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, 2001 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 ----- -------------- Class Outstanding at May 8, 2001 - ----------------------------- --------------------------- (Common stock, no par value) 2,252,695 Page 1 of 14 pages
ORRSTOWN FINANCIAL SERVICES, INC. INDEX Page PART I - FINANCIAL INFORMATION Item 1. Financial statements (unaudited) Condensed consolidated balance sheets - March 31, 2001 and December 31, 2000 3 Condensed consolidated statements of income - three months ended March 31, 2001 and 2000 4 Condensed consolidated statements of comprehensive income - three months ended March 31, 2001 and 2000 5 Condensed consolidated statements of cash flows - three months ended March 31, 2001 and 2000 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
PART I - FINANCIAL INFORMATION
PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> March 31, December 31, 2001 2000 * ASSETS (Unaudited) (000 Omitted) <S> <C> <C> Cash and due from banks $ 8,752 $ 11,021 Interest-bearing deposits with banks 136 172 Federal funds sold 15,354 3,049 Securities available-for-sale 62,320 69,919 Federal Home Loan Bank, Federal Reserve and Atlantic Central Bankers Bank Stock, at cost which approximates market value 2,134 2,134 Loans 216,357 209,181 Allowance for loan losses (2,747) (2,691) --------- --------- Net loans 213,610 206,490 Bank premises and equipment, net 9,203 9,269 Accrued interest receivable 1,885 2,016 Cash value - life insurance 5,695 5,636 Other assets 2,057 2,197 --------- --------- Total assets $ 321,146 $ 311,903 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Noninterest-bearing $ 29,806 $ 31,716 Interest-bearing 208,284 210,292 --------- --------- Total deposits 238,090 242,008 Federal funds purchased and other short term borrowed funds 22,097 18,426 Long term borrowed funds 29,487 21,515 Accrued interest payable 541 614 Other liabilities 2,534 2,666 --------- --------- Total liabilities 292,749 285,229 --------- --------- STOCKHOLDERS' EQUITY Common stock, no par value - $ .1041 stated value per share at March 31, 2001 and December 31, 2000, 10,000,000 shares authorized with 2,246,764 shares issued at March 31, 2001 and 2,240,744 issued at December 31, 2000 234 233 Additional paid-in capital 19,606 19,360 Retained earnings 7,406 6,619 Accumulated other comprehensive income 1,151 462 --------- --------- Total stockholders' equity 28,397 26,674 --------- --------- Total liabilities and stockholders' equity $ 321,146 $ 311,903 ========= ========= </TABLE> * 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, 2001 AND 2000 (UNAUDITED) <TABLE> <CAPTION> 2001 2000 (000 Omitted) <S> <C> <C> Interest Income Interest & fees on loans $ 4,648 $ 3,918 Interest on federal funds sold 38 49 Interest and dividends on investment securities 1,194 1,013 Interest income on deposits with banks 2 8 --------- --------- Total interest income 5,882 4,988 --------- --------- Interest Expense Interest on deposits 2,223 1,718 Interest on borrowed money 612 575 --------- --------- Total interest expense 2,835 2,293 --------- --------- Net interest income 3,047 2,695 Provision for loan losses 60 75 --------- --------- Net interest income after provision for loan losses 2,987 2,620 --------- --------- Other Income Service charges on deposits 412 270 Other service charges 138 115 Trust Department income 296 253 Brokerage income 68 79 Other income 84 86 Net gains (losses)on available for sale securities 33 (2) --------- --------- Total other income 1,031 801 --------- --------- Other Expenses Salaries and employee benefits 1,284 1,176 Net occupancy and equipment expenses 412 355 Other operating expenses 761 606 --------- --------- Total other expenses 2,457 2,137 --------- --------- Income before income taxes 1,561 1,284 Income tax expenses 436 335 --------- --------- Net income $ 1,125 $ 949 ========= ========= Weighted average number of shares outstanding 2,245,118 2,220,092 Net income per share $ .50 $ .43 Cash dividends declared per share $ .15 .14 </TABLE> 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, 2001 AND 2000 (UNAUDITED) <TABLE> <CAPTION> 2001 2000 (000 Omitted) <S> <C> <C> Net income $ 1,125 $ 949 Other comprehensive income, net of tax Unrealized gain (loss) on investment securities available for sale 