Back to GetFilings.com
FORM 10 - Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended June 30, 2003 Commission file number 33-18888
ORRSTOWN FINANCIAL SERVICES, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
Commonwealth of Pennsylvania 23-2530374
- ----------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
77 East King Street 17257
P.O. Box 250, Shippensburg, Pennsylvania ----------
- -------------------------------------------------- (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (717) 532-6114
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filled by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO ________
Class Outstanding at July 30, 2003
- ------------------------------ ----------------------------
(Common Stock, no par value ) 2,529,290
Page 1 of 25
ORRSTOWN FINANCIAL SERVICES, INC.
INDEX
Page
Part I - FINANCIAL INFORMATION
Item 1. Financial statements (unaudited)
Condensed consolidated balance sheets - June 30, 2003
and December 31, 2002 4
Condensed consolidated statements of income - Three months
ended June 30, 2003 and 2002 5
Condensed consolidated statements of income - Six months
ended June 30, 2003 and 2002 6
Condensed consolidated statements of comprehensive income -
Three months & Six months ended June 30, 2003 and 2002 7
Condensed consolidated statements of cash flows - Six
months ended June 30, 2003 and 2002 8
Notes to condensed consolidated financial statements 9 - 11
Item 2. Management's discussion and analysis of financial
condition and results of operations 12 - 17
PART II - OTHER INFORMATION
Other Information 19
Signatures 20
Exhibits 21 - 25
Page 2 of 25
PART I - FINANCIAL INFORMATION
Page 3 of 25
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Unaudited) (Audited)*
June 30, December 31,
(Dollars in Thousands) 2003 2002
ASSETS
Cash and due from banks $ 12,535 $ 10,656
Interest bearing deposits with banks 1,313 1,095
Federal funds sold 14,866 8,217
Securities available for sale 87,035 90,106
Federal Home Loan Bank, Federal Reserve and
Atlantic Central Bankers Bank Stock, at cost
which approximates market value 2,606 2,268
Loans 314,019 281,391
Allowance for loan losses ( 3,989) ( 3,734)
-------- --------
Net Loans 310,030 277,657
Premises and equipment, net 10,512 9,849
Accrued interest receivable 1,633 1,606
Cash value-life insurance 7,052 6,916
Other assets 2,180 1,928
-------- --------
Total assets $ 449,762 $ 410,298
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 46,666 $ 42,704
Interest bearing 297,297 276,464
-------- --------
Total deposits 343,963 319,168
Federal funds purchased and other short
term borrowed funds 24,310 20,808
Long term borrowed funds 37,486 28,539
Accrued interest payable 219 248
Other liabilities 3,446 3,573
-------- --------
Total liabilities 409,424 372,336
-------- --------
Common stock, no par value-$.1041 stated
value per share at June 30, 2003 and
December 31, 2002, 10,000,000 shares
authorized with 2,526,069 shares issued
at June 30, 2003 and 2,398,405 issued
at December 31, 2002 263 250
Additional paid - in capital 32,353 25,913
Retained earnings 6,005 9,750
Accumulated other comprehensive income 1,717 2,049
-------- --------
Total stockholders' equity 40,338 37,962
-------- --------
Total liabilities and stockholders' equity $ 449,762 $ 410,298
======== ========
*Condensed from audited financial statements
The accompanying notes are an integral part of these
condensed financial statements.
Page 4 of 25
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
June June
(Dollars in Thousands) 2003 2002
INTEREST INCOME
Interest and fees on loans $ 4,926 $ 4,599
Interest on federal funds sold 38 57
Interest and dividends on investment securities 915 1,066
Interest income on deposits with banks 5 5
------- -------
Total interest income 5,884 5,727
------- -------
INTEREST EXPENSE
Interest on deposits 1,299 1,544
Interest on borrowed money 417 490
------- -------
Total interest expense 1,716 2,034
------- -------
Net interest income 4,168 3,693
Provision for loan losses 24 150
------- -------
Net interest income after provision for loan losses 4,144 3,543
------- -------
OTHER INCOME
Service charges on deposits 666 548
Other service charges 315 249
Trust department income 375 381
Brokerage income 139 132
Other income 96 82
Securities gains / (losses) ( 7) 17
------- -------
Total other income 1,584 1,409
------- -------
OTHER EXPENSES
Salaries and employee benefits 1,626 1,433
Net occupancy and equipment expenses 522 435
Other operating expenses 1,070 945
------- -------
Total other expense 3,218 2,813
Income before income tax 2,510 2,139
Income tax expenses 693 642
------- -------
Net income $ 1,817 $ 1,497
======= =======
PER SHARE DATA
Earnings per share
Basic earnings per share $ 0.72 $ 0.60
Weighted average number of shares outstanding 2,525,139 2,508,512
Diluted earnings per share $ 0.70 $ 0.59
Weighted average number of shares outstanding 2,595,989 2,555,349
Dividends per share $ 0.21 $ 0.162
The accompanying notes are an integral part of these
condensed financial statements.
