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, 2004 Commission file number: 33-18888 ORRSTOWN FINANCIAL SERVICES, INC. (Exact name of registrant as specified in its charter) Commonwealth of Pennsylvania 23-2530374 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 77 East King Street 17257 P.O. Box 250, Shippensburg, Pennsylvania (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (717) 532-6114 Indicate by check mark whether the registrant (1) has filed all reports required to be filled by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Class Outstanding at July 26, 2004 (Common Stock, no par value ) 5,112,291 ORRSTOWN FINANCIAL SERVICES, INC. INDEX Page Part I - FINANCIAL INFORMATION Item 1. Financial statements (unaudited) Condensed consolidated balance sheets - June 30, 2004 and December 31, 2003 4 Condensed consolidated statements of income - Three months ended June 30, 2004 and 2003 5 Condensed consolidated statements of income - Six months ended June 30, 2004 and 2003 6 Condensed consolidated statements of comprehensive income - Three months and six months ended June 30, 2004 and 2003 7 Condensed consolidated statements of cash flows - Six months ended June 30, 2004 and 2003 8 Notes to condensed consolidated financial statements 9 - 11 Item 2. Management's discussion and analysis of financial condition and results of operations 12 - 16 PART II - OTHER INFORMATION Other Information 18 Signatures 19 Exhibits 20 - 24 PART I - FINANCIAL INFORMATION PART I - FINANCIAL INFORMATION Item 1. Financial Statements ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Unaudited) (Audited)* June 30, December 31, (Dollars in Thousands) 2004 2003 ASSETS Cash and due from banks $ 9,214 $ 12,283 Interest bearing deposits with banks 601 1,001 Federal funds sold 12,308 3,829 Securities available for sale 75,766 89,074 Federal Home Loan Bank, Federal Reserve and Atlantic Central Bankers Bank Stock, at cost which approximates market value 2,739 2,912 Loans 372,533 345,054 Allowance for loan losses (4,352) (4,161) ---------- ---------- Net Loans 368,181 340,893 Premises and equipment, net 11,786 11,168 Accrued Interest receivable 1,656 1,647 Cash value-life insurance 7,370 7,234 Other assets 2,415 2,352 ---------- ---------- Total assets $ 492,036 $ 472,393 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing $ 56,273 $ 52,276 Interest bearing 332,047 306,367 ---------- ---------- Total deposits 388,320 358,643 Federal funds purchased and other short term borrowed funds 18,522 29,440 Long term borrowed funds 35,869 37,193 Accrued interest payable 231 226 Other liabilities 3,562 4,056 ---------- ---------- Total liabilities 446,504 429,558 ---------- ---------- Common stock, no par value - $ .05205 stated value per share 10,000,000 shares authorized with 5,106,923 shares issued at June 30, 2004 and $ .1041 stated value per share with 2,537,011 shares issued at December 31, 2003 266 264 Additional paid - in capital 33,767 32,928 Retained earnings 10,985 8,509 Accumulated other comprehensive income 514 1,134 ---------- ---------- Total stockholders' equity 45,532 42,835 ---------- ---------- Total liabilities and stockholders' equity $ 492,036 $ 472,393 ========== ========== * Condensed from audited financial statements The accompanying notes are an integral part of these condensed financial statements.
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended June June (Dollars in Thousands) 2004 2003 INTEREST INCOME Interest and fees on loans $ 5,437 $ 4,926 Interest on federal funds sold 36 38 Interest and dividends on investment securities 808 915 Interest income on deposits with banks 1 5 ----------- ----------- Total interest income 6,282 5,884 ----------- ----------- INTEREST EXPENSE Interest on deposits 1,266 1,299 Interest on borrowed money 417 417 ----------- ----------- Total interest expense 1,683 1,716 ----------- ----------- Net interest income 4,599 4,168 Provision for loan losses 30 24 ----------- ----------- Net interest income after provision for loan losses 4,569 4,144 ----------- ----------- OTHER INCOME Service charges on deposits 769 666 Other service charges 305 315 Trust department income 458 375 Brokerage income 121 139 Other income 43 96 Securities gains / (losses) 48 (7) ----------- ----------- Total other income 1,744 1,584 ----------- ----------- OTHER EXPENSES Salaries and employee benefits 1,893 1,626 Net occupancy and equipment expenses 612 522 Other operating expenses 1,191 1,070 ----------- ----------- Total other expense 3,696 3,218 ----------- ----------- Income before income tax 2,617 2,510 Income tax expenses 726 693 ----------- ----------- Net income $ 1,891 $ 1,817 =========== =========== PER SHARE DATA Earnings per share Basic earnings per share $ 0.37 $ 0.36 Weighted average number of shares outstanding 5,103,395 5,050,278 Diluted earnings per share $ 0.36 $ 0.35 Weighted average number of shares outstanding 5,272,266 5,191,977 Dividends per share $ 0.12 $ 0.105 The accompanying notes are an integral part of these condensed financial statements.
