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 June 30, 2004 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 July 26, 2004
(Common Stock, no par value ) 5,112,291
ORRSTOWN FINANCIAL SERVICES, INC.
INDEX
Page
Part I - FINANCIAL INFORMATION
Item 1. Financial statements (unaudited)
Condensed consolidated balance sheets - June 30, 2004
and December 31, 2003 4
Condensed consolidated statements of income - Three months
ended June 30, 2004 and 2003 5
Condensed consolidated statements of income - Six months
ended June 30, 2004 and 2003 6
Condensed consolidated statements of comprehensive income -
Three months and six months ended June 30, 2004
and 2003 7
Condensed consolidated statements of cash flows - Six months
ended June 30, 2004 and 2003 8
Notes to condensed consolidated financial statements 9 - 11
Item 2. Management's discussion and analysis of financial
condition and results of operations 12 - 16
PART II - OTHER INFORMATION
Other Information 18
Signatures 19
Exhibits 20 - 24
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)
(Unaudited) (Audited)*
June 30, December 31,
(Dollars in Thousands) 2004 2003
ASSETS
Cash and due from banks $ 9,214 $ 12,283
Interest bearing deposits with banks 601 1,001
Federal funds sold 12,308 3,829
Securities available for sale 75,766 89,074
Federal Home Loan Bank, Federal Reserve and Atlantic Central
Bankers Bank Stock, at cost which approximates market
value 2,739 2,912
Loans 372,533 345,054
Allowance for loan losses (4,352) (4,161)
---------- ----------
Net Loans 368,181 340,893
Premises and equipment, net 11,786 11,168
Accrued Interest receivable 1,656 1,647
Cash value-life insurance 7,370 7,234
Other assets 2,415 2,352
---------- ----------
Total assets $ 492,036 $ 472,393
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 56,273 $ 52,276
Interest bearing 332,047 306,367
---------- ----------
Total deposits 388,320 358,643
Federal funds purchased and other short term borrowed
funds 18,522 29,440
Long term borrowed funds 35,869 37,193
Accrued interest payable 231 226
Other liabilities 3,562 4,056
---------- ----------
Total liabilities 446,504 429,558
---------- ----------
Common stock, no par value - $ .05205 stated value per share
10,000,000 shares authorized with 5,106,923 shares issued
at June 30, 2004 and $ .1041 stated value per share with
2,537,011 shares issued at December 31, 2003 266 264
Additional paid - in capital 33,767 32,928
Retained earnings 10,985 8,509
Accumulated other comprehensive income 514 1,134
---------- ----------
Total stockholders' equity 45,532 42,835
---------- ----------
Total liabilities and stockholders' equity $ 492,036 $ 472,393
========== ==========
* Condensed from audited financial statements
The accompanying notes are an integral part of these condensed
financial statements.
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
June June
(Dollars in Thousands) 2004 2003
INTEREST INCOME
Interest and fees on loans $ 5,437 $ 4,926
Interest on federal funds sold 36 38
Interest and dividends on investment securities 808 915
Interest income on deposits with banks 1 5
----------- -----------
Total interest income 6,282 5,884
----------- -----------
INTEREST EXPENSE
Interest on deposits 1,266 1,299
Interest on borrowed money 417 417
----------- -----------
Total interest expense 1,683 1,716
----------- -----------
Net interest income 4,599 4,168
Provision for loan losses 30 24
----------- -----------
Net interest income after provision for loan losses 4,569 4,144
----------- -----------
OTHER INCOME
Service charges on deposits 769 666
Other service charges 305 315
Trust department income 458 375
Brokerage income 121 139
Other income 43 96
Securities gains / (losses) 48 (7)
----------- -----------
Total other income 1,744 1,584
----------- -----------
OTHER EXPENSES
Salaries and employee benefits 1,893 1,626
Net occupancy and equipment expenses 612 522
Other operating expenses 1,191 1,070
----------- -----------
Total other expense 3,696 3,218
----------- -----------
Income before income tax 2,617 2,510
Income tax expenses 726 693
----------- -----------
Net income $ 1,891 $ 1,817
=========== ===========
PER SHARE DATA
Earnings per share
Basic earnings per share $ 0.37 $ 0.36
Weighted average number of shares outstanding 5,103,395 5,050,278
Diluted earnings per share $ 0.36 $ 0.35
Weighted average number of shares outstanding 5,272,266 5,191,977
Dividends per share $ 0.12 $ 0.105
The accompanying notes are an integral part of these condensed financial
statements.