Page 5 of 25
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six Months Ended
June June
(Dollars in Thousands) 2003 2002
INTEREST INCOME
Interest and fees on loans $ 9,562 $ 9,141
Interest on federal funds sold 59 113
Interest and dividends on investment securities 1,954 2,068
Interest income on deposits with banks 9 10
------- -------
Total interest income 11,584 11,332
------- -------
INTEREST EXPENSE
Interest on deposits 2,594 3,152
Interest on borrowed money 824 944
------- -------
Total interest expense 3,418 4,096
------- -------
Net interest income 8,166 7,236
Provision for loan losses 276 300
------- -------
Net interest income after provision for loan losses 7,890 6,936
------- -------
OTHER INCOME
Service charges on deposits 1,276 1,024
Other service charges 569 468
Trust department income 694 703
Brokerage income 250 212
Other income 197 162
Securities gains / (losses) 171 18
------- -------
Total other income 3,157 2,587
------- -------
OTHER EXPENSES
Salaries and employee benefits 3,302 2,912
Net occupancy and equipment expenses 1,028 863
Other operating expenses 2,007 1,726
------- -------
Total other expense 6,337 5,501
------- -------
Income before income tax 4,710 4,022
Income tax expenses 1,349 1,191
------- -------
Net income $ 3,361 $ 2,831
======= =======
PER SHARE DATA
Earnings per share
Basic earnings per share $ 1.33 $ 1.13
Weighted average number of shares outstanding 2,522,973 2,505,522
Diluted earnings per share $ 1.30 $ 1.11
Weighted average number of shares outstanding 2,592,089 2,550,497
Dividends per share $ 0.40 $ 0.324
The accompanying notes are an integral part of these
condensed financial statements.
Page 6 of 25
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended
June June
(Dollars in Thousands) 2003 2002
COMPREHENSIVE INCOME
Net Income $ 1,817 $ 1,497
Other comprehensive income, net of tax
Unrealized gain (loss) on investment securities
available for sale 242 722
------- -------
Comprehensive Income $ 2,059 $ 2,219
======= =======
Six Months Ended
June June
(Dollars in Thousands) 2003 2002
COMPREHENSIVE INCOME
Net Income $ 3,361 $ 2,831
Other comprehensive income, net of tax
Unrealized gain (loss) on investment securities
available for sale ( 332) 618
------- -------
Comprehensive Income $ 3,029 $ 3,449
======= =======
The accompanying notes are an integral part of these
condensed financial statements.
Page 7 of 25
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June June
(Dollars in Thousands) 2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,361 $ 2,831
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 448 382
Provision for loan losses 276 300
Other, net ( 379) ( 411)
-------- --------
Net cash provided by operating activities 3,706 3,102
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing
deposits with banks ( 218) ( 420)
Purchases of available for sale securities ( 23,625) ( 15,122)
Sales and maturities of available for sale
securities 26,172 7,284
Net (purchases) redemption of FHLB Stock ( 338) ( 101)
Net (increase) in loans ( 32,649) ( 13,210)
Purchases of bank premises and equipment ( 1,111) ( 850)
-------- --------
Net cash provided (used) by investing activities ( 31,769) ( 22,419)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 24,795 11,352
Cash dividends paid ( 1,011) ( 812)
Proceeds from sale of stock 380 483
Cash paid in lieu of fractional shares ( 22) 0
Net increase (decrease) in short term purchased
funds 3,502 ( 9,038)
Proceeds in long term debt issuance 10,000 5,000
Payments on long term debt ( 1,053) 0
-------- --------
Net cash provided by financing activities 36,591 6,985
-------- --------
Net increase (decrease) in cash and cash equivalents 8,528 ( 12,332)
Cash and cash equivalents at beginning of period 18,873 36,997
-------- --------
Cash and cash equivalents at end of period $ 27,401 $ 24,665
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 3,447 $ 4,186
Income Taxes 1,450 1,135
Supplemental schedule of noncash investing and
financing activities:
Unrealized gain (loss) on investments
available for sale (net of deferred taxes
of ($ 171) and $ 318 at June 30, 2003 and
2002,respectively) ( 332) 618
The accompanying notes are an integral part of these
condensed financial statements.
