Orrstown Financial Services, Inc. Reports Fourth Quarter and Full Year 2020 Results Nasdaq:ORRF

Diluted fourth quarter 2020 EPS of $0.91 per share versus $0.45 per share in the

  • Diluted fourth quarter 2020 EPS of $0.91 per share versus $0.45 per share in the third quarter of 2020 due to robust revenue growth combined with expense reductions; full year diluted EPS of $2.40 per share
  • Tangible book value per share(1) increased to $19.93 at December 31, 2020 from $18.70 at September 30, 2020 and $17.65 at December 31, 2019, an increase of 12.9{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} for fiscal year 2020
  • Small Business Administration Paycheck Protection Program (“SBA PPP”) portfolio averaged $443 million in the three months ended December 31, 2020; $5.8 million of unearned net processing fees at December 31, 2020
  • Continued efforts to assist clients, employees and communities affected by COVID-19; active participant in new round of SBA PPP lending in January 2021
  • Net interest income solidly higher at $23.7 million in the three months ended December 31, 2020 versus $20.8 million in the three months ended September 30, 2020; fourth quarter 2020 net interest margin expands to 3.73{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} versus 3.24{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} in the linked quarter
  • Relationship fee income momentum continues as noninterest income increased to $7.2 million for the fourth quarter of 2020 from $6.9 million in the third quarter of 2020
  • Commercial loan growth, excluding SBA PPP loans, for the three months ended December 31, 2020 totaled $38.1 million, or 13.9{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} annualized; total gross loans, excluding SBA PPP loans, grew slightly during the quarter as residential mortgage loans continue to be paid off at a high rate
  • Deposit growth of $77.4 million, or 13.6{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} annualized, from September 30, 2020 to December 31, 2020 with non-interest DDA balances growing by $47.5 million from September 30, 2020 to $457.0 million at December 31, 2020
  • COVID-19 related loan deferrals fell to $18.2 million at December 31, 2020 from $78.4 million at September 30, 2020 and $239.3 million at June 30, 2020
  • Provision for loan losses in fourth quarter of $0.3 million due primarily to loan growth; COVID-19 qualitative reserves flat at $2.7 million at December 31, 2020
  • Asset quality metrics continue to be solid with non-performing loans to non-SBA loans of 0.65{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} at December 31, 2020 as compared to 0.50{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} at September 30, 2020; net recoveries in the three months ended December 31, 2020 totaling $126 thousand as compared to $8 thousand in the three months ended September 30, 2020.
  • Allowance to non-SBA and non-acquired loans of 1.5{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} at December 31, 2020 and September 30, 2020; allowance plus purchase accounting marks to unguaranteed loans(1) of 1.8{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} at December 31, 2020 compared to 1.9{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} at September 30, 2020
  • For the full year, net recoveries totaled $0.2 million with another $2.8 million in net gains recorded on the sale of problem loans
  • The fourth quarter 2020 efficiency ratio fell to 58.5{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} due to strong revenue growth; noninterest expenses fell to $18.1 million
  • The Board of Directors declared a cash dividend of $0.18 per common share, payable February 8, 2021, to shareholders of record as of February 1, 2021, an increase from the $0.17 dividend declared in previous quarters.

(1) Non-GAAP measure. See Appendix B for additional information.

SHIPPENSBURG, Pa., Jan. 20, 2021 (GLOBE NEWSWIRE) — Orrstown Financial Services, Inc. (“Orrstown” or the “Company”) (NASDAQ: ORRF), the parent company of Orrstown Bank (the “Bank”), announced earnings for the three months and full year ended December 31, 2020. Net income totaled $10.1 million for the three months ended December 31, 2020, compared with $5.0 million for the three months ended September 30, 2020 and $4.2 million for the three months ended December 31, 2019. Diluted earnings per share totaled $0.91 for the three months ended December 31, 2020, compared with $0.45 for the three months ended September 30, 2020 and $0.38 for the three months ended December 31, 2019. For the year ended December 31, 2020, net income was $26.5 million, or $2.40 per diluted share compared to $16.9 million, or $1.61 per diluted share for the year ended December 31, 2019.

Thomas R. Quinn, Jr., President & CEO, commented, “The COVID-19 pandemic and resultant economic fallout brought unprecedented challenges for Orrstown Bank in 2020. However, past strategic investments in technology, geographic diversity, and top-notch talent combined with our associates’ unwavering dedication to clients, Company, and coworkers resulted in a record level of pretax earnings for both the full-year and the fourth quarter. Though the window for new PPP loans was closed during the fourth quarter of 2020, the work continued as our team members shepherded clients through the forgiveness process and worked to deepen relationships with clients that are new to Orrstown Bank from the PPP. Mortgage volumes remained robust during the fourth quarter, but experienced seasonal slowness. Despite an elevated loan loss provision in 2020 due to economic uncertainty, asset quality metrics remain strong with minimal charge-offs during the year, which speaks to the Company’s risk management discipline.”

Mr. Quinn continued, “The arrival of a vaccine and passage of more government stimulus in late 2020 provides hope for a return to normalcy in 2021. That said, many of the headwinds created by the pandemic will persist into 2021 and perhaps beyond. These include, but are not limited to, a lower interest rate environment, which will impact our margin negatively, reduced loan demand, and greater risk of default from borrowers. We remain confident we can partially offset these negative factors through the combined impact of increased fee revenue, particularly mortgage, wealth management, and interchange income and expense control, as evidenced by our third quarter 2020 announcement of reductions to our branch count and staffing re-alignment. Commercial loan demand is expected to be muted in 2021 as the economy recovers and we remain committed to maintaining our credit and financial discipline. We are pleased to report that we are participating in the latest round of PPP, and will provide updated information at a later date, but we look forward to using this opportunity to introduce more new clients to the high-touch, consultative business approach of the Company.”

Orrstown has implemented the following steps to mitigate the potential spread of COVID-19 and help our clients during this challenging time:

  • Continue to perform branch transactions via drive-thru lanes or scheduled appointments at branch locations;
  • Launched an internal Pandemic Response Team at the outset of the COVID-19 pandemic;
  • Waived Orrstown fees on all foreign ATM transactions from March 18, 2020 through June 1, 2020 to encourage and support the use of this key delivery channel;
  • Waived late fees on all loan payments for 60 days through May 31, 2020 to assist those whose employment status and income may have been negatively impacted by the virus;
  • Designated a select group of loan specialists to work with clients needing special assistance or guidance;
  • Implemented strategic efforts to effectively operate most of the core operations of the Company in a remote work environment;
  • Maintaining enhanced staffing levels at our Client Service Center to manage and support our increased call volume;
  • Instituted extensive preventative measures for workplace health and safety;
  • Continuing to educate clients and consumers on the various assistance programs available to them through the SBA, as well as other federal and state government resources;
  • Conducted virtual, interactive webinars with lending clients and community groups in order to educate and support them on the SBA PPP process, including loan forgiveness. Recently held more than five webinars regarding new SBA PPP funding;
  • Conducted media interviews and launched a multi-channel advertising campaign in all markets aimed at educating the community about PPP funding; and
  • Partnered with the American Bankers Association to execute their Banks Never Ask That campaign, aimed at educating clients and consumers on how to protect their privacy and money, especially during the pandemic as reports warn of heightened scam and fraud attempts

Loss Mitigation Efforts / Loan Concentration

Management has continued numerous proactive efforts to prepare for the difficult economic environment, including quarterly contact with commercial loan clients having $1.0 million or more in exposure and many with lower exposure, initiating a loan payment deferral program for consumer and business clients of up to six months, actively participating in the initial SBA PPP program and the recently approved Second Draw PPP Loan program, performing stress testing of higher risk concentrations in the loan portfolio and implementing tighter underwriting for new loans. Currently, with government stimulus programs adding support to the economy and the benefits of limited re-opening of businesses in our markets, the Bank has not experienced a material increase in loan delinquencies or a negative impact to charge-off trends. We remain cautious regarding the economic impact of COVID-19 on our consumer and business borrowers in future quarters as the impact of federal stimulus wanes.

