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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 September 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 October 29, 2003
- ----------------------------- --------------------------------
(Common Stock, no par value ) 2,532,315
Page 2 of 25
ORRSTOWN FINANCIAL SERVICES, INC.
INDEX
Page
Part I - FINANCIAL INFORMATION
Item 1. Financial statements (unaudited)
Condensed consolidated balance sheets - September 30, 2003
and December 31, 2002 4
Condensed consolidated statements of income - Three months
ended September 30, 2003 and 2002 5
Condensed consolidated statements of income - Nine months
ended September 30, 2003 and 2002 6
Condensed consolidated statements of comprehensive income -
Three months & Nine months ended September 30, 2003 and 2002 7
Condensed consolidated statements of cash flows - Nine
months ended September 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 3 of 25
PART I - FINANCIAL INFORMATION
Page 4 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)*
September 30, December
31,
(Dollars in Thousands) 2003 2002_
- --------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 11,382 $ 10,656
Interest bearing deposits with banks 1,494 1,095
Federal funds sold 17,542 8,217
Securities available for sale 87,569 90,106
Federal Home Loan Bank, Federal Reserve and
Atlantic Central Bankers Bank Stock, at cost
which approximates market value 2,666 2,268
Loans 326,220 281,391
Allowance for loan losses ( 3,994) ( 3,734)
--------- ---------
Net Loans 322,226 277,657
Premises and equipment, net 10,993 9,849
Accrued interest receivable 1,681 1,606
Cash value-life insurance 7,120 6,916
Other assets 2,285 1,928
--------- ---------
Total assets $ 464,958 $ 410,298
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 52,264 $ 42,704
Interest bearing 303,421 276,464
--------- ---------
Total deposits 355,685 319,168
Federal funds purchased and other short
term borrowed funds 27,108 20,808
Long term borrowed funds 37,326 28,539
Accrued interest payable 212 248
Other liabilities 3,495 3,573
--------- ---------
Total liabilities 423,826 372,336
--------- ---------
Common stock, no par value-$.1041 stated
value per share at September 30, 2003 and
December 31, 2002, 10,000,000 shares
authorized with 2,529,286 shares issued
at September 30, 2003 and 2,398,405 issued
at December 31, 2002 264 250
Additional paid - in capital 32,551 25,913
Retained earnings 7,208 9,750
Accumulated other comprehensive income 1,109 2,049
--------- ---------
Total stockholders' equity 41,132 37,962
--------- ---------
Total liabilities and stockholders' equity $ 464,958 $ 410,298
========= =========
*Condensed from audited financial statements
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 INCOME (UNAUDITED)
Three Months Ended
September September
(Dollars in Thousands) 2003 2002__
- --------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 4,924 $ 4,760
Interest on federal funds sold 65 84
Interest and dividends on investment securities 852 1,084
Interest income on deposits with banks 2 5
------- -------
Total interest income 5,843 5,933
------- -------
INTEREST EXPENSE
Interest on deposits 1,196 1,526
Interest on borrowed money 471 511
------- -------
Total interest expense 1,667 2,037
------- -------
Net interest income 4,176 3,896
Provision for loan losses 24 150
------- -------
Net interest income after provision for loan losses 4,152 3,746
------- -------
OTHER INCOME
Service charges on deposits 666 589
Other service charges 421 217
Trust department income 378 344
Brokerage income 111 108
Other income 103 86
Securities gains / (losses) 23 ( 6)
------- -------
Total other income 1,702 1,338
------- -------
OTHER EXPENSES
Salaries and employee benefits 1,737 1,567
Net occupancy and equipment expenses 528 464
Other operating expenses 963 962
------- -------
Total other expense 3,228 2,993
------- -------
Income before income tax 2,626 2,091
Income tax expenses 891 509
------- -------
Net income $ 1,735 $ 1,582
======= =======
PER SHARE DATA
Earnings per share
Basic earnings per share $ 0.69 $ 0.63
Weighted average number of shares outstanding 2,528,448 2,512,642
Diluted earnings per share $ 0.66 $ 0.61
Weighted average number of shares outstanding 2,620,325 2,580,556
Dividends per share $ 0.21 $ 0.171
The accompanying notes are an integral part of these
condensed financial statements.
