Orrstown Financial Services(ORRF) - 2025 Q2 - Quarterly Results

Second Quarter 2025 Financial Highlights Overview of Q2 2025 Performance Orrstown Financial Services reported strong Q2 2025 results with increased net income, improved net interest margin, and balance sheet growth Q2 2025 Financial Performance | Metric | Q2 2025 | Q1 2025 | Q2 2024 | | :--- | :--- | :--- | :--- | | Net Income | $19.4 million | $18.1 million | $7.7 million | | Diluted EPS | $1.01 | $0.93 | $0.73 | | Adjusted Net Income (Non-GAAP) | $20.2 million | $19.3 million | $8.7 million | | Adjusted Diluted EPS (Non-GAAP) | $1.04 | $1.00 | $0.83 | - Net interest margin (tax-equivalent) expanded to 4.07% in Q2 2025 from 4.00% in Q1 2025, positively impacted by 50 basis points from purchase accounting accretion[3] - Loans grew by $55.4 million (6% annualized) from the previous quarter, while classified loans decreased by $10.4 million, indicating improved credit quality[3] - The Board of Directors increased the quarterly cash dividend by $0.01 to $0.27 per share and authorized a new share repurchase program for up to 500,000 shares[3] Management Commentary Management expressed satisfaction with post-merger performance, highlighting strong loan pipeline, improved margin, and efficiency focus - Management is pleased with achieving metrics near the top of peers one year after the merger with Codorus Valley Bancorp[4] - The commercial loan pipeline remains strong for Q3, despite lower-than-expected growth in Q2, with a continued focus on maintaining credit quality[4] - Meaningful merger-related expenses are not anticipated in the future, and the company is implementing process improvements to boost efficiency and support growth[4] Discussion of Results Balance Sheet Analysis The balance sheet showed loan and investment growth funded by decreased deposits and increased FHLB borrowings Loans - Loans held for investment increased by $55.4 million to $3.9 billion at June 30, 2025. The growth was driven by a $37.9 million increase in residential mortgages and a $16.1 million increase in commercial loans. This included a $25.4 million purchase of property assessed clean energy (PACE) loans[5] Investment Securities - Investment securities increased by $29.9 million to $885.4 million at June 30, 2025. The bank purchased $50.1 million in securities, offset by $20.4 million in paydowns. The portfolio's duration slightly increased from 4.3 to 4.5 years[6] Deposits - Total deposits decreased by $117.1 million to $4.5 billion, primarily due to a $58.0 million decline in time deposits and a $35.8 million drop in money market deposits from the run-off of higher-yielding promotional balances. This caused the loan-to-deposit ratio to increase from 84% to 87%[7] Borrowings - FHLB advances and other borrowings increased by $36.0 million to $136.3 million. This was due to higher utilization of overnight borrowings to compensate for the decline in deposit balances and fund lending and investing activities. The Bank maintained approximately $1.7 billion in available alternative funding sources[8] Income Statement Analysis Q2 2025 income statement shows improved profitability with increased net interest income, expanded margin, and controlled expenses Net Interest Income and Margin Net Interest Income and Margin | Metric | Q2 2025 | Q1 2025 | | :--- | :--- | :--- | | Net Interest Income | $49.5 million | $48.8 million | | Net Interest Margin (Tax-Equivalent) | 4.07% | 4.00% | - The increase in NIM was primarily driven by a 12 basis point decline in the cost of funds, which was partially offset by a 7 basis point decrease in the yield on loans[9] - The net accretion impact of purchase accounting marks positively contributed $5.2 million to NII in Q2 2025, down from $6.9 million in Q1 2025 due to lower accelerated accretion[10] Provision for Credit Losses on Loans Provision for Credit Losses on Loans | Metric | Q2 2025 | Q1 2025 | | :--- | :--- | :--- | | Provision Expense | $0.2 million | ($0.6 million) recovery | | Net Charge-offs | $0.1 million | $0.3 million | | ACL to Total Loans | 1.22% | 1.23% | - Credit quality improved as classified loans decreased by $10.4 million to $65.8 million, and non-accrual loans to total loans fell to 0.57% from 0.59%[15] Noninterest Income - Noninterest income increased by $1.3 million to $12.9 million in Q2 2025. Key contributors to the increase were swap fee income (up $0.3 million), income from service charges (up $0.2 million), mortgage banking activities (up $0.2 million), and other income (up $0.7 million)[16][17][18] Noninterest Expenses - Noninterest expenses decreased by $0.6 million to $37.6 million in Q2 2025. This was primarily due to a $0.6 million reduction in merger-related expenses, which are not