689 (139) ------- ----- Comprehensive income $ 1,814 $ 810 ======= ===== </TABLE> 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, 2001 and 2000 (UNAUDITED) <TABLE> <CAPTION> 2001 2000 (000 Omitted) <S> <C> <C> Cash flows from operating activities: Net income $ 1,125 $ 949 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 209 158 Provision for loan losses 60 75 Other - Net (428) 40 -------- -------- Net cash provided by operating activities 966 1,222 -------- -------- Cash flows from investing activities: Net (increase) decrease in interest bearing deposits with banks 36 (139) Purchase of available for sale securities (4,107) (6,267) Sales and maturities of available-for-sale securities 12,749 899 Net (increase) in loans (7,180) (4,986) Purchases of bank premises and equipment (129) (771) (Increase) decrease in other assets 67 (391) -------- -------- Net cash provided (used) by investing activities 1,436 b (11,655) -------- -------- Cash flows from financing activities: Net increase (decrease) in deposits (3,918) 1,521 Cash dividends paid (337) (311) Dividend reinvestment plan purchases 246 90 Net increase in short term purchased funds 11,671 10,137 Payments on long term debt (28) (7) -------- -------- Net cash provided by financing activities 7,634 11,430 -------- -------- Net increase(decrease) in cash and cash equivalents 10,036 997 Cash and cash equivalents at beginning of period 14,070 8,585 -------- -------- Cash and cash equivalents at end of period $ 24,106 $ 9,582 ======== ======== Supplemental disclosure of cash flows information: Cash paid during the period for: Interest $ 2,908 $ 2,308 Income taxes 0 0 Supplemental schedule of noncash investing and financing activities: Unrealized gain (loss) on investments available for sale (net of deferred taxes of $ 354 and $ (72) at March 31, 2001 and 2000, respectively) 689 (139) </TABLE> The accompanying notes are an integral part of these condensed financial statements. Page 6 of 14 pages
ORRSTOWN FINANCIAL SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 (UNAUDITED) Review of Interim Financial Statements The condensed consolidated financial statements as of and for the three months ended March 31, 2001 and 2000 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 March 31, 2001 and 2000 is unaudited. Information presented at December 31, 2000 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
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. 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, 2001 fair value exceeded amortized cost by $ 1,744,000. This resulted in an increase in stockholders' equity of $ 1,151,000 after recognizing the tax effects of the unrealized gains. At December 31, 2000, fair value exceeded amortized cost by $ 700,000 resulting in an increase in stockholders' equity of $ 462,000 after recognizing the tax effects of the unrealized gains. 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 $ 1,125,000 for the first quarter of 2001 compared to $ 949,000 for the same period in 2000; representing an increase of $ 176,000 or 18.5%. Net income per share was $ .50 during 2001's first quarter up $ .07 from the $ .43 earned during 2000's first quarter. The following statistics compare 2001's first quarter performance to that of 2000: First Quarter 2001 2000 Return on average assets 1.47% 1.42% Return on average equity 16.99% 16.99% Average equity/average assets 8.84% 8.33% 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 2001 was $3,047,000 representing a growth of $ 352,000, or 13.1%, over the $ 2,695,000 realized during 2000's first quarter. The growth in net interest income is driven by volume factors since spreads have been tightened slightly. Net interest spread narrowed by 17 basis points while net interest margin tightened by 12 basis points due primarily to the falling rate environment and level of prime floating loans versus one year ago. Net interest margin has held within 4 basis points of fourth quarter 2000 level, however. The table that follows states rates on a fully taxable equivalent basis (F.T.E.) and demonstrates the aforementioned effects: <TABLE> <CAPTION> First Quarter 2001 2000 (in thousands) Avg. Balances Rates Avg. Balances Rates <S> <C> <C> <C> <C> Interest earning assets $ 286,855 8.46% $ 248,785 8.29% Interest bearing liabilities 252,243 4.56% 218,478 4.22% --------- ---- --------- ---- Free funds $ 34,612 $ 30,307 ========= ========= Net interest income $ 3,047 $ 2,695 ========= ========= Net interest spread (F.T.E.) 3.90% 4.07% ==== ==== Free funds ratio 12.07% 12.18% ===== ===== Net interest margin (F.T.E.) 4.46% 4.58% ==== ==== </TABLE> Page 9 of 14 pages
