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, 2000
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 May 4, 2000
- ----------------------------- --------------------------
(Common stock, .625 par value) 2,228,359
Page 1 of 14 pages
<PAGE>
ORRSTOWN FINANCIAL SERVICES, INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial statements (unaudited)
Condensed consolidated balance sheets - March 31, 2000
and December 31, 1999 3
Condensed consolidated statements of income - three months
ended March 31, 2000 and 1999 4
Condensed consolidated statements of comprehensive income -
three months ended March 31, 2000 and 1999 5
Condensed consolidated statements of cash flows - three
months ended March 31, 2000 and 1999 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
<PAGE>
PART I - FINANCIAL INFORMATION
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999*
---- -----
ASSETS (Unaudited) (000 Omitted)
<S> <C> <C>
Cash and due from banks $ 7,199 $ 8,585
Interest-bearing deposits with banks 254 115
Federal funds sold 2,383 0
Securities available-for-sale 65,384 60,455
Federal Home Loan Bank, Federal Reserve and
Atlantic Central Bankers Bank Stock, at cost
which approximates market value 1,734 1,509
Loans 185,670 180,691
Allowance for loan losses (2,523) (2,455)
--------- ---------
Net loans 183,147 178,236
Bank premises and equipment, net 7,435 6,809
Accrued interest receivable 1,616 1,599
Cash surrender value of life insurance 5,443 5,384
Other assets 2,752 2,361
--------- ---------
Total assets $ 277,347 $ 265,053
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 28,498 $ 25,264
Interest-bearing 177,412 179,125
--------- ---------
Total deposits 205,910 204,389
Federal funds purchased and other short term
borrowed funds 25,543 15,406
Long term borrowed funds 20,815 20,822
Accrued interest payable 407 422
Other liabilities 2,215 2,146
--------- ---------
Total liabilities 254,890 243,185
--------- ---------
STOCKHOLDERS' EQUITY
Common stock, no par value - $.1041 stated value per share
at March 31, 2000 and December 31, 1999, 10,000,000 shares
authorized with 2,220,598 shares issued at March 31, 2000
and 2,218,291 issued at December 31, 1999 231 231
Additional paid-in capital 18,589 18,498
Retained earnings 4,354 3,717
Unrealized holding loss, net of tax of
($369) and ($298) at March 31, 2000
and December 31, 1999, respectively (717) (578)
--------- ---------
Total stockholders' equity 22,457 21,868
--------- ---------
Total liabilities and
stockholders' equity $ 277,347 $ 265,053
========= =========
</TABLE>
* Condensed from audited financial statements
The accompanying notes are an integral part of these condensed
financial statements.
Page 3 of 14 pages
<PAGE>
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
---- ----
(000 Omitted)
<S> <C> <C>
Interest Income
Interest & fees on loans $ 3,918 $ 3,465
Interest on federal funds sold 49 80
Interest and dividends on investment
securities 1,013 762
Interest income on deposits with banks 8 2
--------- ---------
Total interest income 4,988 4,309
--------- ---------
Interest Expense
Interest on deposits 1,718 1,581
Interest on borrowed money 575 341
--------- ---------
Total interest expense 2,293 1,922
--------- ---------
Net interest income 2,695 2,387
Provision for loan losses 75 90
--------- ---------
Net interest income after provision
for loan losses 2,620 2,297
--------- ---------
Other Income
Service charges on deposits 270 236
Other service charges 115 120
Trust Department income 253 184
Brokerage income 79 82
Other income 86 91
Net gains on available for sale securities (2) (9)
--------- ---------
Total other income 801 704
--------- ---------
Other Expenses
Salaries and employee benefits 1,176 1,001
Net occupancy and equipment expenses 355 215
Other operating expenses 606 613
--------- ---------
Total other expenses 2,137 1,829
--------- ---------
Income before income taxes 1,284 1,172
Income tax expenses 335 323
--------- ---------
Net income $ 949 $ 849
========= =========
Weighted average number of shares
outstanding 2,220,092 2,211,511
Net income per share $ .43 $ .38
Cash dividends declared per share $ .14 .12
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
All per share amounts have been adjusted to give retroactive recognition to a
7-1/2% stock dividend effective November 19, 1999.
Page 4 of 14 pages
<PAGE>
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
2000 1999
---- ----
(000 Omitted)
Net income $ 949 $ 849
Other comprehensive income, net of tax
Unrealized gain (loss) on investment
securities available for sale (139) (209)
----- -----
Comprehensive income $ 810 $ 640
===== =====
The accompanying notes are an integral part of these condensed
financial statements.