Page 8 of 25
ORRSTOWN FINANCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(UNAUDITED)
Review of Interim Financial Statements
The condensed consolidated financial statements as of and for the three months
ended and six months ended June 30, 2003 and 2002 have been reviewed by
independent certified public accountants. Their report on their review is
attached as Exhibit 99 to this 10-Q.
Note 1: Basis of Presentation
The financial information presented at and for the three months ended and six
months ended June 30, 2003 and 2002 is unaudited. Information presented at
December 31, 2002 is condensed from audited year-end financial statements.
However, unaudited information reflects all adjustments (consisting solely of
normal recurring adjustments) that are, in the opinion of management, necessary
for a fair presentation of the financial position, results of operations and
cash flows for the interim period.
Note 2: Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Corporation
and its wholly-owned subsidiaries, Orrstown Bank (the Bank) and Pennbanks
Insurance Company Cell P1. All significant intercompany transactions and
accounts have been eliminated.
Cash Flows
For purposes of the Statements of Cash Flows, the Corporation has defined cash
and cash equivalents as those amounts included in the balance sheet captions
"Cash and due from banks" and "Federal funds sold". As permitted by Statement
of Financial Accounting Standards No. 104, the Corporation has elected to
present the net increase or decrease in deposits in banks, loans and deposits in
the Statement of Cash Flows.
Federal Income Taxes
For financial reporting purposes, the provision for loan losses charged to
operating expense is based on management's judgment, whereas for federal income
tax purposes, the amount allowable under present tax law is deducted.
Additionally, deferred compensation is charged to operating expense in the
period the liability is incurred for financial reporting purposes, whereas for
federal income tax purposes, these expenses are deducted when paid. As a result
of these timing differences and timing differences in depreciation expense,
deferred income taxes are provided in the financial statements. Income tax
expense is less than the amount calculated using the statutory tax rate as a
result of tax exempt income earned primarily from state and political
subdivision obligations.
Page 9 of 25
Stock-Based Compensation
The Corporation maintains two stock-based compensation plans. These plans
provide for the granting of stock options to the Corporation's employees and
directors. The Corporation accounts for its stock option plans based on the
intrinsic-value method set forth in APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and related interpretations, under which no compensation
cost has been recognized for any of the periods presented. All options granted
under the plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the Corporation had applied
the fair value recognition provisions of FASB Statement No. 123, "Accounting for
Stock-Based Compensation", to stock-based employee and/or director compensation.
(In thousands, except per share data)
Three Months Ended Six Months Ended
June June June June
2003 2002 2003 2002
Net income
As reported $ 1,817 $ 1,497 $ 3,361 $ 2,831
Pro forma 1,594 1,294 3,138 2,628
Basic earnings per share
As reported $ 0.72 $ 0.60 $ 1.33 $ 1.13
Pro forma 0.63 0.52 1.24 1.05
Diluted earnings per share
As reported $ 0.70 $ 0.59 $ 1.30 $ 1.11
Pro forma 0.61 0.51 1.21 1.03
Investment Securities
Management determines the appropriate classification of securities at the time
of purchase. If management has the intent and the Corporation has the ability
at the time of purchase to hold securities until maturity, they are classified
as securities held to maturity and carried at amortized historical cost.
Securities to be held for indefinite periods of time and not intended to be held
to maturity are classified as available for sale and carried at fair value.
Securities held for indefinite periods of time include securities that
management intends to use as part of its asset and liability management strategy
and that may be sold in response to changes in interest rates, resultant
prepayment risk, and other factors related to interest rate and resultant
prepayment risk changes.
