November 09, 2007 at 16:27 PM EST
Oak Ridge Financial Services Announces Third Quarter Earnings

Oak Ridge Financial Services, Inc. (NASDAQ CM: BKOR), the holding company for Bank of Oak Ridge, today reported diluted earnings per share of 17 cents for the third quarter of 2007, compared with diluted earnings per share of 19 cents for the same period of 2006.

Bank of Oak Ridge President, Ron Black, in commenting on the results, noted, We are extremely pleased with results in the third quarter of 2007, especially considering that we recorded $164,000 in income tax expense in the third quarter of 2007, with none recorded in the same period in 2006. Our pretax net income for the quarter ended September 30, 2007 increased 31 percent over the same period in 2006, so our core operating performance increased dramatically and our noninterest income for the quarter ended September 30, 2007 increased 45 percent over the same period in 2006. We also had 20 and 19 percent increases in loans and deposits from December 31, 2006 to September 30, 2007, respectively. Additionally, our asset quality trends continue to be exemplary, with no exposure to subprime mortgages, and with a minimal level of nonperforming assets as of June 30, 2007. My thanks to all the great efforts of the employees and our Board of Directors in helping us to achieve these results.

Operating Results for the three months ended September 30, 2007 and 2006

Net Income

The Company recorded net income of $299,000 and $354,000 for the three months ended September 30, 2007 and 2006, respectively. The primary factors that contributed to the decline in net income between the two periods were increases of $368,000, $6,000, $164,000 in noninterest expense, provision for loan losses, and income tax expense, respectively. The Company recorded no income tax expense in the three months ended September 30, 2006. The increases in expenses were offset by increases in the net interest margin and noninterest income of $255,000 and $228,000, respectively.

Net Interest Income

The Companys net interest income in the third quarter of 2007 was $1.9 million, up $255,000, or 15 percent, from $1.6 million in the third quarter of 2006. The net interest margin in the third quarter of 2007 was 3.51 percent, compared with 3.69 percent for the same period in 2006. The 18 basis point decrease in the net interest margin in the third quarter of 2007 over the same period in 2006 is primarily a result of a 44 basis point increase in funding costs, offset by a 20 basis point increase in earning asset yields. Average interest-earning assets and average interest-bearing liabilities increased $42.6 million and $42.0 million, respectively, from September 30, 2006 to September 30, 2007.

Provision for Loan Losses

The provision for loan losses increased slightly to $110,000 for the three months ended September 30, 2007, compared to $104,000 for the same period in the prior year. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level we deem appropriate. In evaluating the allowance for loan losses, we consider factors that include growth and composition of the loan portfolio, historical loan loss experience, individual loans that may have estimated losses, and other relevant factors. The current level of the allowance for loan losses to total loans is based on our assessment of the strong credit quality of the Companys current loan portfolio as well as a low level of charge offs in the last three fiscal years.

Noninterest Income

Noninterest income totaled $735,000 for the 2007 third quarter, up $228,000, or 45 percent, from $507,000 for the 2006 third quarter. The Company experienced increases in all noninterest income categories, with the exception of income earned on bank owned life insurance, which remained unchanged. The Company experienced increases in service charges on deposit accounts, mortgage loan origination fees, investment and insurance commissions, trading income, fee income from accounts receivable financing, and other service charges and fees of $36,000, $2,000, $71,000, $11,000, $66,000 and $42,000, respectively. The primary factor related to increases in noninterest income categories, with the exception of trading income, was the Banks continued growth in business and consumer customers.

