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, 2001 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
----- --------------
Class Outstanding at May 8, 2001
- ----------------------------- ---------------------------
(Common stock, no par value) 2,252,695
Page 1 of 14 pages
ORRSTOWN FINANCIAL SERVICES, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial statements (unaudited)
Condensed consolidated balance sheets - March 31, 2001
and December 31, 2000 3
Condensed consolidated statements of income - three months
ended March 31, 2001 and 2000 4
Condensed consolidated statements of comprehensive income -
three months ended March 31, 2001 and 2000 5
Condensed consolidated statements of cash flows - three
months ended March 31, 2001 and 2000 6
Notes to condensed consolidated financial statements 7 and 8
Item 2. Management's discussion and analysis of financial
condition and results of operations 9 - 12
PART II - OTHER INFORMATION
Other information 13
Signatures 14
Exhibits
Page 2 of 14 pages
PART I - FINANCIAL INFORMATION
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2001 2000 *
ASSETS (Unaudited)
(000 Omitted)
Cash and due from banks $ 8,752 $ 11,021
Interest-bearing deposits with banks 136 172
Federal funds sold 15,354 3,049
Securities available-for-sale 62,320 69,919
Federal Home Loan Bank, Federal Reserve and
Atlantic Central Bankers Bank Stock, at cost
which approximates market value 2,134 2,134
Loans 216,357 209,181
Allowance for loan losses (2,747) (2,691)
--------- ---------
Net loans 213,610 206,490
Bank premises and equipment, net 9,203 9,269
Accrued interest receivable 1,885 2,016
Cash value - life insurance 5,695 5,636
Other assets 2,057 2,197
--------- ---------
Total assets $ 321,146 $ 311,903
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 29,806 $ 31,716
Interest-bearing 208,284 210,292
--------- ---------
Total deposits 238,090 242,008
Federal funds purchased and other short term
borrowed funds 22,097 18,426
Long term borrowed funds 29,487 21,515
Accrued interest payable 541 614
Other liabilities 2,534 2,666
--------- ---------
Total liabilities 292,749 285,229
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, no par value - $ .1041 stated value per share at March 31,
2001 and December 31, 2000, 10,000,000 shares authorized with 2,246,764
shares issued at March 31, 2001 and 2,240,744 issued
at December 31, 2000 234 233
Additional paid-in capital 19,606 19,360
Retained earnings 7,406 6,619
Accumulated other comprehensive income 1,151 462
--------- ---------
Total stockholders' equity 28,397 26,674
--------- ---------
Total liabilities and
stockholders' equity $ 321,146 $ 311,903
========= =========
* 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, 2001 AND 2000
(UNAUDITED)
2001 2000
(000 Omitted)
Interest Income
Interest & fees on loans $ 4,648 $ 3,918
Interest on federal funds sold 38 49
Interest and dividends on investment
securities 1,194 1,013
Interest income on deposits with banks 2 8
--------- ---------
Total interest income 5,882 4,988
--------- ---------
Interest Expense
Interest on deposits 2,223 1,718
Interest on borrowed money 612 575
--------- ---------
Total interest expense 2,835 2,293
--------- ---------
Net interest income 3,047 2,695
Provision for loan losses 60 75
--------- ---------
Net interest income after provision
for loan losses 2,987 2,620
--------- ---------
Other Income
Service charges on deposits 412 270
Other service charges 138 115
Trust Department income 296 253
Brokerage income 68 79
Other income 84 86
Net gains (losses)on available for
sale securities 33 (2)
--------- ---------
Total other income 1,031 801
--------- ---------
Other Expenses
Salaries and employee benefits 1,284 1,176
Net occupancy and equipment expenses 412 355
Other operating expenses 761 606
--------- ---------
Total other expenses 2,457 2,137
--------- ---------
Income before income taxes 1,561 1,284
Income tax expenses 436 335
--------- ---------
Net income $ 1,125 $ 949
========= =========
Weighted average number of shares
outstanding 2,245,118 2,220,092
Net income per share $ .50 $ .43
Cash dividends declared per share $ .15 .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 COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
2001 2000
(000 Omitted)
Net income $ 1,125 $ 949
Other comprehensive income, net of tax
Unrealized gain (loss) on investment
securities available for sale 689 (139)
------- -----
Comprehensive income $ 1,814 $ 810
======= =====
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, 2001 and 2000
(UNAUDITED)
2001 2000
(000 Omitted)
Cash flows from operating activities:
Net income $ 1,125 $ 949
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 209 158
Provision for loan losses 60 75
Other - Net (428) 40
-------- --------
Net cash provided by operating activities 966 1,222
-------- --------
Cash flows from investing activities:
Net (increase) decrease in interest bearing
deposits with banks 36 (139)
Purchase of available for sale securities (4,107) (6,267)
Sales and maturities of available-for-sale
securities 12,749 899
Net (increase) in loans (7,180) (4,986)
Purchases of bank premises and equipment (129) (771)
(Increase) decrease in other assets 67 (391)
-------- --------
Net cash provided (used) by investing activities 1,436 b (11,655)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in deposits (3,918) 1,521
Cash dividends paid (337) (311)
Dividend reinvestment plan purchases 246 90
Net increase in short term purchased funds 11,671 10,137
Payments on long term debt (28) (7)
-------- --------
Net cash provided by financing activities 7,634 11,430
-------- --------
Net increase(decrease) in cash and cash
equivalents 10,036 997
Cash and cash equivalents at beginning
of period 14,070 8,585
-------- --------
Cash and cash equivalents at end of period $ 24,106 $ 9,582
======== ========
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest $ 2,908 $ 2,308
Income taxes 0 0
Supplemental schedule of noncash investing and financing activities:
Unrealized gain (loss) on investments available for sale (net of deferred taxes
of $ 354 and $ (72) at March 31, 2001 and 2000, respectively) 689 (139)
The accompanying notes are an integral part of these condensed
financial statements.
