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CALL PARTICIPANTS
- President and Chief Executive Officer — Tom Quinn
- Senior Executive Vice President and Chief Operating Officer — Adam Metz
- Executive Vice President and Chief Financial Officer — Neel Kalani
- Chief Risk Officer — Bob Coradi
- Chief Credit Officer — David Chajkowski
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TAKEAWAYS
- Adjusted ROA and ROE: Adjusted return on average assets reached 1.51% in Q2 2025, and adjusted return on average equity was 15.1% in Q2 2025, both up from the prior quarter.
- Net Interest Margin (NIM): Net interest margin rose to 4.07% from 4% sequentially despite a highly competitive lending environment.
- Fee Income as Revenue Percent: Fee income accounted for 21% of operating revenue in Q2 2025, which is higher than recent periods.
- Noninterest Income: Noninterest income increased by $1.3 million quarter over quarter, driven by strong performance in wealth management and swap fee generation.
- Loan Growth: Total loans grew at a 6% annualized rate in Q2 2025, and commercial loans advanced at a 2% annualized rate in Q2 2025, with management citing a strong and growing pipeline.
- Credit Quality: Net charge-offs remained nominal, while nonaccrual loans to total loans decreased to 0.57% in the second quarter, compared to 0.59% in the first quarter of 2025.
- Allowance for Loan Losses: Allowance coverage ratio stood at 1.22% in Q2 2025, with management stating it “adequately addresses the risk in the loan portfolio.”
- Noninterest Expense Trend: Noninterest expenses fell by approximately $600,000 quarter over quarter in Q2 2025, including merger-related and consulting costs; core efficiency ratio, excluding merger expenses, improved to 58.7% in the second quarter, compared to 60.5% in the first quarter of 2025.
- Deposit Change and Cost: Deposits declined by $117 million in Q2 2025, while cost of deposits decreased to 2.01% from 2.14% as strategic pricing actions were implemented.
- Capital and Liquidity: Tier 1 common equity (TCE) exceeded 8% in Q2 2025, all key capital ratios increased in Q2 2025, and the loan-to-deposit ratio was 87% in Q2 2025, providing liquidity headroom.
- Shareholder Return Actions: The board authorized a new share repurchase program up to 500,000 shares, and repurchased 2,134 shares in Q2 2025; dividend increased by 1¢ to 27¢ per share in Q2 2025, marking the third dividend increase over the past year and a cumulative 35% rise since the merger.
- Securities Portfolio: Purchased $50 million of securities in Q2 2025, bringing the total to $885 million as of Q2 2025; duration remained steady at four and a half years as of June 30, 2025, with unrealized losses were unchanged at approximately 3% of book value as of June 30, 2025.
SUMMARY
Orrstown Financial Services (ORRF 6.10%) reported sequential improvements in profitability, margin, and operating leverage in Q2 2025, citing a strong lending pipeline and capital flexibility as key forward drivers. Management emphasized that deposit costs declined in Q2 2025, while the loan yield experienced a minor decline due to reduced purchase loan accretion in Q2 2025, and that further merger-related expenses are not expected in future quarters (as stated on the Q2 2025 earnings call). Notably, strategic shareholder returns expanded through increased repurchases and dividends in Q2 2025, while the wealth management business and fee-based revenue streams remained central to noninterest income growth initiatives.
- Neel Kalani stated, “We are asset sensitive, so there would be a negative impact to overall net interest income going forward, with the floating rate loans resetting, but we would certainly have the opportunity to continue to bring the deposit cost down.”
- Hiring initiatives added experienced middle market bankers, including “the number one lender from a $40 billion regional bank,” contributing to what management described as the largest pipeline since the merger.
- Share repurchase activity and the expanded authorization highlight board confidence in current valuation and capital adequacy, with merger integration progress supporting further optionality.
- Management noted, “the broad fee waivers that we’ve discussed previously that we temporarily implemented are no longer in place,” which contributed to the improved fee income mix in Q2 2025.
INDUSTRY GLOSSARY
- Net Interest Margin (NIM): A measure of the difference between interest income generated and interest paid relative to average earning assets.
- Core Efficiency Ratio: Noninterest expense as a percentage of revenue, excluding merger-related or one-time charges, indicating cost efficiency of the banking operation.
- Classified Loans: Loans designated by regulators as having a higher risk of loss due to credit concerns or borrower performance deterioration.
- Allowance Coverage Ratio: The ratio of allowance for loan losses to total loans outstanding, used as a gauge of reserve adequacy against potential loan defaults.
- Loan Accretion: Incremental interest income recognized as acquired loans are paid off at a faster pace than estimated, often tied to accounting for purchased credit-impaired loans.
- TCE (Tier 1 Common Equity): A capital adequacy metric that measures a bank’s core equity capital compared to its risk-weighted assets.
