Market Overview

Orrstown Financial Services, Inc. Announces Third Quarter Earnings of $2.8 Million And Quarterly Cash Dividend of $0.12 Per Share

Share:
  • Net income for the three months ended September 30, 2017 totaled $2.8 million, or $0.34 per diluted share, compared with $1.4 million, or $0.18 per diluted share, for the same period in 2016. Net income for the nine months ended September 30, 2017 totaled $8.1 million, or $0.98 per diluted share, compared with $4.7 million, or $0.58 per diluted share, for the same period in 2016.
  • Gross loans outstanding at September 30, 2017, excluding loans held for sale, totaled $981.2 million, an increase of $97.8 million, or 14.8% on an annualized basis, compared with the balance of $883.4 million at December 31, 2016. In a year-over-year comparison, gross loans outstanding at September 30, 2017 increased 15.8% over September 30, 2016.
  • Deposits totaled $1.22 billion at September 30, 2017 and grew at a 7.5% annualized basis compared with the $1.15 billion balance at December 31, 2016.
  • Net interest income for the three months ended September 30, 2017 totaled $11.1 million, an increase of 20.0% over the three months ended September 30, 2016, of $9.2 million, with net interest margin, on a taxable-equivalent basis, increasing from 3.14% to 3.31% for the respective periods. Net interest income totaled $32.0 million for the nine months ended September 30, 2017, a 19.4% increase compared with $26.8 million for the nine months ended September 30, 2016. Net interest margin, on a taxable-equivalent basis, increased from 3.12% in 2016 to 3.34% in 2017 for the respective periods.
  • The Board of Directors declared a cash dividend of $0.12 per common share, payable November 15, 2017, to shareholders of record as of November 6, 2017, an increase of 33.3% over the dividend declared in the fourth quarter of 2016 and 20.0% over prior quarters in 2017.

SHIPPENSBURG, Pa., Oct. 25, 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 nine months ended September 30, 2017. Net income totaled $2.8 million for the three months ended September 30, 2017, compared with $1.4 million for the same period in 2016. For the nine months ended September 30, 2017, net income totaled $8.1 million, compared with $4.7 million for the same period in 2016. Diluted earnings per share totaled $0.34 and $0.98 for the three and nine months ended September 30, 2017, respectively, compared with $0.18 and $0.58 for the same 2016 periods. Earnings in 2017 continue to reflect increased interest income from expanding loan and investment portfolios.

Thomas R. Quinn, Jr., President and Chief Executive Officer, commented, "We are encouraged by continued momentum and improvement in key performance indicators as we continue to execute our strategic plan. In the third quarter we experienced solid earnings, continued double-digit annualized loan growth, and year-over-year margin expansion. Our results have enabled us to increase our dividend in the fourth quarter. We're also pleased that, in late August, we opened our newest full service branch in New Holland, Lancaster County, and initial results have validated our investment in this vibrant community."

OPERATING RESULTS

Net Interest Income

Net interest income totaled $11.1 million for the three months ended September 30, 2017, a 20.0% increase compared with the same period in 2016. For the nine months ended September 30, 2017, net interest income totaled $32.0 million, a 19.4% increase compared with the nine months ended September 30, 2016. Net interest margin on a taxable-equivalent basis totaled 3.31% for the three months and 3.34% for the nine months ended September 30, 2017, compared with 3.14% and 3.12% for the same periods in 2016. 

As had been experienced in the first half of 2017, increased yields on loans and investments reflected a higher interest rate environment in 2017 compared with 2016. Additionally, tax-exempt securities were added to the portfolio in late 2016 and early 2017 with taxable-equivalent yields higher than the portfolio average. The cost of interest-bearing liabilities has increased at a slower pace than the yields earned on interest-earning assets in 2017, as the market was initially slow to respond to interest rate changes. The net interest margin of 3.31% in the third quarter of 2017 was 4 basis points less than the 3.35% experienced in each of the first two quarters of 2017, principally due to increases in costs of interest-bearing liabilities.

Provision for Loan Losses

The Company recorded a $100 thousand provision for loan losses for the three months ended September 30, 2017 compared with $250 thousand in the same period in 2016. For the nine months ended September 30, the provision for loan losses totaled $200 thousand in 2017 compared with $250 thousand in 2016. 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. Favorable historical charge-off data combined with continued stable economic and market conditions resulted in the determination that a modest provision for loan losses in the third quarter of 2017 was required to offset net charge-offs and for loan growth experienced.

While asset quality metrics have improved throughout 2016 and 2017, as noted below, the growth the Company has experienced in its loan portfolio is one factor that may result in the need for additional provisions for loan losses in future quarters.

