Orrstown Financial Services, Inc. Third Quarter 2025 Earnings Call - Post-merger execution drives record quarter, margin stable but asset-sensitive to Fed cuts

Tiffany, Conference Operator: Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to the Orrstown Financial Services, Inc. Third Quarter 2025 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question and answer session. If you would like to ask a question during the Q&A session, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. I will now turn the call over to Tom Quinn, President and Chief Executive Officer of Orrstown Financial Services, Inc. and Orrstown Bank, who will begin the conference. Mr. Quinn, please go ahead.

Tom Quinn, President and Chief Executive Officer, Orrstown Financial Services, Inc. and Orrstown Bank: Thank you, Tiffany, and good morning. I’d like to thank everyone for participating in Orrstown’s Third Quarter 2025 Earnings Conference Call, both by telephone and through the webcast. If you have not read the earnings release we issued yesterday afternoon, you may access it along with the financial tables and schedules by going to our website, www.orrstown.com. Once there, you can click on the Investor Relations link and then on the Events and Presentation link. Also, before we start, I would like to mention that today’s presentation may contain forward-looking information. Cautionary statements about the information are included in the earnings release, the investor presentation, and our SEC filings. The presentation also includes non-GAAP financial measures as identified in the earnings release and the investor presentation. The appropriate reconciliations to GAAP are included in the appendices.

Joining me today on the call are Orrstown Bank’s Senior Executive Vice President and Chief Operating Officer Adam Metz, as well as Executive Vice President and Chief Financial Officer Neelesh Kalani. Our Chief Revenue Officer Zach Curry, Chief Risk Officer Bob Coradi, and our Chief Credit Officer Dave Chajkowski will also participate on the call. Our financial highlights for the quarter are summarized on slide three of the deck. We delivered another quarter of excellent results. Loan growth was strong. In the third quarter, we achieved 4.9% annualized loan growth after taking some steps early in the year to align the acquired portfolio with our risk profile. We have seen good growth in the last two quarters. Net interest margin was 4.11% for the third quarter of 2025 compared to 4.07% for the second quarter of 2025.

We believe that we are pricing loans prudently and managing funding costs well, which is evidenced by the stable margin. Fee income remained a core strength of the organization during the third quarter. Fee income as a percentage of operating revenue was 20.8%. The second consecutive quarter that this ratio was nearly 21%. Expenses continued to decline. Non-interest expense declined by $1.3 million compared to the prior quarter. Our efficiency ratio decreased from 60.3% to 56.4% quarter to quarter. All this translated into our strongest quarter of earnings on record, with a diluted EPS of $1.13. Our return on assets of 1.60% and return on equity nearly 16%. We believe that our successful execution of last year’s merger with Kudor’s Value is evident in our financial performance. At this time, I would like to turn the call over to Adam Metz for a discussion on our balance sheet. Adam.

Adam Metz, Senior Executive Vice President and Chief Operating Officer, Orrstown Bank: Thank you, Tom. Good morning, everyone. We have previously discussed the steps that we’ve taken to proactively protect the bank’s risk profile and position the bank to be successful in all economic scenarios. These steps seem particularly relevant given the credit concerns disclosed by other institutions last week. As a reminder, these steps included managing our CRE portfolio to reduce concentration, stress testing the C&I portfolio for the potential impact of tariffs, reviewing our TM platform for clients sending foreign wires, proactively discussing strategies with them, and reevaluated lending relationships above $2 million, adjusted risk ratings as deemed appropriate, and presented some of them with exit plans. Our relationship banking model requires our sales teams to keep in close touch with our clients.

We have regular conversations with our clients on a variety of topics, recently including tariffs, the government shutdown, the Pennsylvania budget impasse, and general economic conditions, helping them navigate the evolving landscape and plan accordingly. After the first quarter, we indicated that these steps had resulted in higher than expected reductions in loan balances but expressed optimism that steps had taken to protect credit quality and laid a solid foundation for future growth. We believe that this solid foundation was reflected in our third quarter results. As Tom said, in the third quarter, we achieved 4.9% annualized loan growth. We continue to lean into our relationship banking model, where high engagement and local decision-making differentiate us in the market and allow us to meet client needs with speed and care. Importantly, credit quality remains sound. Net charge-offs were again nominal in the quarter.