expected to be meaningful going forward. The decrease was partially offset by a $1.0 million increase in salaries and benefits, which included $0.6 million in severance costs[19][20][21] Income Taxes - The effective tax rate was 21.3% for Q2 2025, compared to 20.7% for Q1 2025. The rate is higher than the 21% federal statutory rate mainly due to the disallowed portion of interest expense related to tax-exempt investments[25] Capital Position The company's capital position strengthened in Q2 2025, with increased shareholders' equity and improved regulatory ratios - Shareholders' equity increased by $15.5 million to $548.4 million at June 30, 2025, primarily due to $19.4 million in net income, partially offset by $5.1 million in dividend payments[26] Capital Metrics | Capital Metric | June 30, 2025 | March 31, 2025 | | :--- | :--- | :--- | | Tangible Book Value per Share | $22.77 | $21.99 | | Tangible Common Equity Ratio | 8.3% | 7.9% | | Tier 1 Leverage Ratio | 9.0% | 8.6% | | Tier 1 Common Equity Capital Ratio | 10.9% | 10.6% | | Total Risk-Based Capital Ratio | 13.3% | 13.1% | - All four capital ratios applicable to the Company were above regulatory minimum levels to be deemed 'well capitalized' under current bank regulatory guidelines[28] - On June 20, 2025, the Board of Directors authorized a share repurchase program for up to 500,000 shares of its common stock[29] Financial Tables Financial Highlights This section summarizes key financial results, ratios, balance sheet data, and credit quality for Q2 2025 and prior periods Consolidated Balance Sheets This table presents the unaudited consolidated balance sheets, detailing assets, liabilities, and equity as of June 30, 2025 Condensed Consolidated Statements of Income This section provides unaudited consolidated income statements, detailing income, expenses, and per-share data for Q2 2025 Analysis of Net Interest Income These tables analyze net interest income on a taxable-equivalent basis, detailing average balances, interest, and yields/rates Historical Trends in Quarterly Financial Data This section presents five-quarter trends of key financial data, including profitability, ratios, balance sheet, and credit quality Appendices Appendix A: Non-GAAP Reconciliations This appendix reconciles non-GAAP financial measures to GAAP, explaining adjustments for non-recurring items like merger expenses - Management provides non-GAAP measures to help investors understand the financial results without the effect of non-recurring charges, such as merger-related expenses[48] - The company incurred merger-related expenses of $1.0 million in Q2 2025 and $1.6 million in Q1 2025, which are adjusted for in the non-GAAP calculations[49] - The document provides detailed tables to reconcile GAAP measures like Shareholders' Equity, Net Income, and Efficiency Ratio to their non-GAAP counterparts (Tangible Common Equity, Adjusted Net Income, Adjusted Efficiency Ratio)[51][53][54] Appendix B: Investment Portfolio Concentrations This appendix details the high credit quality and composition of the $885.2 million investment portfolio as of June 30, 2025 Investment Portfolio Mix | Portfolio Mix | % of Total | Key Collateral/Guarantee | | :--- | :--- | :--- | | Agency CMO | 38% | U.S. government agencies | | Agency MBS | 22% | U.S. government agencies | | Municipal - Revenue | 13% | N/A | | Municipal - General Obligation | 11% | N/A | | Federal Family Education Loan ABS | 8% | 97% guaranteed by U.S. government | - The investment portfolio demonstrates high credit quality, with 85% of its rated holdings rated AA and 4% rated AAA. The majority of the portfolio is guaranteed by the U.S. government or its agencies[55] Company Information and Forward-Looking Statements About the Company Orrstown Financial Services, Inc. is a $5.4 billion financial holding company offering diverse services across PA and MD - The company has $5.4 billion in assets and operates through its subsidiary, Orrstown Bank[56] - Primary service areas include Berks, Cumberland, Dauphin, Franklin, Lancaster, Perry, and York Counties in Pennsylvania, and Anne Arundel, Baltimore, Harford, Howard, and Washington Counties in Maryland[56] Cautionary Note Regarding Forward-Looking Statements This note warns that forward-looking statements are subject to risks and uncertainties, and actual results may differ materially - Forward-looking statements are subject to risks and uncertainties and are not guarantees of future performance[57] - Key risk factors include interest rate volatility, general economic conditions, competition, credit quality changes, and the possibility that anticipated merger benefits are not realized[57] - The company disclaims any obligation to publicly update forward-looking statements[58]