, an increase of $0.2 million from the three months ended June 30, 2023, which resulted in an increase of two basis points in net interest margin.
Interest income on investment securities was $5.5 million for the three months ended September 30, 2023 compared to $5.4 million in the second quarter of 2023. The investment portfolio continues to benefit from increasing yields on adjustable-rate securities.
Interest expense increased by $2.0 million to $12.5 million for the three months ended September 30, 2023 compared to $10.5 million for the three months ended June 30, 2023 due primarily to increasing deposit and borrowing rates for both existing and new balances. In addition, average interest-bearing deposits increased by $47.7 million; whereas, average borrowed funds decreased by $2.6 million during the three months ended September 30, 2023.
Provision for Credit Losses
The Company recorded a provision for credit losses of $0.1 million for the three months ended September 30, 2023 compared to $0.4 million for the three months ended June 30, 2023. The allowance for credit losses decreased by $0.1 million to $28.3 million at September 30, 2023 compared to $28.4 million at June 30, 2023. Although there was loan growth of $32.4 million during the third quarter of 2023, the allowance for credit losses was impacted by improvements in the macroeconomic conditions within the forecasted loss rate model. The allowance for credit losses to total loans was 1.25% at September 30, 2023 compared to 1.27% at June 30, 2023. Net charge-offs were $0.2 million for the three months ended September 30, 2023 compared to net charge-offs of $0.4 million for the three months ended June 30, 2023. Special mention loans decreased by $13.7 million from $45.5 million at June 30, 2023 to $31.8 million at September 30, 2023 due to repayments of $10.2 million and upgrades of $3.5 million. Classified loans increased by $7.3 million to $33.6 million at September 30, 2023 from $26.3 at June 30, 2023. The increase in classified loans was primarily due to downgrades to two commercial loans, within the owner-occupied and commercial and industrial loan classes, to one client totaling $6.3 million. The increase in classified loans was partially offset by repayments within this category. Non-accrual loans increased by $1.2 million to $22.3 million at September 30, 2023 from $21.1 million at June 30, 2023 primarily due to one loan in the owner-occupied loan class. Management believes the allowance for credit losses to be adequate based on current asset quality metrics and economic conditions.
Management regularly analyzes the commercial real estate portfolio, which includes the review of occupancy, cash flows, expenses and expiring leases, as well as the location of the real estate. At September 30, 2023, the Company had $244.7 million in loans related to office space, which had a weighted average loan-to-value ratio of 57% and a weighted average debt coverage ratio of 1.62x, compared to $236.7 million at June 30, 2023. Management believes that the office space portfolio is well-diversified and includes only limited exposure to properties located in major metro markets (approximately 3% of the total commercial real estate loan balance as of September 30, 2023).
Noninterest Income
Noninterest income decreased by $1.3 million to $5.9 million in the three months ended September 30, 2023 compared to $7.2 million in the three months ended June 30, 2023. Other income in the three months ended June 30, 2023 includes a gain of $1.2 million from the sale of the Bank's Path Valley branch.
Mortgage banking income decreased by $0.2 million from income of $0.1 million in the second quarter of 2023 to a loss of $0.1 million in the third quarter of 2023. During the three months ended September 30, 2023, mortgage interest rates increased significantly, which resulted in a decline to the fair value mark of the Bank's held-for-sale loans of $0.4 million compared to a decrease in the fair value market of $0.1 million during the three months ended June 30, 2023. Market conditions and elevated interest rates continued to hinder mortgage production during the third quarter of 2023. Most mortgage production remains in adjustable-rate products, which are held in portfolio.
During the third quarter of 2023, the Company recorded swap fee income of $0.3 million compared to $0.2 million in the three months ended June 30, 2023. Swap fee income fluctuates based on market conditions and client demand.
Noninterest Expenses
Noninterest expenses decreased by $0.3 million to $20.4 million in the three months ended September 30, 2023 from $20.7 million in the three months ended June 30, 2023.
Salaries and benefits expense decreased by $0.2 million to $12.9 million for the three months ended September 30, 2023 compared to $13.1 million for the three months ended June 30, 2023. The decrease was attributed primarily to employee severance costs of $0.5 million during the second quarter of 2023 and a decline of $0.1 million in healthcare costs, partially offset by increases in merit-based salaries and incentive compensation of $0.5 million. The increase in merit-based salaries was a result of merit increases during the second quarter of 2023, the filling of vacancies and an additional day in the third quarter of 2023 compared to the second quarter of 2023, which impacts the accrual.
