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 September 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 October 29, 1996
(Common stock, no par value) 976,863
Page 1 of 15 pages
ORRSTOWN FINANCIAL SERVICES, INC.
INDEX
Page
PART I - FINANCIAL INFORMATION
Condensed consolidated balance sheets - September 30, 1996
and December 31, 1995 3
Condensed consolidated statements of income - Three months
ended September 30, 1996 and 1995 4
Condensed consolidated statements of income - Nine months
ended September 30, 1996 and 1995 5
Condensed consolidated statements of cash flows - Nine months
ended September 30, 1996 and 1995 6 and
7
Notes to condensed consolidated financial statements 8 and
9
Management's discussion and analysis of financial condition
and results of operations 10 -
13
PART II - OTHER INFORMATION 14
Signatures 15
Page 2 of 15 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)
September 30, December 31,
1996 1995 *
ASSETS (Unaudited)
(000 Omitted)
Cash and due from banks $ 6,079 $
4,330
Interest-bearing deposits with banks 301 1,289
Federal funds sold 5,903 2,317
Securities available for sale 30,382
30,694
Federal Home Loan Bank, Federal Reserve
and Atlantic Central Bankers Bank
Stock, at cost which approximates
market value 934 869
Loans 107,295
102,857
Allowance for loan losses ( 1,573) (
1,433)
Net loans 105,722
101,424
Bank premises and equipment, net 3,766 3,042
Other assets 2,244
2,033
Total assets $ 155,331 $
145,998
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 16,692 $
13,962
Interest-bearing 119,152
113,368
Total deposits 135,844
127,330
Federal funds purchased and other
borrowed money 2,340 2,345
Other liabilities 1,915
1,690
Total liabilities 140,099
131,365
STOCKHOLDERS' EQUITY
Common stock, no par value - $ .2083
stated value per share at September 30,
1996 and December 31, 1995, 2,000,000
shares authorized with 976,863 shares
issued at September 30, 1996 and
December 31, 1995 204 204
Additional paid-in capital 10,625
10,625
Retained earnings 4,403 3,232
Unrealized holding gain (loss), net of
tax $ 0 and $ 295 at September 30, 1996
and December 31, 1995, respectively 0
572
Total stockholders' equity 15,232
14,633
Total liabilities and
stockholders' equity $ 155,331 $
145,998
* Condensed from audited financial statements
The accompanying notes are an integral part of these condensed financial
statements.
Page 3 of 15 pages
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30, 1996 and 1995
(UNAUDITED)
1996 1995
(Unaudited) (Unaudited)
(000 Omitted)
Interest Income
Interest and fees on loans $ 2,450 $
2,331
Interest on federal funds sold 104 9
Interest and dividends on investment
securities 479 459
Interest income on deposits with banks 21
9
Total interest income 3,054
2,808
Interest Expense
Interest on deposits 1,251 1,143
Interest on borrowed money 46
65
Total interest expense 1,297
1,208
Net interest income 1,757
1,600
Provision for loan losses 60
30
Net interest income after provision for
loan losses 1,697
1,570
Other Income
Service charges on deposits 119 92
Other service charges 67 41
Other 132
89
Total other income 318
222
Other Expenses
Salaries and employee benefits 602 524
Net occupancy and equipment expense 153 137
Other operating expense 379
307
Total other expense 1,134
968
Income before income taxes 881 824
Income tax expense 273
231
Net income $ 608 $
593
Weighted average number of shares
outstanding 976,863
976,863
Net income per share $ .62 $
.61
Cash dividends declared per share $ .18 $
.15
The accompanying notes are an integral part of these condensed financial
statements.
