10-Q 1 0001.txt 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 September 30, 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 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 filled 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 Class Outstanding at November 1, 2000 (Common Stock, no par value) 2,240,744 ORRSTOWN FINANCIAL SERVICES, INC. INDEX Page Part I - FINANCIAL INFORMATION Item 1. Financial statements (unaudited) Condensed consolidated balance sheets - September 30, 2000 and December 31, 1999 3 Condensed consolidated statements of income - Three months ended September 30, 2000 and 1999 4 Condensed consolidated statements of income - Nine months ended September 30, 2000 and 1999 5 Condensed consolidated statements of comprehensive income - Three months & Nine months ended September 30, 2000 and 1999 6 Condensed consolidated statements of cash flows - Nine months ended September 30, 2000 and 1999 7 Notes to condensed consolidated financial statements 8-9 Item 2. Management's discussion and analysis of financial condition and results of operations 10-13 PART II - OTHER INFORMATION Other Information 15 Signatures 16 Exhibits 17 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) September 30, December 31, 2000 1999* (Unaudited) ASSETS (000 Omitted) Cash and due from banks 7,709 8,585 Interest - bearing deposits with banks 250 115 Federal funds sold 10,861 0 Securities available for sale 65,260 60,455 Federal Home Loan Bank, Federal Reserve and Atlantic Central Bankers Bank Stock, at cost which approximates market value 2,134 1,509 Loans 197,616 180,691 Allowance for loan losses (2,560) (2,455) -------- ------- Net Loans 195,056 178,236 Bank premises and equipment, net 9,295 6,809 Accrued Interest receivable 1,748 1,599 Cash value-life insurance 5,561 5,384 Other assets 2,403 2,361 -------- ------- Total assets 300,277 $265,053 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Noninterest bearing $ 27,274 $ 25,264 Interest bearing 203,332 179,125 -------- ------- Total deposits 230,606 204,389 Federal funds purchased and other short term borrowed funds 21,290 15,406 Long term borrowed funds 20,816 20,822 Accrued interest payable 498 422 Other liabilities 2,137 2,146 -------- ------- Total liabilities 275,347 243,185 -------- ------- STOCKHOLDERS' EQUITY Common stock, no par value - $ .1041 stated value per share at September 30, 2000 and December 31, 1999, 10,000,000 shares authorized with 2,233,690 shares issued at September 30, 2000 and 2,218,291 issued at December 31, 1999 233 231 Additional paid - in capital 19,091 18,498 Retained earnings 5,832 3,717 Accumulated other comprehensive income/(loss), net of tax $(116) and $(298) at September 30, 2000 and December 31, 1999, respectively (226) (578) -------- -------- Total stockholders' equity 24,930 21,868 -------- -------- Total liabilities and stockholders' equity $300,277 $265,053 ======== ======== * Condensed from audited financial statements The accompanying notes are an integral part of these condensed financial statements. Page 3 ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY - OWNED SUBSIDIARY, ORRSTOWN BANK CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended September 30, 2000 and 1999 (UNAUDITED)
2000 1999 (Unaudited) (Unaudited) (000 Omitted) Interest Income Interest and fees on loans $ 4,352 $ 3,735 Interest on federal funds sold 131 85 Interest and dividends on investment securities 1,091 845 Interest income on deposits with banks 3 7 ---------- ---------- Total interest income 5,577 4,672 Interest Expense Interest on deposits 2,025 1,635 Interest on borrowed money 690 398 ---------- ---------- Total interest expense 2,715 2,033 ---------- ---------- Net interest income 2,862 2,639 Provision for loan losses 75 90 ---------- ---------- Net interest income after provision for loan losses 2,787 2,549 ---------- ---------- Other Income Service charges on deposits 291 288 Other service charges 146 130 Trust department income 263 212 Brokerage Income 86 90 Other income 80 81 Net gains on available for sale securities 36 271 ---------- ---------- Total Other income 902 1,072 Other Expenses Salaries and employee benefits 1,220 1,164 Net occupancy and equipment expenses 423 297 Other operating expenses 677 841 ---------- ---------- Total other expense 2,320 2,302 Income before income tax 1,369 1,319 Income tax expenses 342 345 ----------- ---------- Net income $1,027 $974 Weighted average number of shares outstanding 2,232,240 2,216,158 Net income per share $ 0.46 $ 0.44 Cash dividends declared per share $ 0.14 $ 0.13