Page 6 of 14 pages
ORRSTOWN FINANCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(UNAUDITED)
Review of Interim Financial Statements
The condensed consolidated financial statements as of and for the
three months ended March 31, 2001 and 2000 have been reviewed by
independent certified public accountants. Their report on their review
is attached as Exhibit 99 to this 10-Q.
Note 1. Basis of Presentation
The financial information presented at and for the three months ended
March 31, 2001 and 2000 is unaudited. Information presented at
December 31, 2000 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
statements 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.
Page 7 of 14 pages
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.
Note 6. 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 investment securities as "available for
sale". At March 31, 2001 fair value exceeded amortized cost by $
1,744,000. This resulted in an increase in stockholders' equity of $
1,151,000 after recognizing the tax effects of the unrealized gains.
At December 31, 2000, fair value exceeded amortized cost by $ 700,000
resulting in an increase in stockholders' equity of $ 462,000 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
RESULTS OF OPERATIONS
Summary
Orrstown Financial Services, Inc. recorded net income of $
1,125,000 for the first quarter of 2001 compared to $ 949,000 for the same
period in 2000; representing an increase of $ 176,000 or 18.5%. Net income per
share was $ .50 during 2001's first quarter up $ .07 from the $ .43 earned
during 2000's first quarter.
The following statistics compare 2001's first quarter
performance to that of 2000:
First Quarter
2001 2000
Return on average assets 1.47% 1.42%
Return on average equity 16.99% 16.99%
Average equity/average assets 8.84% 8.33%
A more detailed discussion of the elements having the greatest
impact on net income follows.
NET INTEREST INCOME
Net interest income for the first quarter of 2001 was $3,047,000
representing a growth of $ 352,000, or 13.1%, over the $ 2,695,000 realized
during 2000's first quarter. The growth in net interest income is driven by
volume factors since spreads have been tightened slightly. Net interest spread
narrowed by 17 basis points while net interest margin tightened by 12 basis
points due primarily to the falling rate environment and level of prime floating
loans versus one year ago. Net interest margin has held within 4 basis points of
fourth quarter 2000 level, however.
The table that follows states rates on a fully taxable
equivalent basis (F.T.E.) and demonstrates the aforementioned effects:
First Quarter
2001 2000
(in thousands) Avg. Balances Rates Avg. Balances Rates
Interest earning assets $ 286,855 8.46% $ 248,785 8.29%
Interest bearing liabilities 252,243 4.56% 218,478 4.22%
--------- ---- --------- ----
Free funds $ 34,612 $ 30,307
========= =========
Net interest income $ 3,047 $ 2,695
========= =========
Net interest spread (F.T.E.) 3.90% 4.07%
==== ====
Free funds ratio 12.07% 12.18%
===== =====
Net interest margin (F.T.E.) 4.46% 4.58%
==== ====
Page 9 of 14 pages
OTHER INCOME AND OTHER EXPENSES
First Quarter 2001 vs. First Quarter 2000
Other income increased $ 230,000, or 28.7% from $ 801,000 during
the first quarter of 2000 to $ 1,031,000 during the first quarter of 2001. The
increase was across all categories but primarily attributable to service charge
increases.
Other expenses rose from $ 2,137,000 during the first quarter
2000 to $ 2,457,000 during 2001's first quarter, an increase of $ 320,000, or
15.0%. Growth over the past few years has caused staff increases and systems
outlay increases. Our tenth full service branch was opened during 2001's first
quarter in Greencastle, Pennsylvania.
