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 March 31, 1998 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 April 30, 1998
(Common stock, no par value) 1,025,094
Page 1 of 14 pages
ORRSTOWN FINANCIAL SERVICES, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
Condensed consolidated balance sheets - March 31, 1998
and December 31, 1997 3
Condensed consolidated statements of income - Three months
ended March 31, 1998 and 1997 4
Condensed consolidated statements of comprehensive income -
Three months ended March 31, 1998 and 1997 5
Condensed consolidated statements of cash flows - Three months
ended March 31, 1998 and 1997 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)
March 31, December 31,
1998 1997 *
ASSETS (Unaudited)
(000 Omitted)
Cash and due from banks $ 6,702 $ 5,963
Interest-bearing deposits with banks 128 16
Federal funds sold 7,998 2,858
Securities available for sale 49,242 46,208
Federal Home Loan Bank, Federal Reserve and
Atlantic Central Bankers Bank Stock, at cost
which approximates market value 983 983
Loans 133,202 128,331
Allowance for loan losses ( 1,846) ( 1,767)
Net loans 131,356 126,564
Bank premises and equipment, net 5,070 5,130
Other assets 2,678 2,520
Total assets $ 204,157 $ 190,242
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 20,459 $ 17,649
Interest-bearing 150,308 142,931
Total deposits 170,767 160,580
Federal funds purchased and other borrowed money 11,886 8,569
Other liabilities 3,022 2,828
Total liabilities 185,675 171,977
STOCKHOLDERS' EQUITY
Common stock, no par value - $ .2083 stated
value per share at September 30, 1997 and
December 31, 1996 2,000,000 shares authorized
with 1,025,094 shares issued at March 31, 1998
and December 31, 1997 214 214
Additional paid-in capital 12,352 12,352
Retained earnings 5,136 4,730
Unrealized holding gain, net of tax
$ 402 and $ 499 at March 31, 1998 and
December 31, 1997, respectively 780 969
Total stockholders' equity 18,482 18,265
Total liabilities and stockholders'
equity $ 204,157 $ 190,242
* 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 March 31, 1998 and 1997
(UNAUDITED)
1998 1997
(Unaudited) (Unaudited)
(000 Omitted)
Interest Income
Interest and fees on loans $ 2,905 $ 2,485
Interest on federal funds sold 90 45
Interest and dividends on investment securities 735 565
Interest income on deposits with banks 1 2
Total interest income 3,731 3,097
Interest Expense
Interest on deposits 1,560 1,260
Interest on borrowed money 146 40
Total interest expense 1,706 1,300
Net interest income 2,025 1,797
Provision for loan losses 75 45
Net interest income after provision for loan
losses 1,950 1,752
Other Income
Service charges on deposits 189 158
Other service charges 96 51
Other income 202 138
Net gains on available for sale securities ( 10) ( 5)
Total other income 477 342
Other Expenses
Salaries and employee benefits 808 699
Net occupancy and equipment expense 196 172
Other operating expense 536 432
Total other expense 1,540 1,303
Income before income taxes 887 791
Income tax expense 245 232
Net income $ 642 $ 559
Weighted average number of shares outstanding 1,025,094 1,025,706
Net income per share $ .63 $ .55
Cash dividends declared per share $ .23 $ .18
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 COMPREHENSIVE INCOME
Three Months Ended March 31, 1998 and 1997
(UNAUDITED)
1998 1997
(000 Omitted)
Net income $ 642 $ 559
Other comprehensive income, net of tax
Unrealized gain (loss) on investment securities
available for sale ( 189) ( 284)
Comprehensive income $ 453 $ 275
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
Three Months Ended March 31, 1998 and 1997
(UNAUDITED)
1998 1997
(Unaudited) (Unaudited)
(000 Omitted)
Cash flows from operating activities:
Net income $ 642 $ 559
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 103 71
Provision for loan losses 75 45
Other, net 122 ( 246)
Net cash provided by operating activities 942 429
Cash flows from investing activities:
Net (increase) decrease in interest bearing
deposits with banks ( 112) 1,524
Purchase of available for sale securities ( 5,014) ( 4,245)
Maturities of available for sale securities 1,695 820
Net (increase) in loans ( 4,867) ( 3,280)
Purchases of bank premises and equipment ( 33) ( 218)
Net cash (used) by investing activities ( 8,331) ( 5,399)
Cash flows from financing activities:
Net increase in deposits 10,187 5,443
Cash dividends paid ( 236) ( 186)
Net increase in purchased funds 3,323 0
Proceeds from long-term debt 0 3,000
Payments on debt ( 6) ( 5)
Net cash provided by financing activities 13,268 8,252
Net increase (decrease) in cash and cash
equivalents 5,879 3,282
Cash and cash equivalents at beginning
of period 8,821 8,172
Cash and cash equivalents at end of period $ 14,700 $ 11,454
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest $ 1,582 $ 1,293
Income taxes 42 43
Supplemental schedule of noncash investing and financing activities:
Unrealized gain (loss) on investments available for
sale (net of deferred taxes of $ (96) and $ (146)
at March 31, 1998 and 1997, respectively) ( 189) ( 284)
The accompanying notes are an integral part of these condensed
financial statements.
