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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
Commission file number: 33-18888
ORRSTOWN FINANCIAL SERVICES, INC.
---------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2530374
- ------------------------------ -----------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
77 East King Street, P. O. Box 250, Shippensburg, Pennsylvania 17257
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 532-6114
-------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
--------------------------
Title of each class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such 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 mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ X ] No [ ]
As of December 31, 2003, 2,537,011 shares of the registrant's common stock were
outstanding. The aggregate market value of such shares held by nonaffiliates on
that date was $ 169,979,737.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended December 31, 2003
are incorporated by reference into Parts I and II. Portions of the Proxy
Statement for the 2004 Annual Meeting of Security Holders are incorporated by
reference in Part III of this Form 10-K.
ORRSTOWN FINANCIAL SERVICES, INC.
FORM 10-K
INDEX
Page
Part I
Item 1. Business 2
Item 2. Properties 9
Item 3. Legal Proceedings 9
Item 3a. Executive Officers of the Registrant 9
Item 4. Submission of Matters to a Vote of Security Holders 10
Part II
Item 5. Market for Registrant's Common Equity and Related
Security Holder Matters 11
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results
of Operations 11
Item 8. Financial Statements and Supplementary Data 11
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 21
Item 9a. Controls and Procedures 21
Part III
Item 10. Directors and Executive Officers of the Registrant 22
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners
and Management 22
Item 13. Certain Relationships and Related Transactions 23
Item 14. Principal Accountant Fees and Services 23
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 24
Signatures 27
Part I
Item 1. Business.
- --------------------
History and Business
- --------------------
Orrstown Financial Services, Inc. (the Corporation) is a financial
holding company registered under the Gramm-Leach-Bliley Act. Orrstown Financial
Services, Inc. was organized on November 17, 1987, under the laws of the
Commonwealth of Pennsylvania for the purpose of acquiring Orrstown Bank (the
Bank), Shippensburg, Pennsylvania, and such other banks and bank related
activities as are permitted by law and desirable. On March 8, 1988, Orrstown
Financial Services, Inc. acquired 100% ownership of Orrstown Bank, issuing
131,455 shares of Orrstown Financial Services, Inc.'s common stock to the former
Bank shareholders.
Orrstown Financial Services, Inc.'s primary activity consists of
owning and supervising its two subsidiaries, Orrstown Bank and Pennbanks
Insurance Company Cell P1. Orrstown Bank is engaged in providing banking and
bank related services in South Central Pennsylvania, principally Franklin and
Cumberland Counties, where its twelve branches are located in Shippensburg (2),
Carlisle (3), Spring Run, Orrstown, Chambersburg (3), Greencastle and
Mechanicsburg, Pennsylvania. The day-to-day management of Orrstown Bank is
conducted by the subsidiary's officers. Pennbanks Insurance Company Cell P1 is
a reinsurer of credit life, and disability insurance which services customers of
Orrstown Bank. Orrstown Financial Services, Inc. derives a majority of its
current income from Orrstown Bank.
Orrstown Financial Services, Inc. has no employees other than its six
officers who are also employees of the Bank, its subsidiary. On December 31,
2003, the Bank had 126 full-time and 32 part-time employees.
Orrstown Bank was organized as a state-chartered bank in 1987 as part
of an agreement and plan of merger between Orrstown Financial Services, Inc. and
Orrstown Bank, the predecessor of Orrstown Bank, under which Orrstown Bank
became a wholly-owned subsidiary of Orrstown Financial Services, Inc. As
indicated, the Bank is the successor to Orrstown Bank which was originally
organized in 1919.
The Bank is engaged in commercial banking and trust business as
authorized by the Pennsylvania Banking Code of 1965. This involves accepting
demand, time and savings deposits, and granting loans. The Bank grants
agribusiness, commercial and residential loans to customers in South Central
Pennsylvania, principally Franklin and Cumberland Counties. The concentrations
of credit by type of loan are set forth on the face of the balance sheet (page 2
of the annual report to shareholders). The Bank maintains a diversified loan
portfolio and evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Bank upon
the extension of credit, is based on management's credit evaluation of the
customer and collateral standards established in the Bank's lending policies and
procedures.
All secured loans are supported with appraisals of collateral.
Business equipment and machinery, inventories, accounts receivable, and farm
equipment are considered appropriate security, provided they meet acceptable
standards for liquidity and marketability.
-2-
Loans secured by equipment and/or other non real estate collateral
normally do not exceed 70% of appraised value or cost, whichever is lower.
Loans secured by real estate generally do not exceed 80% of the appraised value
of the property. Loan to collateral values are monitored as part of the loan
review, and appraisals are updated as deemed appropriate in the circumstances.
Administration and supervision over the lending process is provided by
the Bank's Credit Administration Department via loan reviews. The loan review
process is continuous, commencing with the approval of a loan. Each new loan is
reviewed by the Credit Administration Department for compliance with banking
regulations and lending policy requirements for documentation, collateral
standards, and approvals.
The Credit Administration Department continues to monitor and evaluate
loan customers utilizing risk-rating criteria established in the lending policy
in order to spot deteriorating trends and detect conditions which might indicate
potential problem loans.
Reports of the results of the loan reviews are submitted quarterly to
the Directors' Credit Administration Committee for approval and provide the
basis for evaluating the adequacy of the allowance for loan losses.
Through its trust department, the Bank renders services as trustee,
executor, administrator, guardian, managing agent, custodian, investment
advisor, and other fiduciary activities authorized by law.
As of December 31, 2003, the Corporation had total assets of
approximately $ 472 million, total shareholders' equity of approximately $ 43
million and total deposits of approximately $ 359 million.
Regulation and Supervision
- --------------------------
Orrstown Financial Services, Inc. is a financial holding company, and
is registered as such with the Board of Governors of the Federal Reserve System
(the Federal Reserve Board). As a registered bank holding company and financial
holding company, the Corporation is subject to regulation under the Bank Holding
Company Act of 1956 and to inspection, examination, and supervision by the
Federal Reserve Board.
The operations of the Bank are subject to federal and state statutes
applicable to banks chartered under the banking laws of the United States, and
to banks whose deposits are insured by the Federal Deposit Insurance
Corporation. Bank operations are also subject to regulations of the
Pennsylvania Department of Banking, the Federal Reserve Board, and the Federal
Deposit Insurance Corporation (FDIC).
Several of the more significant regulatory provisions applicable to
banks and financial holding companies to which the Corporation and its
subsidiaries are subject are discussed below, along with certain regulatory
matters concerning the Corporation and its subsidiaries. To the extent that the
following information describes statutory or regulatory provisions, it is
qualified in its entirety by reference to the particular statutory provisions.
Any change in applicable law or regulation may have a material effect on the
business and prospects of the Corporation and its subsidiaries.
-3-
Financial and Bank Holding Company Activities
- ---------------------------------------------
"Financial in Nature" Requirement. As a financial holding company,
the Corporation may engage in, and acquire companies engaged in, activities that
are considered "financial in nature", as defined by the Gramm-Leach-Bliley Act
and Federal Reserve Board interpretations. These activities include, among
other things, securities underwriting, dealing and market-making, sponsoring
mutual funds and investment companies, insurance underwriting and agency
activities, and merchant banking. If any banking subsidiary of the Corporation
ceases to be "well capitalized" or "well managed" under applicable regulatory
standards, the Federal Reserve Board may, among other things, place limitations
on the Corporation's ability to conduct the broader financial activities
permissible for financial holding companies or, if the deficiencies persist,
require the Corporation to divest the banking subsidiary. In addition, if any
banking subsidiary of the Corporation receives a Community Reinvestment Act
rating of less than satisfactory, the Corporation would be prohibited from
engaging in any additional activities other than those permissible for bank
holding companies that are not financial holding companies. The Corporation may
engage directly or indirectly in activities considered financial in nature,
either de novo or by acquisition, as long as it gives the Federal Reserve Board
after-the-fact notice of the new activities.