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
?
Six Months Ended
June June
(Dollars in Thousands) 2004 2003
INTEREST INCOME
Interest and fees on loans $ 10,639 $ 9,562
Interest on federal funds sold 40 59
Interest and dividends on investment securities 1,727 1,954
Interest income on deposits with banks 3 9
---------- ----------
Total interest income 12,409 11,584
---------- ----------
INTEREST EXPENSE
Interest on deposits 2,481 2,594
Interest on borrowed money 863 824
---------- ----------
Total interest expense 3,344 3,418
---------- ----------
Net interest income 9,065 8,166
Provision for loan losses 180 276
---------- ----------
Net interest income after provision for loan losses 8,885 7,890
---------- ----------
OTHER INCOME
Service charges on deposits 1,450 1,276
Other service charges 515 569
Trust department income 914 694
Brokerage income 217 250
Other income 150 197
Securities gains / (losses) 115 171
---------- ----------
Total other income 3,361 3,157
---------- ----------
OTHER EXPENSES
Salaries and employee benefits 3,803 3,302
Net occupancy and equipment expenses 1,185 1,028
Other operating expenses 2,105 2,007
---------- ----------
Total other expense 7,093 6,337
---------- ----------
Income before income tax 5,153 4,710
Income tax expenses 1,456 1,349
---------- ----------
Net income $ 3,697 $ 3,361
========== ==========
PER SHARE DATA
Earnings per share
Basic earnings per share $ 0.72 $ 0.67
Weighted average number of shares outstanding 5,096,169 5,046,273
Diluted earnings per share $ 0.70 $ 0.65
Weighted average number of shares outstanding 5,266,199 5,184,505
Dividends per share $ 0.24 $ 0.2005
The accompanying notes are an integral part of these condensed financial
statements.
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended
June June
(Dollars in Thousands) 2004 2003
COMPREHENSIVE INCOME
Net Income $ 1,891 $ 1,817
Other comprehensive income, net of tax
Unrealized gain (loss) on investment securities
available for sale (921) 242
---------- ----------
Comprehensive Income $ 970 $ 2,059
========== ==========
Six Months Ended
June June
(Dollars in Thousands) 2004 2003
COMPREHENSIVE INCOME
Net Income $ 3,697 $ 3,361
Other comprehensive income, net of tax
Unrealized gain (loss) on investment securities (620) (332)
available for sale
---------- ----------
Comprehensive Income $ 3,077 $ 3,029
========== ==========
The accompanying notes are an integral part of these condensed financial
statements.
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June June
(Dollars in Thousands) 2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,697 $ 3,361
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 519 448
Provision for loan losses 180 276
Other, net (353) (379)
-------- --------
Net cash provided by operating activities 4,043 3,706
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing deposits 400 (218)
with banks
Purchases of available for sale securities (4,290) (23,625)
Sales and maturities of available for sale securities 16,638 26,172
Net (purchases) redemption of FHLB Stock 173 (338)
Net (increase) in loans (27,468) (32,649)
Purchases of bank premises and equipment (1,137) (1,111)
-------- --------
Net cash provided (used) by investing activities (15,684) 31,769)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 29,677 24,795
Cash dividends paid (1,225) (1,011)
Proceeds from sale of stock 841 380
Cash paid in lieu of fractional shares 0 (22)
Net increase (decrease) in short term purchased funds (10,918) 3,502
Proceeds of long term debt issuance 0 10,000
Payments and maturities on long term debt (1,324) (1,053)
-------- --------
Net cash provided by financing activities 17,051 36,591
-------- --------
Net increase (decrease) in cash and cash equivalents 5,410 8,528
Cash and cash equivalents at beginning of period 16,112 18,873
-------- --------
Cash and cash equivalents at end of period $ 21,522 $ 27,401
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 3,339 $ 3,447
Income Taxes 1,575 1,450
Supplemental schedule of noncash investing and financing
activities:
Unrealized gain (loss) on investments available for sale
(net of deferred taxes of ($ 319) and ($ 171) at June 30, 2004
and 2003, respectively) (620) (332)
The accompanying notes are an integral part of these condensed financial
statements.
