Orrstown Financial Services, Inc. Reports First Quarter 2020 diluted EPS of $0.46 and Announces Quarterly Dividend of $0.17 per Share

  • Announced initiatives in March 2020 to assist clients, employees and communities affected by COVID-19
  • Began to see impact of COVID-19 in Q1 with provision for loan losses of $0.9 million, mortgage servicing impairment of $0.5 million, wealth management fee pressure and a reduction in commercial loan closings due to project delays
  • Initiated proactive risk mitigation efforts, which included contacting existing clients representing over 70% of the commercial loan portfolio, completing loan deferral arrangements for clients with balances totaling $35.7 million through March 31, 2020 and actively participating in the Small Business Administration Paycheck Protection Program (the “SBA PPP”) in April 2020
  • In April 2020, expected closings of SBA PPP loans total approximately $370 million with approximately $9 million of processing fees to be earned primarily over Q2 and Q3
  • Classified loans fell by $10.3 million to $30.5 million at March 31, 2020 from $40.8 million at December 31, 2019; non-performing loans to total loans fell by 18 basis points to 0.47% at March 31, 2020 as compared to 0.65% at December 31, 2019; net recoveries of $0.2 million were recorded in the three months ended March 31, 2020
  • Due to the hiring of commercial relationship managers in the second half of 2019, commercial loan growth was strong for a second quarter in a row, at 15% annualized, after 20% annualized growth in the fourth quarter of 2019; however, the impact of COVID-19 will make it difficult to maintain that growth throughout the remainder of 2020
  • Annualized gross loan growth of 3.0%, despite sales of portfolio loans and high payoffs in the mortgage portfolio due to heavy refinance activity
  • With market uncertainty, deposits grew by $54.3 million, or 16% annualized, in checking, money market and savings accounts; continued planned runoff of an additional $25 million of brokered and subscription deposits
  • With rapidly falling interest rates and an asset sensitive balance sheet, margin management was active, resulting in a four basis point expansion in the net interest margin to 3.41% for the three months ended March 31, 2020 as compared to 3.37% for the three months ended December 31, 2019
  • Repriced deposits quickly, leading to a nine basis point reduction in the cost of deposits, replaced maturing funding with lower cost alternatives, and new origination loan spreads were widened
  • Noninterest income totaled $7.1 million, or 28% of revenues, for the three months ended March 31, 2020, negatively impacted by seasonal reductions in many fee categories and the COVID-19 event, which was more than offset by $1.9 million of gains from the sale of acquired classified loans and an acquired recreational vehicle portfolio
  • Announced that the annual shareholder meeting will be held virtually on April 28, 2020 at 9:00 AM
  • Declared a cash dividend of $0.17 per common share, payable May 11, 2020, to shareholders of record as of May 4, 2020, maintaining the dividend declared in the previous quarter

SHIPPENSBURG, Pa., April 21, 2020 (GLOBE NEWSWIRE) -- Orrstown Financial Services, Inc. ("Orrstown" or the “Company”) (NASDAQ: ORRF), the parent company of Orrstown Bank (the “Bank”) and Wheatland Advisors, Inc., announced earnings for the three months ended March 31, 2020. Net income totaled $5.1 million for the first quarter of 2020, compared with $4.2 million for the fourth quarter of 2019 and $3.1 million in the first quarter of 2019.  Diluted earnings per share totaled $0.46 for the three months ended March 31, 2020, compared with $0.38 for the three months ended December 31, 2019 and $0.33 for the three months ended March 31, 2019.

Thomas R. Quinn, Jr., President & CEO, commented, “The first quarter saw a progression of our strategy, which carried on even as the COVID-19 pandemic changed how Orrstown conducts business.  Commercial loans grew as recent hires of commercial lenders brought high quality relationships to the Bank.  Additionally, through two loan sales, we further aligned our existing portfolio with our risk tolerances.  However, as the quarter passed, the disruptive impact of the COVID-19 outbreak became more and more evident.  We pivoted to providing service through electronic channels.  We engaged in direct outreach to clients to assess their needs and provide assistance where needed. 

Though the SBA Paycheck Protection Program was not introduced until second quarter 2020, work done in the first quarter of 2020 and before laid the foundation for successful implementation at Orrstown.  Investments in 2019 in Baltimore and Harrisburg, as well as our 2015 expansion into Lancaster while maintaining our focus in our historic Cumberland Valley footprint, allowed us to accept almost 1,500 applications.  Many of these represent new relationships to the Bank, for which our intention is to bring the whole relationship to Orrstown over time; however, the associated loans will all be underwritten with the same prudence as our existing portfolio.  We look forward to returning to business as usual, as do our clients, employees, and shareholders, just as soon as it is safe to do so.”

COVID-19 Response Efforts

Orrstown has implemented the following steps to mitigate the potential spread of this virus, and to help our clients during this challenging time:

  • Temporarily closed all branch lobbies for transaction purposes; drive thru lanes remain open.
  • Encouraged clients to utilize the Bank’s online, mobile, and telephone banking services, as well as night drops and ATMs.
  • Implemented a by-appointment only process, where we will meet with clients face-to-face for critical and essential needs that cannot be serviced remotely or via a drive-up, such as a loan settlement or safe deposit box access request.
  • Waived Orrstown fees on all foreign ATM transactions from March 18, 2020 through May 15, 2020.
  • Waived late fees on all loan payments for 60 days.
  • Designated loan experts available to work with clients to assist them during this challenging time.
  • Implemented a work-from-home policy for employees whose primary responsibilities can be completed in this manner.
  • Enhanced staffing levels at our Client Service Center to manage our increased call volume.
  • Instituted additional preventative measures by providing guidance to all employees on hygiene and social distancing.
  • Educated clients and consumers to explore programs provided by the U.S. Small Business Administration (“SBA”).
  • Changed Annual Meeting to a Virtual Meeting.

