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, 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 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 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.
X
YES --------------- N--------------
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 31, 1997
(Common stock, no par value) 1,025,094
ORRSTOWN FINANCIAL SERVICES, INC.
INDEX
Page
Part I - FINANCIAL INFORMATION
Item 1. Financial statements ( unaudited )
Condensed consolidated balance sheets - September 30, 1997
and December 31, 1996 3
Condensed consolidated statements ofThree months
ended September 30, 1997 and 1996 4
Condensed consolidated statements of income - Nine months
ended September 30, 1997 and 1996 5
Condensed consolidated statements of cash flows - Nine months
ended September 30, 1997 and 1996 6
Notes to condensed consolidated financial statements 7 - 8
Item 2. Management's discussion and analysis of financial condition
and results of operations 9 -12
PART II - OTHER INFORMATION 13
Signatures 14
PART I - FINANCIAL INFORMATION
PART I - FINANCIAL INFORMATION
Item 1. Financial Statments
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY - OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
1997 1996*
(Unaudited)
ASSETS (000 Omitted)
Cash and due from banks 4,876 5,236
Interest - bearing deposits with banks 22 1,554
Federal funds sold 4 2,936
Securities available for sale 43,239 33,421
Federal Home Loan Bank, Federal Reserve and
Atlantic Central Bankers Bank Stock, at cost
which approximates market value 983 934
Loans 122,782 108,926
Allowance for loan losses (1,691) (1,620)
----------- -----------
Net Loans 121,091 107,306
Bank premises and equipment, net 4,721 3,916
Other assets 2,383 2,253
----------- -----------
Total assets 177,319 157,556
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest - bearing 17,489 16,322
Interest - bearing 134,348 120,937
----------- -----------
Total deposits 151,837 137,259
Federal funds purchased and other borrowed money 5,334 2,339
Other liabilities 2,468 2,102
----------- -----------
Total liabilities 159,639 141,700
----------- -----------
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 September 30, 1997
and 976, 863 issued at December 31, 1996 214 204
Additional paid - in capital 12,351 10,625
Retained earnings 4,449 4,786
Unrealized holding gain, net of tax
$ 343 and $ 124 at September 30, 1997 and
December 31, 1996, respectively 666 241
----------- -----------
Total stockholders' equity 17,680 15,856
----------- -----------
Total liabilities and stockholders'
equity 177,319 157,556
=========== ===========
* Condensed from audited financial statements
The accompanying notes are an integral part of these condensed
financial statements.
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY - OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30, 1997 and 1996
(UNAUDITED)
1997 1996
(Unaudited) (Unaudited)
(000 Omitted)
Interest Income
Interest and fees on loans 2,764 2450
Interest on federal funds sold 44 104
Interest and dividends on investment securities 666 479
Interest income on deposits with banks 0 21
--------- ---------
Total interest income 3,474 3,054
Interest Expense
Interest on deposits 1,421 1,251
Interest on borrowed money 83 46
--------- ---------
Total interest expense 1,504 1,297
--------- ---------
Net interest income 1,970 1,757
--------- ---------
Provision for loan losses 45 60
--------- ---------
Net interest income after provision for loan
losses 1,925 1,697
--------- ---------
Other Income
Service charges on deposits 155 119
Other service charges 81 67
Other income 115 131
Net gains on available for sale
securities 5 1
--------- ---------
Total other income 356 318
--------- ---------
Other Expenses
Salaries and employee benefits 707 602
Net occupancy and equipment expense 170 153
Other operating expense 420 379
--------- ---------
Total other expense 1,297 1,134
--------- ---------
Income before income taxes 984 881
Income tax expense 256 273
--------- ---------
Net income 728 608
========= =========
Weighted average number of shares outstanding ********* *********
Net income per share .71 .60
Cash dividends declared per share .20 .17
The accompanying notes are an integral part of these condensed financial
statements.
