FORM 10 - Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
33-18888
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(Commission file number)
ORRSTOWN FINANCIAL SERVICES, INC.
----------------------------------
(Exact name of registrant as specified in its charter)
Commonwealth of Pennsylvania 23-2530374
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification
No.)
77 East King Street 17257
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P.O. Box 250, Shippensburg, Pennsylvania (Zip Code)
- ----------------------------------------
(Address of principal executive offices)
(717) 532-6114
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(Registrant's telephone number, including area code)
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 ________
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b - 2 of the Exchange Act).
YES X NO ________
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Common Stock, no par value 5,138,394
------------------------
(Title of Class) (Outstanding Shares)
Page 1 of 22
ORRSTOWN FINANCIAL SERVICES, INC.
INDEX
Page
Part I - FINANCIAL INFORMATION
Item 1. Financial statements (unaudited)
Condensed consolidated balance sheets - March 31, 2005
and December 31, 2004 4
Condensed consolidated statements of income - Three months
ended March 31, 2005 and 2004 5
Condensed consolidated statements of comprehensive income -
Three months ended March 31, 2005 and 2004 6
Condensed consolidated statements of cash flows - Three
months ended March 31, 2005 and 2004 7
Notes to condensed consolidated financial statements 8 - 9
Item 2. Management's discussion and analysis of financial condition and
results of operations 10 - 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Securities Holders 17
Item 5. Other Information 17
Item 6. Exhibits 19 - 22
SIGNATURES 18
Page 2 of 22
PART I - FINANCIAL INFORMATION
Page 3 of 22
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ORRSTOWN FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Unaudited) (Audited) *
March 31, December 31,
(Dollars in Thousands) 2005 2004
ASSETS
Cash and due from banks $ 9,572 $ 11,456
Federal funds sold 13,766 8,393
--------- ----------
Cash and cash equivalents 23,338 19,849
Interest bearing deposits with banks 328 1,124
Securities available for sale 79,810 79,829
FHLB, Federal Reserve and Atlantic Central Bankers
Bank stock,
at cost which approximates market value 2,549 2,972
Loans 402,702 389,268
Allowance for loan losses (4,338) (4,318)
--------- ----------
Net Loans 398,364 384,950
Premises and equipment, net 13,172 13,222
Accrued interest receivable 1,851 1,775
Cash surrender value of life insurance 7,575 7,516
Other assets 4,024 3,414
--------- ----------
Total assets $ 531,011 $ 514,651
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 63,197 $ 66,784
Interest bearing 355,654 338,579
Total deposits 418,851 405,363
Short term borrowings 20,545 19,493
Long-term debt 35,403 35,569
Accrued interest payable 280 266
Other liabilities 5,379 4,710
--------- ----------
Total liabilities 480,458 465,401
--------- ----------
Common stock, no par value - $ .05205 stated value per
share;
50,000,000 shares authorized; 5,138,394 and
5,126,205 shares
issued 268 267
Additional paid - in capital 34,858 34,434
Retained earnings 15,174 13,723
Accumulated other comprehensive income 253 826
--------- ----------
Total shareholders' equity 50,553 49,250
--------- ----------
Total liabilities and shareholders' equity $ 531,011 $ 514,651
========= ==========
The accompanying notes are an integral part of these condensed financial
statements.
Page 4 of 22
ORRSTOWN FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
March March
(Dollars in Thousands) 2005 2004
INTEREST INCOME
Interest and fees on loans $ 6,261 $ 5,202
Interest and dividends on investment securities 914 919
Interest on short term investments 44 6
------- -------
Total interest income 7,219 6,127
------- -------
INTEREST EXPENSE
Interest on deposits 1,492 1,215
Interest on short-term borrowings 108 76
Interest on long-term debt 361 370
------- -------
Total interest expense 1,961 1,661
------- -------
Net interest income 5,258 4,466
Provision for loan losses 24 150
------- -------
Net interest income after provision for loan 5,234 4,316
losses
------- -------
OTHER INCOME
Service charges on deposits 807 681
Other service charges 270 210
Trust department income 537 456
Brokerage income 197 96
Other income 92 107
Securities gains / (losses) (2) 67
------- -------
Total other income 1,901 1,617
------- -------
OTHER EXPENSES
Salaries and employee benefits 2,200 1,910
Net occupancy and equipment expenses 639 573
Data processing 141 129
Advertising 95 54
Other operating expenses 952 731
------- -------
Total other expense 4,027 3,397
------- -------
Income before income tax 3,108 2,536
Income tax expenses 937 730
------- -------
Net income $ 2,171 $ 1,806
======= =======
PER SHARE DATA
Earnings per share
Basic earnings per share $ 0.42 $ 0.35
Weighted average number of shares outstanding 5,134,435 5,088,942
Diluted earnings per share $ 0.41 $ 0.34
Weighted average number of shares outstanding 5,331,682 5,260,132
Dividends per share $ 0.14 $ 0.12
The accompanying notes are an integral part of these condensed financial
statements.
