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, 2002 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 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 April 30, 2002 - ---------------------------- ----------------------------- (Common Stock, no par value) 2,389,910 Page 1 of 16
ORRSTOWN FINANCIAL SERVICES, INC. INDEX Page Part I - FINANCIAL INFORMATION Item 1. Financial statements (unaudited) Condensed consolidated balance sheets - March 31, 2002 and December 31, 2001. 4 Condensed consolidated statements of income - Three months ended March 31, 2002 and 2001. 5 Condensed consolidated statements of comprehensive income - Three months ended March 31, 2002 and 2001. 6 Condensed consolidated statements of cash flows - Three months ended March 31, 2002 and 2001. 7 Notes to condensed consolidated financial statements 8 - 9 Item 2. Management's discussion and analysis of financial condition and results of operations 10 - 12 PART II - OTHER INFORMATION Other Information 14 Signatures 15 Exhibits 16 - 17 Page 2 of 16
PART I - FINANCIAL INFORMATION Page 3 of 16
PART I - FINANCIAL INFORMATION Item 1. Financial Statements ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <S> <C> <C> (Unaudited) (Audited)* (Dollars in Thousands) March 31, December 31, 2002 2001 -------- ------------ ASSETS Cash and due from banks $ 9,362 $ 12,650 Interest bearing deposits with banks 1,048 679 Federal funds sold 21,583 24,347 Securities available for sale 71,799 68,422 Federal Home Loan Bank, Federal Reserve and Atlantic Central Bankers Bank Stock, at cost which approximates market value 1,803 1,703 Loans 253,764 249,816 Allowance for loan losses (3,208) (3,104) -------- -------- Net Loans 250,556 246,712 Premises and equipment, net 9,318 9,019 Accrued Interest receivable 1,545 1,541 Cash value-life insurance 5,982 5,923 Other assets 2,965 2,732 -------- -------- Total assets $375,961 $373,728 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits: Non-interest bearing 39,993 39,881 Interest bearing 242,637 241,287 -------- -------- Total deposits 282,630 281,168 Federal funds purchased and other short term borrowed funds 26,172 31,531 Long term borrowed funds 31,512 26,512 Accrued interest payable 315 373 Other liabilities 3,088 2,982 -------- -------- Total liabilities 343,717 342,566 -------- -------- STOCKHOLDERS' EQUITY Common stock, no par value-$.1041 stated value per share at March 31, 2002 and December 31, 2001, 10,000,000 shares authorized with 2,385,048 shares issued at March 31, 2002 and 2,378,608 issued at December 31, 2001 248 248 Additional paid - in capital 25,334 25,077 Retained earnings 6,486 5,557 Accumulated other comprehensive income 176 280 -------- -------- Total stockholders' equity 32,244 31,162 -------- -------- Total liabilities and stockholders' equity $375,961 $373,728 ======== ======== *Condensed from audited financial statements </TABLE> The accompanying notes are an integral part of these condensed financial statements. Page 4 of 16
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> Three Months Ended (Dollars in Thousands) March 2002 March 2001 ---------- ---------- INTEREST INCOME <S> <C> <C> Interest and fees on loans $ 4,542 $ 4,648 Interest on federal funds sold 56 38 Interest and dividends on investment securities 1,002 1,194 Interest income on deposits with banks 5 2 ---------- ---------- Total interest income 5,605 5,882 ---------- ---------- INTEREST EXPENSE Interest on deposits 1,608 2,223 Interest on borrowed money 454 612 ---------- ---------- Total interest expense 2,062 2,835 ---------- ---------- Net interest income 3,543 3,047 Provision for loan losses 150 60 ---------- ---------- Net interest income after provision for loan losses 3,393 2,987 ---------- ---------- OTHER INCOME Service charges on deposits 476 412 Other service charges 219 138 Trust department income 322 296 Brokerage income 80 68 Other income 80 84 Securities gains/(losses) 1 33 ---------- ---------- Total other income 1,178 1,031 ---------- ---------- OTHER EXPENSES Salaries and employee benefits 1,479 1,284 Net occupancy and equipment expenses 428 412 Other operating expenses 781 761 ---------- ---------- Total other expense 2,688 2,457 ---------- ---------- Income before income tax 1,883 1,561 Income tax expenses 549 436 ---------- ---------- Net income $ 1,334 $ 1,125 ========== ========== PER SHARE DATA Earnings per share Basic earnings per share $ 0.56 $ 0.48 Weighted average number of shares outstanding 2,383,332 2,357,374 Diluted earnings per share $ 0.55 $ 0.47 Weighted average number of shares outstanding 2,424,392 2,377,396 Dividends per share $ 0.170 $ 0.143 </TABLE> The accompanying notes are an integral part of these condensed financial statements. Page 5 of 16
