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Orrstown Financial Services, Inc. Reports Second Quarter 2021 Results and Announces Increased Quarterly Dividend

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·44 min read
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  • Net income of $8.8 million for the quarter; diluted second quarter 2021 EPS of $0.79 per share versus $0.92 per share in the first quarter of 2021 and $0.58 per share in the second quarter of 2020

  • The Board of Directors declared a cash dividend of $0.19 per common share, payable August 9, 2021, to shareholders of record as of August 2, 2021, an increase from $0.18 per common share in the first quarter of 2021

  • Commercial loan growth for the quarter, excluding Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans, was 24% annualized as loan demand was robust late in the second quarter of 2021; momentum continues with a strong commercial pipeline

  • Provision expense of $0.6 million was recorded in the second quarter of 2021 as compared to a provision reversal of $1.0 million in the first quarter of 2021; commercial loan production drove the increase; the provision included $0.8 million and $1.0 million of COVID-19 reserve reductions for the three months ended June 30, 2021 and March 31, 2021, respectively

  • Noninterest expenses improved to $17.0 million in the second quarter of 2021 as compared to $17.8 million in the first quarter of 2021; the efficiency ratio was stable at 60% for first and second quarters of 2021

  • Noninterest income was $6.7 million in the second quarter of 2021 as compared to $7.5 million in the first quarter of 2021; the first quarter included a $0.6 million reduction of the mortgage servicing rights valuation reserve

  • Return on average assets totaled 1.2% in the second quarter of 2021 compared to 1.4% in the first quarter of 2021; second quarter provision increase caused the reduction

  • Tangible book value per share(1) increased to $21.61 at June 20, 2021 from $20.59 at March 31, 2021 and $19.93 at December 31, 2020

  • Net interest margin declined to 3.24% in the second quarter of 2021 from 3.38% in the first quarter of 2021 due primarily to increased liquidity that resulted from SBA PPP forgiveness

  • The SBA PPP portfolio averaged $471.2 million in the three months ended June 30, 2021 as compared to $463.0 million in the three months ended March 31, 2021

  • Deposits declined by $53.0 million, or 8% annualized, from the first quarter of 2021 as a result of the usage of stimulus and PPP funds; average deposits per branch remained strong at $97 million for the second quarter of 2021

  • Cost of deposits fell by six basis points in the quarter due to late first quarter rate adjustments and changes in mix

(1) Non-GAAP measure. See Appendix B for additional information.

SHIPPENSBURG, Pa., July 20, 2021 (GLOBE NEWSWIRE) -- Orrstown Financial Services, Inc. ("Orrstown" or the “Company”) (NASDAQ: ORRF), the parent company of Orrstown Bank (the “Bank”), announced earnings for the three months ended June 30, 2021. Net income totaled $8.8 million for the three months ended June 30, 2021, compared with $10.2 million for the three months ended March 31, 2021 and $6.4 million in the three months ended June 30, 2020. Diluted earnings per share totaled $0.79 for the three months ended June 30, 2021, compared with $0.92 in the three months ended March 31, 2021 and $0.58 in the three months ended June 30, 2020.

Thomas R. Quinn, Jr., President & CEO, commented, “With another quarter of strong earnings and growing optimism for sustained future earnings, Orrstown's Board saw an opportunity to further enhance shareholder value and approved an increase to its quarterly dividend. Orrstown strives to serve its community, employees and shareholders in the best way possible and this action along with the Company's efforts in the past 15 months solidifies that message. After tirelessly devoting the past several quarters to SBA PPP efforts, our seasoned lending team quickly pivoted to commercial loan production. While we continue to service the needs of our PPP clients as we help them navigate through the forgiveness process, our primary focus has returned to growing our core business. The commercial loan pipeline is robust and we expect to see excellent production through the second half of the year. Orrstown continues to take advantage of market disruption which has resulted in both new client relationships and new talent that fits with our strategic vision and core values.”

Mr. Quinn continued, “With the economy re-opened and COVID-19 mandates lifted, our commercial lenders have been enabled to do what they do best, which is interacting with clients and driving new business opportunities. Recruitment will be the key to increasing mortgage banking revenue and replenishing the mortgage loan portfolio. As the profit boost from PPP activity wanes through 2022, our focus remains on replacing that income over the long-term. With interest rates expected to remain at historical lows in the near term, we plan to maintain discipline with our commercial lending and seek appropriate opportunities to utilize excess liquidity that fit within our relationship model and drive long-term growth.”

DISCUSSION OF RESULTS

Balance Sheet

Loans

Loans held for investment, which includes SBA PPP loans, declined by $99.6 million from March 31, 2021 to June 30, 2021, or 20% annualized, due to SBA PPP forgiveness and consumer loan reductions, partially offset by net commercial loan production. SBA PPP loans, net of deferred fees and costs, declined during the quarter by $148.7 million to $355.6 million at June 30, 2021 from $504.3 million at March 31, 2021. Commercial loans, excluding SBA PPP loans, increased by $68.8 million, or 24% annualized, from March 31, 2021 to June 30, 2021 resulting from strong commercial loan production. Loans held for investment are down by $34.3 million, or 2%, from December 31, 2020 to June 30, 2021. Loan demand has increased and is expected to continue for the remainder of the year as the COVID-19 related restrictions were lifted in the second quarter of 2021.

We expect most of the 2020 SBA PPP loan balances to be forgiven by the end of 2021. The SBA PPP loan originations in 2021 totaled $231.7 million at June 30, 2021. A number of the 2021 loans began to achieve forgiveness in the second quarter of 2021 and it is expected most of these 2021 originations will be forgiven by the end of 2022. Net deferred fees of $11.2 million remain at June 30, 2021, the majority of which is expected to be earned by the end of 2022.

Residential mortgage loans declined by $13.3 million, or 24% annualized in the three months ended June 30, 2021. In addition to experiencing an overall decline in mortgage volume, the low interest rate environment has reduced the Company's appetite for portfolio mortgage loans. Despite this decline, overall loan growth in 2021, excluding SBA PPP, is expected to be mid-single digits with commercial lending growth exceeding 10%.