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY - OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended September 30, 1997 and 1996
(UNAUDITED)
1997 1996
(Unaudited) (Unaudited)
(000 Omitted)
Interest Income
Interest and fees on loans 7,879 7,219
Interest on federal funds sold 163 259
Interest and dividends on investment securities 1,847 1,407
Interest income on deposits with banks 4 69
----------- ------------
Total interest income 9,893 8,954
Interest Expense
Interest on deposits 4,020 3,723
Interest on borrowed money 202 120
----------- ------------
Total interest expense 4,222 3,843
----------- ------------
Net interest income 5,671 5,111
Provision for loan losses 135 180
----------- ------------
Net interest income after provision for loan
losses 5,536 4,931
----------- ------------
Other Income
Service charges on deposits 449 324
Other service charges 225 176
Other income 407 374
Net gains on available for sale securities 5 1
----------- ------------
Total other income 1,086 875
Other Expenses
Salaries and employee benefits 2,103 1,877
Net occupancy and equipment expense 523 445
Other operating expense 1,232 1,097
----------- ------------
Total other expense 3,858 3,419
----------- ------------
Income before income taxes 2,764 2,387
Income tax expense 758 707
----------- ------------
Net income 2,006 1,680
=========== ============
Weighted average number of shares outstanding 1,025,398 1,025,706
Net income per share 1.96 1.64
Cash dividends declared per share 0.57 0.49
The accompanying notes are an integral part of these condensed financial
statements.
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY - OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1997 and 1996
(UNAUDITED)
1997 1996
(Unaudited) (Unaudited)
(000 Omitted)
Cash flows from operating activities:
Net income 2,006 1,680
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 252 185
Provision for loan losses 135 180
Other, net (14) 308
---------- ---------
Net cash provided by operating activities 2,379 2,353
Cash flows from investing activities:
Net (increase) decrease in interest bearing
deposits with banks 1,532 988
Purchase of available for sale securities (11,818) (5,577)
Maturities of available for sale securities 2,583 2,560
Sales of available for sale securities 12 2,397
Net (increase) in loans (13,920) (4,478)
Purchases of bank premises and equipment (1,026) (909)
---------- ---------
Net cash (used) by investing activities (22,637) (5,019)
---------- ---------
Cash flows from financing activities:
Net increase in deposits 14,578 8,514
Cash dividends paid (585) (508)
Cash paid in lieu of fractional dividends (22) 0
Proceeds from long - term debt 3,000 0
Payments on debt (5) (5)
---------- ---------
Net cash provided by financing activities 16,966 8,001
---------- ---------
Net increase (decrease) in cash and cash
equivalents (3,292) 5,335
Cash and cash equivalents at beginning of
period 8,172 6,647
---------- ---------
Cash and cash equivalents at beginning of
period 4,880 11,982
========== =========
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest 3,860 3,713
Income Taxes 724 652
Supplemental schedule of noncash investing and financing activities:
Unrealized gain (loss) on investments available for
sale (net of deferred taxes of $ 219 and $ [ 295 ]
at September 30, 1997 and 1996,
respectively) 425 (572)
5 % stock dividend issued May, 1997 1,736 0
The accompanying notes are an integral part of these condensed financial
statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 1. Basis of Presentation
The financial information presented at and for the three months
ended and nine months September 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. 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.
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 September 30, 1997 fair value exceeded amortized cost
by $1,009,000. This resulted in an increase in stockholders'
equity of $666,000 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.
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 $ 728,000 for the
third quarter of 1997 compared to $ 608,000 for the same period in 1996,
representing an increase of $ 120,000 or 19.7 %. Net income per share was
$ .71 during 1997's third quarter up $ .11 from the $ .60 earned during
1996's third quarter.
Net income for the first nine months of 1997 was $ 2,006,000 compared to
$ 1,680,000 for the same period in 1996, representing an increase of
$ 326,000 or 19.4 %. Net income per share for the first nine months
was $ 1.96 up $ .32 from the 1.64 per share realized during the nine months
ended September 30, 1996.
The following statistics compare 1997's year to date performance to that
of 1996:
Third Quarter Nine Months Year to Date
1997 1996 1997 1996
Return on average assets 1.65 % 1.56 % 1.59 % 1.47 %
Return on average equity 16.89 % 16.14 % 16.22 % 15.16 %
Average equity / Average assets 9.75 % 9.59 % 9.83 % 9.71 %
A more detailed discussion of the elements having the greatest impact on net
income follows.