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) ? Six Months Ended June June (Dollars in Thousands) 2004 2003 INTEREST INCOME Interest and fees on loans $ 10,639 $ 9,562 Interest on federal funds sold 40 59 Interest and dividends on investment securities 1,727 1,954 Interest income on deposits with banks 3 9 ---------- ---------- Total interest income 12,409 11,584 ---------- ---------- INTEREST EXPENSE Interest on deposits 2,481 2,594 Interest on borrowed money 863 824 ---------- ---------- Total interest expense 3,344 3,418 ---------- ---------- Net interest income 9,065 8,166 Provision for loan losses 180 276 ---------- ---------- Net interest income after provision for loan losses 8,885 7,890 ---------- ---------- OTHER INCOME Service charges on deposits 1,450 1,276 Other service charges 515 569 Trust department income 914 694 Brokerage income 217 250 Other income 150 197 Securities gains / (losses) 115 171 ---------- ---------- Total other income 3,361 3,157 ---------- ---------- OTHER EXPENSES Salaries and employee benefits 3,803 3,302 Net occupancy and equipment expenses 1,185 1,028 Other operating expenses 2,105 2,007 ---------- ---------- Total other expense 7,093 6,337 ---------- ---------- Income before income tax 5,153 4,710 Income tax expenses 1,456 1,349 ---------- ---------- Net income $ 3,697 $ 3,361 ========== ========== PER SHARE DATA Earnings per share Basic earnings per share $ 0.72 $ 0.67 Weighted average number of shares outstanding 5,096,169 5,046,273 Diluted earnings per share $ 0.70 $ 0.65 Weighted average number of shares outstanding 5,266,199 5,184,505 Dividends per share $ 0.24 $ 0.2005 The accompanying notes are an integral part of these condensed financial statements.
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended June June (Dollars in Thousands) 2004 2003 COMPREHENSIVE INCOME Net Income $ 1,891 $ 1,817 Other comprehensive income, net of tax Unrealized gain (loss) on investment securities available for sale (921) 242 ---------- ---------- Comprehensive Income $ 970 $ 2,059 ========== ========== Six Months Ended June June (Dollars in Thousands) 2004 2003 COMPREHENSIVE INCOME Net Income $ 3,697 $ 3,361 Other comprehensive income, net of tax Unrealized gain (loss) on investment securities (620) (332) available for sale ---------- ---------- Comprehensive Income $ 3,077 $ 3,029 ========== ========== The accompanying notes are an integral part of these condensed financial statements.
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June June (Dollars in Thousands) 2004 2003 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,697 $ 3,361 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 519 448 Provision for loan losses 180 276 Other, net (353) (379) -------- -------- Net cash provided by operating activities 4,043 3,706 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in interest bearing deposits 400 (218) with banks Purchases of available for sale securities (4,290) (23,625) Sales and maturities of available for sale securities 16,638 26,172 Net (purchases) redemption of FHLB Stock 173 (338) Net (increase) in loans (27,468) (32,649) Purchases of bank premises and equipment (1,137) (1,111) -------- -------- Net cash provided (used) by investing activities (15,684) 31,769) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 29,677 24,795 Cash dividends paid (1,225) (1,011) Proceeds from sale of stock 841 380 Cash paid in lieu of fractional shares 0 (22) Net increase (decrease) in short term purchased funds (10,918) 3,502 Proceeds of long term debt issuance 0 10,000 Payments and maturities on long term debt (1,324) (1,053) -------- -------- Net cash provided by financing activities 17,051 36,591 -------- -------- Net increase (decrease) in cash and cash equivalents 5,410 8,528 Cash and cash equivalents at beginning of period 16,112 18,873 -------- -------- Cash and cash equivalents at end of period $ 21,522 $ 27,401 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 3,339 $ 3,447 Income Taxes 1,575 1,450 Supplemental schedule of noncash investing and financing activities: Unrealized gain (loss) on investments available for sale (net of deferred taxes of ($ 319) and ($ 171) at June 30, 2004 and 2003, respectively) (620) (332) The accompanying notes are an integral part of these condensed financial statements.
