Orrstown Financial Services, Inc.

Good morning. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Orsan Financial Services Inc. First Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question and answer session. If you would like to ask a question during the Q&A session, simply press star followed by the number one on your telephone keypad. And if you would like to withdraw your question, press star one again. I will now turn the call over to Tom Quinn, President and Chief Executive Officer of Orrstown Financial Services, Inc. and Orrstown Bank, who will begin the conference. Mr. Quinn, please go ahead.

Thank you, Operator, and good morning. I'd like to thank everyone for participating in Orrstown's first quarter 2026 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.orstown.com. Once there, you can 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 earnings release and investor presentations also include non-GAAP financial measures. The appropriate reconciliations to GAAP are included in those documents. Joining me on the call this morning are Orrstown Senior Executive Vice President and Chief Operating Officer Adam Metz, as well as Chief Financial Officer Neil Kalani, our Chief Revenue Officer Zach Curry, Chief Risk Officer Bob Karate and Chief Credit Officer Dave Tchaikovsky will also participate on the call. For our financial highlights, Orrstown achieved another successful quarter, delivering strong results across the board. Net income increased to $21.8 million, or $1.12 per diluted share. Return on average equity and return on average assets continued to exceed peer multiples. Fee income of $15.6 million contributed 24.1% of the total operating income. Non-interest expense declined, highlighting our continued commitment to creating efficiencies within the company. Our net interest margin remained near the top of all peers. We started off the year with another profitable quarter and created momentum leading into the rest of the year. I will now turn the call over to Adam Metz, who will speak about our balance sheet. Adam?

Thank you, Tom. Good morning, everyone. Loan growth was steady during the quarter, coming in at 4% on an annualized basis. Loan production was excellent, but overall growth was impacted by unexpected loan prepayments. Growth has occurred across our footprint and our product set, a mix of CNI and CRE. Our pipelines continue to be robust and support our growth targets. On the credit front, we recorded moderate provision expense aligning with the portfolio growth and experienced a reduction in classified loans. We remain prudent in our lending decisions, but we feel that the credit environment remains sound and without significant signs of stress. We are pleased with our meaningful deposit growth during the quarter. Deposits increased by 98.7 million, reflecting increases in interest-bearing demand deposits, non-interest demand deposits, time deposits, and money market deposits. This deposit growth accelerated in the second half of the quarter, which enabled us to reduce borrowings at quarter end. This shift from borrowings to deposits reduced our go forward funding costs, which we expect to become more apparent in the second quarter. Neil will discuss this in more detail during his presentation. Our capital ratios continue to build quickly with our earnings generation, which will create flexibility for us in the future. Capital levels continue to support our growth as well as providing the ability to facilitate other capital allocation opportunities. We maintain a long-term focus on generating earnings and growth to continually build shareholder value. In support of that, the board declared a quarterly dividend of 30 cents per share payable in May. Neil Kalani, our CFO, will now discuss our quarterly results in more detail. Neil? Thanks, Adam.

Good morning, everyone. We started 2026 off strong with net income of $21.8 million, or $1.12 in earnings per diluted share. Return on average assets for the quarter was $159, and return on average equity was 14.76%. As noted on slide four of the earnings deck, the net interest margin was 3.90% in the first quarter, down from 4.00% in the fourth quarter of 25. This was driven by a combination of the impact of the December Fed rate cut on interest income, reduced purchase accounting accretion, and temporarily elevated funding costs. We typically experience seasonal deposit outflows at the beginning of the year. This persisted for longer than in prior years, which drove borrowing balances higher for the first half of the quarter. In the second half of the quarter, deposit balances grew substantially, and we implemented some delayed deposit rate reductions. As a result of actions taken during the quarter, cost of funds was still down from the prior quarter, but not by as much as previously projected. With a full quarter of impact, I expect funding costs will decline further in the second quarter of 26. The previous guidance for net interest margin in the range of 3.90% to 4.00% for 26 remains, with an expectation of the margin increasing from here. Overall, in an extremely competitive environment, we feel good about the first quarter's deposit growth, reduced reliance on borrowings, and where our funding costs are settling in. On slide five, fee income increased to 15.6 million in the first quarter from 14.4 in the fourth quarter. In the first quarter, 2.4 million of life insurance proceeds were recognized. The quarter included wealth management income of 5.6 million, down only slightly from the prior quarter, despite difficult stock market conditions. Swap fees were very strong at 1.3 million in the quarter. While there is expected volatility in some of the components, I expect normalized non-interest income to be in line with previously reported guidance. Now I'll cover non-interest expenses on slide six. Expenses declined by 700,000 this quarter to 36.7 million. Salaries and benefits declined with lower healthcare costs and some year-end incentive adjustments. Professional services came down substantially as we continued to reduce our reliance on third-party support. And I anticipate our expenses will fall into the lower end of the guidance range, unless we choose to make some strategic investments in personnel to drive or support growth. Slide seven discusses credit quality. Provision expense was $728,000 for the quarter, primarily due to loan growth. We had approximately $900,000 of net charge-offs, which was offset by the impact of favorable economic factors in the allowance calculation. Our allowance coverage ratio was 1.17% at March 31st, 26, and we believe it remains adequately aligned with the risk profile of our loan portfolio. Classified loans declined again in the first quarter. Non-recruits increased by 2 million from the prior quarter, primarily due to two relationships. While we experienced some movement into the non-performing category, we also continued to see payoffs and upgrades out of that bucket, resulting from our focus on achieving the best solutions for the bank. Our earnings and performance metrics are on slide eight. All metrics remain strong. TCE has increased to 9.2% despite an increase since December 31st, 25 of 6.8 million in unrealized losses on investment securities due to changes in market rates. Slide nine addresses our loan portfolio. Loans again grew by 4% in the quarter. Loan yields declined during the first quarter due to the impact of lower rates on the variable rate loan portfolio. We did have 211 million of loan production during the first quarter and still have a strong pipeline. As noted on slide 10, deposits grew by 98.7 million or 9% annualized in the first quarter. The loan-to-deposit ratio declined slightly to 88%, leaving us plenty of room to support balance sheet growth. The cost of deposits declined to 1.96% for the first quarter. With the timing of rate reductions in the middle of the first quarter and having 86% of the deposit growth being in demand deposits, we expect deposit costs to come down further. Another positive trend for the quarter was the increase in non-interest bearing deposits of 14 million or 7% annualized. Our sales team remains focused on expanding existing relationships and creating new ones to continue building lower cost deposit balances. The investment portfolio was covered on slide 11. There was a little bit of purchase activity during the quarter in order to keep the portfolio flat. The overall portfolio yield declined during the quarter due to the impact of the December Fed rate cut on floating rate investments. We view the investment portfolio as a reliable source for income generation and will continue to facilitate that by taking advantage of any market opportunities that correspond with our balance sheet strategy. As presented on slide 12, our regulatory capital ratios continue to build at a rapid pace. Capital generation is expected to remain strong going forward based on projected earnings, and we continue to believe we're positioned to take advantage of various capital allocation options. So in summary, we believe the net interest margin has stabilized with the opportunity to grow from here with declining funding costs. Fee income remains a core strength and a differentiator, particularly with wealth management, if the market can maintain or improve from current levels. And expense management remains a key focus for us in order to achieve our financial goals. Thank you for your time this morning, and I'll turn it back to Adam Metz for his closing remarks. Adam.

