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, 1997 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, 1997
(Common stock, no par value) 1,025,101
Page 1 of 14 pages
ORRSTOWN FINANCIAL SERVICES, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
Condensed consolidated balance sheets - June 30, 1997
and December 31, 1996 3
Condensed consolidated statements of income - Three months
ended June 30, 1997 and 1996 4
Condensed consolidated statements of income - Six months
ended June 30, 1997 and 1996 5
Condensed consolidated statements of cash flows - Six months
ended June 30, 1997 and 1996 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,
1997 1996 *
ASSETS (Unaudited)
(000 Omitted)
Cash and due from banks $ 6,868 $ 5,236
Interest-bearing deposits with banks 73 1,554
Federal funds sold 2,340 2,936
Securities available for sale 40,221 33,421
Federal Home Loan Bank, Federal Reserve and
Atlantic Central Bankers Bank Stock, at cost
which approximates market value 983 934
Loans 117,986 108,926
Allowance for loan losses ( 1,684) ( 1,620)
Net loans 116,302 107,306
Bank premises and equipment, net 4,369 3,916
Other assets 2,557 2,253
Total assets $ 173,713 $ 157,556
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 18,569 $ 16,322
Interest-bearing 130,685 120,937
Total deposits 149,254 137,259
Federal funds purchased and other borrowed money 5,334 2,339
Other liabilities 2,315 2,102
Total liabilities 156,903 141,700
STOCKHOLDERS' EQUITY
Common stock, no par value - $ .2083 stated
value per share at June 30, 1997 and
December 31, 1996 2,000,000 shares authorized
with 1,025,101 shares issued at June 30, 1997
and 976,863 issued at December 31, 1996 214 204
Additional paid-in capital 12,351 10,625
Retained earnings 3,926 4,786
Unrealized holding gain (loss), net of tax
$ 164 and $ 124 at June 30, 1997 and
December 31, 1996, respectively 319 241
Total stockholders' equity 16,810 15,856
Total liabilities and stockholders'
equity $ 173,713 $ 157,556
* 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, 1997 and 1996
(UNAUDITED)
1997 1996
(Unaudited) (Unaudited)
(000 Omitted)
Interest Income
Interest and fees on loans $ 2,624 $ 2,403
Interest on federal funds sold 74 112
Interest and dividends on investment securities 616 452
Interest income on deposits with banks 2 27
Total interest income 3,316 2,994
Interest Expense
Interest on deposits 1,339 1,249
Interest on borrowed money 79 37
Total interest expense 1,418 1,286
Net interest income 1,898 1,708
Provision for loan losses 45 60
Net interest income after provision for loan
losses 1,853 1,648
Other Income
Service charges on deposits 151 106
Other service charges 86 74
Other 153 121
Total other income 390 301
Other Expenses
Salaries and employee benefits 697 675
Net occupancy and equipment expense 175 145
Other operating expense 382 364
Total other expense 1,254 1,184
Income before income taxes 989 765
Income tax expense 270 227
Net income $ 719 $ 538
Weighted average number of shares outstanding 1,025,548 1,025,906
Net income per share $ .70 $ .52
Cash dividends declared per share $ .19 $ .16
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, 1997 and 1996
(UNAUDITED)
1997 1996
(Unaudited) (Unaudited)
(000 Omitted)
Interest Income
Interest and fees on loans $ 5,115 $ 4,769
Interest on federal funds sold 119 155
Interest and dividends on investment
securities 1,181 928
Interest income on deposits with banks 4 48
Total interest income 6,419 5,900
Interest Expense
Interest on deposits 2,599 2,472
Interest on borrowed money 119 74
Total interest expense 2,718 2,546
Net interest income 3,701 3,354
Provision for loan losses 90 120
Net interest income after provision for
loan losses 3,611 3,234
Other Income
Service charges on deposits 294 205
Other service charges 144 109
Other 292 243
Total other income 730 557
Other Expenses
Salaries and employee benefits 1,396 1,275
Net occupancy and equipment expense 353 292
Other operating expense 812 718
Total other expense 2,561 2,285
Income before income taxes 1,780 1,506
Income tax expense 502 434
Net income $ 1,278 $ 1,072
Weighted average number of shares outstanding 1,025,548 1,025,706
Net income per share $ 1.25 $ 1.04
Cash dividends declared per share $ .37 $ .32
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, 1997 and 1996
(UNAUDITED)
1997 1996
(Unaudited) (Unaudited)