Page 5 of 22
ORRSTOWN FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended
March March
(Dollars in Thousands) 2005 2004
COMPREHENSIVE INCOME
Net Income $ 2,171 $ 1,806
Other comprehensive income, net of tax
Unrealized gain (loss) on investment securities (573) 301
available for sale
-------- --------
Comprehensive Income $ 1,598 $ 2,107
======== ========
The accompanying notes are an integral part of these condensed financial
statements.
Page 6 of 22
ORRSTOWN FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
March March
(Dollars in Thousands) 2005 2004
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,171 $ 1,806
Adjustments to reconcile net income to net cash provided
by
operating activities:
Depreciation and amortization 311 253
Provision for loan losses 24 150
Other, net 208 (215)
--------- ---------
Net cash provided by operating activities 2,714 1,994
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest bearing deposits with banks 796 647
Purchases of available for sale securities (4,262) (259)
Sales and maturities of available for sale securities 3,418 11,928
Net (purchases) sales of FHLB Stock 423 (293)
Net (increase) in loans (13,438) (14,095)
Purchases of bank premises and equipment (241) (520)
--------- ---------
Net cash (used) by investing activities (13,304) (2,592)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 13,488 11,670
Cash dividends paid (719) (612)
Proceeds from sale of stock 424 518
Cash paid in lieu of fractional shares - -
Net increase (decrease) in short term purchased funds 1,052 (6,630)
Proceeds in long term debt - -
Payments on long term debt (166) (1,162)
--------- ---------
Net cash provided by financing activities 14,079 3,784
--------- ---------
Net increase in cash and cash equivalents 3,489 3,186
Cash and cash equivalents at beginning of period 19,849 16,112
--------- ---------
Cash and cash equivalents at end of period $ 23,338 $ 19,298
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,947 $ 1,658
Income Taxes 0 0
Supplemental schedule of non-cash investing and financing
activities:
Unrealized gain (loss) on investments available for sale
(net of
deferred taxes of $295 and $155 at March 31, 2005 and
2004,
respectively) (573) 301
The accompanying notes are an integral part of these condensed financial
statements.
Page 7 of 22
ORRSTOWN FINANCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(UNAUDITED)
Note 1: Summary of Significant Accounting Policies
Basis of Presentation
The unaudited financial information presented at and for the three months ended
March 31, 2005 and 2004 has been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and instructions to Form 10-Q. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete 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. Information presented at December 31, 2004 is
condensed from audited year-end financial statements. For further information,
refer to the audited consolidated financial statements, and footnotes thereto,
included in the Annual Report on Form 10-K, for the year ended December 31,
2004.
Operating
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. Operating results
for the three months ended March 31, 2005, are not necessarily indicative of the
results that may be expected for the year ending December 31, 2005.
Cash Flows
For purposes of the Statements of Cash Flows, cash and cash equivalents include
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. The options have
exercise prices equal to the market value of the underlying common stock on the
dates of grant. If grants are made during a reporting period the proforma
effect on net income and earnings per share are disclosed via footnote as if the
Corporation had applied the fair value recognition provisions of FASB 123,
"Accounting for Stock-Based Compensation", to stock-based employee and/or
director compensation. No grants were made during the periods presented herein.
