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 quarter ended June 30,1998 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 incorporation (I.R.S. Employer
or organization) Identification No.)
77 East King Street 17257
P.O. Box 250, Shippensburg, Pennsylvania (Zip Code)
(Address of principal executive offices)
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 filled 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.
X
YES --------------- N--------------
Class Outstanding at July 31,1998
(Common Stock, no par value) 1,025,101
ORRSTOWN FINANCIAL SERVICES, INC.
INDEX
Page
Part I - FINANCIAL INFORMATION
Item 1. Financial statements ( unaudited )
Condensed consolidated balance sheets - June 30,1998
and December 31, 1997 3
Condensed consolidated statements of income - Three months
ended June 30,1998 and 1997 4
Condensed consolidated statements of income - Six months
ended June 30,1998 and 1997 5
Condensed consolidated statements of comprehensive income -
Three months ended June 30,1998 and 1997 6
Condensed consolidated statements of comprehensive income -
Six months ended June 30,1998 and 1997 6
Condensed consolidated statements of cash flows - Six months
ended June 30,1998 and 1997 7
Notes to condensed consolidated financial statements 8
Item 2. Management's discussion and analysis of financial condition
and results of operations 10
PART II - OTHER INFORMATION 14
Signatures 15
Data Table 16
PART I - FINANCIAL INFORMATION
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY - OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
1998 1997*
(Unaudited)
ASSETS
(000 Omitted)
Cash and due from banks 6,483 5,963
Interest - bearing deposits with banks 89 16
Federal funds sold 2,306 2,858
Securities available for sale 50,690 46,208
Federal Home Loan Bank, Federal Reserve and
Atlantic Central Bankers Bank Stock, at cost
which approximates market value 1,119 983
Loans 143,243 128,331
Allowance for loan losses (1,905) (1,767)
----------- -----------
Net Loans 141,338 126,564
Bank premises and equipment, net 5,065 5,130
Other assets 2,722 2,520
----------- -----------
Total assets 209,812 $ 190,242
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing $ 20,762 $ 17,649
Interest bearing 154,707 142,931
----------- -----------
Total deposits 175,469 160,580
Federal funds purchased and other borrowed money 11,950 8,569
Other liabilities 3,180 2,828
----------- -----------
Total liabilities 190,599 171,977
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, no par value - $ .2083 stated
value per share at June 30, 1998 and
December 31, 1997, 2, 000, 000 shares authorized
with 1, 025,101 shares issued at June 30, 1998 and
1,025,094 issued at December 31, 1997 214 214
Additional paid - in capital 12,352 12,352
Retained earnings 5,685 4,730
Unrealized holding gain, net of tax
$496 and $499 at June 30, 1998 and
December 31, 1997, respectively 962 969
----------- -----------
Total stockholders' equity 19,213 18,265
----------- -----------
Total liabilities and stockholders'
equity $ 209,812 $ 190,242
=========== ===========
* Condensed from audited financial statements
The accompanying notes are an integral part of these condensed
financial statements.
- -3-
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY - OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, 1998 and 1997
(UNAUDITED)
1998 1997
(Unaudited) (Unaudited)
(000 Omitted)
Interest Income
Interest and fees on loans $ 3,105 $ 2,644
Interest on federal funds sold 85 75
Interest and dividends on investment securities 787 617
Interest income on deposits with banks 2 1
--------- ---------
Total interest income 3,979 3,337
Interest Expense
Interest on deposits 1,630 1,340
Interest on borrowed money 170 79
-------- ---------
Total interest expense 1,800 1,419
-------- ---------
Net interest income 2,179 1,918
Provision for loan losses 75 45
--------- ---------
Net interest income after provision for loan
losses 2,104 1,873
--------- ---------
Other Income
Service charges on deposits 208 155
Other service charges 128 86
Trust department income 185 130
Other income 14 14
Net gains (losses) on available for sale securiti (2) 9
--------- ---------
Total other income 533 394
--------- ---------
Other Expenses
Salaries and employee benefits 830 697
Net occupancy and equipment expenses 207 175
Other operating expenses 519 406
--------- ---------
Total other expense 1,556 1,278
--------- ---------
Income before income taxes 1,081 989
Income tax expenses 296 270
--------- ---------
Net income $ 785 $ 719
========= =========
Weighted average number of shares outstanding ********* *********
Net income per share $ 0.76 $ 0.70
Cash dividends declared per share $ 0.23 $ 0.19
The accompanying notes are an integral part of these condensed financial
statements.