ORRSTOWN FINANCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
(UNAUDITED)
Review of Interim Financial Statements
The condensed consolidated financial statements as of and for the three
months ended and six months ended June 30, 2004 and 2003 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 six months ended June 30, 2004 and 2003 is unaudited. Information
presented at December 31, 2003 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: Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Orrstown
Financial Services, Inc. (the Corporation) and its wholly-owned
subsidiaries, Orrstown Bank (the Bank) and Pennbanks Insurance Company
Cell P1. All significant intercompany transactions and accounts have
been eliminated.
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 with banks, loans and deposits in the Statement of
Cash Flows.
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, deferred compensation is 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 the aforementioned
timing differences, plus the timing differences associated with
depreciation expense, 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.
Stock-Based Compensation
The Corporation maintains two stock-based compensation plans. These
plans provide for the granting of stock options to the Corporation's
employees and directors. The Corporation accounts for its stock option
plans based on the intrinsic-value method set forth in APB Opinion No.
25, "Accounting for Stock Issued to Employees" and related
Interpretations, under which no compensation cost has been recognized
for any of the periods presented. All options granted under the plans
had an exercise price equal to the fair market value as established by
the average of the daily high bid and daily low offer quotations for the
shares reported in the OTC Bulletin Board service during the ten trading
days immediately preceding the date of purchase.
The following table illustrates the effect on net income and earnings
per share if the Corporation had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee and/or director compensation.
Three Months Ended Six Months Ended
June June June June
(In Thousands, except 2004 2003 2004 2003
per share data)
Net income
As reported $ 1,891 $ 1,817 $ 3,697 $ 3,361
Pro forma 1,506 1,594 3,312 3,138
Basic earnings
per share
As reported $ 0.37 $ 0.36 $ 0.72 $ 0.67
Pro forma 0.30 0.32 0.65 0.62
Diluted earnings
per share
As reported $ 0.36 $ 0.35 $ 0.70 $ 0.65
Pro forma 0.29 0.31 0.63 0.61
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the assumptions shown
below:
Nonemployee Employee
Director Stock Stock Option
Option Plan Plan
Grant Date April 1, 2004 June 24, 2004
Fair Value $ 14.75 $ 12.60
Expected Life in Years 7 5
Risk Free Interest Rate 3.38% 3.85%
Expected Dividend Yield 1.11% 1.18%
Expected Volatility 32.80% 32.18%
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,
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, 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 other comprehensive income, whereas realized gains
and losses flow through the Corporation's results of operations.
The Corporation has classified all investments securities as "available
for sale". At June 30, 2004 fair value exceeded amortized cost by
$ 780,000. In shareholders' equity, the balance of accumulated other
comprehensive income decreased to $ 514,000 compared to December 31,
2003, after recognizing the tax effects of the unrealized gains. At
December 31, 2003, fair value exceeded amortized cost by $ 1,719,000
decreasing accumulated other comprehensive income to $ 1,134,000 after
recognizing the tax effects of the unrealized gains.
Note 3: 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 4: Changes in Common Stock
On January 2, 2004 the Board of Directors of Orrstown Financial Services,
Inc. approved a 2-for-1 stock split paid on February 10, 2004 to
shareholders of record on January 16, 2004. Under this split
shareholders received one additional share of common stock for each share
owned at the close of business on January 16, 2004. All per share
amounts have been adjusted to give retroactive recognition to the 2-for-1
stock split.
