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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, 1995
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 (I.R.S. Employer
incorporation 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:
Title of each class
Common Stock, No Par Value The Common Stock is
not registered on any
exchange.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section13 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
As of January 27, 1996, 976,863 shares of the registrant's common
stock were outstanding. The aggregate market value of such shares
held by nonaffiliates on that date was $ 29,305,890.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended
December31, 1995 are incorporated by reference into Parts I and
II. Portions of the Proxy Statement for 1996 Annual Meeting of
Security Holders are incorporated by reference in Part III of this
Form 10-K.
- - -1-
Item 1. Business.
History and Business
Orrstown Financial Services, Inc. (OFS) is a bank holding
company registered under the Bank Holding Company Act of 1956, as
amended. Orrstown Financial Services, Inc. was organized on
November17, 1987, under the laws of the Commonwealth of
Pennsylvania for the purpose of acquiring Orrstown Bank
("Orrstown"), Shippensburg, Pennsylvania, and such other banks and
bank related activities as are permitted by law and desirable. On
March8, 1988, Orrstown Financial Services, Inc. acquired 100%
ownership of Orrstown, issuing 131,455 shares of Orrstown Financial
Services, Inc.'s common stock to the former Orrstown shareholders.
Orrstown Financial Services, Inc.'s primary activity
consists of owning and supervising its subsidiary, Orrstown Bank,
which is engaged in providing banking and bank related services in
South Central Pennsylvania, principally Franklin and Cumberland
Counties, where its five branches are located in Shippensburg, (2)
Carlisle and Spring Run, and Orrstown, Pennsylvania. The day-to-
day management of Orrstown Bank is conducted by the subsidiary's
officers. Orrstown Financial Services, Inc. derives its current
income from Orrstown.
Orrstown Financial Services, Inc. has no employees other
than its six officers who are also employees of Orrstown, its
subsidiary. On December31, 1995, Orrstown had 61 full-time and 19
part-time employees.
- - -2-
Business of Orrstown
Orrstown 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, under which Orrstown became a wholly-owned subsidiary of
Orrstown Financial Services, Inc. As indicated, Orrstown is the
successor to Orrstown Bank which was originally organized in 1919.
Orrstown 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 (as shown on page 15). 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.
- - -3-
Loans secured by equipment and/or other nonreal estate
collateral normally do not exceed 70% of appraised value or cost,
whichever is lower. Loans secured by real estate do not exceed 80%
of the appraised value of the property which is the maximum loan to
collateral value established in the Bank's lending policy. 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, Orrstown renders services
as trustee, executor, administrator, guardian, managing agent,
custodian, investment advisor and other fiduciary activities
authorized by law.
- - -4-
As of December31, 1995, Orrstown had total assets of
approximately $ 146 million, total shareholders' equity of
approximately $ 14.6 million and total deposits of approximately
$ 127 million.
Regulation and Supervision
Orrstown Financial Services (OFS) is a bank holding
company within the meaning of the Bank Holding Company Act of 1956
(BHC Act), and is registered as such with the Board of Governors of
the Federal Reserve System (FRB). OFS is subject to examination by
the FRB and is restricted in its acquisitions, certain of which are
prohibited and certain of which are subject to approval by the FRB.
The FRB generally is prohibited from approving any application by a
bank holding company to acquire voting shares of any bank in
another state unless such acquisition is specifically authorized by
the laws of such state or unless, under certain circumstances, such
bank is a failing bank.
Under the BHC Act, a bank holding company is, with
limited exceptions, prohibited from (i) acquiring direct or
indirect ownership or control of more than 5% of the voting shares
of any company which is not a bank or (ii) engaging in any activity
other than managing or controlling banks. With the prior approval
of the FRB, however, a bank holding company may own shares of a
company engaged in activities which the FRB determines to be so
closely related to banking or managing or controlling banks as to
be a proper incident thereto. In addition, federal law imposes
certain restrictions on transactions between OFS and its
- - -5-
subsidiary, Orrstown Bank. As an affiliate of Orrstown Bank OFS is
subject, with certain exceptions, to provisions of federal law
imposing limitations on, and requiring collateral for, extensions
of credit by Orrstown Bank to its affiliates.
The operations of Orrstown 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.
The primary supervisory authority of Orrstown is the
Pennsylvania Department of Banking, who regularly examines such
areas as reserves, loans, investments, management practices and
other aspects of bank operations. These examinations are designed
primarily for the protection of the Bank depositors.
Federal and state banking laws and regulations govern,
among other things, the scope of a bank's business, the investments
a bank may make, the reserves against deposits a bank must
maintain, the loans a bank makes and collateral it takes, the
maximum interest rates a bank may pay on deposits, the activities
of a bank with respect to mergers and consolidations, and the
establishment of branches, and management practices and other
aspects of banking operations. See Note13 of the Notes to
Financial Statements for a discussion of the limitations on the
availability of Orrstown Financial Services' subsidiary's
undistributed earnings for the payment of dividends due to such
regulation and other reasons.
- - -6-
The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FIRREA) provides that a financial
institution insured by the Federal Deposit Insurance Corporation
(FDIC) sharing common ownership with a failed institution can be
required to indemnify the FDIC for its losses resulting from the
insolvency of the failed institution, even if such indemnification
causes the affiliated institution also to become insolvent. OFS
currently has only one subsidiary and as a result has not been
significantly affected by the aforementioned provisions of FIRREA.
Regulatory authorities have issued guidelines that establish
risk-based capital and leverage standards. These capital
requirements of bank regulators, are discussed on pages 45 and 46
under "Capital Funds". Failure to meet applicable capital
guidelines could subject a bank to a variety of enforcement
remedies available to the regulatory authorities. Depending upon
circumstances, the regulatory agencies may require an institution
to develop a "capital plan" to increase its capital to levels
established by the agency.
In 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted. Among other
things, FDICIA provides increased funding for the Bank Insurance
Fund of the FDIC by granting authority for special assessments
against insured deposits through a general risk-based assessment
systems. FDICIA also contains provisions limiting activities and
business methods of depository institutions. FDICIA requires the
- - -7-
primary federal banking regulators to promulgate regulations
setting forth standards relating to, among other things, internal
controls and audit systems; credit underwriting and loan
documentation; interest rate exposure and other off-balance sheet
assets and liabilities; and compensation of directors and officers.
FDICIA also contains provisions limiting the acceptance of
brokered deposits by certain depository institutions, placing
restrictions on the terms of "bank investment contracts" that may
be offered by depository institutions and provisions requiring the
FDIC to study the current rules applicable to the aggregation of
accounts of depositors at an institution that are entitled to FDIC
insurance. Finally, FDICIA provides for expanded regulation of
depository institutions and their affiliates, including parent
holding companies, by such institutions' primary federal banking
regulator. Each primary federal banking regulator is required to
specify, by regulation, capital standards for measuring the capital
adequacy of the depository institutions it supervises and,
depending upon the extent to which a depository institution does
not meet such capital adequacy measures, the primary federal
banking regulator may prohibit such institution from paying
dividends or may require such institution to take other steps to
become adequately capitalized.
The earnings of Orrstown Bank, and therefore the earnings
of Orrstown Financial Services, are affected by general economic
conditions, management policies, and the legislative and
governmental actions of various regulatory authorities including
- - -8-
the FRB, the FDIC and the Pennsylvania Department of Banking. In
addition, there are numerous governmental requirements and
regulations that affect the activities of Orrstown Financial
Services.
Competition
Orrstown's principal market area consists of the north
central portion of Franklin County, Pennsylvania, and Cumberland
County, Pennsylvania. It services a substantial number of
depositors in this market area, with the greatest concentration
within a radius of Shippensburg and Carlisle, Pennsylvania.
Orrstown, like other depository institutions, has been
subjected to competition from less heavily regulated entities such
as brokerage firms, money market funds, consumer finance and credit
card companies and other commercial banks, many of which are larger
than Orrstown Bank. Orrstown Bank is generally 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.
Item 2. Properties.
Orrstown Bank owns buildings in Orrstown, Pennsylvania,
Shippensburg, Pennsylvania (3), Carlisle, Pennsylvania and Spring
Run, Pennsylvania. Offices of the bank are located in each of
these buildings. One of the offices located in Shippensburg is an
"Operations Center" which does not operate as a branch, but rather
as an accounting office. The bank also owns certain other
properties which are located adjacent to the downtown office, which
are currently being renovated to provide for expansion of the Trust
- - -9-
Department, and the Orrstown office which it intends to hold for
future expansion purposes.
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 Orrstown Financial Services, Inc.'s management,
Orrstown Financial Services, Inc. has adequate legal defenses
and/or insurance coverage respecting any and each of these actions
and does not believe that they will materially affect Orrstown
Financial Services, Inc.'s operations or financial position.
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 inactively
through the local and over the counter local markets. At
December31, 1995, the approximate number of shareholders of record
was 1,422. 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 (1)
1995 1994
First Quarter $ 27.00 $ .15 $ 25.00 $ .13
Second Quarter 27.00 .15 25.00 .13
Third Quarter 30.00 .15 26.00 .14
Fourth Quarter 30.00 .17 27.00 .14
(1) Note: Cash dividends per share for 1994 were based on
weighted average shares of common stock
outstanding in 1994 after giving retroactive
recognition to a 5% stock dividend issued in
July 1995.
See "Notes to Consolidated Financial Statements" for
restrictions on the payment of dividends.
- - -11-
Item 6. Selected Financial Data.
