Orrstown Financial Services Q1 Earnings Call Highlights

Key Points

• Net income of $21.8 million ($1.12 diluted EPS) with strong profitability metrics — ROA 1.59% and ROE 14.76% — while net interest margin was 3.90% (down from 4.00%) but management kept 2026 NIM guidance at 3.90%–4.00% and expects margin improvement as funding costs fall.
• Deposits grew $98.7 million (9% annualized), enabling a reduction in borrowings, lowering forward funding costs, and trimming the loan-to-deposit ratio to 88% as loan growth ran about 4% annualized despite some prepayments.
• Fee income was a meaningful contributor at $15.6 million (24.1% of operating income) while non-interest expense fell $0.7 million to $36.7 million; capital generation remained strong (TCE 9.2%) and the board declared a $0.30 quarterly dividend.

Orrstown Financial Services NASDAQ: ORRF reported first-quarter 2026 net income of $21.8 million, or $1.12 per diluted share, as executives pointed to strong profitability metrics, solid deposit growth, and ongoing expense discipline. President and CEO Tom Quinn said the company “delivered strong results across the board,” highlighting that return on average equity and return on average assets continued to exceed peer levels and that the bank’s net interest margin remained near the top of its peer group.

Profitability and margin trends

Chief Financial Officer Neil Kalani said Orrstown began 2026 “off strong,” posting a return on average assets of 1.59% and return on average equity of 14.76% for the quarter. Net interest margin was 3.90% in the first quarter, down from 4.00% in the fourth quarter of 2025.

Kalani attributed the margin decline to several factors, including the impact of a December Federal Reserve rate cut on interest income, reduced purchase accounting accretion, and “temporarily elevated funding costs.” He said the bank experienced seasonal deposit outflows at the beginning of the year that “persisted for longer than in prior years,” which drove borrowing balances higher during the first half of the quarter. Deposit balances grew substantially in the second half, and the company implemented “some delayed deposit rate reductions.”

Despite the decline, Kalani maintained the company’s prior 2026 net interest margin guidance range of 3.90% to 4.00% and said he expects the margin to increase from current levels as funding costs fall. In response to an analyst question, Kalani said the bank ended the quarter “a few basis points higher than the average for the quarter” and expects to rise “a few basis points from there” over the remainder of the year.

Balance sheet growth and funding mix

Senior Executive Vice President and Chief Operating Officer Adam Metz said loan growth was steady at 4% on an annualized basis. He described loan production as “excellent,” though overall growth was impacted by “unexpected loan prepayments.” Metz said growth occurred across the company’s footprint and product set, with a mix of commercial and industrial (C&I) and commercial real estate (CRE) lending, and noted that pipelines remain “robust” and supportive of growth targets.

On the funding side, Metz said Orrstown delivered “meaningful deposit growth” during the quarter, with deposits increasing by $98.7 million. He said the deposit increase accelerated in the second half of the quarter, enabling the company to reduce borrowings at quarter end. Metz said the shift from borrowings to deposits lowered expected forward funding costs, an impact he said should become “more apparent” in the second quarter.

Kalani added that deposits grew $98.7 million, or 9% annualized, and that the loan-to-deposit ratio declined slightly to 88%, which he said leaves room to support balance sheet growth. The cost of deposits declined to 1.96% during the first quarter, and Kalani said deposit costs are expected to come down further given the timing of rate reductions and that 86% of deposit growth came in demand deposits. He also noted an increase in non-interest-bearing deposits of $14 million, or 7% annualized.

Fee income and expense discipline

Quinn highlighted fee income as a meaningful contributor, noting it totaled $15.6 million and represented 24.1% of total operating income. Kalani said fee income increased from $14.4 million in the fourth quarter to $15.6 million in the first quarter, including $2.4 million of life insurance proceeds recognized during the period.

Wealth management income was $5.6 million, which Kalani said was only slightly lower than the prior quarter “despite difficult stock market conditions.” Swap fees were $1.3 million, which he described as “very strong.” While acknowledging expected volatility in some fee categories, Kalani said he expects normalized non-interest income to be in line with previously communicated guidance.

On expenses, Kalani said non-interest expense declined $700,000 to $36.7 million. He attributed the decrease to lower salaries and benefits driven by lower healthcare costs and year-end incentive adjustments, along with a substantial reduction in professional services costs as the company continued reducing reliance on third-party support. Kalani said he anticipates expenses will fall into the lower end of the company’s guidance range unless Orrstown chooses to make “strategic investments in personnel” to support growth.

Credit quality, capital, and shareholder returns

Metz said the company recorded “moderate provision expense” aligned with portfolio growth and experienced a reduction in classified loans, adding that Orrstown remains prudent in lending decisions and sees a credit environment that is “sound and without significant signs of stress.”

Kalani reported provision expense of $728,000, primarily due to loan growth. Net charge-offs were approximately $900,000, which he said was offset by favorable economic factors used in the allowance calculation. The allowance coverage ratio was 1.17% as of March 31, 2026, which Kalani said remains aligned with the risk profile of the portfolio.

Classified loans declined again in the first quarter, while nonaccruals increased by $2 million from the prior quarter due primarily to two relationships. Kalani said the company also continued to see payoffs and upgrades out of the non-performing category, reflecting a focus on achieving “the best solutions for the bank.”

On capital, Metz said capital ratios “continue to build quickly” through earnings generation, creating future flexibility for growth and “other capital allocation opportunities.” Kalani said regulatory capital ratios continue to build at a “rapid pace,” and he expects capital generation to remain strong. He also noted tangible common equity (TCE) increased to 9.2% despite a $6.8 million increase in unrealized losses on investment securities since December 31, 2025 due to changes in market rates.

The board declared a quarterly dividend of $0.30 per share payable in May, Metz said.

Management commentary on competition and outlook

During the Q&A, KBW’s Tim Switzer asked about deposit competition. Management said competition remains prevalent, but emphasized outreach efforts to existing relationships and an internal push to drive deposit growth. “We were very pleased with the results, and we think that we have a lot of momentum going forward,” management said.

Kalani summarized the quarter by saying Orrstown believes the net interest margin has stabilized with an opportunity to grow as funding costs decline, while fee income remains a “core strength and a differentiator,” particularly through wealth management if markets improve or hold steady. He added that expense management remains a key focus to achieve the bank’s financial goals.

About Orrstown Financial Services NASDAQ: ORRF

Orrstown Financial Services, Inc is the bank holding company for Orrstown Bank, a community banking organization headquartered in Shippensburg, Pennsylvania. The roots of Orrstown Bank date back to 1865, and the holding company structure was established to support its growth and diversification. As a regional financial institution, Orrstown Financial Services focuses on delivering personalized banking solutions to individuals, families and businesses across Central Pennsylvania.

The company's core offerings include a full suite of deposit products such as checking and savings accounts, money market accounts and certificates of deposit.

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