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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, 1996
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 Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X
No
As of January 29, 1997, 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 $ 33,213,342.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended
December 31, 1996 are incorporated by reference into Parts I and II.
Portions of the Proxy Statement for 1997 Annual Meeting of Security
Holders are incorporated by reference in Part III of this Form 10-K.
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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
November 17, 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 March 8, 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 six branches are located in Shippensburg (2), Carlisle (2),
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 a majority of 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 December 31, 1996, Orrstown had 64 full-time and 19
part-time employees.
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
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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.
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.
- -3-
As of December 31, 1996, Orrstown had total assets of
approximately $ 158 million, total shareholders' equity of approximately
$ 15.8 million and total deposits of approximately $ 137 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.
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 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
- -4-
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 Note 13 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.
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 page 35 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 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
- -5-
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 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. In 1996 the Bank began
- -6-
leasing building space for a second office location in Carlisle,
Pennsylvania, which opened in January 1997. 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 completed the
renovation of a property located adjacent to the downtown office, which
expanded its trust department and certain administrative facilities.
The Bank also owns property adjacent to 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
Executive Officers of Registrant
The following table sets forth selected information about
the principal officers of the holding company, each of whom is elected
by the Board of Directors and each of whom holds office at the
discretion of the Board.
Age
Held Bank Employee
as of
Name/Office Held Since Since
3/15/97
Galen L. Myers, Chairman of Board 1989 (1) 58
Joel R. Zullinger, Vice Chairman
of the Board 1991 (1) 48
Jeffrey W. Coy, Secretary 1988 (1) 45
Kenneth R. Shoemaker, President
and Chief Executive Officer 1987 1986 49
Stephen C. Oldt, Executive
Vice President 1987 1987 54
Philip E. Fague, Vice President
and Trust Officer 1990 1988 37
Robert B. Russell, Vice President
and Treasurer 1988 1982 43
(1) Mr. Myers, Mr. Zullinger and Mr. Coy are not employees
of the Bank.
- -7-
Senior Operating Officers of the Bank
Age
Held Bank Employee
as of
Name/Office Held Since Since
3/15/97
Kenneth R. Shoemaker, President &
Chief Executive Officer 1987 1988 49
Stephen C. Oldt, Executive Vice
President & Chief Operating
Officer 1987 1987 54
Philip E. Fague, Vice President/ 1990/
Senior Trust Officer 1993 1988 37
Bradley S. Gerlach, Vice President
Director of Sales & Marketing 1995 1995 37
Robert S. Nickey, III, Vice 1993/
President/Senior Loan Officer 1994 1993 34
Robert B. Russell, Vice President/ 1982/
Chief Accounting Officer 1993 1982 43
Patricia A. Corwell, Vice President
and Assistant Secretary 1982 1954 62
James B. Dubbs, Vice President & 1983/
Cashier/Community Office Manager 1982 1976 38
Charles E. Ferguson, Vice President
Human Resource Manager 1995 1995 60
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 December 31,
1996, the approximate number of shareholders of record was 1,500. 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)
1996
1995
First Quarter $ 32.00 $ .17 $ 27.00 $ .14
Second Quarter 33.00 .17 27.00 .15
Third Quarter 34.00 .18 30.00 .15
Fourth Quarter 34.00 .19 30.00 .17
(1) Note: Cash dividends per share for 1995 were based on
weighted average shares of common stock outstanding in 1995
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.
- -8-
Item 6. Selected Financial Data.
1996 1995 1994 1993
1992
Income (000 omitted)
Interest income $ 11,981 $ 10,829 $ 8,571 $ 8,250 $ 8,632
Interest expense 5,139 4,542 3,241 3,129 3,800
Provision for loan
losses 240 270 71 121 366
Net interest income
after provision for
loan losses 6,602 6,017 5,259 5,000 4,466
Securities gains
(losses) ( 5) ( 45) 95 ( 5) 77
Other operating
income 1,282 980 765 607 616
Other operating
expenses 4,793 4,256 3,964 3,593 3,369
Income before
income taxes 3,086 2,696 2,155 2,009 1,790
Applicable income
tax 838 742 520 525 452
Net income $ 2,248 $ 1,954 $ 1,635 $ 1,484 $ 1,338
Per share amounts are based on following weighted averages:
1996 - 976,863 1994 - 976,863 1992 - 956,443
1995 - 976,863 1993 - 976,777
1996 1995 1994 1993
1992
Income before income
taxes $ 3.16 $ 2.76 $ 2.20 $ 2.06 $ 1.87
Applicable income
taxes .86 .76 .53 .54 .47
Net income 2.30 2.00 1.67 1.52 1.40
Cash dividend paid .71 .61 .52 .47 .43
Book value 16.23 14.98 12.65 11.87 11.06
1996 1995 1994 1993
1992
Year-End Balance Sheet Figures (000 omitted)
Total assets $ 157,556 $ 145,998 $ 123,004 $ 113,581 $ 106,191
Net loans 107,306 101,424 89,639 74,449 69,865
Total investment
securities 34,355 31,563 24,318 30,381 28,488
Deposits-non-
interest
bearing 16,322 13,962 13,262 13,417 11,678
Deposits-interest
bearing 120,937 113,368 93,103 85,165 82,553
Total deposits 137,259 127,330 106,365 98,582 94,231
Liabilities for
borrowed money 2,339 2,345 2,350 1,000 0
Total stockholders'
equity 15,856 14,633 12,353 11,597 10,583
Ratios
1996 1995 1994 1993
1992 Average equity/
average assets 9.8 10.00 10.34 10.23 10.00
Return on average
equity 14.9 14.40 13.36 13.24 13.02
Return on average
assets 1.47 1.44 1.38 1.36 1.30
- -9-
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 31 through 35 of the annual
shareholders' report for the year ended December 31, 1996 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 11
Consolidated balance sheets December 31,
1996 and 1995 12
Consolidated statements of income for the
years ended December 31, 1996, 1995 and 1994 13
Consolidated statements of changes in
stockholders' equity for the years ended
December 31, 1996, 1995, and 1994 14
Consolidated statements of cash flows for
the years ended December 31, 1996, 1995,
and 1994 15 and 16
Notes to consolidated financial statements 17 - 29
Summary of quarterly financial data (unaudited) 30
- -10-
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 December 31, 1996 and 1995 and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the
three years ended December 31, 1996. 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 December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years ended
December 31, 1996 in conformity with generally accepted accounting
principles.
