Orrstown Financial Services, Inc. Q2 FY2025 earnings call

• Financial highlights: GAAP earnings were strong despite merger-related expenses; excluding merger-related charges, return on average assets was 1.51% and return on average equity was 15.12% in Q2 2025 vs. 1.45% and 14.97% in Q1 2025. Net income expected to strengthen with loan growth acceleration. - Balance sheet: Loan pipeline is strong, credit quality remains sound with nominal net charge-offs and decreasing classified/nonaccrual loans. Capital ratios increased, and the board authorized a share repurchase program and increased the quarterly dividend. - Expenses: While slightly elevated, they are coming down; excluding merger-related expenses, efficiency ratio was 58.7% in Q2 vs. 60.5% in Q1, and expected to continue declining. - Wealth management: Assets under management at $3 billion, with significant opportunity for growth.

For the second quarter of 2025, net interest margin (NIM) was 4.07% compared to 4% in the first quarter, with potential for further upside. Fee income was a core strength, making up 21% of operating revenue, and noninterest income increased $1.3 million quarter-to-quarter. Loan growth was relatively modest at 6% annualized, with commercial loan growth at 2%. Total loans grew to $3.93 billion, and deposits declined by $117 million as they shifted away from promotional time deposits and money markets.

• Expect stronger net income as loan growth accelerates. - Net interest margin had increased to 4.07% in Q2 2025 and may have further upside. - Expenses expected to continue declining throughout the year, boosting earnings. - Loan pipeline is strong, providing potential for future growth.

• Competitive lending environment. - Potential negative impact to net interest income from rate cuts as the company is asset sensitive. - Difficulty in accurately projecting margin with potential rate cuts and competitive deposit costs.

Q: Are there still other credits in the Codorus Valley deal that you were still looking to move off or sell?

A: There might be a couple of loans that could be considered for sale in the next couple of quarters but nothing real substantial.

Q: Is there a capital level that you guys have in mind that you would like to reach before seriously considering another acquisition?

A: We're at premerger levels now and will continue to build to a good spot over the next couple of quarters, feeling we're in a good spot now to consider acquisitions.

Q: How would 2 to 3 Fed rate cuts impact NIM?

A: There would be a negative impact to overall net interest income with floating rate loans resetting, but we can continue to bring deposit costs down; however, there's some downside as rates come down.

Q: Details on wealth management growth initiatives?

A: Opportunity through talent acquisition, bringing in more advisors, and leveraging the RIA space with $3 billion AUM and potential to grow the franchise.

Q: Line utilization rate on commercial portfolio and growth outlook?

A: Line utilization rate has remained fairly stable; growth in the back half of the year is mixed with C&I and CRE, and there's room for additional CRE with proper pricing and relationship-driven model.

Q: Ready to do another transaction a year after Codorus Valley deal?

A: The bank has done a good job integrating the merger, exceeded cost save targets, and is looking for something that adds tremendous value to the franchise in a beneficial geography, but details are not typically publicized.