Market Overview

Orrstown Financial Services, Inc. Announces Fourth Quarter Earnings of $1.9 Million And Quarterly Cash Dividend of $0.10 Per Share

Share:
  • Net income for the three months ended December 31, 2016 totaled $1.9 million, or $0.24 per diluted share, compared to $1.4 million, or $0.18 per diluted share, for the same period in 2015.  Net income for the year ended December 31, 2016 totaled $6.6 million, or $0.81 per diluted share, compared to $7.9 million, or $0.97 per diluted share, for the same period in 2015.
  • Gross loans outstanding at December 31, 2016, excluding loans held for sale, totaled $883.4 million, an increase of $101.7 million, or 13.0%, as compared to the balance at December 31, 2015 of $781.7 million.
  • Total deposits were $1.2 billion at December 31, 2016, an 11.7% increase from December 31, 2015, with growth experienced in both noninterest and interest-bearing deposits.
  • Net interest income for the three months ended December 31, 2016 totaled $9.7 million, an increase of 11.5% over the same period in the prior year, and resulted in an increase in net interest margin, on a taxable equivalent basis, from 3.08% to 3.20%.
  • The Board of Directors declared a cash dividend of $0.10 per common share, payable February 17, 2017 to shareholders of record as of February 10, 2017, an increase of 25.0% over the dividend declared in the first quarter of 2016.

SHIPPENSBURG, Pa., Jan. 26, 2017 (GLOBE NEWSWIRE) -- Orrstown Financial Services, Inc. (the "Company") (NASDAQ: ORRF), the parent company of Orrstown Bank (the "Bank") and Wheatland Advisors, Inc. ("Wheatland"), announced earnings for the three and twelve months ended December 31, 2016.  Net income was $1.9 million for the three months ended December 31, 2016, compared to $1.4 million for the same period in 2015.  For the year ended December 31, 2016, net income was $6.6 million, compared to $7.9 million in 2015.   Diluted earnings per share amounted to $0.24 and $0.81 for the three months and year ended December 31, 2016, compared to $0.18 and $0.97 for the three months and year ended December 31, 2015.

Thomas R. Quinn, Jr., President and Chief Executive Officer, commented, "Our momentum in the fourth quarter continued the trend of double digit loan and deposit growth we saw throughout the year.  We are encouraged by the expansion of revenue and assets as the investments we made in new people, markets, and products has begun to positively impact both our margin businesses and fee income sources."

OPERATING RESULTS

Net Interest Income

Net interest income totaled $9.7 million for the three months ended December 31, 2016, an 11.5% increase compared to $8.7 million for the same period in 2015.  For the year ended December 31, 2016, net interest income was $36.5 million, a 6.4% increase compared to $34.3 million for the year ended December 31, 2015.  Net interest margin on a fully tax-equivalent basis was 3.20% and 3.14% for the three and twelve months ended December 31, 2016, compared to 3.08% and 3.14% for the same periods in 2015.  During the twelve month period ended December 31, 2016, interest rate volatility has been significant.  Despite this, the Company has been able to maintain an overall net interest margin of 3.14% for both 2016 and 2015.  For the three months ended December 31, 2016, the net interest margin of 3.20% expanded 12 basis points over the same period in 2015, and was 6 basis points higher than the net interest margin for the three months ended September 30, 2016.

During the fourth quarter, yields on new loan originations were slightly higher than the portfolio average.  Additionally, early in the fourth quarter, the Company purchased additional tax-exempt securities with yields higher than the portfolio average.  The cost of interest-bearing liabilities has remained relatively constant for 2015 and 2016. 

Provision for Loan Losses

The Company recorded no provision for loan losses during the three months ended December 31, 2016 or December 31, 2015.  The Company recorded a $250 thousand provision for the year ended December 31, 2016 and $603 thousand negative provision, or reversal of amounts previously provided, for the year ended December 31, 2015.  In calculating the required provision for loan losses, both quantitative and qualitative factors are considered in the determination of the adequacy of the allowance for loan losses.  The negative provision for the twelve months ended December 31, 2015 was the result of a recovery on a loan with prior charge-offs totaling $603 thousand.

As a result of net charge-offs of $1 million, offset by the $250 thousand provision for loan losses, during the year ended December 31, 2016, the allowance for loan losses decreased from $13.6 million at December 31, 2015 to $12.8 million at December 31, 2016.  During the fourth quarter, the most significant impact was an $846 thousand charge-off recorded as the Company resolved a $6 million nonaccrual loan.  A specific reserve of $650 thousand had been previously identified and established on this loan in the third quarter of 2016.  The allowance for loan losses represents 1.45% of total loans at December 31, 2016 compared to 1.74% at December 31, 2015.  Despite the decrease in the allowance for loan losses to total loans ratio, coverage on nonperforming loans increased from 82.0% at December 31, 2015 to 181.4% at December 31, 2016 as nonaccrual loans decreased significantly.  Classified loans, defined as loans rated substandard, doubtful or loss, totaled $17.8 million at December 31, 2016, or approximately 2.0% of total loans outstanding, and decreased from $25.3 million, or 3.2% of loans outstanding, at December 31, 2015.

