Orrstown Financial Services Q1 2025 Earnings Call Transcript

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Provided by Quartr
April 23, 2025
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Operator

Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to the Orestown Financial Services, Inc. First Quarter twenty twenty five Earnings Conference Call. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. I will now turn the call over to Tom Quinn, President and Chief Executive Officer of Orestown Financial Services, Inc. And Orestown Bank, who will begin the conference. Mr. Quinn, you may go ahead.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

Thank you, Julianne, and good morning. I would like to thank everyone for participating in Orestown first quarter twenty twenty five 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.orestown.com. Once there, you can click on the investor relations link and then on the events and presentation

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

link.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

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 presentation also includes non GAAP financial measures as identified in the earnings release and the investor presentation. The the appropriate reconciliations to GAAP are included in the appendices. Joining me on the call this morning, Orestown senior executive vice president and chief operating officer, Adam Metz, as well as executive vice president and chief financial officer, Neil Clonnie, Our chief risk officer, Bob Carrotty, and our chief credit officer, Dave Chukowski, will also participate on the call today.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

Before we discuss the financial results of the quarter, I wanted to bring everyone up to speed on some of the important events that took place at Oarstown during the first quarter. First, we put the finishing touches on our core conversion. With the integration behind us, we are excited about returning our focus to growing the company, enhancing the shareholder value, and building the premier community bank franchise in our Pennsylvania and Maryland markets. Second, we continue to invest in the future of the larger organization by making several additions and changes to our leadership team. In January, we added Chris Orr and Ben Colvard to our executive team as chief information officer and chief operations officer, respectively.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

Together, Chris and Ben have over forty years of banking experience. Their combined experience will play a vital role in scaling our technological and operational capabilities and shaping our future success. In February, we added Barb Robes to our board of directors. Barb's forty years of banking experience, expertise in wealth management, and human capital management, and extensive knowledge of our markets makes her a valuable resource for both our board and management team. Also in February, we we announced that Adam Metz has been promoted to senior executive vice president and chief operating officer of the company with the intent for him to succeed me as president and chief executive officer of the company and bank upon my retirement in May of twenty twenty six.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

I would like to now turn the call over to Adam Metz for a discussion on market trends. Adam?

Adam Metz
Adam Metz
Senior EVP & COO at Orrstown Financial Services

Thank you, Tom, and good morning, everyone. Before we discuss our quarterly results, it is important to discuss the changing economic environment and the steps we've taken to position the bank to be successful in any scenario. Shortly before our year end earnings announcement, the presidential administration came to power and immediately began to take aggressive action to change the economy through the creation of DOGE, the threat, implementation, and then partial delay of tariffs and other measures. These actions introduced market volatility and uncertainty into the national economy. Thankfully, we had previously begun to take steps designed to protect credit quality and position the bank for success in any economic scenario.

Adam Metz
Adam Metz
Senior EVP & COO at Orrstown Financial Services

These steps included proactively managing our CRE portfolio to reduce concentration, and we've been very successful in that initiative that we started almost a year ago. Stress tested the c and I portfolio for the potential impact of tariffs, and Bob and and Dave can speak more about that later. Reviewed our TM platform for clients sending form wires and proactively discussing strategies with them. And we reevaluated lending relationships above $2,000,000 1 by one and adjusted risk ratings appropriately, targeting some of them with exit plans. While these steps resulted in higher than expected loan payoffs during the first quarter, we are confident that we have positioned us well for future loan growth.

Adam Metz
Adam Metz
Senior EVP & COO at Orrstown Financial Services

With that said, we are not immune to the changing economic environment, and it is possible that borrowers may take a wait and see approach on expansion plans and capital needs. Despite the economic uncertainty, we are seeing positive momentum in our loan pipelines, up over 40% since year end. Over the past year, our teams have been laser focused on executing a successful merger and integration. With that milestone now behind us, we have devoted our full resources and times towards our clients, working closely with them as trusted hands on financial advisers. The strength of our pipelines reflect that renewed energy.