Loss Mitigation Efforts / Loan Concentration

Management initiated numerous proactive efforts to prepare for the difficult economic environment that is imminent, including contacting most commercial loan clients, initiating a loan payment deferral program for consumers and business clients of up to six months, actively participating in the SBA PPP, performing stress testing of higher risk concentrations in the loan portfolio and tighter underwriting for new loans.  Due to the change in the external environment, management increased the qualitative factors for certain loan segments in the Bank’s allowance for loan loss analysis, which resulted in the recording of $0.9 million of provision for loan losses in the quarter.  At March 31, 2020, eight consumer clients with loans totaling $0.8 million were granted payment deferrals while 22 clients with commercial loans totaling $34.9 million also had payment deferrals.  Subsequently, as of April 20, 2020, additional consumer and commercial deferrals were granted totaling $12.1 million and $101.4 million respectively.  These conversations are on-going and we expect more deferrals to be granted in the second quarter of 2020. 

The Bank is also actively consulting with clients on the benefits of the many government lending programs currently available, with the most interest expressed in the SBA PPP.  To date, the Bank has taken almost 1,500 applications and expects to close approximately $370 million of these loans in April 2020.  These loans are fully guaranteed by the SBA and forgivable if certain conditions are met by the borrower, including the client using 75% of the loan for payroll.

The combination of active client relationship consultation, loan payment deferrals, increased risk management focus on higher risk loan concentrations and significant client participation in the SBA PPP is expected to help offset potential future period losses.  Due to the current economic environment, we do expect charge offs to increase in the coming quarters, but more time is needed to fully understand the magnitude and length of the pending economic downturn and its impact on our loan portfolio.

Below is a summary of select loan concentrations as a percentage of total loans and the Bank’s total risk-based capital as of March 31, 2020:

 As a Percentage of
CategoryTotal LoansRisk-based Capital
Multifamily residential6.7 47.3 
Strip Center / Retail3.1 21.7 
Commercial Construction2.9 20.4 
Hotel / Motel2.8 19.6 
Warehouses2.3 16.4 
Restaurants & Bars1.5 10.8 
Storage Units1.5 10.7 
Residential Construction0.8 5.5 


Balance Sheet

Due to the significant addition of commercial relationship managers in the second half of 2019, commercial loans grew $39.9 million, or 15% annualized, in the quarter ended March 31, 2020, despite the aforementioned classified loan sale.  This follows the fourth quarter 2019 growth of 20% annualized, or $52.7 million.  As previously disclosed, the Bank intends to focus growth efforts in relationship commercial lending.  We expect that growth will slow in the coming quarters as the team focuses more effort on managing its existing clients given the change in the economic environment.  Home equity loans were relatively flat at $178.7 million at March 31, 2020 as first mortgage refinance activity reduced home equity loan balances as many clients consolidated debt. Mortgage loan originations grew with the fall in interest rates, but the Bank continues to sell most of its loan production in the secondary market. First lien residential mortgages fell $11.6 million, or 14% annualized, in the three months ended March 31, 2020 as the Bank continues to execute its balance sheet mix optimization strategy. Installment loans fell by $15.1 million in the three months ended March 31, 2020 due to the sale of $11.0 million of acquired RV loans for risk management purposes, plus normal amortization. Overall, period end gross loans grew by $12.6 million, or 3% annualized, in the first quarter of 2020 as compared with December 31, 2019, as the mix continues to shift away from lower margin consumer loans to relationship commercial loans.

Given the market uncertainty, the Bank saw a notable inflow of deposits into checking, money market and savings accounts.  Total core (non-maturity) deposits increased $54.3 million in the first quarter, or 16% annualized, to $1.42 billion. Time deposits, net of brokered and subscription accounts, fell $7.7 million in the quarter, or 6% annualized. Planned reductions in brokered deposits and subscription service deposits continued with $23.8 million of runoff.  The loan to deposit ratio remained stable at 86% at March 31, 2020 as net loans grew by $11.5 million and deposits increased $21.8 million. The Bank will selectively use brokered channels as needed and is targeting a 90-95% loan to deposit ratio over the long term.

Borrowings fell by $5.9 million to $212.0 million in the three months ended March 31, 2020; however, the Bank shifted strategies with regard to borrowings due to the decrease in interest rates.  Initially, maturing long-term borrowings and brokered CDs were replaced with overnight borrowings. This led to an initial reduction in the cost of borrowings as rates fell.  After rates fell significantly, the Bank extended the duration of $100.0 million of borrowings for a weighted average term of six years at a cost of funds of 0.54%.