Classified loans decreased by $1.7 million to $64.1 million at quarter end. Although non-accrual loans increased by $3.8 million to $26.2 million at quarter end, most of this increase was primarily related to one relationship within the commercial construction and development portfolio. We are mindful of some economic uncertainty and its potential impact on the overall business environment. We remain focused on credit quality and plan to continue to grow prudently. We, along with an independent third party, regularly evaluate our portfolio for new risk considerations. We view our capital position as an organizational strength, which provides us with significant strategic flexibility for the future. We are well capitalized by all measures. Neelesh Kalani, our CFO, will now discuss our third quarter results in more detail. Neelesh: Thank you, Adam. Good morning, everyone. The third quarter was another successful quarter for us.

We recorded $21.9 million of net income or $1.13 in earnings per diluted share. This equates to a return on average assets of 1.6%, return on average equity of 15.7%, and return on average tangible common equity around 20%. All these metrics place us near the top of our peer group and were achieved through multiple avenues. Looking at slide four, the margin increased by four basis points to 4.11% in the third quarter. Loan pricing on new originations and increased purchase accounting accretion drove loan yields higher, while the acceleration of $300,000 of debt issuance costs associated with a subordinated debt redemption increased the cost of funds a bit. On September 30, the company redeemed $32.5 million of subordinated debt notes, which were at a rate of 7.72% for most of the second quarter.

This action will reduce interest expense going forward while the company maintains its flexibility from a capital perspective. The other notable result from this quarter is the increase in loan interest to $66.0 million from $63.2 million in the second quarter. We place a significant focus on generating the necessary growth to offset the impact of the reduction in purchase accounting accretion on loans over time and maintaining a margin near its current levels. Being asset-sensitive, as rates come down, I do expect the margin to contract. Competition remains heavy on both loan and deposit pricing, and that will certainly factor into our ability to maintain or increase the margin. Fee income is discussed on slide five. We saw an increase in non-interest income to $13.4 million in the third quarter from $12.9 million for the second quarter. This represents almost 21% of revenues. SWAT fees were substantial at $800,000.

Service charges increased by $400,000 due to higher volumes and credit card incentives earned. Wealth management continues to perform extremely well, and we’re starting to see mortgage volumes increase. I would expect the normalized quarterly run rate to be in the $12.5 to $13 million range going forward. The team continues to succeed in generating additional avenues of fee income, but it’s going to fluctuate from quarter to quarter. On slide six, you can see that the non-interest expenses have declined by $1.3 million from the prior quarter. The key highlight here is that we no longer have merger-related expenses. The efficiency ratio decreased again to 56%, with the continued goal of getting below 55%. The numbers still include the impact of additional third-party consulting services that are expected to continue but will decline over the next several periods.

Considering the decline in expenses while continuing to invest in the bank’s future, I would expect a quarterly run rate around $36 million going forward, plus some standard inflationary impact next year. Our credit quality is discussed on slide seven. Once again, we recorded a small provision with a small amount of net charge-offs. Our allowance coverage ratio was 1.21% at September 30, which we continue to believe adequately addresses the risk of loss in the loan portfolio. As Tom always says, and Adam just reiterated, we lead with risk. Therefore, we are cognizant of general industry concerns about credit, and our proactive approach helps us properly assess our portfolio, identify risks, and take any steps necessary to mitigate them. Slide eight covers the positive trends in our key metrics for the past year. The growth in the earnings metrics noted in those charts speaks for itself.

In addition, TCE has grown to 8.8%, and our tangible book value per share has returned to pre-merger levels, with a strong buildup expected from here. Our loan portfolio is discussed on slide nine. Both Tom and Adam covered our growth for the quarter, but we’re now close to $4 billion in loans with an average yield of 6.58%. We had $224 million of loan production during the third quarter and continue to have a solid pipeline. Payoffs continue to have some impact on the loan growth during the third quarter. On slide ten, deposits increased by $17 million. We tapped into some brokered options for the first time in a while as the team works on building long-term core deposits. The cost of deposits declined again by a couple basis points in the third quarter.

We adjusted deposit pricing downward later in the third quarter, and that impact is expected to be reflected in the fourth quarter. As I’ve discussed in the past, we held deposit rates higher than previously anticipated. We determine now was the appropriate time to start adjusting them to be more in line with market rates. The 88% loan-to-deposit ratio provides us with sufficient liquidity to fund our loan pipeline without placing a heavy reliance on alternative funding sources. Slide 11 highlights the performance of the investment portfolio. We continue to take strategic actions with the portfolio to ensure it performs well in the current environment. The yield of 4.67% remains at the top of peer levels. Net unrealized losses decreased by $9 million as market rates declined, and the duration declined slightly from the prior quarter to 4.4.