Adam Metz
Adam Metz
Senior EVP & COO at Orrstown Financial Services

As for tariffs, we are active daily conversations with our client clients, helping them navigate the evolving landscape and plan accordingly. While tariffs have introduced an added layer of uncertainty, our loan portfolio has been thoroughly stress tested it and remains sound. Importantly, the underlying economic conditions across the communities we serve continue to demonstrate resilience. Overall, we believe that the work we have done since the merger to protect credit quality, enhance liquidity, and build capital has presented us with significant strategic flexibility going forward. Tom and Neil will be talking more about these opportunities in a moment.

Adam Metz
Adam Metz
Senior EVP & COO at Orrstown Financial Services

I would now like to turn the call back over to Tom Quinn for an overview of our quarterly results. Tom?

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

Thank you, Adam. Our financial highlights for the quarter are summarized on slide slide three of our deck. While operating results continue to be impacted by merger related expenses, core earnings were solid. Excluding certain merger and other nonrecurring charges, return on average assets was 1.45%, and return on average equity was 14.97% for the three months ended 03/31/2025 compared to 1.1913.79% respectively for the three months ended 12/31/2024. We do not believe that merger related expenses will be significant going forward and expect operating results to normalize.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

Expenses will be significant going forward and expect operating results to normalize beginning in the second quarter. We also expect approximately 1,000,000 first quarter noninterest expenses to be out of our expense run rate by the end of the second quarter. We have been focused on completing a system conversion and reinvesting in technology and available strong talent in anticipation of future growth. But as adjusted ROE indicates, we are we have restarted our earnings earnings engine and expect stronger results going forward. Net interest margin remains strong.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

NIM was 4% for the first quarter of twenty twenty five compared to four zero five in the fourth quarter of twenty twenty four. We believe that we are managing funding costs well. Funding costs do continue to to decline. The cost of deposits declined 15 basis points from the fourth quarter of twenty four to the first quarter of twenty five. Our strong liquidity positions us well to fund asset growth and maintain NIM going forward.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

Loans did decrease 1.4 quarter to quarter, primarily due to conscientious decisions to manage risk. As Adam discussed, much of the payoff activity was due to strategic actions to reduce risk in the portfolio. We continue to expect loan growth in the mid single digits. Our team is exceptionally talented. The pipeline is very strong, and lending opportunities are still active.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

We remain confident in our ability to grow loans the right way, but we are not immune to changing economic environment. Borrowers do not like uncertainty, and it is possible that they may take a wait and see approach. While credit quality may remain sound, net charge offs were nominal for in the first quarter. Fourth quarter charge off activity was isolated and not indicative of a trend of of broader concerns within the portfolio. Classified loans and nonaccrual loans decreased quarter to quarter.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

Nonaccrual loans to total loans decreased from point five nine March 30 first 20 five compared to point six one at 12/31/2024. We continue to build capital. Capital ratios increased across the the board quarter to quarter. We remain well capitalized by all measures. We believe that the work we have done since the merger to protect credit quality, enhance liquidity, and build capital has presented us with significant strategic flexibility going forward.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

A capacity to accelerate commercial lending for strong credits, considering buybacks as we believe our stock is undervalued, contemplating redemption of sub debt, ability to take advantage of other strategic opportunities. We remain optimistic about the future, both in the short term and the long term. And now I'll turn it over to Neil Kalani, our CFO, who will discuss the first quarter results in more detail. Neil?

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

Thanks, Tom. Good morning, everyone. A significant amount of our focus for the last few quarters has been on the balance sheet, so I'm gonna start there and cover loans on slide four. Total loans are at 3,900,000,000.0 with an average yield of 6.6%. Loans have declined 55,000,000 from 12/31/2024.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

'50 million of that was commercial loans. While in prior quarters, loan sales were completed to remove some risk for the balance sheet, payoffs are what drove the reduction in the first quarter of twenty five. Payoff activity and normal amortization outpaced a hundred 16,000,000 of commercial loan production. Most of the payoffs were for loans which didn't fit the long term credit profile of the bank. There were CRE loans within these payoffs that didn't fully align based on credit risk.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

