-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PNCoLO8vuu1K7aax6OBEWPwTzuwkaHnnsJkJ5Ze819ltsjidX1DSAtngBPwfIjUL 1NNQmQyBs15k3NZ7957Q9Q== 0001168557-03-000046.txt : 20030808 0001168557-03-000046.hdr.sgml : 20030808 20030808125213 ACCESSION NUMBER: 0001168557-03-000046 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030808 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORRSTOWN FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0000826154 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232530374 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-18888 FILM NUMBER: 03830906 BUSINESS ADDRESS: STREET 1: 77 E KING STREET STREET 2: P O BOX 250 CITY: SHIPPENSBURG STATE: PA ZIP: 17257 BUSINESS PHONE: 7175326114 MAIL ADDRESS: STREET 1: 77 EAST KING STREET CITY: SHIPPANSBURG STATE: PA ZIP: 17257 10-Q 1 june10q.txt 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, 2003 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 30, 2003 - ------------------------------ ---------------------------- (Common Stock, no par value ) 2,529,290 Page 1 of 25 ORRSTOWN FINANCIAL SERVICES, INC. INDEX Page Part I - FINANCIAL INFORMATION Item 1. Financial statements (unaudited) Condensed consolidated balance sheets - June 30, 2003 and December 31, 2002 4 Condensed consolidated statements of income - Three months ended June 30, 2003 and 2002 5 Condensed consolidated statements of income - Six months ended June 30, 2003 and 2002 6 Condensed consolidated statements of comprehensive income - Three months & Six months ended June 30, 2003 and 2002 7 Condensed consolidated statements of cash flows - Six months ended June 30, 2003 and 2002 8 Notes to condensed consolidated financial statements 9 - 11 Item 2. Management's discussion and analysis of financial condition and results of operations 12 - 17 PART II - OTHER INFORMATION Other Information 19 Signatures 20 Exhibits 21 - 25 Page 2 of 25 PART I - FINANCIAL INFORMATION Page 3 of 25 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) 2003 2002 ASSETS Cash and due from banks $ 12,535 $ 10,656 Interest bearing deposits with banks 1,313 1,095 Federal funds sold 14,866 8,217 Securities available for sale 87,035 90,106 Federal Home Loan Bank, Federal Reserve and Atlantic Central Bankers Bank Stock, at cost which approximates market value 2,606 2,268 Loans 314,019 281,391 Allowance for loan losses ( 3,989) ( 3,734) -------- -------- Net Loans 310,030 277,657 Premises and equipment, net 10,512 9,849 Accrued interest receivable 1,633 1,606 Cash value-life insurance 7,052 6,916 Other assets 2,180 1,928 -------- -------- Total assets $ 449,762 $ 410,298 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing $ 46,666 $ 42,704 Interest bearing 297,297 276,464 -------- -------- Total deposits 343,963 319,168 Federal funds purchased and other short term borrowed funds 24,310 20,808 Long term borrowed funds 37,486 28,539 Accrued interest payable 219 248 Other liabilities 3,446 3,573 -------- -------- Total liabilities 409,424 372,336 -------- -------- Common stock, no par value-$.1041 stated value per share at June 30, 2003 and December 31, 2002, 10,000,000 shares authorized with 2,526,069 shares issued at June 30, 2003 and 2,398,405 issued at December 31, 2002 263 250 Additional paid - in capital 32,353 25,913 Retained earnings 6,005 9,750 Accumulated other comprehensive income 1,717 2,049 -------- -------- Total stockholders' equity 40,338 37,962 -------- -------- Total liabilities and stockholders' equity $ 449,762 $ 410,298 ======== ======== *Condensed from audited financial statements
The accompanying notes are an integral part of these condensed financial statements. Page 4 of 25 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) 2003 2002 INTEREST INCOME Interest and fees on loans $ 4,926 $ 4,599 Interest on federal funds sold 38 57 Interest and dividends on investment securities 915 1,066 Interest income on deposits with banks 5 5 ------- ------- Total interest income 5,884 5,727 ------- ------- INTEREST EXPENSE Interest on deposits 1,299 1,544 Interest on borrowed money 417 490 ------- ------- Total interest expense 1,716 2,034 ------- ------- Net interest income 4,168 3,693 Provision for loan losses 24 150 ------- ------- Net interest income after provision for loan losses 4,144 3,543 ------- ------- OTHER INCOME Service charges on deposits 666 548 Other service charges 315 249 Trust department income 375 381 Brokerage income 139 132 Other income 96 82 Securities gains / (losses) ( 7) 17 ------- ------- Total other income 1,584 1,409 ------- ------- OTHER EXPENSES Salaries and employee benefits 1,626 1,433 Net occupancy and equipment expenses 522 435 Other operating expenses 1,070 945 ------- ------- Total other expense 3,218 2,813 Income before income tax 2,510 2,139 Income tax expenses 693 642 ------- ------- Net income $ 1,817 $ 1,497 ======= ======= PER SHARE DATA Earnings per share Basic earnings per share $ 0.72 $ 0.60 Weighted average number of shares outstanding 2,525,139 2,508,512 Diluted earnings per share $ 0.70 $ 0.59 Weighted average number of shares outstanding 2,595,989 2,555,349 Dividends per share $ 0.21 $ 0.162
