10-Q 1 june10q2005.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 the quarterly period ended June 30, 2005 33-18888 (Commission file number) 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) (717) 532-6114 (Registrant's telephone number, including area code) Indicate by check Junk whether the registrant (1) has filed all reports required to be filled by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO [____] Indicate by check Junk whether the registrant is an accelerated filer (as defined in Rule 12b - 2 of the Exchange Act). YES X NO [____] Common Stock, no par value 5,403,263 (Title of Class) (Outstanding Shares) Page 1 of 26 ORRSTOWN FINANCIAL SERVICES, INC. INDEX Page Part I - FINANCIAL INFORMATION Item 1. Financial statements (unaudited) Condensed consolidated balance sheets - June 30, 2005 and December 31, 2004 4 Condensed consolidated statements of income - Three months ended June 30, 2005 and 2004 5 Condensed consolidated statements of income - Six months ended June 30, 2005 and 2004 6 Condensed consolidated statements of comprehensive income - Three months & Six months ended June 30, 2005 and 2004 7 Condensed consolidated statements of cash flows - Six months ended June 30, 2005 and 2004 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 Item 3. Quantitative and Qualitative Disclosures about Market Risk 18 Item 4. Controls and Procedures 18 PART II - OTHER INFORMATION Item 1. Legal Proceedings 20 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 20 Item 3. Defaults upon Senior Securities 20 Item 4. Submission of Matters to a Vote of Securities Holders 20 Item 5. Other Information 20 Item 6. Exhibits 23 - 26 SIGNATURES 22 Page 2 of 26 PART I - FINANCIAL INFORMATION Page 3 of 26 PART I - FINANCIAL INFORMATION Item 1. Financial Statements ORRSTOWN FINANCIAL SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Unaudited) (Audited) * June 30, December 31, (Dollars in Thousands) 2005 2004 ASSETS Cash and due from banks $ 15,939 $ 11,456 Federal funds sold 29,000 8,393 --------- --------- Cash and cash equivalents 44,939 19,849 Interest bearing deposits with banks 1,126 1,124 Securities available for sale 79,111 79,829 FHLB, Federal Reserve and Atlantic Central Bankers Bank stock, at cost which approximates market 2,468 2,972 value Loans 424,252 389,268 Allowance for loan losses (4,349) (4,318) --------- --------- Net Loans 419,903 384,950 Premises and equipment, net 13,123 13,222 Accrued interest receivable 2,022 1,775 Cash surrender value of life insurance 7,634 7,516 Other assets 3,693 3,414 --------- --------- Total assets $ 574,019 $ 514,651 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing $ 75,507 $ 66,784 Interest bearing 377,939 338,579 Total deposits 453,446 405,363 Short term borrowings 28,352 19,493 Long-term debt 33,886 35,569 Accrued interest payable 302 266 Other liabilities 4,957 4,710 --------- --------- Total liabilities 520,943 465,401 --------- --------- Common stock, no par value - $ .05205 stated value per share; 50,000,000 shares authorized; 5,403,263 and 5,126,205 shares issued 268 267 Additional paid - in capital 35,174 34,434 Retained earnings 16,961 13,723 Accumulated other comprehensive income 673 826 --------- --------- Total shareholders' equity 53,076 49,250 --------- --------- Total liabilities and shareholders' equity $ 574,019 $ 514,651 ========= ========= * Condensed from audited financial statements The accompanying notes are an integral part of these condensed financial statements.
Page 4 of 26 ORRSTOWN FINANCIAL SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended June June (Dollars in Thousands) 2005 2004 INTEREST INCOME Interest and fees on loans $ 6,851 $ 5,437 Interest and dividends on investment securities 856 808 Interest on short term investments 98 37 ----------- ----------- Total interest income 7,805 6,282 ----------- ----------- INTEREST EXPENSE Interest on deposits 1,698 1,266 Interest on short-term borrowings 154 50 Interest on long-term debt 357 367 ----------- ----------- Total interest expense 2,209 1,683 ----------- ----------- Net interest income 5,596 4,599 Provision for loan losses 24 30 ----------- ----------- Net interest income after provision for loan losses 5,572 4,569 ----------- ----------- OTHER INCOME Service charges on deposits 984 769 Other service charges 371 305 Trust department income 569 458 Brokerage income 276 121 Other income 107 43 Securities gains / (losses) 0 48 ----------- ----------- Total other income 2,307 1,744 ----------- ----------- OTHER EXPENSES Salaries and employee benefits 2,275 1,893 Net occupancy and equipment expenses 633 612 Data processing 188 161 Advertising 66 116 Other operating expenses 982 914 ----------- ----------- Total other expense 4,144 3,696 ----------- ----------- Income before income tax 3,735 2,617 Income tax expenses 1,175 726 ----------- ----------- Net income $ 2,560 $ 1,891 =========== =========== PER SHARE DATA Earnings per share Basic earnings per share $ 0.48 $ 0.35 Weighted average number of shares outstanding 5,401,641 5,358,565 Diluted earnings per share $ 0.45 $ 0.34 Weighted average number of shares outstanding 5,612,715 5,535,856 Dividends per share $ 0.14 $ 0.1143 The accompanying notes are an integral part of these condensed financial statements.