Interstate Banking and Branching. As the bank holding company, the
Corporation is required to obtain prior Federal Reserve Board approval before
acquiring more than 5% of the voting shares, or substantially all of the assets,
of a bank holding company, bank, or savings association. Under the Riegle-Neal
Interstate Banking and Branching Efficiency Act (Riegle-Neal), subject to
certain concentration limits and other requirements, bank holding companies such
as the Corporation may acquire banks and bank holding companies located in any
state. Riegle-Neal also permits banks to acquire branch offices outside their
home states by merging with out-of-state banks, purchasing branches in other
states, and establishing de novo branch offices in other states. The ability of
banks to acquire branch offices is contingent, however, on the host state having
adopted legislation "opting in" to those provisions of Riegle-Neal. In
addition, the ability of a bank to merge with a bank located in another state is
contingent on the host state not having adopted legislation "opting out" of that
provision of Riegle-Neal.
Control Acquisitions. The Change in Bank Control Act prohibits a
person or group of persons from acquiring "control" of a bank holding company,
unless the Federal Reserve Board has been notified and has not objected to the
transaction. Under a rebuttable presumption established by the Federal Reserve
Board, the acquisition of 10% or more of a class of voting stock of a bank
holding company with a class of securities registered under Section 12 of the
Exchange Act, such as the Corporation, would, under the circumstances set forth
in the presumption, constitute acquisition of control of the bank holding
company. In addition, a company is required to obtain the approval of the
Federal Reserve Board under the Bank Holding Company Act before acquiring 25%
(5% in the case of an aquiror that is a bank holding company) or more of any
class of outstanding voting stock of a bank holding company, or otherwise
obtaining control or a "controlling influence" over that bank holding company.
-4-
Liability for Banking Subsidiaries
- ----------------------------------
Under Federal Reserve Board policy, a bank holding company is expected
to act as a source of financial and managerial strength to each of its
subsidiary banks and to commit resources to their support. This support may be
required at times when the bank holding company may not have the resources to
provide it. Similarly, under the cross-guarantee provisions of the Federal
Deposit Insurance Act, the FDIC can hold any FDIC-insured depository institution
liable for any loss suffered or anticipated by the FDIC in connection with (1)
the "default" of a commonly controlled FDIC-insured depository institution; or
(2) any assistance provided by the FDIC to a commonly controlled FDIC-insured
depository institution "in danger of default".
Capital Requirements
- --------------------
Information concerning the Corporation and its subsidiaries with
respect to capital requirements is incorporated by reference from Note 15,
"Regulatory Matters", of the "Notes to Consolidated Financial Statements"
included under Item 8 of this report, and from the "Capital Adequacy and
Regulatory Matters" section of the "Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations", included under Item
7 of this report.
FDICIA
- ------
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA), and the regulations promulgated under FDICIA, among other things,
established five capital categories for insured depository institutions - well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized - and requires federal bank
regulatory agencies to implement systems for "prompt corrective action" for
insured depository institutions that do not meet minimum capital requirements
based on these categories. Unless a bank is well capitalized, it is subject to
restrictions on its ability to offer brokered deposits and on certain other
aspects of its operations. An undercapitalized bank must develop a capital
restoration plan and its parent bank holding company must guarantee the bank's
compliance with the plan up to the lesser of 5% of the bank's assets at the time
it became undercapitalized and the amount needed to comply with the plan. As of
December 31, 2003, the Bank was considered well capitalized based on the
guidelines implemented by the bank regulatory agencies.
Dividend Restrictions
- ---------------------
The Corporation's funds for cash distributions to its shareholders are
derived from a variety of sources, including cash and temporary investments.
One of the principal sources of those funds is dividends received from its
subsidiary Orrstown Bank. Various federal laws limit the amount of dividends
the Bank can pay to the Corporation without regulatory approval. In addition,
federal bank regulatory agencies have authority to prohibit the Bank from
engaging in an unsafe or unsound practice in conducting their business. The
payment of dividends, depending upon the financial condition of the bank in
question, could be deemed to constitute an unsafe or unsound practice. The
ability of the Bank to pay dividends in the future is currently, and could be
further, influenced by bank regulatory policies and capital guidelines.
Additional information concerning the Corporation and its banking subsidiary
with respect to dividends is incorporated by reference from Note 15, "Regulatory
Matters", of the "Notes to Consolidated Financial
-5-
Statements" included under Item 8 of this report, and the "Capital Adequacy and
Regulatory Matters" sections of "Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations", included under Item
7 of this report.
Depositor Preference Statute
- ----------------------------
In the "liquidation or other resolution" of an institution by any
receiver, U.S. federal legislation provides that deposits and certain claims for
administrative expenses and employee compensation against the insured depository
institution would be afforded a priority over the general unsecured claims
against that institution, including federal funds and letters of credit.
Other Federal Laws and Regulations
- ----------------------------------
Our operations are subject to additional federal laws and regulations
applicable to financial institutions, including, without limitation:
- Privacy provisions of the Gramm-Leach-Bliley Act and related
regulations, which require us to maintain privacy policies intended
to safeguard customer financial information, to disclose the
policies to our customers and to allow customers to "opt out" of
having their financial service providers disclose their
confidential financial information to non-affiliated third parties,
subject to certain exceptions;
- Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes
procedures for complying with administrative subpoenas of financial
records;
- Consumer protection rules for the sale of insurance products by
depository institutions, adopted pursuant to the requirements of
the Gramm-Leach-Bliley Act; and
- USA Patriot Act, which requires financial institutions to take
certain actions to help prevent, detect and prosecute international
money laundering and the financing of terrorism.
Sarbanes-Oxley Act of 2002
- --------------------------
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley
Act of 2002. The Sarbanes-Oxley Act represents a comprehensive revision of laws
affecting corporate governance, accounting obligations and corporate reporting.
The Sarbanes-Oxley Act is applicable to all companies with equity securities
registered or that file reports under the Securities Exchange Act of 1934. In
particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit
committees, including independence, expertise, and responsibilities; (ii)
additional responsibilities regarding financial statements for the Chief
Executive Officer and Chief Financial Officer of the reporting company; (iii)
new standards for auditors and regulation of audits; (iv) increased disclosure
and reporting obligations for the reporting company and its directors and
executive officers; and (v) new and increased civil and criminal penalties for
violations of the securities laws. Many of the provisions were effective
immediately while other provisions become effective over a period of time and
are subject to rulemaking by the SEC. Because the Corporation's common stock is
registered with the SEC, it is currently subject to this Act.
-6-
Future Legislation
- ------------------
Changes to the laws and regulations in the state where the Corporation
and the Bank do business can affect the operating environment of bank holding
companies and their subsidiaries in substantial and unpredictable ways. The
Corporation cannot accurately predict whether those changes in laws and
regulations will occur, and, if those changes occur, the ultimate effect they
would have upon the financial condition or results of operations of the
Corporation.
Important Factors Relating to Forward Looking Statements
- --------------------------------------------------------------
This Report contains statements (including, without limitation,
statements in "Management's Discussion and Analysis of Financial Condition and
Results of Operations," included in this Report under Item 7), that are
considered "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. In addition, the Corporation may make other
written and oral communications from time to time that contain such statements.
Forward-looking statements, including statements as to industry trends, future
expectations and other matters that do not relate strictly to historical facts,
are based on certain assumptions by management, and are often identified by
words or phrases such as "anticipated", "believe", "expect", "intend", "seek",
"plan", "objective", "trend", and "goal". Forward-looking statements are
subject to various assumptions, risks, and uncertainties, which change over
time, and speak only as of the date they are made.
The Corporation undertakes no obligation to update any forward-looking
statements. Actual results could differ materially from those anticipated in
forward-looking statements and future results could differ materially from
historical performance. In addition to factors mentioned elsewhere in this
Report or previously disclosed in our SEC reports (accessible on the SEC's
website at www.sec.gov or on our website at www.orrstown.com), the following
factors, among others, could cause actual results to differ materially from
forward-looking statements and future results could differ materially from
historical performance:
- general political and economic conditions may be less favorable
than expected;
- developments concerning credit quality in various corporate lending
industry sectors as well as consumer and other types of credit, may
result in an increase in the level of our provision for credit
losses, nonperforming assets, net charge-offs and reserve for
credit losses;
- customer borrowing, repayment, investment, and deposit practices
generally may be less favorable than anticipated; and interest rate
and currency fluctuations, equity and bond market fluctuations, and
inflation may be grater than expected;
- the mix of interest rates and maturities of our interest earning
assets and interest bearing liabilities (primarily loans and
deposits) may be less favorable than expected;
- competitive product and pricing pressures among financial
institutions within our markets may increase;
-7-
- legislative or regulatory developments, including changes in laws
or regulations concerning taxes, banking, securities, capital
requirements and risk-based capital guidelines, reserve
methodologies, deposit insurance and other aspects of the financial
services industry, may adversely affect the businesses in which we
are engaged or our financial results;
- legal and regulatory proceedings and related matters with respect
to the financial services industry, including those directly
involving the Corporation and its subsidiaries, could adversely
affect the Corporation or the financial services industry
generally;
- pending and proposed changes in accounting rules, policies,
practices, and procedures could adversely affect our financial
results;
- instruments and strategies used to manage exposure to various types
of market and credit risk could be less effective than anticipated,
and we may not be able to effectively mitigate our risk exposures
in particular market environments or against particular types of
risk;
- terrorist activities or other hostilities, including the situation
surrounding Iraq, may adversely affect the general economy,
financial and capital markets, specific industries, and the
Corporation; and
- technological changes, including the impact of the Internet on our
businesses, may be more difficult or expensive than anticipated.