Realized gains and losses on dispositions are based on the net proceeds and the
adjusted book value of the securities sold, using the specific identification
method. Unrealized gains and losses on investment securities available for sale
are based on the difference between book value and fair value of each security.
These gains and losses are credited or charged to other comprehensive income,
whereas realized gains and losses flow through the Corporation's results of
operations.
The Corporation has classified all investments securities as "available for
sale". At June 30, 2003 fair value exceeded amortized cost by $ 2,235,000. In
shareholders' equity, the balance of accumulated other comprehensive income
increased to $ 1,475,000 after recognizing the tax effects of the unrealized
gains. At December 31, 2002, fair value exceeded amortized cost by $ 3,105,000
increasing accumulated other comprehensive income to $ 2,049,000 after
recognizing the tax effects of the unrealized gains.
Page 10 of 25
Note 3: Other Commitments
In the normal course of business, the Bank makes various commitments and incurs
certain contingent liabilities which are not reflected in the accompanying
financial statements. These commitments include various guarantees and
commitments to extend credit and the Bank does not anticipate any losses as a
result of these transactions.
Note 4: Changes in Common Stock
On April 29, 2003 the Board of Directors of Orrstown Financial Services, Inc.
approved a 5% stock dividend, paid May 30, 2003 to shareholders of record on
May 12, 2003. All per share amounts have been adjusted to give retroactive
recognition to the 5% stock dividend.
Page 11 of 25
ORRSTOWN FINANCIAL SERVICES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Summary
Orrstown Financial Services, Inc. recorded net income of $ 1,817,000 for the
second quarter of 2003 compared to $ 1,497,000 for the same period in 2002,
representing an increase of $ 320,000 or 21.4%. Basic earnings per share was
$0.72 for the second quarter of 2003 up $ 0.12 from the $ 0.60 earned during the
second quarter of 2002.
Net income for the first six months of 2003 was $ 3,361,000 compared to
$ 2,831,000 for the same period in 2002, representing an increase of $ 530,000
or 18.7%. Net income per share for the first six months of 2003 was $ 1.33 up
from the $ 1.13 per share realized during the six months ended June 30, 2002.
All per share amounts have been restated reflect the 5% stock dividend paid to
shareholders on May 30, 2003.
The following statistics compare 2003's second quarter and year-to-date
performance to that of 2002:
Three Months Ended Six Months Ended
June June June June
2003 2002 2003 2002
Return on average assets 1.67% 1.60% 1.60% 1.55%
Return on average equity 18.38% 18.08% 17.28% 17.52%
Average equity / Average assets 9.08% 8.82% 9.24% 8.82%
A more detailed discussion of the elements having the greatest impact on net
income follows.
Net Interest Income
Net interest income for the second quarter of 2003 was $ 4,168,000 representing
a growth of $ 475,000, or 12.9% over the $ 3,693,000 realized during the second
quarter of 2002. Growth was due entirely to volume as the net interest margin
tightened from 4.41% in the second quarter 2002 to 4.23% during second quarter
2003.
Net interest income for the first six months of 2003 was $ 8,166,000
representing an increase of $ 930,000, or 12.9% over the $ 7,236,000 generated
during the first six months of 2002. Loan portfolio increases have been
primarily responsible for interest income gains. Commercial loans are up
$ 35,000,000 or 23.7% over first half 2002 amounts. In addition, a 7/1
residential adjustable rate mortgage program that was rolled out within the past
year has been popular. Time deposit volume remained level while core deposits
grew $ 42,000,000 over the same period last year. The combination of higher
rate time deposits being replaced at lower rates and the lowering
discretionarily priced core transaction accounts has decreased interest expense
by 16.6% compared to the first six months of 2002.