This, along with prior quarter actions, significantly reduced our CRE concentration level. We're now well positioned to deploy capital and excess liquidity towards prudent loan production. Moving to slide five, you can see that deposits have remained stable around 4,600,000,000.0 since the merger, and the cost is at 2.14%. The sales team has done an excellent job retaining the acquired deposits from the from the Codorus acquisition. For the first quarter of twenty twenty five, deposits grew by about 11,000,000.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

1 of the bigger challenges for us and and really every other bank out there in this rate cycle has been retaining or replacing promotional deposits as they mature. While we saw a decrease of 48,000,000 in CDs and 37,000,000 in money markets in the first quarter, we also experienced strong growth of about 95,000,000 in demand deposit balances. At March 3125, noninterest bearing deposits represented 20 of total deposits, so we continue to see some some improvement there. With the shift from higher yielding promotional deposits, we believe there will be further reductions in funding cost to benefit the margin. The 84% loan to deposit ratio provides us with sufficient liquidity to fund our growing loan pipeline without placing a heavy reliance on alternative funding resources.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

Another opportunity for allocating our liquidity is the investment portfolio. You can see on slide six that our investment book is now up to 856,000,000. We purchased about 40,000,000 of securities in the first quarter, and we'll continue to evaluate opportunities going forward to allocate our liquidity to higher yielding assets. The current market volatility does create opportunities to enhance the portfolio, which continues to generate a very strong average yield at 4.65%. The duration remains relatively short at four point three years, and not net unrealized losses are just three purse 3% of the book balance at March 3125.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

This takes us to our net interest income net interest margin slide on slide seven. Our margin remains very strong at 44% even. This includes about 51 basis points in net purchase account accretion impact in the first quarter. It was about 52 basis points in in the fourth quarter. I remain cautious in predicting the trajectory of the margin given pricing competition for for both loans and deposits and the overall economic uncertainty, but there is upside potential based on where our deposit rates are positioned.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

As I pointed out previously, as the Fed funds rate has declined, our loan yields have declined faster than our deposit costs. That's been a function of both the competitive environment and our client retention efforts coming out of the merger and the system conversion. This is evident in the graph on the top right on the slide showing the change in interest bearing deposit cost as compared to Fed funds over the past year. You can see that the cost was elevated in 03/2024 from some higher cost acquired deposits, but it's come down since that point. With flat rates at this point in time, there is opportunity here to improve margin if we can maintain good yields on new loans.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

We do continue to remain asset sensitive. On slide eight, fee income was up about 400,000 from the prior quarter. This is mainly driven by wealth management, which generated some additional income in the first quarter. I anticipate wealth management income to drop some in the second quarter given where the stock market has been. There continues to be, uncertainty there.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

Service charges are up. As I mentioned in the prior quarter, we paused some fees for a few months post conversion. Most of those fees were reactivated in the first quarter with some residual carrying into the second quarter. Mortgage banking income decreased by about 300,000 due to a decrease in the mortgage servicing rights valuation. This was driven by market rates.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

One other item of note is the commercial lending team had another strong quarter of originating swaps for clients. This doesn't always pop out in the numbers because it's volume and balance based, but the team remains very focused on driving more fee income. Fee income, in general, remains a focal point for us. For the first quarter, it was a 19% of total revenues, but our goal remains to be to exceed 20. Moving to expenses on slide nine.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

As previously indicated, we've taken the necessary steps to achieve our announced cost savings from the merger for the go forward run rate from 06/30/2025. With less noise expected in the second quarter, this will become more evident, and I expect the efficiency ratio to drop further as a result. Merger related expenses were 1,600,000.0 in the first quarter. This is expected to be the final quarter with significant costs associated with the merger. There are also additional expenses that have been incurred associated with providing additional support as we work through the system conversions.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

These costs are expected to decline in the second quarter. However, as we've stated in the past, we will continue to take advantage of opportunities to invest in talent, to build the infrastructure necessary to reach the next few stages of our growth trajectory. We've done some of that already, as Tom referenced earlier, and expect that further investments will be made to improve our operational efficiency. Also, as always, if the opportunity arises, we'll evaluate either individual or team revenue producers if we believe they align with our strategic vision and can be accretive. Our credit quality is covered on slide 10.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