Page 6 of 14 pages
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(UNAUDITED)
Note 1. Basis of Presentation
The financial information presented at and for the three
months ended March 31, 1998 and 1997 is unaudited.
Information presented at December 31, 1997 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. Income tax expense is less than the
amount calculated using the statutory tax rate primarily as a
result of tax exempt income earned from state and political
subdivision obligations.
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
On March 20, 1997 the Board of Directors of Orrstown
Financial Services, Inc. declared a 5% stock dividend payable
May 15, 1997 to shareholders of record May 1, 1997. Earnings
per share, dividends per share and weighted average shares
outstanding references have been restated to reflect the 5%
stock dividend for all periods presented.
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 March 31, 1998 fair value exceeded
amortized cost by $ 1,183,000. This resulted in an increase
in stockholders' equity of $ 780,000 after recognizing the
tax effects of the unrealized gains. At December 31, 1997,
fair market value exceeded amortized cost by $ 1,468,000
resulting in an increase in stockholders' equity of $ 969,000
after recognizing the tax effects of the unrealized gains.
Note 8. New Pronouncements
The adoption of Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income has resulted in the
addition of the statement of comprehensive income.
Page 8 of 14 pages
ORRSTOWN FINANCIAL SERVICES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Summary
Orrstown Financial Services, Inc. recorded net income of
$ 642,000 for the first quarter of 1998 compared to $ 559,000 for the
same period in 1997, representing an increase of $ 83,000 or 14.85%.
Net income per share was $ .63 during 1998's first quarter up $ .08
from the $ .55 earned during 1997's first quarter.
The following statistics compare 1998's year to date
performance to that of 1997:
First Quarter
1998 1997
Return on average assets 1.31% 1.41
Return on average equity 13.79% 13.84
Average equity/average assets 9.52% 10.16
A more detailed discussion of the elements having the greatest
impact on net income follows.
Net Interest Income
First Quarter 1998 vs. First Quarter 1997
Net interest income for the first quarter of 1998 was
$ 2,025,000 representing a growth of $ 228,000, or 12.7%, over the
$ 1,797,000 realized during 1997's first quarter. Growth in net
interest income was realized solely through volume factors as the net
interest margin narrowed from 5.01% during 1997's first quarter to
4.71%. Matched transactions have accounted for 14 basis points of
this narrowing but the remainder represents spread tightening.
Deposit growth has been exceptional but committed loans in the
pipeline have been somewhat slow to settle with seasonality being a
factor. Loan growth should accelerate during 1998's second quarter as
the pipeline settles and spreads will widen as a result. Free funds
have grown 6.7% over first quarter 1997 but the free funds ratio has
lightened from 16.38% to 14.31%.
The table that follows states rates on a fully taxable
equivalent basis, (F.T.E.) and demonstrates the aforementioned
effects:
First Quarter
1998 1997
(in thousands) Avg. Balances Rates Avg. Balances Rates
Interest earning assets $ 182,363 8.50% $ 149,322 8.59%
Interest bearing liabilities 156,268 4.43% 124,856 4.23%
Free funds $ 26,095 $ 24,466
Net interest income $ 2,025 $ 1,958
Net interest spread (F.T.E.) 4.07% 4.36%
Free funds ratio 14.31% 16.38%
Net interest margin (F.T.E.) 4.71% 5.06%
Page 9 of 14 pages
OTHER INCOME AND OTHER EXPENSES
First Quarter 1998 vs. First Quarter 1997
Other income increased $ 135,000, or 39.5%, from $ 342,000
during the first quarter of 1997 to $ 477,000 during the first quarter
of 1998. Increases were realized in most categories with trust fees
up by $ 51,000, service charges on deposit accounts up $ 31,000,
service charges on loans up $ 26,000 and ATM fees up $ 21,000.
