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, 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
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b - 2 of the Exchange Act).
YES X NO
Class Outstanding at October 25, 2004
(Common Stock, no par value ) 5,120,764
ORRSTOWN FINANCIAL SERVICES, INC.
INDEX
Page
Part I - FINANCIAL INFORMATION
Item 1. Financial statements (unaudited)
Condensed consolidated balance sheets - September 30, 2004
and December 31, 2003 4
Condensed consolidated statements of income - Three months
ended September 30, 2004 and 2003 5
Condensed consolidated statements of income - Nine months
ended September 30, 2004 and 2003 6
Condensed consolidated statements of comprehensive income -
Three months & Nine months ended September 30,
2004 and 2003 7
Condensed consolidated statements of cash flows - Nine months
ended September 30, 2004 and 2003 8
Notes to condensed consolidated financial statements9 - 10
Item 2. Management's discussion and analysis of
financial condition and results of
operations 11 - 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 16
Item 4. Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities, Use of Proceeds
and Issuer Purchases of Equity
Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of
Security Holders 18
Item 5. Other Information 18
Item 6 Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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) *
September 30, December 31,
(Dollars in Thousands) 2004 2003
ASSETS
Cash and due from banks $ 11,303 $ 12,283
Interest bearing deposits with banks 508 1,001
Federal funds sold 21,936 3,829
Securities available for sale 83,090 89,074
Federal Home Loan Bank, Federal Reserve and Atlantic Central
Bankers Bank Stock, at cost which approximates market value 2,766 2,912
Loans 379,021 345,054
Allowance for loan losses (4,339) (4,161)
---------------- ----------------
Net Loans 374,682 340,893
Premises and equipment, net 12,544 11,168
Accrued Interest receivable 1,695 1,647
Cash value-life insurance 7,438 7,234
Other assets 3,441 2,352
---------------- ----------------
Total assets $ 519,403 $ 472,393
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 59,040 $ 52,276
Interest bearing 338,371 306,367
---------------- ----------------
Total deposits 397,411 358,643
Federal funds purchased and other short term borrowed funds 34,107 29,440
Long term borrowed funds 35,705 37,193
Accrued interest payable
243 226
Other liabilities 4,502 4,056
---------------- ----------------
Total liabilities 471,968 429,558
---------------- ----------------
Common stock, no par value - $ .05205 stated value per share
50,000,000 shares authorized with 5,114,559 shares issued
at September 30, 2004 and $.1041 stated value per share
10,000,000 shares authorized with 2,537,011 shares issued at
December 31, 2003 266 264
Additional paid - in capital 34,034 32,928
Retained earnings 12,282 8,509
Accumulated other comprehensive income 853 1,134
---------------- ----------------
Total stockholders' equity 47,435 42,835
---------------- ----------------
Total liabilities and stockholders' equity $ 519,403 $ 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
September September
(Dollars in Thousands) 2004 2003
INTEREST INCOME
Interest and fees on loans $ 5,661 $ 4,924
Interest on federal funds sold 77 65
Interest and dividends on investment 866 852
securities
Interest income on deposits with banks 2 2
--------- ---------
Total interest income 6,606 5,843
--------- ---------
INTEREST EXPENSE
Interest on deposits 1,333 1,196
Interest on borrowed money 469 471
--------- ---------
Total interest expense 1,802 1,667
--------- ---------
Net interest income 4,804 4,176
Provision for loan losses 30 24
--------- ---------
Net interest income after provision for loan losses 4,774 4,152
--------- ---------
OTHER INCOME
Service charges on deposits 793 666
Other service charges 265 421
Trust department income 478 378
Brokerage income 187 111
Other income 95 103
Securities gains / (losses) 0 23
--------- ---------
Total other income 1,818 1,702
--------- ---------
OTHER EXPENSES
Salaries and employee benefits 2,076 1,737
Net occupancy and equipment expenses 592 528
Other operating expenses 1,102 963
--------- ---------
Total other expense 3,770 3,228
--------- ---------
Income before income tax 2,822 2,626
Income tax expenses 856 891
--------- ---------
Net income $ 1,966 $ 1,735
========= =========
PER SHARE DATA
Earnings per share
Basic earnings per share $ 0.39 $ 0.34
