Market Overview

Orrstown Financial Services, Inc. Reports Second Quarter 2019 Net Income and Announces Quarterly Dividend of $0.15 per Share

Share:
  • Completed the acquisition of Hamilton Bancorp, Inc. on May 1, 2019, adding approximately $348.0 million in loans and $393.0 million in deposits.
  • Net income, including the impact of merger related expenses, for the quarter ended June 30, 2019, totaled $2.7 million, or $0.26 per diluted share. Net income, including the impact of merger related expenses, for the six months ended June 30, 2019, totaled $5.8 million or $0.58 per diluted share.
  • Solid asset quality trends continued as nonperforming loans to total loans declined to 27 basis points from 37 basis points in the previous quarter and from 47 basis points in the second quarter of 2018.
  • Total loans at June 30, 2019, grew $537.8 million to $1.60 billion compared with June 30, 2018, with organic growth totaling approximately $85.0 million.
  • Total deposits at June 30, 2019, grew $689.7 million to $2.02 billion compared with June 30, 2018, with organic growth totaling approximately $170.0 million.
  • Net interest income increased $6.1 million to $18.4 million in comparing the quarter ended June 30, 2019 with the same period in 2018, as net interest margin, on a taxable-equivalent basis, expanded by 29 basis points, with average earning assets growing $543.3 million, or 35.4% versus the prior year.
  • The Board of Directors declared a cash dividend of $0.15 per common share, payable August 12, 2019, to shareholders of record as of August 5, 2019, a 15.4% increase over the dividend declared in July, 2018.

SHIPPENSBURG, Pa., July 24, 2019 (GLOBE NEWSWIRE) -- Orrstown Financial Services, Inc. ("Orrstown" or the "Company") (NASDAQ:ORRF), the parent company of Orrstown Bank (the "Bank") and Wheatland Advisors, Inc. ("Wheatland"), announced earnings for the three and six months ended June 30, 2019. Net income, including the impact of merger related expenses, totaled $2.7 million for the second quarter of 2019, compared with $4.0 million for the second quarter of 2018. Net income, including the impact of merger related expenses, for the six months ended June 30, 2019 totaled $5.8 million, compared with $7.6 million for the same period in 2018. Diluted earnings per share totaled $0.26 and $0.58 for the quarter and six months ended June 30, 2019, compared with $0.48 and $0.92 for the same period in 2018. Earnings in 2019 were impacted by the acquisition of Mercersburg Financial Corporation ("Mercersburg"), completed on October 1, 2018 and Hamilton Bancorp, Inc., ("Hamilton") completed May 1, 2019.

Thomas R. Quinn, Jr., President & CEO, commented, "During the quarter we successfully closed our combination with Hamilton, and we remain on track to complete our branding and systems conversion during the third quarter of 2019. We welcome our new associates, clients and communities to Orrstown, as we anticipate our value proposition of personal service combined with quick, local decision making will be well received in the Greater Baltimore Metro Region. Orrstown remains committed to a community bank model with local leadership as evidenced by recent hires of market presidents for the Capital Region in Pennsylvania and the Maryland Region. We believe the entrance into a new, larger, denser market, combined with recent hires, renders Orrstown poised for strong loan origination while maintaining the company's disciplined approach to risk. Our focus in the next few quarters will be on integration and the achievement of better financial performance by extracting merger related cost savings and through execution of profitable organic growth strategies.

"Subsequent to the end of the quarter, Tom Brugger joined Orrstown as Executive Vice President & Chief Financial Officer. His broad banking and financial experience at diverse and complex organizations will be invaluable as we continue to execute our strategic growth plans. Tom joins other recent key additions to the team, including Chris Holt, Market President of the Maryland Region, and Matt Schultheis, leader of investor relations and strategic initiatives."

MERGER AND ACQUISITION ACTIVITY

On May 1, 2019, the Company completed its acquisition of Hamilton Bancorp, Inc., the holding company for Hamilton Bank, based in Towson, Maryland.