Noninterest Income

Noninterest income for the three months ended September 30, 2017, excluding securities gains, totaled $4.7 million compared with $4.6 million in the prior year period. For the nine months ended September 30, 2017, noninterest income, excluding securities gains, totaled $14.0 million, a $674 thousand increase, or 5.0%, compared to the nine months ended September 30, 2016.

Trust, investment management and brokerage income increased $269 thousand and $773 thousand in comparing the three and nine month periods ended September 30 from 2016 to 2017. Wheatland Advisors, Inc., acquired in December 2016, has been a significant contributor to the increases in 2017. Trust department fees have also increased as additional revenues have been generated from favorable market conditions and the addition of an office in Berks County, Pennsylvania.

Mortgage banking income decreased $215 thousand in comparing the third quarter of 2017 with 2016, and decreased $268 thousand in comparing the nine months ended September 30, 2017 with 2016. The comparisons reflect decreased refinance activity as interest rates have increased, some slight compression in margins, as well as the effect of retaining a portion of mortgage production for the loan portfolio in 2017 over 2016.

Investment securities gains totaled $533 thousand and $1.2 million for the three and nine months ended September 30, 2017, compared with $0 and $1.4 million for the same periods in 2016. At times, the Company may accelerate earnings on securities through gains as market conditions present opportunities to act on asset/liability management strategies and interest rate conditions while also meeting the funding requirements of anticipated lending activity. In the third quarter of 2017, the Company took advantage of market conditions to reposition part of its investment portfolio at a gain to improve responsiveness of the portfolio to increases in Fed Funds rates.

Noninterest Expenses

Noninterest expenses totaled $13.1 million and $37.7 million for the three and nine months ended September 30, 2017, compared with $12.0 million and $35.7 million for the corresponding prior year periods.

The principal drivers of increased expense items in comparing 2017 with 2016 were salaries and employee benefits, occupancy, furniture and equipment costs and professional services. As noted in the past few quarters, increases for salaries and benefits and occupancy, furniture and equipment costs include previously disclosed market expansion actions by the Company as it has added new, primarily customer-facing, employees and facilities, principally in Berks, Cumberland, Dauphin and Lancaster counties. In the third quarter of 2017, the Company also expanded its lending activities in York County, Pennsylvania, with the addition of two lenders focused in this region.

Salaries and employee benefits totaled $7.5 million and $22.4 million for the three and nine months ended September 30, 2017, compared with $6.8 million and $19.3 million for the same periods in 2016. Higher expenses throughout 2017 have been incurred for the aforementioned additional employees, merit increases and increased incentive compensation,  increased health care costs, and incremental expense for additional share-based awards granted in 2017.

Professional services expenses totaled $945 thousand and $1.9 million for the three and nine months ended September 30, 2017, compared with $585 thousand and $1.7 million for the same periods in 2016. Generally, professional fees in 2017 have been lower than in 2016, when additional costs for outstanding litigation against the Company and administrative proceedings by the Securities and Exchange Commission were incurred. Professional fees increased in the third quarter of 2017 due to indemnification costs to several professional service providers, totaling $508 thousand,  incurred in connection with the previously disclosed outstanding litigation against the Company. 

Noninterest expenses for the nine months ended September 30, 2016 included a regulatory settlement expense of $1.0 million paid to the Securities and Exchange Commission to settle previously disclosed administrative proceedings.

Other line items within noninterest expenses showed fluctuations attributable to normal business operations between 2017 and 2016.

Income Taxes

Income tax expense totaled $376 thousand and $1.3 million for the three and nine months ended September 30, 2017, compared with $125 thousand and $1.0 million for the same periods in 2016. The Company's effective tax rate is significantly less than the 34.0% federal statutory rate principally due to tax-exempt income, including interest earned on tax-exempt loans and securities, earnings on the cash value of life insurance policies and income tax credits. The effective tax rate for the nine months ended September 30, 2017 was 14.0%, compared with 17.4% for the nine months ended September 30, 2016. The lower effective tax rate for 2017 compared with 2016 is primarily the result of a larger percentage of tax-exempt income to total income and additional tax credits in 2017, coupled with a larger percentage of non-tax deductible expenses in 2016.

FINANCIAL CONDITION

Assets totaled $1.53 billion at September 30, 2017, an increase of $119.1 million from $1.41 billion at December 31, 2016 and of $179.4 million from $1.35 billion at September 30, 2016. Loans, which are summarized below, were the principal driver for the growth in total assets at September 30, 2017 from December 31, 2016 and September 30, 2016. In the September 30 year-over-year comparison, securities available for sale were also a significant  growth component, increasing 12.4%, from $374.9 million in 2016 to $421.5 million in 2017. Deposit growth of $64.3 million in the first nine months of 2017 was the primary source of funding for growth in loans in the period. Year-over-year growth in securities and loans was funded by deposit growth of $83.4 million, an overall increase in borrowings of $88.4 million and a reduction in cash balances of $15.2 million.