Noninterest Expense

Noninterest expense totaled $2.1 million for the 2007 third quarter, up $368,000, or 21 percent, from $1.7 million for the 2006 third quarter. Salaries and employee benefits increased $187,000, or 20 percent, to $1.1 million compared to the third quarter of 2006, due to a higher number of bank employees required to support the Companys growth as well as the 6.5 hours per week increase in operating hours that occurred in October of 2006 in conjunction with the introduction of the Companys Open Early, Open Late and 6-Day Branch Banking at all Locations strategies. Other expense increased $78,000, or 45 percent, to $250,000 compared to the third quarter of 2006, due to an increase in expense of servicing the Banks accounts receivable financing program, as well as increases in postage, directors fees, Federal Deposit Insurance Corporation insurance, charitable contributions, and deposit account charge offs. Equipment expense increased $16,000, or 12 percent, to $145,000 due primarily to higher depreciation expense associated with late 2006 and 2007 equipment purchases. Data and items processing increased $10,000, or 13 percent, due to the Banks continued increase in deposit and loan accounts. Professional and advertising expense increased $57,000, or 27 percent, to $269,000, due to increases in legal, accounting and shareholder relations expenses. Stationary and supplies expense increased $13,000, or 35 percent, to $50,000 compared to the third quarter of 2006 due to the Companys continued growth in locations and number of deposit and loan accounts. Telecommunications expense increased $9,000, or 19 percent, to $55,000 compared to the third quarter of 2006, largely due to the Companys continuing investment in increased bandwidth to make employees more efficient and productive. Monetary increases and decreases in the remaining noninterest expense categories were not significant.

Income Tax Expense

Income tax expense totaled $164,000 for the 2007 third quarter. No expense was recorded in the same quarter in 2006 as the Company was not yet recognizing book income tax expense.

Operating Results for the nine months ended September 30, 2007 and 2006

Net Income

The Company recorded net income of $607,000 and $1.0 million for the nine months ended September 30, 2007 and 2006, respectively. The primary factors that contributed to the decline in net income between the two periods were increases of $1.1 million and $305,000 in noninterest expense and income tax expense, respectively. The Company recorded no income tax expense in the first nine months of 2006. The increases in expenses were offset by increases in the net interest margin and noninterest income of $738,000 and $231,000, respectively, as well as a decline in the provision for loan losses of $50,000.

Net Interest Income

The Companys net interest income in the first nine months of 2007 was $5.6 million, up $738,000, or 15 percent, from $4.8 million in the third quarter of 2006. The net interest margin in the first nine months of 2007 was 3.54 percent, compared with 3.75 percent for the same period in 2006. The 21 basis point decrease in the net interest margin in first nine months of 2007 over the same period in 2006 is primarily a result of a 60 basis point increase in funding costs, offset by a 38 basis point increase in earning asset yields. Average interest-earning assets and average interest-bearing liabilities increased $36.6 million and $35.7 million, respectively, from September 30, 2006 to September 30, 2007.

Provision for Loan Losses

The provision for loan losses decreased to $273,000 for the nine months ended September 30, 2007 compared to $323,000 for the same period in the prior year. Provisions for loan losses are charged to income to bring the allowance for loan losses to a level we deem appropriate. In evaluating the allowance for loan losses, we consider factors that include growth and composition of the loan portfolio, historical loan loss experience, individual loans that may have estimated losses, and other relevant factors. The primary reason for the decreased provision from 2006 to 2007 was a decrease in the allowance for loan losses from 1.15 percent to 1.03 percent of loans from September 30, 2006 to September 30, 2007, respectively. The decrease in the allowance for loan losses to total loans was based on our assessment of the strong credit quality of the Companys current loan portfolio as well as a low level of charge offs in the last three fiscal years. The allowance for loan losses to total loans was 1.03, 1.07 and 1.15 percent at September 30, 2007, December 31, 2006 and September 30, 2006, respectively.

Noninterest Income

Noninterest income totaled $1.7 million for the first nine months of 2007, up $231,000 from $1.5 million for the same period in 2006. The Company experienced increases in service charges on deposit accounts, mortgage loan origination fees, income earned on bank owned life insurance, fee income from accounts receivable financing, and other service charges and fees of $114,000, $78,000, $1,000, $110,000, and $76,000, respectively. These increases were largely due to the Companys expansion into Greensboro through its two banking offices opened in 2005 and 2006. These increases were offset by decreases in investment and insurance commissions and trading income of $13,000 and $135,000, respectively. The decline in investment and insurance commissions was largely the result of a decrease in production in the early part of 2007 as a result of the Companys conversion to a new broker dealer. This conversion was completed in the first quarter of 2007 and commissions in both the second and third quarters of 2007 were above commissions in the same periods in 2006. The decline in trading income was caused by two items, both of which are nonrecurring. First, the trading portfolio experienced a market value increase during the first nine months of 2007 of $30,000. Second, the Company disposed of substantially all its trading portfolio near the end of the second quarter, which resulted in a $165,000 loss. The Company believes that the new investment portfolio that was purchased will improve its asset liability position and will have a higher yield than the portfolio it replaced.