Competition
- -----------
The Bank's principal market area consists of Franklin County and
Cumberland County, Pennsylvania. It services a substantial number of depositors
in this market area, with the greatest concentration within a radius of
Chambersburg, Shippensburg, and Carlisle, Pennsylvania.
The Bank, like other depository institutions, has been subjected to
competition from less heavily regulated entities such as credit unions,
brokerage firms, money market funds, consumer finance and credit card companies,
and other commercial banks, many of which are larger than the Bank. The
principal methods of competing effectively in the financial services industry
include improving customer service through the quality and range of services
provided, improving efficiencies and pricing services competitively. Orrstown
Bank is competitive with all competing financial institutions in its service
area with respect to interest rates paid on time and savings deposits, service
charges on deposit accounts and interest rates charged on loans.
One outgrowth of the competitive environment discussed above has been
significant consolidation within the financial services industry on a global,
national, and regional level. We continue to implement strategic initiatives
focused on expanding our core businesses and to explore, on an ongoing basis,
acquisition, divestiture, and joint venture opportunities. We analyze each of
our products and businesses in the context of customer demands, competitive
advantages, industry dynamics, and growth potential.
-8-
The Corporation files periodic reports with the Securities and
Exchange Commission (SEC) in the form of 10-Q's - quarterly reports; 10-K -
annual report; annual proxy statements and Form 8-K for any significant events
that may arise during the year. Copies of the Corporation's filings may be
obtained through the SEC's internet site at www.sec.gov or by accessing the
Corporation's website at www.orrstown.com.
Item 2. Properties.
- --------------------
Orrstown Bank owns buildings in Orrstown, Shippensburg (2), Carlisle
(2), Spring Run, Chambersburg (2), and Mechanicsburg, Pennsylvania. Offices of
the Bank are located in each of these buildings. It also leases space for
offices located in Greencastle, Chambersburg, and Carlisle, Pennsylvania.
Item 3. Legal Proceedings.
- ---------------------------
Orrstown Financial Services, Inc. is an occasional party to legal
actions arising in the ordinary course of its business. In the opinion of
management, the Corporation has adequate legal defenses and/or insurance
coverage respecting any and each of these actions and does not believe that they
will materially affect the Corporation's operations or financial position.
Item 3a. Executive Officers of Registrant
- ------------------------------------------
The following table sets forth selected information about the
principal officers of the holding company, each of whom is elected by the Board
of Directors and each of whom holds office at the discretion of the Board.
Name/Office Held Held Employe Age as
Since e of
Since 3/10/04
Joel R. Zullinger, Chairman of the Board 1991 (1) 55
Jeffrey W. Coy, Vice Chairman of the Board 1988 (1) 52
Kenneth R. Shoemaker, President, CEO 1987 1986 56
Bradley S. Everly, Senior Vice President, Treasurer 1997 1997 52
Stephen C. Oldt, Executive Vice President, 1987 1987 61
Assistant Secretary
Philip E. Fague, Executive Vice President, 2001 1988 44
Assistant Treasurer
Denver L. Tuckey, Secretary 1999 (1) 70
Jeffrey W. Embly, Vice President 1999 1997 33
(1) These officers are not employees of the Corporation
-9-
Senior Operating Officers of the Bank
Name/Office Held Held Bank Age as of
Since Employee 3/10/04
Since
Kenneth R. Shoemaker, President, 1987 1986 56
Chief Executive Officer
Stephen C. Oldt, Executive Vice 1987 1987 61
President, Chief Operations Officer
Philip E. Fague, Executive Vice President, 1999/ 1988 44
Chief Sales and Service Officer 2000
Bradley S. Everly, Senior Vice 1997 1997 52
President, Chief Financial Officer
Benjamin S. Stoops, Vice President, 1998 1998 52
Chief Technology Officer
Jeffrey W. Embly, Vice President, 1999 1997 33
Senior Loan Officer
Barbara E. Brobst, Vice President, 2001 1997 45
Senior Trust Officer
Nathan A. Eifert, Vice President, 2002 2000 35
Director of Marketing
Stephen C. Caldwell, Vice President, 2002 2001 55
Director of Human Resources
Item 4. Submission of Matters to Vote of Security Holders.
- -----------------------------------------------------------
None
-10-
Part II
Item 5. Market for Registrant's Common Stock and Related Security Holder
- -------------------------------------------------------------------------
Matters.
--------
Orrstown Financial Services, Inc.'s common stock is not traded on a
national securities exchange, but is traded through the local and over the
counter local markets under the symbol ORRF. At December 31, 2003, the
approximate number of shareholders of record was approximately 2,338. The price
ranges for Orrstown Financial Services, Inc. common stock set forth below are
the approximate bid prices obtained from brokers who make a market in the stock.
Market Cash Market Cash
Price Dividend Price Dividend
Dividend (1) 2003 2002
High Low High Low
First Quarter $ 48.57 $ 44.76 $ 0.19 $ 39.05 $ 36.71 $ 0.162
Second Quarter 58.00 46.19 0.21 47.62 37.38 0.162
Third Quarter 67.50 60.00 0.21 47.62 41.90 0.171
Fourth Quarter 68.00 63.75 0.23 44.76 43.81 0.191
(1) Note: All per share data has been restated after giving
retroactive recognition to a 5% stock dividend effective May 30, 2003.
See Note 15 to the financial statements contained in the annual
shareholders' report for the year ended December 31, 2003 for restrictions on
the payment of dividends.
Item 6. Selected Financial Data.
- -----------------------------------
The selected five-year financial data on page 26 of the annual
shareholders' report for the year ended December 31, 2003 is incorporated herein
by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
- --------------------------------------------------------------------------
Results of Operations.
- ----------------------
Contractual obligations of the Corporation as of December 31, 2003 are
as follows:
Payments due by period
- - - - - - - - - - - - - - - - - - - - - - - - - -
(In thousands) Total Less 1 - 3 3 - 5 More than
Contractual than 1 years years 5 years
obligations year
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Long-term debt $ 37,193 $ 1,653 $ 7,707 $ 13,679 $ 14,154
obligations
Operating lease 141 162
obligations 454 151 0
-------- ------- ------- -------- --------
Total $ 37,647 $ 1,794 $ 7,869 $ 13,830 $ 14,154
======== ======= ======= ======== ========
All other information required by Item 7 is included in "Management's
Discussion and Analysis of Financial Condition and Results of Operations", on
pages 18 through 25 of the annual shareholders' report which are incorporated
herein by reference.
Item 8. Financial Statements and Supplementary Data.
- -------------------------------------------------------
The financial statements and supplementary data, some of which is
required under Guide 3 (statistical disclosures by bank holding companies) are
shown on pages 2 through 26 of the annual shareholders' report for the year
ended December 31, 2003 and are incorporated herein by reference. Certain
-11-
statistical information required in addition to those included in the annual
shareholders' report are submitted herewith as follows.