Page 8 of 22
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 December 31, 2004, fair value exceeded amortized cost by $1,251,000
and at March 31, 2005 fair value exceeded amortized cost by $384,000. In
shareholders' equity, the balance of accumulated other comprehensive income
decreased to $253,000 from $826,000 at December 31, 2004 due to the first
quarter write down of the investment securities portfolio.
Note 2: 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. Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. The Bank evaluates each
customer's credit-worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary upon extension of credit, is based on management's
credit evaluation of the customer. Standby letters of credit and financial
guarantees written are conditional commitments to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to support
public and private borrowing arrangements. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loans to
customers. The Bank holds collateral supporting those commitments when deemed
necessary by management. As of March 31, 2005, $ 11,804,000 of standby letters
of credit have been issued. The Bank does not anticipate any losses as a result
of these transactions.
Note 3: Subsequent Events
On May 3, 2005, the Board of Directors declared a 5% stock dividend, payable on
June 29, 2005 with shareholders of record as of June 3, 2005. Each shareholder
will be granted a single share for each 20 shares owned as of the record date.
There will be a cash payment for any fractional shares.
Page 9 of 22
PART I - FINANCIAL INFORMATION
Item 2.
ORRSTOWN FINANCIAL SERVICES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The following is a discussion of our consolidated financial condition and
results of operations for each of the three months ended March 31, 2005 and
three months ended March 31, 2004. Throughout this discussion, the yield on
earning assets is stated on a fully taxable-equivalent basis and balances
represent average daily balances unless otherwise stated.
Some statements and information may contain forward-looking statements. The
following factors, among others, could cause actual results to differ materially
from forward-looking statements include: general political and economic
conditions, unforeseen changes in the general interest rate environment,
developments concerning credit quality in various corporate lending industry
sectors, legislative or regulatory developments, legal proceedings, pending and
proposed changes in accounting rules, policies, practices, and procedures. Each
of these factors could affect estimates and assumptions used to produce forward
looking statements causing actual results to differ materially from those
anticipated. Future results could also differ materially from historical
performance.
Critical Accounting Policies
The Bank policy related to the allowance for loan losses is considered to be a
critical accounting policy because the allowance for loan losses represents a
particularly sensitive accounting estimate. The amount of the allowance is
based on management's evaluation of the collectibility of the loan portfolio,
including the nature of the loan portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans, and economic conditions.
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses
when management believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, grouping of like loans,
grading of individual loan quality, review of specific problem loans, the
examination of underlying collateral and current economic conditions that may
affect the borrowers' ability to pay.
SUMMARY OF FINANCIAL RESULTS
Orrstown Financial Services, Inc. recorded net income of $2,171,000 for the
first quarter of 2005 compared to $1,806,000 for the same period in 2004,
representing an increase of $365,000 or 20.2%. Basic earnings per share
increased $0.07 to $0.42 in the recent quarter from the $0.35 earned during the
first three months of 2004. Diluted earnings per share for the same period was
$0.41 and $0.34 respectively.
The following statistics compare 2005's first quarter performance to that of
2004:
Three Months Ended
March March
2005 2004
Return on average assets 1.70% 1.54%
Return on average equity 17.43% 16.47%
Average equity / Average assets 9.74% 9.37%
Net Interest Income
Net interest income for the first quarter of 2005 was $5,258,000 representing a
growth of $792,000, or 17.7% over the $4,466,000 realized during the same
quarter last year. On a fully taxable equivalent basis (FTE), net interest
income for the first quarter of 2005 and 2004 was $5,453,000 and $4,641,000,
respectively.
Page 10 of 22
Interest income totaled $7,219,000 for the first three months of 2005 verses
$6,127,000 for the same period last year, a difference of $1,092,000 or 17.8%.