Due to continuing uncertainty in the external environment, management continues to maintain the qualitative factor designated for the impact of COVID-19, which represented $2.7 million of the Bank’s allowance for loan losses at December 31, 2020. As of December 31, 2020, the Bank had active COVID-19 related deferred loans totaling $18.2 million, or 1.15{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of its total loan portfolio, excluding PPP loans. This compared to $78.4 million, or 5.0{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of total loans, excluding PPP loans, at September 30, 2020 and $239.3 million in active COVID-19 deferrals, or 15.1{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of total loans, excluding PPP loans, at June 30, 2020. While there was recent fiscal stimulus from the Federal government and talk of more to come, its impact will eventually wane and reopening plans continue to yield mixed results in our primary markets. We remain cautious with regard to our future credit outlook.

The Bank is also actively consulting with clients that applied for and received SBA PPP loans. At December 31, 2020, the Bank had $409.1 million outstanding principal for such loans. The program provides that the principal balance (or a reduced portion thereof) and accrued interest on these loans may be forgiven if the borrower satisfies certain specified criteria. The Bank has begun to process applications received from borrowers requesting such forgiveness, including the implementation of the SBA’s recently announced, streamlined forgiveness approval process on PPP loans of $150,000 and under. Loans of $150,000 and under make up the majority of the number of the Bank’s PPP loans, but a relatively small amount of its total PPP loan balances.

The combination of active client relationship consultation, loan payment deferrals, increased risk management focus on higher risk loan concentrations and significant client participation in the SBA PPP are anticipated to help offset potential future losses. Due to the current economic environment, charge-offs may increase in the coming quarters, but more time is needed to fully understand the magnitude and length of the economic downturn and its impact on our loan portfolio.

The following table summarizes COVID-19 related modifications, including deferrals and forbearances:

Loan Type Amount of Loans   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of Non-PPP Loans
December 31, 2020   September 30, 2020   December 31, 2020   September 30, 2020
Commercial $ 15,702     $ 61,597     1.4 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   5.6 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Consumer Portfolio Loans 2,504     16,845     0.6     3.6  
Total Loans $ 18,206     $ 78,442     1.2 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   5.0 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}

The following table summarizes COVID-19 related deferral balances within certain industry segments at December 31, 2020:

Industry Segment Deferral Balance   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of Total non-PPP Loans   $ Non-PPP Segment Total   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of non-PPP Segment
Hotel/Motel $ 9,497     0.6 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   $ 48,379     19.6 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Restaurant/Bar 774     0.1     33,400     2.3  
Commercial construction 499         51,826     1.0  
Mixed use 376         21,875     1.7  
Multi-Family CRE         115,671      
Strip Center/Retail         61,268      
Senior Housing         43,814      

DISCUSSION OF RESULTS

Balance Sheet

Loans

Net loans fell by $50.6 million from September 30, 2020 to December 31, 2020 primarily due to SBA PPP loan forgiveness and runoff in residential mortgages. Commercial loans, excluding SBA PPP loans, grew by $38.1 million, or 13.9{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} annualized, from September 30, 2020 to December 31, 2020 as commercial loan demand started to improve late in the fourth quarter. Commercial loan closing activity significantly increased in the second half of December but local markets still have not improved to pre-pandemic levels. Forgiveness approvals for SBA PPP loans started to be received in the fourth quarter, resulting in outstanding PPP loans, net of deferred fees and costs, falling by $54.8 million to $403.3 million from September 30, 2020 to December 31, 2020. We expect these SBA PPP loans to continue to runoff in the first three quarters of 2021 as our clients’ forgiveness requests are approved. The Bank plans on being an active participant in the new SBA PPP program in the first quarter of 2021 and has seen strong interest for new SBA PPP loans in January 2021.  

Residential mortgage loans on the balance sheet continue to prepay at a high rate due to historically low interest rates, resulting in the portfolio declining $28.8 million or 42{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} annualized to $244.3 million at December 31, 2020 from September 30, 2020. The Bank has begun an effort to selectively portfolio some quality mortgage loans to reduce the runoff. To date, these efforts have not had a material impact on balances but we expect that to change in 2021. Consumer loans also fell $4.6 million or 9{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} annualized to $198.2 million at December 31, 2020 from September 30, 2020. Overall loan growth in 2021, excluding SBA PPP loans is expected to be low single digits with higher single digits possible for commercial lending if conditions continue to improve.

Deposits

Deposits grew by $77.4 million, or 13.6{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} annualized, to $2.36 billion at December 31, 2020 from $2.28 billion at September 30, 2020. Clients continue to hold larger deposits with the Bank given the low level of interest rates and economic uncertainty, which contributed to positive fourth quarter seasonality. Non-interest DDA balances grew by $47.5 million in the quarter, or 46{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} annualized, while interest bearing checking accounts rose $42.9 million, or 21{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} annualized. The Bank also saw modest money market and savings growth of $5.6 million, or 4{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} annualized. Due to very low interest rates, time deposits continue to fall and were down another $18.7 million in the quarter, or 18{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} annualized. Some of the deposit growth achieved during the year was due to new SBA PPP client activity. Over the long term, when interest rates return to more normal levels above today’s rates, some of the deposit growth that has been seen in 2020 is expected to reverse as clients deploy their excess liquidity to meet their needs. The Bank has very strong liquidity and will continue to target a loan to deposit ratio of 90{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}.

During 2020, the Bank announced or completed 11 branch consolidations, which is 30{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of total branch locations at December 31, 2019. The Bank completed the most recent consolidations in January 2021 and now has 26 locations. Because of these efforts, the average branch size has increased from $51 million at December 31, 2019 to $91 million today, an increase of 79{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}.

Other

Total borrowings fell by $123.3 million to $109.4 million from September 30, 2020 to December 31, 2020 due to deposit growth and SBA PPP loan forgiveness. Short term borrowings were paid off and the Bank fully paid off its borrowings under the SBA PPP Borrowing Facility. Excess liquidity is beginning to build as evidenced by a $45.5 million increase in cash held at the Federal Reserve from September 30, 2020 to December 31, 2020. The Bank expects some loan growth as well as deposit runoff in coming quarters but some excess liquidity may build in the short-term depending on timing of portfolio growth and overall SBA PPP activity.

Investments fell by $11.8 million, or 10{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, annualized to $466.5 million at December 31, 2020 as compared to September 30, 2020 due to portfolio runoff. No purchases were completed in the three months ended December 31, 2020. The Bank intends on shrinking this portfolio given the low level of interest rates and the opportunity to deploy funds into quality relationship loans. During the year ended December 31, 2020, there were no other-than-temporary impairment charges or other material changes to the quality of the investment portfolio. See Appendix C for a summary of the current investment portfolio that highlights the concentrations, quality and credit enhancement levels for the portfolio.

Income Statement

Net Interest Income and Margin

Net interest income grew to $23.7 million for the three months ended December 31, 2020 despite a $31.0 million reduction in average earning assets to $2.55 billion during the three months ended December 31, 2020 as compared to the three months ended September 30, 2020. Additionally, the net interest margin rose 49 basis points to 3.73{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} over the same period. Net interest income rose as SBA PPP forgiveness began in the fourth quarter of 2020, which increased processing fee recognition by $1.4 million as compared to the third quarter of 2020. Accretion income grew by $0.6 million from the previous quarter due to some successful asset quality resolutions in the acquired loan portfolio. Finally, prepayment penalty income increased by $0.5 million from the previous quarter due to elevated refinance activity in the commercial real estate portfolio. These three items accounted for 90{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of the increase in net interest income. The remainder was due to a continued favorable shift in balance sheet mix.

