• Net income of $7.2 million for the quarter; diluted third quarter 2021 EPS of $0.65 per share versus $0.45 per share in the third quarter of 2020; net income of $26.2 million for the nine months ended September 30, 2021

• Second consecutive quarter of significant commercial loan growth; excluding Small Business Administration ("SBA") Paycheck Protection Program ("PPP") loans, third quarter commercial loan growth was $98.2 million, or 33% annualized, as our lending team continues to draw from both their long-standing and newly developed relationships

• Tangible book value per share⁽¹⁾ increased to $21.98 at September 30, 2021 from $21.61 at June 30, 2021 and $19.93 at December 31, 2020

• Noninterest income rose to $7.7 million in the third quarter of 2021 compared to $6.7 million in the second quarter of 2021; the third quarter included $0.5 million in gains from the sale of asset-backed securities and $0.2 million in tax credits from the Bank's investment in solar renewable energy partnerships

• A provision for loan losses of $0.4 million was recorded in the third quarter of 2021 compared to $0.6 million in the second quarter of 2021; the provision was net of COVID-19 reserve releases of $1.0 million and $0.8 million for the three months ended September 30, 2021 and June 30, 2021, respectively

• The SBA PPP portfolio averaged $303.2 million in the three months ended September 30, 2021 as compared to $471.2 million in the three months ended June 30, 2021 as the forgiveness process continues

• Noninterest expenses increased to $19.0 million in the third quarter of 2021 from $17.0 million in the second quarter of 2021; salaries and employee benefits increased from additions to staff to facilitate growth, performance-based incentive increases and certain credits recorded in the second quarter; recognized a loss of $0.5 million from the termination of a cash flow hedge towards the end of the third quarter, which should improve net interest margin in future quarters

• Reduced overnight borrowings by $50.0 million upon termination of cash flow hedge

• Net interest margin declined to 3.03% in the third quarter of 2021 from 3.24% in the second quarter of 2021; excess liquidity increased significantly from a seasonal inflow of municipal deposits and continued SBA PPP forgiveness

• The Company repurchased 46,838 shares of its common stock at an average price of $22.82 per share during the three months ended September 30, 2021

• The Board of Directors declared a cash dividend of $0.19 per common share, payable November 8, 2021, to shareholders of record as of November 1, 2021
  

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

SHIPPENSBURG, Pa., Oct. 19, 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 September 30, 2021. Net income totaled $7.2 million for the three months ended September 30, 2021, compared with $8.8 million for the three months ended June 30, 2021 and $5.0 million in the three months ended September 30, 2020. Diluted earnings per share totaled $0.65 for the three months ended September 30, 2021, compared with $0.79 in the three months ended June 30, 2021 and $0.45 in the three months ended September 30, 2020.

Thomas R. Quinn, Jr., President & CEO, commented, “Orrstown's earnings momentum continued into the third quarter of 2021 with year-to-date earnings 60% higher than the same prior year period. Our talented lending teams effectively executed Orrstown's high-touch service model that resonates with businesses and individuals in our markets. Continued loan growth is critical to mitigating the combined impact of excess cash, the prolonged low interest rate environment and declining PPP fee income.”

Mr. Quinn continued, “Orrstown is committed to being the premier financial institution in the markets we serve. As such, the Company will continue to make strategic investments in employees who excel in a consultative sales environment. We also acknowledge changing client preferences for delivery and service and will continue to make investments in technology that enhance the client experience and allow our team to focus more on client needs than operational complexities. In the short term, PPP fee recognition will continue to benefit earnings while longer-term strategic initiatives come to full realization.”

DISCUSSION OF RESULTS

Balance Sheet

Loans

Loans held for investment, which includes SBA PPP loans, declined by $5.6 million from June 30, 2021 to September 30, 2021, or 1% annualized, as the impact of SBA PPP forgiveness and consumer loan runoff was mostly offset by net commercial loan production. Excluding SBA PPP loans, total loans increased by $90.1 million from June 30, 2021 to September 30, 2021, or 23% annualized. SBA PPP loans, net of deferred fees and costs, declined by $95.7 million to $259.9 million at September 30, 2021 from $355.6 million at June 30, 2021. Commercial loans, excluding SBA PPP loans, increased by $98.2 million, or 33% annualized, from June 30, 2021 to September 30, 2021. Commercial loan production remains robust and is expected to continue at a solid pace into the fourth quarter.

The remaining gross balance of SBA PPP loans is $268.5 million at September 30, 2021, of which $195.3 million is from 2021 originations. Net deferred SBA PPP fees of $8.6 million remain at September 30, 2021. The 2021 loans began to achieve forgiveness in the second quarter of 2021 and it is expected that most of them will be forgiven and the net deferred fees will be earned by the end of 2022.