1995 1994 1993 1992 1991
Income (000 omitted)
Interest income $ 10,829 $ 8,571 $ 8,250 $
8,632 $ 8,896
Interest expense 4,542 3,241 3,129 3,800 4,684
Provision for loan
losses 270 71 121
366 170
Net interest income
after provision for
loan losses 6,017 5,259 5,000 4,466 4,042
Securities gains
(losses) ( 45) 95 ( 5) 77
( 8)
Other operating
income 980 765 607 616 498
Other operating
expenses 4,256 3,964 3,593
3,369 3,036
Income before
income taxes 2,696 2,155 2,009 1,790 1,496
Applicable income
tax 742 520
525 452 354
Net income $ 1,954 $ 1,635 $ 1,484
$ 1,338 $ 1,142
Per share amounts are based on following weighted averages:
1995 - 954,192 1993 - 915,218 1991 - 901,374
1994 - 954,192 1992 - 921,098
Income before income
taxes $ 2.83 $ 2.25 $ 2.19 $ 1.94
$ 1.66
Applicable income taxes .78 .54 .57 .49 .39
Net income 2.05 1.71 1.62 1.45 2.27
Cash dividend paid .62 .54 .50 .45 .42
Book value 15.34 12.95 12.67 11.49 11.20
1995 1994 1993 1992 1991
Year-End Balance Sheet Figures
(000 omitted)
Total assets $ 145,998 $ 123,004 $ 113,581 $
106,191 $ 97,938
Net loans 101,424 89,639 74,449
69,865 64,667
Total investment
securities 31,563 24,318 30,381
28,488 24,946
Deposits-non-
interest bearing 13,962 13,262 13,417
11,678 9,360
Deposits-interest
bearing 113,368 93,103 85,165
82,553 77,151
Total deposits 127,330 106,365 98,582
94,231 86,511
Liabilities for
borrowed money 2,345 2,350 1,000 0 0
Total stockholders'
equity 14,633 12,353 11,597
10,583 10,096
- - -12-
Ratios
1995 1994 1993 1992 1991
Average equity/
average assets 10.00 10.34 10.23 10.00
10.27
Return on average
equity 14.40 13.36 13.24 13.02
11.67
Return on average
assets 1.44 1.38 1.36 1.30
1.20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Management's discussion and analysis of financial
condition and results of operations on pages 38 through 46 of the
annual shareholders' report for the year ended December31, 1995
are incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
The report of independent auditors and the following
consolidated financial statements and schedules of Orrstown
Financial Services, Inc. are submitted herewith:
Page
Independent auditor's report 14
Consolidated balance sheets December 31,
1995 and 1994 15
Consolidated statements of income for the
years ended December 31, 1995, 1994 and 1993 16
Consolidated statements of changes in
stockholders' equity for the years ended
December 31, 1995, 1994, and 1993 17
Consolidated statements of cash flows for
the years ended December 31, 1995, 1994,
and 1993 18 and
19
Notes to consolidated financial statements 20 - 36
Summary of quarterly financial data (unaudited) 37
- - -13-
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
subsidiary as of December31, 1995 and 1994 and the related
consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the three years ended December31, 1995.
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 generally
accepted auditing standards. 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 subsidiary as of December31, 1995 and 1994, and the
results of their operations and their cash flows for each of the
three years ended December31, 1995 in conformity with generally
accepted accounting principles.
SMITH ELLIOTT KEARNS & COMPANY
Chambersburg, Pennsylvania
January 25, 1996
- - -14-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
ASSETS 1995 1994
(000 omitted)
Cash and due from banks $ 4,330 $
4,593
Interest bearing deposits with banks 1,289 250
Federal funds sold 2,317 0
Securities available for sale 30,694
23,510
Federal Home Loan Bank, Federal Reserve
and Atlantic Central Bankers Bank stock,
at cost which approximates market value 869
808
39,499
29,161
Loans
Commercial, financial and agricultural 8,211
6,970
Real estate - Mortgages 75,731
68,458
Real estate - Construction and land
development 5,706
5,038
Consumer 13,209
10,373
102,857
90,839
Less: Allowance for loan losses ( 1,433) (
1,200)
101,424
89,639
Bank premises and equipment, net 3,042
2,512
Accrued interest receivable 993 733
Other assets 1,040
959
Total assets $ 145,998 $
123,004
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 13,962 $
13,262
Interest bearing 113,368
93,103
127,330
106,365
Federal funds purchased 0 644
Liabilities for borrowed money 2,345
2,350
Accrued interest and other liabilities 1,690
1,292
Total liabilities 131,365
110,651
Stockholders' equity
Common stock: No par value - $ .2083
stated value per share, 2,000,000 shares
authorized with 976,863 and 930,891 shares
issued at December 31, 1995 and 1994,
respectively 204 194
Additional paid-in capital 10,625
9,393
Retained earnings 3,232
3,133
Unrealized holding gains (losses), net of
tax - $ 295 - 1995 and $ 189 - 1994 572 (
367)
Total stockholders' equity 14,633
12,353
Total liabilities and stockholders'
equity $ 145,998 $
123,004
The Notes to Consolidated Financial Statements are an integral part
of these statements.
- - -15-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
(000 omitted)
Interest and Dividend Income
Interest and fees on loans $ 8,996 $ 6,882 $
6,328
Interest and dividends on
Investment securities
U.S. Government and agencies 1,083 963
1,278
Exempt from federal income tax 529 512 539
Other investment income 221 214
105
Total interest and dividend
income 10,829 8,571
8,250
Interest Expense
Interest on deposits 4,349 3,092
3,064
Interest on borrowed money 193 149
65
Total interest expense 4,542 3,241
3,129
Net interest income 6,287 5,330
5,121
Provision for loan losses 270 71
121
Net interest income after
provision for loan losses 6,017 5,259
5,000
Other Income
Service charges on deposit accounts 375 349 308
Other service charges, commissions,
and fees 218 180 163
Trust department income 297 185 157
Securities gains (losses) ( 45) 95
( 5)
Other income (loss) 90 51 (
21)
Total other income 935 860
602
Net interest income and other
income 6,952 6,119
5,602
Other Expenses
Salaries and employee benefits 2,326 2,115
1,908
Occupancy expense of bank premises,
net, and furniture and equipment
expenses 559 486 405
FDIC insurance premiums 125 221 211
Other operating expenses 1,246 1,142
1,069
Total other expenses 4,256 3,964
3,593
Income before income tax 2,696 2,155
2,009
Applicable income tax 742 520
525
Net income $ 1,954 $ 1,635 $
1,484
Net income per share $ 2.05 $ 1.71 $
1.62
The Notes to Consolidated Financial Statements are an integral part
of these statements.
- - -16-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
Unrealized
Additional Holding
Common Paid-In Retained Gains Treasury
Stock Capital Earnings (Losses) Stock
(000 omitted)
Balance, December 31,
1992 $ 190 $ 8,737 $ 2,093 $ 0 ($
437)
Net income 0 0 1,484 0 0
Cash dividends
($ .50 per share) 0 0 ( 458) 0
0
Stock dividends
issued 4 655 ( 1,095) 0
436
Cash paid in lieu
of fractional
stock dividends 0 0 ( 14) 0
0
Additional stock
issued - 90 shares 0 1 0 0
1
Balance, December 31,
1993 194 9,393 2,010 0 0
Net income 0 0 1,635 0 0
Cash dividends
($ .54 per share) 0 0 ( 512) 0 0
Unrealized loss on
investment securities
available for sale 0 0 0 ( 367)
0
Balance, December 31,
1994 194 9,393 3,133 ( 367) 0
Net income 0 0 1,954 0 0
Cash dividends
($ .62 per share) 0 0 ( 599) 0
0
Stock dividends issued 10 1,232 ( 1,242) 0
0
Cash paid in lieu of
fractional stock
dividends 0 0 ( 14) 0
0
Unrealized gain on
investment securities
available for sale 0 0 0 939
0
Balance, December 31,
1995 $ 204 $ 10,625 $ 3,232 $ 572 $
0
The Notes to Consolidated Financial Statements are an integral part
of these statements.
- - -17-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
(000 omitted)
Cash flows from operating activities:
Net income $ 1,954 $ 1,635 $
1,484
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 265 212 183
Provision for loan losses 270 71 121
Deferred income taxes ( 78) ( 200) (
19)
(Gain) loss on disposal of
other real estate ( 4) ( 10) 42
(Gain) loss on disposal of bank
premises and equipment 1 4 0
Securities (gains) losses 45 ( 95) 5
(Increase) decrease in accrued
interest receivable ( 260) 43 28
Increase (decrease) in accrued
interest payable 290 11 (
82)
Other net ( 2) 9
108
Net cash provided by operating
activities 2,481 1,680
1,870
Cash flows from investing activities:
Net (increase) decrease of interest
bearing deposits with banks ( 1,039) ( 250) 0
Purchase of investment securities 0 0 (
10,796)
Sales of investment securities 0 0
1,971
Maturities of investment securities 0 0
6,928
Sales of available for sale
securities 6,387 6,945 0
Maturities of available for sale
securities 6,694 4,450 0
Purchases of available for sale
securities ( 18,843) ( 5,743) 0
Purchases of FHLB stock ( 61) ( 49) 0
Net (increase) in loans ( 12,055) ( 15,261) (
4,970)
Proceeds from disposal of other
real estate 22 20 223
Purchases of bank premises,
equipment, and other real
estate ( 266) ( 691) (
522)
Net cash (used) by investing
activities ( 19,161) ( 10,579) (
7,166)
The Notes to Consolidated Financial Statements are an integral part
of these statements.
- - -18-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
(000 omitted)
Cash flows from financing activities:
Net increase in deposits $ 19,997 $ 7,783 $
4,351
Net decrease in federal funds
purchased ( 644) ( 456) 0
Proceeds from debt 0 1,350
2,053
Payment on debt ( 6) 0 0
Cash dividends paid ( 599) ( 512) (
472)
Proceeds from issuing common
stock 0 0 2
Cash paid in lieu of fractional
stock dividends ( 14) 0
0
Net cash provided by financing
activities 18,734 8,165
5,934
Net increase (decrease) in cash
and cash equivalents 2,054 ( 734) 638
Cash and cash equivalents,
beginning balance 4,593 5,327
4,689
Cash and cash equivalents,
ending balance $ 6,647 $ 4,593 $
5,327
Supplemental disclosure of cash
flows information:
Cash paid during the year for:
Interest $ 4,252 $ 3,230 $
3,211
Income taxes 800 543 518
Supplemental schedule of noncash
investing and financing activities:
Other real estate acquired in
settlement of loans 22 27 282
Unrealized gain (loss) on investment
securities available for sale
(net of tax effects) 572 ( 367) 0
Other real estate transferred to
bank premises 136 0
0
Property, equipment and other
assets purchased with assumption
of deposit liabilities in
connection with branch
acquisition 968 0
0
The Notes to Consolidated Financial Statements are an integral part
of these statements.