Our regulatory capital ratios are addressed on slide 12, and the total risk-based capital ratio did decline during the quarter as a result of the redemption of subordinated debt. Despite that, we feel good about our current capital position as well as our ability to grow capital rapidly in the future. I’d like to now turn the call back over to Adam Metz for his closing remarks. Adam.

Neelesh Kalani, Executive Vice President and Chief Financial Officer, Orrstown Bank: Thank you, Neelesh. The numbers speak for themselves. We are proud of our quarterly results. As Tom said, we believe that our successful execution of last year’s merger is evident in our financial performance. We are optimistic about the future, both in the short and long term. We would now like to open the call to questions. Before we get started, the operator will briefly review the instructions with you.

Tiffany, Conference Operator: At this time, I would like to remind everyone, in order to ask a question, press star and then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Tim Switzer with KBW. Your line is open.

Hey, good morning. Thank you for taking my question.

Tom Quinn, President and Chief Executive Officer, Orrstown Financial Services, Inc. and Orrstown Bank: Morning, Tim.

I have a follow-up on your commentary regarding the NIM. I understand the asset sensitivity here, and with the Fed rate cuts, probably expect to see some near-term pressure. How should we think about the trajectory of the downward movement, assuming we get maybe one or two more rate cuts over the next few months? Is there a good rule of thumb at all you guys have for how many basis points of the NIM each 25 basis point cut is?

It’s going to vary a little bit. I put out there kind of the guidance I’ve given is the 4.0% to 4.15% range. Obviously, the accretion fluctuates, so that’s going to impact that. Down a couple cuts, whether it’s two 25 basis point cuts, isn’t going to impact us substantially. What will impact it is just competitive pricing. If we consistently price the loans where they’re at and are able to continue to pull deposit costs down, we should be able to maintain where we’re at through the next couple cuts. Depending on where the market is and the push to generate new loans, we’ll see where that pricing falls out. That’s more so a factor, the competitive side of things and continuing to grow the balance sheet and where the margin is going to end up.

We’ve taken with the sub-debt redemption and some other things and some deposit reductions that we took recently and we’ll continue to look at. My hope is that we maintain around here with, again, purchase accounting being around here to potentially like five basis points lower. In that range with the potential that any accretion might have some positive or negative impact depending on the timing.

Okay, got you. Your comments regarding the heavy competition on both loan and deposits, are you able to provide any commentary around where that’s coming from? Is it the larger competitors in your market, others closer to your size? Are there any geographies or categories where it’s a little bit more competitive?

Neelesh Kalani, Executive Vice President and Chief Financial Officer, Orrstown Bank: I think it really depends on the market. You know, as we talked about, our growth markets lean towards the Baltimore, Lancaster, Harrisburg markets, and those competitors vary in those markets. I don’t know that we see consistent, but on any given relationship or any given opportunity, it does remain competitive.

Tom Quinn, President and Chief Executive Officer, Orrstown Financial Services, Inc. and Orrstown Bank: Tim, to add to what I just said and clarify what I just said, just from a numbers perspective, yeah, as the rates come down, we will have some negative impact to the margin, but it’s the actions that we take going forward that can offset that. There’s a big focus on that from a pricing perspective. We know the model just on a standalone basis with no, on a static basis, is going to have the margin come down, but we can take steps to offset that.

Okay, that makes sense. On the loan side of competition, do you have a sense for how much of that is being driven by maybe some competitors who had pulled back on CRE or other areas momentarily and now they’re kind of reentering, or is it just that maybe loan growth demand is a little bit more tepid and so there’s just less of the pie?

Neelesh Kalani, Executive Vice President and Chief Financial Officer, Orrstown Bank: Yeah, I think we see a mix of that, Tim. I would tell you that we have been able here too far to get the price that we sort of set to the markets. In fact, they’ve done better than that. I think that’s a tribute, as I said in my comments, it really is a tribute to our relationship model. We’re very high-touch, very engaged with our clients and our prospects, and it makes a difference.

Got it. Makes sense. Thank you for answering all my questions.

Thanks, Tim.

Tom Quinn, President and Chief Executive Officer, Orrstown Financial Services, Inc. and Orrstown Bank: Thank you.

Tiffany, Conference Operator: Your next question comes from the line of Gregory Zingone with Piper Sandler. Your line is open.

Good morning, guys. Great quarter, and hope everyone’s doing well.

Neelesh Kalani, Executive Vice President and Chief Financial Officer, Orrstown Bank: Morning.