Page 8 of 25
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Nine Months Ended
September September
(Dollars in Thousands) 2003 2002_
- -------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 14,486 $ 13,901
Interest on federal funds sold 124 197
Interest and dividends on investment securities 2,806 3,152
Interest income on deposits with banks 11 15
-------- --------
Total interest income 17,427 17,265
-------- --------
INTEREST EXPENSE
Interest on deposits 3,790 4,678
Interest on borrowed money 1,295 1,455
-------- --------
Total interest expense 5,085 6,133
-------- --------
Net interest income 12,342 11,132
Provision for loan losses 300 450
-------- --------
Net interest income after provision for loan losses 12,042 10,682
-------- --------
OTHER INCOME
Service charges on deposits 1,942 1,613
Other service charges 990 685
Trust department income 1,072 1,047
Brokerage income 361 320
Other income 300 248
Securities gains / (losses) 194 12
-------- --------
Total other income 4,859 3,925
-------- --------
OTHER EXPENSES
Salaries and employee benefits 5,039 4,479
Net occupancy and equipment expenses 1,556 1,327
Other operating expenses 2,970 2,688
-------- --------
Total other expense 9,565 8,494
-------- --------
Income before income tax 7,336 6,113
Income tax expenses 2,240 1,700
-------- --------
Net income $ 5,096 $ 4,413
======== ========
PER SHARE DATA
Earnings per share
Basic earnings per share $ 2.02 $ 1.76
Weighted average number of shares outstanding 2,524,818 2,507,921
Diluted earnings per share $ 1.96 $ 1.72
Weighted average number of shares outstanding 2,601,605 2,560,627
Dividends per share $ 0.61 $ 0.495
The accompanying notes are an integral part of these
condensed financial statements.
Page 10 of 25
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended
September September
(Dollars in Thousands) 2003 2002_
- -------------------------------------------------------------------------------
COMPREHENSIVE INCOME
Net Income $ 1,735 $ 1,582
Other comprehensive income, net of tax
Unrealized gain (loss) on investment securities
available for sale ( 608) 645
------- -------
Comprehensive Income $ 1,127 $ 2,227
======= =======
Nine Months Ended
September September
(Dollars in Thousands) 2003 2002_
- -------------------------------------------------------------------------------
COMPREHENSIVE INCOME
Net Income $ 5,096 $ 4,413
Other comprehensive income, net of tax
Unrealized gain (loss) on investment securities
available for sale ( 940) 1,263
------- -------
Comprehensive Income $ 4,156 $ 5,676
======= =======
The accompanying notes are an integral part of these
condensed financial statements.
Page 12 of 25
ORRSTOWN FINANCIAL SERVICES, INC.
AND ITS WHOLLY-OWNED SUBSIDIARY, ORRSTOWN BANK
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September September
(Dollars in Thousands) 2003 2002__
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,096 $ 4,413
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 695 588
Provision for loan losses 300 450
Other, net ( 234) ( 897)
-------- --------
Net cash provided by operating activities 5,857 4,554
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing
deposits with banks ( 399) ( 556)
Purchases of available for sale securities ( 45,028) ( 24,407)
Sales and maturities of available for sale
securities 46,110 11,335
Net (purchases) redemption of FHLB Stock ( 398) ( 101)
Net (increase) in loans ( 44,869) ( 24,896)
Purchases of bank premises and equipment ( 1,840) ( 1,137)
-------- --------
Net cash provided (used) by investing activities ( 46,424) ( 39,762)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 36,517 28,362
Cash dividends paid ( 1,542) ( 1,244)
Proceeds from sale of stock 578 632
Cash paid in lieu of fractional shares ( 22) 0
Net increase (decrease) in short term purchased
funds 6,300 ( 3,174)
Proceeds in long term debt issuance 10,000 5,000
Payments on long term debt ( 1,213) 0
-------- --------
Net cash provided by financing activities 50,618 29,576
-------- --------
Net increase (decrease) in cash and cash equivalents 10,051 ( 5,632)
Cash and cash equivalents at beginning of period 18,873 36,997
-------- --------
Cash and cash equivalents at end of period $ 28,924 $ 31,365
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 5,121 $ 6,247
Income Taxes 2,100 1,850
Supplemental schedule of noncash investing and
financing activities:
Unrealized gain (loss) on investments
available for sale (net of deferred taxes
of ($484) and $650 at September 30, 2003 and
2002,respectively) ( 940) 1,263
The accompanying notes are an integral part of these
condensed financial statements.
Page 14 of 25
ORRSTOWN FINANCIAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(UNAUDITED)
Review of Interim Financial Statements
The condensed consolidated financial statements as of and for the
three months ended and nine months ended September 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 nine months ended September 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 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.