Page 5 of 26 ORRSTOWN FINANCIAL SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Six Months Ended June June (Dollars in Thousands) 2005 2004 INTEREST INCOME Interest and fees on loans $ 13,112 $ 10,639 Interest and dividends on investment securities 1,770 1,727 Interest on short term investments 142 43 ----------- ---------- Total interest income 15,024 12,409 ----------- ---------- INTEREST EXPENSE Interest on deposits 3,190 2,481 Interest on short-term borrowings 263 125 Interest on long-term debt 717 738 ----------- ---------- Total interest expense 4,170 3,344 ----------- ---------- Net interest income 10,854 9,065 Provision for loan losses 48 180 ----------- ---------- Net interest income after provision for loan losses 10,806 8,885 ----------- ---------- OTHER INCOME Service charges on deposits 1,791 1,450 Other service charges 641 515 Trust department income 1,106 914 Brokerage income 473 217 Other income 199 150 Securities gains / (losses) (2) 115 ----------- ---------- Total other income 4,208 3,361 ----------- ---------- OTHER EXPENSES Salaries and employee benefits 4,475 3,803 Net occupancy and equipment expenses 1,272 1,185 Data processing 329 290 Advertising 161 170 Other operating expenses 1,934 1,645 ----------- ---------- Total other expense 8,171 7,093 ----------- ---------- Income before income tax 6,843 5,153 Income tax expenses 2,112 1,456 ----------- ---------- Net income $ 4,731 $ 3,697 =========== ========== PER SHARE DATA Earnings per share Basic earnings per share $ 0.88 $ 0.69 Weighted average number of shares outstanding 5,396,428 5,350,977 Diluted earnings per share $ 0.84 $ 0.67 Weighted average number of shares outstanding 5,605,520 5,529,486 Dividends per share $ 0.2733 $ 0.2286 The accompanying notes are an integral part of these condensed financial statements.
Page 6 of 26 ORRSTOWN FINANCIAL SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended June June (Dollars in Thousands) 2005 2004 COMPREHENSIVE INCOME Net Income $ 2,560 $ 1,891 Other comprehensive income, net of tax Unrealized gain (loss) on investment securities 420 (921) available for sale -------- -------- Comprehensive Income $ 2,980 $ 970 ======== ========
Six Months Ended June June (Dollars in Thousands) 2005 2004 COMPREHENSIVE INCOME Net Income $ 4,731 $ 3,697 Other comprehensive income, net of tax Unrealized gain (loss) on investment securities (153) (620) available for sale -------- -------- Comprehensive Income $ 4,578 $ 3,077 ======== ========
The accompanying notes are an integral part of these condensed financial statements. Page 7 of 26 ORRSTOWN FINANCIAL SERVICES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June June (Dollars in Thousands) 2005 2004 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,731 $ 3,697 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 586 519 Provision for loan losses 48 180 Other, net (263) (353) ---------- ---------- Net cash provided by operating activities 5,102 4,043 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Net (increase) decrease in interest bearing deposits with banks (2) 400 Purchases of available for sale securities (6,406) ( 4,290) Sales and maturities of available for sale securities 6,875 16,638 Net sales (purchases) of FHLB Stock 503 173 Net (increase) in loans (35,001) (27,468) Purchases of bank premises and equipment ( 487) ( 1,137) ---------- ---------- Net cash (used) by investing activities (34,518) ( 15,684) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 48,083 29,677 Cash dividends paid ( 1,476) (1,225) Proceeds from sale of stock 741 841 Cash paid in lieu of fractional shares ( 19) 0 Net increase (decrease) in short term purchased funds 8,859 (10,918) Payments on long term debt ( 1,682) ( 1,324) ---------- ---------- Net cash provided by financing activities 54,506 17,051 ---------- ---------- Net increase in cash and cash equivalents 25,090 5,410 Cash and cash equivalents at beginning of period 19,849 16,112 ---------- ---------- Cash and cash equivalents at end of period $ 44,939 $ 21,522 ========== ========== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 4,134 $ 3,339 Income Taxes 1,900 1,575 Supplemental schedule of noncash investing and financing activities: Unrealized gain (loss) on investments available for sale (net of deferred taxes of $( 78) and $(319) at June 30, 2005 and 2004, respectively) (153) (620)
The accompanying notes are an integral part of these condensed financial statements. Page 8 of 26 ORRSTOWN FINANCIAL SERVICES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2005 (UNAUDITED) Note 1: Summary of Significant Accounting Policies Basis of Presentation The unaudited financial information presented at and for the three and six months ended June 30, 2005 and 2004 has been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. However, unaudited information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim period. Information presented at December 31, 2004 is condensed from audited year-end financial statements. For further information, refer to the audited consolidated financial statements, and footnotes thereto, included in the Annual Report on Form 10-K, for the year ended December 31, 2004. Operating The consolidated financial statements include the accounts of Orrstown Financial Services, Inc. (the Corporation) and its wholly-owned subsidiaries, Orrstown Bank (the Bank) and Pennbanks Insurance Company Cell