Orrstown Financial Servs (NASDAQ:ORRF) released first-quarter financial results and hosted an earnings call on Wednesday. Read the complete transcript below.

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The full earnings call is available at https://events.q4inc.com/attendee/675663343

Summary

Orrstown Financial Servs reported a net income increase to $21.8 million, or $1.12 per diluted share, with strong return on average equity and assets.

The company achieved significant fee income, contributing 24.1% to total operating income, and reduced non-interest expenses to improve operational efficiency.

Loan growth was steady at an annualized 4%, despite unexpected loan prepayments, while deposit growth was robust, allowing for reduced borrowing costs.

Net interest margin was stable at 3.90%, with expectations for improvement due to declining funding costs and deposit rate management.

The company declared a quarterly dividend of $0.30 per share, maintaining strong capital ratios to support future growth and shareholder value.

Full Transcript

OPERATOR

And 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 and A session, simply press Star followed by the number one on your telephone keypad and if you would like to withdraw your question, press Star one again. I will now turn the call over to Tom Quinn, President and Chief Executive Officer of Orstown Financial Services, Inc. in Orrstown Bank, who will begin the conference. Mr. Quinn, please go ahead.

Tom Quinn (President and Chief Executive Officer)

Thank you Operator and good morning. I'd like to thank everyone for participating in Orrstown's first quarter 2026 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 Presentations link. Also, before we start, I would like to mention that today's presentation may contain forward looking information. Cautionary statements about this information are included in the earnings release, the investor presentation and our SEC filings. The earnings release and investor presentations also include non Generally Accepted Accounting Principles (GAAP) financial measures. The appropriate reconciliations to Generally Accepted Accounting Principles (GAAP) are included in those documents. Joining me on the call this morning are Oristown Senior Executive Vice President and Chief Operating Officer Adam Metz, as well as Chief Financial Officer Neil Kalani. Our Chief Revenue Officer Zach Curry, Chief Risk Officer Bob Karate and Chief Credit Officer Dave Czakowski will also participate on the call. For our financial highlights, Oristown achieved another successful quarter, delivering strong results across the board. Net income increased to $21.8 million, or 112 per diluted share. Return on average equity and return on average assets continued to exceed peer multiples. Fee income of 15.6 million contributed 24.1% of the total operating income. Non interest expense declined, highlighting our continued commitment to creating efficiencies within the company. Our net interest margin remained near the top of all peers. We started off the year with another profitable quarter and created momentum leading into the rest of the year. I will now turn the call over to Adam Metz who will speak about our balance sheet.

Adam Metz (Senior Executive Vice President and Chief Operating Officer)

Adam thank you Tom. Good morning everyone. Loan growth was steady during the quarter, coming in at 4% on an annualized basis. Loan production was excellent, but overall growth was impacted by unexpected loan prepayments. Growth has occurred across our footprint and our product set, a mix of C&I and CRE. Our pipelines continue to be robust and support our growth targets. On the credit front, we recorded moderate provision expense aligning with the portfolio growth and experienced a reduction in classified loans. We remain prudent in our lending decisions, but we feel that the credit environment remains sound and without significant signs of stress. We are pleased with our meaningful deposit growth. During the quarter, deposits increased by 98.7 million, reflecting increases in interest bearing demand deposits, non interest demand deposits, time deposits and money market deposits. This deposit growth accelerated in the second half of the quarter which enabled us to reduce borrowings at quarter end. This shift from borrowings to deposits reduced our go forward funding cost which we expect to become more apparent in the second quarter. Neil will discuss this in more detail during his presentation. Our capital ratios continue to build quickly with our earnings generation which will create flexibility for us in the future. Capital levels continue to support our growth as well as providing the ability to facilitate other capital allocation opportunities. We maintain a long term focus on generating earnings and growth to continually build shareholder value. In support of that, the Board declared a quarterly dividend of $0.30 per share payable in May. Neal Kalani, our CFO, will now discuss our quarterly results in more detail.