During the three months ended March 31, 2020, securities available for sale decreased by $11.3 million as $26.7 million of purchases were offset by $20.5 million of principal repayments and a $17.3 million reduction in the fair value of investments. Due to bond market turmoil in the quarter, spreads widened in many segments of the investment portfolio as liquidity in the market was temporarily constrained.  Many funds liquidated holdings and buying demand was limited, thereby putting pressure on prices.  Given the strength of the investment counterparty or deal credit enhancement for asset-backed securities, this reduction in fair value is likely to be temporary.  In addition, the Bank has the ability and intent to hold these bonds to maturity, so no other than temporary impairment charges were recorded.  As the Bank continues to execute its plan to grow relationship loans, it will look to reduce its investment portfolio concentration to fund some of this loan growth through investment repayments. Total asset growth was limited at $4.2 million for the three months ended March 31, 2020 and we expect limited total balance sheet growth in 2020 as the Company reinvests lower margin investments and mortgages into relationship commercial and consumer loans.

Income Statement

Net Interest Income and Margin
The Bank actively managed its balance sheet to optimize its net interest margin, given the rapid decline in interest rates.  The Bank focused on shifting borrowings short and repricing non-maturity deposits quickly to preserve the margin for the near term to offset the reductions in variable rate loan and investment yield reductions.  Adding to the margin stability was the continued balance sheet mix shift as commercial loans grew by $39.9 million, mortgage loans fell by $11.6 million, brokered and subscription service deposits fell by $23.8 million and core deposit balances rose by $54.3 million from December 31, 2019 to March 31, 2020.  As a result of these efforts, net interest income totaled $18.3 million in the first quarter of 2020 compared with $17.9 million in the fourth quarter of 2019. Average interest-earning assets rose by $44.8 million in the three months ended March 31, 2020 due primarily to average commercial loan growth of $64.5 million over the same period. The net interest margin increased by four basis points in the three months ended March 31, 2020 to 3.41% as the earning asset yield fell by five basis points while the cost of interest-bearing liabilities fell by nine basis points.

As previously disclosed, the Company has an asset sensitive balance sheet with concentrations in variable rate commercial loans and investment securities. It also has significant concentrations in core deposits with a low cost of funds. With this profile, the Bank will normally experience net interest margin pressure as interest rates fall and net interest margin expansion as rates rise. If the external environment continues to favor low interest rates, the Company will continue to focus on mix optimization to preserve margin, while also obtaining its fair share of rate sensitive fee revenues from mortgage loans to be sold in the secondary market and loan swap referral income for commercial real estate clients. The first quarter of 2020 saw record low interest rates and they are expected to stay low throughout 2020. 

Provision for Loan Losses
The allowance for loan losses totaled $15.8 million at March 31, 2020, compared with $14.7 million at December 31, 2019. Total classified loans fell in the quarter by 25%, or $10.3 million. Management initiated a strategy in the first quarter of 2020 to pursue the sale or workout of classified loans.  During the three months ended March 31, 2020, the Bank sold $9.2 million of a portfolio of acquired classified loans, recording a gain on sale of $1.6 million.  While asset quality trends continue to exhibit low levels of charge-offs and non-performing loans, management decided to increase its qualitative reserves in anticipation of an increase in charge-offs in future periods due to the COVID-19 pandemic.  The provision for loan losses totaled $0.9 million in the first quarter of 2020, compared with $0 in the fourth quarter of 2019. Management believes the allowance for loan losses to total loans ratio remains adequate at 0.95% at March 31, 2020. At December 31, 2019, the allowance for loan losses to total loans ratio totaled 0.89%. 

Successful workout efforts led to net recoveries in the quarter ended March 31, 2020 of $0.2 million, as compared with net charge-offs totaling $0.2 million in the quarter ended December 31, 2019. Nonperforming loans decreased by $2.9 million to $8.0 million at March 31, 2020 from $10.9 million at December 31, 2019, due principally to a measurement period adjustment for the transfer of a $2.6 million loan from the Hamilton Bank acquisition into the purchased credit impaired pool during the three months ended March 31, 2020. Nonperforming loans totaled 0.47% of gross loans at March 31, 2020, compared with 0.65% of gross loans at December 31, 2019.  Overall, asset quality continued to be solid and the allowance for loan losses to nonperforming loans ratio was 202% at March 31, 2020.

Noninterest Income
Noninterest income for the quarter ended March 31, 2020, excluding securities gains, totaled $7.1 million, compared with $7.0 million in the quarter ended December 31, 2019. The Bank completed the sale of two portfolios of loans for risk management purposes, which resulted in gains of $1.9 million in the three months ended March 31, 2020. These gains were partially offset by reduced fee revenue as the Bank began to see the negative impact of the COVID-19 pandemic during the second half of the quarter.

Total wealth management income for the quarter ended March 31, 2020 was $2.4 million, as compared to $2.5 million for the quarter ended December 31, 2019. A significant portion of the fees earned in wealth management are from fees assessed as a percentage of assets under management.  With the fall in the market in the latter half of the first quarter of 2020, these fees came under pressure.  If markets do not recover, growth of assets under management may be constrained.  While the Bank continues to acquire new clients, fee growth from these efforts will be muted in the near term if market weakness continues.

In the first quarter of 2020, service charges totaled $1.0 million and interchange income on debit cards totaled $0.8 million, which combined, are down $0.2 million from the quarter ended December 31, 2019. These stable sources of fee revenue should grow over time as we add retail and commercial clients, but the combination of fee waivers from foreign ATMs and a reduction in economic activity due to the COVID-19 pandemic will constrain growth. Growth in these sources continues to be an area of opportunity and focus in future years.