The accompanying notes are an integral part of these condensed financial statements. All shares outstanding and per share amounts have been adjusted to give retroactive recognition to a 7 1/2% stock dividend effective November 19, 1999. Page 4 ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY - OWNED SUBSIDIARY, ORRSTOWN BANK CONDENSED CONSOLIDATED STATEMENTS OF INCOME Nine Months Ended September 30, 2000 and 1999 (UNAUDITED) 2000 1999 (Unaudited) (Unaudited) (000 Omitted) Interest Income Interest and fees on loans $ 12,433 $ 10,750 Interest on federal funds sold 192 244 Interest and dividends on investment securities 3,249 2,408 Interest income on deposits with banks 14 12 ---------- ---------- Total interest income 15,888 13,414 Interest Expense Interest on deposits 5,538 4,806 Interest on borrowed money 1,941 1,090 ---------- ---------- Total interest expense 7,479 5,896 ---------- ---------- Net interest income 8,409 7,518 Provision for loan losses 225 270 ---------- ---------- Net interest income after provision for loan losses 8,184 7,248 ---------- ---------- Other Income Service charges on deposits 848 793 Other service charges 410 412 Trust department income 793 627 Brokerage Income 271 292 Other income 246 252 Net gains on available for sale securities 33 256 ---------- ---------- Total Other income 2,601 2,632 Other Expenses Salaries and employee benefits 3,537 3,217 Net occupancy and equipment expenses 1,133 741 Other operating expenses 1,983 2,093 ---------- ---------- Total other expense 6,653 6,051 Income before income tax 4,132 3,829 Income tax expenses 1,082 1017 ---------- ---------- Net income $3,050 $2,812 Weighted average number of shares outstanding 2,226,209 2,213,860 Net income per share $ 1.37 $ 1.27 Cash dividends declared per share $ 0.42 $ 0.37 The accompanying notes are an integral part of these condensed financial statements. All shares outstanding and per share amounts have been adjusted to give retroactive recognition to a 7 1/2% stock dividend effective November 19, 1999. Page 5 ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY - OWNED SUBSIDIARY, ORRSTOWN BANK CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Three Months Ended September 30, 2000 and 1999 (UNAUDITED) 2000 1999 (000 Omitted) Net Income $1,027 $ 974 Other comprehensive income, net of tax Unrealized gain (loss) on investment securities available for sale 463 (660) Comprehensive Income $1,490 $ 314 ====== ===== 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 COMPREHENSIVE INCOME Nine Months Ended September 30,2000 and 1999 (UNAUDITED) 2000 1999 (000 Omitted) Net Income $3,050 $2,812 Other comprehensive income, net of tax Unrealized gain (loss) on investment securities available for sale 352 (1,536) Comprehensive Income $3,402 $1,276 ====== ====== The accompanying notes are integral part of these condensed financial statements. Page 6 ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY - OWNED SUBSIDIARY, ORRSTOWN BANK CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, 2000 and 1999 (UNAUDITED)
2000 1999 (Unaudited) (Unaudited) (000 Omitted) Cash flows from operating activities: Net income $ 3,050 $ 2,812 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 516 332 Provision for loan losses 225 270 Other, net 986 (1,826) ------- ------- Net cash provided by operating activities 4,777 1,588 Cash flows from investing activities: Net increase in interest bearing deposits with banks (135) (135) Purchase of available for sale securities 15,520) 19,601) Purchase of Federal Home Loan Bank Stock (625) 0 Sales and maturities of available for sale securities 9,740 5,562 Net (increase) in loans 17,046) 18,248) Purchases of bank premises and equipment (2,961) (1,590) ------- ------- Net cash (used) by investing activities 26,547) 34,012) ------- ------- Cash flows from financing activities: Net increase in deposits 26,217 26,913 Cash dividends paid (935) (823) Dividend reinvestment plan purchases 595 219 Net increase in short term purchased funds 5,884 9,851 Payments on long term debt (6) (6) ------- ------- Net cash provided by financing activities 31,755 36,154 ------- ------- Net increase (decrease) in cash and cash equivalents 9,985 3,730 Cash and cash equivalents at beginning of period 8,585 15,100 ------- ------- Cash and cash equivalents at end of period $18,570 $18,830 ======= ======= Supplemental disclosure of cash flows information: Cash paid during the period for: Interest $ 7,403 $ 7,636 Income Taxes 1,166 1,005 Supplemental schedule of noncash investing and financing activities: Unrealized gain (loss) on investments available for sale (net of deferred taxes of $181 and $(791) at September 30, 2000 and 1999, respectively) 352 (1,536)