Chambersburg, Pennsylvania
January 29, 1997
- -11-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
ASSETS
1996 1995
(000 omitted)
Cash and due from banks $ 5,236 $ 4,330
Interest bearing deposits with banks 1,554 1,289
Federal funds sold 2,936 2,317
Securities available for sale 33,421 30,694
Federal Home Loan Bank, Federal Reserve
and Atlantic Central Bankers Bank stock,
at cost which approximates market value 934 869
44,081 39,499
Loans
Commercial, financial and agricultural 8,401 8,211
Real estate - Mortgages 82,687 75,731
Real estate - Construction and land
development 4,304 5,706
Consumer 13,534 13,209
108,926 102,857
Less: Allowance for loan losses ( 1,620) ( 1,433)
107,306 101,424
Bank premises and equipment, net 3,916 3,042
Accrued interest receivable 929 993
Other assets 1,324 1,040
Total assets $ 157,556 $ 145,998
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 16,322 $ 13,962
Interest bearing 120,937 113,368
137,259 127,330
Liabilities for borrowed money 2,339 2,345
Accrued interest and other liabilities 2,102 1,690
Total liabilities 141,700 131,365
Stockholders' equity
Common stock: No par value - $ .2083
stated value per share, 2,000,000
shares authorized with 976,863 shares
issued at December 31, 1996 and 1995 204 204
Additional paid-in capital 10,625 10,625
Retained earnings 4,786 3,232
Unrealized holding gains, net of tax -
$ 124 - 1996 and $ 295 - 1995 241 572
Total stockholders' equity 15,856 14,633
Total liabilities and stockholders'
equity $ 157,556 $ 145,998
The Notes to Consolidated Financial Statements are an integral part of these
statements.
- -12-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
(000 omitted)
Interest and Dividend Income
Interest and fees on loans $ 9,638 $ 8,996 $ 6,882
Interest and dividends on investment
securities
U.S. Government and agencies 1,265 1,083 963
Exempt from federal income tax 601 529 512
Other investment income 477 221 214
Total interest and dividend
income 11,981 10,829 8,571
Interest Expense
Interest on deposits 4,981 4,349 3,092
Interest on borrowed money 158 193 149
Total interest expense 5,139 4,542 3,241
Net interest income 6,842 6,287 5,330
Provision for loan losses 240 270 71
Net interest income after
provision for loan losses 6,602 6,017 5,259
Other Income
Service charges on deposit accounts 477 375 349
Other service charges, commissions,
and fees 295 218 180
Trust department income 384 297 185
Securities gains (losses) ( 5) ( 45) 95
Other income 126 90 51
Total other income 1,277 935 860
Net interest income and other
income 7,879 6,952 6,119
Other Expenses
Salaries and employee benefits 2,621 2,326 2,115
Occupancy expense of bank premises,
net, and furniture and equipment
expenses 665 559 486
FDIC insurance premiums 2 125 221
Other operating expenses 1,505 1,246 1,142
Total other expenses 4,793 4,256 3,964
Income before income tax 3,086 2,696 2,155
Applicable income tax 838 742 520
Net income $ 2,248 $ 1,954 $ 1,635
Net income per share $ 2.30 $ 2.00 $ 1.67
The Notes to Consolidated Financial Statements are an integral part of these
statements.
- -13-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
Unrealized
Additional Holding
Common Paid-In Retained Gains
Stock Capital Earnings (Losses)
(000 omitted)
Balance, December 31,
1993 $ 194 $ 9,393 $ 2,010 $ 0
Net income 0 0 1,635 0
Cash dividends ($ .52
per share) 0 0 ( 512) 0
Unrealized loss on
investment securities
available for sale 0 0 0 ( 367)
Balance, December 31,
1994 194 9,393 3,133 ( 367)
Net income 0 0 1,954 0
Cash dividends ($ .61
per share) 0 0 ( 599) 0
Stock dividends issued 10 1,232 ( 1,242) 0
Cash paid in lieu of
fractional stock dividends 0 0 ( 14) 0
Unrealized gain on
investment securities
available for sale 0 0 0 939
Balance, December 31,
1995 204 10,625 3,232 572
Net income 0 0 2,248 0
Cash dividends ($ .71
per share) 0 0 ( 694) 0
Unrealized loss on
investment securities
available for sale 0 0 0 ( 331)
Balance, December 31,
1996 $ 204 $ 10,625 $ 4,786 $ 241
The Notes to Consolidated Financial Statements are an integral part of these
statements.
- -14-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
(000 omitted)
Cash flows from operating
activities:
Net income $ 2,248 $ 1,954 $ 1,635
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 329 265 212
Provision for loan losses 240 270 71
Deferred income taxes ( 62) ( 78) ( 200)
(Gain) loss on disposal of
other real estate 5 ( 4) ( 10)
(Gain) loss on disposal of
bank premises and equipment ( 20) 1 4
Securities (gains) losses 5 45 ( 95)
(Increase) decrease in
accrued interest receivable 64 ( 260) 43
Increase (decrease) in
accrued interest payable 278 290 11
Other net 64 ( 2) 9
Net cash provided by operating activities 3,151 2,481 1,680
Cash flows from investing activities:
Net (increase) in interest
bearing deposits with banks ( 265) ( 1,039) ( 250)
Sales of available for sale securities 2,392 6,387 6,945
Maturities of available for
sale securities 3,508 6,694 4,450
Purchases of available for
sale securities ( 9,134) ( 18,843) ( 5,743)
Purchases of FHLB stock ( 65) ( 61) ( 49)
Net (increase) in loans ( 6,291) ( 12,055) ( 5,261)
Proceeds from sale of bank premises
and equipment 36 0 0
Proceeds from disposal of other real
estate 142 22 20
Purchases of bank premises and equipment ( 1,178) ( 266)
(
691)
Net cash (used) by investing activities ( 10,855) ( 19,161) (
10,579)
Cash flows from financing activities:
Net increase in deposits 9,929 19,997 7,783
Net decrease in federal funds purchased 0 ( 644) ( 456)
Proceeds from debt 0 0 1,350
Payment on debt ( 6) ( 6) 0
Cash dividends paid ( 694) ( 599) ( 512)
Cash paid in lieu of fractional
stock dividends 0 ( 14) 0
Net cash provided by financing activities 9,229 18,734 8,165
Net increase (decrease) in cash
and cash equivalents 1,525 2,054 ( 734)
Cash and cash equivalents,
beginning balance 6,647 4,593 5,327
Cash and cash equivalents, ending balance $ 8,172 $ 6,647 $ 4,593
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 CASH FLOWS (CONTINUED)
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
(000 omitted)
Supplemental disclosure of cash
flows information:
Cash paid during the year for:
Interest $ 5,418 $ 4,252 $ 3,230
Income taxes 892 800 543
Supplemental schedule of noncash
investing and financing activities:
Other real estate acquired in
settlement of loans 169 22 27
Unrealized gain (loss) on
investment securities available
for sale (net of tax effects) ( 331) 939 ( 367)
Other real estate transferred
to bank premises 0 136 0
Property, equipment and other
assets purchased with
assumption of deposit liabilities
in connection with branch
acquisition 0 968 0
The Notes to Consolidated Financial Statements are an integral part of these
statements.
