Orrstown Financial Services (ORRF) Q4 2026 earnings call transcript

Thank you, Holly, and good morning, everyone. I would like to thank everyone for participating in Orestown's 3rd 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 orestown. 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 released in Investor Presentation also include non-GAP financial measures. The appropriate reconciliations to GAP are included in those documents. Joining me today on the call is Neil Kalani, Orestown's Chief Financial Officer.

Also participating in the discussion are Zack Corey, Chief Revenue Officer, Bob Karate, Chief Risk Officer, and Dave Chikowski, Chief Credit Officer. Orestown delivered another strong quarter with solid execution across the franchise. Net income was $22.8 million or $1.17 per diluted share. Return on average equity and return on average assets both increased quarter to quarter and continued to exceed pure multiples. Net interest income rose $4.5 million to $53.3 million.

Net interest margin improved to 4.12% and increase of 25 basis points on an absolute basis and 12 basis points after adjusting the prior quarter for a one-time charge. Total loans increased by 95.3 million or 9% analyzed with growth across the commercial, consumer, and residential mortgage deposit outflows, some of which were seasonal, required increased reliance on borrowings. Available alternative funding sources remain strong at $1.7 billion. Our efficiency ratio declined to 56% from adjusted 58.6% the prior quarter, reflecting improved operating leverage.

Credit quality remains sound. Classified loans and non-acrual loans both decreased quarter to quarter. We remain prudent in our lending decisions, but we believe that the credit and environment remain stable and without significant signs of stress, even in a rising rate environment.

Neil Kalani, our CFO, will now discuss our quarterly results in more detail. Neil.

Thanks, Adam, and good morning, everyone. We had an outstanding quarter with return on average assets of 1.60% and return on average equity was 14.62%. As noted on slide four of the earnings deck, our net interest margin expanded this quarter to 4.12%. This is 12 basis points higher than the prior quarter margin adjusted for the one-time $1.6 million charge from this subordinated debt redemption.

During the third quarter, our asset yields increased by eight basis points and our cost of interest bearing liabilities decreased to 2.40%. We continued to maintain a disciplined loan pricing philosophy and also had the benefit of lower funding costs after redeeming our subordinated debt. Since we remain asset sensitive, our asset yields will benefit from the rate increase in September as well as any subsequent hikes. Through the end of 2027, I'm projecting that interest margin. In the range of 4.05% to 4.15%, we'll reevaluate this range next quarter as we get a better sense of the market dynamics. Since the Cadoris Valley merger in 2024, we've been focused on replacing the loan accretion as a wines down. We've been addressing this with strong loan growth and prudent pricing.

While we've been achieving that goal, it hasn't been clearly evident given some of the purchase accounting noise. This quarter, we can clearly demonstrate that accomplishment. Our interest income on loans excluding purchase accounting accretion was 62.6 million for the third quarter of 26 compared to 59.0 million in the second quarter. We believe our loan production capability along with pricing and overall balance sheet management approach will lead to continued net interest income growth going forward. On slide 5, the fee income decreased to 13.4 million in the quarter from 13.8 million in the second quarter. Wealth management income increased to 6.0 million from 5.9 million in the second quarter. This is the second consecutive quarter in which Georgetown Financial Advisors recorded historical revenues.

Swap fees declined slightly due to the impact of timing. Mortgage income also declined mainly due to market adjustments on the health or sale portfolio and pipeline. In the third quarter, non-interest income was 20% of total revenue. While this is down from the second quarter, it was driven by the growth and then interest income noted earlier. Fee income remains a meaningful contributor to earnings supported by continued strength across multiple fee categories. Annualized guidance for fee income into 2027 is in the range of 54 to 56 million.