Description of Statistical Information Page
Changes in net interest income tax equivalent yields 13
Investment portfolio 14
Loan portfolio 15
Summary of loan loss experience 16
Nonaccrual, delinquent and impaired loans 17
Allocation of allowances for loan losses 18
Deposits and return on equity and assets 19
Consolidated summary of operations 20
-12-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
CHANGES IN NET INTEREST INCOME TAX EQUIVALENT YIELDS
2003 Versus 2002 2002 Versus 2001
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
Average Average Total Average Average Total
Volume Rate Increase Volume Rate Increase
(Decrease) (Decrease)
(000 omitted)
Interest Income
Loans (net of $ 3,507 ($ 2,529) $ 978 $ 2,598 ($ 3,287) ($ 689)
unearned
discounts)
Taxable investment 494 ( 1,004) ( 510) 230 ( 609) ( 379)
securities
Nontaxable ( 29) ( 25) ( 54) 769 ( 56) 713
investment
securities
Other short-term ( 36) ( 83) ( 119) 17 ( 240) ( 223)
investments
------- ------- ------- ------- ------- ------
Total interest 3,936 ( 3,641) 295 3,614 ( 4,192) ( 578)
income
------- ------- ------- ------- ------- ------
Interest Expense
Interest bearing 553 ( 720) ( 167) 927 ( 1,180) ( 253)
demand
Savings deposits 26 ( 87) ( 61) 40 ( 140) ( 100)
Time deposits 136 ( 962) ( 826) ( 479) ( 1,446) ( 1,925)
Short-term ( 13) ( 142) ( 155) ( 8) ( 503) ( 511)
borrowings
Long-term 180 ( 199) ( 19) 106 ( 9) 97
borrowings
------- ------- ------- ------- ------- ------
Total interest 882 ( 2,110) ( 1,228) 586 ( 3,278) ( 2,692)
expense
------- ------- ------- ------- ------- ------
Net interest income $ 1,523 $ 2,114
======= =======
Changes which are attributed in part to volume and in part to rate are
allocated in proportion to their relationships to the amounts of changes.
-13-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
INVESTMENT PORTFOLIO
The following table shows the maturities of investment securities at
book value as of December 31, 2003, and weighted average yields of such
securities. Yields are shown on a tax equivalent basis, assuming a 34% federal
income tax rate.
Within 1 After 1 After 5 After 10 Total
year year but years but years
within 5 within 10
years years
(000 omitted)
Bonds:
U. S. Treasury
Book value $ 1,007 $ 27 $ 0 $ 28 $ 1,062
Yield 5.78% 5.29% 0% 5.35% 5.76%
U. S. Government
agencies
Book value 0 13,988 0 0 13,988
Yield 0% 2.98% 2.98%
State and municipal
Book value 0 875 2,521 18,626 22,022
Yield 0% 9.01% 7.69% 7.99% 8.00%
Corporate
Book value 1,000 0 0 945 1,945
Yield 2.41% 0% 0% 1.92% 2.17%
Trust preferred
Book value 0 0 0 1,000 1,000
Yield 0% 0% 0% 9.25% 9.25%
Total book value $ 2,007 $ 14,890 $ 2,521 $ 20,599 $ 40,017
======= ======== ======= ======== ========
Yield 7.69%
4.10% 3.34% 7.77% 5.93%
==== ==== ==== ==== ====
Mortgage-backed
securities:
Total book value $ 45,867
========
Yield 4.02%
========
Equity Securities:
Total book value $ 1,472
========
Yield 4.68%
========
Total Investment $ 87,356
Securities
========
Yield 4.91%
========
-14-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
LOAN PORTFOLIO
The following table presents the loan portfolio at the end of each of the
last five years:
2003 2002 2001 2000 1999
(000 omitted)
Commercial, financial
and agricultural $ 38,186 33,806 $ 28,534 $23,938 $ 23,938
Real estate - Construction 21,016 22,048 20,480 17,425 15,580
Real estate - Mortgage 277,985 217,791 192,192 157,722 134,046
Installment and other
personal loans (net
of unearned
discount) 7,867 7,746 8,610 10,096 9,562
--------- --------- --------- --------- ---------
Total loans $ 345,054 $ 281,391 $ 249,816 $ 209,181 $ 180,691
========= ========= ========= ========= =========
Presented below are the approximate maturities of the loan portfolio
(excluding real estate mortgages, installments, and credit cards) at December
31, 2003:
Under One One to Over Five Total
Year Five Years
years
(000 omitted)
Commercial, financial and agricultural $ 6,032 $ 7,236 $ 24,918 $ 38,186
Real estate - Construction 2,905 3,477 14,634 21,016
------- -------- -------- --------
Total $ 8,937 $ 10,713 $ 39,552 $ 59,202
======= ======== ======== ========
The following table presents the approximate amount of fixed rate
loans and variable rate loans due as of December 31, 2003:
Fixed Rate Variable
Loans Rate Loans
(000 omitted)
Due within one year $ 886 $ 16,630
Due after one but within five years 22,094 9,833
Due after five years 79,975 215,636
------------ ----------
Total $ 102,955 $ 242,099
============ ==========
-15-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31
2003 2002 2001 2000 1999
(000 omitted)
Average total loans outstanding $ 313,833 $ 264,296 $ 233,103 $ 192,902 $ 169,458
(net of unearned income)
========= ========= ========= ========= =========
Allowance for loan losses, $ 3,734 $ 3,104 $ 2,691 $ 2,455 $ 1,971
beginning of period
Additions to provision for loan 491 720 504 360 547
losses charged to operations
Loans charged off during the
year
Mortgages 12 0 0 0 0
Commercial 4 48 67 99 97
Installment 33 36 2 19 24
Personal credit lines and credit 32 17 29 11 7
cards
--------- --------- --------- --------- ---------
Total charge-off's 81 101 98 129 128
--------- --------- --------- --------- ---------
Recoveries of loans previously
charged off:
Mortgages 3 0 0 0 0
Commercial 0 3 6 1 59
Installment 8 8 1 2 1
Personal credit lines and credit 6 0 0 2 5
cards
--------- --------- --------- --------- ---------
Total recoveries 17 11 7 5 65
--------- --------- --------- --------- ---------
Net loans charged off 64 90 91 124 63
(recovered)
Allowance for loan losses, end $ 4,161 $ 3,734 $ 3,104 $ 2,691 $ 2,455
of period
========= ========= ========= ========= =========
Ratio of net loans charged off .02% .03% .04% .06% .04%
to average loans outstanding
========= ========= ========= ========= =========
The provision is based on an evaluation of the adequacy of the
allowance for possible loan losses. The evaluation includes, but is not
limited to, review of net loan losses for the year, the present and
prospective financial condition of the borrowers, and
evaluation of current and projected economic conditions.
-16-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
NONACCRUAL, DELINQUENT AND IMPAIRED LOANS
The following table sets forth the outstanding balances of those
loans on anonaccrual status and those on accrual status which are contractually
past due as to principal or interest payments for 30 days or more at
December 31.
2003 2002 2001 2000 1999
(000 omitted)
Nonaccrual loans $ 130 $ 85 $ 56 $ 12 $ 64
======== ======== ======== ======== ========
Accrual loans:
Restructured $ 0 $ 1,428 $ 0 $ 0 $ 0
30 through 89 days past due 1,440 1,419 2,244 865 3,420
90 days or more past due 2,743 1,446 644 814 97
-------- -------- -------- -------- --------
Total accrual loans $ 4,183 $ 4,293 $ 2,888 $ 1,679 $ 3,517
======== ======== ======== ======== ========
See Note 6 of the notes to consolidated financial statements for
details of income recognized and foregone revenue on nonaccrual loans for the
past three years, and discussion concerning impaired loans at December 31,
2003.
