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DATE
Wednesday, April 22, 2026 at 9 a.m. ET
CALL PARTICIPANTS
- President & Chief Executive Officer — Thomas R. Quinn
- Executive Vice President, Chief Operating Officer — Adam Metz
- Executive Vice President, Chief Financial Officer — Neelesh Kalani
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TAKEAWAYS
- Net Income -- $21.8 million, or $1.12 per diluted share, representing an increase from the previous quarter.
- Return on Average Assets -- 1.59%, demonstrating performance exceeding peer multiples.
- Return on Average Equity -- 14.76%, highlighted as above peer levels.
- Net Interest Margin -- 3.90%, down from 4.00% in the prior quarter due to the impact of a December Federal Reserve rate cut and temporarily elevated funding costs.
- Loan Growth -- 4% annualized, with production of $211 million, affected by unexpected prepayments across both C&I and CRE portfolios.
- Deposit Growth -- $98.7 million increase, or 9% annualized, with 86% of the growth from demand deposits; accelerated in the second half of the quarter, enabling reduced reliance on borrowings at period end.
- Loan-to-Deposit Ratio -- Declined to 88%, creating additional capacity to support balance sheet expansion.
- Fee Income -- $15.6 million, constituting 24.1% of total operating income, supported by $2.4 million in life insurance proceeds, $5.6 million in wealth management revenue, and $1.3 million in swap fees.
- Noninterest Expense -- Decreased by $700,000 to $36.7 million, reflecting reductions in salaries, benefits, and third-party professional services.
- Provision Expense -- $728,000, driven by loan portfolio growth.
- Net Charge-Offs -- approximately $900,000, offset by favorable economic implications in allowance calculations.
- Allowance Coverage Ratio -- 1.17% as of March 31, 2026.
- Nonaccrual Loans -- Increased by $2 million from the prior quarter due to two lending relationships; classified loans decreased again in the period.
- Tangible Common Equity (TCE) Ratio -- Rose to 9.2% despite a $6.8 million increase in unrealized losses on securities since December 31, 2025.
- Cost of Deposits -- Declined to 1.96% following mid-quarter deposit rate reductions, with further decreases expected.
- Dividend Declaration -- Quarterly cash dividend of $0.30 per share, payable in May.
- Strategic Focus -- Management reiterated a long-term commitment to generating earnings, enhancing shareholder value, improving expense efficiency, and pursuing balance sheet growth.
- Outlook for Net Interest Margin -- Neelesh Kalani said, "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."
- Credit Quality Statement -- Adam Metz stated, "the credit environment remains sound and without significant signs of stress."
SUMMARY
Orrstown Financial Services (ORRF 4.66%) reported improved profitability and capital strength in the first quarter, with expanding deposits and reduced reliance on borrowings aligning with strategic goals. The company experienced a sequential decline in net interest margin due to rate pressures but expects stabilization and future expansion, citing strong deposit momentum and management actions. Noninterest income benefited from atypical life insurance proceeds, while credit quality remained stable apart from a discrete increase in nonaccrual loans linked to two relationships. Company executives reaffirmed the ability to pursue future growth and capital allocation opportunities due to robust earnings generation and rising capital ratios.
- Management highlighted successful execution on deposit growth initiatives, which contributed to declining funding costs and increased operational flexibility.
- The shift from higher-cost borrowings to lower-cost deposits is projected to further benefit net interest margin in the coming quarter.
- Strategic focus remains on balancing expense controls with potential investments in personnel to support targeted growth objectives.
- The call emphasized the bank's ongoing pursuit of fee-income diversification through wealth management and continued efforts to optimize risk-adjusted returns.
INDUSTRY GLOSSARY
- C&I: Commercial and Industrial loans, typically used by businesses for working capital or equipment purchases.
- CRE: Commercial Real Estate loans, secured by income-producing or commercial property.
- Tangible Common Equity (TCE) Ratio: A regulatory capital measure calculated as tangible common equity divided by tangible assets, used to assess a bank’s capital strength.
Full Conference Call Transcript
For our financial highlights, Orrstown achieved another successful quarter, delivering strong results across the board. Net income increased to $21.8 million or $1.12 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. Noninterest 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?
Adam Metz: 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, noninterest 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 costs, 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. Neil Kalani, our CFO, will now discuss our quarterly results in more detail. Neil?
Neelesh Kalani: 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 1.59%, 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 4.00% in the fourth quarter of '25. 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 the second quarter of '26. 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 million 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 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 noninterest income to be in line with previously reported guidance.
Now I'll cover noninterest 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, '26, and we believe it remains adequately aligned with the risk profile of our loan portfolio. Classified loans declined again in the first quarter. Nonaccruals increased by $2 million from the prior quarter, primarily due to 2 relationships. While we experienced some movement into the nonperforming 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 December 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 noninterest-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 is 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: Thank you, Neil. 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: [Operator Instructions] Your first question comes from the line of Tim Switzer with KBW.
Timothy Switzer: I appreciate the commentary on kind of the puts and takes on the NIM this quarter. And 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 -- sorry, deposits?
Neelesh Kalani: No, there's nothing surprising. It is primarily deposits. We -- as I've 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 it truly is driven by the deposit -- the timing of the deposits. So we are -- 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.
Timothy Switzer: Okay. Got it. And are you able to help -- you said an upward trajectory from here. Are you help us -- can you help us quantify that at all? Like maybe what was the spot NIM at the end of Q1 once those deposits came back, and you're able to run off some of the higher cost borrowings? And any idea on maybe where we would end the year, say, if we get just a 0 rate cut?
Neelesh Kalani: So 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 be able to go up a few basis points from there over the course of the remainder of the year.
Timothy Switzer: Okay. Great. That's very helpful. And then one last one, if I can get it on the deposit side. There's been some chatter about increasing deposit competition, but it's more extreme in some markets than others. Have you guys experienced that? I get you still have 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?
Adam Metz: Yes, Tim, I would say 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're very pleased with the results, and we think that we have a lot of momentum going forward.
Operator: That concludes the Q&A portion of the presentation. Mr. Quinn, I turn the call back over to you for concluding remarks.
Thomas Quinn: 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.
Operator: This concludes the Orrstown Financial Services, Inc. First Quarter 2026 Earnings Conference Call. You may disconnect your lines at this time.