- -16-
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 six branches are located in Shippensburg (2),
Carlisle (2), 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.
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.
- -17-
Note 1. Summary of Significant Accounting Policies (Continued)
Investment securities (Continued)
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.
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.
Advertising
The corporation follows the policy of charging costs of
advertising to expense as incurred. Advertising expense was
$ 86,910, $ 54,224 and $ 71,619 for 1996, 1995 and 1994,
respectively.
Loans and allowance for loan losses
Loans are stated at the amount of unpaid principal, reduced by
an allowance for loan losses. Interest on loans is calculated
by using the simple interest method on daily balances of the
principal amount outstanding. 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.
- -18-
Note 1. Summary of Significant Accounting Policies (Continued)
Loans and allowance for loan losses (Continued)
Loans are charged against the allowance 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 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 976,863 shares of common stock outstanding
in 1996, 1995 and 1994 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 Note 10 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 independent markets and, in
- -19-
Note 1. Summary of Significant Accounting Policies (Continued)
Fair values of financial instruments (Continued)
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 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.
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.
- -20-
Note 2. Investments
At December 31, 1996 and 1995 the investment securities
portfolio was comprised of securities classified as "available
for sale", resulting in investment securities being carried at
fair value.
The amortized cost and fair values of investment securities
available for sale at December 31 were:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(000 omitted)
1996
U. S. Treasury securities
and obligations of U. S.
Government corporations
and agencies $ 10,830 $ 65 $ 36 $ 10,859
Obligations of states and
political subdivisions 11,397 381 10 11,768
Mortgage-backed securities 10,413 37 149 10,301
Equity securities 417 78 2 493
Totals $ 33,057 $ 561 $ 197 $ 33,421
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
The amortized cost and fair values of investment securities
available for sale at December 31, 1996, 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 $ 1,203 $ 1,207
Due after one year through
five years 7,244 7,380
Due after five years through
ten years 4,677 4,765
Due after ten years 9,103 9,275
Mortgage-backed securities 10,413 10,301
Equity securities 417 493
$ 33,057 $ 33,421
- -21-
Note 2. Investments (Continued)
Proceeds from sales of securities available for sale during
1996, 1995 and 1994 were $ 2,391,746, $ 6,369,602 and
$ 6,944,826, respectively. Gross gains and losses on 1996
sales were $ 16,440 and $ 21,455, 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, 1996 is $ 241,000 of
unrealized holding gains on securities available for sale, net
of $ 124,000 in deferred taxes. 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.
The bank owns $ 691,200 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, 1996. At
December 31, 1995 the bank's stock ownership was $ 625,900 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 $ 10,517,100 and $ 10,036,000 at
December 31, 1996 and 1995, 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:
1996 1995 1994
(000 omitted)
Balance at beginning of period $ 1,433 $ 1,200 $ 1,125
Recoveries 15 14 12
Provision for loan losses
charged to income 240 270 71
Total 1,688 1,484 1,208
Losses 68 51 8
Balance at the end of period $ 1,620 $ 1,433 $ 1,200
Note 5. Bank Premises and Equipment
A summary of bank premises and equipment is as follows:
1996 1995
(000 omitted)
Land $ 424 $ 424
Buildings and improvements 3,107 2,306
Furniture and equipment 2,202 2,006
Construction in progress 120 49
Total 5,853 4,785
Less accumulated depreciation and
amortization 1,937 1,743
Bank premises and equipment, net $ 3,916 $ 3,042
- -22-
Note 5. Bank Premises and Equipment (Continued)
Depreciation expense amounted to $ 287,624 in 1996, $ 250,769
in 1995, and $ 213,000 in 1994.
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 $ 2,005,000 and
$ 1,758,000 at December 31, 1996 and 1995, respectively. During
1996, $ 830,000 of new loans were made and repayments totalled
$ 793,000. During 1995, $ 310,000 of new loans were made and
repayments totalled $ 379,000.
Outstanding loans to bank employees totalled $ 610,000 and
$ 954,000 for years ended December 31, 1996 and 1995,
respectively.
Note 7. Nonaccrual Loans
The following table shows the principal balances of nonaccrual
loans as of December 31:
1996 1995 1994
Nonaccrual loans $ 14,000 $ 132,000 $ 27,000
Interest income that
would have been accrued
at original contract
rates $ 560 $ 1,616 $ 401
Amount recognized as
interest income 0 0 0
Foregone revenue $ 560 $ 1,616 $ 401
The corporation had no impairment of loans during 1996 or 1995
as defined by Statement of Financial Accounting Standard No.
114.
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
1996 1995
(000 omitted)
Financial instruments whose contract amounts
represent credit risk at December 31:
Commitments to extend credit $ 20,691 $ 14,074
Standby letters of credit and financial
guarantees written 3,014 2,348
- -23-
Note 8. Financial Instruments With Off-Balance-Sheet Risk (Continued)
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 and private borrowing
arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending
loans to customers. The bank holds collateral supporting those
commitments when deemed necessary by management.
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 $ 306,379, $ 260,334,
and $ 219,193 for 1996, 1995, and 1994, 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
$ 171,331 and $ 179,253 at December 31, 1996 and 1995,
respectively. Total annual expense for this deferred
compensation plan was $ 20,153 for 1996 and $ 19,064 for 1995
and 1994.
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. Total amount contributed to the plan was $ 55,950
and $ 48,273 for 1996 and 1995, respectively.
Note 10. Income Taxes
The components of federal income tax expense are summarized as
follows:
1996 1995 1994
(000 omitted)
Current year provision $ 900 $ 820 $ 570
Deferred income taxes (benefits) ( 62) ( 78) ( 13)
Accrued refund due 0 0 ( 37)
Net federal income tax expense $ 838 $ 742 $ 520
- -24-
Note 10. Income Taxes (Continued)
Federal income taxes were computed after reducing pretax
accounting income for non-taxable income in the amount of $
661,000, $ 599,000, and $ 589,000 for 1996, 1995, and 1994,
respectively.
A reconciliation of the effective applicable income tax rate to
the federal statutory rate is as follows:
1996 1995
1994
Federal income tax rate 34.0% 34.0% 34.0%
Reduction resulting from:
Nontaxable interest income and
deferred taxes 6.8 6.5 9.9
Effective income tax rate 27.2% 27.5% 24.1%
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:
1996 1995
Total deferred tax assets $ 553,000 $ 472,000
Total deferred tax liabilities ( 256,000) ( 410,000)
Net deferred tax asset $ 297,000 $ 62,000
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 December 31 are NOW
and Super NOW account balances totalling $ 18,163,000 and
$ 13,215,000 for 1996 and 1995, respectively. Also included in
interest bearing deposits at December 31, 1996 and 1995 are
money market account balances totalling $ 10,569,000 and
$ 13,104,000, respectively.