Tom Quinn, President and Chief Executive Officer, Orrstown Financial Services, Inc. and Orrstown Bank: Morning.

Just to go back to the NIM for a second, do you have a spot NIM for September?

It’s in the low 4s.

Okay. Pivoting to credit for a minute, would you be able to provide some color on what those largest credits are in classified today?

Neelesh Kalani, Executive Vice President and Chief Financial Officer, Orrstown Bank: Yes. The larger credits are, you know, there’s some CRE, there’s an auto dealer, and you know, a variety of other C&I credits.

Would you be able to pin down a dollar figure in terms of maybe like your top one or two credits in there?

The top couple of credits would total in classified total about $20 million.

You said it’s roughly probably two or three credits that make up that balance?

That’s right.

Okay. Since quarter end, are there any new updates with any of those balances that you could share with us today?

I would tell you, you know, we talked about some of the movement into classified, and there was an owner-occupied credit that we received a, you know, it was $1.3 million, and it had moved into, we had moved it to non-accrual in the third quarter. Subsequently, we’ve received a paydown of just under $900,000 on that. That just, you know, demonstrates, I think, that, you know, we’re pretty conservative in our decisions to move credits into non-accrual. As another point worth noting on our non-accrual balances is that approximately 50% of them are current for, you know, their monthly principal and interest payments.

Okay. Awesome. Thank you for the color on that. Last question for me, the early 5% loan guide for next year, do you have a lending focus in mind for how you want the mix to look like? Thank you.

Yeah, I mean, like we’ve talked about, we feel like we have some CRE capacity. We were very proactive in addressing that pre-merger and immediately post-merger. We’ve recently, in the last quarter here, hired some additional talent on the C&I side, particularly in our middle market group, so we have some opportunity there. We feel like we can deliver a unique experience in the middle market space. As I’ve said, talent wins, and I think we have some real talent there.

Thanks, everyone.

Thank you.

Tom Quinn, President and Chief Executive Officer, Orrstown Financial Services, Inc. and Orrstown Bank: Thanks.

Tiffany, Conference Operator: Your next question comes from the line of David Long with Raymond James. Your line is open.

Good morning, everyone. Neelesh, you mentioned that you may see some NIM pressure with the rate cuts, but then you said that you can take some steps to offset such compression. What specifically, what are some of the tools that you have to help you avoid some NIM compression if that looks like we’re going to see the rate cuts?

Tom Quinn, President and Chief Executive Officer, Orrstown Financial Services, Inc. and Orrstown Bank: Yeah, it really comes from the pricing perspective. If we’ve got, we made some adjustments to deposit costs, and we’ve been intentionally higher kind of coming out, as I’ve talked about in the past, coming out of the system conversion and the merger. From a client perspective, it made a lot of sense to not push down on rates as quickly as others may have. We have some capacity there to pull down, and the new funding opportunities impact that as well. The other piece of it, again, the answer is really competitive-driven. On the loan pricing side, we can continue to price at the levels that we have been, and we should be able to maintain. There’s that balance of generating the growth and also kind of maintaining the margin. We need to find that sweet spot.

If it makes sense for us as an organization to generate that growth, we may come down a little more on the margin. A lot of it, again, is market-driven, competitive-driven.

Got it. With that outlook, you know, the 4 to 4.15 on the NIM, what are your assumptions on the shape of the curve over the next several quarters? How much does that, you know, if we do see a flatter curve or an inverted curve, how much pressure could that put on the NIM versus your expectations?

Our modeling assumes the existing curve, and probably then I would expect that it would flatten out a little bit over time. Again, we’ll manage against that. That’s part of the thought process and seeing some contraction there. If longer-term rates do work their way back up, that will benefit us.

Got it. Thanks, Neelesh.

If we start to see some steepening and slope there, it’ll benefit us.

Right. Thanks.

Tiffany, Conference Operator: That concludes the Q&A portion of the presentation. Mr. Quinn, I turn the call back over to you for concluding remarks.

Tom Quinn, President and Chief Executive Officer, Orrstown Financial Services, Inc. and Orrstown Bank: Thank you, operator, and thank you all for participating today. As always, if we can clarify any of the items discussed on the call this morning or in our earnings release, please feel free to give us a call or contact us. I wish you all a wonderful day. Thank you. Bye now.

Tiffany, Conference Operator: This concludes the Orrstown Financial Services, Inc. Third Quarter 2025 Earnings Conference Call. You may disconnect your line at this time.