Gross loans, excluding those held for sale, totaled $981.2 million at September 30, 2017, increasing $97.8 million, or 11.1% (14.8% annualized), from $883.4 million at December 31, 2016. In comparison with September 30, 2016's loan balance of $847.1 million, loans increased $134.2 million, or 15.8%.

The following table presents loan balances, by loan class within segments, at September 30, 2017, December 31, 2016 and September 30, 2016.

(Dollars in thousands) September 30, 2017   December 31, 2016   September 30, 2016
           
Commercial real estate:          
Owner occupied $ 117,687     $ 112,295     $ 111,437  
Non-owner occupied 231,111     206,358     192,449  
Multi-family 52,118     47,681     39,394  
Non-owner occupied residential 76,763     62,533     56,759  
Acquisition and development:          
1-4 family residential construction 10,214     4,663     6,379  
Commercial and land development 24,219     26,085     28,030  
Commercial and industrial 107,998     88,465     87,492  
Municipal 50,533     53,741     54,241  
Residential mortgage:          
First lien 155,811     139,851     134,498  
Home equity – term 12,506     14,248     14,896  
Home equity – lines of credit 129,911     120,353     114,274  
Installment and other loans 12,349     7,118     7,212  
  $ 981,220     $ 883,391     $ 847,061  

Growth was experienced in nearly all loan segments from December 31, 2016 to September 30, 2017, with the largest dollar increase in the commercial real estate segment, which grew by $48.8 million (15.2% annualized), representing approximately one-half of the portfolio growth for the period. The residential mortgage and commercial and industrial segments also showed substantial growth of $23.8 million (11.6% annualized) and $19.5 million (29.5% annualized), respectively, during this period. The Company continues to grow in both core markets and new markets through expansion of its sales force and by capitalizing on market disruption caused by the acquisition of some of our competitors by larger institutions. The Company has placed emphasis on growing commercial and industrial loans in 2017 to increase diversification of its loan portfolio. In the third quarter of 2017, the Company also increased diversification of its loan portfolio  with the purchase of approximately $5 million of automobile financing loans at returns higher than comparable cash flows in the investment portfolio. These purchased loans are included in installment and other loans.

Total deposits grew 5.6% (7.5% annualized) from $1.15 billion at December 31, 2016 to $1.22 billion at September 30, 2017, and increased 7.4% in comparison with $1.13 billion at September 30, 2016, due principally to growth in interest-bearing accounts. The Company continues to increase both noninterest-bearing and interest-bearing deposit relationships from enhanced cash management offerings delivered by its expanded sales force.

Shareholders' Equity

Shareholders' equity totaled $144.4 million at September 30, 2017, an increase of $9.5 million, or 7.1%, from $134.9 million at December 31, 2016. Equity increased principally from net income totaling $8.1 million for the nine months ended September 30, 2017 coupled with a $2.7 million increase in accumulated other comprehensive income (loss), net of tax, and was reduced by dividends declared on common stock during the first nine months of 2017.

Asset Quality

The allowance for loan losses balance totaled $12.8 million at September 30, 2017 and December 31, 2016, compared with $13.9 million at September 30, 2016. Management believes the allowance for loan losses to total loans ratio remains adequate at 1.30% at September 30, 2017. Favorable historical charge-off data and management's emphasis on loan quality have been significant contributors to the determination that a relatively stable allowance for loan losses balance is adequate even as the loan portfolio has been increasing.

Asset quality metrics have continued to improve throughout 2016 and 2017. Nonperforming and other risk assets, defined as nonaccrual loans, restructured loans still accruing, loans past due 90 days or more and still accruing, and other real estate owned totaled $7.7 million at September 30, 2017, a decrease of $620 thousand, or 7.5%, from $8.3 million at December 31, 2016 and $7.5 million, or 49.4%, from $15.2 million at September 30, 2016. Nonaccrual loans decreased $8.3 million from September 30, 2016 to September 30, 2017.

The allowance for loan losses to nonperforming loans totaled 243.3% at September 30, 2017 compared with 181.4% at December 31, 2016, and 102.2% at September 30, 2016, reflecting the decrease in nonaccrual loans. The allowance for loan losses to nonperforming and restructured loans still accruing totaled 198.3% at September 30, 2017, compared with 160.2% at December 31, 2016 and 95.8% at September 30, 2016.

Classified loans, or loans rated substandard, doubtful or loss, totaled $21.3 million at September 30, 2017 (approximately 2.2% of total loans), compared with $22.9 million (2.6%) at December 31, 2016 and $24.5 million (2.9%) at September 30, 2016.

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) 2017   2016   2017   2016
               
Net income $ 2,774     $ 1,442     $ 8,084     $ 4,700  
Diluted earnings per share $ 0.34    
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