As a result of the reduction in loan balances, a negative provision was required during the quarter. This, again, is indicative of our conscious steps that we've have taken to reduce risk in a loan portfolio. Classified loans declined by 14%, and nonaccruals were down as well. Our allowance coverage ratio was 1.223% at 03/31/2025, which remains near the top of our peer group, and we believe adequately addresses the risk of loss in the loan portfolio. Slide 11 highlights our key performance metrics.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

There were substantial increases in adjusted EPS to a dollar per share and adjusted ROA and ROE as mentioned by Tom from the prior quarter. We have the opportunity to continue to improve from there. In addition, from a capital standpoint, TCE is nearing 8%. If you recall when the the merger closed in July, we acknowledged that our capital ratios were below peer levels due to purchase accounting marks As shown on slide 12 through a comb combination of the higher post merger earnings and various actions taken with the balance sheet, the regulatory capital ratios are approaching premerger levels. We believe we're in a strong position for continued growth and, at the same time, expect to continue to build these ratios at a good pace.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

I'll now turn the call back over to Adam Metz to discuss our strategic focus going forward on slide 13. Adam?

Adam Metz
Adam Metz
Senior EVP & COO at Orrstown Financial Services

Thanks, Neil. Yeah. I just go through these. You can see them listed on this deck. But number one here is the recruit talent throughout our footprint.

Adam Metz
Adam Metz
Senior EVP & COO at Orrstown Financial Services

And I I would say that as we promote or hire people in a management position, we always challenge them that they have to be able to recruit talent. And Tom talked a little bit about those key hires on the executive level, but there has also been additional bodies added from the sales team, additional RMs, some credit enhancement, data people, and operational enhancements, and we'll continue to look at that. Second one here is maximize automation. Part of the platforms we picked through the merger was geared towards this, and and we feel very optimistic about our ability to further automate and and drive efficiencies through those platforms. Number three here, return focus on loan and deposit growth.

Adam Metz
Adam Metz
Senior EVP & COO at Orrstown Financial Services

As I said earlier, our pipelines are up over 40% since year end, and we'll remain focused on that. Deploy excess liquidity to drive prudent growth at 84% loan to deposit ratio. We feel very good about the position we're at. Number five, evaluate expansion and acquisition opportunities. That'll be both organically and potentially acquisitions.

Adam Metz
Adam Metz
Senior EVP & COO at Orrstown Financial Services

We've had a number of opportunities, and we'll continue to look at those in conjunction with our organic growth. But we'll be smart about those and prudent as we've proven in the past. Number six here, continue to build capital. As Neil just said, we're ahead of where we, initially planned, and so we we feel really good about the position we're at. And and the last point here is everyone here in this company is aligned to maximizing shareholder value.

Adam Metz
Adam Metz
Senior EVP & COO at Orrstown Financial Services

It is a part of our mission statement, and we'll continue to focus on that. At this time, we would like to open the call to questions. Before we get started, Julianne will briefly review the instructions with you.

Operator

Thank you. In the interest of time, we ask that you please limit yourselves to one question and one follow-up. And for any additional questions, please rejoin the queue. Our first question will come from David Long from Raymond James. Please go ahead.

Operator

Your line is open.

David Long
David Long
Analyst at Raymond James Financial

Good morning, everyone.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

Good morning.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

Good morning, Dave.

David Long
David Long
Analyst at Raymond James Financial

You know, as a growth oriented bank, I I just wanted to to to to hear from you guys maybe what you guys are hearing from your commercial customers in a little bit more detail. And and, you know, there's obviously some headwinds out there. More businesses seem to be sitting on their hands. And then how does that play into your outlook for mid single digit loan growth this year?

Adam Metz
Adam Metz
Senior EVP & COO at Orrstown Financial Services

Yeah. We're having daily conversations with our clients. And as I said, the pipeline has grown significantly in the last three months. And so, you know, we feel good about where we're at, but, yes, certainly, there is some uncertainty out there. But right now, our our economy continues to be pretty sound in the in the markets that we cover, and, we feel good about where we're positioned.