-4-
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY - OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended June 30, 1998 and 1997
(UNAUDITED)
1998 1997
(Unaudited) (Unaudited)
(000 Omitted)
Interest Income
Interest and fees on loans $ 5,995 $ 5,141
Interest on federal funds sold 175 119
Interest and dividends on investment securities 1,521 1,183
Interest income on deposits with banks 3 2
--------- ---------
Total interest income 7,694 6,445
Interest Expense
Interest on deposits 3,190 2,599
Interest on borrowed money 317 119
--------- ---------
Total interest expense 3,507 2,718
--------- ---------
Net interest income 4,187 3,727
Provision for loan losses 150 90
--------- ---------
Net interest income after provision for loan
losses 4,037 3,637
--------- ---------
Other Income
Service charges on deposits 394 325
Other service charges 224 123
Trust department income 377 257
Other income 31 30
Net gains (losses) on available for sale securiti (12) 4
--------- ---------
Total other income 1,014 739
--------- ---------
Other Expenses
Salaries and employee benefits 1,638 1,396
Net occupancy and equipment expenses 409 353
Other operating expenses 1,036 847
--------- ---------
Total other expense 3,083 2,596
--------- ---------
Income before income taxes 1,968 1,780
Income tax expenses 541 502
--------- ---------
Net income $ 1,427 $ 1,278
========= =========
Weighted average number of shares outstanding ********* *********
Net income per share $ 1.39 $ 1.25
Cash dividends declared per share $ 0.46 $ 0.37
The accompanying notes are an integral part of these condensed financial
statements.
-5-
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY - OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended June 30, 1998 and 1997
(UNAUDITED)
1998 1997
(000 Omitted)
Net Income $ 785 $ 719
Other comprehensive income, net of tax
Unrealized gain (loss) on investment securities
available for sale 182 362
Comprehensive Income $ 967 $ 1,081
=========== ============
The accompanying notes are integral part of these condensed financial
statements.
*********************************************************************
*****
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY - OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Six Months Ended June 30,1998 and 1997
(UNAUDITED)
1998 1997
(000 Omitted)
Net Income $ 1,427 $ 1,278
Other comprehensive income, net of tax
Unrealized gain (loss) on investment securities
available for sale (7) 78
Comprehensive Income $ 1,420 $ 1,356
=========== ============
The accompanying notes are integral part of these condensed financial
statements.
-6-
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY - OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1998 and 1997
(UNAUDITED)
1998 1997
(Unaudited) (Unaudited)
(000 Omitted)
Cash flows from operating activities:
Net income $ 1,427 $ 1,278
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 200 144
Provision for loan losses 150 90
Other, net 134 (131)
----------- -----------
Net cash provided by operating activities 1,911 1,381
Cash flows from investing activities:
Net (increase) decrease in interest bearing
deposits with banks (73) 1,481
Purchase of available for sale securities (8,205) (8,789)
Sales on Maturities of available for sale securities 3,576 2,058
Net (increase) in loans (14,924) (9,086)
Purchases of bank premises and equipment (115) (597)
----------- -----------
Net cash (used) by investing activities (19,741) (14,933)
----------- -----------
Cash flows from financing activities:
Net increase in deposits 14,889 11,995
Cash dividends paid (472) (381)
Cash paid in lieu of fractional shares 0 (21)
Net increase in purchased funds 3,387 0
Proceeds from long - term debt 0 3,000
Payments on debt (6) (5)
----------- -----------
Net cash provided by financing activities 17,798 14,588
----------- -----------
Net increase (decrease) in cash and cash equivalents (32) 1,036
Cash and cash equivalents at beginning of period 8,821 8,172
----------- -----------
Cash and cash equivalents at end of period $ 8,789 $ 9,208
========= ==========
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest $ 3,159 $ 2,414
Income Taxes 602 452
Supplemental schedule of noncash investing and financing activities:
Unrealized gain (loss) on investments available for
sale (net of deferred taxes of $(4) and $40 at
June 30, 1998 and 1997, respectively (7) 78
The accompanying notes are an integral part of these condensed financial
statements.