Page 15 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 occurred during the quarters ended
June 30, 2003 and 2002, and had exercise prices equal to the market
value of the underlying common stock on the dates of grant. Thus,
there is no effect on third quarter results. 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)
Nine Months Ended
September September
2003 2002
---- ----
Net income
As reported $ 5,096 $ 4,413
Pro forma 4,873 4,210
Basic earnings per share
As reported $ 2.02 $ 1.76
Pro forma 1.93 1.68
Diluted earnings per share
As reported $ 1.96 $ 1.72
Pro forma 1.87 1.64
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 September 30, 2003 fair value exceeded
amortized cost by $ 1,681,000. In shareholders' equity, the
balance of accumulated other comprehensive income decreased to
$ 1,109,000 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 17 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 18 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
$ 1,735,000 for the third quarter of 2003 compared to $ 1,582,000
for the same period in 2002, representing an increase of $ 153,000
or 9.7%. Basic earnings per share was $0.69 for the third quarter
of 2003 up $ 0.06 from the $ 0.63 earned during the third quarter
of 2002.
Net income for the first nine months of 2003 was $ 5,096,000
compared to $ 4,413,000 for the same period in 2002, representing
an increase of $ 683,000 or 15.5%. Net income per share for the
first nine months of 2003 was $ 2.02 up from the $ 1.76 per share
realized during the nine months ended September 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 third quarter and year-to-
date performance to that of 2002:
Three Months Ended Nine
Months Ended
September September
September September
2003 2002 2003
2002
------ ------ -----
- - ------
Return on average assets 1.50% 1.58%
1.56% 1.56%
Return on average equity 16.70% 17.81%
17.08% 17.62%
Average equity / Average assets 8.96% 8.88%
9.14% 8.84%
A more detailed discussion of the elements having the greatest
impact on net income follows.
Net Interest Income
Net interest income for the third quarter of 2003 was $ 4,176,000
representing a growth of $ 280,000, or 7.2% over the $ 3,896,000
realized during the third quarter of 2002. Growth was due entirely
to volume as the net interest margin tightened from 4.37% in the
third quarter 2002 to 4.00% during third quarter 2003.
Net interest income for the first nine months of 2003 was
$ 12,342,000 representing an increase of $ 1,210,000, or 10.9% over
the $ 11,132,000 generated during the first nine months of 2002.
Nine month net interest income growth is attributable to volume
increases as the net interest margin has declined by 20 basis
points. Core deposit and loan growth have both been strong. The
maintenance of ample liquidity has served to marginally shrink the
margin temporarily.
Page 19 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
September 2003
September 2002
Avg Balance Rates Avg
Balance Rates
----------- ----- -------
- ---- -----
Interest earning assets $432,054 5.53%
$370,707 6.55%
Interest bearing liabilities 362,657 1.82%
315,844 2.56%
-------- -----
- ---
Free Funds $ 69,397 $
54,863
-------- -----
- ---
Net interest income $ 4,176 $
3,896
Net interest spread 3.71%
3.99%
Free funds ratio 16.06%
14.80%
Net interest margin 4.00%
4.37%
(Dollars in Thousands) Nine Months Ended
September 2003
September 2002
Avg Balance Rates Avg
Balance Rates
----------- ----- -------
- ---- -----
Interest earning assets $410,014 5.83%
$353,321 6.70%
Interest bearing liabilities 347,219 1.96%
302,868 2.71%
-------- -----
- ---
Free Funds $ 62,795 $
50,453
-------- -----
- ---
Net interest income $ 12,342 $
11,132
Net interest spread 3.87%
3.99%
Free funds ratio 15.32%
14.28%
Net interest margin 4.18%
4.38%
Non-Interest Income and Expense
The following compares three months ended September 30, 2003 to
three months ended September 30, 2002:
Other income increased $ 364,000, or 27.2%, from $ 1,338,000 during
the third quarter of 2002 to $ 1,702,000 during the third quarter
of 2003. Fee income increased in all areas but the largest gains
came in secondary mortgage market income of $160,000, loan fees
grew $55,000, asset management income increased $37,000 and the
bounce protection program generated $34,000 of additional revenue.
Page 20 of 25
Other expenses rose from $ 2,993,000 during the third quarter 2002
to $ 3,228,000 during 2003's third quarter, resulting in an
increase of $ 235,000, or 7.9%. Salaries and benefits expense grew
$ 170,000, or 10.8% due to annual reviews, staff additions, and the
success of our various incentive compensation programs. The
opening of our twelfth full service branch in May 2003 contributed
to and increase in occupancy and equipment expense of 13.8% over
the prior year. Other operating expenses remained flat versus
third quarter 2002.
The following compares nine months ended September 30, 2003 to nine
months ended September 30, 2002:
Other income grew $ 934,000, or 23.8%, from $ 3,925,000 during the
first nine months of 2002 to $ 4,859,000 during the same period of
2003. Primary areas of growth included $184,000 of increases
secondary market income, an increase of $160,000 in bounce
protection revenue, a $155,000 increase in loan fees, merchant fee
increases of $77,000 and an increase of $66,000 in asset management
fees.
