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 March 31,1999 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 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 May 7,1999
(Common Stock, no par value)
2,059,920
ORRSTOWN FINANCIAL SERVICES, INC.
INDEX
Page
Part I - FINANCIAL INFORMATION
Item 1. Financial statements ( unaudited )
Condensed consolidated balance sheets - March 31,1999
and December 31, 1998
3
Condensed consolidated statements of income - Three months
ended March 31,1999 and 1998
4
Condensed consolidated statements of comprehensive income -
Three months
ended March 31,1999 and 1998
5
Condensed consolidated statements of cash flows -Three months
ended March 31,1999 and 1998
6
Notes to condensed consolidated financial statements
7
Item 2. Management's discussion and analysis of financial condition
and results of operations
9
PART II - OTHER INFORMATION
13
Signatures
14
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)
March 31,
December 31,
1999
1998*
(Unaudited)
ASSETS
(000 Omitted)
Cash and due from banks 6,567
7,028
Interest - bearing deposits with banks 20
27
Federal funds sold 6,152
8,072
Securities available for sale 52,347
49,852
Federal Home Loan Bank, Federal Reserve and
Atlantic Central Bankers Bank Stock, at cost
which approximates market value 1,285
1,285
Loans 163,097
158,632
Allowance for loan losses (2,057)
(1,971)
-----------
- -----------
Net Loans 161,040
156,661
Bank premises and equipment, net 5,257
5,224
Other assets 7,963
7,673
-----------
- -----------
Total assets 240,631
235,822
===========
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing 23,894
22,020
Interest bearing 164,193
161,744
-----------
- -----------
Total deposits 188,087
183,764
Federal funds purchased and repurchase agreements 6,337
6,234
Other borrowed funds 20,822
20,828
Other liabilities 3,863
3,916
-----------
- -----------
Total liabilities 219,109
214,742
-----------
- -----------
STOCKHOLDERS' EQUITY
Common stock, no par value - $ .1041 stated
value per share at March 31, 1999 and
December 31, 1998, 10, 000, 000 shares authorized
with 2,057,799 shares issued at March 31, 1999
and 2,055,315 shares issued at December 31, 1 214
214
Additional paid - in capital 12,545
12,476
Retained earnings 7,445
6,863
Unrealized holding gain, net of tax
$ 679 and $ 786 at March 31, 1998 and
December 31, 1998, respectively 1,318
1,527
-----------
- -----------
Total stockholders' equity 21,522
21,080
-----------
- -----------
Total liabilities and stockholders'
equity 240,631
235,822
===========
===========
* 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 March 31, 1999 and 1998
(UNAUDITED)
1999
1998
(Unaudited)
(Unaudited)
(000
Omitted)
Interest Income
Interest and fees on loans 3,465
2,890
Interest on federal funds sold 80
90
Interest and dividends on investment securities 762
734
Interest income on deposits with banks 2
1
---------
- ---------
Total interest income 4,309
3,715
Interest Expense
Interest on deposits 1,581
1,560
Interest on borrowed money 341
147
---------
- ---------
Total interest expense 1,922
1,707
---------
- ---------
Net interest income 2,387
2,008
---------
- ---------
Provision for loan losses 90
75
---------
- ---------
Net interest income after provision for loan
losses 2,297
1,933
---------
- ---------
Other Income
Service charges on deposits 207
186
Other service charges 152
96
Trust department income 184
166
Brokerage income 82
26
Other income 88
17
Net gains or (losses) on available for sale sec (9)
(10)
---------
- ---------
Total other income 704
481
---------
- ---------
Other Expenses
Salaries and employee benefits 1,001
808
Net occupancy and equipment expenses 215
202
Other operating expenses 613
517
---------
- ---------
Total other expense 1,829
1,527
---------
- ---------
Income before income taxes 1,172
887
Income tax expenses 323
245
---------
- ---------
Net income 849
642
=========
=========
Weighted average number of shares outstanding *********
*********
Net income per share 0.41
0.32
Cash dividends declared per share 0.13
0.115
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 COMPREHENSIVE INCOME
Three Months Ended March 31,1999
and 1998
(UNAUDITED)
1999
1998
(000
Omitted)
Net Income 849
642
Other comprehensive income, net of tax
Unrealized gain (loss) on investment securities
available for sale (209)
(189)
_________
__________
Comprehensive Income 640