Weighted average number of shares 5,111,776 5,056,896
outstanding
Diluted earnings per share $ 0.37 $ 0.33
Weighted average number of shares 5,318,301 5,240,650
outstanding
Dividends per share $ 0.13 $ 0.1050
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)
Nine Months Ended
September September
(Dollars in Thousands) 2004 2003
INTEREST INCOME
Interest and fees on loans $ 16,300 $ 14,486
Interest on federal funds sold 117 124
Interest and dividends on investment securities 2,593 2,806
Interest income on deposits with banks 5 11
---------- ----------
Total interest income 19,015 17,427
---------- ----------
INTEREST EXPENSE
Interest on deposits 3,814 3,790
Interest on borrowed money 1,332 1,295
---------- ----------
Total interest expense 5,146 5,085
---------- ----------
Net interest income 13,869 12,342
Provision for loan losses 210 300
---------- ----------
Net interest income after provision for loan losses 13,659 12,042
---------- ----------
OTHER INCOME
Service charges on deposits 2,243 1,942
Other service charges 780 990
Trust department income 1,392 1,072
Brokerage income 404 361
Other income 245 300
Securities gains / (losses) 115 194
---------- ----------
Total other income 5,179 4,859
---------- ----------
OTHER EXPENSES
Salaries and employee benefits 5,879 5,039
Net occupancy and equipment expenses 1,777 1,556
Other operating expenses 3,207 2,970
---------- ----------
Total other expense 10,863 9,565
---------- ----------
Income before income tax 7,975 7,336
Income tax expenses 2,312 2,240
---------- ----------
Net income $ 5,663 $ 5,096
========== ==========
PER SHARE DATA
Earnings per share
Basic earnings per share $ 1.11 $ 1.01
Weighted average number of shares outstanding 5,101,409 5,049,853
Diluted earnings per share $ 1.07 $ 0.98
Weighted average number of shares outstanding 5,283,693 5,203,426
Dividends per share $ 0.37 $ 0.3055
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
September September
(Dollars in Thousands) 2004 2003
COMPREHENSIVE INCOME
Net Income $ 1,966 $ 1,735
Other comprehensive income, net of tax
Unrealized gain (loss) on investment
securities available for sale 339 (608)
---------- ----------
Comprehensive Income $ 2,305 $ 1,127
========== ==========
Nine Months Ended
September September
(Dollars in Thousands) 2004 2003
COMPREHENSIVE INCOME
Net Income $ 5,663 $ 5,096
Other comprehensive income, net of tax
Unrealized gain (loss) on investment (281) (940)
securities available for sale
---------- ----------
Comprehensive Income $ 5,382 $ 4,156
========== ==========
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)
Nine Months Ended
September September
(Dollars in Thousands) 2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,663 $ 5,096
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 798 695
Provision for loan losses 210 300
Other, net (702) (234)
---------- ----------
Net cash provided by operating activities 5,969 5,857
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest 493 (399)
bearing deposits with banks
Purchases of available for sale (14,923) (45,028)
securities
Sales and maturities of available for 20,450 46,110
sale securities
Net (purchases) redemption of FHLB Stock 145 (398)
Net (increase) in loans (33,999) (44,869)
Purchases of bank premises and equipment (2,174) (1,840)
---------- ----------
Net cash provided (used) by investing activities (30,008) (46,424)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 38,768 36,517
Cash dividends paid (1,889) (1,542)
Proceeds from sale of stock 1,108 578
Cash paid in lieu of fractional shares 0 (22)
Net increase in short term purchased funds 4,667 6,300
Proceeds of long term debt issuance 0 10,000
Payments and maturities on long term debt (1,488) (1,213)
---------- ----------
Net cash provided by financing activities 41,166 50,618
---------- ----------
Net increase in cash and cash equivalents 17,127 10,051
Cash and cash equivalents at beginning of period 16,112 18,873
---------- ----------
Cash and cash equivalents at end of period $ 33,239 $ 28,924
========= =========
Supplemental disclosure of cash flow nformation:
Cash paid during the period for:
Interest $ 5,129 $ 5,121
Income Taxes 2,225 2,100
Supplemental schedule of noncash investing
and financing activities:
Unrealized gain (loss) on investments
available for sale (net of
deferred taxes of $(145) and $(484) at
September 30, 2004 and
2003, respectively). (281) (940)
The accompanying notes are an integral part of
these condensed financial statements.