Home equity lines of credit increased by $4.4 million, or 12% annualized in the third quarter of 2021. Residential mortgage loans declined by $8.6 million, or 16% annualized, in the three months ended September 30, 2021. Due to the low interest rate and competitive environment, the Company has not been aggressively pursuing portfolio mortgage loans. Overall loan growth, excluding SBA PPP loans, was 7% for the nine months ended September 30, 2021.

Deposits

Deposits increased by $8.0 million, or 1% annualized, remaining at $2.5 billion at September 30, 2021 compared to June 30, 2021 as an influx of municipal deposits received during the third quarter more than offset the impact of SBA PPP deposit usage and runoff in certificates of deposit. In the third quarter of 2021, noninterest-bearing demand deposits increased by $16.3 million, or 12% annualized; interest bearing checking deposits increased by $16.2 million, or 7% annualized; and money market and savings deposits increased $11.4 million, or 7% annualized. These increases were mostly offset by a decline in certificates of deposit of $35.9 million, or 38% annualized, from June 30, 2021 to September 30, 2021. Deposits rose by $145.2 million, or 6%, from December 31, 2020 to September 30, 2021 due primarily to SBA PPP loan funding and municipal deposit seasonality. The Bank's loan-to-deposit ratio was 78% at September 30, 2021. On a longer-term basis, the Bank continues to target a loan-to-deposit ratio of 90%.

Other

Investment securities decreased by $8.0 million to $452.1 million at September 30, 2021 compared to $460.1 million at June 30, 2021. During the third quarter of 2021, the Bank rebalanced its investment portfolio by selling $72.8 million of asset-backed securities and purchasing mortgage-backed securities, municipal securities and United States Treasury notes totaling $60.0 million. See Appendix C for a summary of the Bank's current investments that highlights the concentrations, quality and credit enhancement levels of the portfolio.

FHLB advances and other borrowings decreased by $56.0 million to $2.0 million at September 30, 2021 compared to $58.0 million at June 30, 2021 due primarily to the payoff of $50.0 million in overnight borrowings in conjunction with the termination of a cash flow hedge.

Income Statement

Net Interest Income and Margin

Net interest income decreased by $1.3 million to $20.6 million for the three months ended September 30, 2021 compared to the three months ended June 30, 2021. The net interest margin declined to 3.03% in the third quarter of 2021 from 3.24% in the second quarter of 2021. The margin reduction was primarily a result of a decrease in SBA PPP interest income (eight basis points), an increase in excess cash (six basis points) and lower purchase accounting accretion (three basis points).

For the three months ended September 30, 2021 and June 30, 2021, there were $98.2 million and $197.5 million of SBA PPP loans forgiven, respectively. Interest income recognized on SBA PPP loans totaled $3.4 million in the three months ended September 30, 2021 as compared to $5.2 million in the three months ended June 30, 2021. This decline is due to the reduction in forgiveness of 2020 SBA PPP loan originations and reduced outstanding balances.

The cost of deposits was 0.15% in the third quarter of 2021, which is down from 0.17% in the second quarter of 2021 and 0.44% in the third quarter of 2020. Rate reductions in the first and third quarters of 2021 combined with the maturity of higher yielding certificates of deposit drove this decrease. Late in the third quarter of 2021, the Company terminated a cash flow hedge. Upon discontinuance, the hedged overnight borrowings of $50.0 million were repaid. These transactions are expected to improve the net interest margin by approximately seven basis points on an annualized basis.

Excess liquidity that has resulted from SBA PPP loan forgiveness and a seasonal inflow of municipal deposits negatively impacted the net interest margin in the three months ended September 30, 2021. Average cash and cash equivalents increased from $290.0 million in the three months ended June 30, 2021 to $347.2 million in the three months ended September 30, 2021. However, the period end cash and cash equivalents balance was reduced to $311.4 million at September 30, 2021 from $336.8 million at June 30, 2021. We have begun implementing strategies to reduce cash balances, which may result in a decline in total assets, but should lead to growth in net interest income, earnings and return on average assets. The net interest margin is expected to improve in the fourth quarter as excess liquidity continues to be reduced.

Provision for Loan Losses

Asset quality metrics remain strong and trended positively in the third quarter. The allowance for loan losses totaled $20.0 million at September 30, 2021, compared with $19.4 million at June 30, 2021. Total classified loans decreased by $1.8 million, or 6%, to $26.9 million from June 30, 2021 to September 30, 2021. As of September 30, 2021, the Bank had active COVID-19 related deferred loans totaling $0.3 million, or 0.02% of its total loan portfolio, excluding SBA PPP loans. This compared to $3.9 million, or 0.25% of total loans, excluding SBA PPP loans, at June 30, 2021 and $78.4 million, or 5.0% of total loans, excluding SBA PPP loans, at September 30, 2020.