- - -19-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Nature of operations
Orrstown Financial Services, Inc.'s primary activity
consists of owning and supervising its subsidiary,
Orrstown Bank, which is engaged in providing banking and
bank related services in South Central Pennsylvania,
principally Franklin and Cumberland Counties. Its five
branches are located in Shippensburg (2), Carlisle, Spring
Run, and Orrstown, Pennsylvania.
Principles of consolidation
The consolidated financial statements include the accounts
of the corporation and its wholly-owned subsidiary,
Orrstown Bank. 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 allowances 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
allowances for losses on loans and foreclosed real estate.
Such agencies may require the corporation to recognize
additions to the allowances 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.
- - -20-
Note 1. Summary of Significant Accounting Policies (Continued)
Investment securities
In accordance with Statement of Financial Accounting
Standards No. 115 (SFAS 115) the Bank 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
net as a separate component of stockholders' equity.
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 or on a long-
term basis, 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 or on a long-term
basis 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 shareholders'
equity, 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". As permitted by
Statement of Financial Accounting Standards No. 104, the
corporation has elected to present the net increase or
decrease in deposits in banks, loans, and time deposits in
the Statements of Cash Flows.
- - -21-
Note 1. Summary of Significant Accounting Policies (Continued)
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.
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. Loan
origination and commitment fees and certain direct costs
are deferred and the net amount amortized over the
contractual life of the loan as an adjustment of the
loan's yield. If a loan is sold, any deferred fees not
yet amortized are recognized as an adjustment to the gain
or loss on sale. The allowance for loan losses is
established through a provision for loan losses charged to
expenses. Loans are charged against the allowance for
loan losses when management believes that the
collectibility of the principal is unlikely. The
allowance is an amount that management believes will be
adequate to absorb possible losses on existing loans that
may become uncollectible, based on evaluations of the
collectibility of loans and prior loan loss experience.
The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio,
overall portfolio quality, review of specific problem
loans, and current economic conditions that may affect the
borrowers' ability to pay.
Nonaccrual 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
- - -22-
Note 1. Summary of Significant Accounting Policies (Continued)
Nonaccrual loans (Continued)
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.
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 of 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 cost to sell.
Earnings per share of common stock
Earnings per share of common stock were computed based on
a weighted average of 954,192 shares of common stock
outstanding in 1995 and 1994; and 915,218 shares of common
stock outstanding in 1993, after giving retroactive
recognition to a 5% stock dividend issued in July 1995.
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
in the financial statements. See Note10 for further
details.
Fair values of financial instruments
Statement of Financial Accounting Standards No. 107,
Disclosures About Fair Value of Financial Instruments,
requires 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
- - -23-
Note 1. Summary of Significant Accounting Policies (Continued)
Fair values of financial instruments (Continued)
independent markets and, in many cases, could not be
realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments
and all nonfinancial instruments from its 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 and Cash Equivalents. The carrying amounts of cash
and short-term instruments approximate their fair value.
Securities to be Held to Maturity and 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 monthly maturities on time deposits.
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 Bank's current
incremental borrowing rates for similar types of
borrowing arrangements.
- - -24-
Note 1. Summary of Significant Accounting Policies (Continued)
Fair values of financial instruments (Continued)
Long-Term Borrowings. The fair value of the Bank's
long-term debt is estimated using a discounted cash flow
analysis based on the Bank'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 Bank generally does
not charge commitment fees. Fees for standby letters of
credit and their off-balance-sheet instruments are not
significant.
Note 2. Investments
At December 31, 1995 and 1994 the investment securities
portfolio was comprised of securities classified as
available for sale in conjunction with the adoption of
SFAS 115, resulting in investment securities being carried
at fair value.
The amortized cost and fair values of investment
securities available for sale at December31 were:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(000 omitted)
1995
U. S. Treasury securities
and obligations of U. S.
Government corporations
and agencies $ 7,912 $ 110 $
0 $ 8,022
Obligations of states
and political
subdivisions 11,329 676 0
12,005
Mortgage-backed
securities 10,272 88 34
10,326
Equity securities 314 27
0 341
Totals $ 29,827 $ 901 $
34 $ 30,694
- - -25-
Note 2. Investments (Continued)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(000 omitted)
1994
U. S. Treasury securities
and obligations of U. S.
Government corporations
and agencies $ 7,370 $ 0 $
154 $ 7,216
Obligations of states
and political
subdivisions 7,904 152 189
7,867
Mortgage-backed securities 8,530 14 373
8,171
Equity securities 262 0
6 256
Totals $ 24,066 $ 166 $
722 $ 23,510
The amortized cost and fair values of investment securities
available for sale at December31, 1995, by expected maturity
are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or
prepayment penalties.
Amortized
Cost Fair Value
(000 omitted)
Due in one year or less $ 2,138 $
2,153
Due after one year through five
years 5,530
5,630
Due after five years through ten
years 2,690
2,849
Due after ten years 8,883
9,395
Mortgage-backed securities 10,272
10,326
Equity securities 314
341
$ 29,827 $
30,694
Proceeds from sales of securities available for sale during
1995 and 1994 were $ 6,369,602 and $6,944,826,
respectively. Gross gains and losses on 1995 sales were
$37,559 and $53,389, respectively. Gross gains and losses
on 1994 sales were $ 222,089 and $ 127,019, respectively.
Included in shareholders' equity at December 31, 1995 is
$ 572,000 of unrealized holding gains on securities available
for sale, net of $ 295,000 in deferred taxes. Included in
shareholders' equity at December31, 1994 is $367,000 of
unrealized holding losses on securities available for sale,
net of $189,000 in deferred taxes.
- - -26-
Note 2. Investments (Continued)
Proceeds from sales of investment securities during 1993
were $1,971,410. Gross gains of $20,573 and gross
losses of $0 for 1993 were realized on those sales.
The bank owns $625,900 of Federal Home Loan Bank stock,
$ 54,000 of Atlantic Central Bankers Bank stock and
$ 189,000 of Federal Reserve Bank stock at December 31,
1995. At December31, 1994 the bank's stock ownership was
$564,700 of Federal Home Loan Bank stock, $54,000 of
Atlantic Central Bankers Bank stock and $ 189,000 of
Federal Reserve Bank stock. Market value approximates
cost since none of the stocks are actively traded.
Securities carried at $10,036,000 and $ 8,323,000 at
December31, 1995 and 1994, respectively, were pledged to
secure public funds and for other purposes as required or
permitted by law.
Note 3. Concentration of Credit Risk
The bank grants agribusiness, commercial, residential and
consumer 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. 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. Collateral held varies but
generally includes equipment and real estate.
Note 4. Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as
follows:
1995 1994 1993
(000 omitted)
Balance at beginning of period $ 1,200 $ 1,125 $
1,042
Recoveries 14 12 13
Provision for loan losses
charged to income 270 71
121
Total 1,484 1,208
1,176
Losses 51 8
51
Balance at the end of period $ 1,433 $ 1,200 $
1,125
- - -27-
Note 5. Bank Premises and Equipment
A summary of bank premises and equipment is as follows:
1995 1994
(000 omitted)
Land $ 424 $
375
Buildings and improvements 2,306
1,862
Furniture and equipment 2,006
1,799
Construction in progress 49
0
Total 4,785
4,036
Less accumulated depreciation and
amortization 1,743
1,524
Bank premises and equipment, net $ 3,042 $
2,512
Depreciation expense amounted to $ 250,769 in 1995,
$213,000 in 1994, and $180,000 in 1993.
Note 6. Loans to Related Parties
The bank has granted loans to the officers and directors
of the corporation and its subsidiary and to their
associates. Related party loans are made on substantially
the same terms, including interest rates and collateral,
as those prevailing at the time for comparable
transactions with unrelated persons and do not involve
more than normal risk of collectibility. The aggregate
dollar amount of these loans was $1,758,000 and
$1,827,000 at December31, 1995 and 1994, respectively.
During 1995, $310,000 of new loans were made and
repayments totalled $379,000. During 1994, $866,000 of
new loans were made and repayments totalled $628,000.
Outstanding loans to bank employees totalled $954,000 and
$797,000 for years ended December31, 1995 and 1994,
respectively.
Note 7. Nonaccrual Loans
The following table shows the principal balances of
nonaccrual loans as of December31:
1995 1994 1993
Nonaccrual loans $ 132,000 $ 27,000
$ 0
Interest income that would have
been accrued at original
contract rates $ 1,616 $ 401
$ 0
Amount recognized as interest
income 0 0
0
Foregone revenue $ 1,616 $ 401
$ 0
The corporation had no impairment of loans during 1995 or
1994 as defined by Statement of Financial
Accounting
Standard No. 114.
- - -28-
Note 8. Financial Instruments With Off-Balance-Sheet Risk
The bank is a party to financial instruments with off-
balance-sheet risk in the normal course of business to
meet the financial needs of its customers and to reduce
its own exposure to fluctuations in
interest rates. These
financial instruments include commitments to extend credit
and standby letters of credit. Those instruments involve,
to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the balance
sheets. The contract amounts of those
instruments reflect
the extent of involvement the bank has in particular
classes of financial instruments.
The bank's exposure to credit loss in the event of
nonperformance by the other party to the financial
instrument for commitments to extend credit and standby
letters of credit and financial guarantees written is
represented by the contractual amount of those
instruments. The bank uses the same credit policies in
making commitments and conditional obligations as it does
for on-balance-sheet instruments.
Contract or
Notional Amount
1995 1994
(000 omitted)
Financial instruments whose contract amounts
represent credit risk at December 31:
Commitments to extend credit $ 14,074 $
12,208
Standby letters of credit and financial
guarantees written 2,348
2,035
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of
any condition
established in the contract. Commitments generally have
fixed expiration dates or other termination
clauses and
may require payment of a fee. Since many of the
commitments are expected to
expire without being drawn
upon, the total commitment amounts do not
necessarily
represent future cash requirements. The bank evaluates
each customer's
creditworthiness on a case- by-case basis.
The amount of collateral obtained if deemed necessary
by
the bank upon extension of credit is based
on management's
credit evaluation of the
customer. Collateral held varies
but may include accounts receivable, inventory, real
estate, equipment, and income-producing commercial
properties.
Standby letters of credit and financial guarantees written
are conditional commitments issued by the bank to
guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public
private borrowing arrangements. The credit risk
- - -29-
Note 8. Financial Instruments With Off-Balance-Sheet Risk
(Continued)
involved in issuing letters of credit is essentially the
same as that involved in extending loans to customers.