Growth of earning assets was due almost equally to volume increases and interest
rate increases. The rate on earning assets went from 6.10% for the first
quarter 2005 from 5.66% in the same quarter last year. Increases in the prime
lending rate and the federal funds rate during the last half of 2004 and
continuing through the first quarter of 2005 have helped the earnings stream of
the Bank and Corporation. Total earning assets grew $43.5 million or 9.8% from
$443.1 million for the quarter of 2004 to $486.6 million in the first quarter
2005. Total securities decreased by $4.5 million as a result of payments and
maturities of mortgage backed securities. The $4.7 million growth in federal
funds sold offset the decline in securities. Mortgage loans maintained their
balances growing slightly form $89.4 million to $91.1 million. The growth in
mortgage loans occurred in the adjustable rate mortgages while the portfolio of
fixed rate mortgages declined. The Bank's commercial loans increased $32.5
million from $217.1 $249.6. All growth occurred in the variable or semi-fixed
commercial loan portfolios. This growth, as well as increases in the prime
lending rate, resulted in $876,000 of interest income from the commercial loan
portfolio.
Interest expense increased $300,000 from $1,961,000 to $1,661,000 or 18.1% over
the first quarter of 2004. The growth in loans was funded by the growth in
deposits. Core deposits like non interest demand deposits grew $10.0 million
while interest bearing transaction accounts increased $15.7 million. Money
maker accounts have seen a decline of $11.6 million in balances over last year.
Money market accounts continued to grow throughout 2004 and have now leveled out
increasing the average daily balance from $16.8 million during the first quarter
of 2004 to $33.9 million in the current quarter. As the stock market rates
finally start to increase, deposits in these areas may become more volatile. A
newly created product this quarter was a prime savings account. This account
grew to $9.2 million within the three months it was opened. This growth in
total interest bearing transaction accounts increased interest expense by
$74,000, while time deposits increased interest expense by $203,000. Time
deposit portfolios increased 22.7% or $24.4 million over the first three months
last year with the majority of growth in jumbo certificates of deposits. The
balances of short term and long term borrowings were both down compared to last
year by $9.1 million. Repurchase agreements go through cycles according to the
needs of the school districts and other customers. Reductions in long term
borrowings are due to maturities of debt and amortization of principal.
As a result of the balance movements above and the rising interest rate trend,
the interest spread increased from 3.87% to 4.13% and the interest margin
increased from 4.16% to 4.47% from the first quarter 2004 to the first quarter
2005, respectively.
The table that follows states rates on a fully taxable equivalent basis (FTE)
and demonstrates the aforementioned effects:
(Dollars in Thousands) Three Months Ended
March 2005 March 2004
Avg Rates Avg Rates
Balance Balance
Interest earning assets 486,647 6.10% 443,126 5.66%
Interest bearing 403,075 1.97% 372,075 1.80%
liabilities
--------- ---------
Free Funds 83,572 71,051
--------- ---------
Net interest income 5,258 4,466
Net interest spread 4.13% 3.86%
Net interest margin 4.47% 4.16%
Free funds ratio 17.17 16.03
% %
Page 11 of 22
RESULTS OF OPERATIONS
The following compares three months ended March 31, 2005 to three months ended
March 31, 2004:
Non-Interest Income
Other income, excluding securities gains, increased $353,000, or 22.8%, from
$1,550,000 to $1,903,000. Securities gains (losses) decreased from $67,000 in
gains in 2004 to $2,000 of net losses from the sale of equity securities in
2005.
Other income decreased $15,000 partially as a result of declining earnings on
the cash surrender value of life insurance. Service charge on deposits
increased 18.5% or $126,000 primarily as a result of the usage of the bounce
protection program and fees from merchant accounts.
Other service charges increased by $60,000. Loan fees increased by $74,000;
including a $61,000 increase in secondary mortgage market fees. Insurance fees
decreased by $15,000 due to the reduction in new accounts processed.
Asset management fees increased by $81,000 or 17.8%. Trust assets under
management increased $27 million from $319 million to $346 million from March
31, 2004 to March 31, 2005. Brokerage income increased $101,000 including
$90,000 from Integrity Financial which was purchased in July 2004, therefore
there were no related fees in the first quarter 2004. Other brokerage fees
increased by $10,000 over the first quarter of 2004.
Non-Interest Expense
Other expenses rose from $3,397,000 during the first quarter 2004 to $4,027,000
during 2005's first quarter, an increase of $630,000, or 18.5%. The $290,000
increase in salaries and benefits was the largest contributor to increased
expenses with annual salary increases and the addition of new employees due to
company growth in the lending and asset management areas.