Deposits

Deposits declined by $53.0 million, or 8% annualized, but remained at $2.5 billion at June 30, 2021 compared to March 31, 2021. This decline is attributed to deposit customers' utilization of stimulus funds received in the first quarter of 2021, as well as usage of SBA PPP funds. Non-interest bearing demand deposits declined by $19.0 million in the second quarter of 2021, or 14% annualized, and interest bearing checking deposits declined by $28.9 million, or 12% annualized. This decline was partially offset by money market and savings account growth of $19.3 million, or 12% annualized, from March 31, 2021 to June 30, 2021. Certificates of deposit declined by $24.3 million from March 31, 2021 to June 30, 2021, or 25% annualized. Deposits are up by $137.2 million, or 6%, from December 31, 2020 to June 30, 2021 due primarily to SBA PPP loan fundings. Deposit balances are expected to continue to gradually decline over time as clients access their remaining PPP funds and deploy their excess liquidity, which contributed to the Bank's loan-to-deposit ratio of 78% at June 30, 2021. On a longer term basis, the Bank will continue to target a loan-to-deposit ratio of 90%.

Other

Investment securities increased by $42.1 million to $460.1 million at June 30, 2021 as compared to $418.0 million at March 31, 2021, due primarily to purchases of agency backed securities and municipal bonds. Longer term, the Bank will continue to seek to deploy excess liquidity to relationship lending strategies to maximize its net interest margin as rates rise. See Appendix C for a summary of the current investment portfolio that highlights the concentrations, quality and credit enhancement levels for the portfolio.

Income Statement

Net Interest Income and Margin

Net interest income remained consistent at $21.9 million for the three months ended June 30, 2021 compared to the three months ended March 31, 2021. The net interest margin declined to 3.24% in the second quarter of 2021 from 3.38% in the first quarter of 2021. The margin reduction was primarily a result of an increase in excess cash (17 basis points) and lower purchase accounting accretion (6 basis points), partially offset by a 13 basis point increase in yield on SBA PPP loans.

SBA PPP loans had an average outstanding balance of $471.2 million and yielded approximately 4.4% in the three months ended June 30, 2021. This yield increased from approximately 3.9% in the first quarter of 2021 due to the realization of fees on $197.5 million of SBA PPP loans forgiven in the second quarter of 2021 compared to $80.3 million forgiven in the first quarter of 2021. Net deferred SBA PPP fees of $3.8 million were earned in the second quarter of 2021.

Repricing actions by management at the end of the first quarter of 2021 led to a deposit cost reduction of six basis points in the second quarter of 2021 to 0.17%, which is down from 0.23% in the first quarter of 2021 and 0.60% in the second quarter of 2020.

Excess liquidity that has resulted from SBA PPP forgiveness and an inflow of deposit funds from the SBA PPP and government stimulus programs is expected to continue to negatively impact the margin in the short term as there is little spread on its earnings. We expect that this excess liquidity will exit the banking system in the future as our clients utilize these funds. Our objective of emphasizing balance sheet mix is expected to lead to a higher net interest margin over the long-term. These efforts may mute growth in assets, but should lead to growth in net interest income, earnings and return on assets. It is anticipated that the net interest margin will remain under pressure in 2021 due to excess liquidity combined with low interest rates anticipated for the remainder of the year, coupled with an asset sensitive balance sheet. We believe that our efforts on balance sheet mix enhancement, SBA PPP lending and fee income generation will be effective to manage through the currently challenging external environment.

Provision for Loan Losses

We continue to see favorable asset quality trends including most loans that we placed on payment deferral in 2020 having resumed paying status. The allowance for loan losses totaled $19.4 million at June 30, 2021, compared with $19.0 million at March 31, 2021. Total classified loans decreased by $3.7 million, or 11%, to $28.7 million from March 31, 2021 to June 30, 2021. As of June 30, 2021, the Bank had active COVID-19 related deferred loans totaling $3.9 million, or 0.25% of its total loan portfolio, excluding PPP loans. This compared to $7.5 million, or 0.49% of total loans, excluding PPP loans, at March 31, 2021 and $239.3 million, or 15.1% of total loans, excluding PPP loans, at June 30, 2020.

Net charge offs were $0.2 million, or 0.01% of total non-SBA PPP loans, for both the June 30, 2021 and March 31, 2021 quarters. Nonperforming loans totaled $9.9 million at both June 30, 2021 and March 31, 2021, which was 0.51% of gross loans at June 30, 2021 and 0.48% of gross loans at March 31, 2021. The ratio of the allowance for loan losses to nonperforming loans was 195% at June 30, 2021 compared to 192% at March 31, 2021. The allowance to non-SBA guaranteed loans(1) remained steady at 1.2% as of June 30, 2021 and March 31, 2021. Management believes the allowance for loan losses to be adequate based on current asset quality metrics.

Strong commercial loan growth and some charge-off activity resulted in provision expense of $0.6 million in the three months ended June 30, 2021 despite generally positive trends and sustained performance in the asset quality of the loan portfolio. This compares to a provision reversal of $1.0 million recorded in the three months ended March 31, 2021 and $1.9 million of provision expense recorded in the three months ended June 30, 2020. While there remains uncertainty in the external environment regarding the relative strength of the economy, management determined that a release of a portion of its COVID-19 qualitative reserve is appropriate. This was due to the satisfactory performance of borrowers in the commercial portfolio and consideration of the amount of deferrals that have resumed making regular monthly payments. Accordingly, the qualitative factor within the allowance designated for the impact of COVID-19 was lowered by $0.8 million from March 31, 2021 to $1.0 million at June 30, 2021.

The combination of active client relationship consultation, loan payment deferrals, increased risk management focus on higher risk loan concentrations (primarily hotels and restaurants) and significant client participation in the SBA PPP have contributed to the favorable delinquency and charge-off trends we experienced during the pandemic.

(1) Non-GAAP measure. See Appendix B for additional information.

Noninterest Income

Noninterest income totaled $6.7 million in the three months ended June 30, 2021 compared with $7.5 million in the three months ended March 31, 2021 and $7.2 million in the three months ended June 30, 2020. Management continues to focus on opportunities to enhance fee income to offset potential net interest margin compression.