The bank holds collateral supporting those commitments
when deemed necessary by management.
Note 9. Employee Benefit Plans
The bank maintains a 401(k) profit-sharing plan for those
employees who meet the eligibility requirements set forth
in the plan. Employer contributions to the plan are based
on bank performance and are at the discretion of the
bank's Board of Directors. In addition, there is a
provision for an employer match of 50 cents on the dollar
for employee contributions up to 6% of the employees'
eligible compensation. Substantially all of the bank's
employees are covered by the plan and the contribution
charged to operations was $ 260,334, $219,193, and
$220,744 for 1995, 1994, and 1993, respectively.
The bank has a deferred compensation arrangement with
certain present and former board directors whereby a
director or his beneficiaries will receive a monthly
retirement benefit at age 65. The arrangement is funded
by an amount of life insurance on the participating
director calculated to meet the bank's obligations under
the compensation agreement. The cash value of the life
insurance policies is an unrestricted asset of the bank.
The estimated present value of future benefits to be paid,
which are included in other liabilities, amounted to
$ 179,253 and $188,264 at December31, 1995 and 1994,
respectively. Total annual expense for this deferred
compensation plan was $19,064 for 1995, 1994, and 1993.
A supplemental discretionary deferred compensation plan
for executive officers and directors was started
during 1995. The plan is funded annually with salary and
fee reductions which are placed in a trust account
invested by the Bank's trust department.
Note 10. Income Taxes
The components of federal income tax expense are
summarized as follows:
1995 1994 1993
(000 omitted)
Current year provision $ 820 $ 570 $ 544
Deferred income taxes (benefits) ( 78) ( 13) (
19)
Accrued refund due 0 ( 37) 0
Net federal income tax expense $ 742 $ 520 $ 525
- - -30-
Note 10. Income Taxes (Continued)
Federal income taxes were computed after reducing pretax
accounting income for non-taxable income in the amount of
$ 599,000, $589,000, and $601,000 for 1995, 1994, and
1993, respectively.
A reconciliation of the effective applicable income tax
rate to the federal statutory rate is as follows:
1995 1994 1993
Federal income tax rate 34.0% 34.0%
34.0%
Reduction resulting from:
Nontaxable interest income and
deferred taxes 6.5 9.9 7.9
Effective income tax rate 27.5% 24.1%
26.1%
Deferred tax liabilities have been provided for taxable
temporary differences related to accumulated depreciation
and unrealized gains on available for sale securities.
Deferred tax assets have been provided for deductible
temporary differences related to the allowance for loan
losses, directors' deferred compensation and unrealized
losses on available for sale securities. The net deferred
tax assets included in other assets in the accompanying
consolidated balance sheets include the following
components:
1995 1994
Total deferred tax assets $ 472,000 $
566,000
Total deferred tax liabilities ( 410,000) (
99,000)
Net deferred tax asset $ 62,000 $
467,000
The corporation has not recorded a valuation allowance for
the deferred tax assets as they feel that it is more
likely than not that they will be ultimately realized.
Note 11. Deposits
Included in interest bearing deposits at December31 are
NOW and Super NOW account balances totalling $ 13,215,000
and $11,554,000 for 1995 and 1994, respectively. Also
included in interest bearing deposits at December31, 1995
and 1994 are money market account balances totalling
$ 13,104,000 and $14,971,000, respectively.
At December31, 1995 and 1994 time deposits of $100,000
and over aggregated $ 6,447,000 and $4,804,000,
respectively.
Interest expense on time deposits of $ 100,000 and over
was $ 337,000; $ 220,000; and $ 239,000 for 1995, 1994 and
1993, respectively.
- - -31-
Note 11. Deposits (Continued)
The bank accepts deposits of the officers and directors of
the corporation and its subsidiary on the same terms,
including interest rates, as those prevailing at the time
for comparable transactions with unrelated persons. The
aggregate dollar amount of deposits of officers and
directors totaled $ 1,194,510 and $732,019 at
December31, 1995 and 1994, respectively.
Note 12. Liabilities For Borrowed Money
At December 31, 1995 and 1994 the corporation had two
long-term notes with the Federal Home Loan Bank of
Pittsburgh as follows:
Amount Maturity Date Interest Rate
$ 1,000,000 2004 6.42%
1,000,000 2003 6.58%
$ 2,000,000
Interest rates are fixed and interest only is paid on a
monthly basis. The notes contain prepayment penalty
charges, but management has no intention to pay off early.
In addition to the aforementioned long-term notes the bank
obtained a term loan in 1994 totaling $350,000 with the
Federal Home Loan Bank of Pittsburgh. The corporation
repaid $ 5,026 in 1995. The maturity dates and applicable
fixed interest rates on the remaining balance at
December 31, 1995 are as follows:
Amount Maturity Date Rate
$ 5,291 2/96 4.31%
5,570 2/97 4.61%
5,863 2/98 5.00%
6,173 2/99 5.21%
6,498 2/00 5.48%
315,579 2/01 5.58%
$ 344,974
In addition, the bank has available a line of credit with
the Federal Home Bank of Pittsburgh which is limited to
10% of the corporation's total assets. Collateral for the
line consists of the corporation's 1-4 family mortgage
loans totaling $58,953,000 at December31, 1995. The
corporation also has available an unused line of credit
with Atlantic Central Bankers Bank of $3.5 million at
December31, 1995.
Total interest on the aforementioned borrowings charged to
operations in 1995 and 1994 were $ 149,083 and $146,577,
respectively.
- - -32-
Note 13. Orrstown Financial Services, Inc. (Parent Company Only)
Financial Information
The following are the condensed balance sheets, income
statements and statements of cash flows for the parent
company:
Balance Sheets
December 31
Assets 1995 1994
(000 omitted)
Cash $ 186 $
14
Interest-bearing balances with banks 0 250
Securities available for sale 341 256
Investment in Orrstown Bank 14,154
11,835
Furniture and equipment (net of
depreciation) 1 2
Other assets 0
2
Total assets $ 14,682 $
12,359
Liabilities
Accrued management fee 40
0
Accrued taxes and other liabilities 9
6
Total liabilities 49
6
Stockholders' Equity
Common stock, no par value - $ .2083
stated value per share, 2,000,000
shares authorized with 976,863 and
930,891 issued at December 31,
1995 and 1994, respectively $ 204
$ 194
Additional paid-in capital 10,625
9,393
Retained earnings 3,232
3,133
Unrealized holding losses 572
( 367)
Total
stockholders' equity 14,633
12,353
Total
liabilities and
stockholders'
equity $ 14,682 $ 12,359
Income Statements
Years Ended December 31
1995 1994 1993
(000 omitted)
Interest and dividend
income $ 20 $ 16 $
11
Net gain on sale of
investment 0 112 0
Cash dividends from wholly-
owned subsidiary 614 512 560
Equity in undistributed
income of subsidiary 1,401 1,077
962
2,035 1,717
1,533
Less: Operating expenses 81 82
49
Net income $ 1,954 $ 1,635 $
1,484
- - -33-
Note 13. Orrstown Financial Services, Inc. (Parent Company Only)
Financial Information (Continued)
Statements of Cash Flows
Years Ended December 31
1995 1994 1993
(000 omitted)
Cash flows from operating
activities:
Net income $
1,954 $ 1,635 $ 1,484
Adjustments to
reconcile net
income to cash
provided by
operating activities:
Depreciation and
amortization 0 0 5
Security (gains) 0 ( 112) 0
Equity in undistributed
income of subsidiary ( 1,401) ( 1,077) (
962)
Increase (decrease) in
accrued liabilities 34 6
0
Net cash provided by operating
activities 587 452
527
Cash flows from investing activities:
Net decrease (increase) in
interest-bearing deposits
with banks 250 ( 250) 0
Purchase of available for
sale securities ( 52) ( 60) 0
Sales of available for
sale securities 0 315
0
Net cash provided by
investing activities 198 5
0
Cash flows from financing
activities:
Cash dividends paid ( 599) ( 512) (
472)
Cash paid in lieu of
fractional shares ( 14) 0 0
Proceeds from stock sales 0 0
2
Net cash (used) by financing
activities ( 613) ( 512) (
470)
Net increase (decrease) in cash 172 ( 55) 57
Cash, beginning balance 14 69
12
Cash, ending balance $ 186 $ 14 $
69
Supplemental disclosure of cash
flows information:
Cash paid during the year for:
Income taxes $ 6 $ 0 $
0
- - -34-
Note 13. Orrstown Financial Services, Inc. (Parent Company Only)
Financial Information (Continued)
Dividends paid by Orrstown Financial Services, Inc. are
provided from the bank's dividends to the parent company.
Under provisions of the Pennsylvania Banking Code, cash
dividends may be paid from accumulated net earnings
(retained earnings) as long as minimum capital
requirements are met. The minimum capital requirements
stipulate that the bank's surplus or additional paid-in
capital be equal to the amount of capital. Orrstown Bank
is well above these requirements and the balance of
$7,301,000 in its retained earnings at December31, 1995
is fully available for cash dividends. Orrstown Financial
Services' balance of retained earnings at December31,
1995 is $3,232,000 and would be available for cash
dividends, although payment of dividends to such extent
would not be prudent or likely. The Federal Reserve
Board, which regulates bank holding companies, establishes
guidelines which indicate that cash dividends should be
covered by current period earnings.
Note 14. Leases
The bank leases land and building space associated with
its various remote automated teller machines under
agreements which expire at various times through 1997.
Total rent expense charged to operations in connection
with these leases was $ 16,920, $17,520, and $18,120 for
1995, 1994, and 1993, respectively.
The total minimum rental commitment under operating leases
at December31, 1995 is as follows:
Due in the year ending December 31, 1996 $ 9,120
1997 3,660
Note 15. Compensating Balance Arrangements
Required deposit balances at the Federal Reserve were
$ 65,000 at December31, 1995 and 1994. Required
deposit
balances at Atlantic Central Bankers Bank were $ 585,000
and $834,000 at
December31, 1995 and 1994, respectively.
These balances are maintained to cover processing costs
and service charges. An additional $16,200 is on deposit
with First Union National Bank of Florida
as a reserve for
potential clearing
losses related to the credit card
operations.