Net Interest Income
Third Quarter 1997 vs. Third Quarter 1996
Net interest income for the third quarter of 1997 was $ 1,970,000
representing a growth of $ 213,000, or 12.1 % , over the $ 1,757,000
realized during 1996's third quarter. Loan demand has been adequate to
enable the loan portfolio to grow at a slightly higher rate than the total
balance sheet. This loan growth coupled with liability pricing and product
offerings have enabled a 14 basis point increase in net interest spread. In
addition, a growth in free funds of $ 1,785,000, or 7.3 %, has enabled a
12 basis point increase in net interest margin.
Nine Months 1997 vs. Nine Months 1996
Net interest income for the first nine months of 1997 was $ 5,671,000
representing an increase of $ 560,000, or 11.0 %, over the $ 5,111,000
generated during the first nine months of 1996. Loan growth and liability
pricing have contributed to a 15 basis point increase
in net interest spread over the prior year's results. Free funds growth of
$ 560,000, or 11.5 %, has contributed to a similar 15 basis point increase
in net interest margin.
The table that follows states rates on a fully taxable equivalent basis,
( F.T.E. ) and demonstrates the aforementioned effects:
<TABLE>
<S>
<C> <C> <C> <C> <C>
THIRD QUARTER
1997 1996
( in thousands ) Avg. Balances Rates Avg. Balances Rates
Interest earning assets 165,358 8.55 146,538 8.33 %
Interest bearing
liabilities 138,978 4.27 % 121,943 4.19 %
--------- --------- ---------- --------
Free Funds 26,380 24,595
========= ==========
Net interest income 1,970 1,757
========= ==========
Net interest spread
( F.T.E. ) 4.28 % 4.14 %
========= ========
Free funds ratio 15.95 % 16.78 %
========= ==========
Net interest margin
( F.T.E ) 4.96 % 4.84 %
========= =========
Nine Months Year to Date
1997 1996
<C> <C> <C> <C> <C>
(in thousands) Avg. Balances Rates Avg. Balances Rates
Interest earning assets 158,002 8.57% 142,619 8.44%
Interest bearing
liabilities 132,441 4.25% 119,686 4.27%
_________ ______ _______ _____
Free Funds 25,561 22,933
========= ========
Net interest income 5,671 5,111
========= ========
Net interest spread
(F.T.E.) 4.32% 4.17%
======= ======
Free funds ratio 16.18% 16.08%
======== =======
Net interest margin
(F.T.E.) 5.01% 4.86%
====== ======
</TABLE>
Other Income and Other Expenses
Third Quarter 1997 vs. Third Quarter 1996
Other income increased $ 38,000, or 11.9 %, from $ 318,000 during the third
quarter of 1996 to $ 356,000 during the third quarter of 1997. Increases in
service charges on deposit accounts accounted for $ 36,000 of the increase
generated by a revised service fee schedule and growth in the deposit base.
Other expense rose $ 163,000, or 14.47 %, from $ 1,134,000 for third quarter
1996 to $ 1,297,000 for 1997's third quarter. Salary and benefit increases
contributed $ 105,000 of the growth. All expense categories grew due to
general growth of the bank plus the opening of a sixth branch office
during January 1997 in Carlisle, Pennsylvania and preliminary planning and
staffing for the opening of a seventh branch office during November, 1997
in Chambersburg, Pennsylvania. Robust loan and deposit growth plus the
addition of these two banking facilities have contributed to increases in all
noninterest expense categories.
Nine Months 1997 vs. Nine Months 1996
Other income increased $ 211,000, or 24.1 %, to $ 1,086,000 from $ 875,000 a
year ago. A $ 125,000, or 14.3 %, increase in service charges on deposit
account plus a $ 75,000, or 26.5 %, increase in trust department income were
the primarily contributors to this growth. Other expenses rose $ 439,000,
or 12.8 %, from $ 3,419,000 during the first nine months of 1996 to
$ 3,858,000 for the same period of 1997. All categories of noninterest
expense rose due to the aforementioned growth plus the addition
of two new branch locations during 1997. Staff increases contributed to
growth in salaries and benefits of $ 226,000, the largest single component
of increase.