Noninterest Expense

Noninterest expense totaled $6.1 million for the first nine months of 2007, up $1.1 million, or 23 percent, from $5.0 million for the same period in 2006. Salaries and employee benefits increased $654,000, or 24 percent, to $3.4 million in the first nine months of 2007 compared to the same period in 2006, due to a higher number of Company employees required to support the Companys growth as well as the 6.5 hours per week increase in operating hours that occurred in October of 2006 in conjunction with the introduction of the Companys Open Early, Open Late and 6-Day Branch Banking at all Locations strategies. Additionally, the Company opened its fourth banking office in June of 2006. The employees associated with this location also contributed to the increase in salaries and employee benefits from 2006 to 2007. Other expense increased $299,000, or 70 percent, to $724,000 compared to the same period in 2006, largely due to an increase in director fees, postage, insurance expense, dues and memberships, employee education, and debit card and check losses. Stationary and supplies expense increased $37,000, or 31 percent, to $158,000 compared to 2006 due to the Companys continued growth in locations and number of deposit and loan accounts, as well as mailings and new brochures associated with the Companys conversion to a new broker dealer for its investment services area in the first quarter of 2007. Telecommunications expense increased $47,000, or 40 percent, to $164,000 compared to 2006, largely due to the Companys continuing investment in increased bandwidth to make employees more efficient and productive. Monetary increases and decreases in the remaining noninterest expense categories were not significant.

Income Tax Expense

Income tax expense totaled $305,000 for the first nine months of 2007. No expense was recorded in the same period 2006 as the Company was not yet recognizing book income tax expense.

Comparison of Financial Condition at September 30, 2007 and December 31, 2006

The Companys assets increased from $207.1 million to $247.5 million, up $40.4 million, or 20 percent, from December 31, 2006 to September 30, 2007. The majority of the increase in assets was due to increases in cash and due from banks, interest-bearing deposits with banks, federal funds sold, trading assets, net loans, property and equipment, accrued interest receivable, bank owned life insurance, and other assets; offset by decreases in securities available-for-sale, held-to-maturity securities, and Federal Home Loan Bank stock.

Loans

Gross loans receivable totaled $192.0 million at the end of the 2007 third quarter, up $32.6 million, or 21 percent, from $159.4 million at December 31, 2006. Most of the growth in loans receivable came from increases of $19.6 million, $17.0 million, and $3.9 million in construction and land development, commercial and industrial loans, and loans secured by liens on 1-4 family residential properties, respectively, offset by a decline of $8.3 million in nonfarm nonresidential loans. The remaining increases and decreases in different loan categories were not significant. The large increases in construction and development and commercial and industrial loans are due to the Banks continued expansion into the Greensboro market, which has presented more of these loan opportunities for our commercial lenders. The increase in loans secured by second liens on 1-4 family residential properties are due to a fixed rate loan promotion on these types of loans during the period. The decreases in nonfarm nonresidential loans are due to payoffs during the year on some of these loans.

Federal funds sold

Federal funds totaled $13.3 million at the end of the 2007 third quarter, up $6.5 million, or 96 percent, from $6.8 million at December 31, 2006. The primary reasons for the large increase between the two periods were the issuance of $8.3 million in notes payable to subsidiary grantor trust near the end of the second quarter as well as continued growth in deposits due to the Banks continued expansion into Greensboro. The Banks intent is to use the excess liquidity at September 30, 2007 to fund loan growth during the last three months of fiscal 2007.