Note 16. Changes in Common Stock
In June 1995, the Board of Directors approved a 5% stock
dividend with 45,972 new shares issued.
In November 1993, the Board of Directors approved a 5%
stock dividend with 26,148 shares issued out of treasury
stock and 17,658 new shares issued.
- - -35-
Note 17. Branch Acquisition
In September, 1995, the Orrstown Bank acquired a branch of
another bank. The acquisition included deposits of
$ 12,373,000 and land, building and equipment of
$ 376,000.
Note 18. Fair Value of Financial Instruments
Statement on Financial Accounting Standards (SFAS) No.
107, Disclosure About Fair Value of Financial Instruments,
became effective for the corporation's 1995 financial
statements. The estimated fair values of the
corporation's financial instruments were as follows at
December31, 1995:
Carrying Amount Fair Value
(000 Omitted)
FINANCIAL ASSETS
Cash and due from banks $ 4,330 $ 4,330
Federal funds sold 2,317 2,317
Interest bearing deposits
with banks 1,289 1,289
Securities available for sale 29,827 30,694
Other bank stock 869 869
Loans receivable 102,857 102,621
Accrued interest receivable 993 993
FINANCIAL LIABILITIES
Deposits 127,330 127,616
Borrowed funds 2,345 2,353
Accrued interest payable 887 887
Note 19. Commitments
In 1995 the corporation began the renovation of a building
adjacent to its King Street, Shippensburg office. Total
commitments remaining on this project at December 31, 1995
aggregated $ 370,000.
In addition, the corporation has entered into a contract
for the installation of a computer network. The
remaining commitment on the contract was $ 120,000 at
December 31, 1995. Both of the aforementioned projects
are expected to be completed in 1996.
- - -36-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
SUMMARY OF QUARTERLY FINANCIAL DATA
The unaudited quarterly results of operations for the years
ended December31, 1995 and 1994 are as follows:
1995
($ 000 omitted Quarter Ended
except per share) Mar. 31 June 30 Sept. 30 Dec. 31
Interest income $ 2,430 $ 2,661 $ 2,808 $ 2,930
Interest expense 968 1,089 1,208 1,277
Net interest income 1,462 1,572 1,600 1,653
Provision for loan
losses 30 30 30 180
Net interest income
after provision for
loan losses 1,432 1,542 1,570 1,473
Securities gains
(losses) ( 21) ( 2) ( 21)
( 2)
Other income 209 236 243 293
Other expenses 1,010 1,082 968 1,196
Operating income
before income taxes 610 694 824 568
Applicable income
taxes 176 217 231 118
Net income $ 434 $ 477 $ 593 $ 450
Net income applicable
to common stock
Per share data:
Net income $ .46 $ .50 $ .62 $ .47
- - -37-
1994
($ 000 omitted Quarter Ended
except per share) Mar. 31 June 30 Sept. 30 Dec. 31
Interest income $ 1,989 $ 2,036 $ 2,179 $ 2,367
Interest expense 769 783 829 860
Net interest income 1,220 1,253 1,350 1,507
Provision for loan
losses 5 0 0 66
Net interest income
after provision for
loan losses 1,215 1,253 1,350 1,441
Securities gains
(losses) 14 45 60 ( 24)
Other income 178 208 186 193
Other expenses 915 935 1,023 1,091
Operating income
before income taxes 492 571 573 519
Applicable income taxes 121 149 149 101
Net income $ 371 $ 422 $ 424 $ 418
Net income applicable
to common stock
Per share data:
Net income $ .39 $ .44 $ .44 $ .44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in
conjunction with the selected supplementary financial information
presented in this report.
OPERATING RESULTS
Net income was $1,954,000 for 1995, compared to $1,635,000
for 1994, representing an increase of $ 319,000 or 19.5%. Net
income on an adjusted per share basis for 1995 was $ 2.05, up $ .34
from the $ 1.71 per share realized during 1994.
Interest income for 1995 was $ 10,829,000, up $ 2,258,000, or
26.3% over 1994. The volume of earning assets increased 16.3% in
1995 and 7.5% in 1994. Average rates continued to rebound after
steady decreases throughout 1993 and 1992.
Loan demand continued to increase significantly in 1995.
Total loans at December 31, 1995 stood at $ 102,857,000 compared to
$ 90,839,000 as of December 31, 1994. Increases in earning assets
in 1995 were primarily in loans which typically produce higher
yields than investments. An overall increase of 13.2% in loans was
realized with most of the loan growth being concentrated in
mortgage and commercial loans. This growth is consistent with
management's plans following an expansion into the Carlisle,
Pennsylvania market in March of 1994. Net interest margins were
maintained at desired levels throughout 1995 by closely monitoring
rates.
Total interest expense was $ 4,542,000 for 1995, an increase
of $ 1,301,000 over the $ 3,241,000 for 1994. The increase in
total deposits was 19.7% in 1995 compared to 7.9% in 1994.
Approximately 11.3% of the increase was due to the September 1995
purchase of the Spring Run branch from another local bank. This
represents a significant increase in deposit growth, but the most
important factor is where the deposit growth has occurred, as
indicated in the following trends:
Noninterest-bearing deposits increased 5.3% over the
previous year
Average balances of interest-bearing demand and savings
decreased 8.0% and .9%, respectively
Average balances in time deposits increased 42.2% in 1995
Due to increasing rates, deposits previously maintained in
more liquid accounts such as statement savings and money market
accounts were moved to longer term certificates.
By having a significantly higher portion of the deposit
growth occurring in the higher priced deposits, the bank has
experienced proportionately higher interest costs as interest rates
rose during 1995. Management continues to direct its marketing
efforts toward attracting more low cost retail deposits while
continuing to competitively price its time deposits in order to
maintain favorable net interest margins.
- - -38-
Net interest income is the difference between total interest
income and total interest expense. Interest income is generated
through earning assets which include loans, interest on deposits
with other banks and investments. The amount of interest income is
dependent on many factors including the volume of earning assets,
the level of interest rates and the changes in interest rates, and
volumes of nonperforming loans. The cost of funds varies with the
volume of funds necessary to support earning assets, the rates paid
to maintain deposits, rates paid on borrowed funds and the level of
interest-free deposits.
Net interest income for 1995 totaled $ 6,287,000, up
$ 957,000 over 1994. Management continuously monitors liquidity
and interest rate risk through its ALCO reporting and reprices
products in order to maintain desired net interest margins.
Other income represents service charges on deposit accounts;
fees received for foreign ATM transactions, loan insurance, credit
cards, travelers' checks and other services; fees for trust
services; securities gains and losses and other income such as safe
deposit box rents and gains (losses) on sales of property and
equipment.
Other income increased $ 75,000 from 1994 to 1995. The
increase in 1995 was due largely to increases in Trust Department
income, service charge income, and income from the sale of mutual
funds. The corporation initiated a project in 1995 for the purpose
of expanding the Trust Department and other administrative
facilities by renovating a property adjacent to its King Street,
Shippensburg office which management feels will facilitate further
growth of its trust activities and provide more opportunities for
increased trust revenues. The project is expected to be completed
in 1996. The 1994 results reflected a $ 112,000 gain from the sale
of stock. The 1993 results reflected a $ 42,000 loss from the sale
of property received through loan foreclosure. The loss in 1993
was partially offset by an increase in Trust Department income of
$ 38,000.
The noninterest expenses are classified into four main
categories: salaries and employee benefits; occupancy expenses and
furniture and equipment expenses which include depreciation,
maintenance, utilities, taxes, insurance, rents and maintenance;
FDIC insurance premiums; and other operating expenses which include
all other expenses incurred in daily operations.
Employee related expenses increased 10.0% and 10.8% for 1995
and 1994, respectively, primarily due to salary and related benefit
increases. The largest proportionate increase in noninterest
expenses was for occupancy expense which increased 15.0% and 20.0%
in 1995 and 1994, respectively. This increase is due to the
additional depreciation expense associated with the Carlisle and
Spring Run branches and the purchase of new data processing
equipment in 1994. Management expects increases in employee
related expenses and occupancy expense to continue with the
addition of the Spring Run branch and the expansion project at the
King Street, Shippensburg, Pennsylvania location which was started
- - -39-
during the fourth quarter 1995. Other operating expenses were
unchanged, largely due to a 43.4% decrease in FDIC insurance
premiums offset by an increase in merchant processing charges, the
amortization of the deposit premium paid on the Spring Run branch
acquisition and personnel training.
Applicable income taxes changed between 1993, 1994 and 1995
as a result of changes in pre-tax accounting income and taxable
income. The effective tax rate for 1995 increased over 1994 due to
the proportionate decrease in nontaxable interest income in
relation to total income.
FINANCIAL CONDITION
Total assets at December 31, 1995 were $ 145,998,000, an
18.7% increase over December 31, 1994. Net loans at December 31,
1995 totaled $ 101,424,000, an increase of $ 11,785,000 over the
$ 89,639,000 level at December 31, 1994.
The provision for loan losses was $ 270,000 in 1995 compared
to $ 71,000 in 1994. The provisions were based on management's
evaluation of the adequacy of the reserve balance and represents
amounts considered necessary to maintain the reserve at the
appropriate level based on the quality of the loan portfolio and
economic conditions. The bank's history of net charge-offs has
traditionally been better than peer group performance with an
average rate of .04% of average loans outstanding over the past
five years. While this trend is expected to continue management
recognizes the need to build the reserve to meet the expected
increased risks associated with a growing loan portfolio and an
expanding customer base. Therefore, it is management's intention
to maintain the reserve at appropriate levels based on an ongoing
evaluation of the loan portfolio. Based on the evaluation
performed in the fourth quarter of 1995 and the projected loan
growth for 1996, management increased the provision by $ 180,000 in
the fourth quarter of 1995.
Loans 90 days or more past due (still accruing interest) and
those on nonaccrual status were as follows at December 31 (in
thousands):
90 Days or More
Past Due Nonaccrual Status
1995 1994 1995 1994
Real estate mortgages $ 322 $ 166 $ 92 $ 0
Installment loans 82 95 34 27
Demand and time loans 4 0 0 0
Credit card 9 1 6 0
Total $ 417 $ 262 $ 132 $ 27
There were no restructured loans for any of the time periods
set forth above.
