FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1996
Commission file number: 33-18888
ORRSTOWN FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Commonwealth of Pennsylvania 23-2530374
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
77 East King Street
P. O. Box 250, Shippensburg, Pennsylvania 17257
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 532-6114
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at July 31, 1996
(Common stock, no par value) 976,863
Page 1 of 14 pages
ORRSTOWN FINANCIAL SERVICES, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
Condensed consolidated balance sheets - June 30, 1996
and December 31, 1995 3
Condensed consolidated statements of income - Three months
ended June 30, 1996 and 1995 4
Condensed consolidated statements of income - Six months
ended June 30, 1996 and 1995 5
Condensed consolidated statements of cash flows - Six months
ended June 30, 1996 and 1995 6
Notes to condensed consolidated financial statements 7 and
8
Management's discussion and analysis of financial condition
and results of operations 9 - 12
PART II - OTHER INFORMATION 13
Signatures 14
Page 2 of 14 pages
PART I - FINANCIAL INFORMATION
PART I - FINANCIAL INFORMATION
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
1996 1995 *
ASSETS (Unaudited)
(000 Omitted)
Cash and due from banks $ 5,934 $
4,330
Interest-bearing deposits with banks 1,631 1,289
Federal funds sold 7,627 2,317
Securities available for sale 27,801
30,694
Federal Home Loan Bank, Federal Reserve and
Atlantic Central Bankers Bank Stock, at cost
which approximates market value 934 869
Loans 106,767
102,857
Allowance for loan losses ( 1,519) (
1,433)
Net loans 105,248
101,424
Bank premises and equipment, net 3,445 3,042
Other assets 2,329
2,033
Total assets $ 154,949 $
145,998
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 16,358 $
13,962
Interest-bearing 119,815
113,368
Total deposits 136,173
127,330
Federal funds purchased and other borrowed money 2,340 2,345
Other liabilities 1,685
1,690
Total liabilities 140,198
131,365
STOCKHOLDERS' EQUITY
Common stock, no par value - $ .2083 stated
value per share at June 30, 1996 and
December 31, 1995 2,000,000 shares authorized
with 976,863 shares issued at June 30, 1996
and December 31, 1995 204 204
Additional paid-in capital 10,625
10,625
Retained earnings 3,972 3,232
Unrealized holding gain (loss), net of tax
$ 26 and $ 295 at June 30, 1996 and
December 31, 1995, respectively ( 50)
572
Total stockholders' equity 14,751
14,633
Total liabilities and stockholders'
equity $ 154,949 $
145,998
* Condensed from audited financial statements
The accompanying notes are an integral part of these condensed financial
statements.
Page 3 of 14 pages
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, 1996 and 1995
(UNAUDITED)
1996 1995
(Unaudited) (Unaudited)
(000 Omitted)
Interest Income
Interest and fees on loans $ 2,403 $
2,255
Interest on federal funds sold 112 27
Interest and dividends on investment securities 452 358
Interest income on deposits with banks 27
21
Total interest income 2,994
2,661
Interest Expense
Interest on deposits 1,249
1,052
Interest on borrowed money 37
37
Total interest expense 1,286
1,089
Net interest income 1,708
1,572
Provision for loan losses 60
30
Net interest income after provision for loan
losses 1,648
1,542
Other Income
Service charges on deposits 106 95
Other service charges 74 53
Other 121
86
Total other income 301
234
Other Expenses
Salaries and employee benefits 675 581
Net occupancy and equipment expense 145 121
Other operating expense 364
380
Total other expense 1,184
1,082
Income before income taxes 765 694
Income tax expense 227
217
Net income $ 538 $
477
Weighted average number of shares outstanding 976,863
976,863
Net income per share $ .55 $
.49
Cash dividends declared per share $ .17 $
.14
The accompanying notes are an integral part of these condensed
financial statements.
Page 4 of 14 pages
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended June 30, 1996 and 1995
(UNAUDITED)
1996 1995
(Unaudited) (Unaudited)
(000 Omitted)
Interest Income
Interest and fees on loans $ 4,769 $
4,310
Interest on federal funds sold 155 32
Interest and dividends on investment
securities 928 718
Interest income on deposits with banks 48
31
Total interest income 5,900
5,091
Interest Expense
Interest on deposits 2,472
1,967
Interest on borrowed money 74
90
Total interest expense 2,546
2,057
Net interest income 3,354
3,034
Provision for loan losses 120
60
Net interest income after provision for
loan losses 3,234
2,974
Other Income
Service charges on deposits 205 183
Other service charges 109 96
Other 243
143
Total other income 557
422
Other Expenses
Salaries and employee benefits 1,275
1,113
Net occupancy and equipment expense 292 265
Other operating expense 718
714
Total other expense 2,285
2,092
Income before income taxes 1,506
1,304
Income tax expense 434
393
Net income $ 1,072 $
911
Weighted average number of shares outstanding 976,803
976,863
Net income per share $ 1.10 $
.93
Cash dividends declared per share $ .34 $
.29
The accompanying notes are an integral part of these condensed financial
statements.