Advertising and bank promotions expense decreased by $0.6 million to $0.3 million in the three months ended September 30, 2023 from $0.9 million for the three months ended June 30, 2023 due to $0.5 million in contributions to tax credit programs during the second quarter of 2023. Taxes other than income increased by $0.3 million to $0.4 million in the three months ended September 30, 2023 compared to less than $0.1 million in the three months ended June 30, 2023. This increase reflects the tax credits recognized on the contributions during the second quarter of 2023.
Professional services expense increased by $0.5 million to $1.0 million in the three months ended September 30, 2023 from $0.5 million in the three months ended June 30, 2023 due primarily to an increase in consulting costs to support technology improvements and compliance enhancements.
Other operating expenses decreased by $0.5 million to $1.5 million during the third quarter of 2023 compared to $2.0 million during the second quarter of 2023. This decrease included a reduction of $0.3 million in credit value adjustments on derivatives for the three months ended September 30, 2023 compared to the three months ended June 30, 2023. The remaining fluctuation is attributable to normal business operations.
Income Taxes
The Company's effective tax rate for the third quarter of 2023 was 21.9% compared to 20.6% for the second quarter of 2023. The Company's effective tax rate for the three months ended September 30, 2023 is greater than the 21% federal statutory rate primarily due to an increase in state taxes in addition to the disallowed portion of interest expense against earnings in association with the Bank's tax-exempt investments under the Tax Equity and Fiscal Responsibility Act of 1982, partially offset by tax-exempt income, including interest earned on tax-exempt loans and securities and income from life insurance policies and tax credits. The effective tax rate was 20.7% for the nine-months ended September 30, 2023 compared to 15.7% for the nine months ended September 30, 2022. The lower effective tax rate for the nine months ended September 30, 2022 was partially caused by the impact of the restructuring charge for branch closures and other expense savings initiatives and a provision for legal settlement during the third quarter of 2022. The Company regularly analyzes its projected taxable income and makes adjustments to the provision for income taxes accordingly.
Capital
Shareholders’ equity totaled $243.1 million at September 30, 2023, a decrease of $2.5 million from $245.6 million at June 30, 2023. The decrease was primarily attributable to other comprehensive losses of $10.1 million and dividends paid of $2.1 million partially offset by net income of $9.0 million. Other comprehensive losses increased during the third quarter of 2023 due to after-tax declines from $11.2 million in net unrealized losses on investment securities partially offset by net unrealized gains on cash flow hedges of $1.1 million.
Tangible book value per share(1) decreased to $20.94 per share at September 30, 2023 from $21.19 per share at June 30, 2023 due to the decrease in shareholders' equity.
(1) Non-GAAP measure. See Appendix A for additional information.
The Company's tangible common equity ratio decreased to 7.3% at September 30, 2023 from 7.5% at June 30, 2023 primarily due to a decrease in tangible equity from net unrealized losses on investment securities and an increase in total tangible assets. The Company's total risk-based capital ratio was 13.0% at both September 30, 2023 and June 30, 2023. The Company's Tier 1 leverage ratio increased from 8.6% at June 30, 2023 to 8.7% at September 30, 2023. At September 30, 2023, all four capital ratios applicable to the Company were above regulatory minimum levels to be deemed “well capitalized” under current bank regulatory guidelines. The Company continues to believe that capital is adequate to support the risks inherent in the balance sheet, as well as growth requirements.
The Board of Directors approved a cash dividend of $0.20 per share, payable on November 14, 2023, to shareholders of record as of November 7, 2023.