- - -40-
Total deposits increased to $ 127,330,000 at December 31,
1995 compared to $ 106,365,000 at December 31, 1994. Increases
were largely a result of the Spring Run branch acquisition in
September, 1995.
Stockholders' equity reached $14,633,000 at December31,
1995 for an 18.5% increase over the prior year. The increase in
stockholders' equity was partially due to a $572,000 unrealized
holding gain on investment securities categorized "available for
sale", in accordance with SFAS 115. Total stockholders' equity
represented 10.0% of total assets at the end of 1995 and 1994. The
primary source of capital growth in 1995 has been from retained
earnings. Cash dividends paid in 1995 were up $87,000 over the
previous year. In June 1995 the board approved a 5% stock
dividend, issuing 45,972 shares of new stock. It is the management
and the Board of Directors' intention to continue paying a fair
return on the stockholders' investment while retaining adequate
earnings to allow for continued growth.
As described in Note 1 of the Notes to Consolidated Financial
Statements, deferred income taxes have been provided for timing
differences in the recognition of certain expenses between
financial reporting and tax purposes. Deferred income taxes have
been provided at prevailing tax rates for such items as
depreciation, provision for loan losses, deferred compensation and
unrealized holding losses on available for sale securities. At
December31, 1995, deferred taxes amounted to $62,000. If all
timing differences reversed in 1995, the actual income taxes saved
by the recognition of the aforementioned expenses would not be
significantly different from the deferred income taxes recognized
for financial reporting purposes.
The current level of nontaxable investment and loan income is
such that the bank is not affected by the Alternative Minimum Tax
rules.
The schedule below reflects comparative changes in income and
expense included in the Consolidated Statements of Income for 1995
and 1994 together with changes in asset and liability volumes
associated with these income and expense items.
- - -41-
1995 Compared to 1994
Average Volumes Income/Expense
($ 000 omitted) $ % $ %
Loans 15,922 19.8
2,114 30.7
Investment securities1,469 6.1 137 9.3
Other investments 56 5.1 7 3.3
Total17,447 16.3 2,258 26.3
Interest/borrowed funds 679 28.5 43 28.7
Interest bearing demand
deposits( 2,184) ( 8.0) ( 50) (
7.6)
Savings deposits ( 225) ( .9) 43 6.1
Time deposits 15,824 42.2 1,265 74.0
Total 14,094 15.4 1,301 42.1
Net interest income 957 18.0
Provision for loan losses 199 280.3
Net interest income after
provision for loan losses 75814.4
Security transactions ( 140)(147.4)
Other operating income 215 28.1
Income before operating expense 833 13.6
Salaries & employee benefits 21110.0
Occupancy & equipment expense 7315.0
FDIC insurance premiums ( 96) ( 43.4)
Other operating expenses 1049.1
Total operating expenses 292 7.4
Income before income taxes 541 25.1
Applicable income taxes 22242.7
Net income 319 19.5
- - -42-
1994 Compared to 1993
Average Volumes Income/Expense
($ 000 omitted) $ % $ %
Loans9,164 12.6 554 8.8
Investment securities(3,867) ( 13.2) (342) ( 18.8)
Other investments2,363 229.2 109 103.8
Total7,660 7.5 321 3.9
Interest/borrowed funds1,132 90.6 84 103.1
Interest bearing demand
deposits1,486 5.8 ( 65) ( 6.7)
Savings deposits2,645 12.1 42 6.1
Time deposits1,528 4.2 51 3.1
Total6,791 8.0 112 3.7
Net interest income 209 4.1
Provision for loan losses ( 50) ( 41.3)
Net interest income after
provision for loan losses 259 5.2
Security transactions 100 2000.0
Other operating income 158 26.0
Income before operating expense 517 9.2
Salaries & employee benefits 207 10.8
Occupancy & equipment expense 81 20.0
FDIC insurance premiums 10 4.7
Other operating expenses 73 6.8
Total operating expenses 371 10.3
Income before income taxes 146 7.3
Applicable income taxes ( 5) ( 1.0)
Net income 151 10.2
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board has recently issued
two Statements of Financial Accounting Standards. SFAS No. 121
"Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" applies to such assets as property, plant
and equipment; capital leases; certain intangibles and related
goodwill. This statement provides measurement standards when such
assets are deemed to be "impaired".
SFAS No. 122 "Accounting for Mortgage Servicing Rights"
amends SFAS No. 65 and provides expanded requirements for the
accounting and measurement of servicing rights for both purchased
and originated mortgages.
Both statements are effective for fiscal years beginning
after December 15, 1995.
Management does not anticipate that either of these
statements will impact future operations.
- - -43-
LIQUIDITY
Liquidity and interest rate sensitivity are related but
distinctly different from one another.
Liquidity involves the bank's ability to meet cash withdrawal
needs of customers and their credit needs in the form of loans.
Liquidity is provided by cash on hand and transaction balances held
at correspondent banks. Liquidity available to meet credit demands
and/or adverse deposit flows is also made available from sales or
maturities of short-term assets. Additional sources of funds to
meet credit needs is provided by access to the marketplace to
obtain interest-bearing deposits and other borrowings, including
special programs available through Federal Home Loan Bank.
Interest rate sensitivity is the matching or mismatching of
the maturity and rate structure of the interest-bearing assets and
liabilities. It is the objective of management to control the
difference in the timing of the rate changes for these assets and
liabilities to preserve a satisfactory net interest margin. The
following table approximately reflects the matching of assets and
liabilities maturing within one year and thereafter, which
management feels is adequate to meet customer cash and credit needs
while maintaining a desired interest rate spread.
Due Due Due Due Due
0 -30 31-90 91-180 181-360 After
(000 omitted) Days Days Days Days 1 Year Total
Rate Sensitive Assets
Interest bearing
deposits
with
banks $ 1,289 $ 0 $ 0 $ 0 $ 0 $
1,289
Other short-
term
investments 2,317 0 0 0 0
2,317
Investment
securities 3,786 59 1,089 1,307 24,453
30,694
Real estate,
commercial and
consumer
loans 25,886 5,960 12,636 25,614
32,761 102,857
$ 33,278 $ 6,019 $ 13,725 $ 26,921 $
57,214$ 137,157
- - -44-
Due Due Due Due Due
0 -30 31-90 91-180 181-360 After
(000 omitted) Days Days Days Days 1 Year Total
Rate Sensitive
Liabilities
Certificates of
deposit over
$ 100,000 $ 600 $ 710 $ 1,308 $ 1,000 $
2,829 $ 6,447
Other
certificates
of deposit 3,907 2,862 14,534 9,885 22,56853,756
Money market
deposit
accounts 1,092 2,184 3,276 6,552 013,104
Other
interest-bearing
deposits 3,338 6,677 10,015 20,031 040,061
Long-term
borrowings 0 5 0 0
2,340 2,345
$ 8,937 $ 12,438 $ 29,133 $ 37,468 $
27,737$ 115,713
Cumulative
GAP $ 24,341 $ 17,922 $ 2,514 ($ 8,033)
$ 21,444
Money market accounts totaling $ 13,104,000, interest bearing
checking accounts totaling $ 13,215,000, and regular savings
totaling $ 25,536,000 have been included proportionately in rate
sensitive liabilities of one year or less due to these funds being
subject to immediate withdrawal. However, in monitoring and
evaluating liquidity throughout the year, management normally does
not consider regular savings to be particularly rate sensitive due
to the fact that rates are generally consistent among institutions
in Orrstown's trading area; nor does management consider all
interest bearing checking accounts to be due within one year since
it is unlikely that 100% of these deposits will be withdrawn within
the next 360 days. Therefore, management generally considers 50%
of these funds to be due within one year when repricing deposits
and evaluating liquidity.
CAPITAL FUNDS
Internal capital generation has been the primary method
utilized by Orrstown Financial Services, Inc. to increase its
capital. Stockholders' equity, which exceeded $14 million at
December31, 1995 has steadily increased. Regulatory authorities
have established capital guidelines in the form of the "leverage
ratio" and "risk-based capital ratios." The leverage ratio
compares capital to total balance sheet assets, while the risk-
based ratios compare capital to risk-weighted assets and off-
balance-sheet activity in order to make capital levels more
sensitive to risk profiles of individual banks. A comparison of
Orrstown Financial Services' capital ratios to regulatory minimums
at December31 is as follows:
- - -45-
Orrstown Financial Services Regulatory Minimum
1995 1994 Requirements
Leverage ratio 10.0% 10.0% 4%
Risk-based capital
ratio
Tier I (core
capital) 16.2% 17.1% 4%
Combined Tier I
and Tier II (core
capital plus allowance
for loan losses) 17.8% 18.7% 8%
Orrstown Financial Services, Inc. has traditionally been well
above required levels and expects equity capital to continue to
exceed regulatory guidelines and industry averages. Certain ratios
are useful in measuring the ability of a company to generate
capital internally.
The following chart indicates the growth in equity capital
for the past three years.
1995 1994 1993
Equity capital at December 31
($ 000 omitted) $ 14,633 $ 12,353 $
11,597
Equity capital as a percent
of assets at December 31 10.0%10.0% 10.2%
Return on average assets 1.44%1.38% 1.36%
Return on average equity 14.40%13.36% 13.24%
Cash dividend payout ratio 30.7%31.3% 30.9%
STOCK MARKET ANALYSIS AND DIVIDENDS
The corporation's common stock is traded inactively in the
over-the-counter market. As of December31, 1995 the approximate
number of shareholders of record was 1,422.
Market Cash Market Cash
Price Dividend Price Dividend(1)
1995 1994
First Quarter $ 27.00 $ .15 $ 25.00 $ .13
Second Quarter 27.00 .15 25.00 .13
Third Quarter 30.00 .15 26.00 .14
Fourth Quarter 30.00 .17 27.00 .14
(1) Note: Cash dividends per share for 1994 were based on
weighted average shares of common stock
outstanding in 1994 after giving retroactive
recognition to a 5% stock dividend issued in July
1995.
- - -46-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
For additional information concerning liquidity, refer to
statistical disclosures applicable to the investment and loan
portfolio.