-17-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
The following is an allocation by loan categories of the allowance for loan
losses at December 31 for the last five years. In retrospect the specific
allocation in any particular category may prove excessive or inadequate and
consequently may be reallocated in the future to reflect the then current
conditions. Accordingly, the entire allowance is available to absorb losses in
any category:
Years Ended December 31
2003 2002
Allowanc Percentage Allowance Percentage
e Amount of Loans Amount of Loans
to Total to Total
Loans Loans
(000 omitted)
Commercial, financial and $ 928 10.75% $ 806 12.01%
agricultural
Commercial, real estate secured 828 44.20 545 41.37
Real estate - Construction 0 6.37 0 7.84
Real estate - Mortgage 326 35.78 255 36.03
Installment 9 2.90 28 2.75
Unallocated 2,070 0.00 2,100 0.00
------- ------ ------- ------
Total $ 4,161 100.00% $ 3,734 100.00%
======= ====== ======= ======
Years Ended December 31
2001 2000
Allowanc Percentage Allowance Percentage
e Amount of Loans Amount of Loans
to Total to Total
Loans Loans
(000 omitted)
Commercial, financial and $ 466 11.42% $ 43 11.74%
agricultural
Commercial, real estate secured 563 46.42 786 21.29
Real estate - Construction 0 8.20 0 8.30
Real estate - Mortgage 350 30.51 56 53.86
Installment 33 3.45 34 4.81
Unallocated 1,692 0.00 1,772 0.00
------- ------ ------- ------
Total $ 3,104 100.00% $ 2,691 100.00%
======= ====== ======= ======
Years Ended December 31
1999
Allowance Percentage of
Amount Loans to Total
Loans
(000 omitted)
Commercial, financial and $ 45 11.90%
agricultural
Commercial, real estate secured 609 18.03
Real estate - Construction 0 8.62
Real estate - Mortgage 93 56.16
Installment 27 5.29
Unallocated 1,681 0.00
------- -------
Total $ 2,455 100.00%
======= =======
-18-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
DEPOSITS
The average amounts of deposits are summarized below:
Years Ended December 31
2003 2002 2001
(000 omitted)
Demand deposits $ 47,416 $ 39,688 $ 32,628
Interest bearing demand 170,832 136,500 99,103
deposits
Savings deposits 26,602 23,558 20,787
Time deposits 94,043
97,539 102,856
--------- --------- ---------
Total deposits $ 342,389 $ 293,789 $ 255,374
========= ========= =========
The following is a breakdown of maturities of time deposits of $ 100,000 or
more as of December 31, 2003:
(000 omitted)
Three months or less $ 7,083
Over three months through twelve months 3,649
Over one year through three years 6,366
Over three years 1,747
--------
$ 18,845
========
RETURN ON EQUITY AND ASSETS (APPLYING DAILY AVERAGE BALANCES)
The following table presents a summary of significant earnings and
capital ratios: (000 omitted)
2003 2002 2001
Average assets $ 443,737 $ 385,765 $ 340,428
Net income $ 6,980 $ 5,915 $ 5,092
Average equity $ 40,491 $ 34,408 $ 29,612
Cash dividends paid $ 2,126 $ 1,722 $ 1,411
Return on assets 1.57% 1.53% 1.50%
Return on equity 17.24% 17.19% 17.20%
Dividend payout ratio 30.45% 29.12% 27.71%
Equity to asset ratio 9.12% 8.92% 8.70%
-19-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED SUMMARY OF OPERATIONS
Years Ended December 31
2003 2002 2001 2000 1999
(000 omitted)
Interest income $ 23,484 $ 23,173 $ 23,978 $ 21,758 $ 18,324
Interest expense 10,677 10,318
6,757 7,985 8,074
-------- -------- -------- -------- --------
Net interest income 16,727 15,188 13,301 11,440 10,250
Provision for loan losses 504 547
491 720 360
-------- -------- -------- -------- --------
Net interest income after 16,236 14,468 12,797 11,080 9,703
provision for loan losses
Other income:
Trust and brokerage services 1,948 1,780 1,480 1,466 1,230
Service charges - Deposits, 3,866 3,171 2,634 1,818 1,623
other service charges,
collection and exchange
charges, commission and fees
Other operating income 618 409 366 458 728
-------- -------- -------- -------- --------
Total other income 6,432 5,360 4,480 3,742 3,581
-------- -------- -------- -------- --------
Income before operating expense 22,668 19,828 17,277 14,822 13,284
Operating expenses:
Salaries and employees benefits 6,787 5,993 5,151 4,755 4,297
Occupancy and equipment expense 2,109 1,800 1,676 1,558 1,099
Other operating expenses 4,114 3,895 3,420 2,800 2,822
-------- -------- -------- -------- --------
Total operating expenses 13,010 11,688 10,247 9,113 8,218
-------- -------- -------- -------- --------
Income before income taxes 9,658 8,140 7,030 5,709 5,066
Income tax 2,678 2,225 1,537
-------- -------- -------- -------- --------
Net income applicable to
common stock $ 6,980 $ 5,915 $ 5,092 $ 4,172 $ 3,755
======== ======== ======== ======== ========
Per share data (1):
Basic earnings $ 2.76 $ 2.36 $ 2.05 $ 1.70 $ 1.54
Diluted earnings $ 2.68 $ 2.30 $ 2.02 $ 1.69 $ 1.54
Cash dividends $ .84 $ .69 $ .57 $ .52 $ .47
Weighted average shares:
Basic 2,527,185 2,510,144 2,485,042 2,457,876 2,441,984
Diluted 2,607,769 2,566,681 2,518,041 2,469,732 2,441,984
(1) Per share amounts have been restated to reflect:
The 5% stock dividend effective May 30, 2003.
The 5% stock dividend effective September 15, 2001.
The 71/2% stock dividend effective November 19, 1999.
-20-
Item 9. Disagreements on Accounting and Financial Disclosures.
- -----------------------------------------------------------------
Not applicable.
Item 9a. 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 (the "Exchange Act")) as of December 31, 2003.
Based on such evaluation, such officers have concluded that, as of December 31,
2003, 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.
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 fourth quarter of 2003.
-21-
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The Corporation has adopted a code of ethics that applies to all senior
financial officers (including its chief executive officer, chief financial
officer, chief accounting officer, controller, and any person performing similar
functions). The Corporation has filed a copy of this Code of Ethics as Exhibit
14 to this Form 10-K. The Corporation has also made the Code of Ethics
available on its website at http://www.orrstown.com.
All other information required by Item 10 is incorporated by reference from
Orrstown Financial Services, Inc.'s definitive proxy statement for the 2004
Annual Meeting of Shareholders filed pursuant to Regulation 14A.
Item 11. Executive Compensation
- --------------------------------
The information required by Item 11 is incorporated by reference from
Orrstown Financial Services, Inc.'s definitive proxy statement for the 2004
Annual Meeting of Shareholders filed pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Equity Compensation Plan Information
Plan Category Number of securities to be Weighted-average Number of
issued upon exercise of exercise price of securities
outstanding options outstanding options remaining available
for future issuance
under equity
compensation plans
(excluding
securities
reflected in column
(a))
(a) (b) (c)
Equity compensation 80,221 $ 42.43 139,177
plan approved by
security holders
Equity compensation 10,554 $ 38.41 22,251
plan not approved by
security holders (1)
------ ------- -------
Total 90,775 $ 41.97 161,428
====== ======= =======
(1) Non-Employee Director Stock Option Plan of 2000. On January 27,
2000, the Board of Directors of the Corporation approved the
Orrstown Financial Services, Inc. Non-Employee Director Stock
Option Plan of 2000. The Directors' Option Plan is a formula plan
under which options to purchase shares of the Corporation's Common
Stock are granted each year to directors in office on April 1. The
number of options granted each year is based on the Corporation's
return on average equity for the most recent fiscal year. All
options have a term of 10 years from the regular grant date, are
fully exercisable from the regular grant date, and have an exercise
price equal to the fair market value of the Corporation's Common
Stock as of the date of the grant of the option based upon
criteria as outlined in the plan. If a director "retires",
whether as a result of reaching mandatory retirement age,
-22-
(1)
or under any other circumstances, the Board of Directors, in its
discretion, may determine to constitute retirement, the options
previously granted to the director will expire at their scheduled
expiration date. If a director's service as a director terminates
for any other reason, the options previously granted to the
director will expire six months after the date of termination of
service unless scheduled to expire sooner.
All other information required by Item 12 is incorporated by
reference from Orrstown Financial Services, Inc.'s definitive proxy
statement for the 2004 Annual Meeting of Shareholders filed
pursuant to Regulation 14A.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by Item 13 is incorporated by reference from
Orrstown Financial Services, Inc.'s definitive proxy statement for the 2004
Annual Meeting of Shareholders filed pursuant to Regulation 14A.
Item 14. Principal Accountant Fees and Services
- ------------------------------------------------
The information required by Item 14 is incorporated by reference from
Orrstown Financial Services, Inc.'s definitive proxy statement for the 2004
Annual Meeting of Shareholders filed pursuant to Regulation 14A.
-23-
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports of Form 8-K.