SBA PPP loans had an average outstanding balance of $443 million and yielded 4.3{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} in the three months ended December 31, 2020. This yield increased from the third quarter 2020 level of 2.9{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} due primarily to PPP forgiveness. As of December, 2020, 57{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of the total $13.5 million in net deferred SBA PPP fees have been earned. The remaining fees are expected to be earned in the coming quarters upon SBA forgiveness of the loans. While there continues to be uncertainty, we expect a significant portion of the balances in the existing SBA PPP portfolio to be forgiven in the first three quarters of 2021 and a continuation of elevated SBA PPP income due to that forgiveness.

Balance sheet mix improvement efforts have been emphasized throughout the past year and the fourth quarter saw additional progress. In the loan portfolio, commercial loans, excluding PPP loans, rose $38.1 million while residential loans fell $28.8 million and investments fell by $11.8 million. Additionally, the funding mix improved as non-interest DDA balances rose $47.5 million, interest bearing DDA balances rose by $42.9 million, CDs fell by $18.7 million and borrowings fell by $123.3 million. During 2020, CDs fell from 27{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}of total deposits in the first quarter of 2020 to 18{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} in the fourth quarter of 2020 while core deposits rose from 73{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} to 82{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of total deposits during the same period. The Bank ended the year with no brokered deposits. The mix improvement and repricing actions by management led to a deposit cost reduction of an additional 11 basis points in the fourth quarter to 0.33{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}. As CDs reprice, this cost of funds will drift lower but we are nearing the bottom for deposit cost of funds.  

While some excess liquidity is beginning to build which may negatively impact the margin in the short term, our long-term objective of emphasizing balance sheet mix is expected to lead to a higher net interest margin over the long-term. These efforts may mute growth in assets but should lead to growth in net interest income, earnings and return on assets. It is anticipated that the net interest margin will be under pressure with low interest rates forecasted for 2021 given the low-cost deposit portfolio and short duration asset profile. We believe that our efforts on balance sheet mix enhancement and fee income generation will be effective to manage through the current external environment.

Provision for loan losses

The allowance for loan losses totaled $20.2 million at December 31, 2020, compared with $19.7 million at September 30, 2020. Total classified loans decreased by $3.3 million, or 9{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}, to $33.1 million from September 30, 2020 to December 31, 2020. The provision for loan losses totaled $0.3 million in the three months ended December 31, 2020, which is down from $2.2 million in the three months ended September 30, 2020 and $1.9 million in the three months ended June 30, 2020. We continue to see favorable asset quality trends and most loans that we placed on payment deferral have resumed paying status.

Asset quality metrics remain solid with net recoveries for a second consecutive quarter. Net recoveries of $126 thousand were recorded in the fourth quarter of 2020 following $8 thousand recorded in the third quarter of 2020. Nonperforming loans increased by $2.4 million from $7.9 million at September 30, 2020 to $10.3 million at December 31, 2020 and totaled 0.52{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of gross loans at December 31, 2020, compared with 0.39{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} of loans at September 30, 2020. The allowance for loan losses to nonperforming loans ratio was 195{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} at December 31, 2020. We believe the allowance for loan losses to be adequate based on current asset quality metrics; however, deterioration in the loan portfolio could occur, requiring additional provisioning, if unemployment remains elevated or due to other economic factors caused by lower business activity as a result of the COVID-19 pandemic.

Noninterest Income

Noninterest income totaled $7.2 million in the three months ended December 31, 2020 compared with $6.9 million in the three months ended September 30, 2020.

Total wealth management income for the three months ended December 31, 2020 was $2.6 million, as compared to $2.5 million for the three months ended September 30, 2020. Strong equity markets helped to propel income along with the addition of new clients. The Bank remains focused on growth markets and there continue to be opportunities for growth over the long-term as the Bank seeks to expand its portfolio of wealth management clients.

Debit card interchange income totaled $0.9 million for a second quarter in a row. After the COVID-19 pandemic hit, the Bank saw increased client usage of cards and revenue trends 7{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} higher than the same period last year. We expect more growth in 2021 as client usage continues to increase and we add new clients. Other service charge income was $1.0 million for the three months ended December 31, 2020 as compared to $0.9 million in the prior quarter but down 11{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} from $1.1 million in the same period last year. This is primarily a result of less overdraft income as clients have kept more cash in their accounts due to economic uncertainty and client retention of government stimulus payments.

Mortgage banking activity fell from the third quarter due primarily to seasonality. Mortgage banking income for the three months ended December 31, 2020 decreased to $1.3 million versus $2.0 million in the previous linked quarter. Mortgage loans sold in the fourth quarter of 2020 totaled $60.7 million compared with $72.8 million in the third quarter of 2020. The pipeline remains solid with locked loans of $22.6 million at December 31, 2020. The Bank records gains on closed and locked loans. In the three months ended December 31, 2020 and September 30, 2020, impairment charges of $0 and $0.2 million, respectively, were recognized on the Bank’s mortgage servicing rights asset due to falling interest rates.

With an increase in loan demand occurring across our markets, loan swap fees increased to $0.3 million in the fourth quarter of 2020 as compared to $0.1 million in the previous quarter. These fees are derived from interest rate hedges for commercial real estate clients and we anticipate an increase in swap demand and activity in 2021.

With low interest rates, the Bank will focus on relationship fee income growth to offset net interest margin pressures. Growth in mortgage banking, wealth management, interchange income and interest rate swaps are an emphasis for 2021.

Noninterest Expenses

Noninterest expense fell by $1.2 million to $18.1 million in the three months ended December 31, 2020 from the three months ended September 30, 2020. In the third quarter of 2020, there were $1.6 million of charges related to the consolidation of branches and staff reductions. These initiatives are expected to result in approximately $4 million of expense savings in 2021.

Salaries and employee benefits totaled $11.0 million in the fourth quarter of 2020 as compared with $10.6 million in the third quarter of 2020. In the fourth quarter, $0.4 million was recorded for the liability associated with the carryover of paid time off for employees due to the pandemic. It is not anticipated that this will reoccur in future years. Also, $0.4 million was added for performance related incentives given the strong financial results recorded in fourth quarter of 2020. Finally, health insurance expenses rose by $0.2 million from the previous quarter to $0.9 million due to claims activity as employee spending was deferred from earlier quarters due to the pandemic.

Advertising expense increased by $0.3 million in the fourth quarter of 2020 as compared to the third quarter of 2020 primarily due to spending associated with a Pennsylvania Educational Improvement Initiative. Taxes other than income fell by $0.3 million primarily due to the related credit associated with the Educational Improvement program. Professional fees rose by $0.2 million from the three months ended September 30, 2020 to $0.8 million in the three months ended December 31, 2020 due primarily to higher legal expenses incurred in the quarter.

The Bank will continue to closely manage expenses in the near term. As the cost saving initiatives announced in 2020 are expected to be fully realized in 2021, we intend to selectively invest some of those savings in technology to meet client needs and improve the Bank’s efficiency in 2021. We also expect normal mild expense increases due to inflation but have no material hiring plans for 2021. Longer term, Orrstown will continue to invest in talent, technology and infrastructure.

Income Taxes

The Company’s effective tax rate for the fourth quarter of 2020 was 19.7{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} compared with 19.9{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} for the third quarter of 2020. The Company’s effective tax rate is less than the 21{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} federal statutory rate due to tax-exempt income, including interest earned on tax-exempt loans and securities and income from life insurance policies, as well as tax credits.

Capital

Shareholders’ equity totaled $246.2 million at December 31, 2020, an increase of $13.4 million from $232.8 million at September 30, 2020. The increase was primarily attributable to net income recorded in the three months ended December 31, 2020 and an increase in accumulated other comprehensive income from changes in net unrealized gains and losses in securities available for sale which increased by $5.7 million from September 30, 2020 to December 31, 2020. For the year, tangible book value per share grew from $17.65 at December 31, 2019 to $19.93 at December 31, 2020, an increase of 12.9{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}.