Other expenses rose from $ 8,494,000 during the first nine months
of 2002 to $ 9,565,000 for the nine months ended September 30,
2003. This is a growth of $ 1,071,000, or 12.6%. Salary and
benefit expense, the largest component of noninterest expense,
increased $ 560,000. Occupancy and equipment expenses grew by
17.3% with one branch added in mid 2002 and another added in mid
2003. Other operating expenses grew moderately at 10.5% less than
our asset growth rate.
Income Tax Expense
Income tax expense increased $ 382,000, or 75.0%, during the third
quarter of 2003 versus the third quarter of 2002. The increase
included $171,000 of deferred federal income tax increases, largely
due to the liberalization of income tax depreciation methods during
2003. For the first nine months of 2003 versus 2002, income tax
expense rose $ 540,000, or 31.8%. The year to date increase
includes $112,000 of deferred federal income tax expense.
Effective income tax rates were as follows:
Three Months Ended Nine
Months Ended
September September
September September
2003 2002
2003 2002
---- ---- ---
- - ----
Effective income tax rate 33.9% 24.3%
30.5% 27.8%
The marginal federal income tax bracket is 34% for all periods
presented.
Page 21 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 Nine Months Ended
September September September September
2003 2002 2003 2002
Balance at beginning of period $ 3,989 $ 3,354 $ 3,734 $ 3,104
Recoveries of loans prev. charged off 2 4 16 9
Additions to allowance charged to exp. 24 150 300 450
------- ------- ------ -------
Total 4,015 3,508 4,050 3,563
Loans charged off 21 12 56 67
------- ------- ------ -------
Balance at end of period $ 3,994 $ 3,496 $ 3,994 $ 3,496
======= ======= ======= =======
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 51% at September 30, 2003.
Nonperforming Assets / Risk Elements
Nonperforming assets at September 30, are as follows:
(Dollars in Thousands) 2003 2002
---- ----
Loans on nonaccrual (cash) basis
Loans secured by real estate $ 131 $ 28
Installment loans 10 9
Commercial loans 6 0
Credit card 0 0
------- -------
Total nonaccrual loans 147 37
------- -------
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 $ 1,828 $ 1,676
======= =======
Ratio of nonperforming assets to total loans and OREO 0.56% 0.61%
Ratio of nonperforming assets to total assets 0.39% 0.41%
Loans past due 90 or more days and still accruing
Loans secured by real estate $ 2,762 $ 1,040
Installment loans 15 9
Commercial loans 1 11
Credit card 0 0
------- -------
Total loans 90 or more days past due $ 2,778 $ 1,060
======= =======
Ratio of loans 90 or more days past due to total loans
And OREO 0.85% 0.39%
Ratio of loans 90 or more days past due to total assets 0.60% 0.26%
------- -------
Total nonperforming and other risk assets $ 4,606 $ 2,736
======= =======
Ratio of total risk assets to total loans and OREO 1.41% 1.00%
Ratio of total risk assets to total assets 0.99% 0.67%
Page 23 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 September 30, 2003 are as
follows:
Orrstown
Regulatory
Financial Regulatory
Well Capitalized
Services, Inc. Minimums
Minimums
Leverage Ratio 8.69% 4%
5%
Risk Based Capital Ratios:
Tier I Capital Ratio 12.36% 4%
6%
Total (Tier I & II) Capital
Ratio (core capital plus
allowance for loan losses) 13.60% 8%
10%
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 $ 579,000 to equity as of September 30,
2003. Equity represented 8.85% of assets at September 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 nine months 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 and a Whistle Blower policy have been adopted
and approved by the Board of Directors during 2003.
Page 24 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 25 of 25
PART II - OTHER INFORMATION
Page 26 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 27 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 November 4, 2003
---------------
Page 28 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 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)
November 4, 2003
Page 29 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 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)
November 4, 2003
Page 30 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 Corporation) on Form 10-Q for the period ending September 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 Corporation,
certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the final condition and results of operations of the
Corporation.
/s/ Kenneth R. Shoemaker
------------------------------------
Kenneth R. Shoemaker
Chief Executive Officer
November 4, 2003
Page 31 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 Corporation) on Form 10-Q for the period ending September 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 Corporation,
certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the final condition and results of operations of the
Corporation.
/s/ Bradley S. Everly
------------------------------------
Bradley S. Everly
Chief Financial Officer
November 4, 2003
Page 32 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 September 30, 2003 and the
related consolidated statements of income for the three and nine months ended
September 30, 2003 and 2002 and consolidated statements of comprehensive income
for the three and nine months ended September 30, 2003 and 2002 and consolidated
statements of cash flows for the nine months ended September 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
November 4, 2003
Page 33 of 25