Market Overview

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

Share:
  • Net income totaled $6.9 million, or $0.62 per diluted share.

  • Hamilton conversion successfully completed on August 18, 2019; merger related expenses totaled $471,000 in the third quarter and $8.0 million year to date in 2019.

  • Total loans decreased $8.6 million in the third quarter; loan growth absent the Hamilton acquisition totaled $7.5 million, or 2.4% annualized for the third quarter.

  • Total deposits decreased $92.1 million in the third quarter; deposit growth absent the Hamilton acquisition and brokered deposit reductions totaled $30.6 million, or 8.2% annualized for the third quarter.

  • The implementation of a plan to consolidate 5 branch locations and reduce 50,000 square feet of excess office space has commenced. 

  • The Board of Directors declared a cash dividend of $0.15 per common share, payable November 12, 2019, to shareholders of record as of November 4, 2019, a 15.4% increase over the dividend declared in October, 2018.

SHIPPENSBURG, Pa., Oct. 23, 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 nine months ended September 30, 2019. Net income, including the impact of merger related expenses, totaled $6.9 million for the third quarter of 2019, compared with $4.0 million for the third quarter of 2018. Net income, including the impact of merger related expenses, for the nine months ended September 30, 2019 totaled $12.7 million, compared with $11.7 million for the same period in 2018.  Diluted earnings per share totaled $0.62 and $1.23 for the quarter and nine months ended September 30, 2019, compared with $0.49 and $1.41 for the same periods 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 on May 1, 2019.

Thomas R. Quinn, Jr., President & CEO, commented, "In the third quarter of 2019, we continued to execute successfully on our strategic growth plans. Our dedicated team of associates completed the conversion of Hamilton's systems onto Orrstown's systems in August. We hired experienced commercial lenders in our Maryland and Capital Regions, and subsequent to the quarter's end, we announced our brand ambassador for the Maryland Region, Jonathan Ogden, Hall of Fame football player for the Baltimore Ravens. Despite what we view as a favorable outlook for future growth and returns, we are not immune from near-term headwinds. An increase in economic uncertainty and an adverse interest rate environment are challenges to overcome, and we are taking action to assure continued success. Late in the third quarter, we terminated some brokered deposits and borrowings to reduce cash build. Combined with anticipated loan and deposit growth from recent hires, we look for this to favorably shift loan and deposit mix, aiding in defending our margin. We remain focused on growing fee income in mortgage banking, loan swap referral fees, wealth management, and other fee based business in this low rate environment. We are attuned to changing client appetites for service delivery at Orrstown and the industry as a whole, and are announcing the consolidation of five branches while serving our clients through an improved online banking platform with increased functionality and enhanced ATMs. Additionally, we are reducing excess office space; though we expect little impact on expenses from this action, it will allow us to focus on our clients more than physical plant. We continue to be laser focused on efficiency and automation efforts as we build a scalable organization that is well positioned for future growth and enhanced profitability."

MERGER AND ACQUISITION ACTIVITY

The Company incurred merger related expenses totaling $471,000 and $8.0 million for the quarter and nine months ended September 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 both the Mercersburg and Hamilton acquisitions, all of which are included in noninterest expenses.

OPERATING RESULTS

Results for the third quarter of 2019 were impacted by the following items:
•  Merger related expenses totaling $471,000, or $0.03 per diluted share, net of tax;
•  Securities gains totaling $2.3 million, or $0.17 per diluted share, net of tax; and
•  Accelerated the payoff of brokered deposits and borrowings due to accelerated payoffs in the Hamilton loan portfolio, which negatively impacted net interest income by $223,000, or $0.02 per diluted share.

Net Interest Income

Net interest income totaled $17.9 million in the third quarter of 2019, a 41.1% increase compared with $12.7 million for the third quarter of 2018. Net interest income totaled $51.0 million for the nine months ended September 30, 2019, a 38.9% increase compared with $36.7 million for the same period in 2018. Net interest margin on a taxable-equivalent basis totaled 3.27% for the third quarter of 2019, compared with 3.28% for the third quarter of 2018. Net interest margin on a taxable-equivalent basis totaled 3.43% for the nine months ended September 30, 2019, compared with 3.29% for the same period in 2018.

During the third quarter, we experienced a net $9 million reduction in loans outstanding due to repayments totaling $16 million from the acquired Hamilton loan portfolio. The focus on the successful Hamilton system conversion while simultaneously recruiting and onboarding a team of experienced lenders in the Maryland Region resulted in a slowdown in loan origination activity in Maryland. We also experienced a seasonal increase in government deposits, which increased the average cash on the balance sheet in the quarter. Due to the short-term increase in cash, we took steps to reduce brokered deposits in an effort to reduce cash to our normal target of $25 million or less. The excess cash held on the balance sheet, totaling approximately $70 million, during the third quarter negatively impacted the net interest margin by 11 basis points.