The Company’s tangible common equity ratio rose from 7.6{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} at September 30, 2020 to 8.2{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} at December 31, 2020 and the Company’s Tier 1 leverage ratio increased from 7.8{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} at September 30, 2020 to 8.1{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} at December 31, 2020. The Company’s total risk-based capital ratio increased from 15.0{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} at September 30, 2020 to 15.6{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} at December 31, 2020. Based upon conversations with SBA PPP borrowers regarding their eligibility for loan forgiveness and guidance issued by the SBA, it is anticipated that most of the SBA PPP loans will achieve loan forgiveness by September 30, 2021. During this time, the Bank expects to generate approximately $4.7 million of additional retained earnings from its SBA PPP lending efforts. After the SBA PPP loans exit the balance sheet and the Bank records the net income, capital ratios are expected to increase, all other inputs remaining static. While the leverage ratio has temporarily declined from December 31, 2019, the risk-based capital ratios are not impacted by SBA PPP loan growth due to their 0{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} regulatory capital risk weighting. The Company continues to believe that capital is adequate at this time to support the risks inherent in the balance sheet.

Investor Relations Contact: Media Contact:
Matthew C. Schultheis, CFA Luke Bernstein
Director Strategic Planning and Investor Relations Corporate Communications Officer
Phone (717) 510-7127 Phone (717) 510-7107
ORRSTOWN FINANCIAL SERVICES, INC.              
FINANCIAL HIGHLIGHTS (Unaudited)              
               
               
  Three Months Ended   Year Ended
  December 31,   December 31,   December 31,   December 31,
(Dollars in thousands, except per share amounts) 2020   2019   2020   2019
               
Profitability for the period:              
Net interest income $ 23,729     $ 17,941     $ 83,607     $ 69,295  
Provision for loan losses 300         5,325     900  
Noninterest income 7,181     7,028     28,309     28,539  
Noninterest expenses 18,080     19,707     74,080     77,300  
Income before income taxes 12,530     5,262     32,511     19,634  
Income tax expense 2,471     1,028     6,048     2,710  
Net income available to common shareholders $ 10,059     $ 4,234     $ 26,463     $ 16,924  
               
Financial ratios:              
Return on average assets (1) 1.47 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   0.72 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   1.00 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   0.76 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Return on average equity (1) 17.01 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   7.53 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   11.66 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   8.21 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Net interest margin (1) 3.73 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   3.37 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   3.44 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   3.43 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Efficiency ratio 58.5 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   78.9 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   66.2 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   79.0 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Income per common share:              
Basic $ 0.92     $ 0.39     $ 2.42     $ 1.63  
Diluted $ 0.91     $ 0.38     $ 2.40     $ 1.61  
               
Average equity to average assets 8.65 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   9.60 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   8.58 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   9.26 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
               
(1) Annualized.              
ORRSTOWN FINANCIAL SERVICES, INC.      
FINANCIAL HIGHLIGHTS (Unaudited)      
(continued)      
  December 31,   December 31,
  2020   2019
At period-end:      
Total assets $ 2,750,572      $ 2,383,274   
Total deposits 2,356,880      1,875,522   
Loans, net of allowance for loan losses 1,959,539      1,629,675   
Loans held-for-sale, at fair value 11,734      9,364   
Securities available for sale 466,465      490,885   
Borrowings 77,511      217,936   
Subordinated notes 31,903      31,847   
Shareholders’ equity 246,249      223,249   
       
Credit quality and capital ratios (1):      
Allowance for loan losses to total loans 1.02  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   0.89  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Total nonaccrual loans to total loans 0.52  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   0.65  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Nonperforming assets to total assets 0.37  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   0.46  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Allowance for loan losses to nonaccrual loans 195  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   138  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Total risk-based capital:      
Orrstown Financial Services, Inc. 15.6  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   14.1  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Orrstown Bank 14.7  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   13.4  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Tier 1 risk-based capital:      
Orrstown Financial Services, Inc. 12.5  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   11.3  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Orrstown Bank 13.5  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   12.5  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Tier 1 common equity risk-based capital:      
Orrstown Financial Services, Inc. 12.5  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   11.3  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Orrstown Bank 13.5  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   12.5  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Tier 1 leverage capital:      
Orrstown Financial Services, Inc. 8.1  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   8.6  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Orrstown Bank 8.7  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   9.4  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
       
Book value per common share $ 21.98      $ 19.93   
       
(1) Capital ratios are estimated, subject to regulatory filings      
ORRSTOWN FINANCIAL SERVICES, INC.      
CONSOLIDATED BALANCE SHEETS (Unaudited)      
       
(Dollars in thousands, except per share amounts) December 31, 2020   December 31, 2019
Assets      
Cash and due from banks $ 26,203     $ 25,969  
Interest-bearing deposits with banks 99,055     29,994  
Cash and cash equivalents 125,258     55,963  
Restricted investments in bank stocks 10,563     16,184  
Securities available for sale (amortized cost of $460,999 and $491,492 at December 31, 2020 and December 31, 2019, respectively) 466,465     490,885  
Loans held for sale, at fair value 11,734     9,364  
Loans 1,979,690     1,644,330  
Less: Allowance for loan losses (20,151 )   (14,655 )
Net loans 1,959,539     1,629,675  
Premises and equipment, net 35,149     37,524  
Cash surrender value of life insurance 68,554     63,613  
Goodwill 18,724     19,925  
Other intangible assets, net 5,458     7,180  
Accrued interest receivable 8,927     6,040  
Other assets 40,201     46,921  
Total assets $ 2,750,572     $ 2,383,274  
Liabilities      
Deposits:      
Noninterest-bearing $ 456,778     $ 249,450  
Interest-bearing 1,900,102     1,626,072  
Total deposits 2,356,880     1,875,522  
Securities sold under agreements to repurchase 19,466     8,269  
FHLB Advances and other 58,045     209,667  
Subordinated notes 31,903     31,847  
Accrued interest and other liabilities 38,029     34,720  
Total liabilities 2,504,323     2,160,025  
Shareholders’ Equity      
Preferred stock, $1.25 par value per share; 500,000 shares authorized; no shares issued or outstanding      
Common stock, no par value—$0.05205 stated value per share 50,000,000 shares authorized; 11,257,046 shares issued and 11,201,317 outstanding at December 31, 2020; 11,220,604 shares issued and 11,199,874 outstanding at December 31, 2019 586     584  
Additional paid—in capital 189,066     188,365  
Retained earnings 54,100     35,246  
Accumulated other comprehensive income (loss) 3,345     (480 )
Treasury stock— 55,729 and 20,730 shares, at cost at December 31, 2020 and December 31, 2019, respectively (848 )   (466 )
Total shareholders’ equity 246,249     223,249  
Total liabilities and shareholders’ equity $ 2,750,572     $ 2,383,274  
ORRSTOWN FINANCIAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
                 
