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Orrstown Financial Services, Inc. Reports Second Quarter 2018 Net Income of $4.0 Million and Announces Quarterly Dividend of $0.13 per Share

  • Net income for the quarter ended June 30, 2018 totaled $4.0 million, or $0.48 per diluted share, compared with $3.3 million, or $0.40 per diluted share, for the same period in 2017.  Net income for the six months ended June 30, 2018 totaled $7.6 million, or $0.92 per diluted share, compared with $5.3 million, or $0.65 per diluted share, for the same period in 2017.
  • Gross loans outstanding at June 30, 2018, excluding loans held for sale, totaled $1.06 billion, an increase of $53.9 million, or 10.8% annualized, compared with the December 31, 2017 balance totaling $1.01 billion. In a year-over-year comparison, gross loans outstanding at June 30, 2018 increased 13.9% over June 30, 2017.
  • Deposits totaled $1.33 billion at June 30, 2018, growing 8.7%, compared with the December 31, 2017 balance totaling $1.22 billion.
  • Net interest income for the quarter ended June 30, 2018 totaled $12.4 million, an increase of 15.3% over the quarter ended June 30, 2017, which totaled $10.7 million. Net interest income for the six months ended June 30, 2018 totaled $24.0 million, a 14.7% increase compared with $21.0 million for the same period in 2017.  Net interest margin, on a taxable-equivalent basis, totaled 3.32% for the second quarter in 2018 compared with 3.26% for the first quarter of 2018 and 3.35% for the second quarter of 2017. Net interest margin, on a taxable-equivalent basis, totaled 3.29% for the six months ended June 30, 2018 compared with 3.35% for the same period in 2017. Yields and interest income on tax-exempt assets reflected the Company’s lower statutory tax rate in 2018.
  • The Board of Directors declared a cash dividend of $0.13 per common share, payable August 3, 2018, to shareholders of record as of July 28, 2018, a 30.0% increase over the dividend declared in July, 2017.

SHIPPENSBURG, Pa., July 18, 2018 (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 six months ended June 30, 2018.  Net income totaled $4.0 million for the second quarter of 2018, compared with $3.3 million for the same period in 2017. Net income for the six months ended June 30, 2018 totaled $7.6 million, compared with $5.3 million for the same period in 2017.  Diluted earnings per share totaled $0.48 and $0.92 for the quarter and six months ended June 30, 2018, compared with $0.40 and $0.65 for the same periods in 2017. Earnings in the second quarter of 2018 continued to reflect increased interest income from expanding loan and investment portfolios in an increased rate environment, partially offset by increases in interest expense.

Commenting on the Company’s results for the first half of 2018, Thomas R. Quinn, Jr., President and CEO, said, “We are very encouraged by our continued solid loan and deposit growth and pleased that we were able to expand our net interest income from the first to second quarters of this year despite competitive pricing pressure.”  He continued, noting that, “Over the next several quarters we expect to execute several key elements of our strategic plan, including organic growth via four new full-service branches in Lancaster County, and growth through merger and acquisition activity as we integrate the First Community Bank of Mercersburg.”

OPERATING RESULTS

Net Interest Income

Net interest income totaled $12.4 million in the second quarter of 2018, a 15.3% increase compared with $10.7 million for the same period in 2017. Net interest income totaled $24.0 million for the six months ended June 30, 2018, a 14.7% increase compared with $21.0 million for the same period in 2017. Net interest margin on a taxable-equivalent basis totaled 3.32% for the second quarter of 2018, compared with 3.26% for the first quarter of 2018 and 3.35% for the second quarter of 2017. Net interest margin on a taxable-equivalent basis totaled 3.29% for the six months ended June 30, 2018, compared with 3.35% for the same period in 2017. Yields and interest income on tax-exempt assets were computed on a taxable-equivalent basis assuming a 21% tax rate in 2018 and a 34% tax rate in 2017, reflecting the 21% statutory tax rate that became effective on January 1, 2018, under the Tax Cuts and Jobs Act of 2017. Taxable-equivalent yields on interest-earning assets and costs of interest-bearing liabilities both increased from 2017 to 2018, reflecting the increased interest rate environment between years. The change in the statutory tax rate was the principal factor in the decrease in net interest margin on a taxable-equivalent basis from 2017 to 2018.

