Orrstown Financial Services, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Orrstown is a community bank holding company operating mainly in Pennsylvania and Maryland. Amounts below are in millions of dollars unless otherwise stated.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $26.2 | $25.5 | $78.9 | $72.1 |
| Provision for credit losses | $0.1 | $1.5 | $1.3 | $3.6 |
| Noninterest income | $5.9 | $6.1 | $19.2 | $20.7 |
| Noninterest expense | $20.4 | $36.4 | $61.5 | $74.6 |
| Net income (loss) | $9.0 | $(4.8) | $28.0 | $12.4 |
| Diluted EPS | $0.87 | $(0.47) | $2.68 | $1.16 |
- Q3 taxable-equivalent net interest margin was 3.73%, down 19 basis points year over year; nine-month margin was 3.83%, up 13 basis points. Funding costs rose faster than asset yields in Q3, pressuring spread and margin.
- Net cash from operating activities was $30.0 million for the nine months, versus $37.8 million a year earlier. Investing used $127.5 million, while financing provided $131.6 million; cash and cash equivalents ended at $94.9 million.
- At September 30, assets were $3.05 billion, loans $2.27 billion, deposits $2.55 billion, and shareholders’ equity $243.1 million. Loans grew $115.6 million and deposits grew $70.2 million from year-end 2022.
- Available-for-sale securities were $495.2 million, with $58.1 million of net unrealized losses. The company attributed the losses primarily to interest rates and spreads, recorded no securities credit-loss allowance, and stated it did not expect to need to sell the securities before recovery.
Material changes and comparisons
- Reported 2022 earnings were affected by a $13.0 million legal settlement provision and $3.2 million restructuring charge, both recorded in Q3 2022. Excluding their after-tax impact, the company reported adjusted 2022 net income of $7.9 million for Q3 and $25.2 million for nine months; adjusted diluted EPS was $0.75 and $2.34, respectively. These are company-presented non-GAAP measures.
- Q3 2023 net interest income increased modestly year over year as loan and securities yields rose, but deposit and borrowing expense increased substantially. Nine-month interest expense rose to $31.0 million from $4.4 million.
- Nine-month noninterest income declined $1.6 million, mainly because swap fee income fell $1.5 million. Noninterest expense fell $13.1 million, primarily because the 2022 settlement and restructuring charges did not recur; salaries, data processing, and FDIC insurance costs increased.
- CECL adoption on January 1, 2023 increased the loan allowance by $2.4 million and the off-balance-sheet reserve by $0.1 million, reducing opening retained earnings after tax by approximately $2.0 million.
Credit, liquidity, capital and outlook
- The allowance for credit losses on loans was $28.3 million, or 1.25% of loans, at September 30. Nine-month net charge-offs were $0.6 million, compared with $0.05 million in the prior-year period. Nonaccrual loans were $22.3 million, or 0.98% of loans, versus 0.25% a year earlier. Management highlighted a $14.3 million commercial real estate loan on nonaccrual and said collateral value was expected to cover potential losses.
- Deposits shifted toward higher-cost products: time deposits increased $126.3 million from year-end, while noninterest-bearing deposits declined. Uninsured and uncollateralized deposits totaled $387.5 million, or 15% of deposits.
- FHLB advances and other borrowings were $157.3 million, up $51.1 million from year-end; subordinated notes were $32.1 million. The company reported $94.9 million in cash and cash equivalents, $59.2 million in unencumbered securities, $917.5 million of additional FHLB availability based on qualifying collateral, and $30.0 million in available unsecured bank lines.
- The Bank was categorized as well capitalized. Its September 30 total risk-based capital ratio was 12.5%, and Tier 1 leverage ratio was 9.3%.
- Management described its 2023 focus as limiting margin compression while pursuing prudent growth. It provided no specific financial forecast in the supplied filing text. It cited deposit competition, rising funding costs, interest-rate sensitivity, economic uncertainty, inflation, credit quality, securities-market volatility, and operational and cybersecurity risks. The bank said it was not materially affected by 2023 banking-sector disruptions but continued to assess liquidity, funding and capital.
- A customer putative class action alleges improper overdraft fees; the Bank intends to defend itself. Management stated other legal proceedings were not expected to materially affect the company, but the filing does not provide a clear estimate of potential exposure for this suit.
Important facts for investors to verify
- Whether deposit pricing and reliance on borrowings continue to rise, and how that affects net interest margin and earnings.
- Trends in nonaccrual, criticized and classified loans, charge-offs, and the adequacy of the CECL allowance—especially the identified commercial real estate credit.
- Whether available liquidity and contingency funding remain adequate if uninsured deposits leave or loan commitments are drawn.
- Potential effects of persistent unrealized securities losses, including whether the company can continue holding securities until recovery.
- Developments and any eventual financial impact of the overdraft-fee class action.
- Execution and recurring costs of the company’s growth and efficiency plans; reported year-over-year earnings comparisons are affected by the prior-year settlement and restructuring charges.