During the three months ended March 31, 2020, the Bank sold two portfolios of loans for risk management purposes.  The first was a portfolio of purchased RV loans that were acquired in the Hamilton Bank merger.  A decision was made to exit this portfolio for risk management purposes and the $11.0 million portfolio was sold for a gain of $0.3 million.  The second portfolio was a pool of $9.2 million in classified commercial loans primarily acquired from Hamilton Bank.  The strategy was to reduce complexity and risk by selling the loans given the favorable pricing in the secondary market.  The sale of these classified loans resulted in a gain on sale of $1.6 million in the three months ended March 31, 2020.

Mortgage banking income for the quarter ended March 31, 2020 fell by $1.0 million to $0.3 million. In the first quarter of 2020, a $0.5 million impairment charge was recognized on the mortgage servicing rights asset (“MSR”) due to falling interest rates. In the fourth quarter 2019, $0.2 million of the MSR impairment was recovered due to an increase in interest rates.  Thus $0.7 million of the reduction in mortgage banking income was caused by volatility in the MSR valuation.  Loans sold in the three months ended March 31, 2020 totaled $22.0 million compared with $32.2 million in the three months ended December 31, 2019. The mortgage market was disrupted in the quarter, which delayed closings. The Bank ended the quarter with an elevated amount of locked loans that were not closed, totaling $22.7 million. Since the Bank records gains on closed and locked loans, income was not impacted by these delays.

Loan swap referral fees totaled $0.2 million in the first quarter of 2020, a reduction of $0.4 million from the previous quarter. There were opportunities in the pipeline, scheduled to close in the first quarter of 2020, that did not occur primarily due to the impact of the COVID-19 pandemic.  These fees for interest rate hedge referral income are related to commercial real estate lending.  With the market turmoil, many commercial real estate projects were put on hold or cancelled.  This fee revenue will fluctuate from quarter to quarter, but we expect to continue to see client demand to convert to fixed loan interest rates in this current rate environment once markets stabilize.

Noninterest Expenses
Noninterest expenses totaled $18.3 million in the first quarter of 2020 compared with $19.7 million in the fourth quarter of 2019. The fourth quarter of 2019 results included $1.0 million of branch consolidation expenses.

Salaries and employee benefits totaled $11.6 million in the first quarter of 2020 as compared with $11.4 million in the previous quarter. The normal seasonal first quarter increase in payroll taxes led to a $0.3 million increase.  Overtime increased with the complexities related to the COVID-19 pandemic leading to a $0.2 million increase in salary expense in the three months ended March 31, 2020.  Bonuses and incentives, which were elevated in the fourth quarter of 2019 due primarily to new hiring efforts, normalized as expected in the first quarter of 2020 and fell by $0.6 million.  Health insurance expenses remained above average under the Company's self-insured group health plan, but fell $0.2 million in the three months ended March 31, 2020.

Occupancy expense decreased by $0.1 million from the three months ended December 31, 2019 to the three months ended March 31, 2020 due primarily to savings from the consolidation of five branches in the first quarter of 2020.  Professional fees fell by $0.2 million in the three months ended March 31, 2020 as many projects from 2019 ended prior to year-end.  First quarter 2020 advertising and bank promotions expense increased by $0.2 million from the previous quarter due to an increase in charitable contributions. The Company received certain tax credits associated with a portion of these increased contributions related to Pennsylvania’s Educational Improvement Tax Credit program, which allowed the Company to reduce its Pennsylvania bank shares tax expense, included in taxes other than income, by $0.1 million in the first quarter of 2020 to $0. 

FDIC insurance expense reflects credits received in the first quarter of 2020, similar to those received in the third and fourth quarters of 2019, under the FDIC's regulations to provide credits to banks with consolidated assets under $10 billion, when the reserve ratio reaches 1.38%. The Company exhausted its credits in the first quarter of 2020 and expects FDIC insurance expense to return to customary levels in the second quarter of 2020.


At March 31, 2020, the Company had a tier 1 leverage ratio of 8.5%, total risk-based capital ratio of 14.0% and tier 1 risk-based capital ratio of 11.2%. The Bank’s capital ratios remain solid with the tier 1 leverage ratio of 9.4%, total risk-based capital ratio of 13.4% and tier 1 risk-based capital ratio of 12.5% at March 31, 2020.  Shareholders’ equity totaled $210.6 million at March 31, 2020, a decrease of $12.7 million from $223.2 million at December 31, 2019. The decrease was primarily attributable to an increase in accumulated other comprehensive loss from changes in net unrealized gains and losses in securities available for sale, which fell by $13.6 million from December 31, 2019 to March 31, 2020 due to declining interest rates. The Company repurchased 71,955 shares in the first quarter of 2020 at a weighted average price of $16.27, thus reducing equity by $1.2 million.  This repurchase program was suspended on March 21, 2020 due to the COVID-19 pandemic.  The Bank intends to utilize the new Paycheck Protection Program Liquidity Facility (the “PPPLF”) to fund the growth in loan closings expected for the SBA PPP in the second quarter of 2020.  SBA loans are 100% guaranteed by the SBA and, therefore, do not impact risk-based capital.  We also intend on pledging the SBA PPP loans to the PPPLF, which would reduce or eliminate the leverage capital impact, depending on how much is actually borrowed.