ORRSTOWN FINANCIAL SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 (UNAUDITED) Review of Interim Financial Statements The condensed consolidated financial statements as of and for the three months ended and six months ended June 30, 2004 and 2003 have been reviewed by independent certified public accountants. Their report on their review is attached as Exhibit 99 to this 10-Q. Note 1: Basis of Presentation The financial information presented at and for the three months ended and six months ended June 30, 2004 and 2003 is unaudited. Information presented at December 31, 2003 is condensed from audited year-end financial statements. However, unaudited information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim period. Note 2: Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Orrstown Financial Services, Inc. (the Corporation) and its wholly-owned subsidiaries, Orrstown Bank (the Bank) and Pennbanks Insurance Company Cell P1. All significant intercompany transactions and accounts have been eliminated. Cash Flows For purposes of the Statements of Cash Flows, the Corporation has defined cash and cash equivalents as those amounts included in the balance sheet captions "Cash and due from banks" and "Federal funds sold". As permitted by Statement of Financial Accounting Standards No.104, the Corporation has elected to present the net increase or decrease in deposits with banks, loans and deposits in the Statement of Cash Flows. Federal Income Taxes For financial reporting purposes the provision for loan losses charged to operating expense is based on management's judgment, whereas for federal income tax purposes, the amount allowable under present tax law is deducted. Additionally, deferred compensation is charged to operating expense in the period the liability is incurred for financial reporting purposes, whereas for federal income tax purposes, these expenses are deducted when paid. As a result of the aforementioned timing differences, plus the timing differences associated with depreciation expense, deferred income taxes are provided in the financial statements. Income tax expense is less than the amount calculated using the statutory tax rate primarily as a result of tax exempt income earned from state and political subdivision obligations. Stock-Based Compensation The Corporation maintains two stock-based compensation plans. These plans provide for the granting of stock options to the Corporation's employees and directors. The Corporation accounts for its stock option plans based on the intrinsic-value method set forth in APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related Interpretations, under which no compensation cost has been recognized for any of the periods presented. All options granted under the plans had an exercise price equal to the fair market value as established by the average of the daily high bid and daily low offer quotations for the shares reported in the OTC Bulletin Board service during the ten trading days immediately preceding the date of purchase. The following table illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based employee and/or director compensation. Three Months Ended Six Months Ended June June June June (In Thousands, except 2004 2003 2004 2003 per share data) Net income As reported $ 1,891 $ 1,817 $ 3,697 $ 3,361 Pro forma 1,506 1,594 3,312 3,138 Basic earnings per share As reported $ 0.37 $ 0.36 $ 0.72 $ 0.67 Pro forma 0.30 0.32 0.65 0.62 Diluted earnings per share As reported $ 0.36 $ 0.35 $ 0.70 $ 0.65 Pro forma 0.29 0.31 0.63 0.61
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the assumptions shown below: Nonemployee Employee Director Stock Stock Option Option Plan Plan Grant Date April 1, 2004 June 24, 2004 Fair Value $ 14.75 $ 12.60 Expected Life in Years 7 5 Risk Free Interest Rate 3.38% 3.85% Expected Dividend Yield 1.11% 1.18% Expected Volatility 32.80% 32.18%
Investment Securities Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Corporation has the ability at the time of purchase to hold securities until maturity, they are classified as securities held to maturity and carried at amortized historical cost. Securities to be held for indefinite periods of time, and not intended to be held to maturity, are classified as available for sale and carried at fair value. Securities held for indefinite periods of time include securities that management intends to use as part of its asset and liability management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk and other factors related to interest rate and resultant prepayment risk changes. Realized gains and losses on dispositions are based on the net proceeds and the adjusted book value of the securities sold, using the specific identification method. Unrealized gains and