(000 Omitted)
Cash flows from operating activities:
Net income $ 1,278 $ 1,072
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 144 125
Provision for loan losses 90 120
Other, net ( 131) 20
Net cash provided by operating activities 1,381 1,337
Cash flows from investing activities:
Net (increase) decrease in interest bearing
deposits with banks 1,481 ( 342)
Purchase of investment securities ( 8,740) ( 1,576)
Maturities of investment securities 2,046 1,130
Sales of investment securities 12 2,396
Purchases of FHLB stock ( 49) ( 65)
Net (increase) in loans ( 9,086) ( 3,944)
Purchases of bank premises and equipment -
Net ( 597) ( 528)
Net cash (used) by investing activities ( 14,933) ( 2,929)
Cash flows from financing activities:
Net increase in deposits 11,995 8,843
Cash dividends paid ( 381) ( 332)
Cash paid in lieu of fractional dividends ( 21) 0
Proceeds from long-term debt 3,000 0
Payments on debt ( 5) ( 5)
Net cash provided by financing activities 14,588 8,506
Net increase in cash and cash equivalents 1,036 6,914
Cash and cash equivalents, beginning balance 8,172 6,647
Cash and cash equivalents, ending balance $ 9,208 $ 13,561
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest $ 2,414 $ 2,462
Income taxes 452 413
Supplemental schedule of noncash investing and financing activities:
Unrealized gain (loss) on investments available for
sale (net of deferred taxes of $ 40 and $ 321
at June 30, 1997 and 1996, respectively) 78 ( 622)
5% stock dividend issued May, 1997 1,736 0
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, 1997
(UNAUDITED)
Note 1. Basis of Presentation
The financial information presented at and for the three
months ended and six months ended June 30, 1997 and 1996 is
unaudited. Information presented at December 31, 1996 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, 1996 were computed based on an average of 989,389
shares after giving retroactive recognition to the 5% stock
dividend, issued in May, 1997.
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, 1997 fair value exceeded
amortized cost by $ 483,000. This resulted in an increase in
stockholders' equity of $ 319,000 after recognizing the tax
effects of the unrealized gains. At December 31, 1996, fair
market value exceeded amortized cost by $ 365,000 resulting
in an increase in stockholders' equity of $ 241,000 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 1997 was
$ 1,278,000 compared to $ 1,072,000 for the same period in 1996
representing an increase of $ 206,000 or 19.2%. Net income on an
adjusted per share basis for the first six months was $ 1.29 up $ .21
from the $ 1.08 per share realized during the six months ended
June 30, 1996.
RESULTS OF OPERATIONS
Second Quarter 1997 vs. Second Quarter 1996
Interest income for the second quarter of 1996 was $ 3,316,000
compared to $ 2,994,000 as of June 30, 1996, for an increase of
$ 322,000. The increase is due primarily to an increase in loan
volumes.
Interest expense for the current quarter was $ 1,418,000, an
increase of $ 132,000 over the $ 1,286,000 for the same period of the
prior year. Deposit volumes continued to increase during the second
quarter with the growth being concentrated in interest bearing
transaction accounts. Average rates have decreased over those paid in
the second quarter of 1996.
Net interest income for the second quarter of 1997 totaled
$ 1,898,000, up $ 190,000 from the second quarter of 1996.
Six Months 1997 vs. Six Months 1996
For the six months ended June 30, 1997, interest income was
$ 6,419,000, an increase of $ 519,000 over the $ 5,900,000 of the six
months ended June 30, 1996. The increase is largely due to an
increase in loan volumes. Gross loans at June 30, 1997 stood at
$ 116,302,000 compared to $ 106,767,000 as of June 30, 1996.
Interest expense for the first six months of 1997 was
$ 2,718,000 compared to $ 2,546,000 for the same period in 1996
representing a 6.7% increase. The corporation realized growth in all
deposit categories through June 30, 1997. However, the most
significant increases occurred in noninterest bearing demand deposit
accounts, and interest bearing transaction accounts. Average rates
paid have decreased slightly compared to those paid in the second
quarter of 1996 resulting in a smaller increase in interest cost than
was experienced as of June 30, 1996.