Provision for Loan Losses

The provision for loan losses totaled $200 thousand in the second quarter of 2018, compared with $100 thousand in the same period in 2017. For the six months ended June 30, the provision for loan losses in 2018 totaled $400 thousand, compared with $100 thousand in 2017. The Company has experienced loan portfolio growth, as well as the benefit of favorable historical charge-off statistics and generally stable economic and market conditions for the last several years. These key factors were 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.

Changes in historical charge-off statistics and additional loan portfolio growth 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, 2018, excluding securities gains, totaled $5.5 million compared with $5.0 million in 2017. For the six months ended June 30, noninterest income in 2018, excluding securities gains, totaled $10.3 million, a $1.0 million increase, or 11.2%, compared with $9.3 million in 2017.

Trust, investment management and brokerage income increased $61 thousand and $374 thousand in comparing the quarter and six months ended June 30, from 2017 to 2018. Overall, fees have increased as additional revenues have been generated as marketplace volatility generated increased volumes. In addition, the six month comparison reflects increased estate fees recognized in the first quarter of 2018 compared with 2017.

Mortgage banking income decreased $134 thousand in comparing the second quarter of 2018 with 2017, reflecting decreased refinancing activity as mortgage rates have been rising as well as a shortage in available housing inventory. Mortgage banking income for the six months ended June 30, in comparing 2018 with 2017, was substantially unchanged.

Other income increased $529 thousand and $578 thousand in comparing the quarter and six months ended June 30, from 2017 to 2018, and reflects an increase of $406 thousand in service charges, commissions and fees experienced in the second quarter of 2018 from the second quarter of 2017.

Investment securities gains totaled $46 thousand and $862 thousand for the quarter and six months ended June 30, 2018, compared with $654 thousand and $657 thousand for the same periods in 2017. At times, the Company may accelerate earnings on securities through realized gains as opportunities become available to reposition part of the 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 $13.3 million and $26.3 million for the quarter and six months ended June 30, 2018, compared with $12.4 million and $24.6 million for the corresponding 2017 periods.

The principal drivers of increases in noninterest expenses in comparing these periods were salaries and employee benefits, and occupancy, furniture and equipment costs. The Company’s expanded presence in Lancaster County, Pennsylvania, contributed to these increases with the addition of branch banking locations in the second and third quarters of 2017. 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 that region. Advertising and bank promotions expense decreased from 2017 to 2018, reflecting the increased activity in 2017 in connection with branch openings. New branch location openings in Lancaster County in the second half of 2018 are expected to increase costs in each of these expense categories.

Salaries and employee benefits totaled $7.9 million and $15.9 million for the quarter and six months ended June 30, 2018, compared with $7.4 million and $14.8 million for the same periods in 2017. A higher level of expense has been incurred over the last several quarters for additional employees as a result of the Company’s new branches and overall expansion efforts, annual merit increases, increased incentive compensation, and incremental expense for additional share-based awards granted in 2018. Costs associated with the Company’s self-insured group health plan decreased year-over-year due to improving claims experience.

In the second quarter of 2018, the Company incurred $154 thousand in merger related costs, principally legal and professional fees, in connection with the announced merger of Mercersburg Financial Corporation (“Mercersburg”) with the Company. The merger is expected to be completed in the fourth quarter of 2018, subject to required regulatory approvals and the approval of Mercersburg’s shareholders.

Other line items within noninterest expenses showed fluctuations attributable to normal business operations between 2018 and 2017.

Income Taxes

Income tax expense totaled $374 thousand and $866 thousand for the quarter and six months ended June 30, 2018, compared with $516 thousand and $940 thousand for the same periods in 2017. The effective tax rate for the six months ended June 30, 2018 was 10.2%, compared with 15.0% for the six months ended June 30, 2017. The Company’s effective tax rate is significantly less than the federal statutory rate due to tax-exempt income, including interest earned on tax-exempt loans and securities and earnings on the cash value of life insurance policies, as well as tax credits. The decrease in the effective tax rate from 2017 to 2018 is principally due to the decrease in the Company’s federal statutory rate, which changed from 34% to 21% effective January 1, 2018, under the Tax Cuts and Jobs Act of 2017.