ORRSTOWN FINANCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
(UNAUDITED)
Review of Interim Financial Statements
The condensed consolidated financial statements as of and for the
three months ended and nine months ended September 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 nine months ended September 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 occurred during the
quarters ended June 30, 2004 and 2003, and 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. Thus, there is
no effect on third quarter results.
Nine Months Ended
September September
(In Thousands, except per share data) 2004 2003
Net income
As reported $ 5,663 $ 5,096
Pro forma 5,278 4,873
Basic earnings per share
As reported $ 1.11 $ 1.01
Pro forma 1.04 0.97
Diluted earnings per share
As reported $ 1.07 $ 0.98
Pro forma 1.00 0.94
Investment Securities
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 September 30, 2004 fair value exceeded
amortized cost by $1,293,000. In shareholders' equity, the
balance of accumulated other comprehensive income decreased to
$853,000 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.
Item 2. Management's Discussion and Analysis
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 $1,966,000
for the third quarter of 2004 compared to $1,735,000 for the same
period in 2003, representing an increase of $231,000 or 13.3%. Basic
earnings per share was $0.39 for the third quarter of 2004 compared to
the $0.34 earned during the third quarter of 2003.
Net income for the first nine months of 2004 was $5,663,000 compared
to $5,096,000 for the same period in 2003, representing an increase of
$567,000 or 11.1%. Net income per share for the first nine months of
2004 was $1.11 up from the $1.01 per share realized during the nine
months ended September 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 third quarter and year-to-date
performance to that of 2003:
Three Months Ended Nine Months Ended
September September September September
2004 2003 2004 2003
Return on average assets 1.53% 1.50% 1.54% 1.56%
Return on average equity 16.77% 16.70% 16.62% 17.08%
Average equity / Average 9.12% 8.96% 9.27% 9.14%
assets
Orrstown Financial Services, Inc. (OTC Bulletin board: ORRF) stock is
thinly traded but continues to trade at price to earnings and price to
book value multiples that are well above industry averages. The
closing price on September 30, 2004 was $43.00 which represented 29
times basic earnings per share and 30 times diluted earnings per share
realized during the twelve months ended September 30, 2004. This also
represents 4.6 times the September 30, 2004 book value per share.
Comparatively, according to SNL financial, a banking industry
specialist located in Charlottesville, Virginia, the median price /
earnings ratio was 16.83 for all publicly traded banks and 18.39 for
all publicly traded community (under $500 million in assets) banks
while the median price / book value was 1.84 for all banks and 1.64 for
all community banks.
A detailed discussion of the elements having the greatest impact on net
income follows.
Net Interest Income
Net interest income for the third quarter of 2004 was $4,804,000
representing a growth of $628,000, or 15.0% over the $4,176,000
realized during the third quarter of 2003. This was due to both volume
and rate increases as the net interest margin grew from 4.00% in the
third quarter 2003 to 4.11% during third quarter 2004. Due to the
recent increases in Prime and the Federal Funds rates, the rate on
interest earning assets increased 7 basis points from 5.53% during the
third quarter 2003 to 5.60% in the third quarter 2004. The largest
growth was in loans, with the average daily balance of commercial loans
increasing $40,896,000 or 21.4% for the third quarter 2004 over the
same period last year. Deposit rates stayed nearly flat between the
third quarter this year and the third quarter last year even though
interest expense increased by $135,000 for the same period, due to an
increase in money market and time deposit account balances.
