Orrstown Financial Services, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Dollar amounts are in millions unless stated otherwise. The company operates Orrstown Bank, a community bank serving Pennsylvania and Maryland markets.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Interest income | $36.9 | $25.4 | $71.2 | $49.1 |
| Net interest income | $26.4 | $24.1 | $52.7 | $46.7 |
| Provision for credit losses | $0.4 | $1.8 | $1.1 | $2.1 |
| Noninterest income | $7.2 | $7.2 | $13.2 | $14.7 |
| Noninterest expense | $20.7 | $18.8 | $41.0 | $38.2 |
| Net income | $9.8 | $8.9 | $19.0 | $17.2 |
| Diluted EPS | $0.94 | $0.83 | $1.82 | $1.59 |
| Taxable-equivalent net interest margin | 3.83% | 3.68% | 3.88% | 3.59% |
Q2 net interest income benefited from loan growth, higher yields and rising rates, partly offset by sharply higher deposit and borrowing costs. The Q2 net interest spread narrowed to 3.44% from 3.62%, while the six-month spread was 3.52% in both periods. Q2 noninterest income was broadly unchanged: a $1.2 million gain on the Path Valley branch sale largely offset lower swap fees and mortgage banking income. Six-month noninterest income declined mainly because swap fees fell $1.5 million and mortgage banking income fell $0.6 million. Expense growth was led by salaries and benefits, up $1.7 million in Q2 and $2.6 million for the first half.
Financial position, cash flow and capital
- At June 30, total assets were $3.008 billion, loans were $2.234 billion, deposits were $2.523 billion, and shareholders’ equity was $245.6 million. Loans grew $83.2 million and deposits increased $46.6 million from year-end 2022.
- Cash and cash equivalents were $76.3 million, up from $60.8 million at year-end. Six-month operating cash flow was $21.7 million, investing cash flow was negative $93.3 million, and financing cash flow was positive $87.1 million.
- FHLB advances and other borrowings totaled $136.7 million, up from $106.1 million at year-end; the company added $40 million of term FHLB advances. It reported $943.5 million of additional FHLB availability, $30 million of unsecured correspondent-bank lines, and $108.0 million of unencumbered securities. These are reported capacities, not cash on hand.
- Uninsured, uncollateralized deposits were $409.1 million, or 16% of deposits. Time deposits rose $95.0 million in the first half as customers shifted toward higher-yielding accounts.
- The allowance for credit losses was $28.4 million, or 1.27% of loans. CECL adoption added $2.4 million to the loan allowance and reduced opening retained earnings by $2.0 million after tax. The Bank was reported well-capitalized; its total risk-based capital ratio was 12.5% and leverage ratio was 9.3%.
- Available-for-sale securities had a $508.6 million fair value against $552.2 million amortized cost, a $43.6 million net unrealized loss. Management attributed the loss to market rates and spreads, reported no credit-loss allowance, and said it did not expect to need to sell securities before recovery.
- Book value per share was $23.15 and tangible book value per share was $21.19 at June 30, versus $21.45 and $19.47, respectively, at year-end. The company paid $0.40 per share in first-half dividends and declared another $0.20 dividend payable August 15, 2023.
Asset quality, outlook and notable matters
- Nonaccrual loans were $21.1 million, or 0.94% of loans, versus 0.96% at year-end and 0.27% a year earlier. A $14.8 million commercial real estate credit is a prominent exposure; management said collateral value was sufficient to cover potential losses. Nonaccrual loans generated no interest income in the first half.
- Special Mention loans increased $12.5 million to $45.4 million, reflecting downgrades across five commercial borrowers. Classified loans declined to $26.3 million, or 1.2% of loans, from $35.1 million at year-end. Net charge-offs were $0.35 million in the first half, including a partial charge-off on one commercial loan.
- Management said the 2023 banking-industry disruptions had not materially affected the company, but it continued to monitor funding, liquidity, interest-rate sensitivity and capital. The filing describes deposit competition, higher funding costs, inflation and economic uncertainty as ongoing pressures. Its rate-sensitivity model showed the company as liability-sensitive, with modeled net interest income declining 0.9% under a 100-basis-point rise and 2.6% under a 200-basis-point rise.
- No specific earnings or financial guidance was provided. Management cautioned that results depend on economic conditions, interest rates, deposit competition, credit quality, securities markets, operational and cybersecurity risks, regulation and litigation. The company said risk factors had not materially changed from its 2022 Form 10-K.
- CECL and updated loan-modification accounting were adopted January 1, 2023. The company reported no financial-difficulty modifications meeting the new disclosure criteria in the first half. The Path Valley branch sale closed May 12 and generated a reported $1.2 million gain.
- The SEPTA securities class action received final approval and was dismissed with prejudice; the appeal period expired without an appeal. A separate customer class action alleging improper overdraft fees remains pending; the Bank disputes the claims.
Key facts for investors to verify
- Track deposit mix, uninsured deposits, deposit pricing and borrowing needs as funding costs rise.
- Monitor the $14.8 million commercial real estate credit, nonaccrual trends, Special Mention downgrades and charge-offs.
- Assess whether net interest margin can hold up against higher deposit and borrowing costs, including the disclosed liability-sensitive rate profile.
- Review the size and recovery profile of the securities portfolio’s $43.6 million unrealized loss and liquidity available without securities sales.
- Separate recurring earnings from the one-time branch-sale gain and assess lower swap-fee and mortgage-banking income alongside higher operating expenses.
- Follow the pending overdraft-fee litigation and any subsequent changes in capital, liquidity, credit reserves or management outlook.