Page 12 of 25
Net Interest Income (Continued)
The table that follows states rates on a fully taxable equivalent basis (FTE)
and demonstrates the aforementioned effects:
(Dollars in Thousands) Three Months Ended
June 2003 June 2002
Avg Balance Rates Avg Balance Rates
Interest earning assets $410,134 5.90% $350,869 6.73%
Interest bearing liabilities 348,933 1.97% 301,610 2.70%
-------- --------
Free Funds $ 61,201 $ 49,259
-------- --------
Net interest income $ 4,168 $ 3,693
Net interest spread 3.93% 4.03%
Free funds ratio 14.92% 14.04%
Net interest margin 4.23% 4.41%
(Dollars in Thousands) Six Months Ended
June 2003 June 2002
Avg Balance Rates Avg Balance Rates
Interest earning assets $398,812 6.00% $344,484 6.79%
Interest bearing liabilities 339,372 2.03% 296,271 2.79%
-------- --------
Free Funds $ 59,440 $ 48,213
-------- --------
Net interest income $ 8,166 $ 7,236
Net interest spread 3.97% 4.00%
Free funds ratio 14.90% 14.00%
Net interest margin 4.27% 4.39%
Non-Interest Income and Expense
The following compares three months ended June 30, 2003 to three months ended
June 30, 2002:
Other income increased $ 175,000, or 12.4%, from $ 1,409,000 during the second
quarter of 2002 to $ 1,584,000 during the second quarter of 2003. Fee income
from deposit transactions increased $ 118,000, or 21.5% over 2002. Bounce
protection fees, merchant fees, and debit card fees were the primary
contributors. Securities gains/losses decreased $ 24,000, while asset
management fees remained flat. Loan fees, not including origination fees,
increased $ 96,000. In May 2003, Orrstown Bank kicked off its Secondary Market
Mortgage program. The program is administered through the Federal Home Loan
Bank of Pittsburgh's Mortgage Partnership Program and offers residential
mortgage products and services to customers. The Bank originates single-family
residential mortgage loans for sale in the secondary market and, unlike the
prior secondary market mortgage program, retains the servicing of those loans.
The current refinancing boom has enabled the product to be very profitable from
inception.
Page 13 of 24
Other expenses rose from $ 2,813,000 during the second quarter 2002 to
$ 3,218,000 during 2003's second quarter, resulting in an increase of $ 405,000,
or 14.4%. Salaries and benefits expense grew $ 193,000, or 13.5% due to annual
reviews, staff additions, increases in health insurance costs, the success of
our various incentive compensation programs, and the opening of our twelfth full
service branch in Chambersburg, Pennsylvania on May 14, 2003. This also
contributed to an increase in occupancy and equipment expense of 20.0% over the
prior year. Other operating expenses increased $ 125,000 for the current
quarter versus the second quarter 2002. Increases in professional fees,
insurance costs, travel, and lodging expenses were the primary factors of this
increase.
The following compares six months ended June 30, 2003 to six months ended
June 30, 2002:
Other income grew $ 570,000, or 22.0%, from $ 2,587,000 during the first half of
2002 to $ 3,157,000 during the same period of 2003. Primary areas of growth
included an increase in bounce protection fees of $ 127,000, a $ 124,000
increase in other loan fees generated via significant commercial loan increases
and secondary mortgage market fees, and an increase in securities gains of
$ 153,000 over the prior year. Although trust assets under management have been
growing steadily, income has decreased by $ 9,000 compared to the prior year due
to a contraction in market valuations. Brokerage income increased by $ 38,000
over the prior year period.
Other expenses rose from $ 5,501,000 during the six months of 2002 to
$ 6,337,000 for the six months ended 2003, growing $ 836,000, or 15.2%. Salary
and benefit expense, the largest component of noninterest expense, increased
$ 390,000. The opening of the twelfth branch was also responsible for
investment in premises and equipment rising 6.7% from $ 9,849,000 to
$ 10,512,000 for the current year. This increased occupancy and equipment
expenses by 19.1% over the prior year. Insurance expense increased $ 58,000
over the matching prior year period.
Income Tax Expense
Income tax expense increased $ 51,000, or 7.9%, during the second quarter of
2003 versus the second quarter of 2002. For the first half of 2003 versus 2002,
income tax expense rose $ 158,000, or 13.3%.
Effective income tax rates were as follows:
Three Months Ended Six Months Ended
June June June June
2003 2002 2003 2002
Effective income tax rate 27.6% 30.0% 28.6% 29.6%
The marginal federal income tax bracket is 34% for all periods presented.