Occupancy and equipment expense rose $66,000, or 11.5%, over the prior year due
to the addition of our thirteenth branch in the Carlisle region during the
second quarter of 2004 and the building of the fourteenth branch in Chambersburg
in December 2004. Depreciation expense contributed more than half of the
expense, with increases in real estate taxes and insurance expense also.
All other operating expenses increased by $274,000, including a $41,000 increase
in advertising expense. Postage, printing and supplies, auditing and accounting
and contributions also had noted increases. Even with the increase in non
interest expenses, the Corporations overhead efficiency ratio of 54.47% for the
current quarter is lower than the first quarter 2004 ratio of 54.66%.
Income Tax Expense
Income tax expense increased $207,000, or 28.4%, during the first quarter of
2005 versus the first quarter of 2004. The Corporation's insurance subsidiary,
Cell P-1, had deferred income tax expense of $30,000 recorded during the first
quarter of 2005. Tax exempt income from the Bank's investment portfolio has
become a slightly smaller part of the revenue steam. The marginal federal
income tax bracket is 34% for all periods presented. Effective income tax rates
were as follows:
Three Months
Ended
March March
2005 2004
Effective income tax rate 30.1% 28.8%
Page 12 of 22
Provision and Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses
when management believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions that may affect the borrowers'
ability to pay.
Through this review and evaluation process, an amount deemed adequate to meet
current growth and future loss expectations is charged to operations. The
provision for loan losses amounted to $24,000 and $150,000 for the first quarter
of 2005 and 2004, respectively. These provisions compared to net charge-offs of
$4,000 for the first quarter 2005 and net recoveries of $16,000 for the same
period last year. The provision for loan losses decreased 84.0% while loans
increased 12.2% on an average daily basis. This served to reduce the
unallocated portion of the reserve, under internal evaluation procedures, to
approximately 34.8%. The reserve at March 31, 2005 represented 1.08% of loans
outstanding. The provision for loan losses and the other changes in the
allowance for loan losses are shown below:
(Dollars in Thousands) Three Months Ended
March March
2005 2004
Balance at beginning of period $ 4,318 $ 4,161
Recoveries of loans previously charged 4 21
off
Additions to allowance charged to expense 24 150
------- -------
Total 4,346 4,332
Loans charged off 8 5
------- -------
Balance at end of period $ 4,338 $ 4,327
======= =======
Nonperforming Assets / Risk Elements
Nonperforming assets at March 31, are as follows:
(Dollars in Thousands) 2005 2004
Loans on nonaccrual (cash) basis $ 311 $ 102
Loans whose terms have been renegotiated 0 1,402
OREO 0 211
-------- --------
Total nonperforming loans and OREO 311 1,715
-------- --------
Loans past due 90 or more days and still 2,116 2,222
accruing
-------- --------
Total nonperforming and other risk assets $ 2,427 $ 3,937
======== ========
Ratio of total risk assets to total loans and 0.60% 1.10%
OREO
Ratio of total risk assets to total assets 0.46% 0.82%
Any loans classified for regulatory purposes as loss, doubtful, substandard or
special mention that have not been disclosed under Item III of Industry Guide 3
do not represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity or
capital resources.
Page 13 of 22
CAPITAL
Orrstown Financial Services, Inc.'s is a financial holding company and, as such,
must maintain a well capitalized status in its bank subsidiary. Management
foresees no problem in maintaining capital ratios well in excess of regulatory
minimums. A comparison of Orrstown Financial Services, Inc.'s capital ratios to
regulatory minimum requirements at March 31, 2005 are as follows:
Orrstown Regulatory
Financial Regulatory Well
Capitalized
Services, Minimums Minimums
Inc.
Leverage Ratio 9.48% 4% 5%
Risk Based Capital Ratios:
Tier I Capital Ratio 11.98% 4% 6%
Total (Tier I & II) Capital Ratio (core
capital
plus allowance for loan losses) 13.07% 8% 10%
The growth experienced during 2005 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 $252,000 to
equity as of March 31, 2005. Also during the first quarter of 2005 there were
numerous Employee Stock Options exercised, increasing capital by $172,000, thus
decreasing diluted shares. Equity represented 9.52% of assets at March 31, 2005
which is down from 9.57% at December 31, 2004 due assets increasing at a
slightly faster pace than equity.