Total wealth management income for the three months ended June 30, 2021 grew to $2.9 million, as compared to $2.7 million for the three months ended March 31, 2021 and $2.3 million in the second quarter of 2020. Strong market conditions continue to drive wealth management income along with the addition of new clients.

Mortgage banking income declined by $1.0 million from the first quarter of 2021 to $1.2 million in the second quarter of 2021, partially due to a $0.5 million reduction in the fair value of the mortgages held for sale and interest rate lock commitments compared a reduction of $0.1 million in the first quarter of 2021. This was driven by declining production volume. Also, the second quarter of 2021 included a mortgage servicing valuation allowance reduction of $0.1 million as compared to $0.6 million in the first quarter of 2021. Mortgage loans sold totaled $51.8 million in the second quarter of 2021 compared with $57.3 million in the first quarter of 2021 and $49.5 million in the second quarter of 2020. As of June 30, 2021, the Bank services $480.4 million of loans for others, which is up by $16.4 million from March 31, 2021. On a year-to-date basis, mortgage activity has been strong. Mortgage banking income was $3.4 million for the six months ended June 30, 2021 as compared to $1.9 million for the six months ended June 30, 2020.

Debit card interchange income totaled $1.1 million in the second quarter of 2021, which is up $0.1 million from the prior quarter and up $0.2 million from the second quarter of 2020. Rising spending activity from the re-opening of the economy from COVID-19 and government stimulus payments drove this increase.

Noninterest Expenses

Noninterest expenses declined by $0.8 million to $17.0 million in the three months ended June 30, 2021 from the three months ended March 31, 2021. The decrease is due primarily to a $0.4 million reduction in the Bank's unfunded commitment reserve in the three months ended June 30, 2021 as compared to an increase of $0.3 million in the same reserve for the three months ended March 31, 2021. There were also declines in occupancy, advertising and professional services due to normal fluctuations. Market disruption continues to present opportunities to add experienced lenders and other valuable contributors to the organization. As these opportunities arise to facilitate the Company's growth, it could lead to increased expenses.

Income Taxes

The Company's effective tax rate for the second quarter of 2021 was 19.3% compared with 19.1% for the first quarter of 2021. The Company's effective tax rate is 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 change in the effective rate reflects an increase in projected income for the full 2021 year.

Capital

Shareholders’ equity totaled $265.9 million at June 30, 2021, an increase of $11.5 million from $254.4 million at March 31, 2021. The increase was primarily attributable to net income and accumulated other comprehensive income from investment gains recorded in the three months ended June 30, 2021 offset by dividends paid in the period. Tangible book value per share grew from $19.93 per share at December 31, 2020 to $21.61 per share at June 30, 2021, an increase of 8%.

The Company's tangible common equity ratio increased to 8.4% at June 30, 2021 from 7.8% at March 31, 2021. The Company's Tier 1 leverage ratio was 8.0% at June 30, 2021 and 8.1% at March 31, 2021. The Company's total risk-based capital ratio decreased from 16.2% at March 31, 2021 to 15.6% at June 30, 2021. A balance sheet shift to higher risk assets, including commercial loans, drove this reduction. As the balance of SBA PPP loans starts to decline, the Bank's tier 1 leverage ratio is expected to gradually increase if the cash position remains stable or reduced. The ratio is still well above that required to be considered "well-capitalized" under applicable regulatory requirements. As a result of the Company's performance in the first half of 2021 and a strong capital position, the Board of Directors approved a quarterly dividend increase from $0.18 per share to $0.19 per share. The dividend payout ratio totaled 24% for the three months ended June 30, 2021. The Company continues to believe that capital is adequate at this time to support the risks inherent in the balance sheet, as well as growth requirements.

Investor Relations Contact:

Media Contact:

Matthew C. Schultheis, CFA

Luke Bernstein

Director Strategic Planning and Investor Relations

Corporate Communications Officer

Phone (717) 510-7127

Phone (717) 510-7107


ORRSTOWN FINANCIAL SERVICES, INC.

FINANCIAL HIGHLIGHTS (Unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

June 30,

June 30,

(Dollars in thousands, except per share amounts)

2021

2020

2021

2020

Profitability for the period:

Net interest income

$

21,901

$

20,798

$

43,756

$

39,060

Provision for loan losses

625

1,900

(375

)

2,825

Noninterest income

6,664

7,193

14,208

14,267

Noninterest expenses

17,033

18,431

34,816

36,735

Income before income taxes

10,907

7,660

23,523

13,767

Income tax expense

2,131

1,301

4,540

2,340

Net income available to common shareholders

$

8,776

$

6,359

$

18,983

$

11,427

Financial ratios:

Return on average assets (1)

1.20

%

0.94

%

1.33

%

0.90

%

Return on average equity (1)

13.56

%

11.82

%

15.04

%

10.36

%

Net interest margin (1)

3.24

%

3.37

%

3.31

%

3.39

%

Efficiency ratio

59.6

%

65.8

%

60.1

%

68.9

%

Income per common share:

Basic

$

0.80

$

0.58

$

1.73

$

1.04

Diluted

$

0.79

$

0.58

$

1.71

$

1.04

Average equity to average assets

8.83

%

7.94

%

8.84

%

8.69

%

(1) Annualized.


ORRSTOWN FINANCIAL SERVICES, INC.

FINANCIAL HIGHLIGHTS (Unaudited)

(continued)

June 30,

December 31,

2021

2020

At period-end:

Total assets

$

2,912,717

$

2,750,572

Total deposits

2,494,100

2,356,880

Loans, net of allowance for loan losses

1,926,002

1,959,539

Loans held-for-sale, at fair value

8,092

11,734

Securities available for sale

450,402

466,465

Borrowings

80,709

77,511

Subordinated notes

31,932

31,903

Shareholders' equity

265,938

246,249

Credit quality and capital ratios (1):

Allowance for loan losses to total loans

1.00

%

1.02

%

Total nonaccrual loans to total loans

0.51

%

0.52

%

Nonperforming assets to total assets

0.34

%

0.37

%

Allowance for loan losses to nonaccrual loans

195

%

195

%

Total risk-based capital:

Orrstown Financial Services, Inc.