Net recoveries were $0.2 million for the three months ended September 30, 2021 compared to net charge-offs of $0.2 million for the three months ended June 30, 2021. Nonperforming loans decreased by $0.8 million to $9.1 million at September 30, 2021 from $9.9 million at June 30, 2021, which was 0.47% of gross loans at September 30, 2021 and 0.51% of gross loans at June 30, 2021. The ratio of the allowance for loan losses to nonaccrual loans was 219% at September 30, 2021 compared to 195% at June 30, 2021. The allowance for loan losses to non-SBA guaranteed loans⁽¹⁾ remained steady at 1.2% as of September 30, 2021 and June 30, 2021. Management believes the allowance for loan losses to be adequate based on current asset quality metrics.

Commercial loan growth drove provision expense of $0.4 million, net of recoveries, in the three months ended September 30, 2021. This compares to provision expense of $0.6 million and $2.2 million recorded in the three months ended June 30, 2021 and September 30, 2020, respectively. As a result of the relative strength of the economy and performance of the Bank's borrowers, including those that have been on deferral, the remaining qualitative reserve designated for the impact of COVID-19 of $1.0 million was reversed in the three months ended September 30, 2021.

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

Noninterest Income

Noninterest income totaled $7.7 million in the three months ended September 30, 2021 compared with $6.7 million in the three months ended June 30, 2021 and $6.9 million in the three months ended September 30, 2020. Fee income growth remains a significant focus for the Bank.

Investment securities gains totaled $0.5 million in the third quarter of 2021, attributable primarily to the sale of $72.8 million of asset-backed securities.

Total wealth management income for the three months ended September 30, 2021 and June 30, 2021 remained strong at $2.9 million for both periods, as compared to $2.5 million in the third quarter of 2020. Assets under management have increased by $239.0 million to $1.8 billion from $1.6 billion at September 30, 2020.

Mortgage banking income increased by $0.2 million from the second quarter of 2021 to $1.3 million in the third quarter of 2021 due to an increase of $0.5 million in the fair value of the residential mortgage loans held for sale and interest rate lock commitments. This was partially offset by a decrease in gain on sale of mortgages of $0.3 million to $1.2 million compared to $1.5 million for the three months ended June 30, 2021. Mortgage loans sold totaled $48.0 million in the third quarter of 2021 compared with $51.8 million in the second quarter of 2021 and $72.8 million in the third quarter of 2020. As of September 30, 2021, the Bank services $488.6 million of residential mortgage loans, which is up by $8.3 million from June 30, 2021. Mortgage banking operations continued to be benefit from the low rate environment driving heightened refinance and purchase activity; however, the market for top-flight talent remains exceedingly competitive. Mortgage banking income was $4.7 million for the nine months ended September 30, 2021 compared to $3.9 million for the nine months ended September 30, 2020.

Other income increased by $0.2 million to $0.8 million in the third quarter of 2021 from the second quarter of 2021 due primarily to the recognition of tax credits from the Bank's investment in solar renewable energy partnerships.

Noninterest Expenses

Noninterest expenses increased by $2.0 million to $19.0 million in the three months ended September 30, 2021 from the three months ended June 30, 2021. Salaries and benefits increased as the Company continues to be the employer of choice in our markets among bankers attracted to a client-first approach to the business, which should allow Orrstown to maintain a strong growth trajectory. The increase of $1.2 million in salaries and employee benefits, for the three months ended September 30, 2021, was attributed to higher employee benefit costs of $0.3 million, performance-based incentive increases of $0.2 million and credits recorded in the prior quarter of $0.2 million, with most of the remaining increase due to additions in personnel. In addition, the Company recognized a $0.5 million loss in the third quarter from the termination of a cash flow hedge derivative. For the three months ended September 30, 2021, no expense was recorded for the reserve for unfunded commitments compared to a reduction of $0.4 million in the three months ended June 30, 2021.

Income Taxes

The Company's effective tax rate for the third quarter of 2021 was 18.9% compared with 19.3% for the second 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.

Capital

Shareholders’ equity totaled $268.6 million at September 30, 2021, an increase of $2.7 million from $265.9 million at June 30, 2021. The increase was primarily attributable to net income, partially offset by dividends paid and a decrease in unrealized gains on available-for-sale securities. Tangible book value per share⁽¹⁾ has grown from $19.93 per share at December 31, 2020 to $21.98 per share at September 30, 2021, an increase of 10%.

The Company's tangible common equity ratio increased to 8.6% at September 30, 2021 from 8.4% at June 30, 2021. The Company's Tier 1 leverage ratio was 8.3% at September 30, 2021 and 8.0% at June 30, 2021. The Company's total risk-based capital ratio was 15.6% at both September 30, 2021 and June 30, 2021.

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

The Board of Directors approved a quarterly dividend of $0.19 per share, payable November 8, 2021, to shareholders of record as of November 1, 2021. The dividend payout ratio totaled 29% for the three months ended September 30, 2021 compared to 23% 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.