-----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, AN1UA9ImiW1hQaf27yy6rayXFwp6Ukp0UvdwbHOI06gDELXFKbS7lQYPAXZgF1Z/ dpNXHqaVojiYjdk2mWsZKg== 0001168557-04-000035.txt : 20040428 0001168557-04-000035.hdr.sgml : 20040428 20040428111618 ACCESSION NUMBER: 0001168557-04-000035 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040428 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: 04759102 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 mar10q.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 March 31, 2004 Commission file number 33-18888 ORRSTOWN FINANCIAL SERVICES, INC. (Exact name of registrant as specified in its charter) Commonwealth of Pennsylvania 23-2530374 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 77 East King Street 17257 P.O. Box 250, Shippensburg, Pennsylvania (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (717) 532-6114 Indicate by check mark whether the registrant (1) has filed all reports required to be filled by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES __X__ NO ________ Class Outstanding at April 26, 2004 (Common Stock, no par value ) 5,102,673 Page 1 of 21 ORRSTOWN FINANCIAL SERVICES, INC. INDEX Page Part I - FINANCIAL INFORMATION Item 1. Financial statements (unaudited) Condensed consolidated balance sheets - March 31, 2004 and December 31, 2003 4 Condensed consolidated statements of income - Three months ended March 31, 2004 and 2003 5 Condensed consolidated statements of comprehensive income - Three months ended March 31, 2004 and 2003 6 Condensed consolidated statements of cash flows - Three months ended March 31, 2004 and 2003 7 Notes to condensed consolidated financial statements 8 - 9 Item 2. Management's discussion and analysis of financial condition and results of operations 10 - 13 PART II - OTHER INFORMATION Other Information 15 Signatures 16 Exhibits 17 - 21 Page 2 of 21 PART I - FINANCIAL INFORMATION Page 3 of 21 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) * March 31, December 31, (Dollars in Thousands) 2004 2003 ASSETS Cash and due from banks $ 8,820 $ 12,283 Interest bearing deposits with banks 354 1,001 Federal funds sold 10,478 3,829 Securities available for sale 77,850 89,074 Federal Home Loan Bank, Federal Reserve and Atlantic Central Bankers Bank Stock, at cost which approximates 3,205 2,912 market value Loans 359,165 345,054 Allowance for loan losses (4,327) (4,161) --------- --------- Net Loans 354,838 340,893 Premises and equipment, net 11,435 11,168 Accrued interest receivable 1,608 1,647 Cash surrender value of life insurance 7,302 7,234 Other assets 2,504 2,352 --------- --------- Total assets $ 478,394 $ 472,393 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing $ 52,982 $ 52,276 Interest bearing 317,331 306,367 --------- --------- Total deposits 370,313 358,643 Federal funds purchased and other short term borrowed 22,810 29,440 funds Other borrowed funds 36,031 37,193 Accrued interest payable 229 226 Other liabilities 4,163 4,056 --------- --------- Total liabilities 433,546 429,558 --------- --------- Common stock, no par value - $ .05205 stated value per share 10,000,000 shares authorized with 5,097,248 shares issued at March 31, 2003 and $.1041 stated value per share with 2,537,011 shares issued at December 31, 2003 265 264 Additional paid - in capital 33,445 32,928 Retained earnings 9,703 8,509 Accumulated other comprehensive income 1,435 1,134 --------- --------- Total shareholders' equity 44,848 42,835 --------- --------- Total liabilities and shareholders' equity $ 478,394 $ 472,393 ========= ========= * Condensed from audited financial statements
The accompanying notes are an integral part of these condensed financial statements. Page 4 of 21 ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended March March (Dollars in Thousands) 2004 2003 INTEREST INCOME Interest and fees on loans $ 5,202 $ 4,636 Interest on federal funds sold 4 21 Interest and dividends on investment 919 1,039 securities Interest income on deposits with banks 2 4 -------- -------- Total interest income 6,127 5,700 -------- -------- INTEREST EXPENSE Interest on deposits 1,215 1,295 Interest on borrowed money 446 407 -------- -------- Total interest expense 1,661 1,702 -------- -------- Net interest income 4,466 3,998 Provision for loan losses 150 252 -------- -------- Net interest income after provision for loan losses 4,316 3,746 -------- -------- OTHER INCOME Service charges on deposits 681 610 Other service charges 210 254 Trust department income 456 319 Brokerage income 96 111 Other income 107 101 Securities gains / (losses) 67 178 -------- -------- Total other income 1,617 1,573 -------- -------- OTHER EXPENSES Salaries and employee benefits 1,910 1,676 Net occupancy and equipment expenses 573 506 Other operating expenses 914 937 -------- -------- Total other expense 3,397 3,119 -------- -------- Income before income tax 2,536 2,200 Income tax expenses 730 656 -------- -------- Net income $ 1,806 $ 1,544 ======== ======== PER SHARE DATA Earnings per share Basic earnings per share $ 0.35 $ 0.31 Weighted average number of shares 5,088,942 5,042,224 outstanding Diluted earnings per share $ 0.34 $ 0.30 Weighted average number of shares 5,260,132 5,176,950 outstanding Dividends per share $ 0.12 $ 0.0955
