Pro Forma

1 Assumptions
(1) Interest Income grows at a certain rate every year.
(2) There is no issue of new shares
(3) There are tendencies of the ratios, such as net interest income margin, net income margin, return on asset, return on equity, etc., that could be used for forecasting.
(4) Simplify the accounts of Balance Sheet, Income Statement and Cash Flow Statement.

2. I/S Pro Forma
1.1 Interest Income

Graph 2-1 Interest Income

Graph 2-1 shows the total interest income of Orrstown from year 2006-2013. As it takes a longer time for small financial institutions to react on the financial crisis, the negative interest income of orrstown showed in year 2012 and 2013. Because there would be little chance of any big financial crisis in the following five years, it is reasonable to take outliers. Take the average of the annual growth rate of total interest income from 2006 to 2011, and use it as the annual growth rate of total interest income for the nest five years.

1.2 Net Interest Income Margin

Graph 2.2 Net Interest Income Margin

As is shown on Graph 2.2, the net interest income margin grew steadily from 2006-2013. Get the geometric average and Use the result as the predictor of net interest income margin for year 2014-2018.

According to the predictive values of interest income and net interest income margin, get the values of net interest income (interest income* net interest income margin) and interest expense (interest income- net interest income).

Graph 2.3 Int and Fee on Loans/ Int Income

Graph 2.4 Sub-accounts/ Int Income

Graph 2.5 Interest on deposits/ Interest Expense

Graph 2.6 Sub-accounts/ Interest Expense

Based on Graph 2-3 – Graph 2-6, consult proportions of each sub-account of interest income and interest expense in the past years and get the predictive values of each sub-account of 2014-2018.

1.3 Provision for Loan Losses

Graph 2-7 Provision for Loan Losses

Graph 2-7 shows the provision for loan losses form year 2006 to year 2013. Orrstown increased its provision for loan losses dramatically since the outbreak of financial crisis. Considering that there is little chance that the financial crisis could happen in the near future, ignore the outliers and use the average of provision for loan losses before 2009 to predict.

1.4 Net Income Margin

Graph 2-8 Net Income Margin

Net Income Margin was steady from 2006 to 2013, except for year 2011 and 2012. Ignoring the outliers because of the financial crisis, use the average as the prediction of net income margin for the next five years. The net income equals to interest revenue multiplies net income margin.

1.5 Tax Rate

Graph 2-9 Tax Rate

Graph 2-9 tells the tax rates of Orrstown from 2006-2013. The last three years had anomalous tax rates owing to the negative net income before tax. Take the arithmetic average of the tax rates to estimate the tax rate from year 2006-2013.

1.6 Non-interest income and Non-interest expense

Graph 2-10 Non-interest income

Graph 2-11 Non-interest expense

Based on Graph 2-10 and Graph 2-11, assume that the non-interest income and non-interest expense grow at a geometric average rate. Make slight judgments in order to match with other accounts.

The pro forma of Income Statement is shown on appendix I.
1 B/S Pro Forma

Using the forecast data from Income Statement, we can forecast the total Asset and total Equity in Balance Sheet by predict ROA and ROE ratio.

1.7 ROA and ROE

Graph 3-1 ROA ratios

Graph 3-2 ROE ratios

According to the Graph 3-1 and 3-2, except the data in 2011 and 2012, the ROA and ROE ratio deceases gradually. So we assume that in five year, the ROA and ROE ratios will decease at a Compound Annual Growth Rate. Then, we use Net Income dividend by ROA to derive the future total Asset. Also we use Net Income dividend ROE to obtain the future total Equity. The difference between Asset and Equity is the total Liability.

1.8 The Accounts change according to the Interest Income and Interest Expense In the Balance Sheet, some asset accounts will change the same as the change in Interest Income account, and some liability will change according to the Interest Expanse, such as Interest bearing, Net Loans and Long-term debt.

In the first part, we got the interest income increases at the rate of 6.39% annually. So when indicating Net Loans and Accrued Interest Receivable, we assume the data will grow at the annual rate at 6.39%. In the Graph 3-3 and 3-4, we can conclude the trends of these two accounts are as the same as Interest Income.

Graph 3-3 Net Loans

Graph 3-4 Accrued Interest Receivable

The same as the asset accounts, the some loans accounts increase as the rate of the Interest Expense growth rate. These accounts include interest bearing, short-term borrowings, long-term debt and Accrued Interest and other liabilities.

1.9 The Other Asset and Liability Accounts

The other accounts in Asset and Liability part, we have to assume the future growth rate according to the change from 2006 to 2007. The most accounts are trend to growth at a geometric average rate. Use the Cash and cash equivalents and Non-interest bearing as examples, which shown in Graph 3-5
and 3-6.

Graph 3-5 Cash and Cash equivalent

Graph 3-6 Non-interest bearing

In Graph 3-5, it shows that the data in 2012 and 2013 is abnormal, so we conclude the grow rate by geometric average from 2006 to 2010. In Graph 3-6, at the most of periods the Non-interest bearing increased gradually from 2006 to 2013, and so we use the geometric average to estimate the future growth rate. Some accounts may be adjusted by the total Asset or total Liability.

1.10 Shareholders’ Equity Forecast

In the Equity part, there is no Preferred Stock in recently years, so we assume that there will be no preferred stock in the future.

Graph 3-7 Common Stock

Graph 3-7 shows that the Common Stock is stable from 2010 to 2013, so we assume that the Orrstown Service Co. will not issue new stock in the future. The Graph 3-8 and 3-9 shows stabilization since 2010 the same as common stock, so also assume that no addition stock in the future.

Graph 3-8 Additional paid-in Capital

Graph 3-9 Treasury Stock- Common

1.11 Retained earnings

To predict retained earnings, we need to estimate the dividend payout. The Graph 3-10 shows the dividends payout ratio and 3-11 shows the retained earnings from 2003 to 2012.

Graph 3-10 Payout ratio

Assume the Payout ratio in the future is the average of the data from 2006 to 2010, because from 2011 to 2013, the company went through a very difficult period, payout ratio became abnormal during that time. The estimate pay out ratio is 41.44%.

Graph 3-11 Retained Earnings

Shown in Graph 3-11, there was a negative return earnings for the Orrstown Service Co., so we assume that there is no dividend from now on until the return earnings become positive.