At December 31, 1996 and 1995 time deposits of $ 100,000 and
over aggregated $ 7,767,000 and $ 6,447,000, respectively.
Interest expense on time deposits of $ 100,000 and over was
$ 373,000; $ 337,000; and $ 220,000 for 1996, 1995 and 1994,
respectively.
At December 31, 1996 the scheduled maturities of certificates
of deposit are as follows:
1997 $ 45,883,000
1998 10,703,000
1999 2,793,000
2000 3,120,000
2001 1,029,000
2002 and thereafter 1,054,000
$ 64,582,000
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 $ 1,103,000
and $ 1,195,000 at December 31, 1996 and 1995, respectively.
- -25-
Note 12. Liabilities For Borrowed Money
At December 31, 1996 and 1995 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 maturity dates and
applicable fixed interest rates on the remaining balance at
December 31, 1996 are as follows:
Amount Maturity Date Rate
$ 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%
$ 339,683
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
$ 60,070,000 at December 31, 1996. The corporation also has
available an unused line of credit with Atlantic Central
Bankers Bank of $ 3.5 million at December 31, 1996.
Total interest on the aforementioned borrowings charged to
operations in 1996 and 1995 were $ 148,859 and $ 149,083,
respectively.
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
1996 1995
(000 omitted)
Cash $ 107 $ 186
Securities available for sale 493 341
Investment in Orrstown Bank 15,321 14,154
Furniture and equipment (net of
depreciation) 1 1
Total assets $ 15,922 $ 14,682
Liabilities
Accrued management fee $ 40 $ 40
Accrued taxes and other liabilities 26 9
Total liabilities 66 49
- -26-
Note 13. Orrstown Financial Services, Inc. (Parent Company Only)
Financial Information (Continued)
1996 1995
(000 omitted)
Stockholders' Equity
Common stock, no par value - $ .2083 stated
value per share, 2,000,000 shares authorized
with 976,863 shares issued at December 31,
1996 and 1995 $ 204 $ 204
Additional paid-in capital 10,625 10,625
Retained earnings 4,786 3,232
Unrealized holding gains 241 572
Total stockholders' equity 15,856 14,633
Total liabilities and stockholders' equity $ 15,922 $ 14,682
Income Statements
Years Ended December 31
1996 1995 1994
(000 omitted)
Interest and dividend income $ 17 $ 20 $ 16
Net gain on sale of investment 0 0 112
Cash dividends from wholly-owned
subsidiary 796 614 512
Equity in undistributed income of
subsidiary 1,531 1,401 1,077
2,344 2,035 1,717
Less: Operating expenses 96 81 82
Net income $ 2,248 $ 1,954 $ 1,635
Statements of Cash Flows
Years Ended December 31
Cash flows from operating activities:
Net income $ 2,248 $ 1,954 $ 1,635
Adjustments to reconcile net income
to cash provided by operating activities:
Security (gains) 0 0 ( 112)
Equity in undistributed income
of subsidiary ( 1,531) ( 1,401) ( 1,077)
Increase (decrease) in accrued
liabilities 0 34 6
Net cash provided by operating
activities 717 587 452
Cash flows from investing activities:
Net decrease (increase) in interest-
bearing deposits with banks 0 250 ( 250)
Purchase of available for sale
securities ( 102) ( 52) ( 60)
Sales of available for sale
securities 0 0 315
Net cash provided (used) by investing
activities ( 102) 198 5
Cash flows from financing activities:
Cash dividends paid ( 694) ( 599) ( 512)
Cash paid in lieu of fractional
stock dividends 0 ( 14) 0
Net cash (used) by financing
activities ( 694) ( 613) ( 512)
Net increase (decrease) in cash ( 79) 172 ( 55)
Cash, beginning balance 186 14 69
Cash, ending balance $ 107 $ 186 $ 14
- -27-
Note 13. Orrstown Financial Services, Inc. (Parent Company Only)
Financial Information (Continued)
Statements of Cash Flows
Years Ended December 31
1996 1995 1994
(000 omitted)
Supplemental disclosure of cash flows
information:
Cash paid during the year for:
Income taxes $ 8 $ 6 $ 0
Dividends paid by Orrstown Financial Services, Inc. are
generally 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 $ 8,831,000 in its retained earnings at
December 31, 1996 is fully available for cash dividends.
Orrstown Financial Services' balance of retained earnings at
December 31, 1996 is $ 4,786,000 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
downtown Carlisle office and various remote automated teller
machines under agreements which expire at various times through
1997 and 2001. Total rent expense charged to operations in
connection with these leases was $ 14,260, $ 16,920, and
$ 17,520 for 1996, 1995, and 1994, respectively.
The total minimum rental commitment under operating leases at
December 31, 1996 is as follows:
Due in the year ending December 31:
1997 $ 15,710
1998 12,653
1999 13,291
2000 13,953
2001 13,365
Note 15. Compensating Balance Arrangements
Required deposit balances at the Federal Reserve were $ 65,000
at December 31, 1996 and 1995. Required deposit balance at
Atlantic Central Bankers Bank was $ 585,000 at December 31,
1996 and 1995. These balances are maintained to cover
processing costs and service charges. An additional $ 16,560
is on deposit with First Union National Bank of Florida as a
reserve for potential clearing losses related to the credit
card operations.
- -28-
Note 16. Fair Value of Financial Instruments
The estimated fair values of the corporation's financial
instruments were as follows at December 31:
- - - - 1996 - - - - - - - - 1995 - - - -
Carrying Fair Carrying Fair
Amount Value Amount Value
(000 Omitted)
FINANCIAL ASSETS
Cash and due from banks $ 5,236 $ 5,236 $ 4,330 $ 4,330
Federal funds sold 2,936 2,936 2,317 2,317
Interest bearing deposits
with banks 1,554 1,554 1,289 1,289
Securities available for sale 33,057 33,421 29,827 30,694
Other bank stock 934 934 869 869
Loans receivable 108,926 108,774 102,857 102,621
Accrued interest receivable 929 929 993 993
FINANCIAL LIABILITIES
Deposits 137,259 137,451 127,330 127,616
Borrowed funds 2,339 2,348 2,345 2,353
Accrued interest payable 1,165 1,165 887 887
Note 17. Commitments
In November 1996 the bank entered into a lease for the location
of a new branch office in downtown Carlisle, Pennsylvania.