Thank you, Neil. As Tom and Neil has emphasized, it was another highly successful quarter. Having spent nearly a decade at Orrstown, I've seen firsthand the strength of our franchise, the power of our culture, and the collective commitment to our clients and community. An incredibly talented team with common alignment to our core principles will continue to build upon the foundation already in place, driving prudent growth, deepening client relationships, thoughtfully expanding fee-based businesses, and continuing our unwavering commitment to sound risk management and long-term shareholder value. We would now like to open the call to questions. Before we get started, the operator will briefly review the instructions with you.

Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star and then the number one on your telephone keypad. We will pause for a moment to compile the Q&A roster. Your first question comes from the line of Tim Switzer with KBW. Your line is open.

Hey, good morning, guys. Thank you for taking my question. Morning, Tim. What's up? I appreciate the commentary on kind of the puts and takes on the NEM this quarter. And it sounds like the primary driver here was that seasonal deposit runoff at the beginning was maybe a little bit stronger, lasted longer than normal. Was there anything that surprised you on like the loan or security yield side as well, or is it just primarily the NEM, or sorry, the deposits?

No, there's nothing surprising. It is primarily deposits. As I've indicated in the past, since we are a little bit on the asset-sensitive side, we did expect the yields to drop on loans and investments, so it truly is driven by the deposits. the timing of the deposits. So we are, as I indicated, we do expect to see improvement in both the funding costs and translating into the reduction on the NIM side. On the asset side, the lending team continues to price well to help us maintain and improve the margin from here.

Okay, got it. And are you able to help? You said, you know, an upward trajectory from here. Can you help us quantify that at all? Like maybe what was the spot NIM at the end of Q1 once those deposits came back and you were able to run off some of the higher cost borrowings? And any idea on maybe where we would end the year, say, if we get just a zero rate cut?

So we ended – we ended the quarter a few basis points higher than the average for the quarter um for the reported name for the quarter and expect to to be able to go up a few basis points from there over the over the course of the remainder of the year okay great that that's um very very helpful and then um one last one if i can get it on the deposit side um you know there's been some

chatter about increasing deposit competition, but it's more extreme in some markets than others. Have you guys experienced that? I get you still have some room to move downward, but are you starting to see some deposit competition? Is it more competitive in certain markets or deposit categories than others for you?

Yeah, Tim, I would say, you know, competition remains, it's prevalent, but I would tell you, we challenged the team to reach out to their relationships and drive deposit growth. And the team has absolutely responded to that initiative. And so we were very pleased with the results, and we think that we have a lot of momentum going forward.

Great, very helpful. Thanks for taking my questions.

That concludes the Q&A portion of the presentation. Mr. Crean, I turn the call back over to you for concluding remarks.

Thank you again, Operator, and thank you all for participating today. As always, if we can clarify any of the items discussed on this call or in the earnings release, please contact us. Have a great day.

This concludes the Orson Financial Services, Inc. First Quarter 2026 Earnings Conference Call. You may disconnect your lines at this time.