All balance sheet fluctuations exceeding 5% have been created by either the
growth that has been experienced during 2005 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.
LIQUIDITY
The primary function of asset/liability management is to assure adequate
liquidity while minimizing interest rate risk. Liquidity management involves
the ability to meet the cash flow requirements of customers who may be either
depositors wanting to withdraw funds or borrowers needing assurance that
sufficient funds will be available to meet their credit needs. Sources of
liquidity include investment securities, loan and lease income and payments, and
increases in customer's deposit accounts. Additionally, the Bank is a Federal
Home Loan Bank (FHLB) member, and standard credit arrangements available to FHLB
members provide increased liquidity. Funds provided from operating activities
were a significant source of liquidity for the first three months of 2005. The
net increase in deposits of $13,488 as a source of funds was offset by the cash
used by the increase in loans of $13,438 from December 31, 2004 to March 31,
2005.
Page 14 of 22
PART I - FINANCIAL INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is defined as the exposure to interest rate risk, foreign currency
exchange rate risk, commodity price risk, and other relevant market rate or
price risks. For domestic banks, the majority of market risk is related to
interest rate risk.
Interest rate sensitivity management requires the maintenance of an appropriate
balance between interest sensitive assets and liabilities. Interest bearing
assets and liabilities that are maturing or repricing should be adequately
balanced to avoid fluctuating net interest margins and to enhance consistent
growth of net interest income through periods of changing interest rates.
Corporation has consistently followed a strategy of pricing assets and
liabilities according to prevailing market rates while largely matching
maturities, within the guidelines of sound marketing and competitive practices.
Rate sensitivity is measured by monthly gap analysis, quarterly rate shocks, and
periodic simulation. At March 31, 2005, cumulative gap was $114,778,000 and the
RSA/ RSL cumulative ratio was 1.81% and has decreased slightly from the 1.86%
since December 31, 2004. The asset biased, or positive, gap position indicates
that earnings are naturally enhanced, or more easily maintained, in a rising
rate environment. This indicates that the balance sheet is well positioned to
react to anticipated rate increases during 2005 and positioned adequately to
avoid material earnings damage if rates do not rise.
PART I - FINANCIAL INFORMATION
Item 4. 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 March 31, 2005. Based on such
evaluation, such officers have concluded that , as of March 31, 2005, 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 first quarter of 2005.
Page 15 of 22
PART II - OTHER INFORMATION
Page 16 of 22
OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
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 Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350
(b) Reports on From 8-K
The Registrant filed the following reports with the
Commission on Form 8-K
Report Dated April 14, 2005
Registrant announced its earnings for the period ended
March 31, 2005
Report Dated May 3, 2005
Registrant announced the declaration of a 5% stock
dividend, payable on June 29, 2005 with a record date of June 3,
2005.
Page 17 of 22
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 May 5, 2005
-----------
Page 18 of 22
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)) and internal control over financial
reporting (as defined in Exchange Act rules 13a - 15(f) and 15d - 15(f)) 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) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) 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
(d) 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.
By: /s/Kenneth R. Shoemaker
------------------------------
Kenneth R. Shoemaker
President and CEO
(Principal Executive Officer)
May 5, 2005
Page 19 of 22
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)) and internal control over financial
reporting (as defined in Exchange Act rules 13a - 15(f) and 15d - 15(f)) 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) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) 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
(d) 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.
By: /s/Bradley S. Everly
----------------------------
Bradley S. Everly
Sr. Vice President and CFO
(Principal Financial Officer)
May 5, 2005
Page 20 of 22
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 March 31, 2005 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 financial condition and results of operations of the
Corporation.
/s/ Kenneth R. Shoemaker
---------------------------------------
Kenneth R. Shoemaker
Chief Executive Officer
May 5, 2005
Page 21 of 22
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 March 31, 2005 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 financial condition and results of operations of the
Corporation.
/s/ Bradley S. Everly
-----------------------------------
Bradley S. Everly
Chief Financial Officer
May 5, 2005
Page 22 of 22