Renovations of the space were completed and the office opened
in January 1997. The remaining commitment on contracts for the
renovations and equipment acquisitions was $ 56,000 at December
31, 1996.
- -29-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
SUMMARY OF QUARTERLY FINANCIAL DATA
The unaudited quarterly results of operations for the years ended December
31,
1996 and 1995 are as follows:
1996 1995
($ 000 omitted Quarter Ended Quarter Ended
except per share)
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept.
30 Dec. 31
Interest income $ 2,906 $ 2,994 $ 3,054 $ 3,027 $ 2,430 $ 2,661
$
2,808 $ 2,930
Interest expense 1,260 1,286 1,297 1,296 968 1,089
1,208 1,277
Net interest
income 1,646 1,708 1,757 1,731 1,462 1,572 1,600
1,653
Provision for loan
losses 60 60 60 60 30 30 30
180
Net interest
income after
provision for
loan losses 1,586 1,648 1,697 1,671 1,432 1,542
1,570
1,473
Securities gains
(losses) ( 4) 8 ( 7) ( 2) ( 21) ( 2) ( 21)(
2)
Other income 260 293 325 404 209 236 243 293
Other expenses 1,101 1,184 1,134 1,374 1,010 1,082
968 1,196
Operating income
before income
taxes 741 765 881 699 610 694 824 568
Applicable income
taxes 207 227 273 131 176 217
231 118
Net income $ 534 $ 538 $ 608 $ 568 $ 434 $ 477
$
593 $ 450
Net income applicable
to common stock
Per share data:
Net income $ .55 $ .55 $ .62 $ .58 $ .44 $ .49
$
.61 $ .46
- -30-
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 $ 2,248,000 for 1996, compared to $ 1,954,000 for
1995, representing an increase of $ 294,000 or 15.0%. Net income on an
adjusted per share basis for 1996 was $ 2.30, up $ .30 from the $ 2.00
per share realized during 1995.
Interest income for 1996 was $ 11,981,000, up $ 1,152,000, or
10.6% over 1995. The volume of earning assets increased 13.6% in 1996
and 14.9% in 1995. Average rates remained constant throughout 1995 and
1996.
Loan demand diminished somewhat during 1996 causing lower
increases in loan volumes from 1995. Gross loans at December 31, 1996
stood at $ 108,926,000 compared to $ 102,857,000 as of December 31,
1995. Increases in earning assets in 1996 were mixed between loans
(70%) and investment securities (30%). An overall increase of 5.9% 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 for continuing expansion into the Carlisle,
Pennsylvania market. Net interest margins were maintained at desired
levels throughout 1996 by closely monitoring rates.
Total interest expense was $ 5,139,000 for 1996, an increase of
$ 597,000 over the $ 4,542,000 for 1995. The increase in total deposits
was 7.8% in 1996 compared to 19.7% in 1995. The increases realized in
1996 are more indicative of the planned growth through marketing efforts
and the introduction of new products as compared to 1995 whereby
approximately 11.3% of the increase was due to the September 1995
purchase of the Spring Run branch from another local bank. An important
factor is where the deposit growth has occurred, as indicated in the
following trends:
O Noninterest-bearing deposits increased 18.1% over the
previous year
O Average balances of interest-bearing demand and savings
decreased 10.2% and 9.9%, respectively
O Time deposits increased 7.3% in 1996
By realizing a more balanced mix of deposit growth, interest
costs were maintained at desired levels as rates remained constant
throughout 1996. 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.
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 interest rate
spread 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 1996 totaled $ 6,842,000, up $ 555,000
over 1995 compared to an increase of $ 957,000 from 1994 to 1995.
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 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 and real
estate acquired in foreclosure.
- -31-
Other income increased $ 342,000 from 1995 to 1996 compared to
an increase of $ 75,000 from 1994 to 1995. The increase in 1996 was due
largely to increases in Trust Department income, service charge income,
and income from the sale of mutual funds. In 1996 the corporation
completed an expansion of the Trust Department and other administrative
facilities at its King Street, Shippensburg office. The enhancement of
its facilities and increase in Trust Department personnel over the past
three years have facilitated the growth of its Trust activities.
Management expects this growth to continue as it looks toward
implementing on-site trust services at its Carlisle, Pennsylvania
offices.
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 12.7% and 10.0% for 1996 and
1995, respectively, due to increases in personnel and normal salary and
related benefit increases. The largest proportionate increase in
noninterest expenses was for occupancy expense which increased 19.0% and
15.0% in 1996 and 1995, respectively. This increase is due to the
expansion of the King Street, Shippensburg office and the purchase of
new data processing equipment in 1996. Management expects increases in
employee related expenses and occupancy expense to continue with the
addition of a second branch office in Carlisle. Other operating
expenses increased 10% in 1996 primarily in promotion and advertising
costs; ATM expenses; amortization of deposit premium on the Spring Run
branch acquisition; and outside data processing services, offset
somewhat by the reduction of FDIC insurance premiums.
Applicable income taxes changed between 1994, 1995 and 1996 as a
result of changes in pre-tax accounting income and taxable income. The
effective tax rate for 1996 decreased slightly from 1995 due to the
proportionate increase in nontaxable interest income in relation to
total income.
FINANCIAL CONDITION
Total assets at December 31, 1996 were $ 157,556,000, a 7.9%
increase over December 31, 1995. Gross loans at December 31, 1996
totaled $ 108,926,000, an increase of $ 6,069,000 over the $ 102,857,000
level at December 31, 1995.
The provision for loan losses was $ 240,000 in 1996 compared to
$ 270,000 in 1995. 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.
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
1996 1995 1996 1995
Real estate mortgages $ 11 $ 322 $ 0 $ 92
Installment loans 58 82 14 34
Demand and time loans 129 4 0 0
Credit card 5 9 0 6
Total $ 203 $ 417 $ 14 $ 132
There were no restructured loans for any of the time periods set
forth above.
- -32-
Total deposits increased to $ 137,259,000 at December 31, 1996
compared to $ 127,330,000 at December 31, 1995. Increases were balanced
between core deposits and certificates of deposit as mentioned earlier.
Stockholders' equity reached $ 15,856,000 at December 31, 1996
for a 7.7% increase over the prior year. Total stockholders' equity
represented 10.0% of total assets at the end of 1996 and 1995. The
primary source of capital growth in 1996 has been from retained
earnings. Cash dividends paid in 1996 were up $ 95,000 over the
previous year. 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 gains (losses) on
available for sale securities. At December 31, 1996, deferred taxes
amounted to $ 297,000. If all timing differences reversed in 1996, 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 1996 and
1995 together with changes in asset and liability volumes associated
with these income and expense items.