    Three Months Ended   Year Ended
    December 31,   December 31,   December 31,   December 31,
(In thousands, except per share amounts)   2020   2019   2020   2019
Interest income                
Loans   $ 23,887      $ 20,083     $ 87,492     $ 75,071  
Investment securities – taxable   2,080      3,575     10,458     14,538  
Investment securities – tax-exempt   445      271     1,566     2,054  
Short-term investments   14      99     115     1,331  
Total interest income   26,426      24,028     99,631     92,994  
Interest expense                
Deposits   1,862      4,908     12,009     19,310  
Securities sold under agreements to repurchase   13      539     85     623  
FHLB Advances and other   320      139     1,924     1,779  
Subordinated notes   502      501     2,006     1,987  
Total interest expense   2,697      6,087     16,024     23,699  
Net interest income   23,729      17,941     83,607     69,295  
Provision for loan losses   300          5,325     900  
Net interest income after provision for loan losses   23,429      17,941     78,282     68,395  
Noninterest income                
Service charges   999      1,119     3,557     4,209  
Interchange income   916      859     3,423     3,281  
Loan swap referral fees   320      568     847     1,197  
Wealth management income   2,615      2,478     9,733     9,681  
Mortgage banking activities   1,348      1,304     5,274     3,047  
Gains on sale of portfolio loans   —          2,803      
Other income   955      682     2,688     2,375  
Investment securities gains (losses)   28      18     (16 )   4,749  
Total noninterest income   7,181      7,028     28,309     28,539  
Noninterest expenses                
Salaries and employee benefits   10,998      11,407     43,350     39,495  
Occupancy, furniture and equipment   2,467      2,433     9,516     9,048  
Data processing, telephone, and communication   954      941     3,574     3,599  
Advertising and bank promotions   507      619     1,660     1,967  
FDIC insurance   195      (30 )   686     367  
Professional services   780      876     3,120     2,954  
Taxes other than income   240      92     1,144     1,018  
Intangible asset amortization   345      474     1,569     1,570  
Merger related and branch consolidation expenses   —      988     1,310     8,964  
Insurance claim (recovery) receivable write-off   —          (486 )   615  
Other operating expenses   1,594      1,907     8,637     7,703  
Total noninterest expenses   18,080      19,707     74,080     77,300  
Income before income tax expense   12,530      5,262     32,511     19,634  
Income tax expense   2,471      1,028     6,048     2,710  
Net income   $ 10,059      $ 4,234     $ 26,463     $ 16,924  
                 
Share information:                
Basic earnings per share   $ 0.92      $ 0.39     $ 2.42     $ 1.63  
Diluted earnings per share   $ 0.91      $ 0.38     $ 2.40     $ 1.61  
Weighted average shares – basic   10,953      10,966     10,942     10,362  
Weighted average shares – diluted   11,057      11,097     11,034     10,514  
ORRSTOWN FINANCIAL SERVICES, INC.        
ANALYSIS OF NET INTEREST INCOME        
Average Balances and Interest Rates, Taxable-Equivalent Basis (Unaudited)    
  Three Months Ended
  12/31/2020   09/30/20   06/30/20   03/31/20   12/31/2019
      Taxable-   Taxable-       Taxable-   Taxable-       Taxable-   Taxable-       Taxable-   Taxable-       Taxable-   Taxable-
  Average   Equivalent   Equivalent   Average   Equivalent   Equivalent   Average   Equivalent   Equivalent   Average   Equivalent   Equivalent   Average   Equivalent   Equivalent
(Dollars in thousands) Balance   Interest   Rate   Balance   Interest   Rate   Balance   Interest   Rate   Balance   Interest   Rate   Balance   Interest   Rate
Assets                                                          
Federal funds sold & interest-bearing bank balances $ 48,019     $ 14     0.12 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   $ 31,087     $ 9     0.12 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   $ 27,949     $ 13     0.18 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   $ 22,869     $ 80     1.41 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   $ 21,396     $ 99     1.84 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Securities (1) 486,613     2,643     2.16     496,107     2,673     2.14     493,847     3,327     2.71     500,987     3,797     3.05     504,571     3,919     3.08  
Loans (1)(2)(3) 2,015,749     23,960     4.73     2,054,193     21,741     4.21     1,988,114     21,912     4.43     1,653,547     20,287     4.93     1,606,608     20,207     4.99  
Total interest-earning assets 2,550,381     26,617     4.15     2,581,387     24,423     3.76     2,509,910     25,252     4.05     2,177,403     24,164     4.46     2,132,575     24,225     4.51  
Other assets 182,764             190,119             200,684             188,400             191,585          
Total $ 2,733,145             $ 2,771,506             $ 2,710,594             $ 2,365,803             $ 2,324,160          
Liabilities and Shareholders’ Equity                                                          
Interest-bearing demand deposits $ 1,283,024     655     0.20     $ 1,213,208     939     0.31     $ 1,154,434     1,259     0.44     $ 972,486     1,903     0.79     $ 955,975     2,136     0.89  
Savings deposits 172,068     52     0.12     168,377     67     0.16     160,738     63     0.16     151,195     63     0.17     150,221     64     0.17  
Time deposits 411,395     1,155     1.12     432,438     1,477     1.36     462,664     1,988     1.73     503,364     2,388     1.91     551,789     2,708     1.95  
Securities sold under agreements to repurchase 20,055     13     0.26     21,145     20     0.38     21,582     24     0.45     9,416     28     1.20     9,257     29     1.24  
FHLB advances and other 135,558     320     0.94     219,567     394     0.71     175,336     388     0.89     187,408     822     1.76     119,632     649     2.15  
Subordinated notes 31,895     502     6.29     31,881     501     6.28     31,867     502     6.33     31,853     501     6.33     31,839     501     6.23  
Total interest-bearing liabilities 2,053,995     2,697     0.52     2,086,616     3,398     0.65     2,006,621     4,224     0.85     1,855,722     5,705     1.24     1,818,713     6,087     1.33  
Noninterest-bearing demand deposits 406,454             417,939             452,253             250,163             247,107          
Other 36,216             37,330             36,511             33,763             35,282          
Total Liabilities 2,496,665             2,541,885             2,495,385             2,139,648             2,101,102          
Shareholders’ Equity 236,480             229,621             215,209             226,155             223,058          
Total $ 2,733,145             $ 2,771,506             $ 2,710,594             $ 2,365,803             $ 2,324,160          
Taxable-equivalent net interest income / net interest spread     23,920     3.63 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}       21,025     3.12 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}       21,028     3.20 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}       18,459     3.23 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}       18,138     3.18 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Taxable-equivalent net interest margin         3.73 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}           3.24 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}           3.37 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}           3.41 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}           3.37 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Taxable-equivalent adjustment     (192 )           (207 )           (230 )           (197 )           (197 )    
Net interest income     $ 23,728             $ 20,818             $ 20,798             $ 18,262             $ 17,941      
Ratio of average interest-earning assets to average interest-bearing liabilities         124 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}           124 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}           125 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}           117 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}           117 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
                                                           
NOTES:                                                          
(1) Yields and interest income on tax-exempt assets have been computed on a taxable-equivalent basis assuming a 21{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} tax rate.
(2) Average balances include nonaccrual loans.
(3) Interest income on loans includes prepayment and late fees, where applicable, prior periods have been adjusted to include these fees.
ORRSTOWN FINANCIAL SERVICES, INC.            
ANALYSIS OF NET INTEREST INCOME        
Average Balances and Interest Rates, Taxable-Equivalent Basis (Unaudited)    
(continued)                      
  Year Ended
  December 31, 2020   December 31, 2019
      Taxable-   Taxable-       Taxable-   Taxable-
  Average   Equivalent   Equivalent   Average   Equivalent   Equivalent
(Dollars in thousands) Balance   Interest   Rate   Balance   Interest   Rate
Assets                      
Federal funds sold & interest-bearing bank balances $ 32,519      $ 115     0.35  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   $ 58,100     $ 1,339     2.30 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Securities (1) 494,372      12,440     2.52      499,282     17,130     3.43  
Loans (1)(2)(3) 1,928,486      87,900     4.56      1,492,815     75,568     5.06  
Total interest-earning assets 2,455,377      100,455     4.09      2,050,197     94,037     4.59  
Other assets 190,470              174,924          
Total $ 2,645,847              $ 2,225,121          
Liabilities and Shareholders’ Equity                      
Interest-bearing demand deposits $ 1,156,292      4,755     0.41      $ 920,025     8,253     0.90  
Savings deposits 163,133      246     0.15      138,761     261     0.19  
Time deposits 452,298      7,008     1.55      549,937     10,796     1.96  
Securities sold under agreements to repurchase 18,064      86     0.48      32,001     623     1.95  
FHLB advances and other 179,457      1,923     1.07      80,636     1,779     2.21  
Subordinated notes 31,874      2,006     6.29      31,842     1,987     6.24  
Total interest-bearing liabilities 2,001,118      16,024     0.80      1,753,202     23,699     1.35  
Noninterest-bearing demand deposits 381,869              234,354          
Other 35,960              31,544          
Total Liabilities 2,418,947              2,019,100          
Shareholders’ Equity 226,900              206,021          
Total $ 2,645,847              $ 2,225,121          
Taxable-equivalent net interest income / net interest spread     84,431     3.29  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}       70,338     3.24 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Taxable-equivalent net interest margin         3.44  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}           3.43 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Taxable-equivalent adjustment     (824 )           (1,043 )    
Net interest income     $ 83,607             $ 69,295      
Ratio of average interest-earning assets to average interest-bearing liabilities         123  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}           117 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
                       