The accompanying notes are an integral part of these condensed financial statements. Page 5 of 25 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) 2003 2002 INTEREST INCOME Interest and fees on loans $ 9,562 $ 9,141 Interest on federal funds sold 59 113 Interest and dividends on investment securities 1,954 2,068 Interest income on deposits with banks 9 10 ------- ------- Total interest income 11,584 11,332 ------- ------- INTEREST EXPENSE Interest on deposits 2,594 3,152 Interest on borrowed money 824 944 ------- ------- Total interest expense 3,418 4,096 ------- ------- Net interest income 8,166 7,236 Provision for loan losses 276 300 ------- ------- Net interest income after provision for loan losses 7,890 6,936 ------- ------- OTHER INCOME Service charges on deposits 1,276 1,024 Other service charges 569 468 Trust department income 694 703 Brokerage income 250 212 Other income 197 162 Securities gains / (losses) 171 18 ------- ------- Total other income 3,157 2,587 ------- ------- OTHER EXPENSES Salaries and employee benefits 3,302 2,912 Net occupancy and equipment expenses 1,028 863 Other operating expenses 2,007 1,726 ------- ------- Total other expense 6,337 5,501 ------- ------- Income before income tax 4,710 4,022 Income tax expenses 1,349 1,191 ------- ------- Net income $ 3,361 $ 2,831 ======= ======= PER SHARE DATA Earnings per share Basic earnings per share $ 1.33 $ 1.13 Weighted average number of shares outstanding 2,522,973 2,505,522 Diluted earnings per share $ 1.30 $ 1.11 Weighted average number of shares outstanding 2,592,089 2,550,497 Dividends per share $ 0.40 $ 0.324
The accompanying notes are an integral part of these condensed financial statements. Page 6 of 25 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) 2003 2002 COMPREHENSIVE INCOME Net Income $ 1,817 $ 1,497 Other comprehensive income, net of tax Unrealized gain (loss) on investment securities available for sale 242 722 ------- ------- Comprehensive Income $ 2,059 $ 2,219 ======= =======
Six Months Ended June June (Dollars in Thousands) 2003 2002 COMPREHENSIVE INCOME Net Income $ 3,361 $ 2,831 Other comprehensive income, net of tax Unrealized gain (loss) on investment securities available for sale ( 332) 618 ------- ------- Comprehensive Income $ 3,029 $ 3,449 ======= =======
The accompanying notes are an integral part of these condensed financial statements. Page 7 of 25 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) 2003 2002 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,361 $ 2,831 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 448 382 Provision for loan losses 276 300 Other, net ( 379) ( 411) -------- -------- Net cash provided by operating activities 3,706 3,102 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in interest bearing deposits with banks ( 218) ( 420) Purchases of available for sale securities ( 23,625) ( 15,122) Sales and maturities of available for sale securities 26,172 7,284 Net (purchases) redemption of FHLB Stock ( 338) ( 101) Net (increase) in loans ( 32,649) ( 13,210) Purchases of bank premises and equipment ( 1,111) ( 850) -------- -------- Net cash provided (used) by investing activities ( 31,769) ( 22,419) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits 24,795 11,352 Cash dividends paid ( 1,011) ( 812) Proceeds from sale of stock 380 483 Cash paid in lieu of fractional shares ( 22) 0 Net increase (decrease) in short term purchased funds 3,502 ( 9,038) Proceeds in long term debt issuance 10,000 5,000 Payments on long term debt ( 1,053) 0 -------- -------- Net cash provided by financing activities 36,591 6,985 -------- -------- Net increase (decrease) in cash and cash equivalents 8,528 ( 12,332) Cash and cash equivalents at beginning of period 18,873 36,997 -------- -------- Cash and cash equivalents at end of period $ 27,401 $ 24,665 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 3,447 $ 4,186 Income Taxes 1,450 1,135 Supplemental schedule of noncash investing and financing activities: Unrealized gain (loss) on investments available for sale (net of deferred taxes of ($ 171) and $ 318 at June 30, 2003 and 2002,respectively) ( 332) 618