Page 14 of 25
Provision and Allowance for Loan Losses
The provision for loan losses and the other changes in the allowance for loan
losses are shown below:
(Dollars in Thousands) Three Months Ended Six Months Ended
June June June June
2003 2002 2003 2002
Balance at beginning of period $ 3,979 $ 3,208 $ 3,734 $ 3,104
Recoveries of loans prev. charged off 4 4 14 5
Additions to allowance charged to exp. 24 150 276 300
------- ------- ------- -------
Total 4,007 3,362 4,024 3,409
Loans charged off 18 8 35 55
------- ------- ------- -------
Balance at end of period $ 3,989 $ 3,354 $ 3,989 $ 3,354
======= ======= ======= =======
In the opinion of management, the allowance, when taken as a whole, is adequate
to absorb reasonably estimated loan losses inherent in the Bank's loan
portfolio. The unallocated portion of the allowance for loan losses was
approximately 53% at June 30, 2003.
Nonperforming Assets / Risk Elements
Nonperforming assets at June 30, are as follows:
(Dollars in Thousands) 2003 2002
Loans on nonaccrual (cash) basis
Loans secured by real estate $ 82 $ 0
Installment loans 22 14
Commercial loans 0 0
Credit card 0 0
------- -------
Total nonaccrual loans 104 14
------- -------
Loans whose terms have been renegotiated
Loans secured by real estate 1,420 1,428
Installment loans 0 0
Commercial loans 0 0
Credit card 0 0
------- -------
Total renegotiated loans 1,420 1,428
------- -------
OREO 261 211
------- -------
Total nonperforming loans and OREO $ 1,785 $ 1,653
======= =======
Ratio of nonperforming assets to total loans and OREO 0.57% 0.63%
Ratio of nonperforming assets to total assets 0.40% 0.43%
Loans past due 90 or more days and still accruing
Loans secured by real estate $ 2,390 $ 1,240
Installment loans 7 20
Commercial loans 6 4
Credit card 0 0
------- -------
Total loans 90 or more days past due $ 2,403 $ 2,917
======= =======
Ratio of loans 90 or more days past due to total loans
And OREO 0.76% 0.48%
Ratio of loans 90 or more days past due to total assets 0.53% 0.33%
------- -------
Total nonperforming and other risk assets $ 4,188 $ 2,917
======= =======
Ratio of total risk assets to total loans and OREO 1.33% 1.11%
Ratio of total risk assets to total assets 0.93% 0.76%
Page 15 of 25
Any loans classified for regulatory purposes as loss, doubtful, substandard or
special mention that have not been disclosed under Item III of Industry Guide 3
do not represent or result from trends or uncertainties which management
reasonably expects will materially impact future operating results, liquidity or
capital resources.
Capital Resources and Balance Sheet Fluctuations
A comparison of Orrstown Financial Services, Inc.'s capital ratios to regulatory
minimum requirements at June 30, 2003 are as follows:
Orrstown Regulatory
Financial Regulatory Well Capitalized
Services, Inc. Minimums Minimums
Leverage Ratio 8.82% 4% 5%
Risk Based Capital Ratios:
Tier I Capital Ratio 12.40% 4% 6%
Total (Tier I & II) Capital
Ratio (core capital plus
allowance for loan losses) 13.65% 8% 10%
The growth experienced during 2003 has been supported by capital growth in the
form of retained earnings and capital infusion from the dividend reinvestment
plan. Dividend reinvestment plan participants have added $ 381,000 to equity as
of June 30, 2003. Equity represented 8.97% of assets at June 30, 2003 which is
down from 9.25% at December 31, 2002 due to significant asset growth and an
equity markdown related to the investment portfolio during the first half of
2003.
All balance sheet fluctuations exceeding 5% have been created by either the
growth that has been experienced during 2003 or single day fluctuations.
Management is not aware of any current recommendations by regulatory authorities
which, if implemented, would have a material effect on the Corporation's
liquidity, capital resources or operations.