NOTES TO ANALYSIS OF NET INTEREST INCOME:                
(1) Yields and interest income on tax-exempt assets have been computed on a taxable-equivalent basis assuming a 21{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} tax rate.
(2) Average balances include nonaccrual loans.
(3) Interest income on loans includes prepayment and late fees, where applicable, prior periods have been adjusted to include these fees.
(4) For the year ended December 31, 2019, expenses associated with the early redemption of brokered time deposits totaled $0.2 million, and increased the cost of funds by five basis points.
ORRSTOWN FINANCIAL SERVICES, INC.        
HISTORICAL TRENDS IN QUARTERLY FINANCIAL DATA (Unaudited)        
                   
(In thousands, except per share amounts ) December 31,
2020
  September 30,
2020
  June 30,
2020
  March 31,
2020
  December 31,
2019
Profitability for the quarter:                  
Net interest income $ 23,729      $ 20,818      $ 20,798      $ 18,262      $ 17,941   
Provision for loan losses 300      2,200      1,900      925      —   
Noninterest income 7,181      6,861      7,193      7,074      7,028   
Noninterest expenses 18,080      19,265      18,431      18,304      19,707   
Income before income taxes 12,530      6,214      7,660      6,107      5,262   
Income tax expense 2,471      1,237      1,301      1,039      1,028   
Net income $ 10,059      $ 4,977      $ 6,359      $ 5,068      $ 4,234   
                   
Financial ratios:                  
Return on average assets (1) 1.47  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   0.72  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   0.94  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   0.86  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   0.72  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Return on average equity (1) 17.01  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   8.67  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   11.82  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   8.96  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   7.53  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Net interest margin (1) 3.73  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   3.24  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   3.37  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   3.41  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   3.37  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Efficiency ratio 58.5  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   69.6  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   65.8  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   72.2  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   78.9  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Efficiency ratio, adjusted (2) 58.5  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   64.8  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   65.9  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   72.1  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   75.0  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
                   
Per share information :                  
Income per common share:                  
Basic $ 0.92      $ 0.45      $ 0.58      $ 0.46      $ 0.39   
Diluted $ 0.91      $ 0.45      $ 0.58      $ 0.46      $ 0.38   
Book value $ 21.98      $ 20.78      $ 20.13      $ 18.81      $ 19.93   
Tangible book value (3) $ 19.93      $ 18.70      $ 18.03      $ 16.53      $ 17.65   
Cash dividends paid $ 0.17      $ 0.17      $ 0.17      $ 0.17      $ 0.15   
Average basic shares 10,953      10,941      10,916      10,959      10,966   
Average diluted shares 11,057      11,025      10,993      11,062      11,097   
(1) Annualized.
(2) Efficiency ratio has been adjusted for merger related and branch consolidation expenses and investment securities (losses) gains.
(3) Non-GAAP based financial measure. Please refer to Appendix B – Supplemental Reporting of Non-GAAP Measures and GAAP to Non-GAAP Reconciliations for a discussion of our use of non-GAAP based financial measures, including tables reconciling GAAP and non-GAAP financial measures appearing herein.
                   
ORRSTOWN FINANCIAL SERVICES, INC.                
HISTORICAL TRENDS IN QUARTERLY FINANCIAL DATA (Unaudited)        
(continued)                  
  December 31,
2020
  September 30,
2020
  June 30,
2020
  March 31,
2020
  December 31,
2019
Noninterest income:                  
Service charges $ 999      $ 852     $ 719     $ 987     $ 1,119  
Interchange income 916      900     819     788     859  
Loan swap referral fees 320      95     232     200     568  
Wealth management income 2,615      2,464     2,295     2,359     2,478  
Mortgage banking activities 1,348      1,985     1,609     332     1,304  
Other income 955      578     585     2,448     682  
Investment securities gains (losses) 28      (13 )   9     (40 )   18  
Total noninterest income $ 7,181      $ 6,861     $ 6,268     $ 7,074     $ 7,028  
                   
Noninterest expenses:                  
Salaries and employee benefits $ 10,998      $ 10,695     $ 10,063     $ 11,594     $ 11,407  
Occupancy, furniture and equipment 2,467      2,434     2,326     2,289     2,433  
Data processing, telephone, and communication 954      958     791     871     941  
Advertising and bank promotions 507      197     167     789     619  
FDIC insurance 195      230     214     47     (30 )
Professional services 780      603     1,021     716     876  
Taxes other than income 240      453     449     2     92  
Intangible asset amortization 345      357     404     463     474  
Merger related and branch consolidation expenses —      1,310             988  
Insurance claim receivable recovery —              (486 )    
Other operating expenses 1,594      2,028     2,996     2,019     1,907  
Total noninterest expenses $ 18,080      $ 19,265     $ 18,431     $ 18,304     $ 19,707  
                   
ORRSTOWN FINANCIAL SERVICES, INC.                
HISTORICAL TRENDS IN QUARTERLY FINANCIAL DATA (Unaudited)            
(continued)                  
  December 31,
2020
  September 30,
2020
  June 30,
2020
  March 31,
2020
  December 31,
2019
Balance Sheet at quarter end:                  
Cash and cash equivalents $ 125,258     $ 87,307     $ 52,290     $ 57,137     $ 55,963  
Restricted investments in bank stocks 10,563     12,646     16,256     15,823     16,184  
Securities available for sale 466,465     478,288     483,936     479,599     490,885  
Loans held for sale, at fair value 11,734     12,804     13,594     7,900     9,364  
Loans:                  
Commercial real estate:                  
Owner occupied 174,908     166,623     164,442     168,586     170,884  
Non-owner occupied 409,567     403,138     390,980     377,933     361,050  
Multi-family 113,635     110,153     111,016     107,797     106,893  
Non-owner occupied residential 114,505     111,958     116,531     118,773     120,038  
Commercial and industrial 647,368     690,330     665,312     235,791     214,554  
Total commercial loans 1,459,983     1,482,202     1,448,281     1,008,880     973,419  
Acquisition and development:                  
1-4 family residential construction 9,486     9,627     7,966     13,037     15,865  
Commercial and land development 51,826     37,850     50,220     49,348     41,538  
Municipal 20,523     28,867     34,276     46,551     47,057  
Residential mortgage:                  
First lien 244,321     273,149     295,736     324,766     336,372  
Home equity – term 10,169     11,108     11,944     13,337     14,030  
Home equity – lines of credit 157,021     158,106     160,842     165,375     165,314  
Installment and other loans 26,361     28,961     32,052     35,654     50,735  
Total loans 1,979,690     2,029,870     2,041,317     1,656,948     1,644,330  
Allowance for loan losses (20,151 )   (19,725 )   (17,517 )   (15,803 )   (14,655 )
Net loans held-for-investment 1,959,539     2,010,145     2,023,800     1,641,145     1,629,675  
Goodwill 18,724     18,724     18,724     20,142     19,925  
Other intangible assets, net 5,458     5,803     6,160     6,717     7,180  
Total assets 2,750,572     2,781,667     2,772,796     2,387,553     2,383,274  
Total deposits 2,356,880     2,279,483     2,251,731     1,897,296     1,875,522  
Borrowings 77,511     200,818     226,520     212,099     217,936  
Subordinated notes 31,903     31,889     31,875     31,861     31,847  
Total shareholders’ equity 246,249     232,847     225,638     210,570     223,249  
ORRSTOWN FINANCIAL SERVICES, INC.                
HISTORICAL TRENDS IN QUARTERLY FINANCIAL DATA (Unaudited)            
(continued)                  
  December 31,
2020
  September 30,
2020
  June 30,
2020
  March 31,
2020
  December 31,
2019
Capital and credit quality measures (1):                  
Total risk-based capital:                  
Orrstown Financial Services, Inc 15.6   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   15.0   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   14.5 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   14.0   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   14.1 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Orrstown Bank 14.7   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   14.3   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   13.9 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   13.4   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   13.4 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Tier 1 risk-based capital:                  
Orrstown Financial Services, Inc 12.5   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   12.0   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   11.7 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   11.2   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   11.3 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Orrstown Bank 13.5   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   13.1   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   12.8 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   12.5   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   12.5 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Tier 1 common equity risk-based capital:                  
Orrstown Financial Services, Inc 12.5   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   12.0   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   11.7 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   11.2   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   11.3 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Orrstown Bank 13.5   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   13.1   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   12.8 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   12.5   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   12.5 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Tier 1 leverage capital:                  
Orrstown Financial Services, Inc 8.1   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   7.8   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   7.6 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   8.5   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   8.6 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Orrstown Bank 8.7   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   8.5   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   8.4 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   9.4   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   9.4 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
                   
