Orrstown Financial Services, Inc. — Q1 2022 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2022. Orrstown is a community bank serving markets in Pennsylvania and Maryland, with lending, deposit, fiduciary, investment advisory, insurance and brokerage businesses. Unless stated otherwise, dollar amounts below are in millions.
Financial results and position
| Metric | Q1 2022 / Mar. 31, 2022 | Comparable / prior date |
|---|---|---|
| Net interest income | $22.6 | $21.9 in Q1 2021 |
| Noninterest income | $7.5 | $7.5 in Q1 2021 |
| Net income | $8.4 | $10.2 in Q1 2021 |
| Diluted EPS | $0.76 | $0.92 in Q1 2021 |
| Tax-equivalent net interest margin | 3.49% | 3.38% in Q1 2021 |
| Total assets | $2,900.5 | $2,834.6 at Dec. 31, 2021 |
| Total loans | $1,978.3 | $1,980.0 at Dec. 31, 2021 |
| Total deposits | $2,546.0 | $2,464.9 at Dec. 31, 2021 |
| Shareholders’ equity | $254.8 | $271.7 at Dec. 31, 2021 |
Net interest income plus noninterest income was approximately $30.0 million, compared with $29.4 million in Q1 2021. Noninterest expense increased 8.9% to $19.4 million, driven mainly by $1.1 million higher salaries and benefits. The provision for loan losses was $0.3 million, versus a $1.0 million provision release in Q1 2021. Effective tax rate was 19.4%, compared with 19.1%.
Cash flow and funding. Operating activities provided $6.6 million, investing activities used $77.0 million, and financing activities provided $75.8 million. Cash and cash equivalents ended the quarter at $214.2 million. The company reported $24.6 million in repurchase-agreement funding, $1.8 million in FHLB advances and other borrowings, and $32.0 million in subordinated notes. FHLB borrowing capacity was $914 million; unencumbered securities were $238.8 million. The Bank was categorized as well capitalized; its total risk-based capital ratio was 13.8% and tier 1 leverage ratio was 9.5%.
Material changes versus comparable periods
- Net income fell 18% year over year and diluted EPS declined from $0.92 to $0.76, despite higher net interest income. Lower mortgage banking income and higher expenses contributed to the decline.
- Net interest income rose $0.7 million; interest expense fell $0.9 million as deposit and borrowing costs declined. Tax-equivalent NIM increased 11 basis points.
- Swap fee income rose to $0.95 million from $0.05 million, reflecting customer demand to lock rates. Mortgage banking income fell $1.5 million to $0.7 million amid lower production and refinancing activity.
- Commercial loan production excluding PPP loans was $59.7 million, while $67.4 million of PPP loans were forgiven. Total loans were nearly flat; growth excluding PPP loans was 4% for the quarter.
- Deposits increased $81.1 million, or 3%, from year-end. Shareholders’ equity fell $16.9 million, principally because of $19.1 million of after-tax other comprehensive losses on available-for-sale securities as market rates rose. Tangible book value per share fell to $21.03 from $22.32.
- Nonperforming and other risk assets decreased to $6.3 million from $8.5 million at year-end. The allowance for loan losses rose to $21.5 million, or 1.09% of loans, from $21.2 million, or 1.07%.
Outlook, risks and unusual items
The filing provides no specific earnings or financial guidance. Management described the balance sheet as asset-sensitive and reported that modeled net interest income would increase 3.3% under a 100-basis-point rate increase, but decline 6.0% under a 100-basis-point decrease over the next 12 months. These are simulations, not forecasts. Management cited inflation, supply-chain and labor constraints, geopolitical tensions, interest-rate movements and economic uncertainty as risks that could affect credit losses and fair values.
Available-for-sale securities had $20.6 million of gross unrealized losses at March 31, 2022, primarily attributed to higher rates and wider spreads; the company said it did not intend to sell the securities and did not expect forced sales before recovery. It recorded a $171,000 other-than-temporary impairment on a $14.7 million par-value non-agency CMO expected to be called in Q2 2022. The filing says adoption of the current expected credit loss standard is planned for January 1, 2023; management anticipates an increase in the allowance, but the impact remains under evaluation.
Two legal matters are disclosed: long-running SEPTA securities litigation, for which potential losses cannot currently be estimated, and a March 2022 putative class action alleging improper overdraft fees, also with no estimable loss range. The company recorded no liability for the overdraft action and intends to defend both matters. The company repurchased 181,635 shares in Q1 for an average $24.27 per share. The Board declared a $0.19-per-share dividend payable May 9, 2022.
Important facts for investors to verify
- Whether net interest margin and earnings benefit from rate increases as modeled, and how deposit pricing and deposit mix evolve.
- Performance and credit quality of commercial real estate and commercial lending, including the trend in criticized loans and the allowance for loan losses.
- Further changes in securities fair values and AOCI, including the outcome for the impaired non-agency CMO.
- Actual impact of CECL adoption in 2023 and any change in management’s expected allowance increase.
- Developments and potential financial exposure in the SEPTA and overdraft-fee litigation; the filing does not provide clear loss estimates.
- Whether higher operating expenses, reduced mortgage banking activity and PPP fee runoff affect profitability in subsequent quarters.