15.6

%

15.6

%

Orrstown Bank

14.7

%

14.7

%

Tier 1 risk-based capital:

Orrstown Financial Services, Inc.

12.8

%

12.5

%

Orrstown Bank

13.5

%

13.5

%

Tier 1 common equity risk-based capital:

Orrstown Financial Services, Inc.

12.8

%

12.5

%

Orrstown Bank

13.5

%

13.5

%

Tier 1 leverage capital:

Orrstown Financial Services, Inc.

8.0

%

8.1

%

Orrstown Bank

8.5

%

8.7

%

Book value per common share

$

23.61

$

21.98

(1) Capital ratios are estimated, subject to regulatory filings


ORRSTOWN FINANCIAL SERVICES, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands, except per share amounts)

June 30, 2021

December 31, 2020

Assets

Cash and due from banks

$

27,623

$

26,203

Interest-bearing deposits with banks

309,139

99,055

Cash and cash equivalents

336,762

125,258

Restricted investments in bank stocks

9,691

10,563

Securities available for sale (amortized cost of $440,411 and $460,999 at June 30, 2021 and December 31, 2020, respectively)

450,402

466,465

Loans held for sale, at fair value

8,092

11,734

Loans

1,945,383

1,979,690

Less: Allowance for loan losses

(19,381

)

(20,151

)

Net loans

1,926,002

1,959,539

Premises and equipment, net

34,529

35,149

Cash surrender value of life insurance

69,375

68,554

Goodwill

18,724

18,724

Other intangible assets, net

4,800

5,458

Accrued interest receivable

7,930

8,927

Other assets

46,410

40,201

Total assets

$

2,912,717

$

2,750,572

Liabilities

Deposits:

Noninterest-bearing

$

529,137

$

456,778

Interest-bearing

1,964,963

1,900,102

Total deposits

2,494,100

2,356,880

Securities sold under agreements to repurchase

22,872

19,466

FHLB advances and other

57,837

58,045

Subordinated notes

31,932

31,903

Accrued interest and other liabilities

40,038

38,029

Total liabilities

2,646,779

2,504,323

Shareholders’ Equity

Preferred stock, $1.25 par value per share; 500,000 shares authorized; no shares issued or outstanding

Common stock, no par value—$0.05205 stated value per share 50,000,000 shares authorized; 11,265,510 shares issued and 11,262,751 outstanding at June 30, 2021; 11,257,046 shares issued and 11,201,317 outstanding at December 31, 2020

586

586

Additional paid—in capital

188,772

189,066

Retained earnings

69,052

54,099

Accumulated other comprehensive income

7,578

3,346

Treasury stock— 2,759 and 55,729 shares, at cost at June 30, 2021 and December 31, 2020, respectively

(50

)

(848

)

Total shareholders’ equity

265,938

246,249

Total liabilities and shareholders’ equity

$

2,912,717

$

2,750,572


ORRSTOWN FINANCIAL SERVICES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

June 30,

June 30,

(In thousands, except per share amounts)

2021

2020

2021

2020

Interest income

Loans

$

21,323

$

21,794

$

42,834

$

41,960

Investment securities - taxable

1,614

2,795

3,493

6,233

Investment securities - tax-exempt

638

420

1,138

704

Short-term investments

81

13

120

92

Total interest income

23,656

25,022

47,585

48,989

Interest expense

Deposits

1,081

3,310

2,473

7,664

Securities sold under agreements to repurchase

8

152

17

184

FHLB advances and other

164

260

335

1,078

Subordinated notes

502

502

1,004

1,003

Total interest expense

1,755

4,224

3,829

9,929

Net interest income

21,901

20,798

43,756

39,060

Provision for loan losses

625

1,900

(375

)

2,825

Net interest income after provision for loan losses

21,276

18,898

44,131

36,235

Noninterest income

Service charges

880

719

1,765

1,706

Interchange income

1,064

819

2,019

1,607

Swap fee income

15

232

68

432

Wealth management income

2,930

2,295

5,653

4,654

Mortgage banking activities

1,162

1,609

3,351

1,941

Gains on sale of portfolio loans

925

2,803

Investment securities gains (losses)

11

9

156

(31

)

Other income

602

585

1,196

1,155

Total noninterest income

6,664

7,193

14,208

14,267

Noninterest expenses

Salaries and employee benefits

10,212

10,063

20,409

21,657

Occupancy, furniture and equipment

2,400

2,326

4,918

4,615

Data processing, telephone, and communication

1,032

791

2,051

1,662

Advertising and bank promotions

274

167

699

956

FDIC insurance

158

214

352

261

Professional services

579

1,021

1,300

1,737

Taxes other than income

462

449

913

451

Intangible asset amortization

324

404

658

867

Insurance claim recovery

(486

)

Other operating expenses

1,592

2,996

3,516

5,015

Total noninterest expenses

17,033

18,431

34,816

36,735

Income before income tax expense

10,907

7,660

23,523

13,767

Income tax expense

2,131

1,301

4,540

2,340

Net income

$

8,776

$

6,359

$

18,983

$

11,427

Share information:

Basic earnings per share

$

0.80

$

0.58

$

1.73

$

1.04

Diluted earnings per share

$

0.79

$

0.58

$

1.71

$

1.04

Weighted average shares - basic

10,975

10,916

10,975

10,937

Weighted average shares - diluted

11,112

10,993

11,093

11,027


ORRSTOWN FINANCIAL SERVICES, INC.