Note 5: Subsequent Event
On July 14, 2004 Orrstown Bank, a wholly owned subsidiary of Orrstown
Financial Services, Inc., purchased a Chambersburg, Pennsylvania-based
investment management business and the related "Integrity Financial"
Pennsylvania registered trademark. Orrstown Bank will operate the
Integrity Financial business as part of the Bank's Asset Management
Division.
ORRSTOWN FINANCIAL SERVICES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Summary
Orrstown Financial Services, Inc. recorded net income of $ 1,891,000 for the
second quarter of 2004 compared to $ 1,817,000 for the same period in 2003,
representing an increase of $ 74,000 or 4.1%. Basic earnings per share was
$ .37 for the second quarter of 2004 compared to the $ .36 earned during the
second quarter of 2003.
Net income for the first six months of 2004 was $ 3,697,000 compared to
$ 3,361,000 for the same period in 2003, representing an increase of $ 336,000
or 10.0%. Net income per share for the first six months of 2004 was $ .72 up
from the $ .67 per share realized during the six months ended June 30, 2003.
All per share amounts have been restated to reflect the 2-for-1 stock split paid
to shareholders on February 10, 2004.
The following statistics compare 2004's second quarter and year-to-date
performance to that of 2003:
Three Months Ended Six Months Ended
June June June June
2004 2003 2004 2003
Return on average assets 1.55% 1.67% 1.55% 1.60%
Return on average equity 16.62% 18.38% 16.55% 17.28%
Average equity/Average assets 9.33% 9.08% 9.35% 9.24%
A more detailed discussion of the elements having the greatest impact on net
income follows.
Net Interest Income
Net interest income for the second quarter of 2004 was $ 4,599,000 representing
a growth of $ 431,000, or 10.3% over the $ 4,168,000 realized during the second
quarter of 2003. This increase was due entirely to volume as the net interest
margin tightened from 4.23% in the second quarter 2003 to 4.10% during second
quarter 2004. Growth in interest earning assets was due primarily to strong
commercial loan demand. The average daily balance of commercial loans increased
$ 40,071,000 for the second quarter 2004 over the same period last year.
Although core deposits grew $ 16,294,000 and time deposits grew $ 16,045,000, on
an average daily basis over the second quarter 2003, interest expense on
deposits continued to decrease in the existing low rate environment. Non-
interest deposit accounts also grew $ 12,070,000 for the same period.
Net interest income for the first six months of 2004 was $ 9,065,000
representing an increase of $ 899,000, or 11.0% over the$ 8,166,000 generated
during the first six months of 2003. Loan portfolio growth is responsible for
all interest income gains. Commercial loans were up $ 43,375,000 or 22.2% over
the first six months of 2003 on a daily average basis. Time deposit volume
increased $ 10,885,000 from December 31, 2003 to June 30, 2004 due primarily to
growth in the 100,000 and over certificates of deposits.
The table that follows states rates on a fully taxable equivalent basis (FTE)
and demonstrates the aforementioned effects:
(Dollars in Thousands) Three Months Ended Six Months Ended
June 2004 June 2003 June 2004 June 2003
Avg Balance Rates Avg Rates Avg Rates Avg Rates
Balance Balance Balance
Interest earning $ 461,944 5.56% $ 410,134 5.90% $ 452,535 5.61% $398,812 6.00%
Interest bearing
liabilities 384,498 1.76% 348,933 1.97% 378,287 1.78% 399,372 2.03%
--------- -------- --------- --------
Free Funds $ 77,446 $ 61,201 $ 74,248 $ 59,440
--------- -------- --------- --------
Net interest income $ 4,599 $ 4,168 $ 9,065 $ 8,166
Net interest spread 3.80% 3.93% 3.83% 3.97%
Free funds ratio 16.77% 14.92% 16.41% 14.90%
Net interest margin 4.10% 4.23% 4.13% 4.27%
Non-Interest Income and Expense
The following compares three months ended June 30, 2004 to three months ended
June 30, 2003:
Other income increased $ 160,000, or 10.1%, from $ 1,584,000 during the second
quarter of 2003 to $ 1,744,000 during the second quarter of 2004. Fee income
from deposit transactions increased $ 103,000, or 15.5% over 2003. Bounce
protection fees, merchant fees and debit card fees were the primary
contributors. Securities gains/losses increased by $ 55,000 over the second
quarter 2003, off-setting a capital loss of $ 52,000 this quarter, due to the
sale of other real estate owned. Asset management fees grew $ 65,000 and should
continue to grow with the addition of the investment management business
purchased on July 14, 2004.