FINANCIAL CONDITION

Assets totaled $1.64 billion at June 30, 2018, an increase of $85.3 million from $1.56 billion at December 31, 2017 and an increase of $169.2 million from June 30, 2017. The principal growth components were loans (summarized in the following table), which increased $53.9 million, or 5.3% (10.8% annualized) from $1.01 billion at December 31, 2017 to $1.06 billion at June 30, 2018 and increased $129.5 million, or 13.9%, year-over-year, and securities available for sale, which increased $34.1 million from December 31, 2017 to June 30, 2018 and $47.5 million year-over-year. The primary sources of funding for the year-over-year increases in loans and securities available for sale were deposit growth of $129.9 million, an overall increase in borrowings of $32.9 million and a $15.4 million decrease in cash and cash equivalents.

The following table presents loan balances, by loan class within segments, at June 30, 2018, December 31, 2017 and June 30, 2017.

           
(Dollars in thousands) June 30, 2018   December 31, 2017   June 30, 2017
           
Commercial real estate:          
Owner occupied $ 119,507     $ 116,811     $ 116,419  
Non-owner occupied 244,058     244,491     217,070  
Multi-family 58,575     53,634     48,637  
Non-owner occupied residential 84,009     77,980     68,621  
Acquisition and development:          
1-4 family residential construction 8,801     11,730     8,036  
Commercial and land development 38,773     19,251     28,481  
Commercial and industrial 130,280     115,663     97,913  
Municipal 39,753     42,065     51,381  
Residential mortgage:          
First lien 167,499     162,509     150,173  
Home equity – term 11,313     11,784     13,019  
Home equity – lines of credit 132,528     132,192     127,262  
Installment and other loans 28,787     21,902     7,370  
  $ 1,063,883     $ 1,010,012     $ 934,382  
                       

The Company continues to grow in both its legacy and newer markets through its expanded sales force. Loan portfolio growth was experienced in nearly all loan segments from December 31, 2017 to June 30, 2018, with the largest dollar increases in the acquisition and development, commercial and industrial and commercial real estate segments. Acquisition and development loans grew $16.6 million, or 53.6%, as the need for new construction financing has increased in the market. Commercial and industrial loans grew $14.6 million, or 12.6%, and reflected the Company’s additional emphasis on growing this segment to increase diversification of its loan portfolio. The commercial real estate segment also grew $13.2 million, or 2.7%, during this period. Partially offsetting 2018 growth in commercial real estate loans was the payoff of loans in connection with a business ownership transition and settlement of a nonaccrual loan. Year-over-year dollar growth in the loan portfolio was principally in the commercial real estate and commercial and industrial segments. Year-over-year dollar growth in installment and other loans was principally attributable to purchases of automobile financing loans as the Company continued to increase diversification in the portfolio.

The Company has continued to increase both noninterest-bearing and interest-bearing deposit relationships from enhanced cash management offerings delivered by its expanded sales force. Total deposits grew $106.4 million, or 8.7% from $1.22 billion at December 31, 2017 to $1.33 billion at June 30, 2018 due principally to growth in interest-bearing accounts. Approximately one-third of the growth in interest-bearing accounts occurred as certain larger depository relationships, previously enrolled in the Company’s repurchase agreement program included in short-term borrowings, were enrolled in a program provided through a third party which provides full FDIC insurance on deposit amounts by exchanging or reciprocating larger depository relationships with other member banks.  Year-over-year deposit growth totaled $129.9 million, or 10.9%, with growth principally in interest-bearing relationships.

Shareholders’ Equity

Shareholders’ equity totaled $145.1 million at June 30, 2018, an increase of $372 thousand, or 0.3%, from $144.8 million at December 31, 2017. The increase in net income for the first half of 2018 was offset by dividends declared on common stock and by a decrease in accumulated other comprehensive income (loss) from changes in unrealized gains and losses in securities available for sale.