Page 5 of 14 pages
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1996 and 1995
(UNAUDITED)
1996 1995
(Unaudited) (Unaudited)
(000 Omitted)
Cash flows from operating activities:
Net income $ 1,072 $
911
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 125 116
Provision for loan losses 120 60
Other, net 20 (
207)
Net cash provided by operating activities 1,337
880
Cash flows from investing activities:
Net (increase) in interest bearing
deposits with banks ( 342) (
420)
Purchase of investment securities ( 1,576) (
2,943)
Maturities of investment securities 1,130 2,346
Sales of investment securities 2,396 2,273
Purchases of FHLB stock ( 65) (
61)
Net (increase) in loans ( 3,944) (
7,104)
Purchases of bank premises and equipment -
Net ( 528) (
184)
Net cash (used) by investing activities ( 2,929) (
6,093)
Cash flows from financing activities:
Net increase in deposits 8,843
7,043
Cash dividends paid ( 332) (
287)
Cash paid in lieu of fractional dividends 0 (
15)
Payments on debt ( 5) (
649)
Net cash provided by financing activities 8,506
6,092
Net increase in cash and cash equivalents 6,914 879
Cash and cash equivalents, beginning balance 6,647
4,593
Cash and cash equivalents, ending balance $ 13,561 $
5,472
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest $ 2,462 $
1,933
Income taxes 413 330
Supplemental schedule of noncash investing and financing activities:
Unrealized gain (loss) on investments available for
sale (net of deferred taxes of $ 321 and $ 75
at June 30, 1996 and 1995, respectively) ( 622) 146
5% stock dividend issued June 30, 1995 0 1,242
The accompanying notes are an integral part of these condensed
financial statements.
Page 6 of 14 pages
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
Note 1. Basis of Presentation
The financial information presented at and for the three
months ended and six months ended June 30, 1996 and 1995 is
unaudited. Information presented at December 31, 1995 is
condensed from audited year-end financial statements.
However, unaudited information reflects all adjustments
(consisting solely of normal recurring adjustments) that are,
in the opinion of management, necessary for a fair
presentation of the financial position, results of operations
and cash flows for the interim period.
Note 2. Principles of Consolidation
The consolidated financial statements include the accounts of
the corporation and its wholly-owned subsidiary, Orrstown
Bank. All significant intercompany transactions and accounts
have been eliminated.
Note 3. Cash Flows
For purposes of the statements of cash flows, the corporation
has defined cash and cash equivalents as those amounts
included in the balance sheet captions "cash and due from
banks" and "federal funds sold". As permitted by Statement
of Financial Accounting Standards No. 104, the corporation
has elected to present the net increase or decrease in
deposits in banks, loans and time deposits in the statement
of cash flows.
Note 4. Federal Income Taxes
For financial reporting purposes the provision for loan
losses charged to operating expense is based on management's
judgment, whereas for federal income tax purposes, the amount
allowable under present tax law is deducted. Additionally,
certain expenses are charged to operating expense in the
period the liability is incurred for financial reporting
purposes, whereas for federal income tax purposes, these
expenses are deducted when paid. As a result of these timing
differences, deferred income taxes are provided in the
financial statements. Federal income taxes were computed
after reducing pretax accounting income for nontaxable
municipal and loan income.
Note 5. Other Commitments
In the normal course of business, the bank makes various
commitments and incurs certain contingent liabilities which
are not reflected in the accompanying financial statements.
These commitments include various guarantees and commitments
to extend credit and the bank does not anticipate any losses
as a result of these transactions.
Page 7 of 14 pages
Note 6. Changes in Common Stock
Earnings per share of common stock for the period ended
June 30, 1995 were computed based on an average of 976,863
shares after giving retroactive recognition to the 5% stock
dividend, issued July 25, 1995.