The accompanying notes are an integral part of these condensed financial statements. Page 7 ORRSTOWN FINANCIAL SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2000 (UNAUDITED) Review of Interim Financial Statements The condensed consolidated financial statements as of and for the three and nine month periods ended September 30, 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. NOTE 1. Basis of Presentation The financial information presented at and for the three months ended and nine months ended September 30, 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 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 8 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 presentation 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 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, 2000 amortized cost exceeded fair value by $342,000. This resulted in a decrease in stockholders' equity of $226,000 after recognizing the tax effects of the unrealized losses. At December 31, 1999, amortized cost exceeded fair market value by $ 875,000 resulting in a decrease in stockholders' equity of $578,000 after recognizing the tax effects of the unrealized issues. Page 9 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 $ 1,027,000 for the third quarter of 2000 compared to $ 974,000 for the same period in 1999, representing an increase of $53,000 or 5.4%. Net income per share was $ .46 during 2000's third quarter up $ .02 from the $ .44 earned during 1999's third quarter. Net income for the first nine months of 2000 was $3,050,000 compared to $2,812,000 for the same period in 1999, representing an increase of $238,000 or 8.5%. However, nine month 2000 earnings exceeded nine month 1999 earnings by 14.6% when excluding the after tax effects of securities gains. Net income per share for the first nine months of 2000 was 1.37 up $0.10 from the $1.27 per share realized during the nine months ended September 30, 1999. The following statistics compare 2000's year to date performance to that of 1999:
Third Quarter Nine Months Year to Date 2000 1999 2000 1999 Return on average assets 1.40% 1.52% 1.45% 1.53% Return on average equity 16.85% 17.38% 17.45% 17.10% Average equity / Average assets 8.32% 8.73% 8.32% 8.95%
A more detailed discussion of the elements having the greatest impact on net income follows. Net Interest Income Third Quarter 2000 vs. Third Quarter 1999 Net interest income for the third quarter of 2000 was $ 2,787,000 representing a growth of $ 238,000, or 9.3% , over the $ 2,549,000 realized during 1999's third quarter. The growth in net interest income is driven by volume factors since spreads have been tightened. Nine Months 2000 vs. Nine Months 1999 Net interest income for the first nine months of 2000 was $8,184,000 representing an increase of $936,000 or 12.9%, over the $ 7,248,000 generated during the first nine months of 1999. Volume factors have generated the gains since rate factors have tightened. The table that follows states rates on a fully taxable equivalent basis, ( F.T.E. ) and demonstrates the aforementioned effects:
Third Quarter Nine Months Year To Date 2000 1999 2000 1999 (in thousands) Avg. Balances Rates Avg. Balances Rates Avg. Balances Rates Avg. Balances Rates Interest earning Assets $267,557 8.54% $235,129 8.18% $258,499 8.45% $227,470 8.15% Interest bearing Liabilities 236,040 4.56% 202,480 3.98% 227,412 4.39% 195,524 4.03% -------- ----- -------- ----- -------- ----- -------- ----- Free Funds $ 31,517 $ 32,649 $ 31,087 $ 31,946 ======== ======== ======== ======== Net interest income $ 2,862 $ 2,639 $ 8,409 $ 7,518 ========= ======== ======== ======== Net interest spread (F.T.E.) 3.98% 4.20% 4.06% 4.12% ===== ===== ===== ===== Free funds ratio 11.78% 13.89% 12.03% 14.04% ========= ======== ======== ======== Net interest margin ( F.T.E ) 4.53% 4.75% 4.60% 4.69% ===== ===== ===== =====