P1. All significant intercompany transactions and accounts have been eliminated. Operating results for the three and six months ended June 30, 2005, are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. Cash Flows For purposes of the Statements of Cash Flows, cash and cash equivalents include Cash and due from banks and Federal funds sold. As permitted by Statement of Financial Accounting Standards No. 104, the Corporation has elected to present the net increase or decrease in deposits with banks, loans and deposits in the Statement of Cash Flows. Federal Income Taxes For financial reporting purposes, the provision for loan losses charged to operating expense is based on management's judgment, whereas for federal income tax purposes, the amount allowable under present tax law is deducted. Additionally, deferred compensation is charged to operating expense in the period the liability is incurred for financial reporting purposes, whereas for federal income tax purposes, these expenses are deducted when paid. As a result of the aforementioned timing differences, plus the timing differences associated with depreciation expense, deferred income taxes are provided in the financial statements. Income tax expense is less than the amount calculated using the statutory tax rate primarily as a result of tax exempt income earned from state and political subdivision obligations. Investment Securities Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Corporation has the ability at the time of purchase to hold securities until maturity, they are classified as securities held to maturity and carried at amortized historical cost. Securities to be held for indefinite periods of time, and not intended to be held to maturity, are classified as available for sale and carried at fair value. Securities held for indefinite periods of time include securities that management intends to use as part of its asset and liability management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk, and other factors related to interest rate and resultant prepayment risk changes. Realized gains and losses on dispositions are based on the net proceeds and the adjusted book value of the securities sold, using the specific identification method. Unrealized gains and losses on investment securities available for sale are based on the difference between book value and fair value of each security. These gains and losses are credited or charged to other comprehensive income, whereas realized gains and losses flow through the Corporation's results of operations. The Corporation has classified all investments securities as "available for sale". At December 31, 2004, fair value exceeded amortized cost by $1,251,000 and at June 30, 2005 fair value exceeded amortized cost by $1,020,000. In shareholders' equity, the balance of accumulated other comprehensive income decreased to $673,000 from $826,000 at December 31, 2004. Page 9 of 26 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 bind 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 illustrated 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 Six Months Ended Ended June June June June (In Thousands, except per share data) 2005 2004 2005 2004 Net income As reported $ 2,560 $ 1,891 $ 4,731 $ 3,697 Pro forma 2,283 1,506 4,454 3,312 Basic earnings per share As reported $ 0.48 $ 0.35 $ 0.88 $ 0.69 Pro forma 0.42 0.28 0.82 0.62 Diluted earnings per share As reported $ 0.45 $ 0.34 $ 0.84 $ 0.67 Pro forma 0.41 0.27 0.80 0.60
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, 2005 June 23, 2005 Fair Value $9.28 $8.59 Expected Life in Years 7 5 Risk Free Interest Rate 4.29% 3.74% Expected Dividend Yield 1.28% 1.33% Expected Volatility 19.47% 19.41%
Note 2: Other Commitments In the normal course of business, the Bank makes various commitments and incurs certain contingent liabilities which are not reflected in the accompanying financial statements. These commitments include various guarantees and commitments to extend credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer's credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit evaluation of the customer. Standby letters of credit and financial guarantees written are conditional commitments to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Bank holds collateral supporting those commitments when deemed necessary by management. As of June 30, 2005, $14,939,000 of standby letters of credit have been issued. The Bank does not anticipate any losses as a result of these transactions. Page 10 of 26 Note 4: Changes in Common Stock On May 3, 2005, the Board of Directors of Orrstown Financial Services, Inc., approved a 5% stock dividend, payable on June 29, 2005 with shareholders of record as of June 3, 2005. Each shareholder was granted a single share for each 20 shares owned as of the record date. Fractional shares were paid out in cash. All per share amounts have been restated to give retroactive recognition to the 5% stock dividend. Note 3: Subsequent Events On August 1, 2005, Orrstown Bank, a wholly owned subsidiary of Orrstown Financial Services, Inc., purchased a Carlisle, Pennsylvania-based investment management business and licensed the use of the name "Gibb Financial Services". Orrstown Bank will operate the investment management business as part of the Bank's Asset Management Division. Page 11 of 26 PART I - FINANCIAL INFORMATION Item 2. ORRSTOWN FINANCIAL