Adam Metz
Adam Metz
Senior EVP & COO at Orrstown Financial Services

But to your point, we're having those daily conversations, and, you know, some of the news yesterday was positive. So, we feel good about where we're at.

David Long
David Long
Analyst at Raymond James Financial

Got it. Thank you. And then just the the second thing I wanted to ask about was on the credit side, nonaccrual balances, classified balances declined. You also had some CRE runoff. But on the flip side, the economic outlook has worsened.

David Long
David Long
Analyst at Raymond James Financial

And using CECL, there are certain inputs that I would assume in your models are worse off now than they were. So how do you balance these conflicting inputs in deciding what the right level of reserve is here at the end of the quarter?

Robert Coradi
Robert Coradi
EVP & CRO at Orrstown Financial Services

Yeah. This is this is Bob Carotti. I can take that and turn it over to Neil then. So so, essentially, we we have qualitative factors that provide us with the opportunity to look at the current environment and and to make changes one way or the other. And we did in fact do that with respect to some of the items that we're seeing, and that did cause us to actually increase the the amount of the reserve with respect to the actual calculation.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

Yeah. We have so we've in prior quarters, we have looked closely at the economic environment and certainly made some adjustments within our model to on the qualitative side to to account for potential future losses. So we we look at it both at a granular pretty granular level, by segment and then also kinda higher level looking at our overall coverage. And so kind of looking at it at both levels, we feel very good about where we're at, but we do in doing the analysis this quarter, we felt we took sufficient actions in prior quarter from a qualitative perspective to to address that risk you're referring to. Obviously, there's been new factors that have been introduced, but we did take a close look at that and feel comfortable with where we're at.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

Yeah. I I this is Tom. I would add that as of the end of the year, folks in risk management credit went back and looked at all loans above 2,000,000 and looked at the impact and where how would making sure that how would they be be impacted if tariffs came about? They went back and looked at the cash management and the companies that were moving money, you know, to to to countries that might actually have significantly higher tariffs than others. And in in that, went back and looked at the underlying strength of the credit.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

And so I think, ultimately, the the organization feels as comfortable as you can. We're not immune to the economic challenges, but but feel as comfortable as we can as with the work that we've done and understanding our portfolio. We've looked at any companies that have had that have had government contracts, and we don't have many. So the impact from DOGE is is is is minimal. And we've looked at folks.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

We're located in Central Pennsylvania and in Maryland. A lot of our companies do business with companies locally. We do have some that that that are on the international stage, and and we've we've evaluated that. So I I think the team feels comfortable with where we're at by the actions that we took December, January, February to position us well to and and as we recognize credits that we felt needed to move along, we we we did that. And I credit Dave and and and Bob for for taking that aggressive stance.

David Long
David Long
Analyst at Raymond James Financial

Excellent. That's some great additional color. Really appreciate it, and thanks for taking my question.

Operator

Our next question comes from David Bishop from Hovde Group. Please go ahead. Your line is open.

Analyst

Hey guys, good morning.

Analyst

This is John on for Dave.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

Morning.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

Good Hello, good morning.

Analyst

So first off, congrats on the quarter. Just kind of one nitpicky one. I noticed there was a bit of reshuffling within certain deposit buckets on the average balance sheet this quarter. Apologies if I missed it in the in the press release, but there can can you shed a bit of light on on what was going on there, if possible?

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

Yeah. Some of that we shifted some balances due to as you know, we're going through a the system conversion into in November, we we identified some, some misclassifications at December. So there's some adjustments that were made accordingly. So it's just a function of as we move forward and got a better understanding of the the data that that came over, we had to make some adjustments.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

Got it. Okay. That's helpful.

Analyst

And then maybe just just double back on the loan pipeline. Are there any specific segments that are that are showing strength versus others? How how should

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

we be thinking about that moving forward?

Adam Metz
Adam Metz
Senior EVP & COO at Orrstown Financial Services

I I think it's a sort of a a well diverse pipeline. I I do as we said earlier, we were very proactive in in addressing our CRE concentration ahead of the merger, and we've dropped that significantly. So we are taking a measured approach to commercial real estate. So that is part of the pipeline, but also a diverse group of c and I solar opportunities, etcetera?

