-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K9Ssbw9uFAcs7K+uLEDSXge9QDJrfA+t8G4+PJLDi0oqFyl6bK5VdpRjTKw9pKGe p/yDM9Ssb4iDcSF3El2W4w== 0000826154-98-000002.txt : 19980518 0000826154-98-000002.hdr.sgml : 19980518 ACCESSION NUMBER: 0000826154-98-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORRSTOWN FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0000826154 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232530374 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-18888 FILM NUMBER: 98626550 BUSINESS ADDRESS: STREET 1: 77 E KING STREET STREET 2: P O BOX 250 CITY: SHIPPENSBURG STATE: PA ZIP: 17257 BUSINESS PHONE: 7175326114 MAIL ADDRESS: ZIP: 00000 10-Q 1 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, 1998 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 April 30, 1998 (Common stock, no par value) 1,025,094 Page 1 of 14 pages ORRSTOWN FINANCIAL SERVICES, INC. INDEX Page PART I - FINANCIAL INFORMATION Condensed consolidated balance sheets - March 31, 1998 and December 31, 1997 3 Condensed consolidated statements of income - Three months ended March 31, 1998 and 1997 4 Condensed consolidated statements of comprehensive income - Three months ended March 31, 1998 and 1997 5 Condensed consolidated statements of cash flows - Three months ended March 31, 1998 and 1997 6 Notes to condensed consolidated financial statements 7 and 8 Management's discussion and analysis of financial condition and results of operations 9 - 12 PART II - OTHER INFORMATION 13 Signatures 14 Page 2 of 14 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) March 31, December 31, 1998 1997 * ASSETS (Unaudited) (000 Omitted) Cash and due from banks $ 6,702 $ 5,963 Interest-bearing deposits with banks 128 16 Federal funds sold 7,998 2,858 Securities available for sale 49,242 46,208 Federal Home Loan Bank, Federal Reserve and Atlantic Central Bankers Bank Stock, at cost which approximates market value 983 983 Loans 133,202 128,331 Allowance for loan losses ( 1,846) ( 1,767) Net loans 131,356 126,564 Bank premises and equipment, net 5,070 5,130 Other assets 2,678 2,520 Total assets $ 204,157 $ 190,242 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Noninterest-bearing $ 20,459 $ 17,649 Interest-bearing 150,308 142,931 Total deposits 170,767 160,580 Federal funds purchased and other borrowed money 11,886 8,569 Other liabilities 3,022 2,828 Total liabilities 185,675 171,977 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 March 31, 1998 and December 31, 1997 214 214 Additional paid-in capital 12,352 12,352 Retained earnings 5,136 4,730 Unrealized holding gain, net of tax $ 402 and $ 499 at March 31, 1998 and December 31, 1997, respectively 780 969 Total stockholders' equity 18,482 18,265 Total liabilities and stockholders' equity $ 204,157 $ 190,242 * Condensed from audited financial statements The accompanying notes are an integral part of these condensed financial statements. Page 3 of 14 pages ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, 1998 and 1997 (UNAUDITED) 1998 1997 (Unaudited) (Unaudited) (000 Omitted) Interest Income Interest and fees on loans $ 2,905 $ 2,485 Interest on federal funds sold 90 45 Interest and dividends on investment securities 735 565 Interest income on deposits with banks 1 2 Total interest income 3,731 3,097 Interest Expense Interest on deposits 1,560 1,260 Interest on borrowed money 146 40 Total interest expense 1,706 1,300 Net interest income 2,025 1,797 Provision for loan losses 75 45 Net interest income after provision for loan losses 1,950 1,752 Other Income Service charges on deposits 189 158 Other service charges 96 51 Other income 202 138 Net gains on available for sale securities ( 10) ( 5) Total other income 477 342 Other Expenses Salaries and employee benefits 808 699 Net occupancy and equipment expense 196 172 Other operating expense 536 432 Total other expense 1,540 1,303 Income before income taxes 887 791 Income tax expense 245 232 Net income $ 642 $ 559 Weighted average number of shares outstanding 1,025,094 1,025,706 Net income per share $ .63 $ .55 Cash dividends declared per share $ .23 $ .18 The accompanying notes are an integral part of these condensed financial statements. Page 4 of 14 pages ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three Months Ended March 31, 1998 and 1997 (UNAUDITED) 1998 1997 (000 Omitted) Net income $ 642 $ 559 Other comprehensive income, net of tax Unrealized gain (loss) on investment securities available for sale ( 189) ( 284) Comprehensive income $ 453 $ 275 The accompanying notes are an integral part of these condensed financial statements. Page 5 of 14 pages ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 1998 and 1997 (UNAUDITED) 1998 1997 (Unaudited) (Unaudited) (000 Omitted) Cash flows from operating