In connection with the acquisition of Hamilton, the Company issued 1,765,704 shares of common stock valued at $36.6 million and paid cash totaling $13.4 million for outstanding Hamilton common shares. The Company recorded goodwill totaling $7.0 million and a core deposit intangible asset totaling $4.6 million. Loans and deposits acquired totaled approximately $348.0 million and $393.0 million. The assets purchased and liabilities assumed in the acquisition were recorded at their estimated fair values at the time of closing and may be adjusted for up to one year subsequent to the acquisition.

The Company incurred merger related expenses totaling $6.9 million and $7.5 million for the quarter and six months ended June 30, 2019, representing principally data processing contract termination costs, employee contract termination costs and legal and consulting fees for the Hamilton acquisition and system conversion expenses for the Mercersburg acquisition, which are included in noninterest expenses.

OPERATING RESULTS

Results for the second quarter of 2019 were impacted by the following items:
  • Merger related expenses totaling $6.9 million, or $0.53 per diluted share net of tax;
  • Securities gains totaling $2.1 million, or $0.16 per diluted share, net of tax;
  • Accelerated accretion income related to the payoff of purchased credit impaired loans totaling $715,000, or $0.05 per diluted share net of tax;
  • Life insurance proceeds totaling $255,000, or $0.02 per diluted share net of tax;
  • A benefit from restricted stock issuance forfeitures totaling $350,000, or $0.03 per diluted share net of tax; and
  • A tax benefit of $334,000, or $0.03 per diluted share related to the Company's state deferred tax asset net of federal tax.

Net Interest Income

Net interest income totaled $18.4 million in the second quarter of 2019, a 49.2% increase compared with $12.4 million for the second quarter of 2018. Net interest income totaled $33.1 million for the six months ended June 30, 2019, a 37.8% increase compared with $24.0 million for the same period in 2018. Net interest margin on a taxable-equivalent basis totaled 3.61% for the second quarter of 2019, compared with 3.41% for the first quarter of 2019 and 3.32% for the second quarter of 2018. Net interest margin on a taxable-equivalent basis totaled 3.52% for the six months ended June 30, 2019, compared with 3.29% for the same period in 2018.

The principal contributor to year-over-year revenue growth was an increase in interest and fees on loans, as total loans grew by $537.8 million from June 30, 2018 to June 30, 2019, with approximately $84.5 million in net organic growth and approximately $453.3 million representing the balance, at June 30, 2019, of loans acquired from Mercersburg and Hamilton. Taxable-equivalent yields on interest-earning assets and costs of interest-bearing liabilities both increased from 2018 to 2019, reflecting the increased interest rate environment between years. Other factors impacting the comparison of taxable-equivalent yields between 2018 and 2019 included the effect of purchase accounting related to the Mercersburg and Hamilton acquisitions and the Company's gradual increase in the second half of 2018 in rates paid on interest-bearing deposits in response to market demand with a gradual repricing of term and non-maturity deposits in 2019.

Provision for Loan Losses

The provision for loan losses totaled $200,000 in the second quarter of both 2019 and 2018. For the six months ended June 30, the provision for loan losses in 2019 totaled $600,000, compared with $400,000 in 2018. Net loan charge-offs experienced in 2019 and the Company's organic loan portfolio growth, taking into account favorable historical charge-off statistics and generally stable economic and market conditions for the last several years, were key factors included in the quantitative and qualitative considerations used by management in the determination of the provision expense required to maintain an adequate allowance for loan losses.

Additional loan portfolio growth and changes in historical charge-off statistics are factors that may result in the need for a determination of additional provisions for loan losses in future quarters.

Noninterest Income

Noninterest income for the quarter ended June 30, 2019, excluding securities gains, totaled $5.8 million, a 6.6% increase, compared with $5.5 million in 2018. For the six months ended June 30, noninterest income in 2019, excluding securities gains, totaled $10.7 million, a 3.5% increase, compared with $10.3 million in 2018.