Moving to slide 6, non-interest expenses decreased by 400,000 to 37.3 million in the third quarter of 26. We maintain a focus on managing expenses and have continued to reduce reliance on outside professional services. The efficiency ratio came down to 56% in the third quarter and on an annualized basis, I'm projecting the expense run rate to be between 153 million and 157 million. In addition to normal inflationary increases, this assumes some investments in our sales force and technology to ultimately drive higher revenues. Our credit quality is discussed on slide 7.

Provision expense was 1.1 million for the third quarter of 26. This is inclusive of 1.0 million of net charge off. There were several moving parts to the provision this quarter with the impact of the strong loan production and qualitative factor adjustments being offset by the impact of improving economic data on the quantitative inputs. Our allowance coverage ratio was 1.11% at September 30th, 26, which we believe is adequately aligned with the risk profile of our loan portfolio.

Classified loans declined by another 4 million in the third quarter and non-acrual loans also declined by 900,000 from the second quarter. We continue to see solid credit metrics in our portfolio. The earnings and performance metrics are on slide 8. Our earnings metrics increased meaningfully in the third quarter. We believe we have the opportunity and ability to continue our growth trajectory. We did experience a decline in the tangible common equity ratio to 9.1% at September 30th, 26 from 9.5% at June 30th, as well as a decline in tangible book value per share.

These decreases were directly the result of a $41.6 million increase in unrealized losses on the investment portfolio, which was driven by the increase in market rates and spreads.

The loan portfolio was covered on slide 9. Loans grew by 9% on an annualized basis and the quarter with loan yields increasing. We had $166 million of commercial loan production during the third quarter. And consumer loan growth remained a strength. The bank has reached its full year 5% loan growth goal at September 30th, 2026. Our loan growth goal remains in mid-single digits going forward.

Depending on how rates move and how it impacts client demand, we can see that growth potentially being on the lower end of mid-single digit range. But we remain confident in our team's ability to continue to replicate their success from 2026. Moving over to slide 10, deposits remain up 53 million year to date despite some seasonal pressure during the quarter. The cost of total quarter reflecting our focus on overall mix. The loan to deposit ratio increased to 92% at September 30th, 26. As we utilize borrowings to fund the loan growth, the team will maintain its attention on the deposit mix and driving growth of low-cost deposits. The investment portfolio is covered on slide 11. The yield in the portfolio is very strong at 4.54%.

The higher unrealized losses I referenced earlier were driven by a rapid increase in treasury rates and widening of credit spreads. While this had a substantial impact on the fair value of the investment portfolio, we are comfortable with the positions that we hold. Slide 12 highlights our capital position. There was a modest increase in the ratios during the third quarter of 26.

The deferred tax asset associated with the increased investment losses partially offset the increase in the capital ratios. We remain confident in further capital generation being driven by strong ability to achieve substantial loan growth and also effectively manage our balance sheet. Fee income continues to be a significant source of earnings and our declining efficiency ratio demonstrates our enhanced operating leverage.

Looking forward, we plan to prudently invest in technology and people while continuing our growth story at the same time. Thank you for your time this morning and I'll turn the call back to Adam Metz for his closing remarks.

Thank you Neil. We are proud of our third quarter performance which reflected continued expansion in net interest margin, robust loan growth across several segments, successful management of funding costs and disciplined expense control. Although the economic interest rate and competitive environments remain dynamic, we entered the remainder of the year from a position of strength and remained confident in our ability to execute across a range of economic conditions. As we approached 2027, we believe the company is operating from a position of strength. Our core banking and wealth management business are all contributing to growth while credit quality, capital levels and expense discipline remain favorable. As always, I'd like to thank our employees for their dedication and our shareholders for the trust they place in us.

We appreciate your continued support and look forward to updating you on our achievements next quarter. Before I close, I want to share a piece of exciting external recognition that we received this morning. We are proud to share that Orstown Bank has been ranked 77th on the Fortune 100 fastest growing companies list for 2026, which is based on annualized total return alongside our revenue and earnings growth over the last three years. It is a testament to the hard work of our team and the momentum we are building. We would now like to open the call to questions. Before we get started, Holly will briefly review the instructions with you.