Investments

Securities available-for-sale totaled $17.6 million at the end of the 2007 third quarter, down $5.8 million, or 25 percent, from $23.4 million at December 31, 2006. As discussed in note 6, the Company did adopt SFAS No. 159 as of January 1, 2007. Upon adoption of SFAS No. 159, the Bank selected the fair value option for its entire available-for-sale and held-to-maturity securities portfolio consisting of government sponsored enterprise and mortgage-backed securities with a fair market value on January 1, 2007 of $25.0 million. As a result of the above election, the Banks entire securities portfolio was reclassified from available-for-sale and held-to-maturity categories to the trading category. The initial adoption of SFAS No. 159 had a minimal negative impact on total stockholders equity of $48,000 due to the reclassification of the Banks held-to-maturity category to the trading category, and the cumulative-effect adjustment of $393,000, representing the unrealized loss on the Banks entire securities portfolio (net of tax), was reclassified from accumulated other comprehensive loss as a reduction of Retained Earnings, on January 1, 2007. In June of 2007, the Company disposed of substantially all its trading portfolio and purchased new investment securities with the objective of improving its asset liability position and the yield on the new portfolio as well as reducing the number of investment securities.

Property and equipment

Net property and equipment totaled $6.4 million at the end of the 2007 third quarter, up $1.4 million, or 28 percent, from $5.0 million at December 31, 2006. The increase is primarily due to the construction of the Banks newest banking office located at 400 Pisgah Church Road in Greensboro, offset by depreciation of existing property and equipment. This banking office is expected to open for business in December of 2007.

Deposits

Deposits totaled $204.7 million at the end of the 2007 third quarter, up $32.4 million, or 18 percent, from $172.3 million at December 31, 2006. The increase in deposits assisted in funding the Companys loan growth. The Company experienced strong growth in both noninterest bearing and interest-bearing deposits. Noninterest bearing deposits totaled $16.5 million at the end of the 2007 third quarter, up $2.8 million, or 20 percent, from $13.7 million at December 31, 2006, and interest bearing deposits totaled $188.2 million at the end of the 2007 third quarter, up $29.7 million, or 19 percent, from $158.5 million at December 31, 2006. Most of the increases in noninterest bearing deposits during the nine months ended September 30, 2007 were from new accounts from Triad businesses and consumers.

Borrowings

Borrowings, which consist of Federal Home Loan Bank advances and notes payable to subsidiary grantor trust, totaled $24.3 million at the end of the 2007 third quarter, up $6.8 million, or 39 percent, from $17.5 million at December 31, 2006. The primary reason for the net increase was the payoff of $1.5 million of FHLB advances and the addition of $8.3 million in junior subordinated notes relating to trust preferred securities.

Stockholders Equity

Stockholders equity totaled $17.1 million at the end of the 2007 third quarter, up $669,000, or 4 percent, from $16.5 million at December 31, 2006. Part of the increase resulted from net income of $607,000, with the remaining increase due to an increase in comprehensive income during the third quarter of 2007. The early adoption had a negative impact on total stockholders equity of $48,000 due to the reclassification of the Companys securities from the held-to-maturity category to the trading category. Additionally, the cumulative-effect adjustment of $393,000, representing the unrealized loss on the Companys held-to-maturity and available-for-sale securities portfolio (net of tax), was reclassified from accumulated other comprehensive loss as a reduction of retained earnings, on January 1, 2007, also as a result of the adoption of SFAS No. 159.

Nonperforming Assets

Nonaccrual and accruing loans greater than 90 days past due totaled $394,000 at September 30, 2007, up $41,000, or 12 percent, from $353,000 at December 31, 2006. $309,000 of the total outstanding balance of nonaccrual and accruing loans greater than 90 days is secured by either 1st or 2nd deed of trust on commercial or 1-4 family properties. The remaining $85,000 in loans are unsecured or secured by collateral other than commercial or residential real estate and are in various stages of collection. Management believes that the loan loss reserves allocated to these loans are adequate to cover any anticipated losses. Nonperforming loans to total loans were 0.21 percent and 0.22 percent at September 30, 2007 and December 31, 2006, respectively.