losses on investment securities available for sale are based on the difference between book value and fair value of each security. These gains and losses are credited or charged to other comprehensive income, whereas realized gains and losses flow through the Corporation's results of operations. The Corporation has classified all investments securities as "available for sale". At June 30, 2004 fair value exceeded amortized cost by $ 780,000. In shareholders' equity, the balance of accumulated other comprehensive income decreased to $ 514,000 compared to December 31, 2003, after recognizing the tax effects of the unrealized gains. At December 31, 2003, fair value exceeded amortized cost by $ 1,719,000 decreasing accumulated other comprehensive income to $ 1,134,000 after recognizing the tax effects of the unrealized gains. Note 3: Other Commitments In the normal course of business, the Bank makes various commitments and incurs certain contingent liabilities which are not reflected in the accompanying financial statements. These commitments include various guarantees and commitments to extend credit and the Bank does not anticipate any losses as a result of these transactions. Note 4: Changes in Common Stock On January 2, 2004 the Board of Directors of Orrstown Financial Services, Inc. approved a 2-for-1 stock split paid on February 10, 2004 to shareholders of record on January 16, 2004. Under this split shareholders received one additional share of common stock for each share owned at the close of business on January 16, 2004. All per share amounts have been adjusted to give retroactive recognition to the 2-for-1 stock split. Note 5: Subsequent Event On July 14, 2004 Orrstown Bank, a wholly owned subsidiary of Orrstown Financial Services, Inc., purchased a Chambersburg, Pennsylvania-based investment management business and the related "Integrity Financial" Pennsylvania registered trademark. Orrstown Bank will operate the Integrity Financial business as part of the Bank's Asset Management Division. ORRSTOWN FINANCIAL SERVICES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Summary Orrstown Financial Services, Inc. recorded net income of $ 1,891,000 for the second quarter of 2004 compared to $ 1,817,000 for the same period in 2003, representing an increase of $ 74,000 or 4.1%. Basic earnings per share was $ .37 for the second quarter of 2004 compared to the $ .36 earned during the second quarter of 2003. Net income for the first six months of 2004 was $ 3,697,000 compared to $ 3,361,000 for the same period in 2003, representing an increase of $ 336,000 or 10.0%. Net income per share for the first six months of 2004 was $ .72 up from the $ .67 per share realized during the six months ended June 30, 2003. All per share amounts have been restated to reflect the 2-for-1 stock split paid to shareholders on February 10, 2004. The following statistics compare 2004's second quarter and year-to-date performance to that of 2003: Three Months Ended Six Months Ended June June June June 2004 2003 2004 2003 Return on average assets 1.55% 1.67% 1.55% 1.60% Return on average equity 16.62% 18.38% 16.55% 17.28% Average equity/Average assets 9.33% 9.08% 9.35% 9.24%
A more detailed discussion of the elements having the greatest impact on net income follows. Net Interest Income Net interest income for the second quarter of 2004 was $ 4,599,000 representing a growth of $ 431,000, or 10.3% over the $ 4,168,000 realized during the second quarter of 2003. This increase was due entirely to volume as the net interest margin tightened from 4.23% in the second quarter 2003 to 4.10% during second quarter 2004. Growth in interest earning assets was due primarily to strong commercial loan demand. The average daily balance of commercial loans increased $ 40,071,000 for the second quarter 2004 over the same period last year. Although core deposits grew $ 16,294,000 and time deposits grew $ 16,045,000, on an average daily basis over the second quarter 2003, interest expense on deposits continued to decrease in the existing low rate environment. Non- interest deposit accounts also grew $ 12,070,000 for the same period. Net interest income for the first six months of 2004 was $ 9,065,000 representing an increase of $ 899,000, or 11.0% over the$ 8,166,000 generated during the first six months of 2003. Loan portfolio growth is responsible for all interest income gains. Commercial loans were up $ 43,375,000 or 22.2% over the first six months of 2003 on a daily average basis. Time deposit volume increased $ 10,885,000 from December 31, 2003 to June 30, 2004 due primarily to growth in the 100,000 and over certificates of deposits. The table that follows states rates on a fully taxable equivalent basis (FTE) and demonstrates the aforementioned effects: (Dollars in Thousands) Three Months Ended Six Months Ended June 2004 June 2003 June 2004 June 2003 Avg Balance Rates Avg Rates Avg Rates Avg Rates Balance Balance Balance Interest earning $ 461,944 5.56% $ 410,134 5.90% $ 452,535 5.61% $398,812 6.00% Interest bearing liabilities 384,498 1.76% 348,933 1.97% 378,287 1.78% 399,372 2.03% --------- -------- --------- -------- Free Funds $ 77,446 $ 61,201 $ 74,248 $ 59,440 --------- -------- --------- -------- Net interest income $ 4,599 $ 4,168 $ 9,065 $ 8,166 Net interest spread 3.80% 3.93% 3.83% 3.97% Free funds ratio 16.77% 14.92% 16.41% 14.90% Net interest margin 4.10% 4.23% 4.13% 4.27%