Net interest income for the first half of 1997 totaled
$ 3,701,000, up $ 347,000 from the first half of 1996. 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 1997 vs. Second Quarter 1996
Noninterest income increased from $ 301,000 in 1996 to
$ 390,000 in 1997. The increase was primarily due to increases in
trust department fees and service charges on deposit accounts.
Six Months 1997 vs. Six Months 1996
Noninterest income for the first six months of 1997 was
$ 730,000 compared to $ 557,000 in 1996. Increases occurred in trust
fees and in service charges on deposits as the volume of transaction
accounts continues to grow.
OTHER EXPENSES
Second Quarter 1997 vs. Second Quarter 1996
Other operating expenses totaled $ 1,254,000 as of June 30,
1997, an increase of $ 70,000 over the $ 1,184,000 recorded for
June 30, 1996. Employee related expenses were up 3.2% over the second
quarter 1996. Net occupancy increased $ 30,000 primarily due to
increases in depreciation expense and equipment maintenance as the
result of new branch expansions. Other expenses increased 4.9% over
the prior year.
Six Months 1997 vs. Six Months 1996
Other operating expenses for the first six months of 1997
reflect a $ 276,000 increase over the same period in 1996. Employee
related expenses increased 9.5% as a result of normal salary increases
and the addition of staff to accommodate branch expansions. Net
occupancy increased $ 61,000 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 1997 was
28.2% compared to 28.8% for the same period for 1996.
FINANCIAL CONDITION
Total assets at June 30, 1997 were $ 173,713 a 10.2% increase
over December 31, 1996. Gross loans at June 30, 1997 totaled
$ 117,986,000, an increase of $ 9,060,000 over the $ 108,926,000 level
at December 31, 1996.
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
1997 1996 1997 1996
Balance, beginning of
period $ 1,657 $ 1,475 $ 1,620 $ 1,433
Recoveries 1 7 1 11
Provision for loan loss
charged to income 45 60 90 120
Total 1,703 1,542 1,711 1,564
Losses 19 23 27 45
Balance, end of period $ 1,684 $ 1,519 $ 1,684 $ 1,519
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
1997 1996 1997 1996
Real estate mortgages $ 15 $ 39 $ 0 $ 0
Installment loans 94 33 16 32
Demand and time loans 567 0 0 16
Credit card 20 8 0 0
Total $ 696 $ 80 $ 16 $ 48
There were no restructured loans for any of the time periods
set forth above.
Total deposits increased to $ 149,254,000 at June 30, 1997
compared to $ 137,259,000 at December 31, 1996. Increases occurred
primarily in noninterest bearing demand deposits and interest bearing
transaction accounts.
Total equity at June 30, 1997 was $ 16,810,000 representing
9.7% of total assets. This is a $ 954,000 increase from the company's
capital position at December 31, 1996.
A comparison of Orrstown Financial Services' capital ratios to
regulatory minimum requirements at June 30, 1997 is as follows:
Page 11 of 14 pages
Orrstown Financial Regulatory Minimum
Services Requirements
Leverage ratio 9.7% 4%
Risk based capital ratios:
Tier I (core capital) 12.93% 4%
Combined tier I and tier II
(core capital plus allowance
for loan losses) 14.29% 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 1997 1996
Securities available for sale:
Taxable securities $ 21,699 $ 18,744
Nontaxable securities 14,534 10,263
Total available for sale
securities 36,233 29,007
Other investments 1,378 1,106
Loans (net of unearned discounts) 112,580 103,830
Other short-term investments 4,470 5,875
Total interest earning assets 154,661 139,818
Allowance for loan losses ( 1,661) ( 1,479)
Cash and due from banks 4,668 6,216
Bank premises and equipment 4,100 3,222
Other assets 2,546 2,194
Total assets $ 164,314 $ 149,971
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand deposits $ 32,251 $ 26,685
Savings deposits 25,931 26,433
Time deposits 67,026 63,097
Long-term borrowings 3,964 2,341
Total interest bearing
liabilities 129,172 118,556
Demand deposits 17,065 14,960
Other liabilities 1,946 1,617
Total liabilities 148,183 135,133
Stockholders' equity 16,131 14,838
Total liabilities and
stockholders' equity $ 164,314 $ 149,971
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) (Chief Accounting
Officer)
Page 14 of 14 pages