Page 4 of 15 pages
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended September 30, 1996 and 1995
(UNAUDITED)
1996 1995
(Unaudited) (Unaudited)
(000 Omitted)
Interest Income
Interest and fees on loans $ 7,219 $
6,641
Interest on federal funds sold 259 41
Interest and dividends on investment
securities 1,407 1,177
Interest income on deposits with banks 69
40
Total interest income 8,954
7,899
Interest Expense
Interest on deposits 3,723 3,110
Interest on borrowed money 120
155
Total interest expense 3,843
3,265
Net interest income 5,111
4,634
Provision for loan losses 180
90
Net interest income after provision for
loan losses 4,931
4,544
Other Income
Service charges on deposits 324 275
Other service charges 176 137
Other 375
232
Total other income 875
644
Other Expenses
Salaries and employee benefits 1,877 1,637
Net occupancy and equipment expense 445 402
Other operating expense 1,097
1,021
Total other expense 3,419
3,060
Income before income taxes 2,387 2,128
Income tax expense 707
624
Net income $ 1,680 $
1,504
Weighted average number of shares outstanding 976,863
976,863
Net income per share $ 1.72 $ 1.54
Cash dividends declared per share $ .52 $ .44
The accompanying notes are an integral part of these condensed financial
statements.
Page 5 of 15 pages
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1996 and 1995
(UNAUDITED)
1996 1995
(Unaudited) (Unaudited)
(000 Omitted)
Cash flows from operating activities:
Net income $ 1,680 $
1,504
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 185 174
Provision for loan losses 180 90
Other, net 308 (
30)
Net cash provided by operating activities 2,353
1,738
Cash flows from investing activities:
Net (increase) decrease in interest
bearing deposits with banks 988 (
1,391)
Purchase of investment securities ( 5,512) (
13,342)
Maturities of investment securities 2,560
4,423
Sales of investment securities 2,397
2,273
Purchases of FHLB stock ( 65) (
61)
Net (increase) in loans ( 4,478) (
10,307)
Purchases of bank premises and
equipment - Net ( 909) (
642)
Premium paid on purchase of branch 0 (
589)
Net cash (used) by investing activities ( 5,019) (
19,636)
Cash flows from financing activities:
Net increase in deposits 8,514
21,312
Cash dividends paid ( 508) (
433)
Cash paid in lieu of fractional
dividends 0 (
15)
Payments on debt ( 5) (
649)
Net cash provided by financing activities 8,001
20,215
Net increase in cash and cash equivalents 5,335
2,317
Cash and cash equivalents, beginning
balance 6,647
4,593
Cash and cash equivalents, ending balance $ 11,982 $
6,910
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest $ 3,713 $
3,019
Income taxes 652 543
The accompanying notes are an integral part of these condensed
financial statements.
Page 6 of 15 pages
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine Months Ended September 30, 1996 and 1995
(UNAUDITED)
1996 1995
(Unaudited) (Unaudited)
(000 Omitted)
Supplemental schedule of noncash investing and
financing activities:
Unrealized gain (loss) on investments
available for sale (net of deferred tax
(liability) of $ 295 and $ 91 at
September 30, 1996 and 1995,
respectively) ($ 572) $
153
5% stock dividend issued July 25, 1995 0 1,242
Other real estate acquired in settlement
of loans 0 22
The accompanying notes are an integral part of these condensed
financial statements.
Page 7 of 15 pages
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
Note 1. Basis of Presentation
The financial information presented at and for the three
months ended and nine months ended September 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 8 of 15 pages
Note 6. Changes in Common Stock
Earnings per share of common stock for the period ended
September 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 September 30, 1996 fair market
value was the same as amortized cost. This resulted in a
decrease in stockholders' equity of $ 572,000 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 9 of 15 pages
ORRSTOWN FINANCIAL SERVICES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net after tax income for the first nine months of 1996 was
$1,680,000 compared to $1,504,000 for the same period in 1995
representing an increase of $176,000 or 11.7%. Net income on an
adjusted per share basis for the first nine months was $ 1.72 up $ .18
from the $ 1.54 per share realized during the nine months ended
September 30, 1995.
RESULTS OF OPERATIONS
Third Quarter 1996 vs. Third Quarter 1995
Interest income for the third quarter of 1996 was $ 3,054,000
compared to $ 2,808,000 as of September 30, 1995, for an increase of
$ 246,000. The increase is due primarily to an increase in loan
volumes.