1996 Compared to 1995 1995 Compared to
1994
Average Volumes Income/Expense Average Volumes
Income/Expense
($ 000 omitted) $ % $ % $ % $
%
Loans 8,117 8.3 642 7.1 15,922 19.8 2,114 30.7
Investment
securities 3,743 14.6 254 15.8 1,469 6.1 137 9.3
Other investments 194 16.7 256 115.8 56 5.1 7
3.3
Total 12,054 9.7 1,152 10.6 17,447 16.3 2,258
26.3
Interest/borrowed
funds ( 720) (23.5) ( 35) ( 18.1) 679 28.5 43 28.7
Interest bearing
demand deposits 2,553 10.2 64 10.4 ( 2,184) ( 8.0) ( 50) (
7.6)
Savings deposits 2,355 9.7 34 4.4 ( 225) ( .9) 43 6.1
Time deposits 10,417 19.2 534 17.8 15,824 42.2 1,265 74.0
Total 14,605 13.8 597 13.1 14,094 15.4 1,301 42.1
Net interest income 555 8.8 957 18.0
Provision for loan
losses ( 30) ( 11.1) 199
280.3
Net interest income
after provision for
loan losses 585 9.7 758 14.4
Security transactions 40 88.8 ( 140)
(147.4)
Other operating income 302 30.8 215 28.1
Income before
operating expense 927 13.3 833 13.6
Salaries & employee
benefits 295 12.7 211 10.0
Occupancy & equipment
expense 106 19.0 73 15.0
FDIC insurance premiums ( 123) ( 98.4) ( 96)
(
43.4)
Other operating expenses 259 20.8 104
9.1
Total operating expenses 537 12.6 292 7.4
Income before income taxes 390 14.5 541 25.1
Applicable income taxes 96 12.9 222 42.7
Net income 294 15.0 319 19.5
- -33-
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June of 1996 the Financial Accounting Standards Board issued SFAS
No. 125 Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. Management has not concluded on the impact on
future operations. This statement may significantly affect accounting for and
disclosures about certain bank transactions including the following:
d Assets subject to prepayment risk
d Servicing assets and liabilities
d Securities lending transactions
d Loan participations
d Extinguishment of liabilities
d Collateral controlled by an institution as a secured party
This statement is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996.
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 are provided by federal funds 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 $ 1,554 $ 0 $ 0 $ 0 $ 0 $ 1,554
Other short-term
investments 2,936 0 0 0 0 2,936
Investment
securities 3,510 595 843 286 28,187 33,421
Real estate,
commercial and
consumer loans 26,878 6,459 14,054 23,995 37,540
108,926
$ 34,878 $ 7,054 $ 14,897 $ 24,281 $ 65,727 $ 146,837
Rate Sensitive Liabilities
Certificates of
deposit over
$ 100,000 $ 436 $ 1,669 $ 976 $ 1,440 $ 2,246 $ 6,767
Other certificates
of deposit 4,844 11,687 8,388 14,598 18,297 57,814
Money market deposit
accounts 828 1,656 2,486 4,971 0 9,941
Other interest-bearing
deposits 3,868 7,736 11,604 23,207 0 46,415
Long-term
borrowings 0 5 0 0 2,334 2,339
$ 9,976 $ 22,753 $ 23,454 $ 44,216 $ 22,877 $ 123,276
Cumulative GAP $ 24,902 $ 9,203 $ 646 ($ 19,289) $ 23,561
- -34-
Money market accounts totaling $ 9,941,000, interest bearing checking
accounts
totaling $ 18,163,000, and regular savings totaling $ 26,300,437 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 $ 15 million at December 31, 1996 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 December 31 is as follows:
Orrstown Financial Services Regulatory
Minimum
1996 1995 Requirements
Leverage ratio 10.0% 10.0% 4%
Risk-based capital ratio
Tier I (core capital) 13.2% 15.4% 4%
Combined Tier I and Tier II
(core capital plus allowance
for loan losses) 14.6% 17.1% 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.
1996 1995
1994
Equity capital at December 31 ($ 000 omitted) $ 15,856 $ 14,633 $
12,353
Equity capital as a percent of
assets at December 31 10.0% 10.0%
10.0%
Return on average assets 1.47% 1.44% 1.38%
Return on average equity 14.9% 14.4%
13.4%
Cash dividend payout ratio 30.9% 30.7% 31.3%
STOCK MARKET ANALYSIS AND DIVIDENDS
The corporation's common stock is traded inactively in the over-the-counter
market. As of December 31, 1996 the approximate number of shareholders of
record was
1,500.
Market Cash Market Cash
Price Dividend Price Dividend
(1)
1996 1995
First Quarter $ 32.00 $ .17 $ 27.00 $ .14
Second Quarter 33.00 .17 27.00 .15
Third Quarter 34.00 .18 30.00 .15
Fourth Quarter 34.00 .19 30.00 .17
(1) Note: Cash dividends per share for 1995 were based on weighted
average shares of common stock outstanding in 1995 after
giving
retroactive recognition to a 5% stock dividend issued in
June
1995.
- -35-
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
4.7% 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 1996 1995
Average Average
(000 omitted) Balance Interest Rate Balance Interest
Rate
Investment securities:
Taxable interest
income $ 20,899 $ 1,333 6.4% $ 18,355 $ 1,083 5.9%
Nontaxable
interest income 9,881 601 6.1 8,488 529 6.2
Total investment
securities 30,780 1,934 6.3 26,843 1,612 6.0
Loans (net of
unearned discounts) 105,779 9,638 9.1 97,662 8,996 9.2
Other short-term
investments 7,637 409 5.4 2,406 221 9.2
Total interest
earning assets 144,196 $ 11,981 8.3% 126,911 $ 10,829 8.5%
Allowance for loan
losses ( 1,528) ( 1,257)
Cash and due from banks 4,520 3,143
Bank premises and
equipment 3,486 2,727
Other assets 2,471 4,124
Total assets $ 153,145 $ 135,648
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing
demand deposits $ 27,601 $ 681 2.5% $ 25,048 $ 617 2.5%
Savings deposits 26,555 791 3.0 24,200 758 3.1
Time deposits 63,767 3,509 5.5 53,350 2,974 5.6
Short-term borrowings 0 0 0.0 715 44 6.1
Long-term borrowings 2,340 158 6.7 2,345 149 6.3
Total interest
bearing liabilities 120,263 $ 5,139 4.3% 105,658 $ 4,542 4.3%
Demand deposits 16,078 13,833
Other liabilities 1,728 2,587
Total liabilities 138,069 122,078
Stockholders' equity 15,076 13,570
Total liabilities &
stockholders'
equity $ 153,145 $ 135,648
Net interest income/net
yield on average
earning assets $ 6,842 4.7% $ 6,287 5.0%
- -36-
Year Ended December 31
ASSETS 1994
Average
(000 omitted) Balance Interest Rate
Investment securities:
Taxable interest
income $ 17,170 $ 963 5.6%
Nontaxable
interest income 8,148 512 6.3
Total investment
securities 25,318 1,475 5.8
Loans (net of
unearned discounts) 81,740 6,882 8.4
Other short-term
investments 3,394 214 6.3
Total interest
earning assets 110,452 $ 8,571 7.8%
Allowance for loan
losses ( 1,136)
Cash and due from banks 4,208
Bank premises and
equipment 2,530
Other assets 2,334
Total assets $ 118,388
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing
demand deposits $ 27,232 $ 668 2.5%
Savings deposits 24,425 714 2.9
Time deposits 37,526 1,710 4.6
Short-term borrowings 77 3 3.9
Long-term borrowings 2,304 146 6.3
Total interest
bearing liabilities 91,564 $ 3,241 3.5%
Demand deposits 12,991
Other liabilities 1,595
Total liabilities 106,150
Stockholders' equity 12,238
Total liabilities &
stockholders'
equity $ 118,388
Net interest income/net
yield on average
earning assets $ 5,330 4.8%
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 1996,
1995 and 1994.