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

  Three Months Ended
  March 31, March 31,
(Dollars in thousands, except per share amounts) 2020 2019
Profitability for the period:    
Net interest income $18,262  $14,760 
Provision for loan losses 925  400 
Noninterest income 7,074  5,135 
Noninterest expenses 18,304  16,161 
Income before income taxes 6,107  3,334 
Income tax expense 1,039  232 
Net income available to common shareholders $5,068  $3,102 
Financial ratios:    
Return on average assets (1) 0.86% 0.65%
Return on average equity (1) 8.96% 7.23%
Net interest margin (1) 3.41% 3.41%
Efficiency ratio 72.2% 81.2%
Income per common share:    
Basic $0.46  $0.34 
Diluted $0.46  $0.33 
Average equity to average assets 9.56% 9.05%
(1) Quarterly ratios are annualized.    

 March 31, December 31,
 2020 2019
At period-end:   
Total assets$2,387,488  $2,383,274 
Total deposits1,897,296  1,875,522 
Loans, net of allowance for loan losses1,641,145  1,629,675 
Loans held-for-sale, at fair value7,900  9,364 
Securities available for sale479,599  490,885 
Borrowings212,034  217,936 
Subordinated notes31,861  31,847 
Shareholders' equity210,570  223,249 
Credit quality and capital ratios (1):   
Allowance for loan losses to total loans0.95% 0.89%
Total nonaccrual loans to total loans0.47% 0.65%
Nonperforming assets to total assets0.34% 0.46%
Allowance for loan losses to nonaccrual loans202% 138%
Total risk-based capital:   
Orrstown Financial Services, Inc.14.0% 14.1%
Orrstown Bank13.4% 13.4%
Tier 1 risk-based capital:   
Orrstown Financial Services, Inc.11.2% 11.3%
Orrstown Bank12.5% 12.5%
Tier 1 common equity risk-based capital:   
Orrstown Financial Services, Inc.11.2% 11.3%
Orrstown Bank12.5% 12.5%
Tier 1 leverage capital:   
Orrstown Financial Services, Inc.8.5% 8.6%
Orrstown Bank9.4% 9.4%
Book value per common share$18.81  $19.93 
(1) Capital ratios are estimated, subject to regulatory filings   

(Dollars in thousands, except per share amounts)March 31, 2020 December 31, 2019
Cash and due from banks$33,974  $25,969 
Interest-bearing deposits with banks23,163  29,994 
Cash and cash equivalents57,137  55,963 
Restricted investments in bank stocks15,823  16,184 
Securities available for sale (amortized cost of $497,454 and $491,492 at March 31, 2020 and December 31, 2019, respectively)479,599  490,885 
Loans held for sale, at fair value7,900  9,364 
Loans1,656,948  1,644,330 
Less: Allowance for loan losses(15,803) (14,655)
Net loans1,641,145  1,629,675 
Premises and equipment, net37,098  37,524 
Cash surrender value of life insurance64,016  63,613 
Goodwill20,142  19,925 
Other intangible assets, net6,717  7,180 
Accrued interest receivable6,697  6,040 
Other assets51,214  46,921 
Total assets$2,387,488  $2,383,274 
Noninterest-bearing$263,502  $249,450 
Interest-bearing1,633,794  1,626,072 
Total deposits1,897,296  1,875,522 
Short-term borrowings189,065  154,869 
Long-term debt22,969  63,067 
Subordinated notes31,861  31,847 
Accrued interest and other liabilities35,727  34,720 
Total liabilities2,176,918  2,160,025 
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; 11,268,679 shares issued and 11,196,724 outstanding at March 31, 2020; 11,220,604 shares issued and 11,199,874 outstanding at December 31, 2019586  584 
Additional paid—in capital187,843  188,365 
Retained earnings38,408  35,246 
Accumulated other comprehensive loss(15,097) (480)
Treasury stock— 71,955 and 20,730 shares, at cost at March 31, 2020 and December 31, 2019, respectively(1,170) (466)
Total shareholders’ equity210,570  223,249 
Total liabilities and shareholders’ equity$2,387,488  $2,383,274 

 Three Months Ended
 March 31, March 31,
(In thousands, except per share amounts)2020 2019
Interest income   
Loans$20,166  $15,151 
Investment securities - taxable3,438  3,492 
Investment securities - tax-exempt284  842 
Short-term investments79  173 
Total interest income23,967  19,658 
Interest expense   
Deposits4,354  3,715 
Short-term borrowings562  243 
Long-term debt288  443 
Subordinated notes501  497 
Total interest expense5,705  4,898 
Net interest income18,262  14,760 
Provision for loan losses925  400 
Net interest income after provision for loan losses17,337  14,360 
Noninterest income   
Service charges987  902 
Interchange Income788  736 
Loan swap referral fees200   
Wealth management income2,359  2,236 
Mortgage banking activities332  468 
Other income2,448  454 
Investment securities (losses) gains(40) 339 
Total noninterest income7,074  5,135 
Noninterest expenses   
Salaries and employee benefits11,594  8,677 
Occupancy, furniture and equipment2,289  2,024 
Data processing, telephone, and communication871  770 
Advertising and bank promotions789  521 
FDIC insurance47  185 
Professional services716  557 
Taxes other than income  306 
Intangible asset amortization463  208 
Merger related and branch consolidation expenses  645 
Insurance claim receivable (recovery) write-off(486) 615 
Other operating expenses2,021  1,653 
Total noninterest expenses18,304  16,161 
Income before income tax expense6,107  3,334 
Income tax expense1,039  232 
Net income$5,068  $3,102 
Share information:   
Basic earnings per share$0.46  $0.34 
Diluted earnings per share$0.46  $0.33 
Weighted average shares - basic10,959  9,160 
Weighted average shares - diluted11,062  9,326 

