Orrstown Financial Services (NASDAQ:ORRF) reported third-quarter 2026 net income of $22.8 million, or $1.17 per diluted share, as higher net interest income, loan growth and expense discipline supported improved profitability.
Management said return on average assets rose to 1.60% and return on average equity reached 14.62%. Net interest income increased $4.5 million from the prior quarter to $53.3 million, while the efficiency ratio declined to 56% from an adjusted 58.6% in the second quarter.
Margin Expands as Funding Costs Decline
Net interest margin expanded to 4.12% during the third quarter. Kalani said the figure was 12 basis points above the prior quarter after adjusting the second quarter for a $1.6 million one-time charge tied to the redemption of subordinated debt.
Asset yields increased by 8 basis points during the quarter, while the cost of interest-bearing liabilities declined to 2.40%. The total cost of deposits fell to 1.83%, from 1.88% in the preceding quarter.
Kalani said the company remains asset sensitive and expects asset yields to benefit from the September rate increase and any subsequent rate hikes. Orrstown’s outlook through the end of 2027 calls for net interest margin of 4.05% to 4.15%, based on an assumption of two additional 25-basis-point rate increases over the next year.
The company estimated that every 25-basis-point increase in rates would add approximately $500,000 to net interest income on a ramp basis and about 5 basis points to net interest margin. However, Kalani said deposit beta remains under assessment as the current rate cycle develops, noting that deposit competition has included promotional offers and significant cash incentives from some larger banks.
Loan Growth Reaches Full-Year Goal
Total loans grew by $95.3 million during the third quarter, equivalent to a 9% annualized rate. Growth occurred across commercial, consumer and residential mortgage portfolios. Orrstown produced $166 million in commercial loans during the quarter and said it had reached its full-year loan growth goal of 5% as of Sept. 30.
Management maintained a mid-single-digit loan growth goal going forward, though Kalani said growth could trend toward the lower end of that range depending on interest rates and client demand. He added that core loan growth was 7% during the quarter excluding loan purchases.
Management said a significant share of commercial and industrial loan growth came from the company’s lower-middle-market lending efforts across its footprint. The company plans to continue investing in that area.
Orrstown also purchased approximately $15.5 million of home equity loans during the quarter. Kalani characterized the transaction as opportunistic rather than a core element of the bank’s growth strategy. Management said the portfolio carried yields in the 8% range, had strong borrower credit profiles and a projected average life of about six years.
During the question-and-answer session, management said competition in lending remains generally rational, although it continues to encounter isolated situations involving pricing or credit structures that it chooses not to pursue.
Deposits, Funding and Fee Revenue
Deposits remained up $53 million year to date, despite seasonal pressure and net outflows during the third quarter. The loan-to-deposit ratio rose to 92% at quarter-end as Orrstown used borrowings to fund loan growth. The company reported $1.7 billion in available alternative funding sources.
Kalani said Orrstown expects some near-term reliance on time deposits, money market accounts and wholesale funding, but management remains focused on expanding core deposits and improving deposit mix. Noninterest-bearing deposits increased approximately $40 million year over year, according to management.
Noninterest income declined to $13.4 million from $13.8 million in the second quarter. Wealth management income increased to $6 million from $5.9 million, marking the second consecutive quarter of record revenue for Orrstown Financial Advisors. Swap fees declined modestly because of timing, while mortgage income fell primarily because of mark-to-market adjustments on the held-for-sale portfolio and pipeline.
Fee income represented 20% of total revenue during the quarter. The company guided to annualized fee income of $54 million to $56 million into 2027.
Credit Metrics Improve, Though Investment Losses Weigh on Tangible Equity
Provision expense totaled $1.1 million in the third quarter, including $1 million of net charge-offs. Orrstown’s allowance coverage ratio was 1.11% at Sept. 30. Classified loans declined by $4 million from the second quarter, while nonaccrual loans decreased by $900,000.
Chief Financial Officer Kalani said the company has not identified signs of stress among commercial or consumer borrowers from higher interest rates. Management said it had stress-tested the full commercial and industrial portfolio and conducted a repricing analysis of fixed-rate loans scheduled to reset over the next 12 months, with results remaining within its tolerance ranges.
Noninterest expense declined $400,000 from the second quarter to $37.3 million. Orrstown expects an annualized expense run rate of $153 million to $157 million through 2027, including normal inflation, new hires and technology investments intended to support sales teams and revenue growth.
The tangible common equity ratio declined to 9.1% at Sept. 30 from 9.5% at June 30, while tangible book value per share also fell. Kalani attributed the declines to a $41.6 million increase in unrealized losses in the investment portfolio as market rates increased and credit spreads widened. The investment portfolio’s yield was 4.54%.
Management said its near-term focus remains internal growth, while retaining flexibility for capital allocation through dividends, share repurchases, team lift-outs, branch optimization or potential merger opportunities that meet its financial, cultural and geographic criteria.
About Orrstown Financial Services (NASDAQ:ORRF)
Orrstown Financial Services, Inc is a bank holding company headquartered in Shippensburg, Pennsylvania. Through its principal subsidiary, Orrstown Bank, the company provides banking and financial services to individuals, families, businesses, and institutions.
Orrstown Bank offers deposit accounts, consumer and commercial lending, mortgage banking, cash-management and treasury services, online and mobile banking, and wealth-management services. Its lending activities include residential mortgages, home-equity loans, consumer loans, commercial real estate financing, and loans to small and middle-market businesses.
Orrstown Financial Services traces its history to the founding of Orrstown Bank in 1919.