Other expenses rose from $ 3,218,000 during second quarter 2003 to $ 3,696,000
for 2004's second quarter, resulting in an increase of $ 478,000, or 14.9%.
Salaries and benefits expense grew $ 267,000, or 16.4% due to continued company
wide growth including the expansion of the asset management area and the opening
of our thirteenth full service branch at Seven Gables in Carlisle, Pennsylvania
on May 6, 2004. This also contributed to an increase in occupancy and equipment
expense of 17.2% over the same quarter last year. Other operating expenses
increased $ 121,000 for the current quarter versus second quarter 2003.
Increases in advertising and contributions were factors in this increase, as
well as promotional expenses related to the Seven Gables branch opening.
Processing costs for ATM and debit card transactions rose by $ 31,000 versus
second quarter 2003 as volumes increased.
The following compares six months ended June 30, 2004 to six months ended
June 30, 2003
Other income grew $ 204,000, or 6.5%, from $ 3,157,000 during the first half of
2003 to $ 3,361,000 during the same period of 2004. Primary areas of growth
included an increase in bounce protection fees of $ 73,000, a $ 42,000 increase
in master money cared fee and a $ 46,000 increase in merchant account fees.
Secondary mortgage market fees were up $ 97,000 over the first six months of
2003 while other loan fees decreased by $ 128,000. Asset management fees grew
$219,000 due to the growth of trust assets under management from $ 253,000,000
at June 30, 2003 to $ 318,000,000 at June 30, 2004.
Other expenses rose from $ 6,337,000 during the six months of 2003 to
$ 7,093,000 for the six months ended 2004, growing $ 756,000, or 11.9%. Salary
and benefit expense, the largest component of noninterest expense, increased
$ 501,000. The opening of the Bank's thirteenth branch was also responsible for
investment in premises and equipment rising 12.1% from $ 10,512,000 to
$ 11,786,000 for the current year. This helped increase occupancy and equipment
expenses by $ 157,000 or 15.3% over the prior year.
Income Tax Expense
Income tax expense increased $ 33,000, or 4.8%, during the second quarter of
2004 versus the second quarter of 2003. For the first half of 2004 versus 2003,
income tax expense rose $ 107,000, or 7.9%.
Effective income tax rates were as follows:
Three Months Six Months Ended
Ended
June June June June
2004 2003 2004 2003
Effective income tax rate 27.7% 27.6% 28.3% 28.6%
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:
(Dollars in Thousands) Three Months Ended Six Months Ended
June June June June
2004 2003 2004 2003
Balance at beginning of period $ 4,327 $ 3,979 $4,161 $3,734
Recoveries of loans previously
charged off 7 4 28 14
Additions to allowance charged
to expense 30 24 180 276
------- ------- ------- ------
Total 4,364 4,007 4,369 4,024
Loans charged off 12 18 17 35
------- ------- ------- ------
Balance at end of period $ 4,352 $ 3,989 $ 4,352 $3,989
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 46% at June 30, 2004.