Total trust, investment management and brokerage income for the quarter and six months ended June 30, 2019, increased $219,000 and $229,000 year over year and included the effect of increased revenue from additional advisors and increased estate fees in 2019. 

Mortgage banking income for the quarter and six months ended June 30, 2019 decreased $27,000 and $194,000 year over year. Loans sold in the quarter totaled $24.4 million and $39.6 million year to date compared with $25.1 million and $45.6 million in the previous year.

Income from bank owned life insurance, included in other income, for the quarter and six months ended June 30, 2019 increased $393,000 and $458,000 year over year. In the second quarter of 2019, the Company received death benefit proceeds totaling $255,000. The remainder of the increase reflects additional life insurance policies acquired in the Mercersburg and Hamilton acquisitions.

Net investment securities gains totaled $2.1 million and $2.4 million for the quarter and six months ended June 30, 2019, compared with $46,000 and $862,000 for same periods in 2018. At times, the Company may impact earnings through realized gains or losses on securities as opportunities become available to reposition part of its investment portfolio under asset/liability management strategies or to improve responsiveness of the portfolio to interest rate conditions, while also considering funding requirements of anticipated lending activity.

Noninterest Expenses

Noninterest expenses totaled $23.3 million and $39.5 million for the quarter and six months ended June 30, 2019, compared with $13.3 million and $26.3 million for the quarter and six months ended June 30, 2018. In addition to the previously noted merger related expenses, the following line items reflected notable changes between periods.

Salaries and employee benefits totaled $8.9 million and $17.6 million for the quarter and six months ended June 30, 2019, compared with $7.9 million and $15.9 million for the same periods in 2018, principally reflecting employees added in the Mercersburg acquisition in the fourth quarter of 2018 and the Hamilton acquisition in May, 2019. In addition, a higher level of expense was incurred year-over-year for additional employees for the Company's new branches and overall expansion efforts, annual merit increases, and incremental expense for additional share-based compensation awards granted in 2019, net of the benefit of forfeitures. In 2019, overall costs associated with the Company's self-insured group health plan were higher than in 2018 due to an increased number of employees and fluctuations in claims experience.

Occupancy, furniture and equipment costs for the quarter ended and six months ended June 30, 2019 increased $459,000 and $766,000, respectively, year over year, reflecting Mercersburg and Hamilton branches acquired, and the Company's expanded presence in Lancaster County, Pennsylvania, with two branch banking locations added in the second half of 2018 and two in the first quarter of 2019.

Intangible asset amortization for the quarter ended and six months ended June 30, 2019 increased $378,000 and $562,000, respectively, year over year, due principally to the core deposit intangibles recorded in the Mercersburg and Hamilton acquisitions.

As previously reported, noninterest expenses in the first quarter of 2019 included a $615,000 pretax expense, or approximately $0.05 per diluted share, to write off an insurance claim receivable from a 2018 cyber security incident. 

Income Taxes

Income tax expense totaled $110,000 and $342,000 for the quarter and six months ended June 30, 2019, compared with $374,000 and $866,000 for the same periods in 2018. The effective tax rate for the six months ended June 30, 2019 was 5.6%, compared with 10.2% for the six months ended June 30, 2018. Generally, the Company's effective tax rate is significantly less than the 21% federal statutory rate due to tax-exempt income, including interest earned on tax-exempt loans and securities and income from life insurance policies, as well as tax credits. The Company recorded a tax benefit of $185,000, or approximately $0.02 per diluted share, in the first quarter of 2019, related to a favorable tax law clarification concerning the treatment of life insurance assets of an acquired entity. In the second quarter of 2019, the Company recorded a tax benefit of $334,000, or approximately $0.03 per diluted share, related to an increase in its deferred state income tax asset for the effect of the state tax rate change resulting from the Hamilton acquisition. These tax benefit items had the effect of lowering the effective tax rate for the six months ended June 30, 2019, by approximately 8.5%.

