Orrstown Financial Services, Inc. Announces Increased Quarterly Earnings, Increased Second Quarter Dividend and Reduction in Risk Assets

SHIPPENSBURG, Pa., April 28, 2011 /PRNewswire/ --

• Increased first quarter 2011 earnings to $3.827 million, 12.4% above 2010 results
• Nonperforming assets continue to decline; down 36.7% since March 31, 2010
• Declaration of second quarter 2011 dividend of $0.23 per share, an increase of 4.6% over prior year
• Inclusion on Keefe, Bruyette & Woods, Inc.'s (KBW) Bank Honor Roll of Superior Performers as one of the top 40 best performing publically traded community banks for 2010 (asset size of at least $500 million)
• Inclusion on SNL Financial's 100 best performing community banks for 2010 (asset size ranging between $500 million and $5 billion)

Orrstown Financial Services, Inc. (NASDAQ: ORRF) announced today that net income increased 12.4% to $3.827 million for the quarter ended March 31, 2011, from $3.406 million for the first quarter of 2010.  Diluted earnings per share amounted to $0.48 for the quarter ended March 31, 2011, as compared to $0.52 during the first quarter of 2010, due to a higher share count in the current quarter.  The Company also announced that its Board of Directors declared a second quarter cash dividend of $0.23 per share, an increase of 4.6% over the second quarter of 2010, for shareholders of record on May 13, 2011.  The dividend will be paid to shareholders on May 25, 2011.

"Our primary goal is to manage the institution for consistent and sustainable growth as well as profitability. Thus far we have delivered favorable results throughout this challenging economic cycle that has persisted for over two years. Our solid underlying financial performance places us in a select group of community banks nationally, as evidenced by our inclusion among SNL Financial's 100 best performing community banks for 2010, and KBW's bank honor roll of superior performers," said Thomas R. Quinn, Jr., President and Chief Executive Officer. "We are pleased to have increased our dividend and still retain capital from earnings, while continuing to conservatively add to reserve coverage of problem assets. Total nonperforming assets continue to decline and were down 6.5% at March 31 from end of year levels. We believe our capital position is quite robust and should provide us with a significant platform to enhance our strong organic growth. We opened our 21st branch yesterday at the Carlisle Fairgrounds in Carlisle, Pennsylvania. This will enable us to provide banking services to the many attendees of Carlisle Events car shows and further extend our brand."

Results of Year-to-Date Operations

Net income totaled $3.827 million for the three months ended March 31, 2011, an increase of $421,000, or 12.4%, over first quarter 2010's results. Diluted earnings per share amounted to $0.48 for the three months ended March 31, 2011, compared to $0.52 for the same period in 2010, as a result of the issuance of approximately 1.481 million shares on March 29, 2010 in connection with the company's highly successful common stock offering.

Net interest income for the three months ended March 31, 2011, increased to $12.388 million as compared to $10.497 million in the same prior year period. The net interest margin was 3.68% for the three months ended March 31, 2011 as compared to 3.76% in the same prior year period. The yield on interest-earning assets was 4.52% for the first three months of 2011 as compared to 4.92% for the same period in 2010. Our cost of funds dropped to 0.84% for the three months ended March 31, 2011, as compared to 1.16% in the same prior year period. Average interest-earning assets increased by $277 million for the three months ended March 31, 2011, as compared to first quarter 2010.

The provision for loan losses increased to $3.195 million for the three months ended March 31, 2011, as compared to $1.420 million for the corresponding prior year period. While loan delinquencies remain below March 31, 2010 levels, the continuing tough economic conditions that plague the national and local economies create ongoing pressure even for resilient borrowers. Our ongoing credit review process led us to conduct a thorough review of watch and special mention loans during the quarter. This process led to increased provisioning of certain commercial credits, predominantly in our southern tier. The provision for loan loss for first quarter 2011 was nearly four times net charge offs for the period, which enabled us to bolster the allowance for loan losses to 129% of nonperforming loans and 1.87% of loans outstanding. Management believes these coverage ratios will compare favorably to peers.

