Gregory Zingone

Gregory Zingone from Piper Sandler inquired about the total Assets Under Management (AUM) or Assets Under Administration (AUA) at quarter-end and the success in migrating Codorus Valley customers to Orrstown's wealth management platform. He also asked about the company's focus areas for hiring and investment in the coming year (lending, wealth, technology, or back-office) and the priority of M&A for capital deployment given the strong capital build.

Answer

Adam Metz, COO, stated that total AUM was slightly over $3 billion and reported strong client retention from Codorus Valley, with no significant decline in wealth or depository portfolios. He highlighted strategic focus areas for investment, including building out the middle-market commercial lending platform (which has shown significant results), expanding wealth management in growth markets like Maryland, Lancaster, and Harrisburg, and investing in technology, specifically a state-of-the-art CRM platform. Regarding M&A, Mr. Metz emphasized a focus on organic growth and enhancing existing business lines, noting that while capital build offers optionality, the company is selective about partners, having completed only three M&A deals in 106 years.

Gregory Zingone from Piper Sandler asked for the quarter-end AUM/AUA for wealth management, the success in retaining Codorus Valley customers on the wealth platform, the company's focus areas for new hires (lending, wealth, technology), and the priority of M&A for capital deployment.

Answer

COO Adam Metz stated that total AUM was a little over $3 billion. He noted no significant decline in the Codorus Valley portfolio, either from wealth or depository/commercial sides, indicating good client stickiness despite proactive commercial loan portfolio adjustments in Q4 2024 and Q1 2025. Regarding hiring, he highlighted the successful build-out of a middle-market commercial lending platform in mid-2025, additional opportunities in wealth management in growth markets (Maryland, Lancaster, Harrisburg) with Matt Alpert's recruitment experience, and ongoing investments in technology like a state-of-the-art CRM platform. For M&A, Mr. Metz emphasized a strong focus on organic growth, noting that while capital build offers optionality, the company has historically been very selective with acquisitions.

Gregory Zingone asked for the spot Net Interest Margin (NIM) for September. He also sought detailed color on the largest classified credits, including their composition (e.g., CRE, auto dealer, C&I), the total dollar figure for the top one or two credits, and the number of credits making up that balance. Additionally, Zingone inquired about any updates on these classified balances since quarter-end and the lending focus for the projected 5% loan growth next year.

Answer

Bob Coradi, Chief Risk Officer, stated the spot NIM for September was in the low 4s. He specified that the largest classified credits include some CRE, an auto dealer, and various C&I credits, with the top two or three totaling about $20 million. Coradi provided an update, noting a $1.3 million owner-occupied credit moved to non-accrual in Q3 subsequently received a paydown of nearly $900,000, demonstrating conservative decision-making. He also highlighted that approximately 50% of non-accrual balances are current on P&I payments. For next year's loan growth, Coradi mentioned capacity in CRE, and a focus on the middle market C&I segment, leveraging recent talent hires.

Gregory Zingone of Piper Sandler Companies inquired about remaining credit clean-up from the Codorus Valley deal and the specific capital level Orrstown Financial Services aims to reach before considering another acquisition.

Answer

An executive noted that while some minor loan sales from the Codorus portfolio might occur, no substantial sales are planned due to successful workout resolutions. Regarding M&A, EVP & CFO Neelesh Kalani stated that the bank's capital levels are already at a point where they feel comfortable pursuing a transaction without needing outside capital, noting they have reached pre-merger levels and will continue to build from there.

Gregory Zingone asked for the bank's Commercial Real Estate (CRE) concentration level at quarter-end and its internal target for this metric. He also inquired about the significant increase in cash balances and the strategy for its deployment.

Answer

Chief Credit Officer David Chajkowski reported the CRE to risk-based capital ratio was 302%, below the internal tolerance of 350%, providing room for growth. EVP & CFO Neelesh Kalani explained the cash build-up resulted from loan payoffs and that these funds are being reallocated to investments and will be used to fund the strong future loan pipeline, which should benefit the net interest margin.

Gregory Zingone from Piper Sandler inquired about specific details regarding a single CRE multifamily relationship, including debt service coverage, LTV, size, and geography. He also sought further clarification on the $5.2 million provision related to the CECL model and the bank's policy on insider stock sales before earnings releases.

Answer

Mark DeFazio, President and CEO, explained that the properties are vacant buildings in Champaign, Illinois, and a city in Ohio, intended for renovation and stabilization. He noted an ongoing restructuring with the client and expressed optimism for a reversal of a material part of the specific reserve in Q4 or Q1 2026. Daniel Dougherty, EVP and CFO, clarified that the $5.2 million provision was primarily due to adverse macroeconomic variable forecasts from Moody's, particularly a negative outlook on the CRE price index, with the remainder attributed to loan growth. Regarding insider selling, Mark DeFazio stated that officers operate under 10b5-1 agreements and adhere to blackout periods. Daniel Dougherty added that a shift in the reporting date due to the digital project's dress rehearsal caused the trade date to precede the earnings release, but all trades were compliant with 10b5-1 plans and SEC blackout requirements.

Gregory Zingone of Piper Sandler, stepping in for Mark Fitzgibbon, sought confirmation of the March spot net interest margin. He also asked about strategies for retaining key employees ahead of the merger of equals, plans to align product offerings with Brookline Bancorp before the close, and any target TCE ratio or CRE concentration levels the bank is managing towards.

Answer

CFO Brett Brbovic confirmed the March spot NIM was 3.31%. COO Sean Gray addressed retention, stating that key producers have been identified and that both banks have discussed meaningful retention grants. CEO Nitin Mhatre noted that instead of launching new products, the focus is on enhancing digital capabilities, like a new direct deposit API. Mhatre also stated the bank aims to keep CRE concentration below 300%, while Brbovic added that the TCE ratio is expected to remain stable leading up to the merger.

Gregory Zingone of Piper Sandler inquired about the spot net interest margin for March, employee retention strategies ahead of the merger, plans for aligning deposit products, and target levels for the TCE ratio and CRE concentration.

Answer

CFO Brett Brbovic confirmed the March spot NIM was 3.31%. COO Sean Gray stated that key producers have been identified and offered retention packages. CEO Nitin Mhatre noted a focus on enhancing digital deposit functionality rather than launching new products, and said the CRE concentration target remains below 300%. Brett Brbovic added that the TCE ratio should remain stable until the merger.

Gregory Zingone of Piper Sandler inquired about the specifics of Eastern's $1.2 billion investment portfolio repositioning, asking for the average rate and duration of securities being sold and purchased, and confirming the calculated 5.7-year earn-back period. He also requested details on two legacy Eastern investor office loans that were moved to nonaccrual, including their size, occupancy, and reserve levels.

Answer

CFO R. Rosato explained that the securities being sold had an average yield in the mid-1.80% range, while the new securities being purchased have an average yield around 4.75%. He confirmed the longer earn-back period is due to the homogeneous nature of the portfolio, which was established when rates were low following the company's IPO. Regarding the office loans, Rosato stated they were legacy loans that had been identified and fully reserved for, declining to provide further specific details.