SERVICES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following is a discussion of our consolidated financial condition at June 30, 2005 and results of operations for each of the three and six months ended June 30, 2005 and three and six months ended June 30, 2004. Throughout this discussion, the yield on earning assets is stated on a fully taxable-equivalent basis and balances represent average daily balances unless otherwise stated. Some statements and information may contain forward-looking statements. The following factors, among others, could cause actual results to differ materially from forward-looking statements include: general political and economic conditions, unforeseen changes in the general interest rate environment, developments concerning credit quality in various corporate lending industry sectors, legislative or regulatory developments, legal proceedings, pending and proposed changes in accounting rules, policies, practices, and procedures. Each of these factors could affect estimates and assumptions used to produce forward looking statements causing actual results to differ materially from those anticipated. Future results could also differ materially from historical performance. Critical Accounting Policies The Bank policy related to the allowance for loan losses is considered to be a critical accounting policy because the allowance for loan losses represents a particularly sensitive accounting estimate. The amount of the allowance is based on management's evaluation of the collectibility of the loan portfolio, including the nature of the loan portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, grouping of like loans, grading of individual loan quality, review of specific problem loans, the examination of underlying collateral and current economic conditions that may affect the borrowers' ability to pay. SUMMARY OF FINANCIAL RESULTS Orrstown Financial Services, Inc. recorded net income of $2,560,000 for the second quarter of 2005 compared to $1,891,000 for the same period in 2004, representing an increase of $669,000 or 35.4%. Basic earnings per share increased $0.13 to $0.48 in the recent quarter from the $0.35 earned during the second three months of 2004. Diluted earnings per share for the same period were $0.45 and $0.34 respectively. Net income for the first six months of 2005 was $4,731,000 compared to $3,697,000 for the same period in 2004, representing an increase of $1,034,000 or 28.0%. Basic earnings per share for the first six months of 2005 was $.88 up from the $.69 per share realized during the six months ended June 30, 2004. All per share amounts have been restated to reflect the 5% stock dividend paid to shareholders on June 29, 2005. The following statistics compare 2005's second quarter and year-to-date performance to that of 2004: Three Months Six Months Ended Ended June June June June 2005 2004 2005 2004 Return on average assets 1.90% 1.55% 1.80% 1.55% Return on average equity 19.73% 16.62% 18.61% 16.55% Average equity / Average assets 9.61% 9.33% 9.67% 9.35%
Page 12 of 26 RESULTS OF OPERATINS Quarter ended June 30, 2005 compared to Quarter ended June 30, 2004 Net Interest Income Net interest income for the second quarter of 2005 was $5,596,000 representing a growth of $997,000, or 21.7% over the $4,599,000 realized during the second quarter last year. On a fully taxable equivalent basis (FTE), net interest income for the second quarter of 2005 and 2004 was $5,770,000 and $4,774,000, respectively. Interest income FTE FTE interest income totaled $7,979,000 for the second quarter of 2005 verses $6,457,000 for the same period last year, a difference of $1,522,000 or 23.6%. The rate on earning assets rose 5.56% during the second quarter 2004 to 6.24% during the same quarter this year. Increases in the prime lending rate and the federal funds rate during the last half of 2004 and continuing through the first six months of 2005 have increased the earnings yield of the Bank. Total earning assets grew $46.6 million or 10.1% from $461.9 million on average for the second quarter of 2004 to $508.5 million during the second quarter 2005. Earning assets increases were channeled primarily to the loan portfolio with commercial loans growing the most. Mortgage loans remained flat compared to the second quarter last year, and consumer loans grew $8.5 million for the same period. Commercial loan balances increased $37.9 million from $227.6 to $265.5. Growth in the volume of the commercial loan portfolio and increases in the prime lending rate resulted in an almost equal amount of interest income growth during the second quarter 2005. Total FTE interest income grew $1,522,000 for the same period, with the loan portfolio contributing $1,410,000 of the total. Interest expense Interest expense increased $526,000 from $1,683,000 to $2,209,000 or 31.3% over the second quarter of 2004. Savings accounts have increased by $31.8 million due to the popularity of a savings account introduced at the beginning of 2005 that is tied to the prime rate. Balances in other transaction accounts have decreased and may continue to do so as rates rise. During the first half of 2005, long term debt decreased by $1.4 million due to two maturities. Balances of short term borrowings increased by $1.6 million due to normal fluctuations in customer repurchase agreements. The Corporation's balance sheet is positioned to realize