Average equity to average assets 8.65   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   8.29   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   7.94 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   9.56   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   9.60 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Allowance for loan losses to total loans 1.02   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   0.97   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   0.86 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   0.95   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   0.89 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Total nonaccrual loans to total loans 0.52   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   0.39   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   0.36 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   0.47   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   0.65 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Nonperforming assets to total assets 0.37   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   0.28   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   0.27 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   0.34   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   0.46 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Allowance for loan losses to nonaccrual loans 195   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   250   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   237 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   202   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   138 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
                   
Other information:                  
Net (recoveries) charge-offs $ (126 )     $ (8 )     $ 186     $ (223 )     $ 154  
Classified loans 33,147       36,408       33,376     30,470       40,808  
Nonperforming and other risk assets:                  
Nonaccrual loans 10,310       7,899       7,404     7,806       10,657  
Other real estate owned             17     197       197  
Total nonperforming assets 10,310       7,899       7,421     8,003       10,854  
Restructured loans still accruing 934       945       960     971       979  
Loans past due 90 days or more and still accruing (2) 554       520       909     2,115       2,232  
Total nonperforming and other risk assets $ 11,798       $ 9,364       $ 9,290     $ 11,089       $ 14,065  
(1) Capital ratios are estimated, subject to regulatory filings.
(2) Includes $0.5 million, $0.5 million, $0.6 million, $1.9 million and $2.0 million of purchased credit impaired loans at December 31, 2020, September 30, 2020, June 30, 2020, March 31, 2020, and December 31, 2019, respectively.

Appendix A- Supplemental Reporting of Unusual Items

The following table presents unusual items that impacted each period shown. These items are presented to enable investors to better understand the magnitude of certain significant items on reported GAAP results in the context of the Company’s growth and acquisition activities.

  Three Months Ended   Year To Date
  12/31/2020   9/30/20   6/30/20   3/31/20   12/31/2019   12/31/2020   12/31/2019
(In thousands)                          
Pretax Items                          
Merger related expenses $ —      $     $     $     $     $ —      $ 7,976  
Branch consolidation expenses —      1,310             988     1,310     988  
Net securities gains (losses) 28      (13 )   9     (40 )   18     (16 )   4,749  
Accelerated payoff of brokered deposits and borrowings penalty —                      —      223  
Gain on swap termination 226                      226      
Life insurance proceeds 31                      —      255  
Restricted stock forfeiture expense benefit —                      —      350  
Gain on sale of portfolio loans —          925     1,878         2,803      
Accretion – recoveries on purchased credit impaired loans 779      294     1,021     211     109     2,304     845  
Insurance claim receivable recovery (write-off) —              486         486     (615 )
                           
Income Tax Expense Items                          
Tax benefit from state deferred tax asset rate change —                      —      334  
Tax benefit from acquired life insurance assets —                      —      185  
                           

Appendix B- Supplemental Reporting of Non-GAAP Measures and GAAP to Non-GAAP Reconciliations

As a result of acquisitions, the Company has intangible assets consisting of goodwill and core deposit and other intangible assets totaling $24.2 million and $27.1 million at December 31, 2020 and December 31, 2019, respectively. Additionally, the Company incurred approximately $1.3 million during the three months ended September 30, 2020 and the year ended December 31, 2020 in charges associated with branch consolidation efforts.

Management believes providing certain “non-GAAP” financial information will assist investors in their understanding of the effect of acquisition activity on reported results, particularly to overcome comparability issues related to the influence of intangibles (principally goodwill) created in acquisitions. Management also believes providing certain other “non-GAAP” financial information will assist investors in their understanding of the effect on recent financial results of non-recurring charges associated with increasing operational efficiencies for the long-term.

Tangible book value per share, net interest margin excluding the impact of purchase accounting, adjusted diluted EPS and adjusted non-interest expenses, as used by the Company in this earnings release, are determined by methods other than in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). While we believe this information is a useful supplement to GAAP based measures presented in this earnings release, readers are cautioned that this non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for financial measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of our results and financial condition as reported under GAAP, nor are such measures necessarily comparable to non-GAAP performance measures that may be presented by other companies. This supplemental presentation should not be construed as an inference that our future results will be unaffected by similar adjustments to be determined in accordance with GAAP.

The following tables present the computation of each non-GAAP based measure:

(dollars in thousands, except per share information)

Tangible Book Value per Common Share   December 31,
2020
  September 30,
2020
  June 30,
2020
  March 31,
2020
  December 31,
2019
 
Shareholders’ equity   $ 246,249     $ 232,847     $ 225,638     $ 210,570     $ 223,249    
Less: Goodwill   18,724     18,724     18,724     20,142     19,925    
Other intangible assets   5,458     5,803     6,160     6,717     7,180    
Related tax effect   (1,146 )   (1,219 )   (1,294 )   (1,411 )   (1,508 )  
Tangible common equity (non-GAAP)   $ 223,213     $ 209,539     $ 202,048     $ 185,122     $ 197,652    
                       
Common shares outstanding   11,201     11,204     11,209     11,197     11,200    
                       
Book value per share (most directly comparable GAAP based measure)   $ 21.98     $ 20.78     $ 20.13     $ 18.81     $ 19.93    
Intangible assets per share   2.05     2.08     2.10     2.28     2.28    
Tangible book value per share (non-GAAP)   $ 19.93     $ 18.70     $ 18.03     $ 16.53     $ 17.65    
Allowance for loan losses to unguaranteed, non-acquired loans:      
       
  December 31, 2020   September 30, 2020
Allowance for loan losses $ 20,151       $ 19,725    
less: Reserves on acquired loans (558 )     (518 )  
Allowance for loan losses, adjusted $ 19,593       $ 19,207    
       
Gross loans 1,979,690       2,029,870    
less: SBA guaranteed loans (404,205 )     (459,662 )  
less: Acquired loans (269,103 )     (298,854 )  
Unguaranteed, non-acquired loans $ 1,306,382       $ 1,271,354    
       
Allowance for loan losses to unguaranteed, non-acquired loans 1.5   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   1.5   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Allowance for loan losses plus purchase accounting marks to unguaranteed loans:      
       