-7-
ORRSTOWN FINANCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(UNAUDITED)
NOTE 1. Basis of Presentation
The financial information presented at and for the three months ended and six
months ended June 30, 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.
-8-
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
indentification 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 1998 fair value exceeded amortized cost by $ 1,458,000. This
resulted in an increase in stockholders' equity of $ 962,000 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.
-9-
ORRSTOWN FINANCIAL SERVICES, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Summary
Orrstown Financial Services, Inc. recorded net income of $ 785,000 for the
second quarter of 1998 compared to $ 719,000 for the same period in 1997,
representing an increase
of$ 66,000 or 9.2 %. Net income per share was $ .76 during 1998's second
quarter
up $ .06 from the $ .70 earned during 1997's second quarter.
Net income for the first six months of 1998 was $ 1,427,000 compared to
$ 1,278,000 for
the same period in 1997, representing an increase of $ 149,000, or 11.7 %.
Net income per share for the first six months of 1998 was $ 1.39 up $ .14
from the $ 1.25 per
share realized during the six months ended June 30, 1997.
Robust balance sheet growth has fueled 1998's earnings gains. Despite
tightening net
interest rate margins versus those of 1997, net income has grown
significantly due
to volume factors. In addition, noninterest income has grown at a rate almost
double that of noninterest income increases. Mergers of competitors within
our geographical markets have
provided opportunities for growth and 1998 net interest margins have improved
as we have
advanced through the year with loan demand providing outlets for the funds
growth realized
in early 1998.
Consequently, second quarter 1998 results have improved considerably over
first
quarter
1998 results. Net income of $ 785,000 represents an increase of 22.3 % over
the $ 642,000 earned during the first quarter of 1998.
The following statistics compare 1998's year to date performance to that of
1997:
Second Quarter Six Months Year to Date
1998 1997 1998 1997
Return on average assets 1.51 % 1.70 % 1.43 % 1.57 %
Return on average equity 16.61 % 17.69 % 15.32 % 15.88 %
Average equity / Average assets 9.11 % 9.61 % 9.31 % 9.87 %
A more detailed discussion of the elements having the greatest impact on net
income follows.
Net Interest Income
Second Quarter 1998 vs. Second Quarter 1997
Net interest income for the second quarter of 1998 was $ 2,179,000
representing a
growth of $ 261,000, or 13.6 % , over the $ 1,918,000 realized during 1997's
second quarter.
The growth in net interest income is driven by volume factors since spreads
have
tightened
from the year earlier period. Earning asset growth of 22.9 % has generated
13.6
% net interest
income growth despite a 37 basis point tightening of net interest margin. Net
interest margin
has widened by 8 basis points over 1998's first quarter, however, as loan
demand
has increased.
Six Months 1998 vs. Six Months 1997
Net interest income for the first six months of 1998 was $ 4,187,000
representing
an increase of $ 460,000, or 12.3 %, over the $ 3,727,000 generated during the
first six
months of 1997. Volume factors have generated the increase despite tightened
spreads from
1997. Spreads have improved as we have progressed through 1998, however.
The table that follows states rates on a fully taxable equivalent basis,
( F.T.E. ) and
demonstrates the aforementioned effects:
SECOND QUARTER SIX MONTHS YEAR TO DATE
1998 1997 1998 1997
(in thousands)
Avg. Balances Rates Avg. Balances Rates Avg. Balances Rates
Avg. Balances Rates
Interest earning
assets $ 196,248 8.42% $ 159,692 8.68% $ 190,336 8.42%
$ 154,931 8.65%
Interest
bearing
liabilities 166,230 4.34% 133,490 4.26% 161,283 4.38%
129,201 4.24%
- --------- --------- ---------- -------- ---------- --------
- --------- ---------
Free Funds $ 30,018 $ 26,202 $ 29,053 $
25,730
========= ========== ==========
=========
Net interest
income $ 2,179 $ 1,918 $ 4,187 $ 3,727
========= ========== ==========
=========
Net interest
spread (F.T.E.) 4.08% 4.42% 4.04%
4.21%
========= ======== =========
=========
Free funds
ratio 15.30% 16.41% 15.26% 16.61%
========= ========== ==========
=========
Net interest
margin ( F.T.E ) 4.74% 5.11% 4.70
5.11%
========= ======== ========
=========
- -10-
Other Income and Other Expenses
Second Quarter 1998 vs. Second Quarter 1997
Other income increased $ 139,000, or 35.3 %, from $ 394,000 during the
second quarter of 1997 to
$ 533,000 during the second quarter of 1998. Increases in service charges
on deposit accounts
accounted for $ 53,000 of the increase and trust department income increased
$ 55,000 as all areas of the
bank have experienced robust growth.