Non-Interest Income and Expense The following compares three months ended June 30, 2004 to three months ended June 30, 2003: Other income increased $ 160,000, or 10.1%, from $ 1,584,000 during the second quarter of 2003 to $ 1,744,000 during the second quarter of 2004. Fee income from deposit transactions increased $ 103,000, or 15.5% over 2003. Bounce protection fees, merchant fees and debit card fees were the primary contributors. Securities gains/losses increased by $ 55,000 over the second quarter 2003, off-setting a capital loss of $ 52,000 this quarter, due to the sale of other real estate owned. Asset management fees grew $ 65,000 and should continue to grow with the addition of the investment management business purchased on July 14, 2004. Other expenses rose from $ 3,218,000 during second quarter 2003 to $ 3,696,000 for 2004's second quarter, resulting in an increase of $ 478,000, or 14.9%. Salaries and benefits expense grew $ 267,000, or 16.4% due to continued company wide growth including the expansion of the asset management area and the opening of our thirteenth full service branch at Seven Gables in Carlisle, Pennsylvania on May 6, 2004. This also contributed to an increase in occupancy and equipment expense of 17.2% over the same quarter last year. Other operating expenses increased $ 121,000 for the current quarter versus second quarter 2003. Increases in advertising and contributions were factors in this increase, as well as promotional expenses related to the Seven Gables branch opening. Processing costs for ATM and debit card transactions rose by $ 31,000 versus second quarter 2003 as volumes increased. The following compares six months ended June 30, 2004 to six months ended June 30, 2003 Other income grew $ 204,000, or 6.5%, from $ 3,157,000 during the first half of 2003 to $ 3,361,000 during the same period of 2004. Primary areas of growth included an increase in bounce protection fees of $ 73,000, a $ 42,000 increase in master money cared fee and a $ 46,000 increase in merchant account fees. Secondary mortgage market fees were up $ 97,000 over the first six months of 2003 while other loan fees decreased by $ 128,000. Asset management fees grew $219,000 due to the growth of trust assets under management from $ 253,000,000 at June 30, 2003 to $ 318,000,000 at June 30, 2004. Other expenses rose from $ 6,337,000 during the six months of 2003 to $ 7,093,000 for the six months ended 2004, growing $ 756,000, or 11.9%. Salary and benefit expense, the largest component of noninterest expense, increased $ 501,000. The opening of the Bank's thirteenth branch was also responsible for investment in premises and equipment rising 12.1% from $ 10,512,000 to $ 11,786,000 for the current year. This helped increase occupancy and equipment expenses by $ 157,000 or 15.3% over the prior year. Income Tax Expense Income tax expense increased $ 33,000, or 4.8%, during the second quarter of 2004 versus the second quarter of 2003. For the first half of 2004 versus 2003, income tax expense rose $ 107,000, or 7.9%. Effective income tax rates were as follows: Three Months Six Months Ended Ended June June June June 2004 2003 2004 2003 Effective income tax rate 27.7% 27.6% 28.3% 28.6%
The marginal federal income tax bracket is 34% for all periods presented. Provision and Allowance for Loan Losses The provision for loan losses and the other changes in the allowance for loan losses are shown below: (Dollars in Thousands) Three Months Ended Six Months Ended June June June June 2004 2003 2004 2003 Balance at beginning of period $ 4,327 $ 3,979 $4,161 $3,734 Recoveries of loans previously charged off 7 4 28 14 Additions to allowance charged to expense 30 24 180 276 ------- ------- ------- ------ Total 4,364 4,007 4,369 4,024 Loans charged off 12 18 17 35 ------- ------- ------- ------ Balance at end of period $ 4,352 $ 3,989 $ 4,352 $3,989