Sarbanes-Oxley Act 2002 Requirements
On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act)was
signed into law. The Sarbanes-Oxley Act represents a comprehensive revision of
laws affecting corporate governance, accounting obligations, and corporate
reporting. The Sarbanes-Oxley Act is applicable to all companies with equity or
debt securities registered under the Securities Exchange Act of 1934. In
particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit
committees, including independence, expertise, and responsibilities; (ii)
additional responsibilities regarding financial statements for the Chief
Executive Officer and Chief Financial Officer of the reporting company; (iii)
new standards for auditors and regulation of audits; (iv) increased disclosure
and reporting obligations for the reporting company and their directors and
executive officers; and (v) new and increased civil and criminal penalties for
violation of the securities laws. The Corporation anticipates that it will
incur additional expense in complying with the provisions of the Sarbanes-Oxley
Act and the resulting regulations, but does not expect that such compliance will
have a material impact on the Corporation or the Banks' results of operations or
financial condition. A Code of Ethics for financial officers was approved by
the Board of Directors and adopted during first quarter 2003.
Page 16 of 25
Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Corporation maintains
controls and procedures designed to ensure that information required to be
disclosed in the reports that the Corporation files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized, and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission. Based upon their evaluation of those controls and
procedures preformed within 90 days of the filing date of this report, the Chief
Executive and Chief Financial officers of the Corporation concluded that the
Corporation's disclosure controls and procedures were adequate.
(b) Changes in internal controls. The Corporation made no significant changes
in its internal controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation of the controls by the
Chief Executive and Chief Financial officers.
Page 17 of 25
PART II - OTHER INFORMATION
Page 18 of 25
OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Securities
Not applicable
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8 - K
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350
99 Report of Independent Accountant's on interim financial
statements
(b) Reports on Form 8 - K
None
Page 19 of 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ Kenneth R. Shoemaker
---------------------------------------
(Kenneth R. Shoemaker, President & CEO)
(Duly Authorized Officer)
/s/ Bradley S. Everly
---------------------------------------
(Bradley S. Everly, Senior Vice
President & CFO)
(Chief Financial Officer)
/s/ Robert B. Russell
---------------------------------------
(Robert B. Russell, Controller)
(Chief Accounting Officer)
Date August 5, 2003
--------------
Page 20 of 25
Exhibit 31.1
CERTIFICATION
I, Kenneth R. Shoemaker, President and CEO, certify, that:
1. I have reviewed this quarterly report on Form 10-Q of Orrstown Financial
Services, Inc.
2. Based on my knowledge, the quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this quarterly report based on such evaluation; and
(c) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting.
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
By: /s/ Kenneth R. Shoemaker
----------------------------
Kenneth R. Shoemaker
President and CEO
(Principal Executive Officer)
August 5, 2003
Page 22 of 25
Exhibit 31.2
CERTIFICATION
I, Bradley S. Everly, Sr. Vice President and CFO, certify, that:
1. I have reviewed this quarterly report on Form 10-Q of Orrstown Financial
Services, Inc.
2. Based on my knowledge, the quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this quarterly report based on such evaluation; and
(c) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial
reporting.
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
By: /s/ Bradley S. Everly
----------------------------
Bradley S. Everly
Sr. Vice President and CFO
(Principal Financial Officer)
August 5, 2003
Page 21 of 25
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Orrstown Financial Services,
Inc. (the "Company") on Form 10-Q for the period ending June 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Kenneth R. Shoemaker, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Kenneth R. Shoemaker
-----------------------------------
Kenneth R. Shoemaker
Chief Executive Officer
August 5, 2003
Page 23 of 25
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Orrstown Financial Services,
Inc. (the "Company") on Form 10-Q for the period ending June 30, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Bradley S. Everly, Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-
Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Bradley S. Everly
-----------------------------------
Bradley S. Everly
Chief Financial Officer
August 5, 2003
Page 24 of 25
EXHIBIT 99
INDEPENDENT ACCOUNTANT'S REPORT
Board of Directors
Orrstown Financial Services, Inc.
Shippensburg, Pennsylvania
We have reviewed the accompanying consolidated balance sheet of Orrstown
Financial Services, Inc. and it's subsidiaries as of June 30, 2003 and the
related consolidated statements of income for the three and six months ended
June 30, 2003 and 2002 and consolidated statements of comprehensive income for
the three and six months ended June 30, 2003 and 2002 and consolidated
statements of cash flows for the six months ended June 30, 2003 and 2002. These
financial statements are the responsibility of the Corporation's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the consolidated financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
/s/ Smith Elliott Kearns & Company, LLC
SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, Pennsylvania
August 5, 2003
Page 25 of 25