enhanced spreads in a rising rate environment. As a result of the funds flows mentioned above and the rising interest rate trend, the interest spread increased from 3.80% to 4.14% and the interest margin increased from 4.10% to 4.50% from the second quarter 2004 to the second quarter 2005, respectively. The table that follows states rates on a fully taxable equivalent basis (FTE) and demonstrates the aforementioned effects: Three Months Ended June 2005 June 2004 Tax Tax Tax Tax Average Equivalent Equivalent Average Equivalent Equivalen t (Dollars in thousands) Balance Interest Rate Balance Interest Rate Interest Earning Assets: Federal funds sold & interest bearing bank balances $ 13,256 $ 98 2.97% $ 14,937 $ 37 0.99% Investment securities 81,302 1,009 4.99% 79,895 958 4.81% Total Loans 413,928 6,872 6.60% 367,112 5,462 5.92% Total interest-earning assets 508,486 7,979 6.24% 461,944 6,457 5.56% Interest Bearing Liabilities: Interest bearing demand deposits $ 169,013 $ 423 1.00% $ 182,910 $ 476 1.05% Savings deposits 62,155 265 1.71% 30,352 34 0.45% Time deposits 132,910 1,010 3.05% 114,120 756 2.66% Short term borrowings 22,770 154 2.71% 21,163 50 0.95% Long term borrowings 34,567 357 4.14% 35,953 367 4.11% Total interest bearing liabilities 421,415 2,209 2.10% 384,498 1,683 1.76% Net interest income / net interest spread $ 5,770 4.14% $ 4,774 3.80% Net interest margin 4.50% 4.10%
Page 13 of 26 Non-Interest Income Total non-interest income, excluding securities gains, increased $611,000, or 36.0%, from $1,696,000 to $2,307,000. There were no net securities gains (losses) in the second quarter 2005 compared to the $48,000 of gains taken in the second quarter of 2004. Service charges on deposits increased 28.0% or $215,000 with $119,000 of the growth due to the overdraft protection program. Fees from debit cards and merchant accounts added another $68,000. Other service charges increased by $66,000 due to the success of the secondary mortgage market program. Trust fees increased by $111,000 or 24.2%. Brokerage fees increased $155,000 or 128% including $96,000 from Integrity Financial (Advantage Capital) which had been acquired during the third quarter 2004. The entire asset management area has experienced robust growth during 2005. Non-Interest Expense Other expenses rose from $3,696,000 during the second quarter 2004 to $4,144,000 during 2005's second quarter, an increase of $448,000, or 12.1%. The $382,000 increase in salaries and benefits was the largest contributor to increased expenses. Annual salary increases, the addition of new employees due to company growth, and a one time bonus distributed to employees due to the Corporation's performance, were the main contributors to the increase. Occupancy and equipment expense rose $21,000, or just 3.4%, over the prior year. Rent expense increased with the addition of a new lease for a branch due to open in August 2005 in Camp Hill, Pennsylvania. All other operating expenses increased by $45,000. The Corporations overhead efficiency ratio dropped to 51.05% for the current quarter versus the second quarter 2004s ratio of 56.84%. Rapidly growing net interest income and noninterest income combined with controlled noninterest expenses have combined to improve the efficiency ratio. Six Months ended June 30, 2005 compared to Six Months ended June 30, 2004 Net Interest Income Net interest income for the first six months of 2005 was $10,854,000 representing a growth of $1,789,000, or 19.7% over the $9,065,000 realized during the same quarter last year. On a fully taxable equivalent basis (FTE), net interest income for the first half of 2005 and 2004 was $11,223,000 and $9,415,000, respectively. Interest income FTE Interest income totaled $15,393,000 for the first six months of 2005 verses $12,759,000 for the same period last year. From June 30, 2004 to June 30, 2005 there have been eight 25 basis point moves increasing the prime lending rate and the federal funds sold rate. These rate jumps have contributed to the growth of the Bank's earning asset yield along with the 10.0% growth in the volume of total earning assets. The Bank's earning asset yield increased 56 basis points from the prior years 5.61% to 6.17% for the first six months of 2005. Total securities decreased slightly by $1.6 million primarily as a result of payments and/or maturities in the mortgage backed securities portfolio. The total loan portfolio increased by $45.0 million or 12.5% over the same period last year with mortgage loan balances remaining steady and consumer loans increasing by 18.3% or $8.7 million. The majority of the growth continues to be in the commercial loan portfolio which increased from $222.3 million to $257.6 or 15.9%. The growth in earning assets and bump-ups in the prime lending rate have increased the total interest income by $2,634,000 or 20.6% over the first six months of 2004. Interest expense Total interest expense increased $826,000 from $3,344,000 to $4,170,000 or 24.7% over the first half of 2004. Although interest bearing demand deposits have decreased over the first six months of 2004 by $4.5 million, the Bank has increased its non-interest demand deposits by $8.3 million in the same period. Balances in savings deposits have grown by 72.5% or $21.3 million due primarily to the popularity of a new prime based savings product introduced in January 2005. Time deposits balances have increased by $21.6 