  December 31, 2020   September 30, 2020
Allowance for loan losses $ 20,151       $ 19,725    
Purchase accounting marks 7,784       9,607    
Allowance plus purchase accounting marks $ 27,935       $ 29,332    
       
Gross loans 1,979,690       2,029,870    
Less: SBA guaranteed loans (404,205 )     (459,662 )  
Unguaranteed loans $ 1,575,485       $ 1,570,208    
       
Allowance for loan losses plus purchase accounting marks to unguaranteed loans: 1.8   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   1.9   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
      Three Months Ended
(dollars in thousands)     December 31,
2020
  September 30,
2020
  June 30,
2020
  March 31,
2020
  December 31,
2019
Taxable-Equivalent Net Interest Margin (excluding the effect of purchase accounting)                          
Taxable-equivalent net interest income/margin, as reported     $ 23,920     3.73 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   $ 21,025     3.24 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   $ 21,028     3.37 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   $ 18,459     3.41 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   $ 18,138     3.37 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Effect of purchase accounting:                                        
Loans Income   (1,846 )   (0.30 ){14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   (1,199 )   (0.20 ){14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   (1,603 )   (0.27 ){14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   (899 )   (0.20 ){14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   (1,186 )   (0.24 ){14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Time deposits Expense   13     {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   16     {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   24     {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   28     {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   (145 )   0.03 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Purchase accounting effect on taxable-equivalent income/margin     (1,859 )   (0.30 ){14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   (1,215 )   (0.20 ){14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   (1,627 )   (0.27 ){14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   (927 )   (0.20 ){14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   (1,041 )   (0.21 ){14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Taxable-equivalent net interest income/margin (excluding the effect of purchase accounting) (non-GAAP)     $ 22,061     3.43 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   $ 19,810     3.04 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   $ 19,401     3.10 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   $ 17,532     3.21 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   $ 17,097     3.16 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
                   
      Year Ended
(dollars in thousands)     December 31,
2020
  December 31,
2019
Taxable-Equivalent Net Interest Margin (excluding the effect of purchase accounting)                  
Taxable-equivalent net interest income/margin, as reported     $ 84,431       3.44 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   $ 70,338       3.43 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Effect of purchase accounting:                  
Loans Income   (5,547 )     (0.24 ){14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   (3,758 )     (0.21 ){14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Time deposits Expenses   81       {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   (102 )     0.01 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Purchase accounting effect on taxable-equivalent income/ margin     (5,628 )     (0.24 ){14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   (3,656 )     (0.20 ){14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}
Taxable-equivalent net interest income/margin (excluding the effect of purchase accounting) (non-GAAP)     $ 78,803       3.20 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   $ 66,682       3.23 {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}

Appendix C- Investment Portfolio Concentrations

The following table summarizes the credit ratings and collateral associated with the Company’s investment portfolio, excluding equity securities, at December 31, 2020:

(dollars in thousands)

Sector Portfolio Mix   Amortized Book   Fair Value   Credit Enhancement   AAA   AA   A   BBB   NR   Collateral Type
Unsecured ABS {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   $ 6,730      $ 6,806      44  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   98  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   Unsecured Consumer Debt
Student Loan ABS {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   11,222      11,137      26      —      —      —      —      100      Seasoned Student Loans
Federal Family Education Loan ABS 39  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   180,031      177,519          {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   73  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   23  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   Federal Family Education Loan (1)
PACE Loan ABS {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   5,147      5,243          100  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   PACE Loans
Non-Agency CMBS 14  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   63,941      62,236      53      97  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   Commercial Real Estate
Non-Agency RMBS {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   16,505      16,919      33      100  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   Reverse Mortgages (2)
Municipal – General Obligation 12  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   53,789      59,186          {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   85  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   12  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}    
Municipal – Revenue 11  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   50,915      53,483          —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   61  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   19  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   20  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}    
SBA ReRemic {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   11,295      11,262          —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   100  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   SBA Guarantee (3)
Agency MBS 13  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   61,054      62,304          —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   100  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   Residential Mortgages (3)
Bank CDs —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   249      249          —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   100      FDIC Insured CD
  100  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   $ 460,878      $ 466,344          20  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   61  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   13  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   —  {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}   {14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3}    
                                       
(1) Minimum of 97{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} guaranteed by U.S. government
(2) Reverse mortgages, expected credit enhancement is provided above
(3) 100{14cc2b5881a050199a960a1a3483042b446231310e72f0dc471a7a1eddd6b0c3} guaranteed by U.S. government agencies
Note : Ratings in table are the lowest of the three rating agencies (Standard & Poors, Moody’s & Fitch). Standard & Poors rates U.S. government obligations at AA+

About the Company

With $2.8 billion in assets, Orrstown Financial Services, Inc. and its wholly-owned subsidiary, Orrstown Bank, provide a wide range of consumer and business financial services through banking offices in Berks, Cumberland, Dauphin, Franklin, Lancaster, Perry, and York Counties, Pennsylvania and Anne Arundel, Baltimore, Howard, and Washington Counties, Maryland, as well as Baltimore City, Maryland. Orrstown Bank is an Equal Housing Lender and its deposits are insured up to the legal maximum by the FDIC. Orrstown Financial Services, Inc.’s common stock is traded on Nasdaq (ORRF). For more information about Orrstown Financial Services, Inc. and Orrstown Bank, visit www.orrstown.com.

Cautionary Note Regarding Forward-looking Statements:

This press release contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements reflect the current views of the Company’s management with respect to, among other things, future events and the Company’s financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “project,” “forecast,” “goal,” “target,” “would” and “outlook,” or the negative variations of those words or other comparable words of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about the Company’s industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Company’s control. Accordingly, the Company cautions you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements and there can be no assurances that the Company will be able to continue to successfully execute on its strategic growth plan into Dauphin, Lancaster, York and Berks counties, Pennsylvania, and the greater Baltimore market in Maryland, with newer markets continuing to be receptive to our community banking model; to take advantage of market disruption; to experience sustained growth in loans and deposits or maintain the momentum experienced to date from these actions; and to realize cost savings from our branch consolidation efforts. In addition to risks and uncertainties related to the COVID-19 pandemic and resulting governmental and societal responses, factors which could cause the actual results of the Company’s operations to differ materially from expectations include, but are not limited to: ineffectiveness of the Company’s strategic growth plan due to changes in current or future market conditions; the effects of competition and how it may impact our community banking model, including industry consolidation and development of competing financial products and services; the integration of the Company’s strategic acquisitions; the inability to fully achieve expected savings, efficiencies or synergies from mergers and acquisitions, or taking longer than estimated for such savings, efficiencies and synergies to be realized; changes in laws and regulations; interest rate movements; changes in credit quality; inability to raise capital, if necessary, under favorable conditions; volatility in the securities markets; deteriorating economic conditions; expenses associated with pending litigation and legal proceedings; the failure of the SBA to honor its guarantee of loans issued under the SBA PPP; the timing of the repayment of SBA PPP loans and the impact it has on fee recognition; our ability to convert new relationships gained through the SBA PPP efforts to full banking relationships; and other risks and uncertainties, including those set forth under the heading “Risk Factors” in the Company’s 2019 Annual Report on Form 10-K and subsequent filings. The foregoing list of factors is not exhaustive.

If one or more events related to these or other risks or uncertainties materializes, or if the Company’s underlying assumptions prove to be incorrect, actual results may differ materially from what the Company anticipates. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and the Company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New risks and uncertainties arise from time to time, and it is not possible for the Company to predict those events or how they may affect it. In addition, the Company cannot assess the impact of each factor on its business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. All forward-looking statements, expressed or implied, included in this press release are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that the Company or persons acting on the Company’s behalf may issue.

The review period for subsequent events extends up to and includes the filing date of a public company’s financial statements, when filed with the Securities and Exchange Commission. Accordingly, the consolidated financial information presented in this announcement is subject to change.