ANALYSIS OF NET INTEREST INCOME

Average Balances and Interest Rates, Taxable-Equivalent Basis (Unaudited)

Three Months Ended

6/30/2021

03/31/21

12/31/20

09/30/20

6/30/2020

Taxable-

Taxable-

Taxable-

Taxable-

Taxable-

Taxable-

Taxable-

Taxable-

Taxable-

Taxable-

(Dollars in thousands)

Average

Equivalent

Equivalent

Average

Equivalent

Equivalent

Average

Equivalent

Equivalent

Average

Equivalent

Equivalent

Average

Equivalent

Equivalent

Balance

Interest

Rate

Balance

Interest

Rate

Balance

Interest

Rate

Balance

Interest

Rate

Balance

Interest

Rate

Assets

Federal funds sold & interest-bearing bank balances

$

290,039

$

81

0.11

%

$

145,595

$

39

0.11

%

$

48,019

$

14

0.12

%

$

31,087

$

9

0.12

%

$

27,949

$

13

0.18

%

Investment securities (1)

438,110

2,421

2.22

468,273

2,512

2.18

486,613

2,643

2.16

496,107

2,673

2.14

493,847

3,327

2.71

Loans (1)(2)(3)

2,014,600

21,375

4.26

2,033,219

21,574

4.30

2,015,749

23,960

4.73

2,054,193

21,741

4.21

1,988,114

21,912

4.43

Total interest-earning assets

2,742,749

23,877

3.49

2,647,087

24,125

3.70

2,550,381

26,617

4.15

2,581,387

24,423

3.76

2,509,910

25,252

4.05

Other assets

188,810

182,737

182,764

190,119

200,684

Total

$

2,931,559

$

2,829,824

$

2,733,145

$

2,771,506

$

2,710,594

Liabilities and Shareholders' Equity

Interest-bearing demand deposits

$

1,394,384

292

0.08

$

1,334,219

438

0.13

$

1,283,024

655

0.20

$

1,213,208

939

0.31

$

1,154,434

1,259

0.44

Savings deposits

200,439

50

0.10

183,576

45

0.10

172,068

52

0.12

168,377

67

0.16

160,738

63

0.16

Time deposits

382,467

739

0.78

397,271

909

0.93

411,395

1,155

1.12

432,438

1,477

1.36

462,664

1,988

1.73

Securities sold under agreements to repurchase

22,417

8

0.14

21,452

9

0.17

20,055

13

0.26

21,145

20

0.38

21,582

24

0.45

FHLB advances and other

57,896

164

1.14

58,000

171

1.20

135,558

320

0.94

219,567

394

0.71

175,336

388

0.89

Subordinated notes

31,924

502

6.29

31,909

502

6.29

31,895

502

6.29

31,881

501

6.28

31,867

502

6.33

Total interest-bearing liabilities

2,089,527

1,755

0.34

2,026,427

2,074

0.42

2,053,995

2,697

0.52

2,086,616

3,398

0.65

2,006,621

4,224

0.85

Noninterest-bearing demand deposits

545,617

516,849

406,454

417,939

452,253

Other

37,561

36,244

36,216

37,330

36,511

Total Liabilities

2,672,705

2,579,520

2,496,665

2,541,885

2,495,385

Shareholders' Equity

258,854

250,304

236,480

229,621

215,209

Total

$

2,931,559

$

2,829,824

$

2,733,145

$

2,771,506

$

2,710,594

Taxable-equivalent net interest income / net interest spread

22,122

3.15

%

22,051

3.28

%

23,920

3.63

%

21,025

3.12

%

21,028

3.20

%

Taxable-equivalent net interest margin

3.24

%

3.38

%

3.73

%

3.24

%

3.37

%

Taxable-equivalent adjustment

(221

)

(196

)

(192

)

(207

)

(230

)

Net interest income

$

21,901

$

21,855

$

23,728

$

20,818

$

20,798

Ratio of average interest-earning assets to average interest-bearing liabilities

131

%

131

%

124

%

124

%

125

%

NOTES:

(1) Yields and interest income on tax-exempt assets have been computed on a taxable-equivalent basis assuming a 21% tax rate.

(2) Average balances include nonaccrual loans.

(3) Interest income on loans includes prepayment and late fees, where applicable, prior periods have been adjusted to include these fees.


ORRSTOWN FINANCIAL SERVICES, INC.

ANALYSIS OF NET INTEREST INCOME

Average Balances and Interest Rates, Taxable-Equivalent Basis (Unaudited)

Six Months Ended

June 30, 2021

June 30, 2020

Taxable-

Taxable-

Taxable-

Taxable-

Average

Equivalent

Equivalent

Average

Equivalent

Equivalent

(Dollars in thousands)

Balance

Interest

Rate

Balance

Interest

Rate

Assets

Federal funds sold & interest-bearing bank balances

$

218,216

$

120

0.11

%

$

25,409

$

92

0.73

%

Investment securities (1)

453,108

4,933

2.20

497,418

7,124

2.88

Loans (1)(2)(3)

2,023,858

42,949

4.28

1,820,830

42,199

4.66

Total interest-earning assets

2,695,182

48,002

3.59

2,343,657

49,415

4.24

Other assets

185,791

194,543

Total

$

2,880,973

$

2,538,200

Liabilities and Shareholders' Equity

Interest-bearing demand deposits

$

1,364,483

728

0.11

$

1,063,460

3,161

0.60

Savings deposits

192,039

96

0.10

155,966

127

0.16

Time deposits

389,828

1,649

0.85

483,014

4,376

1.82

Securities sold under agreements to repurchase

21,937

17

0.16

15,499

52

0.67

FHLB advances and other

57,948

335

1.17

181,372

1,210

1.34

Subordinated notes

31,916

1,004

6.29

31,860

1,003

6.29

Total interest-bearing liabilities

2,058,151

3,829

0.38

1,931,171

9,929

1.03

Noninterest-bearing demand deposits

531,313

351,208

Other

36,906

35,139

Total Liabilities

2,626,370

2,317,518

Shareholders' Equity

254,603

220,682

Total

$

2,880,973

$

2,538,200

Taxable-equivalent net interest income / net interest spread

44,173

3.22

%

39,486

3.21

%

Taxable-equivalent net interest margin

3.31

%

3.39

%

Taxable-equivalent adjustment

(417

)

(426

)

Net interest income

$

43,756

$

39,060

Ratio of average interest-earning assets to average interest-bearing liabilities

131

%

121

%

NOTES TO ANALYSIS OF NET INTEREST INCOME:

(1) Yields and interest income on tax-exempt assets have been computed on a taxable-equivalent basis assuming a 21% tax rate.

(2) Average balances include nonaccrual loans.