The principal contributor to year-over-year revenue growth was an increase in interest and fees on loans, as total loans grew by $508.2 million from September 30, 2018 to September 30, 2019, with approximately $82.2 million in net organic growth and approximately $425.9 million representing the balance, at September 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 changes in the interest rate environment between years. The FOMC increased the Fed Funds target rate 25 basis points in both September and December 2018 and decreased it 25 basis points in both July and September 2019. The effect of purchase accounting related to the Mercersburg and Hamilton acquisitions also influenced the comparison of taxable-equivalent yields between 2018 and 2019. In addition, the Company began gradually increasing rates paid on interest-bearing deposits in the second half of 2018 in response to market conditions and continued to do so in 2019.

Provision for Loan Losses

Asset quality trends continue to be solid with a low level of charge-offs and low nonperforming loans. The provision for loan losses totaled $300,000 in the third quarter for 2019, compared with $200,000 for the same period in 2018. For the nine months ended September 30, the provision for loan losses in 2019 totaled $900,000, compared with $600,000 in 2018.

Net recoveries in the quarter ended September 30, 2019 totaled $49,000, equating to (0.01)% annualized as compared with net charge-offs totaling $23,000, or 0.01% annualized, in the previous quarter. Nonperforming loans to loans totaled 0.44% of loans at September 30, 2019, compared with 0.27% of loans at June 30, 2019. Loans outstanding decreased in the quarter with net recoveries, but there was a $2.5 million increase in nonperforming loans which required additional reserves. Overall, asset quality continues to be solid and the allowance for loan losses to nonperforming loans ratio ended the quarter at 213.7%.

The allowance for loan losses totaled $14.8 million at September 30, 2019, compared with $14.0 million at December 31, 2018 and $13.8 million at September 30, 2018. Management believes the allowance for loan losses to total loans ratio remains adequate at 0.93% at September 30, 2019. At September 30, 2018, the allowance for loan losses to total loans ratio totaled 1.27%. The principal factors impacting a comparison with September 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.

Noninterest Income

Noninterest income for the quarter ended September 30, 2019, excluding securities gains, totaled $6.5 million, an 18.1% increase, compared with $5.5 million in 2018. For the nine months ended September 30, noninterest income in 2019, excluding securities gains, totaled $17.2 million, an 8.5% increase, compared with $15.8 million in 2018.

Total trust, investment management and brokerage income for the quarter and nine months ended September 30, 2019, increased $423,000 and $652,000 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 nine months ended September 30, 2019 decreased $112,000 and $306,000 year over year. In the third quarter of 2019, a $205,000 impairment charge due to decreasing interest rates was recognized on mortgage servicing rights. Loans sold in the quarter totaled $34.4 million and $74.0 million year to date compared with $27.6 million and $73.2 million in the previous year.

Income from bank owned life insurance for the quarter and nine months ended September 30, 2019 decreased $54,000 and increased $404,000 year over year. The Company recognized death benefit proceeds income totaling $255,000 in the second quarter of 2019 and $242,000 in the third quarter of 2018. The remainder of the net changes reflects additional life insurance policies acquired in the Mercersburg and Hamilton acquisitions.

In the third quarter of 2019, the Company recognized $629,000 for loan swap referral fees under a program in which it refers qualified commercial borrowers to a third party, which enters into an interest rate swap agreement with the borrower. The rate swap provides the borrower with the economic equivalent of a fixed-rate loan while allowing the Company to receive a variable rate of interest. Income from this program will vary from quarter to quarter depending on demand from qualified borrowers with a preference to enter into swap agreements with the third party.

Net investment securities gains totaled $2.3 million and $4.7 million for the quarter and nine months ended September 30, 2019, compared with $29,000 and $891,000 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 $18.2 million and $57.7 million for the quarter and nine months ended September 30, 2019, compared with $13.3 million and $39.7 million for the quarter and nine months ended September 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 $10.5 million and $28.1 million for the quarter and nine months ended September 30, 2019, compared with $7.6 million and $23.5 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 and nine months ended September 30, 2019 increased $620,000 and $1.4 million year over year, reflecting Mercersburg and Hamilton branches acquired. The Company's expanded presence in Lancaster County, Pennsylvania, also contributed to the increase, with two branch banking locations added in the second half of 2018 and two in the first quarter of 2019.

