8-K: Orrstown Financial Services Reports Record Full-Year Earnings for 2023, Announces Merger with Codorus Valley

Orrstown Financial Services, Inc. announced record earnings for the full year 2023, alongside its fourth-quarter results and a pending merger with Codorus Valley Bancorp.

Summary

• Orrstown Financial Services, Inc. reported a net income of $7.6 million for the fourth quarter of 2023, compared to $9.0 million in the previous quarter and $9.6 million in the same quarter of 2022.
• Diluted earnings per share were $0.73 for the fourth quarter of 2023, down from $0.87 in the third quarter of 2023 and $0.91 in the fourth quarter of 2022.
• For the full year 2023, net income reached a record $35.7 million, a significant increase from $22.0 million in 2022.
• Diluted earnings per share for the full year were $3.42, compared to $2.06 in the previous year.
• Excluding merger-related expenses of $1.1 million, the adjusted net income for the fourth quarter was $8.6 million, and adjusted diluted earnings per share were $0.83.
• Excluding merger-related expenses, the adjusted net income for the full year was $36.6 million, and adjusted diluted earnings per share were $3.51.
• The company's net interest margin was 3.71% in the fourth quarter of 2023, slightly down from 3.73% in the third quarter of 2023.
• Return on average equity for 2023 was 14.66%, up from 9.02% in 2022, and adjusted return on average equity was 15.06% compared to 14.25% in 2022.
• Loan growth was $31.5 million in the fourth quarter and $147.1 million for the full year.
• Deposit growth was $12.4 million in the fourth quarter, and $101.3 million for the full year, excluding the sale of deposits from a branch.
• The tangible common equity ratio increased to 8.0% at the end of 2023 from 7.3% at the end of the previous quarter.
• Tangible book value per common share improved to $23.03 at the end of 2023, up from $20.94 at the end of the previous quarter.

Sentiment

Score: 7

Explanation: The document presents a mixed picture. While the full-year results are strong and a merger is in progress, the fourth-quarter results show a decline, and there are some concerns about credit quality. The overall sentiment is positive but tempered by these factors.

Positives

• The company achieved record full-year earnings in 2023.
• There was significant growth in both loans and deposits throughout the year.
• The tangible common equity ratio and tangible book value per share both improved.
• The company's return on average equity increased substantially year-over-year.
• The company's capital ratios are above regulatory minimum levels to be deemed well capitalized.
• The company has available alternative funding sources of approximately $1.0 billion at December 31, 2023.
• The company's wealth management group has successfully grown income throughout the year.

Negatives

• Net income and diluted earnings per share decreased in the fourth quarter of 2023 compared to the previous quarter.
• The net interest margin slightly decreased in the fourth quarter of 2023 compared to the third quarter of 2023.
• Non-interest expenses increased by $2.0 million in the fourth quarter of 2023, including $1.1 million in merger-related expenses.
• There was a decrease in non-interest bearing deposits, interest bearing demand deposits and savings deposits due to clients shifting to higher-yielding products.
• Classified loans increased by $21.4 million to $55.0 million at December 31, 2023 from $33.6 million at September 30, 2023.
• Non-accrual loans increased by $3.2 million to $25.5 million at December 31, 2023 from $22.3 million at September 30, 2023.

Risks

• The company faces risks related to the pending merger with Codorus Valley, including integration challenges and potential adverse reactions.
• The company is exposed to interest rate risk, which could impact net interest margin and profitability.
• There are risks associated with credit quality, including an increase in classified and non-accrual loans.
• The company is subject to operational risks, including cybersecurity incidents and fraud.
• The company is exposed to market conditions and elevated interest rates which continue to hinder mortgage production.
• The company is exposed to fluctuations in swap fee income based on market conditions and client demand.

Future Outlook

The company anticipates completing the merger with Codorus Valley Bancorp in the near future and expects to incur additional merger-related expenses. Management believes the company is well-positioned for future growth.

Management Comments

• Orrstown's strong fourth quarter reflects the team's tremendous efforts for the past several years, which led us to the Company's strongest earnings on record in 2023.
• We believe that our relationship banking model and hands-on approach enabled us to have a successful year while navigating through the many headwinds facing the industry in 2023.
• Loan production and deposit gathering continue to be steady, which has helped us maintain a healthy net interest margin and limit margin compression.
• Our capital ratios continue to improve through earnings generation, which puts us in a good position for the next exciting phase in Orrstown's growth cycle.
• We look forward to taking the momentum we have built and joining, in the near future, our successful partner in Codorus Valley Bancorp to create an even stronger institution.

Industry Context

The announcement comes amid ongoing consolidation in the banking industry, with many institutions seeking to increase scale and efficiency through mergers. Orrstown's merger with Codorus Valley is a continuation of this trend, aiming to create a stronger regional bank.

Comparison to Industry Standards

• Orrstown's return on average equity of 14.66% for 2023 is strong compared to the industry average, which has been under pressure due to rising interest rates and economic uncertainty. For example, comparible regional banks such as Fulton Financial Corporation (FULT) and First Commonwealth Financial Corporation (FCF) have reported ROAEs in the 10-12% range for 2023.
• The company's loan growth of 7% for the year is solid, indicating a healthy demand for its lending products. This is in line with the growth seen in other regional banks, although some have experienced slower growth due to economic headwinds.
• The net interest margin of 3.71% in Q4 2023 is slightly below the average for regional banks, which have seen some margin compression due to increased funding costs. However, Orrstown's margin is still within a reasonable range.
• The tangible common equity ratio of 8.0% is a positive sign, indicating a strong capital position. This is above the regulatory minimum and is comparable to other well-capitalized regional banks.
• The increase in classified loans to $55.0 million is a concern, as it indicates potential credit quality issues. This is an area that will need to be monitored closely, as it is a common issue in the current economic environment. Comparible banks have also reported increases in classified loans, but the level at Orrstown is higher than some peers.

Stakeholder Impact

• Shareholders will benefit from the record full-year earnings and the declared dividend.
• Employees may experience changes due to the pending merger with Codorus Valley.
• Customers will likely see changes in services and products as a result of the merger.
• Creditors will be impacted by the company's financial performance and capital position.

Next Steps

• The company will continue to work towards completing the merger with Codorus Valley Bancorp.
• Management will focus on managing credit quality and addressing the increase in classified loans.
• The company will continue to monitor and manage its net interest margin in light of changing interest rates.
• The company will continue to focus on loan production and deposit gathering.

Key Dates

Keywords

earnings, merger, financial results, net income, loan growth, deposit growth, interest margin, capital ratios, banking, financial services