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

I I would not wanna minimize, and I know we've talked about this a lot as a team, but the impact of the merger behind us. I mean, go back to those of you who follow us. We've we literally have we changed systems. Everyone in the company need to be trained on on some part of technology, and it took them away from maybe some of the time in the field. And so now that with that be clearly behind them, you see the impact of what we feel is a very strong sales team across the board.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

And Adam's really done a nice job of leading them forward. So I think you'll see us get back to a more normalized loan volume.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

Great. Thanks for taking my questions.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

Thank you.

Operator

Our next question comes from Tim Switzer from KBW. Please go ahead. Your line is open.

Tim Switzer
Vice President at Keefe, Bruyette & Woods (KBW)

Hey. Good morning, guys. Thanks for having me on.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

Morning.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

Good morning, Tim.

Tim Switzer
Vice President at Keefe, Bruyette & Woods (KBW)

Can you discuss a little bit about the NII and NIM trajectory from here, assuming no rate cuts going forward and then the impact of rate cuts? And also, Neil, is that 6,900,000.0 purchase accounting accretion, is that what

Tim Switzer
Vice President at Keefe, Bruyette & Woods (KBW)

we should, project going forward? Is that a little bit elevated?

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

It's

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

probably a little bit elevated. I would, again, as you know, if there could be acceleration at any point in time based on payoff activity, but I would generally expect it around the 12,000,000 range, but it can kinda go above that based on some acceleration. Excuse me. From a from a core name perspective, I'm expecting it to still be around kinda three fifty range where we're at. We do have, as I've indicated in some of my comments, I I do feel we've got an opportunity here.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

I continue we've talked through this in past. I continue to be a little bit hesitant because of the competitive environment and and everything else, but we do have the opportunity to we've we've held deposit costs a little higher, and that has worked for us. But we do have the opportunity to look closer at funding costs and see what opportunity we have there. So I I think there is the chance that we can if rates are flat, that we can continue to look at deposit costs. And like I indicated, we are looking to reinvest.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

We started reinvesting some of the funds. We've got significant excess cash right now. So just reallocating some of those, whether it's to investments or loans, that's giving us some opportunity to expand the NIM. But, again, the the market environment makes it difficult to clearly project where we think it's gonna fall, but there's definitely some some opportunity for improvement there, and we'll we'll keep pushing on that. You should, as far as NII overall, we should expect, you know, as we've reinvested.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

We've purchased some investments throughout the first quarter. There's some late in the first quarter, so those you'll see more of a full period impact of that. And and as we start, like Adam indicated, the loan pipeline's pretty strong here. So as we kinda move that stuff out of out of Fed funds, 4.3% or whatever we're earning there into higher yielding loans, that should benefit us.

Tim Switzer
Vice President at Keefe, Bruyette & Woods (KBW)

Okay. Great. That was really helpful. And can you provide some details on maybe the expense outlook? Are there any more expense saves out there for you to attain, following the integration and the merger?

Tim Switzer
Vice President at Keefe, Bruyette & Woods (KBW)

Would just love to

Tim Switzer
Vice President at Keefe, Bruyette & Woods (KBW)

hear some color there.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

Yeah. We're continuing to to look at efficiencies, and I I think there's there's always opportunities as we, as we implement new processes and and all that. So I do believe setting the merger cost aside, and we have one time kind of cleanup for restructuring expenses for a couple of branch closures of a hundred thousand. If you if you exclude those, we do even in this coming quarter, there's about a million of opportunity of expected reductions. There's certain categories where we're elevated for different reasons.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

One of the big one is is the kinda ongoing. We've had a lot of consultant usage and other things to to keep us moving forward as we work through the conversion. So some of that's gonna a lot of that will wane in this quarter. They mostly be eliminated towards the end. So I do see about another million dollar savings in in run rate.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

So we should be able to get kind of that 35 and a half, 36 core run rate going forward with further further opportunity, but it's it's gonna be again, as I indicated in my comments, it's gonna be a little hard to to measure because there are kinda investments that are that are building as well to support us in the long term.