Interest expense for the current quarter was $ 1,297,000, an
increase of $ 89,000 over the $ 1,208,000 for the same period of the
prior year. Interest bearing deposits, which have increased
significantly from September 30, 1995 plus a slight increase in
average rates paid over those paid in 1995 have resulted in higher
interest expense for the third quarter.
Net interest income for the third quarter of 1996 totaled
$ 1,757,000, up $ 157,000 from the third quarter of 1995.
Nine Months 1996 vs. Nine Months 1995
For the nine months ended September 30, 1996, interest income
was $ 8,954,000, an increase of $ 1,055,000 over the nine months ended
September 30, 1995. The increase is largely due to an increase in
loan volumes. Gross loans at September 30, 1996 stood at
$ 107,295,000 compared to $ 101,124,000 as of September 30, 1995.
Interest expense for the first nine months of 1996 was
$ 3,843,000 compared to $ 3,265,000 for the same period in 1995
representing a 17.7% increase. The Corporation realized 6% growth in
deposits over the past twelve months. One half of this growth was
concentrated in time deposits with the remaining growth occurring in
statement savings and transaction accounts. This mix in growth of
deposits combined with consistent rates has allowed the Corporation to
maintain desired net interest margins through September 30, 1996.
Net interest income for the first three quarters of 1996
totaled $ 5,111,000, up $ 477,000 from the first three quarters 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 10 of 15 pages
OTHER INCOME
Third Quarter 1996 vs. Third Quarter 1995
Noninterest income increased from $ 222,000 in 1995 to
$ 318,000 in 1996. The increase was due primarily to increases in
services charges and trust fees.
Nine Months 1996 vs. Nine Months 1995
Noninterest income for the first nine months of 1996 was
$ 875,000 compared to $ 644,000 in 1995. The increase resulted
primarily from service charges as the volume of transaction accounts
continues to grow; increases in trust fees and the realization of
$ 1,000 in net security gains compared to net losses of $ 47,000 in
1995.
OTHER EXPENSES
Third Quarter 1996 vs. Third Quarter 1995
Other expenses totaled $ 1,134,000 as of September 30, 1996,
an increase of $ 166,000 from the $ 968,000 recorded for September 30,
1995. Employee related expenses were up 14.9% compared to the third
quarter 1995. Net occupancy increased 11.7% while other operating
expenses increased 23.4% from the prior year.
Nine Months 1996 vs. Nine Months 1995
Other expenses for the first nine months of 1996 reflect a
$ 359,000 increase over the same period in 1995. Employee related
expenses increased 14.7% as a result of normal salary increases and
the addition of staff to accommodate branch expansions. Net occupancy
expense increased 10.7% largely due to increases in depreciation and
equipment maintenance as the result of the Spring Run Branch
acquisition.
INCOME TAXES
The effective income tax rate for the third quarter 1996
increased 2.9% compared to the same period for 1995. The effective
income tax rate remained constant at 29% for the nine month period
ended September 30, 1996 compared to 1995.
FINANCIAL CONDITION
Total assets at September 30, 1996 were $ 155,331,000 a 6.4%
increase over December 31, 1995. Net loans at September 30, 1996
totaled $ 105,722,000, an increase of $ 4,298,000 over the
$ 101,424,000 level at December 31, 1995.
Page 11 of 15 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 Nine Months Ended
September 30 September 30
1996 1995 1996 1995
Balance, beginning of
period $ 1,519 $ 1,261 $ 1,433 $
1,200
Recoveries 3 0 14 6
Provision for loan loss
charged to income 60 30 180
90
Total 1,582 1,291 1,627
1,296
Losses 9 17 54
22
Balance, end of period $ 1,573 $ 1,274 $ 1,573 $
1,274
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 September 30 (in
thousands):
<TABLE>
<S> <C> <C>
90 Days or More
Past Due Nonaccrual Status
1996 1995 1996 1995
Real estate mortgages $ 18 $ 381 $ 0$ 0
Installment loans 63 96 06
Demand and time loans 0 0 161
Credit card 14 10 0 0
Total $ 95 $ 487 $ 16$ 7
</TABLE>
There were no restructured loans for any of the time periods
set forth above.