million due to moderately increasing certificate of deposit rates and growth of time deposit open accounts. Borrowings have decreased in balance by $4.4 million primarily from maturity and amortization of principal of long term debt and a decrease in the balances of repurchase agreements. As a result of the balance movements and the positioning of the balance sheet to thrive in a rising rate environment, the interest spread increased from 3.83% to 4.14% and the interest margin increased from 4.13% during the first half of 2004 to 4.49% during the first half of 2005. In summary, deposit rates have grown at a slower pace than loan rates, increasing spread. As the economy continues to improve, the Bank is well positioned to retain these margins if rates remain steady or continue to increase. Page 14 of 26 The table that follows states rates on a fully taxable equivalent basis (FTE) and demonstrates the aforementioned effects: Six Months Ended June 2005 June 2004 Tax Tax Tax Tax Average Equivalent Equivalent Average Equivalent Equivalen t (Dollars in thousands) Balance Interest Rate Balance Interest Rate Interest Earning Assets: Federal funds sold & interest bearing bank balances $ 10,258 $ 142 2.79% $ 8,578 $ 43 1.01% Investment securities 82,678 2,092 5.08% 84,258 2,026 4.82% Total Loans 404,691 13,159 6.49% 359,699 10,690 5.91% Total interest-earning assets 497,627 15,393 6.17% 452,535 12,759 5.61% Interest Bearing Liabilities: Interest bearing demand deposits $ 172,895 $ 877 1.02% $ 177,413 $ 924 1.05% Savings deposits 50,848 365 1.45% 29,473 66 0.45% Time deposits 132,416 1,948 2.97% 110,801 1,491 2.71% Short term borrowings 21,111 263 2.48% 24,538 125 1.03% Long term borrowings 35,026 717 4.07% 36,062 738 4.07% Total interest bearing liabilities 412,296 4,170 2.04% 378,287 3,344 1.78% Net interest income / net interest spread $ 11,223 4.14% $ 9,415 3.83% Net interest margin 4.49% 4.13%
Non-Interest Income Other income, excluding securities gains, increased $964,000, or 29.7%, from $3,246,000 to $4,210,000. Securities gains (losses) decreased from $115,000 of gains in 2004 to $2,000 of net losses in 2005. Service charge on deposits increased 23.5% or $341,000. The overdraft protection program increased $173,000, while debit card fees added $90,000 and merchant account service charges added $51,000. Other service charges increased by $126,000. The largest increase in other service charges was by secondary mortgage market fees which grew $131,000 versus the first half of 2004. Insurance fees decreased by $16,000 due to a decline in activity versus the prior year. The Trust and brokerage area of the Bank has done an outstanding job this year increasing income by $448,000 or 39.6% over the first six months of 2004 making it the largest contributor to noninterest income growth. Trust assets under management reached $352 million at June 30, 2005. Trust income grew $192,000 and brokerage income increased $256,000 including $186,000 from Integrity Financial (Advantage Capital) which was purchased in July 2004. Other brokerage fees increased $70,000 versus the first half of 2004. Non-Interest Expense Other expenses rose from $7,093,000 during the first half 2004 to $8,171,000 during the same period of 2005, an increase of $1,078,000, or 15.2%. Salaries increased $480,000 while benefits increased $192,000. Increased expenses for salaries include annual increases and the addition of new employees. Profit sharing expense grew by $77,000, and a 24.3% rise in the cost of employee insurance plans added an additional $65,000 to employee benefit expense. Occupancy and equipment expense combined rose a modest $87,000, or 7.3%. Depreciation expense contributed $67,000 of the expense. Data processing expense increased by $39,000. Rising merchant processing and debit card program costs have been offset by rising revenue in those areas. Most areas of expense growth have been commensurate with growth of the Corporation as a whole. Management has maintained control over increasing expenses in the past and will continue to watch for ways to control rising operating costs going forward. The overhead efficiency ratio of 52.68% for the first six months has improved from the 55.77% reported for the first half of 2004 as rising net interest income and noninterest income have outstripped more modest increases in noninterest expenses. Page 15 of 26 Income Tax Expense Income tax expense increased $449,000, or 61.8%, during the second quarter of 2005 versus the second quarter of 2004. For the first six months of 2005 the income tax expense rose $656,000 or 45.1% over the same period 2004. The Corporation's insurance subsidiary, Cell P-1, is not part of the Corporation's consolidated federal income tax return, but had deferred income tax expense of $30,000 recorded during the first quarter of 2005 increasing the effective income tax rate for the first six months of this year versus last year. The marginal federal income tax bracket is 34% for all periods presented. Effective income tax rates were as follows: Three Months Six Months Ended Ended June June June June 2005 2004 2005 2004 Effective income tax rate 31.5% 27.7% 30.9% 28.3% Provision and Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay. Through this review and evaluation process, an amount deemed adequate to meet current growth and future loss expectations is charged to operations. The provision for loan