activities: Net income $ 642 $ 559 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 103 71 Provision for loan losses 75 45 Other, net 122 ( 246) Net cash provided by operating activities 942 429 Cash flows from investing activities: Net (increase) decrease in interest bearing deposits with banks ( 112) 1,524 Purchase of available for sale securities ( 5,014) ( 4,245) Maturities of available for sale securities 1,695 820 Net (increase) in loans ( 4,867) ( 3,280) Purchases of bank premises and equipment ( 33) ( 218) Net cash (used) by investing activities ( 8,331) ( 5,399) Cash flows from financing activities: Net increase in deposits 10,187 5,443 Cash dividends paid ( 236) ( 186) Net increase in purchased funds 3,323 0 Proceeds from long-term debt 0 3,000 Payments on debt ( 6) ( 5) Net cash provided by financing activities 13,268 8,252 Net increase (decrease) in cash and cash equivalents 5,879 3,282 Cash and cash equivalents at beginning of period 8,821 8,172 Cash and cash equivalents at end of period $ 14,700 $ 11,454 Supplemental disclosure of cash flows information: Cash paid during the period for: Interest $ 1,582 $ 1,293 Income taxes 42 43 Supplemental schedule of noncash investing and financing activities: Unrealized gain (loss) on investments available for sale (net of deferred taxes of $ (96) and $ (146) at March 31, 1998 and 1997, respectively) ( 189) ( 284) The accompanying notes are an integral part of these condensed financial statements. Page 6 of 14 pages NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 (UNAUDITED) Note 1. Basis of Presentation The financial information presented at and for the three months ended March 31, 1998 and 1997 is unaudited. Information presented at December 31, 1997 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. Page 7 of 14 pages 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 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, 1998 fair value exceeded amortized cost by $ 1,183,000. This resulted in an increase in stockholders' equity of $ 780,000 after recognizing the tax effects of the unrealized gains. At December 31, 1997, fair market value exceeded amortized cost by $ 1,468,000 resulting in an increase in stockholders' equity of $ 969,000 after recognizing the tax effects of the unrealized gains. Note 8. New Pronouncements The adoption of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income has resulted in the addition of the statement of comprehensive income. Page 8 of 14 pages ORRSTOWN FINANCIAL SERVICES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Summary Orrstown Financial Services, Inc. recorded net income of $ 642,000 for the first quarter of 1998 compared to $ 559,000 for the same period in 1997, representing an increase of $ 83,000 or 14.85%. Net income per share was $ .63 during 1998's first quarter up $ .08 from the $ .55 earned during 1997's first quarter. The following statistics compare 1998's year to date performance to that of 1997: First Quarter 1998 1997 Return on average assets 1.31% 1.41 Return on average equity 13.79% 13.84 Average equity/average assets 9.52% 10.16 A more detailed discussion of the elements having the greatest impact on net income follows. Net Interest Income First Quarter 1998 vs. First Quarter 1997 Net interest income for the first quarter of 1998 was $ 2,025,000 representing a growth of $ 228,000, or 12.7%, over the $ 1,797,000 realized during 1997's first quarter. Growth in net interest income was realized solely through volume factors as the net interest margin narrowed from 5.01% during 1997's first quarter to 4.71%. Matched transactions have accounted for 14 basis points of this narrowing but the remainder represents spread tightening. Deposit growth has been exceptional but committed loans in the pipeline have been somewhat slow to settle with seasonality being a factor. Loan growth should accelerate during 1998's second quarter as the pipeline settles and spreads will widen as a result. Free funds have grown 6.7% over first quarter 1997 but the free funds ratio has lightened from 16.38% to 14.31%. The table that follows states rates on a fully taxable equivalent basis, (F.T.E.) and demonstrates the aforementioned effects: First Quarter 1998 1997 (in thousands) Avg. Balances Rates Avg. Balances Rates Interest earning assets $ 182,363 8.50% $ 149,322 8.59% Interest bearing liabilities 156,268 4.43% 124,856 4.23% Free funds $ 26,095 $ 24,466 Net interest income $ 2,025 $ 1,958 Net interest spread (F.T.E.) 4.07% 4.36% Free funds ratio 14.31% 16.38% Net interest margin (F.T.E.) 4.71% 5.06% Page 9 of 14 pages OTHER INCOME AND OTHER EXPENSES First Quarter 1998 vs. First Quarter 1997 Other income increased $ 135,000, or 39.5%, from $ 342,000 during the first quarter of 1997 to $ 477,000 during