Neil Kalani (Chief Financial Officer)

Neil thanks Adam Good morning everyone. We started 2026 off strong with net income of 21.8 million or $1.12 in earnings per diluted share. Return on average assets for the quarter was 159 and return on average equity was 14.76%. As noted on slide 4 of the earnings deck, the net interest margin was 3.90% in the first quarter, down from 4 percent in 4Q25. This was driven by a combination of the impact of the December Fed rate cut on interest income, reduced purchase accounting accretion and temporarily elevated funding costs. We typically experience seasonal deposit outflows at the beginning of the year. This persisted for longer than in prior years which drove borrowing balances higher for the first half of the quarter. In the second half of the quarter, deposit balances grew substantially and we implemented some delayed deposit rate reductions as a result of actions taken during the quarter. Cost of funds was still down from the prior quarter but not by as much as previously projected. With a full quarter of impact. I expect funding costs will decline further in 2Q26. The previous guidance for net interest margin in the range of 3.90% to 4.00% for 26 remains with an expectation of the margin increasing from here. Overall, in an extremely competitive environment, we feel good about the first quarter's deposit growth, reduced reliance on borrowings and where our funding costs are settling in. On Slide 5. Fee income increased to 15.6 million in the first quarter from 14.4 in the fourth quarter. In the first quarter, 2.4 million of life insurance proceeds were recognized. The quarter included wealth management income of 5.6 million, down only slightly from the prior quarter. Despite despite difficult stock market conditions, swap fees were very strong at 1.3 million in the quarter. While there is expected volatility in some of the components, I expect normalized non interest income to be in line with previously reported guidance. Now I'll cover non interest expenses on Slide 6. Expenses declined by 700,000 this quarter to 36.7 million. Salaries and benefits declined with lower health care costs and some year end incentive adjustments. Professional services came down substantially as we continue to reduce our reliance on third party support and I anticipate our expenses will fall into the lower end of the guidance range unless we choose to make some strategic investments in personnel to drive or Support growth. Slide 7 discusses credit quality provision. Expense was 728,000 for the quarter primarily due to loan growth. We had approximately 900,000 of net charge offs which was offset by the impact of favorable economic factors in the allowance calculation. Our allowance coverage ratio was 1.17% at March 31, 2026 and we believe it remains adequately aligned with the risk profile of our loan portfolio. Classified loans declined again in the first quarter. Non accruals increased by 2 million from the prior quarter primarily due to two relationships. While we experienced some movement into the non performing category, we also continue to see payoffs and upgrades out of that bucket resulting from our focus on achieving the best solutions for the bank. Our earnings and performance metrics are on slide 8. All metrics remain strong. TCE has increased to 9.2% despite an increase since 12-31-25 of 6.8 million in unrealized losses on investment securities due to changes in market rates. Slide 9 addresses our loan portfolio. Loans again grew by 4% in the quarter. Loan yields declined during the first quarter due to the impact of lower rates on the variable rate loan portfolio. We did have 211 million of loan production during the first quarter and still have a strong pipeline. As noted on slide 10, deposits grew by 98.7 million or 9% annualized in the first quarter. The loan to deposit ratio declined slightly to 88% leaving us plenty of room to support balance sheet growth. The cost of deposits declined to 1.96% for the first quarter. With the timing of rate reductions in the middle of the first quarter and having 86% of the deposit growth Being in demand deposits, we expect deposit costs to come down further. Another positive trend for the quarter was the increase in non interest bearing deposits of 14 million or 7% annualized. Our sales team remains focused on expanding existing relationships and creating new ones to continue building lower cost deposit balances. The investment portfolio is covered on slide 11. There was a little bit of purchase activity during the quarter in order to keep the portfolio flat. The overall portfolio yield declined during the quarter due to the impact of the December Fed rate cut on floating rate investments. We view the investment portfolio as a reliable source for income generation and we'll continue to facilitate that by taking advantage of any market opportunities that correspond with our balance sheet strategy. As Presented on Slide 12, our regulatory capital ratios continue to build at a rapid pace. Capital generation is expected to remain strong going forward based on projected earnings and we continue to believe we're positioned to take advantage of various capital allocation options. So in summary, we believe the net interest margin has stabilized with the opportunity to grow from here. With declining funding costs, fee income remains a core strength and a differentiator, particularly with wealth management if the market can maintain or improve from current levels and expense management remains a key focus for us in order to achieve our financial goals. Thank you for your time this morning and I'll turn it back to Adam Metz for his closing remarks. Adam?