Other expense rose $ 237,000, or 18.2%, from $ 1,303,000 for
the first quarter 1997 to $ 1,540,000 for 1998's first quarter.
Salary and benefit increases contributed $ 109,000 of the growth. All
expense categories grew due to general growth of the bank plus the
opening of a seventh branch office during November 1998 in
Chambersburg, Pennsylvania. Robust loan and deposit growth plus the
addition of this new banking facility have contributed to increases in
all noninterest expense categories.
INCOME TAX EXPENSE
Income tax expense increased $ 13,000, or 5.6%, during 1998's
first quarter versus first quarter 1997 despite the fact that pretax
income increased 12.17%. The primary factor driving the change in
income tax expense is a 20% increase in the municipal bond portfolio
from $ 14,488,000 at March 31, 1997 to $ 17,423,000 at March 31, 1998.
This increase in tax exempt investing has reduced effective federal
income tax rates as follows:
First Quarter
1998 1997
Effective income tax rate 27.6% 29.3%
The marginal federal income tax bracket is 34% for all periods
presented.
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 March 31
1998 1997
Balance, beginning of period $ 1,767 $ 1,620
Recoveries 11 0
Provision for loan loss charged to income 75 45
Total 1,853 1,665
Losses 7 8
Balance, end of period $ 1,846 $ 1,657
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. The unallocated portion of the
allowance for loan losses exceeds 50% at March 31, 1998.
Loans 90 days or more past due (still accruing interest) and
those on nonaccrual status were as follows at March 31 (in thousands):
Page 10 of 14 pages
90 Days or More Past Due Nonaccrual Status
1998 1997 1998 1997
Real estate mortgages $ 1,151 $ 153 $ 588 $ 0
Installment loans 21 47 3 31
Demand and time loans 6 11 6 0
Credit card 6 4 0 0
Total $ 1,184 $ 215 $ 597 $ 31
There were no restructured loans for any of the time periods
set forth above. The increase in nonperforming loans can be
attributed primarily to three commercial real estate loans that are a
slow pay status but well collateralized.
Any loans classified for regulatory purposes as loss,
doubtful, substandard or special mention that have not been disclosed
under Item III of Industry Guide 3 do not represent or result from
trends or uncertainties which management reasonably expects will
materially impact future operating results, liquidity or capital
resources.
CAPITAL RESOURCES AND BALANCE SHEET FLUCTUATIONS
A comparison of Orrstown Financial Services' capital ratios to
regulatory minimum requirements at March 31, 1998 is as follows:
Orrstown Financial Regulatory Minimum
Services Requirements
Leverage ratio 8.67% 3%
Risk based capital ratios
Tier I (core capital) 11.68% 4%
Combined tier I and tier II
(core capital plus allowance
for loan losses) 12.93% 8%
The robust growth experienced during 1998 has been supported
by capital growth in the form of retained earnings. Equity
represented 9.05% of assets at March 31, 1998 which is down just
slightly from 9.60% at December 31, 1997.
The equity to assets ratio has tightened somewhat but is still
strong by industry averages. The following items have contributed to
the tightening:
1. Capital has been leveraged by the use of $ 8,000,000 of
matched transactions. These transactions generate net
income at the 1.30% return on assets level and enhance
return on equity so they will be net income contributors as
the year advances.
Page 11 of 14 pages
2. Growth has accelerated as the Bank continues to benefit from
market opportunities brought about by mergers local
competitors. Average assets grew $ 33 million, or 22.17%
over first quarter 1997 levels.
3. Dividend payout has been enhanced. The Board of Directors
decided to move the annual dividend payout from roughly 30%
of net income to approximately 35%. First quarter 1998
payout was 36.8% versus 33.3% during first quarter 1997.
All balance sheet fluctuations exceeding 5% have been created
by either the robust growth that has been experienced during 1998 or
single day fluctuations.
Management is not aware of any current recommendations by
regulatory authorities which, if implemented, would have a material
effect on the corporation's liquidity, capital resources or
operations.
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