- --------------------------------------------------------------------------
(a) (1) - List of Financial Statements
The following consolidated financial statements of
Orrstown Financial Services, Inc. and its subsidiaries,
included in the annual report of the registrant to its
shareholders for the year ended December 31, 2003, are
incorporated by reference in Item 8:
Consolidated balance sheets - December 31, 2003 and 2002
Consolidated statements of income - Years ended December 31,
2003, 2002, and 2001
Consolidated statements of shareholders' equity - Years ended
December 31, 2003, 2002, and 2001
Consolidated statements of cash flows - Years ended December 31,
2003, 2002, and 2001
Notes to consolidated financial statements - December 31, 2003
(2) List of Financial Statement Schedules
All financial statement schedules for which provision is made in
the applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been omitted.
(3) Listing of Exhibits
Exhibit (3) (i) Articles of incorporation
Exhibit (3) (ii) Bylaws
Exhibit (4) Instruments defining the rights of security holders
including indentures
Exhibit (10) Material contracts
Exhibit (13) Annual report to security holders
Exhibit (14) Code of Ethics
Exhibit (21) Subsidiaries of the registrant
Exhibit (23) Consent of independent auditors
Exhibit (31) Rule 13a - 14(a)/15d-14(a) Certifications
Exhibit (32) Section 1350 Certifications
All other exhibits for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and therefore have been omitted.
(b) Reports on Form 8-K filed
Report filed January 2, 2004 for news release announcing a 2-for-
1 stock split payable February 10, 2004.
-24
(c) Exhibits
(3) (i) Articles of incorporation. Incorporated by reference to
Exhibit 3(i) of the registrant's Form 10-K for the year ended
December 31, 1998.
(ii) By-laws. Incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-4, Registration
No. 33-18888.
(4) Instruments defining the rights of security holders including
indentures. The rights of the holders of Registrant's common
stock are contained in:
(i) Articles of Incorporation of Orrstown Financial
Services, Inc., incorporated by reference to Exhibit 3(i)
of the registrant's Form 10-K for the year ended
December 31, 1998.
(ii) By-laws of Orrstown Financial Services, Inc.,
incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-4
(Registration No. 33-18888).
(10.1) Change in control agreement between Orrstown Financial
Services, Inc. and its chief executive officer.
Incorporated by reference to Exhibit 99 of the registrant's
Form 10-K for the year ended December 31, 1996.
(10.2) Salary continuation plan for selected officers -
incorporated by reference to the registrant's Form 10-K for
the year ended December 31, 1999
(10.3) Officer group term replacement plan for selected officers -
incorporated by reference to the registrant's Form 10-K for
the year ended December 31, 1999
(10.4) Director retirement plan - incorporated by reference to the
registrant's Form 10-K for the year ended December 31, 1999
(10.5) Revenue neutral retirement plan - incorporated by reference
to the registrant's Form 10-K for the year ended
December 31, 1999
(10.6) Non-employee director stock option plan of 2000 -
incorporated by reference to the registrant's registration
statement on Form S-8 dated April 11, 2000
(10.7) Employee stock option plan of 2000 - incorporated by
reference to the registrant's registration statement on
Form S-8 dated March 31, 2000
(13) Annual report to security holders - filed herewith
(14) Code of Ethics Policy for Senior Financial Officers - filed
herewith
(21) Subsidiaries of the registrant - filed herewith
(23.1) Consent of independent auditors - filed herewith
(31.1) Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 - filed
herewith
-25-
(31.2) Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 - filed herewith
(32.1) Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 - filed herewith.
(32.2) Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 - filed herewith.
(d) Financial statement schedules
None
-26-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ORRSTOWN FINANCIAL SERVICES, INC.
---------------------------------
(Registrant)
By /s/ Kenneth R. Shoemaker
-----------------------------
Kenneth R. Shoemaker, President
Dated: March 10, 2004 (Duly authorized officer)
By /s/ Bradley S. Everly
---------------------------------
Bradley S. Everly, Chief Financial
Officer
(Principal Accounting Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title Date
/s/ Kenneth R. Shoemaker President, CEO and March 10, 2004
- --------------------------------- Director
Kenneth R. Shoemaker
/s/ Anthony F. Ceddia Director March 10, 2004
- ---------------------------------
Dr. Anthony F. Ceddia
/s/ Glenn W. Snoke Director March 10, 2004
- ---------------------------------
Glenn W. Snoke
/s/ Gregory A. Rosenberry Director March 10, 2004
- ---------------------------------
Gregory A. Rosenberry
/s/ Joel R. Zullinger Chairman of the March 10, 2004
- --------------------------------- Board and Director
Joel R. Zullinger
/s/ Jeffrey W. Coy Vice Chairman March 10, 2004
- --------------------------------- of the Board
Jeffrey W. Coy and Director
/s/ John S. Ward Director March 10, 2004
- ---------------------------------
John S. Ward
/s/ Denver L. Tuckey Secretary and March 10, 2004
- --------------------------------- Director
Denver L. Tuckey
/s/ Andrea Pugh Director March 10, 2004
- ---------------------------------
Andrea Pugh
Exhibit 13
Orrstown Financial Services, Inc.
2003 Annual Financial Report
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets 2
Statements of income 3
Statements of changes in shareholders' equity 4
Statements of cash flows 5
Notes to consolidated financial statements 6 - 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18 - 24
SUMMARY OF QUARTERLY FINANCIAL DATA 25
SELECTED FIVE-YEAR FINANCIAL DATA 26
MARKET, DIVIDEND AND INVESTOR INFORMATION 27
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Orrstown Financial Services, Inc.
Orrstown, Pennsylvania
We have audited the accompanying consolidated balance sheets of
Orrstown Financial Services, Inc. and its wholly-owned subsidiaries as of
December 31, 2003 and 2002 and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 2003. These consolidated financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Orrstown Financial Services, Inc. and its wholly-owned subsidiaries as of
December 31, 2003 and 2002, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States of
America.
/S/ SMITH ELLIOTT KEARNS & COMPANY, LLC
--------------------------------------------------
SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, Pennsylvania
February 4, 2004
Consolidated Balance Sheets
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
(Dollars in thousands) Dec. 31, 2003 Dec. 31, 2002
ASSETS
Cash and due from banks $ 12,283 $ 10,656
Federal funds sold 8,217
3,829
Interest bearing deposits with banks 1,095
1,001
Securities available for sale 89,074 90,106
Federal Home Loan Bank, Federal Reserve and
Atlantic
Central Bankers Bank stock, at cost which
approximates market value 2,912 2,268
--------------- ---------------
109,099 112,342
--------------- ---------------
Loans
Commercial, financial and agricultural 38,186 33,806
Real estate - Mortgages 277,985 217,791
Real estate - Construction and land development 21,016 22,048
Consumer 7,867 7,746
--------------- ---------------
345,054 281,391
Less: Allowance for loan losses ( 4,161) ( 3,734)
--------------- ---------------
340,893 277,657
--------------- ---------------
Premises and equipment, net 11,168 9,849
Accrued interest receivable 1,647 1,606
Cash surrender value of life insurance 7,234 6,916
Other assets 2.352 1,928
--------------- ---------------
Total assets $ 472,393 $ 410,298
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing $ 52,276 $ 42,704
Interest bearing 306,367 276,464
-------------- ---------------
358,643 319,168
-------------- ---------------
Federal funds purchased and securities sold under
agreements to repurchase 29,440 20,808
Other borrowed funds 37,193 28,539
Accrued interest and other liabilities 4,282 3,821
-------------- ---------------
Total liabilities 429,558 372,336
-------------- ---------------
Shareholders' equity
Common stock: No par value - $.1041 stated value
per share 10,000,000 shares authorized
with 2,537,011 shares issued at December 31,
2003; 2,398,405 shares issued
at December 31, 2002 264 250
Additional paid-in capital 32,928 25,913
Retained earnings 8,509 9,750
-------------- ---------------
Accumulated other comprehensive income 1,134 2,049
-------------- ---------------
Total shareholders' equity 42,835 37,962
-------------- ---------------
Total liabilities and shareholders' equity $ 472,393 $ 410,298
============== ===============
The Notes to the Consolidated Financial
Statements are an integral part of these
statements.
