ORRSTOWN FINANCIAL SERVICES INC quarterly report, Q1 FY2023

Abrir documento

Orrstown Financial Services, Inc. — Q1 2023 Form 10-Q

Reporting period: Three months ended March 31, 2023; balance-sheet figures are as of March 31, 2023. Dollar amounts are in millions unless otherwise noted. The company operates Orrstown Bank, a community bank serving Pennsylvania and Maryland markets, with lending, deposit, fiduciary, advisory, insurance and brokerage services.

Financial results and position

  • Profitability: Net income was $9.2 million, up 9% from $8.4 million in Q1 2022. Diluted EPS was $0.87 versus $0.76. Income before tax was $11.4 million.
  • Interest income and margins: Net interest income rose 16% to $26.3 million. On a taxable-equivalent basis, net interest margin increased 45 basis points to 3.94%, and net interest spread rose to 3.62% from 3.42%. Higher asset yields and loan growth were partly offset by rising deposit and borrowing costs.
  • Other income and expenses: Noninterest income declined 19% to $6.1 million, chiefly because Q1 2022 included $953 thousand of swap fees; mortgage banking income also fell. Noninterest expenses increased 5% to $20.3 million, primarily due to salaries and benefits, data processing and FDIC insurance costs.
  • Credit costs: Provision for credit losses was $729 thousand versus $300 thousand. The allowance for credit losses (ACL) was $28.4 million, or 1.28% of loans. Q1 net recoveries were $34 thousand.
  • Balance sheet: Total assets were $3.012 billion, up from $2.922 billion at year-end. Loans were $2.208 billion, up $56.3 million since year-end; deposits were $2.516 billion, up $39.4 million. Shareholders’ equity was $240.2 million, compared with $228.9 million.
  • Liquidity and funding: Cash and cash equivalents were $98.3 million, up from $60.8 million. Unencumbered securities totaled $91.2 million; management also reported $903.5 million of additional FHLB borrowing availability and $30 million of unsecured bank lines. FHLB advances and other borrowings totaled $162.3 million, up $56.2 million from year-end, including $40 million of new term advances.
  • Cash flow: Operating activities provided $5.4 million; investing activities used $56.6 million; financing activities provided $88.7 million. Cash and cash equivalents increased $37.5 million during the quarter.
  • Capital and shareholder returns: The Bank was classified as well capitalized. Its total risk-based capital ratio was 12.4%, Tier 1 risk-based ratio 11.2%, and Tier 1 leverage ratio 9.2%. The company paid a $0.20-per-share dividend and repurchased 54,262 shares at an average $21.65 per share.

Material changes versus comparable periods

  • Compared with Q1 2022, net interest income increased as average loans grew and yields rose. Interest expense also increased substantially: deposit expense was $6.2 million versus $685 thousand, while total interest expense was $8.0 million versus $1.2 million.
  • Noninterest income fell $1.4 million year over year, including the absence of prior-year swap fees and lower mortgage banking activity. Net income nevertheless increased.
  • Compared with December 31, 2022, loans, deposits, borrowings and cash increased. AFS securities’ fair value rose to $520.2 million from $513.7 million, while net unrealized losses narrowed to approximately $40.8 million from $49.6 million.
  • Shareholders’ equity increased partly due to net income and $7.1 million of other comprehensive income. The year-earlier quarter included a $19.1 million other comprehensive loss.

Outlook, risks and unusual items

  • No specific financial guidance: The filing does not provide numerical earnings or balance-sheet guidance. Management cautions that Q1 results are not necessarily indicative of full-year results.
  • Rates and banking conditions: Management described inflation, elevated rates, economic uncertainty and recent banking-sector disruption as risks. It said the company was not materially affected by the banking events during Q1, while continuing to assess liquidity, interest-rate sensitivity and capital. Deposit competition and funding costs remain pressures. In the company’s modeled scenarios, net interest income was slightly positive under +100- and +200-basis-point shocks, but declined under a -200-basis-point shock; the filing notes that actual results may differ from model assumptions.
  • Credit quality: Nonaccrual loans were $21.2 million, or 0.96% of loans. A $15.2 million commercial land-development/construction loan was placed on nonaccrual despite not being past due; management stated collateral value was sufficient to cover potential losses and did not consider the credit indicative of broader portfolio stress. The ACL increased partly due to CECL adoption and commercial loan growth.
  • Securities valuation: AFS securities had $41.9 million of gross unrealized losses at quarter-end, which management attributed primarily to interest rates and market conditions rather than credit deterioration. No AFS securities ACL was recorded; management stated it did not intend, and was not likely to be required, to sell the securities before recovery.
  • Accounting change: CECL adoption on January 1, 2023 increased the loan ACL by $2.4 million and the off-balance-sheet reserve by $100 thousand, reducing retained earnings by $2.0 million after tax. Adoption of the revised loan-modification guidance had no material financial-statement impact.
  • Litigation: A proposed settlement of a shareholder class action provides for a $15 million payment; the company agreed to contribute $13 million and had funded that amount in escrow. Final court approval remained pending. A separate putative class action alleges improper overdraft fees; the Bank says the claims are without merit.
  • Branch sale: The planned sale of the Path Valley branch and related deposits was expected to close in Q2 2023. Approximately $21 million of deposits were expected to transfer as of the report date.

Important facts for investors to verify

  • Whether deposit retention, deposit pricing and reliance on wholesale borrowings change as competition and market conditions evolve; uninsured, uncollateralized deposits were $474.2 million, or 19% of deposits.
  • Developments in the $15.2 million nonaccrual commercial construction loan, other criticized credits, and the adequacy of the CECL allowance under changing economic assumptions.
  • Whether the proposed shareholder-litigation settlement receives final court approval and the status and potential exposure of the overdraft-fee case.
  • Whether the branch sale closes on the expected timetable and how the transfer affects deposits and earnings.
  • How large unrealized AFS losses, interest-rate changes and deposit repricing affect liquidity, capital and net interest margin; management’s hold-to-recovery assessment is not a guarantee of market value or liquidity.