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

 Three Months Ended
 3/31/2020 12/31/19 09/30/19 06/30/19 3/31/2019
(Dollars in thousands) Average Balance   Taxable-Equivalent Interest   Taxable-Equivalent Rate   Average Balance   Taxable-Equivalent Interest   Taxable-Equivalent Rate   Average Balance   Taxable-Equivalent Interest   Taxable-Equivalent Rate   Average Balance   Taxable-Equivalent Interest   Taxable-Equivalent Rate   Average Balance   Taxable-Equivalent Interest   Taxable-Equivalent Rate 
Federal funds sold & interest-bearing bank balances$23,368  $79   1.37% $21,895  $102   1.84% $96,212  $561   2.31% $84,843  $503   2.38% $29,108  $173   2.41%
Securities (1)500,488  3,797   3.05  504,072  3,916   3.08  496,482  4,177   3.34  496,803  4,479   3.62  499,755  4,558   3.70 
Loans (1)(2)(3)1,653,547  20,288   4.93  1,606,608  20,207   4.99  1,604,491  20,306   5.02  1,497,445  19,782   5.30  1,257,654  15,273   4.93 
Total interest-earning assets2,177,403  24,164   4.46  2,132,575  24,225   4.51  2,197,185  25,044   4.52  2,079,091  24,764   4.78  1,786,517  20,004   4.54 
Other assets188,400      191,585      193,946      175,566      137,802     
Total$2,365,803      $2,324,160      $2,391,131      $2,254,657      $1,924,319     
Liabilities and Shareholders' Equity                             
Interest-bearing demand deposits$972,487  1,903   0.79  $955,975  2,136   0.89  $954,824  2,206   0.92  $922,612  2,062   0.90  $845,092  1,850   0.89 
Savings deposits151,194  55   0.15  142,524  55   0.15  151,692  81   0.21  146,063  81   0.22  114,314  43   0.15 
Time deposits (4)503,364  2,396   1.91  559,486  2,717   1.93  658,587  3,508   2.11  575,660  2,749   1.92  403,095  1,822   1.83 
Short-term borrowings147,645  562   1.53  65,767  307   1.85  10,497  39   1.48  9,594  34   1.41  42,124  243   2.34 
Long-term debt49,179  288   2.36  63,122  371   2.33  74,524  433   2.30  97,161  532   2.19  88,076  443   2.04 
Subordinated notes31,853  501   6.32  31,839  501   6.23  31,826  490   6.10  31,819  499   6.28  31,886  497   6.32 
Total interest-bearing liabilities1,855,722  5,705   1.24  1,818,713  6,087   1.33  1,881,950  6,757   1.42  1,782,909  5,957   1.34  1,524,587  4,898   1.30 
Noninterest-bearing demand deposits250,163      247,107      252,211      235,046      202,365     
Other33,763      35,282      35,720      31,692      23,310     
Total Liabilities2,139,648      2,101,102      2,169,881      2,049,647      1,750,262     
Shareholders' Equity226,155      223,058      221,250      205,010      174,057     
Total$2,365,803      $2,324,160      $2,391,131      $2,254,657      $1,924,319     
Taxable-equivalent net interest income / net interest spread  18,459   3.22%   18,138   3.18%   18,287   3.10%   18,807   3.44%   15,106   3.24%
Taxable-equivalent net interest margin    3.41%     3.37%     3.30%     3.63%     3.43%
Taxable-equivalent adjustment  (197)      (197)      (208)      (292)      (346)   
Net interest income  $18,262       $17,941       $18,079       $18,515       $14,760    
Ratio of average interest-earning assets to average interest-bearing liabilities    117%     117%     117%     117%     117%

(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.
(4)  For the three months ended September 30, 2019, expenses associated with the early redemption of brokered time deposits totaled $0.2 million, and increased the cost of funds by 13 basis points.