The accompanying notes are an integral part of these condensed financial statements. Page 5 of 21 ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended March March (Dollars in Thousands) 2004 2003 COMPREHENSIVE INCOME Net Income $ 1,806 $ 1,544 Other comprehensive income, net of tax Unrealized gain (loss) on investment 301 ( 574) securities available for sale -------- -------- Comprehensive Income $ 2,107 $ 970 ======== ========
The accompanying notes are an integral part of these condensed financial statements. Page 6 of 21 ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended March March (Dollars in Thousands) 2004 2003 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,806 $ 1,544 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 253 222 Provision for loan losses 150 252 Other, net (215) (26) --------- --------- Net cash provided by operating activities 1,994 1,992 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in interest bearing 647 (233) deposits with banks Purchases of available for sale securities (259) (12,369) Sales and maturities of available for sale 11,928 18,279 securities Net (purchases) of FHLB Stock (293) (650) Net (increase) in loans (14,095) (18,314) Purchases of bank premises and equipment (520) (511) --------- --------- Net cash (used) by investing activities (2,592) (13,798) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 11,670 18,180 Cash dividends paid (612) (480) Proceeds from sale of stock 518 176 Cash paid in lieu of fractional shares - - Net (decrease) in short term purchased funds (6,630) (870) Proceeds in long term debt - - Payments on long term debt (1,162) - --------- --------- Net cash provided by financing activities 3,784 17,006 --------- --------- Net increase in cash and cash equivalents 3,186 5,200 Cash and cash equivalents at beginning of period 16,112 18,873 --------- --------- Cash and cash equivalents at end of period $ 19,298 $ 24,073 19,298 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 1,658 $ 1,703 Income Taxes 0 0 Supplemental schedule of noncash investing and financing activities: Unrealized gain (loss) on investments available for sale (net of deferred taxes of $155 and $296 at March 31, 2004 and 2003, respectively) 301 (574)
The accompanying notes are an integral part of these condensed financial statements. Page 7 of 21 ORRSTOWN FINANCIAL SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 (UNAUDITED) Review of Interim Financial Statements The condensed consolidated financial statements as of and for the three months ended March 31, 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 March 31, 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. 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 21 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 March 31, 2004 fair value exceeded amortized cost by $2,175,000. In shareholders' equity, the balance of accumulated other comprehensive income increased to $1,435,000 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 and the 5% stock dividend paid to shareholders on May 30, 2003. Note 5: Subsequent Event On May 4, 2004, at the Annual Meeting of Shareholders of Orrstown Financial Services, Inc., there will be a vote by shareholders of record as of March 25, 2004, to approve an amendment to the Articles of Incorporation to increase the number of authorized share of the Corporation's common stock from 10 million to 50 million shares. Page 9 of 21 Item 2. 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 $1,806,000 for the first quarter of 2004 compared to $1,544,000 for the same period in 2003, representing an increase of $262,000 or 17.0%. Basic earnings per share was $0.35 in the recent quarter up $0.04 from the $0.31 earned during the first three months of 2003. Diluted earnings per share for the same period was $0.34 and $0.30 respectively. All per share amounts have been restated to reflect the 5% stock dividend paid to shareholders on May 30, 2003, and the 2-for-1 common stock split paid to shareholders on February 10, 2004. The following statistics compare 2004's first quarter performance to that of 2003: Three Months Ended March March 2004 2003 Return on average assets 1.54% 1.52% Return on average equity 16.47% 16.15% Average equity / Average assets 9.37% 9.41%