Yeah, we remain confident in our team's ability to generate long growth. The pipeline, as we look at it today, remains robust. And so our guidance is the mid signal digits, but the team is focused. We are also cognizant of our rising interest rates and our team's ability to adapt and talk to our clients. But as of right now, as we look at the going into 2027, we're pretty confident in our ability to produce. And on the prepayment side, the volume is lower. We're still experiencing some prepayment activity. It's certainly lower than what it was earlier in the year.

Yeah, the new spreads on the floating rate loans are probably in the 225 to 250 range on average. Fixed rates are coming in at low sevens.

No, that's it. Sorry.

No, we've not seen anything yet. We routinely proactively look at the portfolio for various stress tests. We've stressed the entire CNI portfolio under our most conservative stress test. The portfolio metrics still hold up within our tolerance ranges. We recently conducted a repricing analysis for any fixed rate loans that are due to reset within the next 12 months.

The results of that analysis have been very favorable as well. We've not identified anything where we would anticipate any risk rating, downgrades, or losses of any kind.

Thank you.

Yeah, Ken, I don't have the exact number. I would say a significant portion of that increase was drive by our lower end middle market efforts. And it does span the entire footprint. And so as we brought in this expertise, we've enabled the teams to sort of serve that lower end middle market client more effectively. And so we continue to want to invest in that space. And it's been very beneficial to us.

We really do. It's an opportunistic transaction. If opportunities come up with low and portfolios that become available, if it makes sense from a permit, certainly from a yield standpoint and if it fits in with our portfolio, that's something we monitor. But I wouldn't necessarily say it's part of our overall growth strategy. But the core of the growth, Ken, has come from our clients just as the mortgage market has been a little soft, our home equity product remains a very viable solution to our clients. And so we do have a very good product and it's performed. And I would add that our core long growth for the quarter was 7% without the purchases. So that is our primary focus and will continue to be.

Yeah, 4Q, I would expect to be somewhat consistent with third quarter. We'll continue to see the impact of new hires. And obviously, once we hit mid-year, next year, salary increases. So that'll slowly build up. But we do have some assumptions in there of hiring new team members. So that's built in and continued investments on the technology side that ultimately will facilitate our really with the goal of setting up our sales teams with all the data and ability to do what we need them to do.

Thank you.

I would expect some increase in the Cornim. And as we have shown, the Cornim, if you exclude the purchase account, we're at 72, if you recall, a couple quarters ago, we're in the 343.50 range. So we continue to see some growth there. I do think we'll get some benefit from increasing rates as well to help push the Cornim forward. And like I indicated in my comments, it is the focus of ours to which we have accomplished is replacing that accretion.

So our modeling assumes another, another two increases over the course of the next year.

Yes, yes.

The biggest risk is just the economic environment. There's some of the assumptions we have laid out whether they do occur. So that is a focus of ours. And ultimately, the team is pushing towards hitting our goals. The opportunities that we have continue to be the lending team maintaining and improving upon the loan production volumes. We do think we can potentially do higher than the 5% that we put out there. And that is the internal focus for the team. And so both on the lending side and we've talked about OFA and opportunities there and continued focus there. And we're internally having a lot of discussions on formalizing full relationships where they don't exist currently. So there's a lot of opportunity there and the investments that we're putting in on the technology side, which again will arm our sales teams with with more data.

One example of that is some of that HELOC growth that we've seen in the last couple quarters is because of the availability more, more client data we're targeting certain groups, which is that haven't necessarily had the utilization in the past. And we're starting to see the benefit from that. And we expect to continue to improve upon that. No, I would just echo what Neil said. I think we're very well poised to and laser focus on the goals. But the biggest unknown certainly is the economic factors and what that could play into the forecast. But right now, as we look here and see here today, clients are very engaged. They're moving forward with projects. Our pipelines remain strong.