Page 5 of 14 pages
<PAGE>
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2000 and 1999
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
---- ----
(000 Omitted)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 949 $ 849
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 158 112
Provision for loan losses 75 90
Other - Net 40 54
------ --------
Net cash provided by operating activities 1,222 1,105
------ --------
Cash flows from investing activities:
Net (increase) decrease in interest bearing
deposits with banks (139) 7
Purchase of available for sale securities (6,267) (5,016)
Maturities of available-for-sale securities 899 2,201
Net (increase) in loans (4,986) (4,465)
Purchases of bank premises and equipment (771) (133)
(Increase) in other assets (391) (302)
------- --------
Net cash (used) by investing activities (11,655) (7,708)
------- --------
Cash flows from financing activities:
Net increase in deposits 1,521 4,323
Cash dividends paid (311) (268)
Dividend reinvestment plan purchases 90 70
Net increase in purchased funds 10,137 103
Payments on debt (7) (6)
------- --------
Net cash provided by financing activities 11,430 4,222
------- --------
Net increase(decrease) in cash and cash
equivalents 997 (2,381)
Cash and cash equivalents at beginning
Of period 8,585 15,100
------- --------
Cash and cash equivalents at end of period $ 9,582 $ 12,719
======= ========
Supplemental disclosure of cash flows information:
Cash paid during the period for:
Interest $ 2,308 $ 2,007
Income taxes 0 0
Supplemental schedule of noncash investing and financing
activities:
Unrealized (loss) on investments available for sale (net of
deferred taxes of $(72) and $(107) at march 31, 2000 and
1999, respectively (139) (209)
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
Page 6 of 14 pages
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
Review of Interim Financial Statements
The condensed consolidated financial statements as of and for the
three months ended March 31, 2000 and 1999 have been reviewed by
independent certified public accountants. Their report on their review
is attached as Exhibit 99 to this 10-Q filing.
Note 1. Basis of Presentation
The financial information presented at and for the three months ended
March 31, 2000 and 1999 is unaudited. Information presented at
December 31, 1999 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
<PAGE>
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, 1999 the Board of Directors of Orrstown Financial
Services, Inc. approved a 7-1/2% stock dividend payable November 19,
1999 to shareholders of record November 1, 1999. All per share amounts
have been adjusted to give retroactive recognition to this event.
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 investment securities as "available for
sale". At March 31, 2000 amortized cost exceeded fair value by
$1,086,000. This resulted in a decrease in stockholders' equity of
$717,000 after recognizing the tax effects of the unrealized losses.
At December 31, 1999 amortized cost exceeded fair value by $875,000
resulting in a decrease in stockholders' equity of $578,000 after
recognizing the tax effects of the unrealized losses.
Page 8 of 14 pages
<PAGE>
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 $949,000 for the
first quarter of 2000 compared to $849,000 for the same period in 1999;
representing an increase of $100,000 or 11.8%. Net income per share was $.43
during 2000's first quarter up $.05 from the $.38 earned during 1999's first
quarter.
The following statistics compare 2000's first quarter performed to that of
1999:
First Quarter
--------------------
2000 1999
------ ------
Return on average assets 1.42% 1.45%
Return on average equity 16.99% 15.95%
Average equity/average assets 8.33% 9.09%
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 2000 was $2,695,000
representing growth of $308,000, or 12.9%, over the $2,387,000 realized during
1999's first quarter. The growth in net interest income is driven by volume
factors since spreads have tightened slightly. Net interest spread stayed at
4.07% but net interest margin tightened by 5 basis points due to a declining
level of free funds.
The table that follows states rates on a fully taxable equivalent basis
(F.T.E.) and demonstrates the aforementioned effects:
<TABLE>
<CAPTION>
First Quarter
------------------------------------------------------------
2000 1999
------------------------ -----------------------
(in thousands) Avg. Balances Rates Avg. Balances Rates
------------- ----- ------------- -----
<S> <C> <C> <C> <C>
Interest earning assets $ 248,785 8.29% $ 220,587 8.16%
Interest bearing liabilities 218,478 4.22% 190,238 4.09%
--------- ---- --------- ----
Free funds $ 30,307 $ 30,349
========= =========
Net interest income $ 2,695 $ 2,387
========= =========
Net interest spread (F.T.E.) 4.07% 4.07%
==== ====
Free funds ratio 12.18% 13.76%
===== =====
Net interest margin (F.T.E.) 4.58% 4.63%
==== ====
</TABLE>
Page 9 of 14 pages
<PAGE>
OTHER INCOME AND OTHER EXPENSES
First Quarter 2000 vs. First Quarter 1999
Other income increased $97,000, or 13.8% from $704,000 during 1999 to $
801,000 during 2000's first quarter. The increase was primarily attributable to
a $69,000, or 37.5%, increase in trust revenues and a $34,000, or 14.4%
increase in service charges on deposits. Our trust and investment services
division continues to grow and is now contributing approximately 8% of our net
income. The service charge on deposits increase was a by product of deposit
growth and a new service charge schedule installed in mid-1999.
Orrstown Financial Services was one of the First Bank holding companies in
the country to file for and receive Financial Holding Company (FHC) status which
should facilitate the ability to realize noninterest income growth opportunities
in the future.
Other expenses rose from $1,829,000 during the first quarter 1999 to
$2,137,000 during 2000's first quarter, an increase of $308,000, or 16.8%.
Growth over the past three years has caused staff increases and conversions of
all major systems during 1999, including a switch from a third party provider to
in-house processing for core commercial bank processing, has required some staff
increases in our operations area. This major operational overhead should bode
well for future effeciencies and enable growth at improving incremental margins.