Note 7. Investment Securities
Management determines the appropriate classification of
securities at the time of purchase. If management has the
intent and the corporation has the ability at the time of
purchase to hold securities until maturity or on a long-term
basis, they are classified as securities held to maturity and
carried at amortized historical cost. Securities to be held
for indefinite periods of time and not intended to be held to
maturity or on a long-term basis are classified as available
for sale and carried at fair value. Securities held for
indefinite periods of time include securities that management
intends to use as part of its asset and liability management
strategy and that may be sold in response to changes in
interest rates, resultant prepayment risk and other factors
related to interest rate and resultant prepayment risk
changes.
Realized gains and losses on dispositions are based on the
net proceeds and the adjusted book value of the securities
sold, using the specific identification method. Unrealized
gains and losses on investment securities available for sale
are based on the difference between book value and fair value
of each security. These gains and losses are credited or
charged to shareholders' equity, whereas realized gains and
losses flow through the corporation's operations.
Management has classified all investments securities as
"available for sale". At June 30, 1996 amortized cost
exceeded fair market value by $ 76,000. This resulted in a
decrease in stockholders' equity of $ 50,000 after
recognizing the tax effects of the unrealized losses. At
December 31, 1995, fair market value exceeded amortized cost
by $ 867,000 resulting in an increase in stockholders' equity
of $ 572,000 after recognizing the tax effects of the
unrealized gains.
Page 8 of 14 pages
ORRSTOWN FINANCIAL SERVICES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net after tax income for the first six months of 1996 was
$1,072,000 compared to $911,000 for the same period in 1995
representing an increase of $161,000 or 17.8%. Net income on an
adjusted per share basis for the first six months was $ 1.10 up $ .17
from the $ .93 per share realized during the six months ended June 30,
1995.
RESULTS OF OPERATIONS
Second Quarter 1996 vs. Second Quarter 1995
Interest income for the second quarter of 1996 was $ 2,994,000
compared to $ 2,661,000 as of June 30, 1995, for an increase of
$ 333,000. The increase is due primarily to an increase in loan
volumes.
Interest expense for the current quarter was $ 1,286,000, an
increase of $ 197,000 over the $ 1,089,000 for the same period of the
prior year. Interest bearing deposits, which have increased
significantly from June 30, 1995 plus a slight increase in average
rates paid over those paid in 1995 have resulted in higher interest
expense for the second quarter.
Net interest income for the second quarter of 1996 totaled
$ 1,708,000, up $ 136,000 from the second quarter of 1995.
Six Months 1996 vs. Six Months 1995
For the six months ended June 30, 1996, interest income was
$ 5,900,000, an increase of $ 809,000 over the $ 5,091,000 of the six
months ended June 30, 1995. The increase is largely due to an
increase in loan volumes. Gross loans at June 30, 1996 stood at
$ 106,767,000 compared to $ 102,857,000 as of December 31, 1995.
Interest expense for the first six months of 1996 was
$ 2,546,000 compared to $ 2,057,000 for the same period in 1995
representing a 23.8% increase. The corporation realized growth in all
deposit categories through June 30, 1996. However, the most
significant increases occurred in time deposits which have increased
24% over the past twelve months. This trend has resulted in a higher
average cost of funds and a lower net interest margin compared to the
first six months of 1995.
Net interest income for the first half of 1996 totaled
$ 3,354,000, up $ 320,000 from the first half of 1995. Management
continuously monitors liquidity and interest rate risk through its
ALCO reporting and reprices products in order to maintain desired net
interest margins.
Page 9 of 14 pages
OTHER INCOME
Second Quarter 1996 vs. Second Quarter 1995
Noninterest income increased from $ 234,000 in 1995 to
$ 301,000 in 1996. The increase was primarily due to increases in
trust department fees.
Six Months 1996 vs. Six Months 1995
Noninterest income for the first six months of 1996 was
$ 557,000 compared to $ 422,000 in 1995. Service charges and trust
fees were up $ 93,000. This plus an increase of $ 27,000 in net
security gains over 1995 accounts for most of the increase in
noninterest income.
OTHER EXPENSES
Second Quarter 1996 vs. Second Quarter 1995
Other operating expenses totaled $ 1,184,000 as of June 30,
1996, an increase of $ 102,000 over the $ 1,082,000 recorded for
June 30, 1995. Employee related expenses were up 16.2% over the
second quarter 1995, consistent with the prior year. Net occupancy
increased $ 24,000 primarily due to increases in depreciation expense
and equipment maintenance. Other expenses decreased 4.2% over the
prior year.