(In thousands, except per share amounts)March 31,
  December 31,
  September 30,
  June 30,
  March 31,
Profitability for the quarter:              
Net interest income$18,262  $17,941  $18,079  $18,515  $14,760 
Provision for loan losses925    300  200  400 
Noninterest income7,074  7,028  8,602  7,774  5,135 
Noninterest expenses18,304  19,707  18,140  23,292  16,161 
Income before income taxes6,107  5,262  8,241  2,797  3,334 
Income tax expense1,039  1,028  1,340  110  232 
Net income$5,068  $4,234  $6,901  $2,687  $3,102 
Financial ratios:              
Return on average assets (1)0.86% 0.72% 1.15% 0.48% 0.65%
Return on average equity (1)8.96% 7.53% 12.37% 5.26% 7.23%
Net interest margin (1)3.41% 3.37% 3.30% 3.63% 3.43%
Efficiency ratio72.25% 78.93% 67.99% 88.60% 81.23%
Efficiency ratio, adjusted (2)72.13% 75.02% 72.55% 67.83% 79.34%
Per share information :              
Income per common share:              
Basic$0.46  $0.39  $0.63  $0.26  $0.34 
Diluted$0.46  $0.38  $0.62  $0.26  $0.33 
Book value$18.81  $19.93  $20.00  $19.59  $18.89 
Tangible book value (3)$16.53  $17.65  $17.67  $17.27  $17.25 
Cash dividends paid$0.17  $0.15  $0.15  $0.15  $0.15 
Average basic shares10,959  10,966  10,949  10,349  9,160 
Average diluted shares11,062  11,097  11,094  10,514  9,326 
(1)  Annualized.
(2) Efficiency ratio has been adjusted for merger related fees and investment securities (losses) gains.
(3) 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.


 March 31,
  December 31,
  September 30,
  June 30,
 March 31,
Noninterest income:            
Service charges$987  $1,119  $1,110  $1,078 $902
Interchange income788  859  843  843 736
Loan swap referral fees200  568  629   
Wealth management income2,359  2,478  2,546  2,421 2,236
Mortgage banking activities332  1,304  623  652 468
Other income2,448  682  523  716 454
Investment securities (losses) gains(40) 18  2,328  2,064 339
Total noninterest income$7,074  $7,028  $8,602  $7,774 $5,135
Noninterest expenses:            
Salaries and employee benefits$11,594  $11,407  $10,489  $8,922 $8,677
Occupancy, furniture and equipment2,289  2,433  2,385  2,206 2,024
Data processing, telephone, and communication871  941  1,028  1,260 770
Advertising and bank promotions789  619  279  548 521
FDIC insurance47  (30) (9) 221 185
Professional services716  876  814  707 557
Taxes other than income  92  306  314 306
Intangible asset amortization463  474  486  402 208
Merger related and branch consolidation expenses  988  471  6,860 645
Insurance claim receivable (recovery) write-off(486)      615
Other operating expenses2,021  1,907  1,891  1,852 1,653
Total noninterest expenses$18,304  $19,707  $18,140  $23,292 $16,161

 March 31,
 December 31,
 September 30,
 June 30,
 March 31,
Balance Sheet at quarter end:         
Cash and cash equivalents$57,137  $56,462  $50,923  $116,879  $77,217 
Restricted investments in bank stocks15,823  16,184  11,399  10,105  10,292 
Securities available for sale479,599  490,386  481,120  496,930  490,221 
Loans held for sale, at fair value7,900  9,364       
Loans held for sale, at cost    7,610  7,152  4,787 
Commercial real estate:         
Owner occupied168,586  170,884  171,327  170,272  123,100 
Non-owner occupied377,933  361,050  310,334  298,989  264,869 
Multi-family107,797  106,893  108,751  93,342  83,009 
Non-owner occupied residential118,773  120,038  120,395  121,364  101,312 
Commercial and industrial235,791  214,554  215,734  219,551  169,651 
Total commercial loans1,008,880  973,419  926,541  903,518  741,941 
Acquisition and development:         
1-4 family residential construction13,037  15,865  12,257  12,801  6,361 
Commercial and land development49,348  41,538  38,494  57,027  49,784 
Municipal46,551  47,057  47,920  48,358  50,599 
Residential mortgage:         
First lien324,766  336,372  353,811  363,946  231,243 
Home equity – term13,337  14,030  15,175  15,989  11,828 
Home equity – lines of credit165,375  165,314  159,930  157,645  143,308 
Installment and other loans35,654  50,735  38,977  42,386  30,475 
Total loans1,656,948  1,644,330  1,593,105  1,601,670  1,265,539 
Allowance for loan losses(15,803) (14,655) (14,809) (14,460) (14,283)
Net loans held-for-investment1,641,145  1,629,675  1,578,296  1,587,210  1,251,256 
Goodwill20,142  19,925  19,925  19,621  12,592 
Other intangible assets, net6,717  7,180  7,654  8,140  3,702 
Total assets2,387,488  2,383,274  2,313,677  2,399,508  1,973,283 
Total deposits1,897,296  1,875,522  1,923,454  2,015,541  1,620,696 
Borrowings212,034  217,936  99,770  92,634  112,935 
Subordinated notes31,861  31,847  31,834  31,821  31,810 
Total shareholders' equity210,570  223,249  223,493  219,868  179,167 