Net interest income for the first nine months of 2004 was $13,869,000
representing an increase of $1,527,000, or 12.4% over the $12,342,000
generated during the first nine months of 2003. Loan portfolio growth
is responsible for all interest income gains. Commercial loans were up
$40,539,000 or 21.9% and consumer loans were up $11,253,000 or 30.0%
over the first nine months of 2003 on a daily average basis. Time
deposit volume increased $16,118,000 or 16.7% and money market accounts
grew $11,491,000 or 86.2% for the same period.
The table that follows states rates on a fully taxable equivalent basis
(FTE) and demonstrates the aforementioned effects:
(Dollars in Thousands) Three Months Ended
September 2004 September 2003
Avg Balance Rates Avg Balance Rates
Interest earning assets $ 479,566 5.60% $ 432,054 5.53%
Interest bearing liabilities 398,309 1.80% 362,657 1.82%
---------- ----------
Free Funds $ 81,257 $ 69,397
---------- ----------
Net interest income $ 4,804 $ 4,176
Net interest spread 3.80% 3.71%
Free funds ratio 16.94% 16.06%
Net interest margin 4.11% 4.00%
(Dollars in Thousands) Nine Months Ended
September 2004 September 2003
Avg Balance Rates Avg Balance Rates
Interest earning assets $ 461,611 5.61% $ 410,014 5.83%
Interest bearing liabilities 385,010 1.79% 347,219 1.96%
---------- ----------
Free Funds $ 76,601 $ 62,795
---------- ----------
Net interest income $ 13,869 $ 12,342
Net interest spread 3.82% 3.87%
Free funds ratio 16.59% 15.32%
Net interest margin 4.12% 4.18%
Non-Interest Income and Expense
The following compares three months ended September 30, 2004 to three
months ended September 30, 2003:
Total non-interest income increased $116,000, or 6.8%, from $1,702,000
during the third quarter of 2003 to $1,818,000 during the third
quarter of 2004. Fee income from deposit transactions increased
$127,000, or 19.1% over 2003. Bounce protection fees, merchant fees
and debit card fees were the primary contributors. Fees on secondary
market loans decreased by $100,000 and other loan fees decreased by
$71,000 indicating a reduction in mortgage origination and
refinancing. No securities gains / losses were taken this quarter.
Asset management fees grew $100,000 or 26.5%, while brokerage income
increased $76,000 due in part to the addition of the investment
management business purchased on July 14, 2004.
Total non-interest expenses rose from $3,228,000 during third quarter
2003 to $3,770,000 for 2004's third quarter, resulting in an increase
of $542,000, or 16.8%. Salaries and benefits expense grew $339,000,
or 19.5% a large contributor to this was an approximately 20% increase
in healthcare expenses mid 2004. Occupancy and equipment expense grew
12.1% due to continued company wide growth and improvements to
technology. Other operating expenses increased $139,000 for the
current quarter versus third quarter 2003. Increases in professional
fees were factors in this increase and will continue to be for the
next few quarters as compliance with the Sarbanes Oxley Act will
demand extra expense.
The following compares nine months ended September 30, 2004 to nine
months ended September 30, 2003:
Total non-interest income grew $320,000, or 6.6%, from $4,859,000
during the first nine months of 2003 to $5,179,000 during the same
period of 2004. Primary areas of growth included an increase in
bounce protection fees of $116,000, a $89,000 increase in master money
cared fees and a $68,000 increase in merchant account fees. A drop in
loan fees and insurance fees created a declined of $210,000 in other
service charges for the period. Asset management fees grew $302,000
and brokerage income contributed an additional $43,000.
Other expenses rose from $9,565,000 during the first nine months of
2003 to $10,863,000 for the nine months ended 2004, growing
$1,298,000, or 13.6%. Salary and benefit expense, the largest
component of noninterest expense, increased $840,000. Occupancy and
equipment expenses increased by $221,000 or 14.2% over the prior year.
Other operating expenses rose $237,000. Factors for this growth were
primarily from increases in public relations, master money card and
contributions expense. Professional fees also grew due in part to the
acquisition of the Integrity Financial investment management business
on July 14, 2004.
Income Tax Expense
Income tax expense decreased $35,000, or -3.9%, during the third
quarter of 2004 versus the third quarter of 2003. For the first nine
months of 2004 versus 2003, income tax expense rose $72,000, or 3.2%.