A more detailed discussion of the elements having the greatest impact on net income follows. Net Interest Income Net interest income for the first quarter of 2004 was $4,466,000 representing a growth of $468,000, or 11.7% over the $3,998,000 realized during the same quarter last year. All net interest income growth was due to volume increases. Even though the interest spread decreased from 4.01% in the first three months of 2003 to 3.86% during the first quarter of 2004, interest income grew by $427,000 while interest expense declined by $41,000. The interest margin tightened from 4.32% in the first quarter 2003 to 4.16% during the similar 2004 period. Growth in interest earning assets was primarily due to continued strong loan demand, led by an average daily balance increase of $40,740,000 in commercial loans for the first quarter 2004 compared to the first quarter 2003. Consumer loans grew $12,328,000 and mortgage loans increased $10,296,000 during the same period. The decline of $11,224,000 in securities available for sale from December 31, 2003 to March 31, 2004 increased liquidity and enabled the funding of loans in the first quarter of 2004. Average daily balances of deposits were up $38,646,000, or 12.1% over first quarter 2003 levels, with non- interest deposit balances growing $10,358,000 over the first three months last year. 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 2004 March 2003 Avg Rates Avg Rates Balance Balance Interest earning assets 443,126 5.66% 387,364 6.10% Interest bearing liabilities 372,075 1.80% 329,705 2.09% Free Funds 71,051 57,659 Net interest income 4,466 3,998 Net interest spread 3.86% 4.01% Net interest margin 4.16% 4.32% Free funds ratio 16.03% 14.88
Page 10 of 21 Non-Interest Income and Expense The following compares three months ended March 31, 2004 to three months ended March 31, 2003: Other income, excluding securities gains, increased $155,000, or 11.1%, from $1,395,000 during the first quarter of 2003 to $1,550,000 during the first quarter of 2004. Fees from service charges on deposit accounts increased $71,000 or 11.6% over the prior years first quarter. Bounce protection fees and merchant account fees were the primary contributors there. Other service charges decreased by $44,000 for the same time frame. Loan fees decreased over all, although the fees from secondary market mortgage program brought in $36,000 for the quarter ended March 31, 2004. The secondary market mortgage program started in June of 2003, therefore there were no related fees in the first quarter 2003. Other loan fees decreased by $45,000, while ATM fees were up $14,000 and insurance fees decreased by $46,000. In other income, asset management fees increased by $137,000 and securities gains decreased by $111,000. Other expenses rose from $3,119,000 during the first quarter 2003 to $3,397,000 during 2004's first quarter, an increase of only $278,000, or 8.9%. The $234,000 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. Occupancy and equipment expense rose 13.2% over the prior year due, somewhat, to the addition of our twelfth branch that opened in June of 2003. The Bank is now looking forward to the opening of it's thirteenth branch in the Carlisle region during the second quarter of 2004. All other operating expenses decreased by $23,000 which is reflected in our low overhead efficiency ratio of 54.66% for the first three months of 2004. Income Tax Expense Income tax expense increased $74,000, or 11.3%, during the first quarter of 2004 versus the first quarter of 2003. Tax exempt income has become a slightly smaller part of the revenue steam. Effective income tax rates were as follows: Three Months Ended March March 2004 2003 Effective income tax rate 28.8% 29.8%
The marginal federal income tax bracket is 34% for all periods presented. Provision and Allowance for Loan Losses The provision for loan losses and the other changes in the allowance for loan losses are shown below: (Dollars in Thousands) Three Months Ended March March 2004 2003 Balance at beginning of period $ 4,161 $ 3,734 Recoveries of loans previously charged off 21 10 Additions to allowance charged to expense 150 252 ------- ------- Total 4,332 3,996 Loans charged off 5 17 ------- ------- Balance at end of period $ 4,327 $ 3,979 ======= =======