Tim Switzer
Vice President at Keefe, Bruyette & Woods (KBW)

Okay. So that that's 35 and a half to 36,000,000. Does that include the investments you guys are planning to make? I know I know that could change depending on the environment.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

Yeah. For now, but it could again, it it we're not afraid to to add add strong talent if it makes sense for the organization. So I I again, I'm not gonna fully commit to that. But, yes, that that is the expectation, and, that does assume certain investments that we already know of.

Tim Switzer
Vice President at Keefe, Bruyette & Woods (KBW)

Yeah. Makes sense. Thank you.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

Yep.

Operator

Our next question comes from Gregory Zengaan from Piper Sandler. Please go ahead. Your line is open.

Gregory Zingone
Gregory Zingone
Research Analyst at Piper Sandler Companies

Hey guys, good morning.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

Good morning, Greg.

Gregory Zingone
Gregory Zingone
Research Analyst at Piper Sandler Companies

Curious of what your CRE concentration level was at quarter end and if there's a percentage or a goal you have in mind of where you want to get to.

David Chajkowski
David Chajkowski
Chief Credit Officer at Orrstown Financial Services

Yeah. Yeah. Hi. This is Dave Chkowski. So our, our ratio of total CRE to, risk based capital was three zero two at quarter end.

David Chajkowski
David Chajkowski
Chief Credit Officer at Orrstown Financial Services

We have established, several years ago an internal tolerance limit of 350%. So we think where we're at today with the proactive measures we've taken to get that concentration down to where it is now. We have, we have a little bit of, runway there to, accommodate, CRE if if the right opportunities present themselves.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

Hey, Greg. I would just add that we don't obviously, we focus on that number, but we regardless of what that number is, we wanna always we have the credit profile in in mind at all times.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

So, that is always the key focus and making sure that we're we're doing the right thing. And as we've talked about before, we're in a different CRE for us is a little different than the exposure that some of the larger banks have, but, we do pay close attention to that and wanna, but, again, if the if it makes sense from a credit risk standpoint, we're we're not gonna hold back from it.

Gregory Zingone
Gregory Zingone
Research Analyst at Piper Sandler Companies

Okay. Awesome. And then secondly, it looks like cash balances built a decent amount, in the quarter. Could you share more color on that and maybe what we should expect going forward?

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

I'm sorry. I missed what?

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

Cash balances.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

Oh, cash. Yeah. That's a function of obviously, loan balances came down, we had a fair amount of payoffs during the the quarter. We are as I indicated, we we have already started kinda reallocating those funds. So as whether it's through, some of the investment purchases that we already did or whether it's, obviously, ideally, it's gonna fund future loan growth.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

Again, the pipeline's strong. So we do expect to to utilize some of that cash, going forward. The team from a we're very in a very good position from a loan to deposit standpoint at 84%, so and the team is gonna continue to push the the drive deposits, but, we feel very good from a cash position. We don't and I think that's it helps us to my comment earlier, it helps us from a margin perspective as well, having that cash on the balance sheet versus having to go outside to use, other alternative sources.

Gregory Zingone
Gregory Zingone
Research Analyst at Piper Sandler Companies

Alright. Awesome. Thanks, guys.

Operator

Our

Operator

last question will come from Dan Cardenas from Janney Montgomery Scott. Please go ahead. Your line is open.

Dan Cardenas
Director - Banks & Thrifts at Janney Montgomery Scott

Hey. Good morning, guys. Just quickly, Neil, can you tell us how much cash flow is generated off of your securities portfolio on a quarterly basis? And are those proceeds going to be used primarily for the of the end of loan growth? Or are they going to go back into the securities portfolio?