Effective income tax rates were as follows:
Three Months Ended Nine Months Ended
September September September September
2004 2003 2004 2003
Effective income tax rate 30.3% 33.9% 29.0% 30.5%
The marginal federal income tax bracket is 34% for all periods
presented.
Provision and Allowance for Loan Losses
(Dollars in Thousands) Three Months Ended Nine Months Ended
September September September September
2004 2003 2004 2003
Balance at beginning of period $ 4,352 $ 3,989 $ 4,161 $ 3,734
Recoveries of loans
previously charged off 0 2 28 16
Additions to allowance
charged to expense 30 24 210 300
----------- ----------- ----------- -----------
Total 4,382 4,015 4,399 4,050
Loans charged off 43 21 60 56
----------- ----------- ----------- -----------
Balance at end of period $ 4,339 $ 3,994 $ 4,339 $ 3,994
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 38.5% at September 30, 2004.
Nonperforming Assets / Risk Elements
Nonperforming assets at September 30, are as follows:
(Dollars in Thousands) 2004 2003
Loans on nonaccrual (cash) basis
Loans secured by real estate $ 312 $ 131
Installment loans 3 10
Commercial loans 0 6
Credit card 0 0
------------ ------------
Total nonaccrual loans 315 147
Loans whose terms have been renegotiated ------------ ------------
Loans secured by real estate 2,326 1,420
Installment loans 0 0
Commercial loans 0 0
Credit card 0 0
------------ ------------
Total renegotiated loans 2,326 1,420
------------ ------------
OREO 61 261
------------ ------------
Total nonperforming loans and OREO $ 2,702 $ 1,828
============ ============
Ratio of nonperforming assets to
total loans and OREO 0.71% 0.56%
Ratio of nonperforming assets to
total assets 0.52% 0.39%
Loans past due 90 or more days and still accruing
Loans secured by real estate $ 972 $ 2,762
Installment loans 21 15
Commercial loans 0 1
Credit card 0 0
------------ ------------
Total loans 90 or more days past due $ 993 $ 2,778
============ ============
0.26% 0.85%
Ratio of loans 90 or more days past due to total
assets 0.19% 0.60%
------------ ------------
Total nonperforming and other risk assets $ 3,695 $ 4,606
============ ============
Ratio of total risk assets to total loans and OREO 0.97% 1.41%
Ratio of total risk assets to total assets 0.71% 0.99%
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 September 30, 2004 are as follows:
Orrstown Regulatory
Financial Regulatory Well-Capitalized
Services, Inc. Minimums Minimums
Leverage Ratio 8.87% 4% 5%
Risk Based Capital Ratios:
Tier I Capital Ratio 12.00% 4% 6%
Total (Tier I & II) Capital
Ratio (core capital
plus allowance for loan losses) 13.15% 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 $669,000 to equity as of September 30, 2004. Also during
the first nine months of 2004 there were numerous Employee Stock
Options exercised, which increased capital by $403,000. Equity
represented 9.13% of assets at September 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 nine
months of 2004. The audit committee consists of four outside directors
with varied business and financial expertise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the quantitative and qualitative
disclosures made in Orrstown Financial Services, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 2003.
Item 4. Controls and Procedures
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 September
30, 2004. Based on such evaluation, such officers have concluded that,
as of September 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 third quarter of
2004.
PART II - OTHER INFORMATION
PART 11 - OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity 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
The Registrant filed the following reports with the Commission on
Form 8-K
Report Dated October 25, 2004
Registrant announced its earnings for the period ended September
30, 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)
DateOctober 25, 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)
October 25, 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)
October 25, 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
September 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
October 25, 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 September 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
October 25, 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
September 30, 2004 and the related consolidated statements of income
for the three and nine months ended September 30, 2004 and 2003 and
consolidated statements of comprehensive income for the three and nine
months ended September 30, 2004 and 2003 and consolidated statements
of cash flows for the nine months ended September 30, 2004 and 2003.
These financial statements are the responsibility of the Corporation's
management.
We conducted our reviews in accordance with 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
October 25, 2004