(3) Interest income on loans includes prepayment and late fees, where applicable, prior periods have been adjusted to include these fees.


ORRSTOWN FINANCIAL SERVICES, INC.

HISTORICAL TRENDS IN QUARTERLY FINANCIAL DATA (Unaudited)

(In thousands, except per share amounts )

June 30,
2021

March 31,
2021

December 31,
2020

September 30,
2020

June 30,
2020

Profitability for the quarter:

Net interest income

$

21,901

$

21,855

$

23,729

$

20,818

$

20,798

Provision for loan losses

625

(1,000

)

300

2,200

1,900

Noninterest income

6,664

7,544

7,181

6,861

7,193

Noninterest expenses

17,033

17,783

18,080

19,265

18,431

Income before income taxes

10,907

12,616

12,530

6,214

7,660

Income tax expense

2,131

2,409

2,471

1,237

1,301

Net income

$

8,776

$

10,207

$

10,059

$

4,977

$

6,359

Financial ratios:

Return on average assets (1)

1.20

%

1.44

%

1.47

%

0.72

%

0.94

%

Return on average equity (1)

13.56

%

16.31

%

17.01

%

8.67

%

11.82

%

Net interest margin (1)

3.24

%

3.38

%

3.73

%

3.24

%

3.37

%

Efficiency ratio

59.6

%

60.5

%

58.5

%

69.6

%

65.8

%

Per share information :

Income per common share:

Basic

$

0.80

$

0.93

$

0.92

$

0.45

$

0.58

Diluted

$

0.79

$

0.92

$

0.91

$

0.45

$

0.58

Book value

$

23.61

$

22.62

$

21.98

$

20.78

$

20.13

Tangible book value (2)

$

21.61

$

20.59

$

19.93

$

18.70

$

18.03

Cash dividends paid

$

0.18

$

0.18

$

0.17

$

0.17

$

0.17

Average basic shares

10,975

10,975

10,953

10,941

10,916

Average diluted shares

11,112

11,074

11,057

11,025

10,993

(1) Annualized.

(2) Non-GAAP based financial measure. Please refer to Appendix B - Supplemental Reporting of Non-GAAP Measures and GAAP to Non-GAAP Reconciliations for a discussion of our use of non-GAAP based financial measures, including tables reconciling GAAP and non-GAAP financial measures appearing herein.


ORRSTOWN FINANCIAL SERVICES, INC.

HISTORICAL TRENDS IN QUARTERLY FINANCIAL DATA (Unaudited)

(continued)

June 30,
2021

March 31,
2021

December 31,
2020

September 30,
2020

June 30,
2020

Noninterest income:

Service charges

$

880

$

885

$

999

$

852

$

719

Interchange income

1,064

955

916

900

819

Loan swap referral fees

15

53

320

95

232

Wealth management income

2,930

2,723

2,615

2,464

2,295

Mortgage banking activities

1,162

2,189

1,348

1,985

1,609

Other income

602

594

955

578

1,510

Investment securities gains (losses)

11

145

28

(13

)

9

Total noninterest income

$

6,664

$

7,544

$

7,181

$

6,861

$

7,193

Noninterest expenses:

Salaries and employee benefits

$

10,212

$

10,197

$

10,998

$

10,695

$

10,063

Occupancy, furniture and equipment

2,400

2,518

2,467

2,434

2,326

Data processing, telephone, and communication

1,032

1,019

954

958

791

Advertising and bank promotions

274

425

507

197

167

FDIC insurance

158

194

195

230

214

Professional services

579

721

780

603

1,021

Taxes other than income

462

451

240

453

449

Intangible asset amortization

324

334

345

357

404

Merger related and branch consolidation expenses

1,310

Other operating expenses

1,592

1,924

1,594

2,028

2,996

Total noninterest expenses

$

17,033

$

17,783

$

18,080

$

19,265

$

18,431


ORRSTOWN FINANCIAL SERVICES, INC.

HISTORICAL TRENDS IN QUARTERLY FINANCIAL DATA (Unaudited)

(continued)

June 30,
2021

March 31,
2021

December 31,
2020

September 30,
2020

June 30,
2020

Balance Sheet at quarter end:

Cash and cash equivalents

$

336,762

$

326,245

$

125,258

$

87,307

$

52,290

Restricted investments in bank stocks

9,691

10,307

10,563

12,646

16,256

Securities available for sale

450,402

407,690

466,465

478,288

483,936

Loans held for sale, at fair value

8,092

11,449

11,734

12,804

13,594

Loans:

Commercial real estate:

Owner occupied

191,595

177,934

174,908

166,623

164,442

Non-owner occupied

471,541

415,219

409,567

403,138

390,980

Multi-family

112,420

111,757

113,635

110,153

111,016

Non-owner occupied residential

99,631

101,381

114,505

111,958

116,531

Commercial and industrial (1)

599,123

750,831

647,368

690,330

665,312

Acquisition and development:

1-4 family residential construction

9,686

12,138

9,486

9,627

7,966

Commercial and land development

55,330

45,229

51,826

37,850

50,220

Municipal

14,452

19,238

20,523

28,867

34,276

Total commercial loans

1,553,778

1,633,727

1,541,818

1,558,546

1,540,743

Residential mortgage:

First lien

211,918

225,247

244,321

273,149

295,736

Home equity – term

8,321

9,183

10,169

11,108

11,944

Home equity – lines of credit

149,601

153,169

157,021

158,106

160,842

Installment and other loans

21,765

23,695

26,361

28,961

32,052

Total loans

1,945,383

2,045,021

1,979,690

2,029,870

2,041,317

Allowance for loan losses

(19,381

)

(18,967

)

(20,151

)

(19,725

)

(17,517

)

Net loans held-for-investment

1,926,002

2,026,054

1,959,539

2,010,145

2,023,800

Goodwill

18,724

18,724

18,724

18,724

18,724

Other intangible assets, net

4,800

5,124

5,458

5,803

6,160

Total assets

2,912,717

2,963,534

2,750,572

2,781,667

2,772,796

Total deposits

2,494,100

2,547,089

2,356,880

2,279,483

2,251,731

Borrowings

80,709

80,736

77,511

200,818

226,520

Subordinated notes

31,932

31,918

31,903

31,889

31,875

Total shareholders' equity

265,938

254,448

246,249

232,847

225,638

(1) This balance includes $355.6 million, $504.3 million, $403.3 million, $458.1 million and $447.2 million of SBA PPP loans, net of deferred fees and costs, at June 30, 2021, March 31, 2021, December 31, 2020, September 30, 2020, and June 30, 2020, respectively.