Our eighth full service office was opened in September, 1999 at a Chambersburg,
Pennsylvania Wal-Mart and our ninth is scheduled to open in Mid-2000 at Silver
Spring, outside Mechanicsburg, Pennsylvania. We are excited at the prospect of
entering the Mechanicsburg market, a natural extension from our Carlisle
locations. In addition, a new operations center should be completed in June,
2000 in Shippensburg. This expansion has brought increased operating costs but
we have been able to grow profitably.
INCOME TAX EXPENSE
Income tax expense increased $12,000 or 3.7% during 2000's first quarter
versus first quarter 1999. Effective income tax rates were as follows:
First Quarter
---------------------
2000 1999
---- ----
Effective income tax rate 26.1% 27.6%
The marginal federal income tax bracket is 34% for all periods presented.
Page 10 of 14
<PAGE>
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
----------------------------------
2000 1999
---- ----
Balance, beginning of period $ 2,455 $ 1,971
Recoveries 1 1
Provision for loan loss
Charged to income 75 90
------- -------
Total 2,531 2,062
Losses 8 5
------- -------
Balance, end of period $ 2,523 $ 2,057
======= =======
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 March 31, 2000.
Loans 90 days or more past due (still accruing interest) and those on
nonaccrual status were as follows at March 31 (in thousands):
<TABLE>
<CAPTION>
90 Days or More
Past Due Nonaccrual Status
------------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Real estate mortgages $ 139 $ 89 $ 0 $ 0
Installment loans 39 1 0 32
Commercial loans 1,930 90 45 451
Credit card 1 3 0 0
------- ----- ---- -----
Total $ 2,109 $ 183 $ 45 $ 483
======= ===== ==== =====
</TABLE>
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
<PAGE>
CAPITAL RESOURCES AND BALANCE SHEET FLUCTUATIONS
A comparison of Orrstown Financial Services' capital ratios to regulatory
minimum requirements at March 31, 2000 is as follows:
Orrstown Financial Regulatory Minimum
Services Requirements
-------- ------------
Leverage ratio 8.42% 4%
Risk based capital ratios:
Tier I (core capital) 12.61% 4%
Combined tier I and tier II
(core capital plus
allowance for loan losses) 13.86% 8%
The growth experienced during 2000 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 so this
source of capital should expand. Equity represented 8.10% of assets at March 31,
2000 which is down from 8.25% at December 31, 1999. Available-for-sale
investment securities markdowns have reduced equity by $2,035,000 since March
31, 1999 as rates have risen.
All balance sheet fluctuations exceeding 5% have been created by either the
growth that has been experienced during 2000 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
<PAGE>
PART II - OTHER INFORMATION
<PAGE>
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
<PAGE>
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 10, 2000 /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
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-2000
<CASH> 7,199
<INT-BEARING-DEPOSITS> 254
<FED-FUNDS-SOLD> 2,823
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 65,384
<INVESTMENTS-CARRYING> 65,384
<INVESTMENTS-MARKET> 65,384
<LOANS> 185,670
<ALLOWANCE> 2,523
<TOTAL-ASSETS> 277,347
<DEPOSITS> 205,910
<SHORT-TERM> 25,543
<LIABILITIES-OTHER> 2,622
<LONG-TERM> 20,815
<COMMON> 231
0
0
<OTHER-SE> 22,457
<TOTAL-LIABILITIES-AND-EQUITY> 277,347
<INTEREST-LOAN> 3,918
<INTEREST-INVEST> 1,013
<INTEREST-OTHER> 57
<INTEREST-TOTAL> 4,988
<INTEREST-DEPOSIT> 1,718
<INTEREST-EXPENSE> 2,293
<INTEREST-INCOME-NET> 2,695
<LOAN-LOSSES> 75
<SECURITIES-GAINS> (2)
<EXPENSE-OTHER> 2,137
<INCOME-PRETAX> 1,284
<INCOME-PRE-EXTRAORDINARY> 949
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 949
<EPS-BASIC> .43
<EPS-DILUTED> .43
<YIELD-ACTUAL> 4.58
<LOANS-NON> 45
<LOANS-PAST> 2,109
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,455
<CHARGE-OFFS> 8
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 2,523
<ALLOWANCE-DOMESTIC> 2,523
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
EXHIBIT 99
INDEPENDENT ACCOUNTANT'S REPORT
Board of Directors
Orrstown Financial Services, Inc.
Shippensburg, Pennsylvania
We have reviewed the accompanying consolidated balance sheet of Orrstown
Financial Services, Inc. and Subsidiary as of March 31, 2000 and the related
consolidated statements of income for the three months ended March 31, 2000 and
1999 and consolidated statements of comprehensive income for the three months
ended March 31, 2000 and 1999 and consolidated statements of cash flows for the
three months ended March 31, 2000 and 1999. These financial statements are the
responsibility of the corporation's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the consolidated financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
/s/ Smith Elliott Kearns & Company, LLC
---------------------------------------
SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, Pennsylvania
May 10, 2000