Nonperforming Assets / Risk Elements
Nonperforming assets at June 30, are as follows:
(Dollars in Thousands) 2004 2003
Loans on nonaccrual (cash) basis
Loans secured by real estate $ 121 $ 82
Installment loans 6 22
Commercial loans 0 0
Credit card 0 0
------------ -------------
Total nonaccrual loans 127 104
------------ -------------
Loans whose terms have been renegotiated
Loans secured by real estate 1,394 1,420
Installment loans 0 0
Commercial loans 0 0
Credit card 0 0
------------ -------------
Total renegotiated loans 1,394 1,420
------------ -------------
OREO 0 261
------------ -------------
Total nonperforming loans and OREO $ 1,521 $ 1,785
============ ============
Ratio of nonperforming assets to total loans
and OREO 0.41% 0.57%
Ratio of nonperforming assets to total assets 0.31% 0.40%
Loans past due 90 or more days and still
accruing
Loans secured by real estate $ 1,730 $ 2,390
Installment loans 3 7
Commercial loans 20 6
Credit card 0 0
------------ -------------
Total loans 90 or more days past due $ 1,753 $ 2,403
============ ============
Ratio of loans 90 or more days past due to
total loans and OREO 0.47% 0.76%
Ratio of loans 90 or more days past due to
total assets 0.36% 0.53%
------------ -------------
Total nonperforming and other risk assets $ 3,274 $ 4,188
============ ============
Ratio of total risk assets to total loans and OREO 0.88% 1.33%
Ratio of total risk assets to total assets 0.67% 0.93%
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 June 30, 2004 are as follows:
Orrstown Regulatory
Financial Regulatory Well
Capitalized
Services, Minimums Minimums
Inc.
Leverage Ratio 9.16% 4% 5%
Risk Based Capital Ratios:
Tier I Capital Ratio 12.42% 4% 6%
Total (Tier I & II) Capital Ratio (core
capital
plus allowance for loan losses) 13.62% 8% 10%
The growth experienced during 2004 has been supported by capital growth in the
form of retained earnings and capital infusion from the dividend reinvestment
and ESOP plans. Dividend reinvestment plan participants have added $ 442,000 to
equity as of June 30, 2004. Also during the first half of 2004 there were
numerous Employee Stock Options exercised, increasing capital by $ 363,000 and
decreasing diluted shares. Equity represented 9.25% of assets at June 30, 2004
which is up from 9.07% at December 31, 2003 due primarily to the retaining of
earnings and the aforementioned stock sales under plans.
All balance sheet fluctuations exceeding 5% have been created by either the
growth that has been experienced during 2004 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.
Sarbanes-Oxley Act 2002 Requirements
On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) was
signed into law. The Sarbanes-Oxley Act represents a comprehensive revision of
laws affecting corporate governance, accounting obligations and corporate
reporting. The Sarbanes-Oxley Act is applicable to all companies with equity
securities registered or that file reports under the Securities Exchange Act of
1934 (the Exchange Act). In particular, the Sarbanes-Oxley Act establishes: (i)
new requirements for audit committees, including independence, expertise, and
responsibilities; (ii) additional responsibilities regarding financial
statements for the Chief Executive Officer and Chief Financial Officer of the
reporting company; (iii) new standards for auditors and regulation of audits;
(iv) increased disclosure and reporting obligations for the reporting company
and its directors and executive officers; and (v) new and increased civil and
criminal penalties for violations of the securities laws. Many of the
provisions were effective immediately while other provisions become effective
over a period of time and are subject to rulemaking by the Securities and
Exchange Commission (the SEC). Because the Corporation's common stock is
registered with the SEC, it is currently subject to the Sarbanes-Oxley Act.
The Corporation anticipates that it will incur additional expense in complying
with the provisions of the Sarbanes-Oxley Act and the resulting regulations, but
does not expect that such compliance will have a material impact on the
Corporations' or the Banks' results of operations or financial condition.
The Board of Directors revised the Audit Committee Charter in 2003 in order to
bring it into conformity with requirements specified in the Sarbanes-Oxley Act
and related SEC regulations. The Corporation's audit committee held its
regularly scheduled meetings during the first half of 2004. The audit committee
consists of four outside directors with varied business and financial expertise.
Controls and Procedures
(a) Evaluation of disclosure controls and procedures:
The Corporation's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Corporation's disclosure controls and
procedures (as such term is defined in Rules 13a-14(c) under the Securities
Exchange Act of 1934, as amended) as of June 30, 2004. Based on such
evaluation, such officers have concluded that, as of June 30, 2004, the
Corporation's disclosure controls and procedures are effective in alerting them
on a timely basis to material information relating to the Corporation (including
its consolidated subsidiaries) required to be included in the Corporation's
periodic filings under the Exchange Act.