About the Bank of Oak Ridge

Bank of Oak Ridge, headquartered in Oak Ridge, NC, is a community Bank with four locations in Oak Ridge, Summerfield and Greensboro. The Bank offers a complete line of banking and investment services, including savings and checking accounts, mortgage and business loans, extended weekday and Saturday branch banking hours, same-day deposits, cash management services, business and personal internet banking with balance alerts and reminders, internet bill payment, and accounts designed specifically for seniors, small businesses and civic organizations. For more information, contact Bank of Oak Ridge at 336-644-9944, or visit www.bankofoakridge.com.

Forward-looking Information

This form contains certain forward-looking statements with respect to the financial condition, results of operations and business of the Company. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Company and on the information available to management at the time that these disclosures were prepared. These statements can be identified by the use of words like expect,anticipate, estimate and believe, variations of these words and other similar expressions. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, (1) competition in the Companys markets, (2) changes in the interest rate environment, (3) general national, regional or local economic conditions may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and the possible impairment of collectibility of loans, (4) legislative or regulatory changes, including changes in accounting standards, (5) significant changes in the federal and state legal and regulatory environment and tax laws, (6) the impact of changes in monetary and fiscal policies, laws, rules and regulations and (7) other risks and factors identified in the Companys other filings with the Federal Deposit Insurance Corporation. The Company undertakes no obligation to update any forward-looking statements.

Oak Ridge Financial Services, Inc.

Financial Highlights (dollars in thousands,

except share and per share data)

Three months ended September 30,Nine months ended September 30,
20072006Change20072006Change
Income Statement Data:
Total interest income $ 4,268 $ 3,344 27.6

%

$ 11,890 $ 9,269 28.3

%

Total interest expense 2,3481,679 39.8 6,3364,453 42.3
Net interest income 1,920 1,665 15.3 5,554 4,816 15.3
Provision for loan losses 110 104 5.8 273 323 (15.5 )
Non-interest income 735 507 45.0 1,747 1,516 15.2
Non-interest expense 2,0821,714 21.5 6,1164,985 22.7
Net income before tax 463 354 30.8 912 1,024 (10.9 )
Provision for income taxes 164- n/a 305- n/a
Net income $299$354 (15.5 ) $607$1,024 (40.7 )
Per share data and shares outstanding: (1)
Basic net income per share $ 0.17 $ 0.20 (15.0 ) % $ 0.34 $ 0.57 (40.4 ) %
Diluted net income per share 0.17 0.19 (10.5 ) 0.33 0.55 (40.0 )
Book value at period end 9.56 9.01 6.1 9.56 9.01 6.1
Weighted average number of common shares outstanding (000's):
Basic 1,790.2 1,790.0 0.0

%

1,790.2 1,789.8 0.0

%

Diluted 1,809.1 1,863.0 (2.9 ) 1,837.4 1,861.1 (1.3 )
Shares outstanding at period end 1,790.2 1,790.0 0.0 1,790.2 1,790.0 0.0
Change from

Sept. 30,

Dec. 31,

Sept. 30,

Dec. 31,

Sept. 30,

Balance sheet data20072006200620062006
Total assets $ 247,534 $ 207,136 $ 194,736 19.5 % 27.1 %
Loans receivable 191,982 159,427 149,160 20.4 28.7
Allowance for loan losses 1,968 1,704 1,708 15.5 15.2
Other interest-earning assets 36,697 33,729 33,106 8.8 10.8
Total deposits 204,674 172,285 160,462 18.8 27.6
Borrowings 24,248 17,500 17,000 38.6 42.6
Shareholders' equity 17,122 16,453 16,123 4.1 6.2

Three months ended Sept. 30,

Nine months ended

Sept. 30,

Selected performance ratios:2007200620072006
Return on average assets (2) 0.51 % 0.75 % 0.37 % 0.76 %
Return on average stockholders' equity (2) 7.01 8.78 4.86 8.71
Net interest margin (2)(3) 3.51 3.69 3.54 3.75
Net interest spread (2)(4) 3.01 3.25 3.12 3.34
Noninterest income as a % of total revenue 27.7 23.3 23.9 23.9
Noninterest income as a % of average assets (2) 1.2 1.1 1.1 1.1
Efficiency ratio (5) 78.42 78.91 83.77 78.73
Noninterest expense as a % of average assets (2) 3.5 3.6 3.7 3.7