Asset Quality

The allowance for loan losses totaled $13.4 million at June 30, 2018, compared with $12.8 million at December 31, 2017 and $12.8 million at June 30, 2017. Management believes the allowance for loan losses to total loans ratio remains adequate at 1.26% at June 30, 2018. Favorable historical charge-off data and management’s emphasis on loan quality have been significant contributors to the determination that a small increase in the allowance for loan losses is adequate for the increasing loan portfolio.

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 $6.5 million at June 30, 2018, compared with $12.0 million at December 31, 2017 and $7.4 million at June 30, 2017. One commercial loan, downgraded to nonaccrual status in the fourth quarter of 2017 and paid off in the second quarter of 2018, was the principal driver of the changes.

The allowance for loan losses to nonperforming loans totaled 268.9% at June 30, 2018 compared with 130.0% at December 31, 2017 and 247.1% at June 30, 2017, reflecting the changes in nonaccrual loans. The allowance for loan losses to nonperforming and restructured loans still accruing was similarly impacted and totaled 218.4% at June 30, 2018, compared with 116.1% at December 31, 2017 and 200.4% at June 30, 2017.

Classified loans, or loans rated substandard, doubtful or loss, totaled $14.3 million at June 30, 2018 (1.3% of total loans), compared with $20.0 million (2.0% of total loans) at December 31, 2017 and $21.0 million (2.2% of total loans) at June 30, 2017.

               
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) 2018   2017   2018   2017
               
Net income $ 4,012     $ 3,308     $ 7,637     $ 5,310  
Diluted earnings per share $ 0.48     $ 0.40     $ 0.92     $ 0.65  
Dividends per share $ 0.13     $ 0.10     $ 0.25     $ 0.20  
Return on average assets 0.98 %   0.90 %   0.95 %   0.74 %
Return on average equity 11.31 %   9.49 %   10.84 %   7.78 %
Net interest income $ 12,353     $ 10,718     $ 24,037     $ 20,955  
Net interest margin 3.32 %   3.35 %   3.29 %   3.35 %
                       

           
ORRSTOWN FINANCIAL SERVICES, INC.          
Balance Sheet Highlights (Unaudited)          
  June 30,   December 31,   June 30,
(Dollars in thousands, except per share information) 2018   2017   2017
           
Assets $ 1,644,118     $ 1,558,849     $ 1,474,930  
Loans, gross 1,063,883     1,010,012     934,382  
Allowance for loan losses (13,437 )   (12,796 )   (12,751 )
Deposits 1,325,866     1,219,515     1,195,936  
Shareholders’ equity 145,137     144,765     143,263  
Book value per share 17.28     17.34     17.17  
                 

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ORRSTOWN FINANCIAL SERVICES, INC.    
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)      
           
  June 30,   December 31,   June 30,
(Dollars in thousands) 2018   2017   2017
Assets          
Cash and cash equivalents $ 22,582     $ 29,807     $ 38,012  
Securities available for sale 449,419     415,308     401,904  
           
Loans held for sale 5,495     6,089     5,182  
           
Loans 1,063,883     1,010,012     934,382  
Less: Allowance for loan losses (13,437 )   (12,796 )   (12,751 )
Net loans 1,050,446     997,216     921,631  
           
Premises and equipment, net 34,558     34,809     35,036  
Other assets 81,618     75,620     73,165  
Total assets $ 1,644,118     $ 1,558,849     $ 1,474,930  
           
Liabilities          
Deposits:          
Noninterest-bearing $ 178,704     $ 162,343     $ 157,703  
Interest-bearing 1,147,162     1,057,172     1,038,233  
Total deposits 1,325,866     1,219,515     1,195,936  
Borrowings 147,473     177,391     114,553  
Accrued interest and other liabilities 25,642     17,178     21,178  
Total liabilities 1,498,981     1,414,084     1,331,667  
           
Shareholders’ Equity          
Common stock 438     435     435  
Additional paid – in capital 126,402     125,458     124,727  
Retained earnings 21,584     16,042