losses amounted to $24,000 and $30,000 for the second quarter of 2005 and 2004, respectively. These provisions compared to net charge-offs of $13,000 for the second quarter 2005 and $5,000 for the same period last year. The provision for loan losses remained almost flat while loans increased 12.8% on an average daily basis. For the first six months of 2005 the provision for loan losses was $48,000 a 73.3% reduction from the $180,000 taken in the first half of 2004. The provision for 2005 compared to net charge-offs of $17,000 for the same period versus $11,000 of net recoveries for 2004. The 2005 provision has been slowed in order to reduce the unallocated portion of our loan loss reserve. The unallocated portion of the loan loss reserve stood at $1,326,000 and represented 30.5% of the total reserve at June 30, 2005, down from $1,980,000 representing 45.5% of the reserve at June 30, 2004. The loan loss reserve was 43.7% unallocated at December 31, 2004. The reserve at June 30, 2005 represented 1.03% of loans outstanding. The provision for loan losses and the other changes in the allowance for loan losses are shown below: (Dollars in Thousands) Three Months Six Months Ended Ended June June June June 2005 2004 2005 2004 Balance at beginning of period $ 4,338 $ 4,327 $ 4,318 $ 4,161 Recoveries of loans previously charged 11 7 15 28 off Additions to allowance charged to 24 30 48 180 expense ------- ------- ------- ------- Total 4,373 4,364 4,381 4,369 Loans charged off 24 12 32 17 ------- ------- ------- ------- Balance at end of period $ 4,349 $ 4,352 $ 4,349 $ 4,352 ======= ======= ======= =======
Page 16 of 26 Nonperforming Assets / Risk Elements Nonperforming assets at June 30, are as follows: (Dollars in Thousands) 2005 2004 Loans on nonaccrual (cash) basis $ 188 $ 127 Loans whose terms have been renegotiated 0 1,394 OREO 0 0 ---------- ---------- Total nonperforming loans and OREO 188 1,521 ---------- ---------- Loans past due 90 or more days and still accruing 3,078 1,753 ---------- ---------- Total nonperforming and other risk assets $ 3,266 $ 3,274 ========== ========== Ratio of total risk assets to total loans and OREO 0.77% 0.88% Ratio of total risk assets to total assets 0.57% 0.67%
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 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 June 30, 2005 are as follows: Orrstown Regulatory Financial Regulatory Well Capitalized Services, Minimums Minimums Inc. Leverage Ratio 9.45% 4% 5% Risk Based Capital Ratios: Tier I Capital Ratio 11.91% 4% 6% Total (Tier I & II) Capital Ratio (core capital plus allowance for loan losses) 12.95% 8% 10%
The growth experienced during 2005 has been supported by capital growth in the form of retained earnings and capital infusion from the dividend reinvestment and employee stock purchase plans. Dividend reinvestment plan participants have added $520,000 to equity as of June 30, 2005. Also during the first half of 2005 there were numerous Employee Stock Options exercised, increasing capital by $177,000. Equity represented 9.25% of assets at June 30, 2005 which is down from 9.57% at December 31, 2004 due to an influx of funds just prior to June 30. All balance sheet fluctuations exceeding 5% have been created by either the growth that has been experienced during 2005 or single day fluctuations. Management is not aware of any current recommendations by regulatory authorities which, if implemented, would have a material effect on the Corporation's liquidity, capital resources or operations. LIQUIDITY The primary function of asset/liability management is to assure adequate liquidity while minimizing interest rate risk. Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Sources of liquidity include investment securities, loan and lease income and payments, and increases in customer's deposit accounts. Additionally, the Bank is a Federal Home Loan Bank (FHLB) member, and standard credit arrangements available to FHLB members provide increased liquidity. Funds provided from operating activities were a significant source of liquidity for the first six months of 2005. The net increase in deposits of $48,083,000 represented core deposits primarily and $34,984,000 of those funds were channeled into loan growth. Federal funds sold grew $20,607,000 during the same period, increasing liquidity. Page 17 of 26 PART I - FINANCIAL INFORMATION Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk is defined as the exposure to interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks. For domestic banks, the majority of market risk is related to interest rate risk. Interest rate sensitivity management requires the maintenance of an appropriate balance between interest sensitive assets and liabilities. Interest bearing assets and liabilities that are maturing or repricing should be adequately balanced to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. The Corporation has consistently followed a strategy of pricing assets and liabilities according to prevailing market rates while largely matching maturities, within the guidelines of sound marketing and competitive practices. Rate sensitivity is measured by monthly gap analysis, quarterly rate shocks, and periodic simulation. At June 30, 2005, the cumulative gap was $119,127,000 and the RSA/ RSL cumulative ratio was 1.74% which has decreased slightly from the 1.86% since December 31, 2004. The asset biased, or