 March 31,
 December 31,
 September 30,
 June 30,
 March 31,
Capital and credit quality measures (1):         
Total risk-based capital:         
Orrstown Financial Services, Inc14.0% 14.1% 14.5% 14.1% 15.3%
Orrstown Bank13.4% 13.4% 13.6% 13.0% 13.2%
Tier 1 risk-based capital:         
Orrstown Financial Services, Inc11.2% 11.3% 11.6% 11.2% 11.9%
Orrstown Bank12.5% 12.5% 12.7% 12.1% 12.1%
Tier 1 common equity risk-based capital:         
Orrstown Financial Services, Inc11.2% 11.3% 11.6% 11.2% 11.9%
Orrstown Bank12.5% 12.5% 12.7% 12.1% 12.1%
Tier 1 leverage capital:         
Orrstown Financial Services, Inc8.5% 8.6% 8.2% 8.5% 8.5%
Orrstown Bank9.4% 9.4% 8.9% 8.6% 8.6%
Average equity to average assets9.56% 9.60% 9.25% 9.09% 9.05%
Allowance for loan losses to total loans0.95% 0.89% 0.93% 0.90% 1.13%
Total nonaccrual loans to total loans0.47% 0.65% 0.44% 0.27% 0.37%
Nonperforming assets to total assets0.34% 0.46% 0.33% 0.21% 0.26%
Allowance for loan losses to nonaccrual loans202% 138% 214% 330% 301%
Other information:         
Net (recoveries) charge-offs$(223) $154  $(49) $23  $131 
Classified loans30,470  40,808  37,535  27,742  17,782 
Nonperforming and other risk assets:         
Nonaccrual loans7,805  10,657  6,931  4,387  4,743 
Other real estate owned197  197  642  735  454 
Total nonperforming assets8,002  10,854  7,573  5,122  5,197 
Restructured loans still accruing971  979  1,042  1,104  1,116 
Loans past due 90 days or more and still accruing (2)2,115  2,232  2,982  1,661  295 
Total nonperforming and other risk assets$11,088  $14,065  $11,597  $7,887  $6,608 
(1) Capital ratios are estimated, subject to regulatory filings.
(2) Includes $1.9 million, $2.0 million, $2.4 million, $1.7 million, and $0.3 million of purchased credit impaired loans at March 31, 2020, December 31, 2019, September 30, 2019, June 30, 2019 and March 31, 2019, 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
 3/31/2020 12/31/19 9/30/19 6/30/19 3/31/2019
(In thousands)         
Pretax Items         
Merger related expenses$  $  $(471) $(6,860) $(645)
Branch consolidation expenses  (988)      
Net securities (losses) gains(40) 18  2,328  2,064  339 
Accelerated payoff of brokered deposits and borrowings penalty    223     
Life insurance proceeds      255   
Restricted stock forfeiture expense benefit      350   
Accretion -  recoveries on purchased credit impaired loans211  109  21  715   
Insurance claim receivable recovery (write-off)486        (615)
Income Tax Expense Items         
Tax benefit from state deferred tax asset rate change      334   
Tax benefit from acquired life insurance assets        185 

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 $26.9 million and $27.1 million at March 31, 2020 and December 31, 2019, respectively.

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.

Tangible book value per share and net interest margin excluding the impact of purchase accounting, 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 table presents the computation of each non-GAAP based measure shown together with its most directly comparable GAAP based measure.

(in thousands, except per share information) 
Tangible Book Value per Common ShareMarch 31,
 December 31,
 September 30,
 June 30,
 March 31,
Shareholders' equity$210,570  $223,249  $223,493  $219,868  $179,167 
Goodwill20,142  19,925  19,925  19,621  12,592 
Other intangible assets6,717  7,180  7,654  8,140  3,702 
Related tax effect(1,411) (1,508) (1,607) (1,709) (777)
Tangible common equity (non-GAAP)$185,122  $197,652  $197,521  $193,816  $163,650 
Common shares outstanding11,197  11,200  11,175  11,224  9,485 
Book value per share (most directly comparable GAAP based measure)$18.81  $19.93  $20.00  $19.59  $18.89 
Intangible assets per share2.28  2.28  2.33  2.32  1.64 
Tangible book value per share (non-GAAP)$16.53  $17.65  $17.67  $17.27  $17.25 

  Three Months Ended
(dollars in thousands) March 31,
 December 31,
 September 30,
 June 30,
 March 31,
Taxable-Equivalent Net Interest Margin (excluding the effect of purchase accounting)
Taxable-equivalent net interest income/margin, as reported$18,459  3.41% $18,138  3.37% $18,287  3.30% $18,807  3.63% $15,106  3.43%
Effect of purchase accounting:                   
LoansIncome(899) (0.19)% (1,241) (0.24)% (879) (0.17)% (1,385) (0.29)% (253) (0.07)%
Time depositsExpense28  (0.01)% 32  (0.01)% 36  (0.01)% 24  (0.01)% (9) 0.00%
Purchase accounting effect on taxable-equivalent income/margin(927) (0.20)% (1,273) (0.25)% (915) (0.18)% (1,409) (0.30)% (244) (0.07)%
Taxable-equivalent net interest income/margin (excluding the effect of purchase accounting) (non-GAAP)$17,532  3.21% $16,865  3.12% $17,372  3.12% $17,398  3.33% $14,862  3.36%

About the Company

With $2.4 billion in assets, Orrstown Financial Services, Inc. and its wholly-owned subsidiaries, Orrstown Bank and Wheatland Advisors, Inc., provide a wide range of consumer and business financial services through banking and financial advisory offices 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. For more information about Wheatland Advisors, Inc., visit www.wheatlandadvisors.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 our 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; and to realize cost savings from our branch consolidation efforts. In addition to risks and uncertainties related to the COVID-19 pandemic 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; volatilities 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; and other risks and uncertainties, including those set forth under the heading "Risk Factors" in the Company's 2019 Annual Report on Form 10-K and subsequent filings. The foregoing list of factors is not exhaustive.

If one or more events related to these or other risks or uncertainties materialize, 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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