In the opinion of management, the allowance, when taken as a whole, is adequate to absorb reasonably estimated loan losses inherent in the Bank's loan portfolio. The unallocated portion of the allowance for loan losses was approximately 46% at June 30, 2004. Nonperforming Assets / Risk Elements Nonperforming assets at June 30, are as follows: (Dollars in Thousands) 2004 2003 Loans on nonaccrual (cash) basis Loans secured by real estate $ 121 $ 82 Installment loans 6 22 Commercial loans 0 0 Credit card 0 0 ------------ ------------- Total nonaccrual loans 127 104 ------------ ------------- Loans whose terms have been renegotiated Loans secured by real estate 1,394 1,420 Installment loans 0 0 Commercial loans 0 0 Credit card 0 0 ------------ ------------- Total renegotiated loans 1,394 1,420 ------------ ------------- OREO 0 261 ------------ ------------- Total nonperforming loans and OREO $ 1,521 $ 1,785 ============ ============ Ratio of nonperforming assets to total loans and OREO 0.41% 0.57% Ratio of nonperforming assets to total assets 0.31% 0.40% Loans past due 90 or more days and still accruing Loans secured by real estate $ 1,730 $ 2,390 Installment loans 3 7 Commercial loans 20 6 Credit card 0 0 ------------ ------------- Total loans 90 or more days past due $ 1,753 $ 2,403 ============ ============ Ratio of loans 90 or more days past due to total loans and OREO 0.47% 0.76% Ratio of loans 90 or more days past due to total assets 0.36% 0.53% ------------ ------------- Total nonperforming and other risk assets $ 3,274 $ 4,188 ============ ============ Ratio of total risk assets to total loans and OREO 0.88% 1.33% Ratio of total risk assets to total assets 0.67% 0.93%
Any loans classified for regulatory purposes as loss, doubtful, substandard or special mention that have not been disclosed under Item III of Industry Guide 3 do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources. Capital Resources and Balance Sheet Fluctuations A comparison of Orrstown Financial Services, Inc.'s capital ratios to regulatory minimum requirements at June 30, 2004 are as follows: Orrstown Regulatory Financial Regulatory Well Capitalized Services, Minimums Minimums Inc. Leverage Ratio 9.16% 4% 5% Risk Based Capital Ratios: Tier I Capital Ratio 12.42% 4% 6% Total (Tier I & II) Capital Ratio (core capital plus allowance for loan losses) 13.62% 8% 10%
The growth experienced during 2004 has been supported by capital growth in the form of retained earnings and capital infusion from the dividend reinvestment and ESOP plans. Dividend reinvestment plan participants have added $ 442,000 to equity as of June 30, 2004. Also during the first half of 2004 there were numerous Employee Stock Options exercised, increasing capital by $ 363,000 and decreasing diluted shares. Equity represented 9.25% of assets at June 30, 2004 which is up from 9.07% at December 31, 2003 due primarily to the retaining of earnings and the aforementioned stock sales under plans. All balance sheet fluctuations exceeding 5% have been created by either the growth that has been experienced during 2004 or single day fluctuations. Management is not aware of any current recommendations by regulatory authorities which, if implemented, would have a material effect on the corporation's liquidity, capital resources or operations. Sarbanes-Oxley Act 2002 Requirements On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act) was signed into law. The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity securities registered or that file reports under the Securities Exchange Act of 1934 (the Exchange Act). In particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and its directors and executive officers; and (v) new and increased civil and criminal penalties for violations of the securities laws. Many of the provisions were effective immediately while other provisions become effective over a period of time and are subject to rulemaking by the Securities and Exchange Commission (the SEC). Because the Corporation's common stock is registered with the SEC, it is currently subject to the Sarbanes-Oxley Act. The Corporation anticipates that it will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, but does not expect that such compliance will have a material impact on the Corporations' or the Banks' results of operations or financial condition. The Board of Directors revised the Audit Committee Charter in 2003 in order to bring it into conformity with requirements specified in the Sarbanes-Oxley Act and related SEC regulations. The Corporation's audit committee held its regularly scheduled meetings during the first half of 2004. The audit committee consists of four outside directors with varied business and financial expertise. Controls and Procedures (a) Evaluation of disclosure controls and procedures: The Corporation's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Corporation's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) under the Securities Exchange Act of 1934, as amended) as