The accompanying notes are an integral part of these condensed financial statements. Page 8 of 25 ORRSTOWN FINANCIAL SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2003 (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, 2003 and 2002 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, 2003 and 2002 is unaudited. Information presented at December 31, 2002 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 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 in 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 these timing differences and timing differences in 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 as a result of tax exempt income earned primarily from state and political subdivision obligations. Page 9 of 25 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 market value of the underlying common stock on the date of grant. 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. (In thousands, except per share data) Three Months Ended Six Months Ended June June June June 2003 2002 2003 2002 Net income As reported $ 1,817 $ 1,497 $ 3,361 $ 2,831 Pro forma 1,594 1,294 3,138 2,628 Basic earnings per share As reported $ 0.72 $ 0.60 $ 1.33 $ 1.13 Pro forma 0.63 0.52 1.24 1.05 Diluted earnings per share As reported $ 0.70 $ 0.59 $ 1.30 $ 1.11 Pro forma 0.61 0.51 1.21 1.03
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, 2003 fair value exceeded amortized cost by $ 2,235,000. In shareholders' equity, the balance of accumulated other comprehensive income increased to $ 1,475,000 after recognizing the tax effects of the unrealized gains. At December 31, 2002, fair value exceeded amortized cost by $ 3,105,000 increasing accumulated other comprehensive income to $ 2,049,000 after recognizing the tax effects of the unrealized gains. Page 10 of 25 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 April 29, 2003 the Board of Directors of Orrstown Financial Services, Inc. approved a 5% stock dividend, paid May 30, 2003 to shareholders of record on May 12, 2003. All per share amounts have been adjusted to give retroactive recognition to the 5% stock dividend. Page 11 of 25 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 $ 1,817,000 for the second quarter of 2003 compared to $ 1,497,000 for the same period in 2002, representing an increase of $ 320,000 or 21.4%. Basic earnings per share was $0.72 for the second quarter of 2003 up $ 0.12 from the $ 0.60 earned during the second quarter of 2002. Net income for the first six months of 2003 was $ 3,361,000 compared to $ 2,831,000 for the same period in 2002, representing an increase of $ 530,000 or 18.7%. Net income per share for the first six months of 2003 was $ 1.33 up from the $ 1.13 per share realized during the six months ended June 30, 2002. All per share amounts have been restated reflect the 5% stock dividend paid to shareholders on May 30, 2003. The following statistics compare 2003's second quarter and year-to-date performance to that of 2002: Three Months Ended Six Months Ended June June June June 2003 2002 2003 2002 Return on average assets 1.67% 1.60% 1.60% 1.55% Return on average equity 18.38% 18.08% 17.28% 17.52% Average equity / Average assets 9.08% 8.82% 9.24% 8.82%
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 2003 was $ 4,168,000 representing a growth of $ 475,000, or 12.9% over the $ 3,693,000 realized during the second quarter of 2002. Growth was due entirely to volume as the net interest margin tightened from 4.41% in the second quarter 2002 to 4.23% during second quarter 2003. Net interest income for the first six months of 2003 was $ 8,166,000 representing an increase of $ 930,000, or 12.9% over the $ 7,236,000 generated during the first six months of 2002. Loan portfolio increases have been primarily responsible for interest income gains. Commercial loans are up $ 35,000,000 or 23.7% over first half 2002 amounts. In addition, a 7/1 residential adjustable rate mortgage program that was rolled out within the past year has been popular. Time deposit volume remained level while core deposits grew $ 42,000,000 over the same period last year. The combination of higher rate time deposits being replaced at lower rates and the lowering discretionarily priced core transaction accounts has decreased interest expense by 16.6% compared to the first six months of 2002. Page 12 of 25 Net Interest Income (Continued) The table that follows states rates on a fully taxable equivalent basis (FTE) and demonstrates the aforementioned effects: (Dollars in Thousands) Three Months Ended June 2003 June 2002 Avg Balance Rates Avg Balance Rates Interest earning assets $410,134 5.90% $350,869 6.73% Interest bearing liabilities 348,933 1.97% 301,610 2.70% -------- -------- Free Funds $ 61,201 $ 49,259 -------- -------- Net interest income $ 4,168 $ 3,693 Net interest spread 3.93% 4.03% Free funds ratio 14.92% 14.04% Net interest margin 4.23% 4.41%
(Dollars in Thousands) Six Months Ended June 2003 June 2002 Avg Balance Rates Avg Balance Rates Interest earning assets $398,812 6.00% $344,484 6.79% Interest bearing liabilities 339,372 2.03% 296,271 2.79% -------- -------- Free Funds $ 59,440 $ 48,213 -------- -------- Net interest income $ 8,166 $ 7,236 Net interest spread 3.97% 4.00% Free funds ratio 14.90% 14.00% Net interest margin 4.27% 4.39%