Closely related to the management of liquidity is the
management of rate sensitivity which focuses on maintaining stability
in the net interest margin. As illustrated in the table below the tax
equivalent net interest margin ranged from 4.8% to 5.0% of average
earning assets during the past 3 years. An asset/liability committee
monitors and coordinates overall the asset/liability strategy.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
Interest Rates and Interest Differential Tax Equivalent Yields
Years Ended December 31
ASSETS 1995 1994
Average Average
(000 omitted) Balance Interest Rate Balance Interest Rate
Investment securities:
Taxable interest
income $ 18,355 $ 1,083 5.9% $ 17,170
$ 963 5.6%
Nontaxable
interest income 8,488 529 6.2 8,148
512 6.3
Total investment
securities 26,843 1,612 6.0 25,318
1,475 5.8
Loans (net of
unearned discounts) 97,662 8,996 9.2 81,740
6,882 8.4
Other short-term
investments 2,406 221 9.2 3,394
214 6.3
Total interest
earning assets 126,911 $ 10,829 8.5 110,452
$ 8,571 7.8%
Allowance for loan
losses ( 1,257) (
1,136)
Cash and due from banks 3,143 4,208
Bank premises and
equipment 2,727 2,530
Other assets 4,124 2,334
Total assets $ 135,648 $ 118,388
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing
demand deposits $ 25,048 $ 617 2.5% $ 27,232
$ 668 2.5%
Savings deposits 24,200 758 3.1 24,425 714
2.9
Time deposits 53,350 2,974 5.6 37,526
1,710 4.6
Short-term borrowings 715 44 6.1 77 3
3.9
Long-term borrowings 2,345 149 6.3 2,304
146 6.3
Total interest
bearing liabilities 105,658 $ 4,542 4.3% 91,564
$ 3,241 3.5%
Demand deposits 13,833 12,991
Other liabilities 2,587 1,595
Total liabilities 122,078 106,150
Stockholders' equity 13,570 12,238
Total liabilities &
stockholders'
equity $ 135,648 $ 118,388
Net interest income/net
yield on average
earning assets $ 6,287 5.0% $ 5,330
4.8%
- - -47-
Year Ended December 31
ASSETS 1993
Average
(000 omitted) Balance Interest Rate
Investment securities:
Taxable interest income $ 20,734 $ 1,278 6.2%
Nontaxable interest income 8,451 539 6.4
Total investment securities 29,185 1,817 6.2
Loans (net of unearned discounts) 72,576 6,328 8.7
Other short-term investments 1,031 105
10.2
Total interest earning assets 102,792 $ 8,250
8.0%
Allowance for loan losses ( 1,080)
Cash and due from banks 4,278
Bank premises and equipment 1,666
Other assets 1,896
Total assets $ 109,552
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand deposits $ 25,746 $ 735 2.8%
Savings deposits 21,780 672 3.1
Time deposits 35,998 1,657 4.6
Short-term borrowings 521 17 3.3
Long-term borrowings 728 48
6.6
Total interest
bearing liabilities 84,773 $ 3,129
3.7%
Demand deposits 12,052
Other liabilities 1,518
Total liabilities 98,343
Stockholders' equity 11,209
Total liabilities &
stockholders' equity $ 109,552
Net interest income/net
yield on average earning assets $ 5,121
5.0%
For purposes of
calculating loan yields, the average loan
volume includes nonaccrual loans. For purposes of calculating
yields on nontaxable interest income, the taxable equivalent
adjustment is made to equate nontaxable interest on the same basis
as taxable interest. The marginal tax rate was 34% for 1995, 1994
and 1993.
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CHANGES IN NET INTEREST INCOME TAX EQUIVALENT YIELDS
1995 Versus 1994
Increase (Decrease)
Due to Change in
Total
Average Average Increase
Volume Rate (Decrease)
(000 omitted)
Interest Income
Loans (net of unearned discounts) $ 1,337 $ 777 $
2,114
Taxable investment securities 66 54 120
Nontaxable investment securities 21 ( 4) 17
Other short-term investments ( 62)
69 7
Total interest income 1,362 896
2,258
Interest Expense
Interest bearing demand ( 53) 3
( 50)
Savings deposits ( 9) 52
43
Time deposits 728 537
1,265
Short-term borrowings 25 16 41
Long-term borrowings 2 0
2
Total interest expense 693 608
1,301
Net interest income $
957
- - -48-
1994 Versus 1993
Increase (Decrease)
Due to Change in
Total
Average Average Increase
Volume Rate (Decrease)
(000 omitted)
Interest Income
Loans (net of unearned discounts) $ 770 ($ 216) $ 554
Taxable investment securities ( 211) ( 104) (
315)
Nontaxable investment securities ( 29) 2 (
27)
Other short-term investments 96 13 109
Total interest income 626 ( 305) 321
Interest Expense
Interest bearing demand 37 ( 85) (
48)
Savings deposits 77 ( 35) 42
Time deposits 70 ( 19) 51
Short-term borrowings ( 19) 5 (
14)
Long-term borrowings 100 ( 19) 81
Total interest expense 265 ( 153) 112
Net interest income $
209
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.
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
The following table shows the maturities of investment
securities at book value as of December31, 1995, and weighted
average yields of such securities. Yields are shown on a tax
equivalent basis, assuming a 34% federal income tax rate.
After 1 year After 5 years
Within but within but within After
1 year 5 years 10 years 10 years Total
(000 omitted)
Bonds:
U. S. Treasury
Book value $ 2,008 $ 4,826 $ 1,078 $ 0 $
7,912
Yield 6.17% 5.82% 6.06% 0% 5.95%
U. S. Government
agencies
Book value 0 1,812 1,921 6,539
10,272
Yield 0% 6.32% 6.62% 6.57% 6.77%
State and municipal
Book value 130 704 1,611 8,884
11,329
Yield 7.9% 6.49% 6.42% 5.98% 6.06%
Total book
value $ 2,138 $ 7,342 $ 4,610 $ 15,423 $
29,513
Yield 6.27% 6.01% 6.42% 6.23%
6.28%
Equity Securities:
Total Equity Securities $
1,183
Yield 5.4%
Total Investment Securities $
30,696
Yield
6.25%
- - -49-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
LOAN PORTFOLIO
The following table presents the loan portfolio at the
end of each of the last five years:
1995 1994 1993 1992 1991
(000 omitted)
Commercial, financial
and agricultural $ 8,211 $ 6,970 $ 5,281 $
5,630 $ 5,503
Real estate -
Construction 5,706 5,038 3,758 3,493
2,419
Real estate - Mortgage 75,731 68,458 57,278 52,711
45,384
Installment and other
personal loans (net of
unearned discount) 11,880 8,698 9,257 9,073
12,077
Credit cards 1,329 1,675 0
0 0
Total loans $ 102,857 $ 90,839 $ 75,574
$ 70,907 $ 65,383
Presented below are the approximate maturities of the
loan portfolio (excluding real estate mortgages, installments and
credit cards) at December31, 1995:
Under One One to Over Five
Year Five Years Years Total
(000 omitted)
Commercial, financial
and agricultural $ 1,232 $ 1,478$
5,501 $ 8,211
Real estate - Construction 856 1,027
3,823 5,706
Total $ 2,088 $ 2,505 $ 9,324 $
13,917
The following table presents the approximate amount of
fixed rate loans and variable rate loans due as of December31,
1995:
Fixed Rate Variable
Loans Rate Loans
(000 omitted)
Due within one year $ 6,490 $ 11,151
Due after one but within
five years 16,778 15,742
Due after five years 12,510 40,186
Total $ 35,778 $ 67,079
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ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December31
1995 1994 1993 1992 1991
(000 omitted)
Average total loans
outstanding (net of
unearned income) $ 97,662 $ 81,740 $ 72,576 $
67,871 $ 62,701
Allowance for loan
losses, beginning
of period $ 1,200 $ 1,125 $ 1,042
$ 716$ 575
Additions to provision
for loan losses
charged to operations 270 71 121 366170
Loans charged off
during the year
Commercial 0 0 17 06
Personal credit lines 3 1 3 66
Installment 48 7 31
45 35
Total charge-off's 51 8 51
51 47
Recoveries of loans
previously charged off:
Commercial 0 0 0 00
Installment 14 12 13 1017
Personal credit
lines 0 0 0
1 1
Total recoveries 14 12 13
11 18
Net loans charged off
(recovered) 37 ( 4) 38
40 29
Allowance for loan
losses, end of
period $ 1,433 $ 1,200 $ 1,125
$ 1,042 $ 716
Ratio of net loans
charged off to
average loans
outstanding .04% 0.0% .05% .06%
.05%
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.
- - -51-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
LOANS
The following table sets forth the outstanding balances
of those loans on a nonaccrual status and those on accrual status
which are contractually past due as to principal or interest
payments for 30 days or more at December31.
1995 1994 1993 1992 1991
(000 omitted)
Nonaccrual loans $ 132 $ 27 $ 0 $ 781 $
814
Accrual loans:
Restructured $ 0 $ 0 $ 0 $ 0 $
0
30 through 89
days past due 1,949 1,553 1,468 1,974
2,063
90 days or
more past due 417 155 150 63
165
Total accrual
loans $ 2,366 $ 1,708 $ 1,618 $ 2,037 $
2,228
See Note 7 of the notes to consolidated financial statements
for details of income recognized and foregone revenue on nonaccrual
loans for the past three years.
Management has not identified any significant problem loans
in the accrual loan categories shown above.