(b) Changes in internal controls:
There have not been any significant changes in the Corporation's internal
control over financial reporting or in other factors that could significantly
affect such control during the second quarter of 2004.
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
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8 - K
(a) Exhibits
31.1 - Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 - Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 - Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350
32.2 - Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350
99 - Report of independent accountant's on interim financial statements
(b) Reports on Form 8 - K:
Current report on Form 8-K filed with the Commission on July 15, 2004
Current report on Form 8-K filed with the Commission on July 22, 2004
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 & CEO)
(Duly Authorized Officer)
/s/ Bradley S. Everly
--------------------------------------
(Bradley S. Everly, Senior Vice President &
CFO)
(Chief Financial Officer)
/s/ Robert B. Russell
--------------------------------------
Robert B. Russell, Controller)
(Chief Accounting Officer)
Date July 26, 2004
-----------------
Exhibit 31.1
CERTIFICATION
I, Kenneth R. Shoemaker, President and CEO, certify, that:
1. I have reviewed this quarterly report on Form 10-Q of Orrstown
Financial Services, Inc.
2. Based on my knowledge, the quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15 (e) and 15d-15(e)) for the
registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this quarterly report based on
such evaluation; and
(c) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies and material weaknesses in the design
or operation of the internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
/s/ Kenneth R. Shoemaker
--------------------------------------
Kenneth R. Shoemaker
President & CEO
(Principal Executive Officer)
July 26, 2004
Exhibit 31.2
CERTIFICATION
I, Bradley S. Everly, Sr. Vice President and CFO, certify, that:
1. I have reviewed this quarterly report on Form 10-Q of Orrstown
Financial Services, Inc.
2. Based on my knowledge, the quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15 (e) and 15d-15(e)) for the
registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this quarterly report based on
such evaluation; and
(c) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies and material weaknesses in the design
or operation of the internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
/s/ Bradley S. Everly
--------------------------------------
Bradley S. Everly
Sr. Vice President & CFO
(Principal Financial Officer)
July 26, 2004
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Orrstown Financial Services, Inc.
(the Corporation) on Form 10-Q for the period ending June 30, 2004 as filed with
the Securities and Exchange Commission on the date hereof (the Report), I,
Kenneth R. Shoemaker, Chief Executive Officer of the Corporation, certify,
pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the final condition and results of operations of the
Corporation.
/s/Kenneth R. Shoemaker
--------------------------------------
Kenneth R. Shoemaker
Chief Executive Officer
July 26, 2004
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Orrstown Financial Services, Inc.
(the Corporation) on Form 10-Q for the period
ending June 30, 2004 as filed with the Securities and Exchange Commission on the
date hereof (the Report), I, Bradley S.
Everly, Chief Financial Officer of the Corporation, certify, pursuant to 18
U.S.C. section 1350, as adopted pursuant to section
906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the final condition and results of operations of the
Corporation.
/s/ Bradley S. Everly
--------------------------------------
Bradley S. Everly
Chief Financial Officer
July 26, 2004
Exhibit 99
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Orrstown Financial Services, Inc.
Shippensburg, Pennsylvania
We have reviewed the accompanying consolidated balance sheet of Orrstown
Financial Services, Inc. and it's subsidiaries as of June 30, 2004 and the
related consolidated statements of income for the three and six months ended
June 30, 2004 and 2003 and consolidated statements of comprehensive income for
the three and six months ended June 30, 2004 and 2003 and consolidated
statements of cash flows for the six months ended June 30, 2004. These
financial statements are the responsibility of the Corporation's management.
We conducted our reviews in accordance with the standards of the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with the standards of the Public Company Accounting Oversight
Board, the objective of which is the expression of an opinion regarding the
consolidated financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying
consolidated financial statements for them to be in conformity with generally
accepted accounting principles.
/s/ Smith Elliott Kearns & Company, LLC
------------------------------------------
SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, Pennsylvania
July 26, 2004