| Investor Relations Contact: |
| Neelesh Kalani |
| Executive Vice President, Chief Financial Officer |
| Phone (717) 510-7097 |
| ORRSTOWN FINANCIAL SERVICES, INC. | |||||||||||||||
| FINANCIAL HIGHLIGHTS (Unaudited) | |||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||
| September 30, | September 30, | September 30, | September 30, | ||||||||||||
| (Dollars in thousands) | 2023 | 2022 | 2023 | 2022 | |||||||||||
| Profitability for the period: | |||||||||||||||
| Net interest income | $ | 26,219 | $ | 25,455 | $ | 78,888 | $ | 72,146 | |||||||
| Provision for credit losses | 136 | 1,500 | 1,264 | 3,575 | |||||||||||
| Noninterest income | 5,925 | 6,058 | 19,161 | 20,726 | |||||||||||
| Noninterest expenses | 20,447 | 36,412 | 61,451 | 74,570 | |||||||||||
| Income (loss) before income tax expense (benefit) | 11,561 | (6,399 | ) | 35,334 | 14,727 | ||||||||||
| Income tax expense (benefit) | 2,535 | (1,571 | ) | 7,314 | 2,316 | ||||||||||
| Net income (loss) available to common shareholders | $ | 9,026 | $ | (4,828 | ) | $ | 28,020 | $ | 12,411 | ||||||
| Financial ratios: | |||||||||||||||
| Return on average assets (1) | 1.18 | % | (0.68)% | 1.25 | % | 0.59 | % | ||||||||
| Return on average assets, adjusted (1) (2) (3) | 1.18 | % | 1.12 | % | 1.25 | % | 1.19 | % | |||||||
| Return on average equity (1) | 14.42 | % | (7.92)% | 15.51 | % | 6.58 | % | ||||||||
| Return on average equity, adjusted (1) (2) (3) | 14.42 | % | 13.02 | % | 15.51 | % | 13.35 | % | |||||||
| Net interest margin (1) | 3.73 | % | 3.92 | % | 3.83 | % | 3.70 | % | |||||||
| Efficiency ratio | 63.6 | % | 115.5 | % | 62.7 | % | 80.3 | % | |||||||
| Efficiency ratio, adjusted (2) (3) | 63.6 | % | 64.3 | % | 62.7 | % | 62.9 | % | |||||||
| Income (loss) per common share: | |||||||||||||||
| Basic | $ | 0.87 | $ | (0.47 | ) | $ | 2.71 | $ | 1.17 | ||||||
| Basic, adjusted (2) (3) | $ | 0.87 | $ | 0.77 | $ | 2.71 | $ | 2.37 | |||||||
| Diluted | $ | 0.87 | $ | (0.47 | ) | $ | 2.68 | $ | 1.16 | ||||||
| Diluted, adjusted (2) (3) | $ | 0.87 | $ | 0.75 | $ | 2.68 | $ | 2.34 | |||||||
| Average equity to average assets | 8.18 | % | 8.59 | % | 8.09 | % | 8.90 | % | |||||||
| (1) Annualized. | |||||||||||||||
| (2) Ratio for the three and nine months ended September 30, 2022 has been adjusted for the restructuring charge and provision for legal settlement. | |||||||||||||||
| (3) 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. | |||||||
| FINANCIAL HIGHLIGHTS (Unaudited) | |||||||
| (continued) | |||||||
| September 30, | December 31, | ||||||
| (Dollars in thousands, except per share amounts) | 2023 | 2022 | |||||
| At period-end: | |||||||
| Total assets | $ | 3,054,435 | $ | 2,922,408 | |||
| Total deposits | 2,546,435 | 2,476,246 | |||||
| Loans, net of allowance for credit losses | 2,238,558 | 2,126,054 | |||||
| Loans held-for-sale, at fair value | 6,448 | 10,880 | |||||
| Securities available for sale, at fair value | 495,162 | 513,728 | |||||
| Borrowings | 175,241 | 123,390 | |||||
| Subordinated notes | 32,076 | 32,026 | |||||
| Shareholders' equity | 243,080 | 228,896 | |||||
| Credit quality and capital ratios (1): | |||||||
| Allowance for credit losses to total loans | 1.25 | % | 1.17 | % | |||
| Total nonaccrual loans to total loans | 0.98 | % | 0.96 | % | |||
| Nonperforming assets to total assets | 0.73 | % | 0.70 | % | |||
| Allowance for credit losses to nonaccrual loans | 127 | % | 122 | % | |||
| Total risk-based capital: | |||||||
| Orrstown Financial Services, Inc. | 13.0 | % | 12.7 | % | |||
| Orrstown Bank | 12.5 | % | 12.3 | % | |||
| Tier 1 risk-based capital: | |||||||
| Orrstown Financial Services, Inc. | 10.6 | % | |||||