453
============
=============
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 CASH
FLOWS
Three Months Ended March 31,
1999 and 1998
(UNAUDITED)
1999 1998
(Unaudited) (Unaudited)
(000 Omitted)
Cash flows from operating activities:
Net income
849 642
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization
112 103
Provision for loan losses
90 75
Other, net
54 122
----
- ------ ---------
Net cash provided by operating activities
1,105 942
Cash flows from investing activities:
Net (increase) decrease in interest bearing
deposits with banks
7 (112)
Purchase of available for sale securities
(5,016) (5,014)
Maturities of available for sale securities
2,201 1,695
Net (increase) in loans
(4,465) (4,867)
Purchases of bank premises and equipment
(133) (33)
(Increase) in other assets
(302) 0
----
- ------ ---------
Net cash (used) by investing activities
(7,708) (8,331)
----
- ------ ---------
Cash flows from financing activities:
Net increase in deposits
4,323 10,187
Cash dividends paid
(268) (236)
Dividend reinvestment plan purchases
70 0
Net increase in purchased funds
103 3,323
Payments on debt
(6) (6)
----
- ------ ---------
Net cash provided by financing activities
4,222 13,268
----
- ------ ---------
Net increase (decrease) in cash and cash equivalents
(2,381) 5,879
Cash and cash equivalents at beginning of period
15,100 8,821
----
- ------ ---------
Cash and cash equivalents at beginning of period
12,719 14,700
========== =========
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest
2,007 1,582
Income Taxes
0 42
Supplemental schedule of noncash investing and financing activities:
Unrealized gain (loss) on investments available for
sale (net of deferred taxes of $(107) and $(96) at
March 31, 1999 and 1998, respectively)
(209) (189)
The accompanying notes are an integral part of these condensed
financial statements.
ORRSTOWN FINANCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(UNAUDITED)
NOTE 1. Basis of Presentation
The financial information presented at and for the three
months
ended March 31, 1999 and 1998 is unaudited. Information
presented
at December 31, 1998 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 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
In October, 1998 the Board of Directors of Orrstown Financial
Services, Inc. approved
a two for one stock split effective November 21, 1998 for
shareholders of record on
November 2, 1998. Earnings per share, dividends per share and
weighted average
shares outstanding references have been restated to reflect
the two for one stock split
for all periods presented.
Note 7. Investment Securities
Management determines the appropriate classification of
securities at the time of
purchase. If management has the intent and the corporation
has the ability at the time
of purchase to hold securities until maturity or on a long -
term basis, they are classified
as securities held to maturity and carried at amortized
historical cost. Securities to be held
for indefinite periods of time and not intended to be held to
maturity or on a long - term
basis are classified as available for sale and carried at fair
value. Securities held for indefinite
periods of time include securities that management intends to
use as part of its asset
and liability management strategy and that may be sold in
response to changes in interest
rates, resultant prepayment risk and other factors related to
interest rate and resultant
prepayment risk changes.
Realized gains and losses on dispositions are based on the net
proceeds and the adjusted
book value of the securities sold, using the specific
identification method. Unrealized
gains and losses on investment securities available for sale
are based on the difference
between book value and fair value of each security. These
gains and losses are credited
or charged to shareholders' equity, whereas realized gains and
losses flow through the
corporation's operations.
Management has classified all investments securities as
"available for sale". At March 31
1999 fair value exceeded amortized cost by $1,997,000. This
resulted in an increase
in stockholders' equity of $1,318,000 after recognizing the
tax effects of the unrealized
gains. At December 31, 1998, fair market value exceeded
amortized cost by $ 2,313,000
resulting in an increase in stockholders' equity of $1,527,000
after recognizing the tax
effects of the unrealized gains.