Non-Interest Income and Expense The following compares three months ended June 30, 2003 to three months ended June 30, 2002: Other income increased $ 175,000, or 12.4%, from $ 1,409,000 during the second quarter of 2002 to $ 1,584,000 during the second quarter of 2003. Fee income from deposit transactions increased $ 118,000, or 21.5% over 2002. Bounce protection fees, merchant fees, and debit card fees were the primary contributors. Securities gains/losses decreased $ 24,000, while asset management fees remained flat. Loan fees, not including origination fees, increased $ 96,000. In May 2003, Orrstown Bank kicked off its Secondary Market Mortgage program. The program is administered through the Federal Home Loan Bank of Pittsburgh's Mortgage Partnership Program and offers residential mortgage products and services to customers. The Bank originates single-family residential mortgage loans for sale in the secondary market and, unlike the prior secondary market mortgage program, retains the servicing of those loans. The current refinancing boom has enabled the product to be very profitable from inception. Page 13 of 24 Other expenses rose from $ 2,813,000 during the second quarter 2002 to $ 3,218,000 during 2003's second quarter, resulting in an increase of $ 405,000, or 14.4%. Salaries and benefits expense grew $ 193,000, or 13.5% due to annual reviews, staff additions, increases in health insurance costs, the success of our various incentive compensation programs, and the opening of our twelfth full service branch in Chambersburg, Pennsylvania on May 14, 2003. This also contributed to an increase in occupancy and equipment expense of 20.0% over the prior year. Other operating expenses increased $ 125,000 for the current quarter versus the second quarter 2002. Increases in professional fees, insurance costs, travel, and lodging expenses were the primary factors of this increase. The following compares six months ended June 30, 2003 to six months ended June 30, 2002: Other income grew $ 570,000, or 22.0%, from $ 2,587,000 during the first half of 2002 to $ 3,157,000 during the same period of 2003. Primary areas of growth included an increase in bounce protection fees of $ 127,000, a $ 124,000 increase in other loan fees generated via significant commercial loan increases and secondary mortgage market fees, and an increase in securities gains of $ 153,000 over the prior year. Although trust assets under management have been growing steadily, income has decreased by $ 9,000 compared to the prior year due to a contraction in market valuations. Brokerage income increased by $ 38,000 over the prior year period. Other expenses rose from $ 5,501,000 during the six months of 2002 to $ 6,337,000 for the six months ended 2003, growing $ 836,000, or 15.2%. Salary and benefit expense, the largest component of noninterest expense, increased $ 390,000. The opening of the twelfth branch was also responsible for investment in premises and equipment rising 6.7% from $ 9,849,000 to $ 10,512,000 for the current year. This increased occupancy and equipment expenses by 19.1% over the prior year. Insurance expense increased $ 58,000 over the matching prior year period. Income Tax Expense Income tax expense increased $ 51,000, or 7.9%, during the second quarter of 2003 versus the second quarter of 2002. For the first half of 2003 versus 2002, income tax expense rose $ 158,000, or 13.3%. Effective income tax rates were as follows: Three Months Ended Six Months Ended June June June June 2003 2002 2003 2002 Effective income tax rate 27.6% 30.0% 28.6% 29.6%
The marginal federal income tax bracket is 34% for all periods presented. Page 14 of 25 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 2003 2002 2003 2002 Balance at beginning of period $ 3,979 $ 3,208 $ 3,734 $ 3,104 Recoveries of loans prev. charged off 4 4 14 5 Additions to allowance charged to exp. 24 150 276 300 ------- ------- ------- ------- Total 4,007 3,362 4,024 3,409 Loans charged off 18 8 35 55 ------- ------- ------- ------- Balance at end of period $ 3,989 $ 3,354 $ 3,989 $ 3,354 ======= ======= ======= =======
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 53% at June 30, 2003. Nonperforming Assets / Risk Elements Nonperforming assets at June 30, are as follows: (Dollars in Thousands) 2003 2002 Loans on nonaccrual (cash) basis Loans secured by real estate $ 82 $ 0 Installment loans 22 14 Commercial loans 0 0 Credit card 0 0 ------- ------- Total nonaccrual loans 104 14 ------- ------- Loans whose terms have been renegotiated Loans secured by real estate 1,420 1,428 Installment loans 0 0 Commercial loans 0 0 Credit card 0 0 ------- ------- Total renegotiated loans 1,420 1,428 ------- ------- OREO 261 211 ------- ------- Total nonperforming loans and OREO $ 1,785 $ 1,653 ======= ======= Ratio of nonperforming assets to total loans and OREO 0.57% 0.63% Ratio of nonperforming assets to total assets 0.40% 0.43% Loans past due 90 or more days and still accruing Loans secured by real estate $ 2,390 $ 1,240 Installment loans 7 20 Commercial loans 6 4 Credit card 0 0 ------- ------- Total loans 90 or more days past due $ 2,403 $ 2,917 ======= ======= Ratio of loans 90 or more days past due to total loans And OREO 0.76% 0.48% Ratio of loans 90 or more days past due to total assets 0.53% 0.33% ------- ------- Total nonperforming and other risk assets $ 4,188 $ 2,917 ======= ======= Ratio of total risk assets to total loans and OREO 1.33% 1.11% Ratio of total risk assets to total assets 0.93% 0.76%