Full Conference Call Transcript
Tom Quinn: Thank you, Kate, and good morning. I’d like to thank everyone for participating in Orrstown’s second quarter 2025 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.orrstown.com. Once there, you may 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 presentation also includes non-GAAP financial measures as identified in the earnings release and investor presentation. The appropriate reconciliations to GAAP are included in the appendices. Joining me on the call this morning are Orrstown Bank Senior Executive Vice President and Chief Operating Officer, Adam Metz, as well as our Executive Vice President and Chief Financial Officer, Neel Kalani. Our Chief Risk Officer, Bob Coradi, and our Chief Credit Officer, David Chajkowski, will also participate on the call. Our financial highlights for the quarter are summarized on slide three of the deck. Despite some lingering merger-related expenses, GAAP earnings were strong and core earnings continued to increase.
Excluding certain merger-related charges, return on average assets was 1.51%, and return on average equity was 15.12% for the second quarter of 2025, compared to 1.45% and 14.97%, respectively, for the first quarter of 2025. We expect stronger net income going forward as loan growth accelerates. Net interest margin also increased. NIM was 4.07% in the second quarter of 2025, compared to 4% in the first quarter of 2025, with the possibility of further upside. We believe that we are pricing loans prudently and managing funding costs well, which is evidenced by the improving margin. Fee income remained a core strength of the organization during the second quarter.
Fee income as a percentage of operating revenue was 21% during the quarter, an improvement from prior periods. Noninterest income increased $1.3 million quarter to quarter. The team has been doing an excellent job of generating fee income from various sources, led by our wealth management fees, which remained the largest component of our fee income. Now at $3 billion in assets under management, there is significant opportunity to build this business. While expenses remain slightly more elevated than we would like, they are coming down over time, and our core operating expenses are in line with expectations. The team remains focused on establishing a foundation to support future growth.
Excluding the impact of merger-related expenses, the efficiency ratio is 58.7% for the second quarter compared to 60.5% for the first quarter of 2025. We do not anticipate any meaningful merger-related expenses going forward. We do expect expenses to continue to decline throughout the year, which will further boost our already strong earnings stream. We believe that we consistently have demonstrated the ability to maintain strong profitability in any environment. I would now like to turn it over to Adam Metz for a discussion on our balance sheet. Adam?
Adam Metz: Thank you, Tom, and good morning, everybody. Loan growth was relatively modest this quarter, but we believe that the loan pipeline is strong. Total loan growth was 6% for the quarter on an annualized basis. Annualized commercial loan growth was 2%. During the quarter, we saw a good mix of C&I and CRE, and also a good mix between floating and fixed. We believe our overall loan pipeline is strong. Currently, it’s the highest it’s been since the merger of the two companies. This reflects the strength and resilience of our regional economy, the deep engagement of our team with our clients, and the impact of new talent we’ve attracted, including individuals with middle market experience.
As I’ve said before, talent matters, and we feel confident in the team we have in place and continue to build upon. It does remain a competitive lending environment, but we remain confident in our ability to grow loans the right way. And credit quality remains sound. We believe that the work we have done since the merger to protect credit quality has been very beneficial. Net charge-offs were again nominal in the second quarter. Classified loans and nonaccrual loans decreased quarter to quarter. Nonaccrual loans to total loans decreased to 0.57% for the second quarter compared to 0.59% for the first quarter. And we continue to build capital, which will create flexibility for us in the future.
Capital ratios increased across the board quarter to quarter. We remain well-capitalized by all measures. We can continue to prioritize shareholder value. Late in the second quarter, the board of directors authorized a share repurchase program of up to 500,000 shares of common stock. The company repurchased 2,134 common during the quarter. We plan to utilize this authorization judiciously to support our currency as well as we believe we remain undervalued. The board voted to increase our quarterly dividend by 1¢ per share from 26¢ to 27¢ per share. This is the third dividend increase in the past year. And our dividend has increased 35% since the merger.
Neel Kalani, our CFO, will now discuss our second-quarter results in more detail. Neel?
Neel Kalani: Thanks, Adam. Good morning, everyone. We had a very strong second quarter both from a GAAP basis and adjusted for some of the residual merger-related noise. We’ve achieved normalized ROA over 1.5% and expect improvement from there. Already walked through the numbers at a high level, so I’ll just jump into the details starting on slide four. The margin remained very strong and improved to 4.07% in the second quarter. Cost of deposits declined by 12 basis points. This was partially offset by loan yields, declining by seven basis points due to the lower purchase loan accretion than prior quarter. Absent the impact of the loan accretion, loan yields remain relatively flat compared to the previous quarter.
This highlights our continued discipline on both loan and deposit pricing. The environment remains very competitive on both fronts, and the potential for margin pressure is real. But I do see further upside in margin into the third quarter with the expectation that it stabilizes after that point, assuming rates remain unchanged. We do remain asset sensitive. As noted on slide five, fee income was $12.9 million for the second quarter, up by $1.3 million from the prior quarter. But our goal remains to continue to exceed 20%. The team had an excellent quarter from a swap fee generation standpoint with just short of $700,000 in swap fees.