ORRSTOWN FINANCIAL SERVICES, INC.

HISTORICAL TRENDS IN QUARTERLY FINANCIAL DATA (Unaudited)

(continued)

June 30,
2021

March 31,
2021

December 31,
2020

September 30,
2020

June 30,
2020

Capital and credit quality measures (1):

Total risk-based capital:

Orrstown Financial Services, Inc

15.6

%

16.2

%

15.6

%

15.0

%

14.5

%

Orrstown Bank

14.7

%

15.3

%

14.7

%

14.3

%

13.9

%

Tier 1 risk-based capital:

Orrstown Financial Services, Inc

12.8

%

13.2

%

12.5

%

12.0

%

11.7

%

Orrstown Bank

13.5

%

14.1

%

13.5

%

13.1

%

12.8

%

Tier 1 common equity risk-based capital:

Orrstown Financial Services, Inc

12.8

%

13.2

%

12.5

%

12.0

%

11.7

%

Orrstown Bank

13.5

%

14.1

%

13.5

%

13.1

%

12.8

%

Tier 1 leverage capital:

Orrstown Financial Services, Inc

8.0

%

8.1

%

8.1

%

7.8

%

7.6

%

Orrstown Bank

8.5

%

8.6

%

8.7

%

8.5

%

8.4

%

Average equity to average assets

8.83

%

8.85

%

8.65

%

8.29

%

7.94

%

Allowance for loan losses to total loans

1.00

%

0.93

%

1.02

%

0.97

%

0.86

%

Total nonaccrual loans to total loans

0.51

%

0.48

%

0.52

%

0.39

%

0.36

%

Nonperforming assets to total assets

0.34

%

0.33

%

0.37

%

0.28

%

0.27

%

Allowance for loan losses to nonaccrual loans

195

%

192

%

195

%

250

%

237

%

Other information:

Net charge-offs (recoveries)

$

211

$

184

$

(126

)

$

(8

)

$

186

Classified loans

28,731

32,408

33,147

36,408

33,376

Nonperforming and other risk assets:

Nonaccrual loans

9,941

9,895

10,310

7,899

7,404

Other real estate owned

17

Total nonperforming assets

9,941

9,895

10,310

7,899

7,421

Restructured loans still accruing

852

921

934

945

960

Loans past due 90 days or more and still accruing (2)

212

196

554

520

909

Total nonperforming and other risk assets

$

11,005

$

11,012

$

11,798

$

9,364

$

9,290

(1) Capital ratios are estimated, subject to regulatory filings.

(2) Includes $196 thousand, $179 thousand, $515 thousand, $520 thousand and $594 thousand of purchased credit impaired loans at June 30, 2021, March 31, 2021, December 31, 2020, September 30, 2020, and June 30, 2020, respectively.

Appendix A- Supplemental Reporting of Unusual Items

The following table presents unusual items that impacted each period shown. These items are presented to enable investors to better understand the magnitude of certain significant items on reported GAAP results in the context of the Company's growth and acquisition activities.

Three Months Ended

Year To Date

6/30/2021

3/31/21

12/31/20

9/30/20

6/30/2020

6/30/2021

6/30/2020

(In thousands)

Pretax Items

Branch consolidation expenses

$

$

$

$

1,310

$

$

$

Net securities gains (losses)

11

145

28

(13

)

9

156

(31

)

Gain on swap termination

226

Earnings on life insurance proceeds

58

Gains on sale of portfolio loans

925

2,803

Accretion - recoveries on purchased credit impaired loans

23

256

779

294

1,021

278

1,232

Insurance claim receivable recovery

486

Appendix B- Supplemental Reporting of Non-GAAP Measures and GAAP to Non-GAAP Reconciliations

As a result of acquisitions, the Company has intangible assets consisting of goodwill and core deposit and other intangible assets totaling $23.5 million and $24.2 million at June 30, 2021 and December 31, 2020, respectively. Additionally, the Company incurred approximately $1.3 million in charges associated with branch consolidation efforts during the three months ended September 30, 2020.

Management believes providing certain “non-GAAP” financial information will assist investors in their understanding of the effect of acquisition activity on reported results, particularly to overcome comparability issues related to the influence of intangibles (principally goodwill) created in acquisitions. Management also believes providing certain other “non-GAAP” financial information will assist investors in their understanding of the effect on recent financial results of non-recurring charges associated with increasing operational efficiencies for the long-term, and provide investors with clarity on its allowance for loan losses to total loans ratio. The Company believes that excluding SBA PPP loans, due to its credit enhancement, from loans held for investment is useful to investors due to the size and effect on the total and ratio.

Tangible book value per common share and allowance to non-SBA guaranteed loans, as used by the Company in this earnings release, are determined by methods other than in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"). While we believe this information is a useful supplement to GAAP based measures presented in this earnings release, readers are cautioned that this non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for financial measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of our results and financial condition as reported under GAAP, nor are such measures necessarily comparable to non-GAAP performance measures that may be presented by other companies. This supplemental presentation should not be construed as an inference that our future results will be unaffected by similar adjustments to be determined in accordance with GAAP.