Note 8. Year 2000 (Y2K) Data Processing Position
The Corporation's last mission critical function, check
processing, was
converted to a Y2K compliant system effective May 6, 1999.
Renovation of
other systems has been completed and a Phase II regulatory
examination was
satisfactorily completed during February, 1999. Thus, the
Corporation does
not expect Y2K expenses recorded in 1999 to have a material
effect on its
liquidity, capital position or results of operations.
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 $ 849,000 for the first qua
1999 compared to $ 642,000 for the same period
in 1998, representing an increase of
$ 207,000 or 32.2 %. Net income per share was
$ .41 during 1999's third quarter up
from the $ .32 earned during 1998's first
quarter.
The following statistics compare 1999's year
to date performance to that of 1998:
First Quarter
1999 1998
Return on average assets
1.45% 1.33%
Return on average equity
15.95% 13.99%
Average equity / Average assets
9.09% 9.52%
A more detailed discussion of the elements
having the greatest impact on net income
Net Interest Income
First Quarter 1999 vs. First Quarter 1998
Net interest income for the first
quarter of 1999 was $ 2,297,000 representi
growth of $ 364,000, or 18.8 % , over the $
1,933,000 realized during 1998's first q
Growth in net interest income was realized
solely through volume factors as the net
interest margin narrowed from 4.66% during
1998's first quarter to 4.63%. Growth ha
been exceptional with average daily loans up
24.4% from 1998's first quarter and ave
daily deposits up 13% over the same period.
Free funds have grown 7.8% over first
quarter 1998 but the free funds ratio has
lightened from 15.23% to 13.73%.
The table that follows states rates on a fully
taxable equivalent basis, ( F.T.E. )
demonstrates the aforementioned effects:
FIRST QUARTER
1999
1998
( in thousands ) Avg. Balances Rates Avg.
Balances Rates
Interest earning assets 220,508 8.16%
184,359 8.42%
Interest bearing liabilities 190,238 4.09%
156,280 4.43%
--------- --------- -----
- ----- --------
Free Funds 30,270
28,079
=========
==========
Net interest income 2,297
1,933
=========
==========
Net interest spread ( F.T.E. ) 4.07%
3.99%
=========
========
Free funds ratio 13.73%
15.23%
=========
==========
Net interest margin ( F.T.E ) 4.63%
4.66%
=========
========
Other Income and Other Expenses
First Quarter 1999 vs. First Quarter 1998
Other income increased $ 233,000, or 46.4 %, from $ 481,000 during the
first quarter of 1998 to $ 704,000
during the first quarter of 1999. Increases were realized in most
categories with other income growing
$71,000, brokerage income up $56,000, other service charges, including
ATM and loan charges, up
$56,000, deposit service charges up $ 23, 000 and trust income up
$18,000. The other income growth
includes $70,000 attributable to accounting required for the addition
of approximately $4,700,000 of single
premium life insurance cash values to other assets at September 30,
1998. These life insurance assets
support supplemental retirement plan benefits provided to the director
and executive management groups.
$52,000 of growth in other expenses was also attributable to these
policies.
Other expenses rose $ 302,000, or 19.8 %, from $ 1,527,000 for the
first quarter 1998 to $ 1,829,000
for 1999's first quarter. Salary and benefit increases contributed $
193,000 of the growth. All
expense categories grew due to continued robust growth of the bank.
Staff has been expanded to
accommodate the 20% plus growth rate that is being experienced for the
third consecutive year. Market
opportunities have been presented by mergers of area competitors.
Income Tax Expense
Income tax expense increased $ 78,000, or 31.8 %, during 1999's first
quarter versus first quarter
1998. Income before income taxes increased 32.1% during the same
period. This created
a similar effective income tax rate as shown below:
First Quarter
1999 1998
Effective income tax rate 27.6%
27.6%
The marginal federal income tax bracket is 34 % for all periods
presented.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses and the other changes in the
allowance for loan
losses are shown below ( in thousands) :
Quarter Ended March 31
1999 1998
Balance, beginning of period
1,971 1,767
Recoveries
1 11
Provision for loan loss charged to income
90 75
------
- --------- -----------------
Total
2,062 1,853
Losses
5 7
------
- -- ---------
Balance, end of period
2,057 1,846
======== =========
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
54 % at March 31, 1999.