Six Months 1996 vs. Six Months 1995
Other operating expenses for the first six months of 1996
reflect a $ 193,000 increase over the same period in 1995. Employee
related expenses increased 15% as a result of normal salary increases
and the addition of staff to accommodate branch expansions. Net
occupancy increased $ 27,000 largely due to increases in depreciation
expense and equipment maintenance as corporate facilities are
expanded.
INCOME TAXES
The effective income tax rate for the second quarter 1996
decreased 1.3% compared to the same period for 1995. This is due to an
increase in tax free municipal securities and tax free loan income.
FINANCIAL CONDITION
Total assets at June 30, 1996 were $ 154,949,000 a 6.1%
increase over December 31, 1995. Gross loans at June 30, 1996 totaled
$ 106,767,000, an increase of $ 3,910,000 over the $ 102,857,000 level
at December 31, 1995.
Page 10 of 14 pages
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses and the other changes in the
allowance for loan losses are shown below (in thousands):
Quarter Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
Balance, beginning of
period $ 1,475 $ 1,232 $ 1,433 $
1,200
Recoveries 7 1 11 6
Provision for loan loss
charged to income 60 30 120
60
Total 1,542 1,263 1,564
1,266
Losses 23 2 45
5
Balance, end of period $ 1,519 $ 1,261 $ 1,519 $
1,261
In the opinion of management, the allowance, when taken as a
whole, is adequate to absorb reasonably estimated loan losses inherent
in the Bank's loan portfolio.
Loans 90 days or more past due (still accruing interest) and
those on nonaccrual status were as follows at June 30 (in thousands):
90 Days or More
Past Due Nonaccrual Status
1996 1995 1996 1995
Real estate mortgages $ 39 $ 323 $ 0 $ 22
Installment loans 33 57 32 27
Demand and time loans 0 0 16 0
Credit card 8 26 0
0
Total $ 80 $ 406 $ 48 $ 49
There were no restructured loans for any of the time periods
set forth above.
Total deposits increased to $ 136,173,000 at June 30, 1996
compared to $ 127,330,000 at December 31, 1995. Increases occurred
primarily in time deposits, as interest rates rose slightly during the
first half of 1996.
Total equity at June 30, 1996 was $ 14,751,000 representing
9.5% of total assets. This is a $ 118,000 increase from the company's
capital position at December 31, 1995. This is the result of a
$ 740,000 increase in retain earnings offset by an unrealized loss of
$ 622,000 on securities available for sale at June 30, 1996.
A comparison of Orrstown Financial Services' capital ratios to
regulatory minimum requirements at June 30, 1996 is as follows:
Page 11 of 14 pages
Orrstown Financial Regulatory Minimum
Services Requirements
Leverage ratio 9.6% 4%
Risk based capital ratios:
Tier I (core capital) 13.59% 4%
Combined tier I and tier II
(core capital plus allowance
for loan losses) 14.98% 8%
BALANCE SHEET ANALYSIS
The following table highlights the changes in the balance
sheet. Since period end balances can be distorted by one-day
fluctuations, an analysis of changes in average balances is provided
to give a better indication of balance sheet trends.
AVERAGE BALANCE SHEETS
Six Months Ended June 30
(000 Omitted)
ASSETS 1996 1995
Securities available for sale:
Taxable interest income $ 18,744 $
15,339
Nontaxable interest income 10,263
6,922
Total available for sale
securities 29,007 22,261
Other investments 1,106 1,129
Loans (net of unearned discounts) 103,830 94,512
Other short-term investments 5,875
1,039
Total interest earning assets 139,818 118,941
Allowance for loan losses ( 1,479) (
1,230)
Cash and due from banks 6,216 5,097
Bank premises and equipment 3,222 2,617
Other assets 2,194
1,291
Total assets $ 149,971 $
126,716
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand deposits $ 26,685 $
24,659
Savings deposits 26,433 23,311
Time deposits 63,097 48,590
Short-term borrowings 0 536
Long-term borrowings 2,341
2,346
Total interest bearing
liabilities 118,556 99,442
Demand deposits 14,960 13,075
Other liabilities 1,617
1,265
Total liabilities 135,133 113,782
Stockholders' equity 14,838
12,934
Total liabilities and
stockholders' equity $ 149,971 $
126,716
Page 12 of 14 pages
PART II - OTHER INFORMATION
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
Not applicable
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - None
Page 13 of 14 pages
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
/s/
(Kenneth R. Shoemaker,
President) Duly Authorized
Officer)
Date /s/
(Robert B. Russell,
Controller) (Principal
Financial Officer)
Page 14 of 14 pages