The following tables present the computation of each non-GAAP based measure:

(dollars in thousands, except per share information)

Tangible Book Value per Common Share

June 30,
2021

March 31,
2021

December 31,
2020

September 30,
2020

June 30,
2020

Shareholders' equity

$

265,938

$

254,448

$

246,249

$

232,847

$

225,638

Less: Goodwill

18,724

18,724

18,724

18,724

18,724

Other intangible assets

4,800

5,124

5,458

5,803

6,160

Related tax effect

(1,008

)

(1,076

)

(1,146

)

(1,219

)

(1,294

)

Tangible common equity (non-GAAP)

$

243,422

$

231,676

$

223,213

$

209,539

$

202,048

Common shares outstanding

11,263

11,251

11,201

11,204

11,209

Book value per share (most directly comparable GAAP based measure)

$

23.61

$

22.62

$

21.98

$

20.78

$

20.13

Intangible assets per share

2.00

2.03

2.05

2.08

2.10

Tangible book value per share (non-GAAP)

$

21.61

$

20.59

$

19.93

$

18.70

$

18.03


Allowance to Non-SBA Guaranteed Loans:

June 30, 2021

March 31, 2021

Allowance for loan losses

$

19,381

$

18,967

Gross loans

1,945,383

2,045,021

less: SBA guaranteed loans

(356,905

)

(506,296

)

Non-SBA guaranteed loans

$

1,588,478

$

1,538,725

Allowance to non-SBA guaranteed loans

1.2

%

1.2

%

Appendix C- Investment Portfolio Concentrations

The following table summarizes the credit ratings and collateral associated with the Company's investment portfolio, excluding equity securities, at June 30, 2021:

(dollars in thousands)

Sector

Portfolio Mix

Amortized Book

Fair Value

Credit Enhancement

AAA

AA

A

BBB

NR

Collateral Type

Unsecured ABS

1

%

$

4,044

$

4,086

53

%

%

%

%

%

100

%

Unsecured Consumer Debt

Student Loan ABS

2

%

9,945

9,882

26

%

%

%

%

100

%

Seasoned Student Loans

Federal Family Education Loan ABS

41

%

176,220

176,388

6

71

%

16

%

13

%

%

%

Federal Family Education Loan (1)

PACE Loan ABS

1

%

4,525

4,644

6

100

%

%

%

%

%

PACE Loans

Non-Agency RMBS

3

%

14,013

14,642

47

100

%

%

%

%

%

Reverse Mortgages (2)

Municipal - General Obligation

19

%

83,541

89,179

2

%

90

%

8

%

%

%

Municipal - Revenue

15

%

66,344

70,237

%

70

%

15

%

%

15

%

SBA ReRemic

2

%

9,783

9,772

%

100

%

%

%

%

SBA Guarantee (3)

Agency MBS

16

%

71,597

71,173

%

100

%

%

%

%

Residential Mortgages (3)

Bank CDs

%

249

249

%

%

%

%

100

%

FDIC Insured CD

100

%

$

440,261

$

450,252

33

%

52

%

9

%

%

6

%

(1) Minimum of 97% guaranteed by U.S. government

(2) Reverse mortgages fund over time and credit enhancement is estimated based on prior experience

(3) 100% guaranteed by U.S. government agencies

Note : Ratings in table are the lowest of the three rating agencies (Standard & Poors, Moody's & Fitch). Standard & Poors rates U.S. government obligations at AA+

Note: S&P rates US government obligations at AA+

About the Company

With $2.9 billion in assets, Orrstown Financial Services, Inc. and its wholly-owned subsidiary, Orrstown Bank, provide a wide range of consumer and business financial services in Berks, Cumberland, Dauphin, Franklin, Lancaster, Perry, and York Counties, Pennsylvania and Anne Arundel, Baltimore, Howard, and Washington Counties, Maryland, as well as Baltimore City, Maryland. Orrstown Bank is an Equal Housing Lender and its deposits are insured up to the legal maximum by the FDIC. Orrstown Financial Services, Inc.’s common stock is traded on Nasdaq (ORRF). For more information about Orrstown Financial Services, Inc. and Orrstown Bank, visit www.orrstown.com.

Cautionary Note Regarding Forward-looking Statements:

This press release contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements reflect the current views of the Company's management with respect to, among other things, future events and the Company's financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “project,” “forecast,” “goal,” “target,” “would” and “outlook,” or the negative variations of those words or other comparable words of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about the Company's industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company's control. Accordingly, the Company cautions you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements and there can be no assurances that the Company will be able to continue to successfully execute on its strategic growth plan into Dauphin, Lancaster, York and Berks counties, Pennsylvania, and the greater Baltimore market in Maryland, with newer markets continuing to be receptive to our community banking model; to take advantage of market disruption; to experience sustained growth in loans and deposits or maintain the momentum experienced to date from these actions. In addition to risks and uncertainties related to the COVID-19 pandemic (including those related to variants, such as the delta variant) and resulting governmental and societal responses, factors which could cause the actual results of the Company's operations to differ materially from expectations include, but are not limited to: ineffectiveness of the Company's strategic growth plan due to changes in current or future market conditions; the effects of competition and how it may impact our community banking model, including industry consolidation and development of competing financial products and services; the integration of the Company's strategic acquisitions; the inability to fully achieve expected savings, efficiencies or synergies from mergers and acquisitions, or taking longer than estimated for such savings, efficiencies and synergies to be realized; changes in laws and regulations; interest rate movements; changes in credit quality; inability to raise capital, if necessary, under favorable conditions; volatility in the securities markets; deteriorating economic conditions; expenses associated with pending litigation and legal proceedings; the failure of the SBA to honor its guarantee of loans issued under the SBA PPP; the timing of the repayment of SBA PPP loans and the impact it has on fee recognition; our ability to convert new relationships gained through the SBA PPP efforts to full banking relationships; and other risks and uncertainties, including those set forth under the heading "Risk Factors" in the Company's 2020 Annual Report on Form 10-K and subsequent filings with the Securities and Exchange Commission. The foregoing list of factors is not exhaustive.

If one or more events related to these or other risks or uncertainties materializes, or if the Company's underlying assumptions prove to be incorrect, actual results may differ materially from what the Company anticipates. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and the Company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New risks and uncertainties arise from time to time, and it is not possible for the Company to predict those events or how they may affect it. In addition, the Company cannot assess the impact of each factor on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements, expressed or implied, included in this press release are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that the Company or persons acting on the Company's behalf may issue.

The review period for subsequent events extends up to and includes the filing date of a public company’s financial statements, when filed with the Securities and Exchange Commission. Accordingly, the consolidated financial information presented in this announcement is subject to change.



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