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 56% at March 31, 2004. Page 11 of 21 Nonperforming Assets / Risk Elements Nonperforming assets at March 31, are as follows: (Dollars in Thousands) 2004 2003 Loans on nonaccrual (cash) basis Loans secured by real estate $ 102 $ 68 Installment loans - 18 Commercial loans - - Credit card - - ------- ------- Total nonaccrual loans $ 102 $ 86 Loans whose terms have been renegotiated Loans secured by real estate 1,402 1,420 Installment loans - - Commercial loans - - Credit card - - ------- ------- Total renegotiated loans 1,402 1,420 ------- ------- OREO 211 211 ------- ------- Total nonperforming loans and OREO $ 1,715 $ 1,717 ======= ======= Ratio of nonperforming assets to total loans and OREO 0.48% 0.57% Ratio of nonperforming assets to total assets 0.36% 0.40% Loans past due 90 or more days and still accruing Loans secured by real estate $ 2,171 $ 1,345 Installment loans 39 0 Commercial loans 12 193 Credit card 0 0 ------- ------- Total loans 90 or more days past due $ 2,222 $ 1,538 ======= ======= Ratio of loans 90 or more days past due to total loans and OREO 0.62% 0.51% Ratio of loans 90 or more days past due to total assets 0.46% 0.36% ------- ------- Total nonperforming and other risk assets $ 3,937 $ 3,255 ======= ======= Ratio of total risk assets to total loans and OREO 1.10% 1.09% Ratio of total risk assets to total assets 0.82% 0.76%
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 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, 2004 are as follows: Orrstown Regulatory Financial Regulatory Well Capitalized Services, Minimums Minimums Inc. Leverage Ratio 9.20% 4% 5% Risk Based Capital Ratios: Tier I Capital Ratio 12.36% 4% 6% Total (Tier I & II) Capital Ratio (core capital plus allowance for loan losses) 13.60% 8% 10%
Page 12 of 21 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 $216,000 to equity as of March 31, 2004. Also during the first quarter of 2004 there were numerous Employee Stock Options exercised, increasing capital by $302,000, thus decreasing diluted shares. Equity represented 9.37% of assets at March 31, 2004 which is up from 9.07% at December 31, 2003 mainly due to the retaining of first quarter 2004 earnings. 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 2003 Requirements On July 30, 2003, 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 files 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 Corporation 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 meeting during the first quarter 2004. The audit committee consists of four outside directors with varied business and financial expertise. Controls and Procedures (a) Evaluation of disclosure controls and procedures: The Corporation's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Corporation's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) under the Securities Exchange Act of 1934, as amended) as of March 31, 2004. Based on such evaluation, such officers have concluded that , as of March 31, 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 first quarter of 2004. Page 13 of 21 PART II - OTHER INFORMATION Page 14 of 21 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 15 of 21 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 April 26, 2004 -------------- Page 16 of 21 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. By: /s/ Kenneth R. Shoemaker -------------------------- Kenneth R. Shoemaker President and CEO (Principal Executive Officer) April 26, 2004 Page 17 of 21 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. By: /s/ Bradley S. Everly -------------------------- Bradley S. Everly Sr. Vice President and CFO (Principal Financial Officer) April 26, 2004 Page 18 of 21 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, 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 financial condition and results of operations of the Corporation. /s/ Kenneth R. Shoemaker -------------------------- Kenneth R. Shoemaker Chief Executive Officer April 26, 2004 Page 19 of 21 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, 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 financial condition and results of operations of the Corporation. /s/ Bradley S. Everly -------------------------- Bradley S. Everly Chief Financial Officer April 26, 2004 Page 20 of 21 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 March 31, 2004 and the related consolidated statements of income for the three months ended March 31, 2004 and 2003 and consolidated statements of comprehensive income for the three months ended March 31, 2004 and 2003 and consolidated statements of cash flows for the three months ended March 31, 2004 and 2003. 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 April 26, 2004 Page 21 of 21 -----END PRIVACY-ENHANCED MESSAGE-----