positive, gap position indicates that earnings are naturally enhanced, or more easily maintained, in a rising rate environment. This indicates that the balance sheet is well positioned to react to anticipated rate increases during 2005 and positioned adequately to avoid material earnings damage if rates do not rise. The deposit mix leans heavily toward transaction accounts rather than time deposits. Many of the transaction accounts have discretionary pricing so great flexibility exists for deposit side price adjustments. PART I - FINANCIAL INFORMATION Item 4. Controls and Procedures (a) Evaluation of disclosure controls and procedures: The Corporation's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Corporation's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) under the Securities Exchange Act of 1934, as amended) as of June 30, 2005. Based on such evaluation, such officers have concluded that, as of June 30, 2005, the Corporation's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in the Corporation's periodic filings under the Exchange Act. (b) Changes in internal controls: There have not been any significant changes in the Corporation's internal control over financial reporting or in other factors that could significantly affect such control during the second quarter of 2005. Page 18 of 26 PART II - OTHER INFORMATION Page 19 of 26 OTHER INFORMATION Item 1 - Legal Proceedings The nature of Orrstown Financial Services, Inc.'s business generates a certain amount of litigation involving matters arising out of the ordinary course of business. In the opinion of management, there are no legal proceedings that might have a material effect on the results of operations, liquidity, or the financial position of Orrstown at this time. Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds None Item 3 - Defaults upon Senior Securities Not applicable Item 4 - Submission of Matters to a Vote of Security Holders The Annual Meeting of Orrstown Financial Services, Inc. was held on May 3, 2005. Matters that were voted on by security holders were: 1. Elect three directors to Class A for three year terms expiring in 2008; 2. and transact such other business as may properly come before the meeting. Directors that were re-elected at the Annual Meeting were: Jeffrey W. Coy John S. Ward Joel R. Zullinger Each director received affirmative votes representing at least 69.6% of the shares outstanding. No other matters were voted upon at the Annual Meeting. 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 Page 20 of 26 (b) Reports on From 8-K The Registrant filed the following reports with the Commission on Form 8-K Report Dated June 10, 2005 Registrant announced a planned branch opening in Camp Hill, Pennsylvania in the third quarter of 2005. Report Dated June 28, 2005 Registrant announced the declaration of a regular cash dividend of $0.14 per share, payable on July 29, 2005 with a record date of July 7, 2005. Report Dated July 21, 2005 Registrant announced its quarterly and year- to-date earnings for the period ended June 30, 2005. Report Dated August 2, 2005 Registrant announced it has entered into a definitive agreement to purchase an investment management firm based in Carlisle, Pennsylvania. Page 21 of 26 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 3, 2005 -------------- Page 22 of 26 Exhibit 31.1 CERTIFICATION I, Kenneth R. Shoemaker, President and CEO, certify, that: 1. I have reviewed this quarterly report on Form 10-Q of Orrstown Financial Services, Inc. 2. Based on my knowledge, the quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report. 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act rules 13a - 15(f) and 15d - 15(f)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (d) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of the internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/Kenneth R. Shoemaker ------------------------------ Kenneth R. Shoemaker President and CEO (Principal Executive Officer) August 3, 2005 Page 23 of 26 Exhibit 31.2 CERTIFICATION I, Bradley S. Everly, Sr. Vice President and CFO, certify, that: 1. I have reviewed this quarterly report on Form 10-Q of Orrstown Financial Services, Inc. 2. Based on my knowledge, the quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report. 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act rules 13a - 15(f) and 15d - 15(f)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and (d) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of the internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. By: /s/Bradley S. Everly ------------------------------ Bradley S. Everly Sr. Vice President and CFO (Principal Financial Officer) August 3, 2005 Page 24 of 26 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, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Kenneth R. Shoemaker, Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. /s/ Kenneth R. Shoemaker --------------------------------------- Kenneth R. Shoemaker Chief Executive Officer August 3, 2005 Page 25 of 26 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, 2005 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Bradley S. Everly, Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes- Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. /s/ Bradley S. Everly --------------------------------------- Bradley S. Everly Chief Financial Officer August 3, 2005 Page 26 of 26