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) <TABLE> <S> <C> <C> Three Months Ended March March (Dollars in Thousands) 2002 2001 ------- ------- COMPREHENSIVE INCOME Net Income $ 1,334 $ 1,125 Other comprehensive income, net of tax Unrealized gain (loss) on investment securities available for sale ( 104) 689 ------- ------- Comprehensive Income $ 1,230 $ 1,814 ======= ======= </TABLE> The accompanying notes are an integral part of these condensed financial statements. Page 6 of 16
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <S> <C> <C> Three Months Ended March March (Dollars in Thousands) 2002 2001 CASH FLOWS FROM OPERATING ACTIVITIES Net income $1,334 $1,125 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 188 209 Provision for loan losses 150 60 Other, net ( 192) ( 361) --------- --------- Net cash provided by operating activities 1,480 1,033 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in interest bearing deposits with banks ( 369) 36 Purchases of available for sale securities ( 8,444) ( 4,107) Sales and maturities of available for sale securities 4,906 12,749 Net (purchases) redemption of FHLB Stock ( 100) 0 Net (increase) in loans ( 3,993) ( 7,180) Purchases of bank premises and equipment ( 487) ( 129) --------- --------- Net cash provided (used) by investing activities ( 8,487) 1,369 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits 1,462 ( 3,918) Cash dividends paid ( 405) ( 337) Proceeds from sale of stock 257 246 Net increase (decrease) in short term purchased funds ( 5,359) 11,671 Proceeds from long term debt 5,000 0 Payments on long term debt 0 ( 28) --------- --------- Net cash provided by financing activities 955 7,634 --------- --------- Net increase (decrease) in cash and cash Equivalents ( 6,052) 10,036 Cash and cash equivalents at beginning of period 36,997 14,070 --------- --------- Cash and cash equivalents at end of period $ 30,945 $ 24,106 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 2,120 $ 2,908 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 $448 and $354 at March 31, 2002 and 2001, respectively) ( 104) 689 </TABLE> The accompanying notes are an integral part of these condensed financial statements. Page 7 of 16
ORRSTOWN FINANCIAL SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 (UNAUDITED) Review of Interim Financial Statements The condensed consolidated financial statements as of and for the three months ended March 31, 2002 and 2001 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, 2002 and 2001 is unaudited. Information presented at December 31, 2001 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 subsidiaries, Orrstown Bank and Pennbanks Insurance Company, Cell P1. 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 and tax free loans. Page 8 of 16
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 During July 2001 the Board of Directors of Orrstown Financial Services, Inc. approved a 5% stock dividend, payable September 15, 2001 to shareholders of record August 1, 2001. All per share amounts have been adjusted to give retroactive recognition to the 5% stock dividend paid September 15, 2001. 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, 2002 fair value exceeded amortized cost by $266,000. This resulted in an increase in stockholders' equity of $176,000 after recognizing the tax effects of the unrealized gains. At December 31, 2001, fair value exceeded amortized cost by $425,000 resulting in an increase in stockholders' equity of $280,000 after recognizing the tax effects of the unrealized gains. Page 9 of 16
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 $1,334,000 for the first quarter of 2002 compared to $1,125,000 for the same period in 2001, representing an increase of $209,000 or 18.6%. Basic earnings per share was $0.56 for the first quarter of 2002 up $0.08 from the $0.48 earned during the first quarter of 2001. The per share amounts have been restated reflect the 5% stock dividend paid to shareholders on September 15, 2001. The following statistics compare the performance for the three months ended March 31, 2002 to three months ended March 31, 2001: <TABLE> <S> <C> <C> Three Months Ended March March 2002 2001 Return on average assets 1.49% 1.47% Return on average equity 16.93% 16.61% Average equity / Average assets 8.82% 8.84% </TABLE> 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 2002 was $3,543,000 representing a growth of $496,000, or 16.3% over the $3,047,000 realized during the first quarter of 2001. Growth was due primarily to volume as the net interest margin tightened from 4.41% in the first