So our focus right now in the short term is there will be some reliance on time deposits, money markets, wholesale deposits. But overall, the company's got a mid to the longer term strategy that impacts the short term as well. But to focus on driving core deposits that's across the sales team, the commercial side as much as the retail side is heavily focused on that. And also on mix. So we've seen the bulk of that increase in deposits for the full years on the, at least from a mixed standpoint, is on the non-interest bearing deposit side. We've increased about 40 million year over year there. And that's also benefited the margin. We continue to focus on that.

But so we, there will be near-term reliance on, to answer your primary question, we're comfortable with that strategy. But internally, we're heavily focused on driving core deposit growth over time.

Yeah, I would just add that our teams are laser focused on our deposit efforts and not only you know, one of the key strengths of Worstown Bank is our relationship-centric approach. And we'll be leaning into that more. We'll also be exploring additional talent in our efforts, along with sort of our product suite and our technology offerings. So it is a laser focus on it, and we'll remain confident in our ability to execute.

Yep.

I would not say that you certainly have those one-off situations where you scratch your head and you take a pass, whether it's pricing or credit structure. But for the most part, I would say that it's still, you know, people are acting, you know, in their normal fashion. And, you know, our ability to add value to the relationship really is what differentiates and leads to our success and our growth today. So and we'll continue to focus on that. But I would not describe the market yet as irrational.

So the yields are in the 8% range of confirm if we have the average life. Let me try to see if I get that answer for you as we're talking here.

And they're all high quality performing low loan the values, et cetera. Yeah, it's all all strong, strong FICO. Good quality. He walks for sure. Average weight coupon is 858 of 858 on the rate and average average life.

They are not. They're spread, they're throughout the country.

The remaining average remaining term is 357 months. The seasoning on those was the average seasoning was only three months. They were 360 month loans.

Yeah, I mean, I always say our focus remains internal. We feel like we have an incredible internal growth story and we certainly are open to discussions if it makes the right financial sense and culturally it makes sense geographically, it makes sense. But right now we're focused on the internal growth story. And just to back it up on your previous question, that's the estimated for me just on the margin.

So from an interesting income standpoint, every 100 basis points to about 2 million, so about a quarter is about 500,000 impact for every 25 on a on a rent basis. And that would equate to about five basis points for every quarter to the margin.

Thank you.

Good morning Tim.

Is this a little early in the cycle that I can point to the previous rate hike cycle where our beta was lower side 25 basis points. I do expect in this environment it'll be something higher than that. And that's what we've that's what we modeled.

To your other question, it's a little bit unknown what's going to happen with it's going to be market driven and competition driven. So it's a little hard to predict whether that would change. We do see significant and are feeling it now as there's competition out there from a rate perspective. But I can't directly say whether the beta would significantly increase with each rate hike. It is something we've focused heavily on. We've been successful certainly in the past and managing our funding costs and both increasing and decreasing rate environments will continue to heavily focus on on how to manage that.

It's mostly in line. There's there's some some outliers out there with significant I'm sure everybody's seeing these significant cash handouts, particularly from some of the larger banks. So it's interesting seeing the cities of the world and and those institutions getting getting heavily involved here and paying significant dollars. So it's I would say it's probably a little more than what I expected but not not complete surprise either.

But that beta and during the last rate sort of cycle was low because of our relationship model and and we will continue to lean into that. Now you know we've modeled slightly more than what our historical performance has been but you know we will continue to lean into that relationship model.

Yeah we like the optionality that we have. I mean you know certainly if the right M&A opportunity came up we would explore that but we also would look at our dividend share repurchase whether it's team lift outs you know branch optimization but that there are a number of things that we look at from a capital allocation perspective and like I said we sort of like the optionality that we have today.

Yes nice to have.

Thank you.

Thank you Holly and thanks everybody 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. This concludes the Orestown Financial Services Inc. 3rd quarter 2026 earnings conference call. You may now disconnect your line at this time.