the first quarter of 1998. Increases were realized in most categories with trust fees up by $ 51,000, service charges on deposit accounts up $ 31,000, service charges on loans up $ 26,000 and ATM fees up $ 21,000. Other expense rose $ 237,000, or 18.2%, from $ 1,303,000 for the first quarter 1997 to $ 1,540,000 for 1998's first quarter. Salary and benefit increases contributed $ 109,000 of the growth. All expense categories grew due to general growth of the bank plus the opening of a seventh branch office during November 1998 in Chambersburg, Pennsylvania. Robust loan and deposit growth plus the addition of this new banking facility have contributed to increases in all noninterest expense categories. INCOME TAX EXPENSE Income tax expense increased $ 13,000, or 5.6%, during 1998's first quarter versus first quarter 1997 despite the fact that pretax income increased 12.17%. The primary factor driving the change in income tax expense is a 20% increase in the municipal bond portfolio from $ 14,488,000 at March 31, 1997 to $ 17,423,000 at March 31, 1998. This increase in tax exempt investing has reduced effective federal income tax rates as follows: First Quarter 1998 1997 Effective income tax rate 27.6% 29.3% 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 1998 1997 Balance, beginning of period $ 1,767 $ 1,620 Recoveries 11 0 Provision for loan loss charged to income 75 45 Total 1,853 1,665 Losses 7 8 Balance, end of period $ 1,846 $ 1,657 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, 1998. Loans 90 days or more past due (still accruing interest) and those on nonaccrual status were as follows at March 31 (in thousands): Page 10 of 14 pages 90 Days or More Past Due Nonaccrual Status 1998 1997 1998 1997 Real estate mortgages $ 1,151 $ 153 $ 588 $ 0 Installment loans 21 47 3 31 Demand and time loans 6 11 6 0 Credit card 6 4 0 0 Total $ 1,184 $ 215 $ 597 $ 31 There were no restructured loans for any of the time periods set forth above. The increase in nonperforming loans can be attributed primarily to three commercial real estate loans that are a slow pay status but well collateralized. 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, 1998 is as follows: Orrstown Financial Regulatory Minimum Services Requirements Leverage ratio 8.67% 3% Risk based capital ratios Tier I (core capital) 11.68% 4% Combined tier I and tier II (core capital plus allowance for loan losses) 12.93% 8% The robust growth experienced during 1998 has been supported by capital growth in the form of retained earnings. Equity represented 9.05% of assets at March 31, 1998 which is down just slightly from 9.60% at December 31, 1997. The equity to assets ratio has tightened somewhat but is still strong by industry averages. The following items have contributed to the tightening: 1. Capital has been leveraged by the use of $ 8,000,000 of matched transactions. These transactions generate net income at the 1.30% return on assets level and enhance return on equity so they will be net income contributors as the year advances. Page 11 of 14 pages 2. Growth has accelerated as the Bank continues to benefit from market opportunities brought about by mergers local competitors. Average assets grew $ 33 million, or 22.17% over first quarter 1997 levels. 3. Dividend payout has been enhanced. The Board of Directors decided to move the annual dividend payout from roughly 30% of net income to approximately 35%. First quarter 1998 payout was 36.8% versus 33.3% during first quarter 1997. All balance sheet fluctuations exceeding 5% have been created by either the robust growth that has been experienced during 1998 or single day fluctuations. Management is not aware of any current recommendations by regulatory authorities which, if implemented, would have a material effect on the corporation's liquidity, capital resources or operations. Page 12 of 14 pages PART II - OTHER INFORMATION PART II - OTHER INFORMATION Item 1 - Legal Proceedings None Item 2 - Changes in Securities None Item 3 - Defaults Upon Senior Securities Not applicable Item 4 - Submission of Matters to a Vote of Security Holders None Item 5 - Other Information None Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits - None (b) Reports on Form 8-K - None Page 13 of 14 pages SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. /s/ (Kenneth R. Shoemaker, President) Duly Authorized Officer) Date /s/ (Robert B. Russell, Controller) (Principal Financial Officer) Page 14 of 14 pages EX-27 2
9 3-MOS DEC-31-1997 MAR-31-1998 6,702 128 7,998 0 49,242 49,242 49,242 133,202 1,846 204,157 170,767 0 3,022 11,886 0 0 214 18,482 204,157 2,905 735 91 3,731 1,560 1,706 2,025 75 (10) 1,540 887 642 0 0 642 .63 .63 4.71 597 1,184 0 0 1,767 7 11 1,846 1,846 0 0
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