Noninterest income increased to $5.076 million for the three months ended March 31, 2011, as compared to $4.347 million in the same prior year period. Revenue increases were generated across most business lines, with trust and brokerage income and mortgage banking activities posting healthy 25.0% and 92.8% increases, respectively.  

Operating expenses amounted to $9.439 million for the three months ended March 31, 2011, as compared to $8.660 million for the corresponding prior year period. This 9% increase in operating expense was spread broadly across many lines including salaries, advertising and OREO expense. Even with the increase in expenses we were able to generate an improved efficiency ratio of 52.9% during the first quarter of 2011, versus 58.0% during first quarter 2010.

Financial Condition

Assets grew $671,000 to $1.512 billion at March 31, 2011 from December 31, 2010.  Deposits increased by 1.6% to $1.207 billion at March 31, 2011, from $1.188 billion at December 31, 2010.  Stockholders' equity increased to $162.7 million at March 31, 2011 from $160.5 million at December 31, 2010. The Company was able to increase loans outstanding by $21.8 million from $967 million at year-end to $989 million at March 31, 2011.   This asset growth was funded principally through cash flow from available for sale securities, which decreased $36 million during the quarter. The growth in deposits enabled the Company to pay-down some of its borrowings, which declined $21.211 million, or 13.9% since year-end.  

Asset Quality

During the first quarter of 2010, the Company experienced deterioration in its nonperforming assets and loans greater than 90 days past due still accruing.   These problem assets peaked at March 31, 2010, and throughout the remainder of 2010 the Company was able to work its way through a number of these assets, which included foreclosures, pay-downs received from the customers and write-downs.  At December 31, 2010 nonperforming assets were $16.188 million and total nonperforming and loans greater than 90 days past due still accruing totaled $18.436 million.    

During the first quarter of 2011, the Company was able to dispose of several properties it acquired through foreclosure, one $964,000 loan was eliminated after the underlying collateral was sold to a third party, and a $500,000 charge was made to the allowance for loan losses.   These actions reduced the Company's nonperforming assets from $16.188 million at year-end to $15.130 million at March 31, 2011, a 6.5% decline. Loans past due 90 or more days and still accruing increased from $2.248 million at December 31, 2010 to $3.687 million at March 31, 2011.  Loans in this category are believed by management to be well secured and are in the process of collection.

Management prudently increased the provision for loan losses to compensate for increased delinquencies and the migration of loans to higher risk loan ratings, despite improvement in the ratio of nonperforming loans to total loans and nonperforming assets to total assets.

Summary of Financial Highlights:

(1) Supplemental Reporting of Non-GAAP-based Financial Measures

Return on average tangible assets and return on average tangible equity are non-GAAP-based financial measures calculated using non-GAAP-based amounts.  The most directly comparable GAAP-based measures are return on average assets and return on average equity, which are calculated using GAAP-based amounts.  The Company calculates the return on average tangible assets and equity by excluding the balance of intangible assets and their related amortization expense, net of tax, from the calculation of return on average assets and equity.  Management uses the return on average tangible assets and equity to assess the Company's core operating results and believes that this is a better measure of our operating performance, as it is based on the Company's tangible assets and capital.  Further, we believe that by excluding the impact of purchase accounting adjustments it allows for a more meaningful comparison with the Company's peers; particularly those that may not have acquired other companies.  Lastly, the exclusion of goodwill and intangible assets is consistent with the treatment by bank regulatory agencies, which exclude these amounts from the calculation of risk-based capital ratios. However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures.  A reconciliation of return on average assets and equity to the return on average tangible assets and equity, respectively, is set forth below.

Tangible equity is a non-GAAP financial measure calculated using non-GAAP based amounts.  The most directly comparable GAAP based measure is shareholders' equity.  In order to calculate tangible equity, Company management subtracts intangible assets from shareholders' equity.  A reconciliation of tangible equity to shareholders' equity is set forth below.