Loan quality has traditionally been a company strength and
the levels of loans 90 days or
more past due (still accruing interest) and those on
nonaccrual status have improved
since first quarter 1998 as follows:
90 Days or More Past Due
Nonaccrual Status
(in thousands) (in
thousands)
1999 1998
1999 1998
Real estate mortgag 89 1,151
0 588
Installment loans 1 21
32 3
Demand and time loans 90 6
451 6
Credit card 3 6
0 0
--------- -------- ------
- -- ---------
Total 183 1,184
483 597
========= ========
======== =========
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
March 31, 1999 is as follows:
Orrstown
Financia Regulatory Minimum
Services
Requirements
Leverage ratio 8.33%
3%
Risk based capital ratios:
Tier I (core capital) 10.92%
4%
Combined tier I and tier II
(core capital plus allowance
for loan losses) 12.06%
8%
The robust growth experienced during 1998 - 1999 has been supported by
capital growth in the form of retained
earnings and dividend reinvested via the dividend reinvestment plan
adopted in 1998. Equity represented 8.94%
of assets at March 31, 1999 which is similar to the 8.94% realized at
December 31, 1998 and down slightly from
the 9.05% realized at March 31, 1998.
Widespread acceptance of the dividend reinvestment plan initiated with
the second quarter dividend of 1998, along
with a moderated dividend payout, has enabled the stabilization of the
equity to assets ratio at around the 9% level, despite
20% plus asset growth. The dividend payout was 35.9% during 1998's
first quarter and 31.7% for second quarter 1999.
Shares participating in the dividend reinvestment program currently
stand at approximately 27.7% which provides
a quarterly cash infusion in excess of $74,000.
All balance sheet fluctuations exceeding 5% have been created by either
the robust growth the has been
experienced during 1998 - 1999 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
(Kenneth R.
Shoemaker, President and CEO)
/s/
Date: May 13, 1999 Robert B.
Russell
(Robert B.
Russell, Vice President and Chief
Accounting Officer)
/s/
Bradley S.
Everly
(Bradley S.
Everly, Senior Vice President and
Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 6,567
<INT-BEARING-DEPOSITS> 20
<FED-FUNDS-SOLD> 6,152
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 52,347
<INVESTMENTS-CARRYING> 52,347
<INVESTMENTS-MARKET> 52,347
<LOANS> 163,097
<ALLOWANCE> 2,057
<TOTAL-ASSETS> 240,631
<DEPOSITS> 188,087
<SHORT-TERM> 6,337
<LIABILITIES-OTHER> 3,863
<LONG-TERM> 20,822
0
0
<COMMON> 214
<OTHER-SE> 21,308
<TOTAL-LIABILITIES-AND-EQUITY> 240,631
<INTEREST-LOAN> 3,465
<INTEREST-INVEST> 762
<INTEREST-OTHER> 82
<INTEREST-TOTAL> 4,309
<INTEREST-DEPOSIT> 1,581
<INTEREST-EXPENSE> 1,922
<INTEREST-INCOME-NET> 2,387
<LOAN-LOSSES> 90
<SECURITIES-GAINS> (9)
<EXPENSE-OTHER> 1,829
<INCOME-PRETAX> 1,172
<INCOME-PRE-EXTRAORDINARY> 849
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 849
<EPS-PRIMARY> .41
<EPS-DILUTED> .41
<YIELD-ACTUAL> 4.63
<LOANS-NON> 483
<LOANS-PAST> 183
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,971
<CHARGE-OFFS> 1
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<ALLOWANCE-CLOSE> 2,057
<ALLOWANCE-DOMESTIC> 2,057
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,111
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