Adam Metz (Senior Executive Vice President and Chief Operating Officer)

Thank you, Neal. As Tom and Neil has emphasized, it was another highly successful quarter. Having spent nearly a decade at Orrstown, I've seen firsthand the strength of our franchise, the power of our culture and the collective commitment to our clients and community. An incredibly talented team with common alignment to our core principles will continue to build upon the foundation already in place. Driving prudent growth, deepening client relationships, thoughtfully expanding fee based businesses and continuing our unwavering commitment to sound risk management and long term shareholder value. We would now like to open the call to questions before we get started. The operator will briefly review the instructions with you.

OPERATOR

Thank you. At this time I would like to remind everyone. In order to ask a question, please press star and then the number one on your telephone keypad. We will pause for a moment to compile the Q and A roster. Your first question comes from the line of Tim Switzer with kbw. Your line is open.

Tim Switzer (Equity Analyst)

Hey, good morning guys. Thank you for taking my question. Morning Tim. I appreciate the commentary on kind of the puts and takes on the NIM this quarter. And you know, it sounds like the primary driver here was that seasonal deposit runoff at the beginning was maybe a little bit stronger, lasted longer than Normal. Was there anything that surprised you on like the loan or security yield side as well or is it just primarily the NIM or deposits?

Neil Kalani (Chief Financial Officer)

No, there's nothing, nothing surprising. It is primarily deposits. We as I indicated in the past, since we are a little bit on the asset sensitive side, we did expect the yields to drop on loans and investments. So truly is driven by the deposit, the timing of the deposit. So as I indicated, we do expect to see improvement in both the funding costs and translating into the reduction on the NIM side. On the asset side, the lending team continues to price well to help us maintain and improve the margin from here.

Tim Switzer (Equity Analyst)

Okay, got it. And are you able to help, you said you know, an upward trajectory from here. Are you help us, can you help us quantify that at all? Like maybe what was the bottom NIM at the end of Q1 once those deposits came back, you're able to run off some of higher cost borrowings and you know, any, you know, any idea on maybe where we would end the year say if we get just a zero rate cut.

Neil Kalani (Chief Financial Officer)

So we ended, we ended the quarter a few basis points higher than the average for the quarter for the reported NIM for the quarter and expect to, to be able to go up a few basis points from there over the quarter over the course of the remainder of the year.

Tim Switzer (Equity Analyst)

Okay, great. That, that's very, very helpful. And then one last one if I can get it on the deposit side, you know, there's been some chatter about increasing deposit competition but you know, it's more extreme in some markets than others. You know, have you guys experienced that? I get you still have some, some room to move downward, but are you starting to see some deposit competition? Is it more competitive in certain markets or deposit categories than others for you?

Neil Kalani (Chief Financial Officer)

Yeah, Tim, I would say, you know, competition remains, it's prevalent. But I would tell you we challenged the team to reach out to the relationships and drive deposit growth. And the team has absolutely responded to that initiative and so we were very pleased with the results and we think that we have a lot of momentum going forward.

Tim Switzer (Equity Analyst)

Great. Very helpful. Thanks for taking my questions.

OPERATOR

That concludes the Q and A portion of the presentation. Mr. Crean, I turn the call back over to you for concluding remarks.

Crean

Thank you again, operator. And thank you all for participating today. As always, if we can clarify any of the items discussed on this call or in the earnings release, please contact us. Have a great day.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company's SEC filings and official press releases. Corporate participants' and analysts' statements reflect their views as of the date of this call and are subject to change without notice.