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CHANGES IN NET INTEREST INCOME TAX EQUIVALENT YIELDS
1996 Versus 1995
Increase (Decrease)
Due to Change in
Total
Average Average Increase
Volume Rate (Decrease)
(000 omitted)
Interest Income
Loans (net of unearned discounts) $ 747 ($ 105) $ 642
Taxable investment securities 150 100 250
Nontaxable investment securities 86 ( 14) 72
Other short-term investments 481 ( 293) 188
Total interest income 1,464 ( 312) 1,152
Interest Expense
Interest bearing demand 131 ( 67) 64
Savings deposits 73 ( 40) 33
Time deposits 583 ( 48) 535
Short-term borrowings ( 44) 0 ( 44)
Long-term borrowings ( 1) 10 9
Total interest expense 742 ( 145) 597
Net interest income $ 555
- -37-
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
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 December 31, 1996, 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 $ 1,002 $ 6,756 $ 1,072 $ 0 $ 8,830
Yield 6.04% 6.08% 6.06% 0% 6.08%
U. S. Government
agencies
Book value 0 0 2,000 0 2,000
Yield 0% 0% 7.42% 0% 7.42%
State and municipal
Book value 201 488 1,605 9,103 11,397
Yield 6.71% 6.20% 6.5% 5.86% 5.96%
Total book
value $ 1,203 $ 7,244 $ 4,677 $ 9,103 $ 22,227
Yield 6.15% 6.09% 6.79% 5.86% 6.14%
Mortgage-backed
securities:
Total book value $ 10,413
Yield 6.97%
Equity Securities:
Total book value $ 417
Yield 3.0%
Total Investment Securities $ 33,057
Yield 6.36%
- -38-
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:
1996 1995 1994 1993 1992
(000 omitted)
Commercial, financial
and agricultural $ 8,401 $ 8,211 $ 6,970 $ 5,281 $ 5,630
Real estate -
Construction 4,304 5,706 5,038 3,758 3,493
Real estate - Mortgage 82,687 75,731 68,458 57,278 52,711
Installment and other
personal loans (net of
unearned discount) 13,534 13,209 10,373 9,257 9,073
Total loans $ 108,926 $ 102,857 $ 90,839 $ 75,574 $ 70,907
Presented below are the approximate maturities of the loan portfolio
(excluding real estate mortgages, installments and credit cards) at December
31,
1996:
Under One One to Over Five
Year Five Years Years Total
(000 omitted)
Commercial, financial
and agricultural $ 1,261 $ 1,512 $ 5,628 $ 8,401
Real estate - Construction 646 774 2,884 4,304
Total $ 1,907 $ 2,286 $ 8,512 $ 12,705
The following table presents the approximate amount of fixed rate
loans and variable rate loans due as of December 31, 1996:
Fixed Rate Variable
Loans Rate Loans
(000 omitted)
Due within one year $ 7,187 $ 64,969
Due after one but within
five years 18,886 0
Due after five years 17,884 0
Total $ 43,957 $ 64,969
- -39-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31
1996 1995 1994 1993 1992
(000 omitted)
Average total loans
outstanding (net of
unearned income) $ 105,779 $ 97,662 $ 81,740 $ 72,576 $ 67,871
Allowance for loan
losses, beginning
of period $ 1,433 $ 1,200 $ 1,125 $ 1,042 $ 716
Additions to provision
for loan losses
charged to operations 240 270 71 121 366
Loans charged off
during the year
Commercial 20 0 0 17 0
Personal credit lines 17 3 1 3 6
Installment 31 48 7 31 45
Total charge-off's 68 51 8 51 51
Recoveries of loans
previously charged off:
Commercial 3 0 0 0 0
Installment 12 14 12 13 10
Personal credit
lines 0 0 0 0 1
Total recoveries 15 14 12 13 11
Net loans charged off
(recovered) 53 37 ( 4) 38 40
Allowance for loan
losses, end of
period $ 1,620 $ 1,433 $ 1,200 $ 1,125 $ 1,042
Ratio of net loans
charged off to
average loans
outstanding .05% .04% 0.0% .05% .06%
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.
- -40-
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 December
31.
1996 1995 1994 1993 1992
(000 omitted)
Nonaccrual loans $ 14 $ 132 $ 27 $ 0 $ 781
Accrual loans:
Restructured $ 0 $ 0 $ 0 $ 0 $ 0
30 through 89
days past due 1,976 1,949 1,553 1,468 1,974
90 days or
more past due 203 417 155 150 63
Total accrual
loans $ 2,179 $ 2,366 $ 1,708 $ 1,618 $ 2,037
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.