Total deposits increased to $ 135,844,000 at September 30,
1996 compared to $ 127,330,000 at December 31, 1995. Increases were
largely in time deposits, statement savings and transaction accounts
as mentioned earlier.
Total equity at September 30, 1996 was $ 15,232,000
representing 9.8% of total assets. This is a $ 599,000 increase from
the company's capital position at December 31, 1995. This is the
result of a $ 1,171,000 increase in retained earnings offset by an
unrealized loss of $ 572,000 on securities available for sale at
September 30, 1996.
Page 12 of 15 pages
A comparison of Orrstown Financial Services' capital ratios to
regulatory minimum requirements at September 30, 1996 is as follows:
Orrstown Financial Regulatory Minimum
Services Requirements
Leverage ratio 9.8% 4%
Risk based capital ratios:
Tier I (core capital) 14.3%
4%
Combined tier I and
tier II (core capital plus
allowance for loan losses) 15.7%
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
NINE MONTHS ENDED SEPTEMBER 30
(000 OMITTED)
ASSETS 1996 1995
Securities available for sale:
Taxable interest income $ 18,842 $
16,520
Nontaxable interest income 9,820
7,727
Total available for sale
securities 28,662 24,247
Other investments 1,277 1,140
Loans (net of unearned discounts) 104,991 96,206
Other short-term investments 6,528
901
Total interest earning assets 141,458 122,494
Allowance for loan losses ( 1,503) (
1,245)
Cash and due from banks 6,272 5,034
Bank premises and equipment 3,365 2,631
Other assets 2,249
1,502
Total assets $ 151,841 $
130,416
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand deposits $ 27,276 $
24,627
Savings deposits 26,668 23,624
Time deposits 63,401 50,822
Short-term borrowings 0 954
Long-term borrowings 2,340
2,346
Total interest bearing
liabilities 119,685 102,373
Demand deposits 15,812 13,487
Other liabilities 1,415
1,330
Total liabilities 136,912 117,190
Stockholders' equity 14,929
13,226
Total liabilities and
stockholders' equity $ 151,841 $
130,416
Page 13 of 15 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 14 of 15 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 15 of 15 pages
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 6,079
<INT-BEARING-DEPOSITS> 301
<FED-FUNDS-SOLD> 5,903
<TRADING-ASSETS> 934
<INVESTMENTS-HELD-FOR-SALE> 30,382
<INVESTMENTS-CARRYING> 30,382
<INVESTMENTS-MARKET> 30,382
<LOANS> 107,295
<ALLOWANCE> 1,573
<TOTAL-ASSETS> 155,331
<DEPOSITS> 135,844
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,915
<LONG-TERM> 2,340
<COMMON> 204
0
0
<OTHER-SE> 15,232
<TOTAL-LIABILITIES-AND-EQUITY> 155,331
<INTEREST-LOAN> 7,219
<INTEREST-INVEST> 1,407
<INTEREST-OTHER> 328
<INTEREST-TOTAL> 8,954
<INTEREST-DEPOSIT> 3,723
<INTEREST-EXPENSE> 3,843
<INTEREST-INCOME-NET> 5,111
<LOAN-LOSSES> 180
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 3,419
<INCOME-PRETAX> 2,387
<INCOME-PRE-EXTRAORDINARY> 1,680
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,680
<EPS-PRIMARY> 1.72
<EPS-DILUTED> 1.72
<YIELD-ACTUAL> 4.86
<LOANS-NON> 16
<LOANS-PAST> 95
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,433
<CHARGE-OFFS> 54
<RECOVERIES> 14
<ALLOWANCE-CLOSE> 1,573
<ALLOWANCE-DOMESTIC> 1,573
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
