Orrstown Financial Services, Inc. Q3 FY2025 earnings call

• Loan growth: 4.9% annualized loan growth in Q3, strong growth in last 2 quarters. • Net interest margin: 4.11% in Q3, driven by loan yields higher from loan pricing and purchase accounting accretion, offset by some increase in cost of funds. • Fee income: Core strength, 20.8% of operating revenue, nearly 21% for second consecutive quarter. • Expenses: Noninterest expense declined $1.3 million, efficiency ratio improved. • Credit quality: Net charge-offs nominal, classified loans decreased $1.7 million, nonaccrual loans increased $3.8 million mainly related to one commercial construction and development portfolio relationship. • Relationship banking: Sales teams keep close touch with clients, discuss various topics to help them navigate economic landscape. • Merger success: Successful execution of last year's merger with Codorus Valley evident in financial performance.

Loan growth was strong with 4.9% annualized loan growth in the third quarter. Net interest margin was 4.11% in Q3 '25 compared to 4.07% in Q2 '25. Fee income was 20.8% of operating revenue, nearly 21% for the second consecutive quarter. Noninterest expense declined by $1.3 million, efficiency ratio decreased from 60.3% to 56.4%. Diluted EPS was $1.13, return on assets 1.60%, and return on equity nearly 16%. Loan interest increased to $66.0 million from $63.2 million in Q2. Noninterest income rose to $13.4 million in Q3 from $12.9 million in Q2.

• Net interest margin expected to be in the 4.0% to 4.15% range, with purchase accounting and competitive pricing factors influencing. • Fee income expected to fluctuate quarter-to-quarter but normalized quarterly run rate expected in $12.5 million to $13 million range. • Noninterest expense expected to be around $36 million quarterly run rate plus standard inflationary impact next year. • Focus on pricing loans prudently and managing funding costs to offset potential negative impact from rate cuts and maintain or increase margin.

• Economic uncertainty and its potential impact on the overall business environment. • General industry concerns about credit and need to proactively assess and mitigate portfolio risks. • Heavy competition on both loan and deposit pricing which may impact ability to maintain or increase margin.

Q: Regarding NIM trajectory with potential rate cuts, what's the guidance?

A: Neelesh Kalani said 4.0% to 4.15% range, with accretion and competitive pricing factors.

Q: Where is competition coming from?

A: Adam Metz said it depends on the market, varies in growth markets like Baltimore, Lancaster, Harrisburg.

Q: Color on largest credits in classified?

A: Adam Metz said there are some CRE, auto dealer and various C&I credits, top couple of credits total about $20 million.

Q: Any new updates on classified balances since quarter end?

A: Adam Metz said an owner-occupied credit was moved to nonaccrual in Q3 and received a pay down of just under $900,000.

Q: Lending focus for next year's 5% loan guide?

A: Adam Metz said they feel they have CRE capacity, hired additional talent on C&I side, particularly in middle market group.

Q: Tools to offset NIM compression from rate cuts?

A: Neelesh Kalani said it comes from pricing perspective, adjusting deposit costs and loan pricing to offset.

Q: Assumptions on yield curve shape and impact on NIM?

A: Neelesh Kalani said modeling assumes existing curve, expects flattening over time, but longer-term rate increase would benefit margin.