FINANCIAL CONDITION

The following table presents loan balances, by loan class within segments, at June 30, 2019, December 31, 2018 and June 30, 2018.

           
(Dollars in thousands) June 30, 2019   December 31, 2018   June 30, 2018
           
Commercial real estate:          
Owner occupied $ 170,272   $ 129,650   $ 119,507
Non-owner occupied 298,989   252,794   244,058
Multi-family 93,342   78,933   58,575
Non-owner occupied residential 121,364   100,367   84,009
Acquisition and development:          
1-4 family residential construction 12,801   7,385   8,801
Commercial and land development 57,027   42,051   38,773
Commercial and industrial 219,551   160,964   130,280
Municipal 48,358   50,982   39,753
Residential mortgage:          
First lien 363,946   235,296   167,499
Home equity – term 15,989   12,208   11,313
Home equity – lines of credit 157,645   143,616   132,528
Installment and other loans 42,386   33,411   28,787
  $ 1,601,670   $ 1,247,657   $ 1,063,883
                 

Loans grew $354.0 million, from $1.25 billion at December 31, 2018 to $1.60 billion at June 30, 2019. Balances at June 30, 2019 include approximately $335.0 million acquired from Hamilton. The Hamilton acquisition increased the Company's loan portfolio principally in the residential mortgage - first lien, commercial real estate - owner occupied and non-owner occupied, and commercial and industrial classes.

Deposits grew $456.8 million from $1.56 billion at December 31, 2018 to $2.02 billion at June 30, 2019, with the Hamilton acquisition accounting for approximately 85% of that growth. Organic growth occurred principally in interest-bearing deposits, with the Company continuing to increase both noninterest-bearing and interest-bearing deposit relationships from its cash management offerings.

Shareholders' Equity

Shareholders' equity totaled $219.9 million at June 30, 2019, an increase of $46.4 million from $173.4 million at December 31, 2018. The increase was attributable to the issuance of shares of the Company's common stock in connection with the acquisition of Hamilton and growth in retained earnings through net income, net of the impact of dividends paid, and an improvement in accumulated other comprehensive income (loss) from changes in net unrealized gains and losses in securities available for sale.

Asset Quality

The allowance for loan losses totaled $14.5 million at June 30, 2019, compared with $14.0 million at December 31, 2018 and $13.4 million at June 30, 2018. Management believes the allowance for loan losses to total loans ratio remains adequate at 0.90% at June 30, 2019. Favorable historical charge-off data and management's emphasis on loan quality have been significant contributors to the determination that the increase between periods in the allowance for loan losses is adequate for the increasing loan portfolio. At June 30, 2018, the allowance for loan losses to total loans ratio totaled 1.26%. The principal factors impacting a comparison with June 30, 2019, were loans acquired in the Mercersburg and Hamilton transactions that were recorded at fair value, which incorporated a credit factor, and therefore did not require an increase in the Company's allowance for loan losses.

Nonperforming and other risk assets, consisting of nonaccrual loans, other real estate owned, restructured loans still accruing and loans past due 90 days or more and still accruing, totaled $7.9 million at June 30, 2019, and $6.5 million at December 31, 2018.

Classified loans, or loans rated substandard, doubtful or loss, totaled $27.7 million at June 30, 2019 (1.7% of total loans), compared with $19.8 million (1.6% of total loans) at December 31, 2018.

Investor Relations Contact: Media Contact:
Matthew C. Schultheis Luke Bernstein
Director Strategic Planning and Investor Relations Corporate Communications Officer
Phone (717) 510-7127 Phone (717) 510-7107


ORRSTOWN FINANCIAL SERVICES, INC.              
Operating Highlights (Unaudited)              
  Three Months Ended   Six Months Ended
  June 30,   June 30,   June 30,   June 30,
(Dollars in thousands, except per share information) 2019   2018   2019   2018
               
Net income $ 2,687   $
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