INCOME TAX EXPENSE
Income tax expense increased $ 101,000 or 30.1% during 2001's
first quarter versus first quarter 2000. Tax exempt income has become a smaller
part of the revenue stream. Effective income tax rates were as follows:
First Quarter
2001 2000
Effective income tax rate 27.9% 26.1%
The marginal federal income tax bracket is 34% for all periods
presented.
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 March 31
2001 2000
Balance, beginning of period $ 2,691 $ 2,455
Recoveries 1 1
Provision for loan loss
Charged to income 60 75
------- -------
Total 2,752 2,531
Losses 5 8
------- -------
Balance, end of period $ 2,747 $ 2,523
======= =======
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 60% at March 31, 2001.
Loans 90 days or more past due (still accruing interest) and
those on nonaccrual status were as follows at March 31 (in thousands):
90 Days or More
Past Due Nonaccrual Status
2001 2000 2001 2000
Real estate mortgages $ 440 $ 139 $ 0 $ 0
Installment loans 42 39 10 0
Commercial loans 51 1,930 30 45
Credit card 2 1 0 0
----- ------- ---- ----
Total $ 535 $ 2,109 $ 40 $ 45
===== ======= ==== ====
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.
Page 11 of 14 pages
CAPITAL RESOURCES AND BALANCE SHEET FLUCTUATIONS
A comparison of Orrstown Financial Services' capital ratios to
regulatory minimum requirements at March 31, 2001 is as follows:
Orrstown Financial Regulatory Minimum
Services Requirements
Leverage ratio 8.64% 4%
Risk based capital ratios:
Tier I (core capital) 12.53% 4%
Combined tier I and tier II
(core capital plus
allowance for loan losses) 13.78% 8%
The growth experienced during 2001 has been supported by capital
growth in the form of retained earnings and capital infusion from the dividend
reinvestment plan. Dividend reinvestment plan participants will be able to add
up to $ 2,500 per quarter beginning with the second quarter of 2000 and this has
provided a solid source of capital. Equity represented 8.84% of assets at March
31, 2001 which is up from 8.55% at December 31, 2000. Available-for-sale
investment securities markdowns increased equity by $ 1,043,000 since March 31,
2000 as rates have dropped.
All balance sheet fluctuations exceeding 5% have been created by
either the growth that has been experienced during 2001 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:
27 - Financial Data Schedule
99 - Report of independent accountant's on interim
financial statements
(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
---------------------------
(Kenneth R. Shoemaker, President)
(Duly Authorized Officer)
Date May 11, 2001 /s/ Bradley S. Everly
----------------- ---------------------------
(Bradley S. Everly, Senior Vice President)
(Chief Financial Officer)
/s/ Robert B. Russell
----------------------------
(Robert B. Russell, Controller)
(Chief Accounting Officer)
Page 14 of 14 pages
DATA FINANCIAL SCHEDULE
FOR 10-Q AT MARCH 31, 2001
FISCAL YEAR END DEC-31-2001
PERIOD END MARCH 31, 2001
CASH 8,752
INT-BEARING-DEPOSITS 136
FED-FUNDS-SOLD 15,354
TRADING-ASSETS 0
INVESTMENTS-HELD-FOR-SALE 62,320
INVESTMENTS-CARRYING 62,320
INVESTMENTS-MARKET 62,320
LOANS 216,357
ALLOWANCE 2,747
TOTAL-ASSETS 321,146
DEPOSITS 238,090
SHORT-TERM 22,097
LIABILITIES-OTHER 2,534
LONG-TERM 29,487
COMMON 234
PREFERRED-MANDATORY 0
PREFERRED 0
OTHER-SE 28,163
TOTAL-LIABILITIES-AND-EQUITY 321,146
INTEREST-LOAN 4,648
INTEREST-INVEST 1,194
INTEREST-OTHER 40
INTEREST-TOTAL 5,882
INTEREST-DEPOSIT 2,223
INTEREST-EXPENSE 2,835
INTEREST-INCOME-NET 3,047
LOAN-LOSSES 60
SECURITIES-GAINS 33
EXPENSE-OTHER 2,457
INCOME-PRETAX 1,561
INCOME-PRE-EXTRAORDINARY 1,125
EXTRAORDINARY 0
CHANGES 0
NET-INCOME 1,125
EPS-PRIMARY .50
EPS-DILUTED .50
YIELD-ACTUAL 4.46
LOANS-NON 40
LOANS-PAST 535
LOANS-TROUBLED 0
LOANS-PROBLEM 0
ALLOWANCE-OPEN 2,691
CHARGE-OFFS 5
RECOVERIES 1
ALLOWANCE-CLOSE 2,747
ALLOWANCE-DOMESTIC 2,747
ALLOWANCE-FOREIGN 0
ALLOWANCE-UNALLOCATED 1,767