Page 15 of 25 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, 2003 are as follows: Orrstown Regulatory Financial Regulatory Well Capitalized Services, Inc. Minimums Minimums Leverage Ratio 8.82% 4% 5% Risk Based Capital Ratios: Tier I Capital Ratio 12.40% 4% 6% Total (Tier I & II) Capital Ratio (core capital plus allowance for loan losses) 13.65% 8% 10%
The growth experienced during 2003 has been supported by capital growth in the form of retained earnings and capital infusion from the dividend reinvestment plan. Dividend reinvestment plan participants have added $ 381,000 to equity as of June 30, 2003. Equity represented 8.97% of assets at June 30, 2003 which is down from 9.25% at December 31, 2002 due to significant asset growth and an equity markdown related to the investment portfolio during the first half of 2003. All balance sheet fluctuations exceeding 5% have been created by either the growth that has been experienced during 2003 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 or debt securities registered under the Securities Exchange Act of 1934. 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 their directors and executive officers; and (v) new and increased civil and criminal penalties for violation of the securities laws. 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 Corporation or the Banks' results of operations or financial condition. A Code of Ethics for financial officers was approved by the Board of Directors and adopted during first quarter 2003. Page 16 of 25 Controls and Procedures (a) Evaluation of disclosure controls and procedures. The Corporation maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Corporation files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures preformed within 90 days of the filing date of this report, the Chief Executive and Chief Financial officers of the Corporation concluded that the Corporation's disclosure controls and procedures were adequate. (b) Changes in internal controls. The Corporation made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of the controls by the Chief Executive and Chief Financial officers. Page 17 of 25 PART II - OTHER INFORMATION Page 18 of 25 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 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 99 Report of Independent Accountant's on interim financial statements (b) Reports on Form 8 - K None Page 19 of 25 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 August 5, 2003 -------------- Page 20 of 25 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 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) August 5, 2003 Page 22 of 25 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 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) August 5, 2003 Page 21 of 25 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 "Company") on Form 10-Q for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kenneth R. Shoemaker, Chief Executive Officer of the Company, 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 Company. /s/ Kenneth R. Shoemaker ----------------------------------- Kenneth R. Shoemaker Chief Executive Officer August 5, 2003 Page 23 of 25 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 "Company") on Form 10-Q for the period ending June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Bradley S. Everly, Chief Financial Officer of the Company, 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 Company. /s/ Bradley S. Everly ----------------------------------- Bradley S. Everly Chief Financial Officer August 5, 2003 Page 24 of 25 EXHIBIT 99 INDEPENDENT ACCOUNTANT'S REPORT 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, 2003 and the related consolidated statements of income for the three and six months ended June 30, 2003 and 2002 and consolidated statements of comprehensive income for the three and six months ended June 30, 2003 and 2002 and consolidated statements of cash flows for the six months ended June 30, 2003 and 2002. These financial statements are the responsibility of the Corporation's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. 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 generally accepted auditing standards, 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 August 5, 2003 Page 25 of 25 -----END PRIVACY-ENHANCED MESSAGE-----