Income Tax Expense
Income tax expense decreased $ 17,000, or 6.2 %, during 1997's third quarter
versus third quarter 1996. Income tax expense rose $ 51,000, or 7.2 % for
the first nine months of 1997 versus the same period a year ago. The
primary factor driving the change in income tax expense is a 97 % increase in
the municipal bond portfolio from $ 8,933,000 at September 30, 1996 to
$ 17,609,000 at September 30,1997. This increase in tax exempt investing
has reduced effective federal income tax rates as follows:
Third Quarter Nine Months Year to Date
1997 1996 1997 1996
Effective income tax rate 26.0 % 31.0 % 27.9 % 29.6 %
The margined 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 Nine Months Ended
September 30 September 30
1997 1996 1997 1996
Balance, beginning of
period 1,684 1,519 1,620 1,433
Recoveries 0 3 1 14
Provision for loan loss
charged to income 45 60 135 180
--------- -------- -------- ---------
Total 1,729 1,582 1,756 1,627
Losses 38 9 65 54
--------- -------- -------- ---------
Balance, end of
period 1,691 1,573 1,691 1,573
========= ======== ======== =========
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 70 % at September 30, 1997.
Loans 90 days or more past due (still accruing interest) and those on
nonaccrual status were as follows at September 30 ( in thousands) :
90 Days or More
Past Due Nonaccrual Status
1997 1996 1997 1996
Real estate mortgages 463 18 405 0
Installment loans 42 63 15 0
Demand and time loans 12 0 0 16
Credit card 5 14 0 0
--------- -------- -------- ---------
Total 522 95 420 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.
CAPITAL RESOURCES AND BALANCE SHEET FLUCTUATIONS
A comparison of Orrstown Financial Services' capital ratios to regulatory
minimum requirements at September 30, 1997 is as follows:
Orrstown Financial Regulatory Minimum
Services Requirements
Leverage ratio 9.32 % 4 %
Risk based capital ratios:
Tier I (core capital) 12.83 % 4 %
Combined tier I and tier II
(core capital plus allowance
for loan losses) 14.08 % 8 %
The robust growth experienced during 1997 has been supported by capital
growth in the form of retained earnings. Equity represented 9.97 % of
assets at September 30, 1997 which is down just slightly from
10.06 % at December 31, 1997.
All balance sheet fluctuations exceeding 5 % have been created by either
the robust growth that has been experienced during 1997 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.
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
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)
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 4,876
<INT-BEARING-DEPOSITS> 22
<FED-FUNDS-SOLD> 4
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 43,239
<INVESTMENTS-CARRYING> 43,239
<INVESTMENTS-MARKET> 43,239
<LOANS> 122,782
<ALLOWANCE> 1,691
<TOTAL-ASSETS> 177,319
<DEPOSITS> 151,837
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,468
<LONG-TERM> 5,334
0
0
<COMMON> 214
<OTHER-SE> 17,680
<TOTAL-LIABILITIES-AND-EQUITY> 177,319
<INTEREST-LOAN> 7,879
<INTEREST-INVEST> 1,847
<INTEREST-OTHER> 167
<INTEREST-TOTAL> 9,893
<INTEREST-DEPOSIT> 4,020
<INTEREST-EXPENSE> 4,222
<INTEREST-INCOME-NET> 5,671
<LOAN-LOSSES> 135
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 3,858
<INCOME-PRETAX> 2,764
<INCOME-PRE-EXTRAORDINARY> 2,006
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,006
<EPS-PRIMARY> 1.96
<EPS-DILUTED> 1.96
<YIELD-ACTUAL> 5.01
<LOANS-NON> 420
<LOANS-PAST> 522
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,620
<CHARGE-OFFS> 65
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 1,691
<ALLOWANCE-DOMESTIC> 1,691
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