- - -52-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
The following is an allocation by loan categories of the
allowance for loan losses at December31 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 December31
1995 1994
Percentage Percentage
Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans
(000 omitted)
Commercial, financial
and agricultural $ 114 7.98% $ 113
9.42%
Real estate -
Construction 80 5.55 67 5.58
Real estate -
Mortgage 1,055 73.63 844 70.33
Installment 166 11.55 114 9.50
Credit card 18 1.29 62
5.17
Total $ 1,433 100.00% $ 1,200
100.00%
Years Ended December31
1993 1992
Percentage Percentage
Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans
(000 omitted)
Commercial, financial
and agricultural $ 78 6.99% $ 76
7.24%
Real estate -
Construction 56 4.97 51 4.93
Real estate -
Mortgage 853 75.79 763 73.22
Installment 138 12.25 152 14.61
Credit card 0 0.00 0
0.00
Total $ 1,125 100.00% $ 1,042
100.00%
- - -53-
Year Ended December31
1991
Percentage
Allowance of Loans to
Amount Total Loans
(000 omitted)
Commercial, financial
and agricultural $ 60 8.42%
Real estate -
Construction 26 3.70
Real estate -
Mortgage 497 69.25
Installment 133 18.63
Credit card 0 0.00
Total $ 716 100.00%
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
DEPOSITS
The average amounts of deposits are summarized below:
Years Ended December31
1995 1994 1993
(000 omitted)
Demand deposits $ 13,833 $ 12,991 $
12,052
Interest bearing demand deposits 25,048 27,232
25,746
Savings deposits 24,200 24,425
21,780
Time deposits 53,350 37,526
35,998
Total deposits $ 116,431 $ 102,174 $
95,576
The following is a breakdown of maturities of time
deposits of $100,000 or more as of December31, 1995:
Maturity (000 omitted)
Certificates of Deposit
Three months or less $ 1,310
Over three months through
six months 1,308
Over six months through
twelve months 1,000
Over twelve months 2,829
$ 6,447
RETURN ON EQUITY AND ASSETS (APPLYING DAILY AVERAGE BALANCES)
The following table presents a summary of significant
earnings and capital ratios: (dollar amounts in thousands)
1995 1994 1993
Average assets $ 135,648 $ 118,388 $
109,552
Net income $ 1,954 $ 1,635 $
1,484
Average equity $ 13,570 $ 12,238 $
11,209
Cash dividends paid $ 613 $ 512 $
472
Return on assets 1.44% 1.38% 1.36%
Return on equity 14.40% 13.36% 13.24%
Dividend payout ratio 30.7% 31.3% 30.9%
Equity to asset ratio 10.0% 10.34% 10.23%
- - -54-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED SUMMARY OF OPERATIONS
Years Ended December31
1995 1994 1993 1992 1991
(000 omitted)
Interest income $ 10,829 $ 8,571 $ 8,250 $ 8,632 $
8,896
Interest expense 4,542 3,241 3,129 3,800
4,684
Net interest income 6,287 5,330 5,121 4,832
4,212
Provision for loan
losses 270 71 121 366
170
Net interest
income after
provision for
loan losses 6,017 5,259 5,000 4,466
4,042
Other income:
Trust 297 185 157 119 70
Service charges -
Deposits 375 349 308 294 238
Other service charges,
collection and
exchange, charges,
commission fees 218 180 163 170 172
Other operating
income (loss) 45 146 ( 26) 110
10
Total other
income 935 860 602 693
490
Income before
operating expense 6,952 6,119 5,602 5,159
4,532
Operating expenses:
Salaries and
employees benefits 2,326 2,115 1,908 1,725
1,562
Occupancy and
equipment expense 559 486 405 394 359
Other operating
expenses 1,371 1,363 1,280 1,250
1,115
Total operating
expenses 4,256 3,964 3,593 3,369
3,036
Income before income
taxes 2,696 2,155 2,009 1,790
1,496
Income tax 742 520 525 452
354
Net income
applicable to
common stock $ 1,954 $ 1,635 $ 1,484 $ 1,338 $
1,142
Per share data:
Earnings per common
share $ 2.05$ 1.71 $ 1.62 $ 1.45 $ 1.27
Cash dividend -
Common $ .62$ .54 $ .50 $ .45 $ .42
Weighted average
number of common
shares 954,192 954,192 915,218 921,098
901,374
- - -55-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
STATEMENTS OF AVERAGE BALANCES AND AVERAGE RATES
($ 000 omitted) 1995 1994 1993 1992 1991
LOANS
Personal credit
lines $ 4,425 $ 4,113 $ 3,710 $ 3,556
$ 3,559
Tax free 1,207 1,229 1,215 1,092
1,117
Commercial 28,725 21,512 16,958 15,048
13,080
Mortgage 46,728 42,919 39,874 37,006
34,260
Consumer 16,329 11,888 10,819 11,169
10,685
Credit card 248 79 0 0
0
Total loans 97,662 81,740 72,576 67,871
62,701
INVESTMENT SECURITIES
U.S. Government 7,378 7,891 10,385 10,273
11,031
U.S. Government
agencies 9,815 8,173 9,201 7,257
6,086
State & municipal 8,488 8,148 8,451 7,069
5,967
Other 1,162 1,106 1,148 1,110
886
Total investment
securities 26,843 25,318 29,185 25,709
23,970
OTHER SHORT-TERM INVESTMENTS
Interest-bearing
deposits 1,006 0 0 0 0
Federal funds sold 1,328 3,196 1,031 2,668
2,643
Certificates
of deposit 72 198 0 19
144
Total other
short-term
investments 2,406 3,394 1,031 2,687
2,787
TOTAL EARNING
ASSETS 126,911 110,452 102,792 96,267
89,458
TOTAL ASSETS $ 135,648 $ 118,388 $ 109,552 $ 102,761
$ 95,231
Percent increase 14.6% 8.1% 6.6%7.9% 4.2%
DEPOSITS
Demand $ 13,833 $ 12,991 $ 12,052 $ 10,406
$ 8,778
Interest-bearing
demand 25,048 27,232 25,746 23,553
19,091
Savings 24,200 24,425 21,780 17,090
12,807
Time 53,350 37,526 35,998 39,629
43,373
Total deposits 116,431 102,174 95,576 90,678
84,049
OTHER BORROWINGS
Federal funds
purchased 715 77 521 288
0
Liabilities for
borrowed money 2,345 2,304 728 0
0
TOTAL INTEREST-BEARING
LIABILITIES 105,658 91,564 84,773 80,560
75,271
- - -56-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
STATEMENTS OF AVERAGE BALANCES AND AVERAGE RATES (CONTINUED)
1995 1994 1993 1992 1991
AVERAGE RATES EARNED
% % % % %
Loans
Commercial 10.1 9.0 8.4 8.7 10.3
Mortgage 7.9 7.6 8.0 9.1 10.3
Consumer 9.6 10.0 11.6 11.9 12.5
Tax free 8.8 9.5 7.8 9.2 12.5
Personal credit lines 10.5 8.8 8.2 8.7 10.8
Credit card 9.0 6.5 0.0 0.0 0.0
Total 9.0 8.4 8.7 9.4 10.7
Investment Securities
U.S. Government 5.7 5.6 6.7 7.8 8.0
U.S. Government agencies 6.8 6.3 6.4 7.6 8.9
State & municipal 9.5 9.5 9.6 10.4
10.8
Other 5.4 4.5 5.2 4.3 3.2
Total 7.3 7.1 7.4 8.4 8.9
Other Short-Term Investments
Interest-bearing deposits 6.0 0.0 0.0 0.0 0.0
Federal funds sold 6.0 4.0 2.9 3.3 5.8
Certificates of deposit 4.6 4.0 0.0 4.0 9.9
Total earning assets 8.6 7.8 8.2 9.0 10.1
AVERAGE RATES PAID
Time & savings deposits 4.2 3.5 3.7 4.7 6.2
Federal funds purchased 6.1 4.4 3.3 4.0 0.0
Liabilities for borrowed
money 6.3 6.3 6.6 0.0 0.0
- - -57-
Item 9. Disagreements on Accounting and Financial Disclosures.
Not applicable.
- - -58-
PART III
The information required by Items 10, 11, 12 and 13 is
incorporated by reference from Orrstown Financial Services, Inc.'s
definitive proxy statement for the 1996 Annual Meeting of
shareholders filed pursuant to Regulation 14A.
- - -59-
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
Financial Statement Schedules and Exhibits
(1) Financial statements. See Item 8 of this report
for the index to financial statements.
(2) Financial statement schedules. Not applicable.
(3) Exhibits.
Exhibit Numbers
(2) Plan of acquisition, reorganization, arrangement,
liquidation or succession. Not applicable.
(3) (a) Articles of incorporation. Incorporated by
reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-4,
Registration No. 33-18888.
(b) 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., filed as Exhibit 3.1 to
Registrant's Registration Statement on Form S-4
(Registration No. 33-18888).
(ii) By-laws of Orrstown Financial Services, Inc.,
filed as Exhibit 3.2 to the Registrant's
Registration Statement on Form S-4
(Registration No. 33-18888).
- - -60-
(iii) Amendment to by-laws of Orrstown Financial
Services, Inc. - filed herewith
(9) Voting trust agreement. Not applicable.
(10) Material contracts. None.
(11) Statement re: computation of per share earnings.
Not applicable.
(12) Statements re: computation of ratios. Not
applicable.
(13) Annual report to security holders. Form 10-Q or
quarterly report to security holders. Not
applicable.
(16) Letter re: change in certifying accountant. Not
applicable.
(18) Letter re: change in accounting principles. Not
applicable.
(21) Subsidiaries of the registrant. Filed herewith.
(22) Published report regarding matters submitted to vote
of security holders. Not applicable.
(23) Consents of experts and counsel. Not applicable.
(24) Power of attorney. Not applicable.
(27) Financial data schedule. Filed herewith.
(28) Information from reports furnished to state
insurance regulatory authorities. Not applicable.
(99) Additional exhibits. Not applicable.
(b) Reports on Form 8-K. None.
- - -61-
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
Kenneth R. Shoemaker, President
Dated: March _____, 1996 (Duly authorized officer)
By ______________________________
Robert B. Russell, Controller
(Principal Financial 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
President and Chief March , 1996
Kenneth R. Shoemaker Executive Officer
and Director
Secretary and March , 1996
Richard M. Diffenbaugh Director
Director March , 1996
Robert T. Henry
Assistant Secretary March , 1996
William O. Hykes and Director
Vice Chairman of the March , 1996
Joel R. Zullinger Board and Director
Chairman of
Executive March , 1996
Jeffrey W. Coy Committee and
Director
Director
March , 1996
Ned R. Fogelsonger
Chairman of the
March , 1996
Galen L. Myers Board and Director
Director
March , 1996
Frank S. Heberlig
Director
March , 1996
Raymond I. Pugh
- - -62-
Exhibit Index
Exhibit No. Sequentially numbered pages
21 Subsidiaries of the Registrant 64
- - -63-
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
1. Orrstown Bank, Orrstown, Pennsylvania; a state-chartered
bank
organized under the Pennsylvania Banking Code of 1965.