of June 30, 2004. Based on such evaluation, such officers have concluded that, as of June 30, 2004, the Corporation's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in the Corporation's periodic filings under the Exchange Act. (b) Changes in internal controls: There have not been any significant changes in the Corporation's internal control over financial reporting or in other factors that could significantly affect such control during the second quarter of 2004. PART II - OTHER INFORMATION OTHER INFORMATION Item 1 - Legal Proceedings None Item 2 - Changes in Securities None Item 3 - Defaults Upon Senior Securities Not applicable Item 4 - Submission of Matters to a Vote of Security Holders None Item 5 - Other Information None Item 6 - Exhibits and Reports on Form 8 - K (a) Exhibits 31.1 - Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 - Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 - Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 32.2 - Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 99 - Report of independent accountant's on interim financial statements (b) Reports on Form 8 - K: Current report on Form 8-K filed with the Commission on July 15, 2004 Current report on Form 8-K filed with the Commission on July 22, 2004 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. /s/ Kenneth R. Shoemaker -------------------------------------- (Kenneth R. Shoemaker, President & CEO) (Duly Authorized Officer) /s/ Bradley S. Everly -------------------------------------- (Bradley S. Everly, Senior Vice President & CFO) (Chief Financial Officer) /s/ Robert B. Russell -------------------------------------- Robert B. Russell, Controller) (Chief Accounting Officer) Date July 26, 2004 ----------------- Exhibit 31.1 CERTIFICATION I, Kenneth R. Shoemaker, President and CEO, certify, that: 1. I have reviewed this quarterly report on Form 10-Q of Orrstown Financial Services, Inc. 2. Based on my knowledge, the quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report. 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15(e)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of the internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Kenneth R. Shoemaker -------------------------------------- Kenneth R. Shoemaker President & CEO (Principal Executive Officer) July 26, 2004 Exhibit 31.2 CERTIFICATION I, Bradley S. Everly, Sr. Vice President and CFO, certify, that: 1. I have reviewed this quarterly report on Form 10-Q of Orrstown Financial Services, Inc. 2. Based on my knowledge, the quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report. 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15(e)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of the internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Bradley S. Everly -------------------------------------- Bradley S. Everly Sr. Vice President & CFO (Principal Financial Officer) July 26, 2004 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Orrstown Financial Services, Inc. (the Corporation) on Form 10-Q for the period ending June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Kenneth R. Shoemaker, Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the final condition and results of operations of the Corporation. /s/Kenneth R. Shoemaker -------------------------------------- Kenneth R. Shoemaker Chief Executive Officer July 26, 2004 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Orrstown Financial Services, Inc. (the Corporation) on Form 10-Q for the period ending June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Bradley S. Everly, Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the final condition and results of operations of the Corporation. /s/ Bradley S. Everly -------------------------------------- Bradley S. Everly Chief Financial Officer July 26, 2004 Exhibit 99 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors Orrstown Financial Services, Inc. Shippensburg, Pennsylvania We have reviewed the accompanying consolidated balance sheet of Orrstown Financial Services, Inc. and it's subsidiaries as of June 30, 2004 and the related consolidated statements of income for the three and six months ended June 30, 2004 and 2003 and consolidated statements of comprehensive income for the three and six months ended June 30, 2004 and 2003 and consolidated statements of cash flows for the six months ended June 30, 2004. These financial statements are the responsibility of the Corporation's management. We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements for them to be in conformity with generally accepted accounting principles. /s/ Smith Elliott Kearns & Company, LLC ------------------------------------------ SMITH ELLIOTT KEARNS & COMPANY, LLC Chambersburg, Pennsylvania July 26, 2004