Despite improvement in many of the asset quality metrics during 2016, the growth the Company has experienced in its loan portfolio is one factor that may result in additional provisions for loan losses being needed in future quarters.

Noninterest Income

Total noninterest income for the three months ended December 31, 2016, excluding securities gains, totaled $5.0 million, an increase of 21.7% from the $4.1 million earned in the same period in 2015.  For the year ended December 31, 2016, noninterest income, excluding securities gains, totaled $18.3 million, a $1.1 million increase, or 6.2%, compared to the same period in 2015.  Mortgage banking activities generated revenue of $1.0 million and $3.4 million for the three months and year ended December 31, 2016, compared to $597 thousand and $2.7 million for the corresponding periods in 2015.

Favorable interest rate conditions have supported increased new home purchases and refinance activity resulting in the increase in mortgage banking revenues for during the year.  Trust department, investment management and brokerage income totaled $1.8 million and $7.0 million for the three months and year ended December 31, 2016, and represented 12.8% and 6.1% increases in the three and twelve month periods, respectively.  Wheatland Advisors, Inc., acquired in December 2016, made a modest contribution to this increase.  Other income totaled $770 thousand and $2.4 million for the three months and year ended December 31, 2016, representing an increase of 36.3% and a decrease of 8.3% from the $565 thousand and $2.7 million earned in the same periods in 2015.  The largest driver of the year over year decrease in other income is lower gains on sale of USDA and SBA loans.

Securities gains totaled $0 and $1.4 million for the three months and twelve months ended December 31, 2016, compared to $13 thousand and $1.9 million for the same periods in 2015.  For all periods in which securities were sold, asset/liability management strategies and interest rate conditions resulted in gains on sales of securities, as market conditions presented opportunities to accelerate earnings on securities through gains, while also meeting the funding requirements of current and anticipated lending activity.

Noninterest Expenses

Noninterest expenses totaled $12.5 million and $48.1 million for the three and twelve months ended December 31, 2016, compared to $11.2 million and $44.6 million for the corresponding prior year periods.  Salaries and employee benefits totaled $7.1 million and $26.4 million for the three and twelve months ended December 31, 2016, compared to $5.9 million and $24.1 million for the same periods in 2015.  The primary driver of the higher expenses in 2016 was the addition of new, primarily customer-facing, employees in markets where the Company has focused on for expansion.  Other drivers were increases in medical costs and compensation related to share-based awards granted in 2016.

Consistent with the Bank's recent growth strategy in which new facilities were acquired in Berks, Cumberland, Dauphin and Lancaster counties, the Bank has experienced increases in occupancy, furniture and equipment expenses.  For the three and twelve months ended December 31, 2016, these costs totaled $1.7 and $5.8 million, compared to $1.3 million and $5.3 million for the corresponding periods in 2015.

Advertising and bank promotion expense decreased slightly from $524 thousand for the three months ended December 31, 2015 to $473 thousand for the same period in 2016.   For the twelve months ended December 31, 2016, advertising and bank promotion expenses totaled $1.7 million, a $153 thousand increase from the corresponding period in 2015. The increase in the annual amount is primarily due to $100 thousand of incremental Educational Improvement Tax Credit ("EITC") contributions that carried over to the first quarter of 2016, and increased expenditures related to brand marketing and expansion in new markets.

In the third quarter of 2016, the Federal Deposit Insurance Corporation ("FDIC") lowered the assessment rate on banks requiring their insurance, given the surplus accumulated in its fund.  The Company benefited from the lower assessment, which lowered the cost of FDIC insurance to $177 thousand and $775 thousand for the three and twelve months ended December 31, 2016, compared to $228 thousand and $859 thousand for the same periods in 2015.

Professional services for the three and twelve months ended December 31, 2016 totaled $507 thousand and $2.2 million, and decreased from $635 thousand and $2.7 million for the corresponding periods in the prior year.  In 2015, the Company had higher than normal legal expenses as it attended to legal matters, including outstanding litigation and a confidential investigation by the Securities and Exchange Commission ("SEC").  The SEC matter settled in September 2016 and legal services associated with it have been less than the 2015 levels.

Taxes other than income totaled $173 thousand and $767 thousand for the three and twelve months ended December 31, 2016, representing a decrease of $52 thousand and $149 thousand for the three and twelve month periods compared to the same periods in 2015.  The decrease is due to timing of incremental EITC contributions made in 2016 vs. 2015 which generated a corresponding $90 thousand credit on the Pennsylvania Bank Shares Tax liability.

For the year ended December 31, 2016, the Company recorded a $1 million civil money penalty, due as a requirement under a settlement agreement with the SEC.  This amount was accrued in June and paid in September of 2016.