quarter 2001 to 4.37% during first quarter 2002. The volume increases, mostly in the commercial loan portfolio, and the growth in net interest income was aided by the falling rate environment of 2001. The rates paid on interest bearing liabilities declined at a faster pace than those of interest earning assets thereby increasing the net interest spread by 12 basis points. The table that follows states rates on a fully taxable equivalent basis (FTE) and demonstrates the aforementioned effects: <TABLE> <S> <C> <C> <C> <C> (Dollars in Thousands) Three Months Ended March 2002 March 2001 Avg Balance Rates Avg Balance Rates Interest earning assets $ 338,028 6.85% $ 286,855 8.41% Interest bearing liabilities 290,873 2.88% 252,243 4.56% --------- --------- Free Funds 47,155 34,612 ========= ========= Net interest income 3,543 3,047 ========= ========= Net interest spread 3.97% 3.85% Free funds ratio 13.95% 12.07% Net interest margin 4.37% 4.41% </TABLE> Page 10 of 16
NON-INTEREST INCOME AND EXPENSE The following compares three months ended March 31, 2002 to three months ended March 31, 2001: Other income increased $147,000, or 14.3%, from $1,031,000 during the first quarter of 2001 to $1,178,000 during the first quarter of 2002. An increase in trust income offset a decrease in gains on securities, but increases were primarily attributable to gains in service charge fees and insurance fees. Other expenses rose from $2,457,000 during the first quarter 2001 to $2,687,000 during 2002's first quarter for an increase of $230,000, or 9.4%. Growth experienced over the past year has increased operational expenses including salaries and benefits. In addition, our tenth full service branch was opened during 2001's first quarter and our eleventh is slated to open in Carlisle, Pennsylvania during the second quarter 2002. INCOME TAX EXPENSE Income tax expense increased $113,000, or 25.9%, during the first quarter of 2002 versus the first quarter of 2001. Tax exempt income has become a smaller part of the revenue stream. Effective income tax rates were as follows: Three Months Ended March March 2002 2001 Effective income tax rate 29.2% 27.9% 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: <TABLE> <S> <C> <C> (Dollars in Thousands) Three Months Ended March 2002 March 2001 Balance at beginning of period $ 3,104 $ 2,691 Recoveries of loans previously charged off 1 1 Additions to allowance charged to expense 150 60 ------- ------- Total 3,255 2,752 Loans charged off 47 5 ------- ------- Balance at end of period $ 3,208 $ 2,747 ======= ======= </TABLE> 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 was approximately 60% at March 31, 2002. Page 11 of 16
Loans past due 90 or more days and still accruing interest and those on nonaccrual status at March 31, are as follows: <TABLE> <S> <C> <C> <C> <C> (Dollars in Thousands) 90 or More Days Past Due Nonaccrual Status 2002 2001 2002 2001 Loans secured by real estate $ 836 $ 440 $ 10 $0 Installment loans 14 42 12 10 Commercial loans 188 51 0 30 Credit card 7 2 0 0 ------- ----- ---- ---- Total $ 1,045 $ 535 $ 22 $ 40 ======= ===== ==== ==== </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. CAPITAL RESOURCES AND BALANCE SHEET FLUCTUATIONS A comparison of Orrstown Financial Services, Inc's capital ratios to regulatory minimum requirements at March 31, 2002 are as follows: <TABLE> <S> <C> <C> Orrstown Financial Regulatory Minimum Services Requirements Leverage Ratio 8.76% 4% Risk Based Capital Ratios: Tier I Capital Ratio 12.52% 4% Total (Tier II) Capital Ratio (core capital plus allowance for loan losses 13.77% 8% </TABLE> The growth experienced during 2002 has been supported by capital growth in the form of retained earnings and capital infusion from the dividend reinvestment plan. Dividend reinvestment plan participants have added $258,000 to equity as of March 31, 2002. Equity represented 8.58% of assets at March 31, 2002 which is up from 8.34% at December 31, 2001. All balance sheet fluctuations exceeding 5% have been created by either the growth that has been experienced during 2002 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 16
PART II - OTHER INFORMATION Page 13 of 16
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 99 - Report of independent accountant's on interim financial statements (b) Reports on Form 8 - K None Page 14 of 16
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 ------------------------------------------ (Bradley S. Everly, Senior Vice President) (Chief Financial Officer) /s/Robert B. Russell ------------------------------------------ (Robert B. Russell, Controller) (Chief Accounting Officer) Date May 10, 2002 ------------- Page 15 of 16