-2-
Consolidated Statements of Income
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
Years Ended December 31,
(Dollars in thousands) 2003 2002 2001
Interest and Dividend Income
Interest and fees on loans $ 19,610 $ 8,635 $ 19,308
Interest and dividends on investment
securities
U.S. Government and agency 2,141 2,583 2,869
Exempt from federal income tax 1,335 1,370 899
Other investment income 398 585 902
---------- ------------ ----------
Total interest and dividend income 23,484 23,173 23,978
---------- ------------ ----------
Interest Expense
Interest on deposits 5,015 6,069 8,347
Interest on borrowed money 1,742 1,916 2,330
---------- ------------ ----------
Total interest expense 6,757 7,985 10,677
---------- ------------ ----------
Net interest income 16,727 15,188 13,301
Provision for loan losses 491 720 504
---------- ------------ ----------
Net interest income after provision for loan
losses 16,236 14,468 12,797
---------- ------------ ----------
Other Income
Service charges on deposit accounts 2,628 2,257 1,890
Other service charges, commissions, and fees 1,238 914 744
Trust department income 1,463 1,386 1,219
Brokerage income 485 394 261
Securities gains 199 21 11
Other income 419 388 355
---------- ------------ ----------
Total other income 6,432 5,360 4,480
Net interest income and other income 22,668 19,828 17,277
---------- ------------ ----------
Other Expenses
Salaries 4,456 4,035 3,506
Employee benefits 2,331 1,958 1,645
Occupancy expense of bank premises, and
furniture and equipment expenses 2,109 1,800 1,676
Other operating expenses 4,114 3,895 3,420
---------- ------------ ----------
Total other expenses 13,010 11,688 10,247
---------- ------------ ----------
Income before income tax 9,658 8,140 7,030
Applicable income tax 2,678 2,225 1,938
---------- ------------ ----------
Net income $ 6,980 $ 5,915 $ 5,092
========== ============ ==========
Earnings per share
Basic earnings per share $ 2.76 $ 2.36 $ 2.05
Weighted average shares outstanding 2,527,185 2,510,144 2,485,042
Diluted earnings per share $ 2.68 $ 2.30 $ 2.02
Weighted average shares outstanding 2,607,769 2,566,681 2,518,041
Dividends per share $ .84 $ .69 $ .57
The Notes to the
Consolidated Financial
Statements are an
integral part of these
statements.
-3-
Consolidated Statements of Changes in Shareholders' Equity
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
Years Ended December 31, 2003, 2002 and 2001
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Shareholder
s'
(Dollars in thousands) Stock Capital Earnings Income Equity
Balance, December 31, 2000 $ 233 $ 19,360 $ 6,619 $ 462 $ 26,674
Comprehensive income
Net income 0 0 5,092 0 5,092
Change in unrealized gain on
investment securities available
for sale, net of tax of $ 94 0 0 0 ( 182) ( 182)
---------
Total comprehensive income 4,910
Cash dividends ($.57 per share) 0 0 ( 1,411) 0 ( 1,411)
Stock dividends issued 12 4,711 ( 4,723) 0 0
Cash paid in lieu of fractional
stock dividends 0 0 ( 20) 0 ( 20)
Issuance of stock through
employee stock purchase plan/
stock option plan 0 73 0 0 74
Issuance of stock through
dividend reinvestment plan 2 933 0 0 935
-------- -------- -------- -------- --------
Balance, December 31, 2001 248 25,077 5,557 280 31,162
Comprehensive income
Net income 0 0 5,915 0 5,915
Change in unrealized gain on
investment securities available
for sale, net of tax of $ 911 0 0 0 1,769 1,769
--------
Total comprehensive income 7,684
Cash dividends ($.69 per share) 0 0 ( 1,722) 0 ( 1,722)
Issuance of stock through
employee stock purchase plan/
stock option plan 0 71 0 0 71
Issuance of stock through
dividend reinvestment plan 2 765 0 0 767
-------- -------- -------- -------- --------
Balance, December 31, 2002 250 25,913 9,750 2,049 37,962
Comprehensive income
Net income 0 0 6,980 0 6,980
Change in unrealized gain on
investment securities available
for sale, net of tax of $ 471 0 0 0 ( 915) ( 915)
--------
Total comprehensive income 6,065
Cash dividends ($.84 per share) 0 0 ( 2,126) 0 ( 2,126)
Stock dividends issued 12 6,061 ( 6,073) 0 0
Cash paid in lieu of fractional
stock dividends 0 0 ( 22) 0 ( 22)
Issuance of stock through
employee stock purchase plan/
stock option plan 1 205 0 0 206
Issuance of stock through
dividend reinvestment plan 1 749 0 0 750
-------- -------- -------- -------- --------
Balance, December 31, 2003 $ 264 $ 32,928 $ 8,509 $ 1,134 $ 42,835
======== ======== ======== ======== ========
The Notes to the Consolidated Financial
Statements are an integral part of these
statements.
-4-
Consolidated Statements of Cash Flows
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
Years Ended December 31,
(Dollars in thousands) 2003 2002 2001
Cash flows from operating activities:
Net income $ 6,980 $ 5,915 $ 5,092
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,013 874 828
Provision for loan losses 491 720 504
(Gain) on disposal of other real estate owned ( 6) ( 3) ( 4)
Loss on disposal of bank premises and equipment 0 2 3
Deferred income taxes ( 110) ( 131) ( 113)
Securities (gains) ( 199) ( 21) ( 11)
Increase in cash surrender value of life insurance ( 318) ( 312) ( 286)
(Increase) decrease in accrued interest receivable ( 41) ( 64) 474
(Decrease) in accrued interest payable ( 6) ( 107) ( 210)
Other net 555 526 387
-------- -------- --------
Net cash provided by operating activities 8,359 7,399 6,664
-------- -------- --------
Cash flows from investing activities:
Net (increase) decrease in interest bearing deposits
with banks 94 ( 416) ( 507)
Sales of available for sale securities 20,839 1,223 5,427
Maturities of available for sale securities 30,480 21,754 36,239
Purchase of available for sale securities ( 51,475) ( 41,961) ( 40,433)
(Purchases) redemptions of FHLB stock ( 644) ( 565) 431
Net (increase) in loans ( 63,811) ( 31,725) ( 41,118)
Purchases of bank premises and equipment ( 2,261) ( 1,641) ( 512)
Proceeds from disposal of other real estate owned 89 64 180
Proceeds from disposal of bank premises and equipment 0 7 4
Investment in cash surrender value life insurance
policies 0 ( 682) 0
-------- -------- --------
Net cash (used) by investing activities ( 66,689) ( 53,942) ( 40,289)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits 39,475 38,000 39,160
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase 8,632 ( 10,723) 13,105
Proceeds from debt 10,000 5,026 8,025
Payment on debt ( 1,346) ( 3,000) ( 3,316)
Cash dividends paid ( 2,126) ( 1,722) ( 1,411)
Cash paid in lieu of fractional stock dividends ( 22) 0 ( 20)
Proceeds from sale of stock 956 838 1,009
-------- -------- --------
Net cash provided by financing activities 55,569 28,419 56,552
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ( 2,761) ( 18,124) 22,927
Cash and cash equivalents, beginning balance 18,873 36,997 14,070
-------- -------- --------
Cash and cash equivalents, ending balance $ 16,112 $ 18,873 $ 36,997
======== ======== ========
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest 6,763 8,092 10,887
Income taxes 2,650 2,375 2,200
Supplemental schedule of noncash investing and
financing activities:
Other real estate acquired in settlement of 83 61 392
loans
Unrealized gain (loss) on investment securities
available for sale (net of tax effects) ( 915) 1,769 ( 182)
The Notes to the Consolidated Financial
Statements are an integral part of these
statements.
-5-
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
Orrstown Financial Services, Inc.'s primary activity consists of owning and
supervising its subsidiaries, Orrstown Bank, and Pennbanks Insurance Company
Cell P1. Orrstown Bank is engaged in providing banking and bank related
services in South Central Pennsylvania, principally Franklin and Cumberland
Counties. Its twelve branches are located in Shippensburg (2), Carlisle (3),
Spring Run, Orrstown, Chambersburg (3), Mechanicsburg and Greencastle,
Pennsylvania. Pennbanks Insurance Company Cell P1 is a reinsurer of credit,
life, and disability insurance which services customers of Orrstown Bank.
Principles of consolidation
The consolidated financial statements include the accounts of the Corporation
and its wholly-owned subsidiaries, Orrstown Bank and Pennbanks Insurance Company
Cell P1. All significant intercompany transactions and accounts have been
eliminated.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Corporation's allowance for losses on loans and foreclosed real estate.