FDIC insurance expense decreased $178,000 and $110,000 year over year for the quarter and nine months ended September 30, 2019. The decrease reflects credits received in the third quarter that offset the Bank's second quarter 2019 FDIC assessment. The FDIC's assessment regulations provide that, for banks with consolidated total assets under $10 billion, after the reserve ratio reaches 1.38 percent (and provided that it remains at least 1.38%), the FDIC will automatically apply credits to reduce regular deposit insurance assessments up to the full amount of their assessments or the full amount of their credits, whichever is less. The reserve ratio reached 1.40% on June 30, 2019.  Therefore, credits were first applied during the third quarter of 2019. If the reserve ratio remains at least 1.38%, the Company estimates it will receive credits that will offset its third quarter 2019 assessment and partially offset its fourth quarter 2019 assessment.

Intangible asset amortization for the quarter and nine months ended September 30, 2019 increased $462,000 and $1,024,000 year over year, due principally to amortization of 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 net of tax, to write off an insurance claim receivable from a 2018 cyber security incident. 

Income Taxes

Income tax expense totaled $1.3 million and $1.7 million for the quarter and nine months ended September 30, 2019, compared with $644,000 and $1.5 million for the same periods in 2018. The effective tax rate for the nine months ended September 30, 2019 was 11.7%, compared with 11.5% for the nine months ended September 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 nine months ended September 30, 2019, by approximately 3.6%.

FINANCIAL CONDITION

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

(Dollars in thousands) September 30, 2019   December 31, 2018   September 30, 2018
           
Commercial real estate:          
Owner occupied $ 171,327   $ 129,650   $ 119,056
Non-owner occupied 310,334   252,794   249,529
Multi-family 108,751   78,933   75,314
Non-owner occupied residential 120,395   100,367   84,598
Acquisition and development:          
1-4 family residential construction 12,257   7,385   10,217
Commercial and land development 38,494   42,051   33,735
Commercial and industrial 215,734   160,964   127,011
Municipal 47,920   50,982   39,429
Residential mortgage:          
First lien 353,811   235,296   167,178
Home equity – term 15,175   12,208   10,513
Home equity – lines of credit 159,930   143,616   135,578
Installment and other loans 38,977   33,411   32,783
  $ 1,593,105   $ 1,247,657   $ 1,084,941
                 

Loans grew $345.4 million, from $1.25 billion at December 31, 2018 to $1.59 billion at September 30, 2019. Balances at September 30, 2019 include approximately $314.0 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 $364.7 million from $1.56 billion at December 31, 2018 to $1.92 billion at September 30, 2019, with a reduction in brokered deposits totaling approximately $91.0 million during the period. The Hamilton acquisition accounted for approximately 80% of growth in deposits since year end, which contributed to the early payoff of brokered deposits. The remainder of the growth was organic, as the Company continued to increase both noninterest-bearing and interest-bearing deposit relationships from its cash management offerings.   

Shareholders' Equity

Shareholders' equity totaled $223.5 million at September 30, 2019, an increase of $50.1 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, and an improvement in accumulated other comprehensive income (loss) from changes in net unrealized gains and losses in securities available for sale.

Branch Consolidation

Orrstown Bank has experienced significant growth in recent years and is poised for further growth in the future. Our ongoing efforts target serving our local communities, investing in new technologies to support changes in client preferences, growing the Bank and optimizing returns for shareholders. As part of these efforts, we anticipate that the bank will finalize approvals for the consolidation of 5 Pennsylvania branches, that average less than $20 million per location, into other larger Orrstown Bank branches, as well as the sale of an operations center. We expect that these efforts will improve the profitability of the remaining branch locations and eliminate close to 50,000 square feet of excess back office space.

The following Pennsylvania branches will be closing effective January 31, 2020 at the end of the business day:

  • 403 North Market Street, Duncannon;
  • 1 South Carlisle Street, New Bloomfield;
  • 18 Newport Plaza, Newport;
  • 454 Loudon Road, Mercersburg; and
  • 92 Path Valley Road, Fort Loudon.

We anticipate that one time charges associated with the branch consolidations and operations center sale will be in the range of $800,000 to $1.2 million in the fourth quarter of 2019 and thereafter cost savings will be in the range of $1.5 million to $2.0 million annually, beginning in the second quarter of 2020. Subject to regulatory approval, it is anticipated that the consolidations will be completed in the first quarter of 2020. The sale of the operations center is anticipated to be completed in the fourth quarter of 2019 and approximately one third of the space will be leased back to the Bank. While this sale does not materially impact future earnings and does not result in a material gain or loss, it is part of our ongoing efforts to minimize excess space and complexity, thus allowing management to focus on future growth initiatives.

Investor Relations Contact: Media Contact:
Matthew C. Schultheis Luke Bernstein
Director Strat
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