Income Taxes

Income tax expense totaled $275 thousand and $1.3 million for the three and twelve months ended December 31, 2016, compared to $136 thousand and $1.6 million for the same periods in 2015.  The Company's effective tax rate is significantly less than the federal statutory rate of 35.0% principally due to tax-exempt income, including interest earned on tax-exempt loans and securities, and earnings on the cash surrender value of life insurance policies. The effective tax rate for the twelve months ended December 31, 2016 was 16.0%, compared to 17.2% for the twelve months ended December 31, 2015.  The lower effective tax rate for the year ended December 31, 2016 compared to 2015 is primarily the result of a larger percentage of tax-exempt income to total income.

FINANCIAL CONDITION

Assets totaled $1.4 billion at December 31, 2016, an increase of $60.4 million from September 30, 2016 and $121.7 million, or 9.4%, from December 31, 2015.   Securities available for sale increased from $394.1 million at December 31, 2015 to $400.2 million at December 31, 2016.  The Company has experienced loan growth in both its core markets and new markets.  Deposit growth in the fourth quarter was $19.1 million, which combined with additional borrowings during the quarter, funded the growth in loans and securities.

Gross loans, excluding those held for sale, totaled $883.4 million at December 31, 2016, an increase of $101.7 million, or 13.0%, from $781.7 million at December 31, 2015.  In comparison to September 30, 2016's loan balance of $847.1 million, loans increased $36.3 million, or 4.3%.

A summary of loan balances, by loan class within segments, is as follows at December 31, 2016, and December 31, 2015:

(Dollars in thousands) December 31, 2016   December 31, 2015
       
Commercial real estate:      
Owner-occupied $ 112,295     $ 103,578  
Non-owner occupied 206,358     145,401  
Multi-family 47,681     35,109  
Non-owner occupied residential 62,533     54,175  
Acquisition and development:      
1-4 family residential construction 4,663     9,364  
Commercial and land development 26,085     41,339  
Commercial and industrial 88,465     73,625  
Municipal 53,741     57,511  
Residential mortgage:      
First lien 139,851     126,022  
Home equity – term 14,248     17,337  
Home equity – lines of credit 120,353     110,731  
Installment and other loans 7,118     7,521  
  $ 883,391     $ 781,713  

Growth was experienced in several loan segments from December 31, 2015 to December 31, 2016, with the largest increase in the commercial real estate segment, which grew by $90.6 million.  This growth included loans previously classified as construction that were converted to fully amortizing upon completion of the projects.  The Company continues to grow in both core markets and new markets through expansion in the sales force and capitalizing on continued market disruption.

Total deposits were $1.2 billion at December 31, 2016, an 11.7% increase from December 31, 2015.  Noninterest-bearing deposits increased $19.4 million, or 14.7%, from December 31, 2015 to December 31, 2016 and totaled $150.7 million at December 31, 2016.  Interest-bearing deposits totaled $1.0 billion at December 31, 2016, an 11.2% increase from December 31, 2015.  The Company has been able to gather both noninterest-bearing and interest-bearing deposit relationships from enhanced cash management offerings delivered by its expanded sales workforce.

Shareholders' Equity

Shareholders' equity totaled $134.9 million at December 31, 2016, an increase of $1.8 million, or 1.4%, from $133.1 million at December 31, 2015.  This increase was primarily the result of net income of $6.6 million for the twelve months ended December 31, 2016 offset by a decrease in accumulated other comprehensive income (loss), net of tax, of $2.4 million for the twelve months ended December 31, 2016, and by dividends declared on common stock and treasury stock repurchases.

On September 14, 2015, the Board of Directors authorized a stock repurchase plan in which the Company may repurchase up to approximately 416,000 shares in the open market.  As of December 31, 2016, 82,725 shares had been repurchased under the plan at a total cost of $1.4 million.  No shares were repurchased during the quarter ended December 31, 2016.

Asset Quality

Nonperforming and other risk assets, defined as nonaccrual loans, restructured loans, loans past due 90 days or more and still accruing, and other real estate owned totaled $8.3 million at December 31, 2016, a decrease of $9.8 million, or 54.0%, from December 31, 2015.

The allowance for loan losses totaled $12.8 million at December 31, 2016, a decrease of $793 thousand from $13.6 million at December 31, 2015, due to net charge-offs for the period, partially offset by a $250 thousand provision for loan losses.  The allowance for loan losses to nonperforming loans totaled 181.4% at December 31, 2016 compared to 82.0% at December 31, 2015, and the allowance for loan losses to nonperforming and restructured loans still accruing totaled 160.2% at December 31, 2016, compared to 78.2% at December 31, 2015.  Management believes the allowance for loan losses to total loans ratio remains adequate at 1.45% as of December 31, 2016.

ORRSTOWN FINANCIAL SERVICES, INC.              
Operating Highlights (Unaudited):              
  Three Months Ended   Twelve Months Ended
  December 31,   December 31,   December 31,   December 31,
(Dollars in thousands, except per share data) 2016   2 015   2016   2015
               
Net income $ 1,928     $ 1,449     $ 6,628     $ 7,874  
Diluted earnings per share $ 0.24     $ 0.18     $ 0.81     $ 0.97  
Dividends per share $ 0.09     $ 0.08     $ 0.35     $ 0.22  
Return on average assets 0.56 %   0.45 %   0.50 %   0.64 %
Return on average equity 5.58 %
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