Other expense rose $ 278,000, or 21.7 %, from $ 1,278,000 for second quarter
1997 to $ 1,556,000 for 1998's second quarter. Salary and benefit increases
contributed $ 135,000 of the growth. All
expense categories grew due to general growth of the bank plus the opening
of a seventh branch office
during November 1997 in Chambersburg, Pennsylvania.
Six Months 1998 vs. Six Months 1997
Other income increased $ 275,000, or 37.2 %, to $ 1,014,000 from $ 739,000
a year ago. A $ 120,000, or 46.7 %, increase in trust department income,
plus a $ 170,000 increase in service charges were the
primary contributors. Other expenses rose $ 487,000, or 18.8 % from
$ 2,596,000 during the first six months of 1997 to $ 3,083,000 for the
same period of 1998. All categories of noninterest expense rose
due to the aforementioned growth plus the addition of a new branch office
in late 1997. Staff increases
contributed to growth in salaries and benefits of $ 242,000, the largest
single component of increase.
Income Tax Expense
Income tax expense increased $ 26,000, or 9.6 %, during 1998's second
quarter versus second quarter
1997. Income tax expense rose $ 39,000, or 7.8 %, for the first six months
of 1998 versus the same
period a year ago. The growth in income tax expense is the byproduct of
similar increases in pretax
income since effective federal income tax rates has remained relatively
stable, as shown below:
Second Quarter Six Months Year to Date
1998 1997 1998 1997
Effective income
tax rate 27.4% 27.3% 27.5% 28.2%
The margined federal income tax bracket is 34 % for all periods presented.
-11-
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
1998 1997 1998 1997
Balance, beginning of
period $ 1,846 $ 1,657 $ 1,767 $ 1,620
Recoveries 3 1 14 1
Provision for
loan loss
charged to
income 75 45 150 90
--------- -------- -------- ---------
Total 1,924 1,703 1,931 1,711
Losses 19 19 26 27
--------- -------- -------- ---------
Balance, end
of period $ 1,905 $ 1,684 $ 1,905 $ 1,684
========= ======== ======== =========
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 June 30,
1998.
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
1998 1997 1998 1997
Real estate
mortgage $ 255 $ 15 $ 68 $ 0
Installment loans 5 94 0 16
Commercial loans 588 567 454 0
Credit card 3 20 1 0
--------- -------- -------- ---------
Total $ 851 $ 696 $ 523 $ 16
========= ======== ======== =========
There were no restructured loans for any of the time periods set forth above.
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.
-12-
CAPITAL RESOURCES AND BALANCE SHEET FLUCTUATIONS
A comparison of Orrstown Financial Services' capital ratios to regulatory
minimum requirements at
June 30, 1998 is as follows:
Orrstown Financial Regulatory Minimum
Services Requirements
Leverage ratio 8.56% 3%
Risk based capital ratios:
Tier I (core capital) 11.29% 4%
Combined tier I and tier II
(core capital plus allowance
for loan losses) 12.51% 8%
The robust growth experienced during 1998 has been supported by capital
growth in the form of
retained
earnings. Equity represented 9.16 % of assets at June 30, 1998 which is
down slightly from 9.60 %
at December 31, 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.
-13-
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
-14-
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)
/s/
------------------ ------------------------------------
(Robert B. Russell, Controller)
(Chief Accounting Officer)
-15-
DATA TABLE
FOR 10-Q AT JUNE 30, 1998