Such agencies may require the Corporation to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examination. Because of these factors, management's estimate of
credit losses inherent in the loan portfolio and the related allowance may
change in the near term.
Investment securities
Under generally accepting accounting principles, the Corporation may segregate
their investment portfolio into three specific categories: "securities held to
maturity", "trading securities" and "securities available for sale". Securities
held to maturity are to be accounted for at their amortized cost; securities
classified as trading securities are to be accounted for at their current market
value with unrealized gains and losses on such securities included in current
period earnings; and securities classified as available for sale are to be
accounted for at their current market value with unrealized gains and losses on
such securities to be excluded from earnings and reported as a net amount in
other comprehensive income.
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.
The Corporation has classified all of its investment securities as "available
for sale".
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.
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". The Corporation has elected
to present the net increase or decrease in deposits with banks, loans, and
deposits in the Statements of Cash Flows.
Premises, equipment, furniture and fixtures and depreciation
Buildings, improvements, equipment, furniture and fixtures are carried at cost
less accumulated depreciation. Depreciation has been provided generally on the
straight-line method and is computed over the estimated useful lives of the
various assets as follows:
Years
Buildings and improvements 10-40
Equipment, furniture and fixtures 3-15
Repairs and maintenance are charged to operations as incurred.
Computer software is amortized over 3-5 years.
Intangibles
Identifiable intangible assets are amortized on a straight-line basis over
fifteen years.
Advertising
The Corporation follows the policy of charging costs of advertising to expense
as incurred. Advertising expense was $ 267,000, $ 218,000, and $ 196,000, for
2003, 2002, and 2001, respectively.
Loans and allowance for loan losses
Loans are stated at the amount of unpaid principal, reduced by an allowance
for loan losses. Interest on loans is calculated by using the simple interest
method on daily balances of the principal amount outstanding. The allowance for
loan losses is established through a provision for loan losses charged to
expenses. Loans are charged against the allowance when management believes that
the collectibility of the principal is
-6-
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.
Nonaccrual/Impaired loans
The accrual of interest income on loans ceases when principal or interest is
past due 90 days or more and collateral is inadequate to cover principal and
interest or immediately if, in the opinion of management, full collection is
unlikely. Interest accrued but not collected as of the date of placement on
nonaccrual status is reversed and charged against current income unless fully
collateralized. Subsequent payments received either are applied to the
outstanding principal balance or recorded as interest income, depending on
management's assessment of the ultimate collectibility of principal. Interest
income generally is not recognized on specific impaired loans unless the
likelihood of further loss is remote. Interest payments received on such loans
are applied as a reduction of loan principal balance. Interest income on
impaired loans is recognized only to the extent of interest payments received.
Foreclosed real estate
Real estate properties acquired through, or in lieu of, loan foreclosure are
to be sold and are initially recorded at the lower of carrying value or fair
value less estimated costs to sell the underlying collateral. After
foreclosure, valuations are periodically performed by management and the real
estate is carried at the lower of carrying amount or fair value less estimated
cost to sell.
Earnings per share of common stock
Earnings per share is calculated as net income divided by the weighted
average number of shares outstanding, after giving retroactive recognition to a
5% stock dividend in September 2001 and May 2003. For diluted net income per
share, net income is divided by the weighted average of shares outstanding plus
the incremental number of shares added as a result of converting common stock
equivalents. The Corporation's common stock equivalents consist of outstanding
stock options.
A reconciliation of the weighted average shares outstanding used to calculate
basic net income per share and diluted net income per share follows. There is
no adjustment to net income to arrive at diluted net income per share.
2003 2002 2001
Weighted average shares 2,527,185 2,510,144 2,485,042
outstanding (basic)
Impact of common stock 80,584 56,537 32,999
equivalents
--------- --------- ---------
Weighted average shares 2,607,769 2,566,681 2,518,041
outstanding (diluted)
========= ========= =========
Stock-Based Compensation
The Corporation grants stock options for a fixed number of shares to
directors and employees with an exercise price equal to the fair value of the
shares at the date of grant. The Corporation accounts for stock option grants
using the intrinsic-value method in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations. Under
the intrinsic-value method, because the exercise price of the Corporation's
employee stock options is more than or equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized. See Note 10
for the proforma effect on net income and earnings per share as if the
Corporation had applied the fair value recognition provisions of FASB Statement
123, "Accounting for Stock-Based Compensation" to stock-based employee
compensation.
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 and timing differences in depreciation expense, deferred income taxes
are provided for in the financial statements. See Note 11 for further details.
Fair values of financial instruments
The Corporation meets the requirements for disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Certain financial instruments and all
nonfinancial instruments are excluded from disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in
estimating fair values of financial instruments as disclosed herein:
Cash, Due from Banks, Short-Term Investments, and Federal Funds Sold. The
carrying amounts of cash, due from banks, short-term investments, and federal
funds sold approximate their fair value.
Securities Available for Sale. Fair values for investment securities are based
on quoted market prices.
Loans Receivable. For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying values.
Fair values for fixed rate loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Fair values for impaired loans
are estimated using discounted cash flow analyses or underlying collateral
values, where applicable.
Deposit Liabilities. The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable-rate, fixed-term
money market accounts and certificates of deposit approximate their fair values
at the reporting date. Fair values for fixed-rate certificates of deposits and
IRA's are estimated using a discounted cash flow calculation that applies
interest rates currently being offered to a schedule of aggregated expected
maturities on time deposits.
-7-
Short-Term Borrowings. The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings maturing
within 90 days approximate their fair values. Fair values of other short-term
borrowings are estimated using discounted cash flow analyses based on the
Corporation's current incremental borrowing rates for similar types of borrowing
arrangements.
Long-Term Borrowings. The fair value of the Corporation's long-term debt is
estimated using a discounted cash flow analysis based on the Corporation's
current incremental borrowing rate for similar types of borrowing arrangements.
Accrued Interest. The carrying amounts of accrued interest approximate their
fair values.
Off-Balance-Sheet Instruments. The Corporation generally does not charge
commitment fees. Fees for standby letters of credit and other off-balance-sheet
instruments are not significant.
Comprehensive income
Under generally accepted accounting principles, comprehensive income is
defined as the change in equity from transactions and other events from nonowner
sources. It includes all changes in equity except those resulting from
investments by shareholders and distributions to shareholders. Comprehensive
income includes net income and certain elements of "other comprehensive income"
such as foreign currency transactions; accounting for futures contracts;
employers accounting for pensions; and accounting for certain investments in
debt and equity securities.
The Corporation has elected to report its comprehensive income in the
statement of changes in of shareholders' equity. The only element of "other
comprehensive income" that the Corporation has is the unrealized gain or loss on
available for sale securities.
The components of the change in net unrealized gains (losses) on
securities were as follows:
(Dollars in thousands) 2003 2002 2001
Gross unrealized holding gains (losses)
arising during the year ($ 1,187) $ 2,701 ($ 265)
Reclassification adjustment for (gains)
losses realized in net income ( 199) ( 21) ( 11)
------- -------- ---------
Net unrealized holding gains (losses) before ( 1,386) 2,680 ( 276)
taxes
Tax effect 471 ( 911) 94
------- -------- ---------
Net change ($ 915) $ 1,769 ($ 182)
======= ======== =========
NOTE 2. INVESTMENTS
At December 31, 2003 and 2002 the investment securities portfolio was
comprised of securities classified as "available for sale", resulting in
investment securities being carried at fair value.
The amortized cost and fair values of investment securities available for
sale at December 31 were:
Amortized Gross Gross Fair
Cost Unrealized Unrealized Value
Gains Losses
(Dollars in thousands)
2003
U. S. Treasury securities and obligations of U. S.
Government corporations and agencies $ 15,050 $ 51 $ 115 $ 14,986
Obligations of states and political subdivisions 22,022 1,185 3 23,204
Mortgage-backed securities 45,867 448 186 46,129
Corporate bonds 1,945 0 18 1,927
Equity securities 2,472 395 39 2,828
-------- ------- -------- --------
Totals $ 87,356 $ 2,079 $ 361 $ 89,074
======== ======= ======== ========
Amortized Gross Gross Fair
Cost Unrealized Unrealized Value
Gains