Sept. 30,

Dec. 31,

Sept. 30,

Asset quality ratios (at period end):200720062006
Nonperforming assets to period-end loans (6) 0.21 % 0.22 % 0.01 %
Allowance for loan losses to period-end loans 1.03 1.07 1.15
Allowance for loan losses to total assets 0.80 0.82 0.88
Net loan charge-offs to average loans outstanding (2) 0.04 0.03 0.09
Oak Ridge Financial Services, Inc.

Financial Highlights (dollars in thousands,

except share and per share data)

(Unaudited)

Sept. 30,

Dec. 31,

Sept. 30,

Capital and liquidity ratios:200720062006
Equity to assets ratio 6.9 % 7.9 % 8.3 %
Loans to deposits 93.8 92.5 93.0
Three months ended September 30,Nine months ended September 30,
Total Revenue20072006Change2007

2006

Change
Net interest income $ 1,920 $ 1,665 15.3

%

$ 5,554 $ 4,816 15.3

%

Fees and other revenue:
Service charges on deposit accounts 160 124 29.0 405 291 39.2
Mortgage loan origination fees 93 91 2.2 316 238 32.8
Investment and insurance commissions 246 175 40.6 626 639 (2.0 )
Trading income 11 - n/a (135 ) - n/a
Income earned on bank owned life insurance 40 40 - 118 117 0.9
Fee income from accounts receivable financing 104 38 173.7 236 126 87.3
Other service charges and fees 8139 107.7 181105 72.4
Total noninterest income 735507 45.0 1,7471,516 15.2
Total revenue $2,655$2,172 22.2 $7,301$6,332 15.3
Three months ended September 30,Nine months ended September 30,
Noninterest Expense20072006Change20072006Change
Salaries and employee benefits $ 1,103 $ 916 20.4

%

$ 3,356 $ 2,702 24.2

%

Occupancy expense 121 123 (1.6 ) 367 368 (0.3 )
Equipment expense 145 129 12.4 407 374 8.8
Data and items processing 89 79 12.7 223 199 12.1
Professional and advertising 269 212 26.9 717 679 5.6
Stationary and supplies 50 37 35.1 158 121 30.6
Telecommunications expense 55 46 19.6 164 117 40.2
Other 250172 45.3 724425 70.4
Total noninterest expense $2,082$1,714 21.5 $6,116$4,985 22.7
Three months ended September 30,Nine months ended September 30,
Average Balances20072006Change20072006Change
Total assets $ 233,418 $ 187,668 24.4

%

$ 218,780 $ 179,857 21.6

%

Loans receivable 185,004 141,341 30.9 174,484 133,984 30.2
Allowance for loan losses 1,903 1,634 16.5 1,814 1,544 17.5
Other interest-earning assets 32,197 33,297 (3.3 ) 29,620 33,556 (11.7 )
Total deposits 190,615 153,680 24.0 180,691 147,330 22.6
Borrowings 24,248 18,000 34.7 20,140 16,811 19.8
Shareholders' equity 16,921 15,988 5.8 16,700 15,716 6.3
(1) Computed based on the weighted average number of shares outstanding during each period.
(2) Ratios for the three and nine-month periods ended September 30, 2007 and 2006 are presented on an annualized basis.
(3) Net interest margin is net interest income divided by average interest earning assets.
(4) Net interest spread is the difference between the average yield on interest earning assets and the average cost of interest bearing liabilities.
(5) Efficiency ratio is noninterest expense divided by the sum of net interest income and noninterest income, excluding gains on the sale of investment securities.
(6) Nonperforming assets consist of non-accruing loans, restructured loans and foreclosed assets, where applicable.

Contacts:

Oak Ridge Financial Services, Inc.
Ron Black, President & CEO, 336-644-9944
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