OTHER INCOME AND OTHER EXPENSES First Quarter 2001 vs. First Quarter 2000 Other income increased $ 230,000, or 28.7% from $ 801,000 during the first quarter of 2000 to $ 1,031,000 during the first quarter of 2001. The increase was across all categories but primarily attributable to service charge increases. Other expenses rose from $ 2,137,000 during the first quarter 2000 to $ 2,457,000 during 2001's first quarter, an increase of $ 320,000, or 15.0%. Growth over the past few years has caused staff increases and systems outlay increases. Our tenth full service branch was opened during 2001's first quarter in Greencastle, Pennsylvania. INCOME TAX EXPENSE Income tax expense increased $ 101,000 or 30.1% during 2001's first quarter versus first quarter 2000. Tax exempt income has become a smaller part of the revenue stream. Effective income tax rates were as follows: First Quarter 2001 2000 Effective income tax rate 27.9% 26.1% The marginal federal income tax bracket is 34% for all periods presented. Page 10 of 14 pages
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 2001 2000 Balance, beginning of period $ 2,691 $ 2,455 Recoveries 1 1 Provision for loan loss Charged to income 60 75 ------- ------- Total 2,752 2,531 Losses 5 8 ------- ------- Balance, end of period $ 2,747 $ 2,523 ======= ======= 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 March 31, 2001. Loans 90 days or more past due (still accruing interest) and those on nonaccrual status were as follows at March 31 (in thousands): 90 Days or More Past Due Nonaccrual Status 2001 2000 2001 2000 Real estate mortgages $ 440 $ 139 $ 0 $ 0 Installment loans 42 39 10 0 Commercial loans 51 1,930 30 45 Credit card 2 1 0 0 ----- ------- ---- ---- Total $ 535 $ 2,109 $ 40 $ 45 ===== ======= ==== ==== 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
CAPITAL RESOURCES AND BALANCE SHEET FLUCTUATIONS A comparison of Orrstown Financial Services' capital ratios to regulatory minimum requirements at March 31, 2001 is as follows: Orrstown Financial Regulatory Minimum Services Requirements Leverage ratio 8.64% 4% Risk based capital ratios: Tier I (core capital) 12.53% 4% Combined tier I and tier II (core capital plus allowance for loan losses) 13.78% 8% The growth experienced during 2001 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 and this has provided a solid source of capital. Equity represented 8.84% of assets at March 31, 2001 which is up from 8.55% at December 31, 2000. Available-for-sale investment securities markdowns increased equity by $ 1,043,000 since March 31, 2000 as rates have dropped. All balance sheet fluctuations exceeding 5% have been created by either the growth that has been experienced during 2001 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: 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
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 11, 2001 /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
DATA FINANCIAL SCHEDULE FOR 10-Q AT MARCH 31, 2001 FISCAL YEAR END DEC-31-2001 PERIOD END MARCH 31, 2001 CASH 8,752 INT-BEARING-DEPOSITS 136 FED-FUNDS-SOLD 15,354 TRADING-ASSETS 0 INVESTMENTS-HELD-FOR-SALE 62,320 INVESTMENTS-CARRYING 62,320 INVESTMENTS-MARKET 62,320 LOANS 216,357 ALLOWANCE 2,747 TOTAL-ASSETS 321,146 DEPOSITS 238,090 SHORT-TERM 22,097 LIABILITIES-OTHER 2,534 LONG-TERM 29,487 COMMON 234 PREFERRED-MANDATORY 0 PREFERRED 0 OTHER-SE 28,163 TOTAL-LIABILITIES-AND-EQUITY 321,146 INTEREST-LOAN 4,648 INTEREST-INVEST 1,194 INTEREST-OTHER 40 INTEREST-TOTAL 5,882 INTEREST-DEPOSIT 2,223 INTEREST-EXPENSE 2,835 INTEREST-INCOME-NET 3,047 LOAN-LOSSES 60 SECURITIES-GAINS 33 EXPENSE-OTHER 2,457 INCOME-PRETAX 1,561 INCOME-PRE-EXTRAORDINARY 1,125 EXTRAORDINARY 0 CHANGES 0 NET-INCOME 1,125 EPS-PRIMARY .50 EPS-DILUTED .50 YIELD-ACTUAL 4.46 LOANS-NON 40 LOANS-PAST 535 LOANS-TROUBLED 0 LOANS-PROBLEM 0 ALLOWANCE-OPEN 2,691 CHARGE-OFFS 5 RECOVERIES 1 ALLOWANCE-CLOSE 2,747 ALLOWANCE-DOMESTIC 2,747 ALLOWANCE-FOREIGN 0 ALLOWANCE-UNALLOCATED 1,767