Page 10 Other Income and Other Expenses Third Quarter 2000 vs. Third Quarter 1999 Other income decreased $170,000, or 15.9%, from $1,072,000 during the third quarter of 1999 to $902,000 during the third quarter of 2000. Securities gains declined by $235,000, from $271,000 during third quarter 1999 to $36,000. Other sources of noninterest income rose $65,000, or 8.1%, versus third quarter 1999. Trust department income was the most significant contributor with an increase of $51,000, or 24.1% over third quarter 1999 results. Other expenses rose $18,000, or 0.8%, from $2,302,000 for third quarter 1999 to $2,320,000 for 2000's third quarter. Increases would have been greater but third quarter 1999 other operating expenses were burdened with $301,000 of nonrecurring expenses related to the conversion of commercial bank core data processing systems from a third party processing solution to an in-house system. Occupancy and equipment expenses have risen $126,000, or 42.4%, from $297,000 during third quarter, 1999 to $423,000 in the most recent quarter. The opening of the ninth full service branch in Silver Spring, near Mechanicsburg, Pennsylvania, and an expanded operation center in Shippensburg, Pennsylvania contributed to cost increases during the quarter. The improved operations center and system changes effected during 1999 should improve operating efficiency in future quarters. Nine Months 2000 vs. Nine Months 1999 Other income decreased $31,000, or 1.2%, to $2,601,000 from $2,632,000 a year ago. Securities gains declined $223,000, or 87.1%, from the year earlier period but remaining noninterest income items increased $192,000, or 8.1%, versus the first nine months of 1999. Trust department income growth of $166,000, or 26.5%, from $627,000 in 1999 to $793,000 in 2000, accounted for the largest portion of these gains. Other expenses rose $602,000, or 9.9%, from $6,051,000 in 1999 to $6,653,000 during 2000. Occupancy and equipment expense constituted the largest part of that increase rising $392,000, or 52.9%, from a year earlier. The increases were due largely to the aforementioned branch and operations center expansion. Income Tax Expense Income tax expense decreased $3,000, or 0.9%, during 2000's third quarter versus third quarter 1999. Income tax expense rose $65,000, or 6.4% for the first nine months of 2000 versus the same period a year ago. The growth in income tax expense is the byproduct of similar increases in pretax income since effective federal income tax rates has remained relatively stable, as shown below: Third Quarter Nine Months Year to Date 2000 1999 2000 1999 Effective income tax rate 25.0% 26.2% 26.2% 26.6% The marginal federal income tax bracket is 34 % for all periods presented. Page 11 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 2000 1999 2000 1999 Balance, beginning of Period $2,554 $2,049 $2,455 $1,971 Recoveries 0 2 4 4 Provision for loan loss charged to income 75 90 225 270 ------ ------ ------ ------ Total 2,629 2,141 2,684 2,245 Losses 69 4 124 108 ------ ------ ------ ------ Balance, end of Period $2,560 $2,137 $2,560 $2,137 ====== ====== ====== ====== 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 60% at September 30, 2000. 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 2000 1999 2000 1999 Real estate mortgages $168 $164 $ 0 $ 0 Installment loans 15 67 16 24 Commercial loans 781 184 0 596 Credit card 5 5 0 0 ---- ---- --- ---- Total $969 $420 $16 $620 ==== ==== === ==== 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 12 CAPITAL RESOURCES AND BALANCE SHEET FLUCTUATIONS A comparison of Orrstown Financial Services' capital ratios to regulatory minimum requirements at September 30, 2000 is as follows: Orrstown Financial Regulatory Minimum Services Requirements Leverage ratio 8.46% 4% Risk based capital ratios: Tier I (core capital) 12.45% 4% Combined tier I and tier II (core capital plus allowance for loan losses) 13.70% 8% The growth experienced during 2000 has been supported by capital growth in the form of retained earnings and the popularity of the dividend reinvestment plan which has added $595,000 to equity. Equity represented 8.307% of assets at September 30, 2000 which is down slightly from 8.25% at December 31, 1999. 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 13 PART II - OTHER INFORMATION 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 No matters were submitted to a vote of security holders during third quarter, 2000. Item 5 - Other Information None Item 6 - Exhibits and Reports on Form 8 - K (a) Exhibits: Exhibit Number Referred to Item 601 of Regulation S-K 27 Financial Data Schedule 99 Report of Independent Accountant's On Interim Financial Statements (b) Reports on Form 8 - K - None Page 15 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) /s/ Bradley S. Everly Date November 10, 2000 ---------------------------------------- (Bradley S. Everly, Senior Vice President) (Chief Financial Officer) /s/ Robert B. Russell ---------------------------------------- (Robert B. Russell, Controller) (Chief Accounting Officer) Page 16