Service charges increased by $200,000 as our treasury management team continues to successfully grow its base. And the broad fee waivers that we’ve discussed previously that we temporarily implemented are no longer in place. Wealth management had another very strong quarter and remains a significant focus for Orrstown to boost our noninterest income going forward. Obviously, there was a rough start to the stock market in the beginning of the quarter that did have some impact quarter to quarter, but we’re very happy with the income generated from that business and the opportunities that lie ahead. The quarter also included some solar tax credit income and other items that are not necessarily consistent from quarter to quarter.
I don’t expect the current fee income run rate to continue in the near term, but it is a longer-term expectation for us. But several components do remain dependent on timing. A quarterly run rate around $12 million is likely reasonable there, but certainly within the range of $11.5 to $12.5 million. Noninterest expense is covered on slide six. We had a little more noise than we expected during the second quarter, but the picture of our efforts on expenses is becoming more evident. Noninterest expense declined by approximately $600,000 in the quarter, and that includes merger-related expenses of almost $1 million and severance costs of approximately $600,000. The efficiency ratio continues to come down as Tom noted.
And I’ve been messaging a go-forward run rate around $35 million each quarter. If you back out the items I just talked about and about $1 million in consulting fees kind of in excess of normal in the quarter associated with the continued process improvement work that we have going, it gets you to that $35 million number. Merger-related expenses this quarter were associated with the final components of core system conversion, and we don’t anticipate any associated costs of significance going forward associated with the merger.
The excess consulting costs are expected to decline over the next couple quarters, so I expect the quarterly expense run rate in the $35 to $36 million range for the next few quarters and early next year, approaching a 55% efficiency ratio inclusive of amortization costs. However, I will continue to reiterate that the primary reason for our success over the years has been our ability to attract strong talent to set us up for growth. So that approach will continue and could potentially impact the expense run rate. Would obviously expect that those decisions, if they do happen, would impact the revenue side of the equation over time as well. Credit quality is covered on slide seven.
We recorded a small provision this quarter primarily from a negligible amount of charge-offs on a net basis. Classified loans decreased by 14%. Nonaccruals were down slightly as well. Our allowance coverage ratio was 1.22%, which we continue to believe adequately addresses the risk in the loan portfolio. Slide eight highlights our key performance metrics as adjusted for merger-related expenses. The second quarter normalized EPS reached $1.04, adjusted ROA was 1.51%, and adjusted ROE was 15.1%. With both the expected impact of our loan pipeline on interest income and the momentum we have on expenses, we do see some upside in those numbers, which puts us near the top of our peer group.
In addition, now that we’re a year out from the merger, we’ve built TCE back over 8%. Moving to the balance sheet slide on slide nine. Total loans grew to $3.93 billion, while commercial loans, as Adam mentioned, grew by 2% annualized. We do have a strong pipeline heading into the third quarter, and we remain prudent in our lending decisions and continued focus on risk and long-term relationships. Average yield on loans was 6.5%. As mentioned earlier, the yield was impacted by the lower purchase accounting accretion, which will vary each quarter based on timing of prepayments of pre-acquired loans.
On slide 10, deposits did decline by $117 million as we continue to shift away from promotional time deposits and money markets. Cost of deposits declined from 2.14% to 2.01% in the quarter due to the impact of pricing decisions in the first quarter and new funding at lower cost. The 87% loan-to-deposit ratio provides us sufficient liquidity to fund our loan pipeline without placing a heavy reliance on alternative funding sources. As I’ve indicated in the past, we’re fairly comfortable in the low 90% range. We feel good about where we are from that standpoint.
And then as communicated previously and shown on slide 11, we used some of our liquidity to enhance the securities portfolio and generate additional interest income as loan production ramps up. Purchased $50 million of securities in the quarter, and the portfolio is now up to $885 million. We’ll continue to look for opportunities as the market creates them to strengthen our balance sheet and create strong yields. The duration remains relatively short at four and a half years, and unrealized losses are still around 3% of the book balance at June 30. On slide 12, you can see that our regulatory capital ratios are now at or above pre-merger levels.
As we’ve said previously, the capital levels and expected growth in the ratios as we move forward present us with many options to continue our growth trajectory. I’d like to now turn the call back over to Adam Metz for some closing remarks.
Adam Metz: Thank you, Neel. 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. Capacity to accelerate commercial lending for strong relationships, considering buybacks as we believe our stock is undervalued, contemplating redemption of sub-debt, and ability to take advantage of other strategic opportunities. We remain optimistic about the future both in the short and long term. We would now like to open the call to questions. Before we get started, the operator will briefly review the instructions with you.
Operator: At this time, I would like to remind everyone in order to ask a question, press star and then the number one on your telephone keypad. We request that your questions be limited to one question and one follow-up. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Gregory Zingone with Piper Sandler.