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

So we've typically taken the approach of we've changed our view a little bit. I've typically taken the approach of kinda maintaining a flat investment portfolio that I have myself and the our treasurer have changed our approach. I'm sorry. But, so, basically, the new approach is as we always have, we take advantage of of market opportunities. Obviously, there's been a lot of volatility with with market rates now.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

So we, kind of, as I indicated before, if there's opportunity to add purchase securities to add both limit our credit risk because we don't have to do a lot of include a lot of credit risk in the investment portfolio. But if it enables us to to generate some more margin, we'll do it. We've been focused recently on kinda non agency MBS, and there's been some opportunities, again, with the the market fluctuation. So we do it is an opportunity to because of the kind of the runoff and the the loan the payoffs that we had experienced in the loan portfolio, we are looking for other avenues to to offset that for now. But to your initial questions, about 15,000,000 a quarter of of, I'm sorry, 15,000,000 a month of investment portfolio runoff.

Neelesh Kalani
Neelesh Kalani
EVP & CFO at Orrstown Financial Services

But we are, again, looking I'm not opposed to continuing to build the the investment portfolio, which is slight change in kind of the approach previously.

Dan Cardenas
Director - Banks & Thrifts at Janney Montgomery Scott

Okay. Excellent. And and then maybe just some color on the m and a front. Has has have discussions picked up here recently? And then, you know, geographically, what what direction would you guys like to head towards?

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

Yeah. We we really don't spend a lot of time talking publicly about m and a. What I will say to you is that since the merger, we've had no shortage of of folks coming and visiting us and presenting opportunities to us. I think we'd always be we'd always be disciplined. We we have really tried to make sure that if we were gonna look at something seriously, it had to have tremendous value to our shareholders.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

There had to be a a reasonable payback period. And and we we we either wanna acquire talent or acquire a business line that we, you know, we may not have have have been fully entrenched in. And and that's that's pretty much how we we do it. I don't think with the way the market is today, anything is imminent. What we always try to do is is identify opportunities that might fit the company and the culture, very importantly, the culture because we have a high performing organization.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

And and and we wanna make sure that that that that is for that that has always been a piece that the board plays a, obviously, a critical role in. So we do strategic planning and identify some potential opportunities to partner. But we've been around a hundred and six years in May, and we've done three acquisitions. So it's it's well, it's a most recent Codorus transaction was a very beneficial to the to both companies. We'll be very judicious as we move forward.

Dan Cardenas
Director - Banks & Thrifts at Janney Montgomery Scott

Great. Thanks, guys.

Operator

We have no further questions. I'd like to turn the call back over to Tom Quinn for closing remarks.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

Thank you, operator. And I want to thank everybody for participating today. As always, if there's any clarity on any of the items discussed in the quarterly earnings or the call today, please feel free to contact us. I wanna thank you for joining. I know you're all busy and wish you a wonderful day.

Thomas Quinn
Thomas Quinn
President & CEO at Orrstown Financial Services

Thank you very much. Bye now.

Operator

This concludes today's conference call. Thank you for your

Executives
    • Thomas Quinn
      Thomas Quinn
      President & CEO
    • Adam Metz
      Adam Metz
      Senior EVP & COO
    • Neelesh Kalani
      Neelesh Kalani
      EVP & CFO
    • Robert Coradi
      Robert Coradi
      EVP & CRO
    • David Chajkowski
      David Chajkowski
      Chief Credit Officer
Analysts
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Key Takeaways

  • Integration complete: core system conversion finalized so management can refocus on growth and has added experienced executives (new CIO and COO) plus a board member, with succession planning in place.
  • Proactive risk positioning: reduced CRE concentration, stress tested portfolios against tariff impacts, and reevaluated large relationships, resulting in higher payoffs in Q1 but strengthening credit quality.
  • Strong core financial performance: Q1 adjusted ROA of 1.45%, ROE of 14.97%, a net interest margin of 4.00%, and a 15 bps decline in deposit costs with a solid 84% loan-to-deposit ratio.
  • Loan pipeline momentum: despite cautious client behavior amid economic uncertainty, the bank’s commercial loan pipeline is up over 40% since year-end, supporting mid-single-digit loan growth targets.
  • Expense and capital outlook: merger-related costs will largely normalize by Q2, driving efficiency improvements, while capital ratios strengthen, providing flexibility for strategic investments, dividends, or share buybacks.
AI Generated. May Contain Errors.
Earnings Conference Call
Orrstown Financial Services Q1 2025
00:00 / 00:00

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