- -41-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
The following is an allocation by loan categories of the allowance
for loan losses at December 31 for the last five years. In retrospect the
specific allocation in any particular category may prove excessive or
inadequate
and consequently may be reallocated in the future to reflect the then current
conditions. Accordingly, the entire allowance is available to absorb losses in
any category:
Years Ended December 31
1996 1995
Percentage Percentage
Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans
(000 omitted)
Commercial, financial
and agricultural $ 125 7.71% $ 114 7.98%
Real estate -
Construction 64 3.95 80 5.55
Real estate -
Mortgage 1,229 75.91 1,055 73.63
Installment 202 12.43 184 12.84
Total $ 1,620 100.00% $ 1,433 100.00%
Years Ended December 31
1994 1993
Percentage Percentage
Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans
(000 omitted)
Commercial, financial
and agricultural $ 113 9.42% $ 78 6.99%
Real estate -
Construction 67 5.58 56 4.97
Real estate -
Mortgage 844 70.33 853 75.79
Installment 176 14.67 138 12.25
Total $ 1,200 100.00% $ 1,125 100.00%
- -42-
Year Ended December 31
1992
Percentage
Allowance of Loans to
Amount Total Loans
(000 omitted)
Commercial, financial
and agricultural $ 76 7.24%
Real estate -
Construction 51 4.93
Real estate -
Mortgage 763 73.22
Installment 152 14.61
Total $ 1,042 100.00%
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
DEPOSITS
The average amounts of deposits are summarized below:
Years Ended December 31
1996 1995 1994
(000 omitted)
Demand deposits $ 16,078 $ 13,833 $ 12,991
Interest bearing demand deposits 27,601 25,048 27,232
Savings deposits 26,555 24,200 24,425
Time deposits 63,767 53,350 37,526
Total deposits $ 134,001 $ 116,431 $ 102,174
The following is a breakdown of maturities of time deposits of
$ 100,000 or more as of December 31, 1996:
Maturity (000 omitted)
Certificates of Deposit
Three months or less $ 2,116
Over three months through
six months 3,427
Over six months through
twelve months 2,124
Over twelve months 100
$ 7,767
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)
1996 1995 1994
Average assets $ 153,145 $ 135,648 $ 118,388
Net income $ 2,248 $ 1,954 $ 1,635
Average equity $ 15,076 $ 13,570 $ 12,238
Cash dividends paid $ 694 $ 613 $ 512
Return on assets 1.47% 1.44% 1.38%
Return on equity 14.90% 14.40% 13.36%
Dividend payout ratio 30.90% 30.7% 31.3%
Equity to asset ratio 9.8% 10.0% 10.34%
- -43-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED SUMMARY OF OPERATIONS
Years Ended December 31
1996 1995 1994 1993 1992
(000 omitted)
Interest income $ 11,981 $ 10,829 $ 8,571 $ 8,250 $ 8,632
Interest expense 5,139 4,542 3,241 3,129 3,800
Net interest income 6,842 6,287 5,330 5,121 4,832
Provision for loan
losses 240 270 71 121 366
Net interest
income after
provision for
loan losses 6,602 6,017 5,259 5,000 4,466
Other income:
Trust 384 297 185 157 119
Service charges -
Deposits 477 375 349 308 294
Other service charges,
collection and
exchange, charges,
commission fees 295 218 180 163 170
Other operating
income (loss) 121 45 146 ( 26) 110
Total other
income 1,277 935 860 602 693
Income before
operating expense 7,879 6,952 6,119 5,602 5,159
Operating expenses:
Salaries and
employees benefits 2,621 2,326 2,115 1,908 1,725
Occupancy and
equipment expense 665 559 486 405 394
Other operating
expenses 1,507 1,371 1,363 1,280 1,250
Total operating
expenses 4,793 4,256 3,964 3,593 3,369
Income before income
taxes 3,086 2,696 2,155 2,009 1,790
Income tax 838 742 520 525 452
Net income
applicable to
common stock $ 2,248 $ 1,954 $ 1,635 $ 1,484 $ 1,338
Per share data:
Earnings per common
share $ 2.30 $ 2.00 $ 1.67 $ 1.52 $ 1.40
Cash dividend -
Common $ .71 $ .61 $ .52 $ .47 $ .43
Weighted average
number of common
shares 976,863 976,863 976,863 976,777 956,443
- -44-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
STATEMENTS OF AVERAGE BALANCES AND AVERAGE RATES
($ 000 omitted) 1996 1995 1994 1993 1992
LOANS
Personal credit lines $ 4,859 $ 4,425 $ 4,113 $ 3,710 $ 3,556
Tax free 996 1,207 1,229 1,215 1,092
Commercial 33,432 28,725 21,512 16,958 15,048
Mortgage 47,057 46,728 42,919 39,874 37,006
Consumer 19,099 16,329 11,888 10,819 11,169
Credit card 336 248 79 0 0
Total loans 105,779 97,662 81,740 72,576
67,871
INVESTMENT SECURITIES
U.S. Government 8,384 7,378 7,891 10,385 10,273
U.S. Government agencies 11,159 9,815 8,173 9,201 7,257
State & municipal 9,881 8,488 8,148 8,451 7,069
Other 1,356 1,162 1,106 1,148 1,110
Total investment
securities 30,780 26,843 25,318 29,185 25,709
OTHER SHORT-TERM INVESTMENTS
Interest-bearing deposits 1,261 1,006 0 0 0
Federal funds sold 6,312 1,328 3,196 1,031 2,668
Certificates of deposit 64 72 198 0 19
Total other short-term
investments 7,637 2,406 3,394 1,031 2,687
TOTAL EARNING ASSETS 144,196 126,911 110,452 102,792 96,267
TOTAL ASSETS $ 153,145 $ 135,648 $ 118,388 $ 109,552 $
102,761
Percent increase 12.9% 14.6% 8.1% 6.6% 7.9%
DEPOSITS
Demand $ 16,078 $ 13,833 $ 12,991 $ 12,052 $ 10,406
Interest-bearing demand 27,601 25,048 27,232 25,746 23,553
Savings 26,555 24,200 24,425 21,780 17,090
Time 63,767 53,350 37,526 35,998 39,629
Total deposits 134,001 116,431 102,174 95,576 90,678
OTHER BORROWINGS
Federal funds purchased 0 715 77 521 288
Liabilities for borrowed
money 2,340 2,345 2,304 728 0
TOTAL INTEREST-BEARING
LIABILITIES 120,263 105,658 91,564 84,773 80,560
- -45
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
STATEMENTS OF AVERAGE BALANCES AND AVERAGE RATES (CONTINUED)
1996 1995 1994 1993
1992
AVERAGE RATES EARNED
% % %
% %
Loans
Commercial 9.6 10.1 9.0 8.4 8.7
Mortgage 8.2 7.9 7.6 8.0 9.1
Consumer 9.5 9.6 10.0 11.6 11.9
Tax free 9.0 8.8 9.5 7.8 9.2
Personal credit lines 10.0 10.5 8.8 8.2 8.7
Credit card 9.4 9.0 6.5 0.0 0.0
Total 9.0 9.0 8.4 8.7 9.4
Investment Securities
U.S. Government 6.0 5.7 5.6 6.7 7.8
U.S. Government agencies 6.8 6.8 6.3 6.4 7.6
State & municipal 9.2 9.5 9.5 9.6 10.4
Other 6.0 5.4 4.5 5.2 4.3
Total 7.3 7.3 7.1 7.4 8.4
Other Short-Term Investments
Interest-bearing deposits 5.3 6.0 0.0 0.0 0.0
Federal funds sold 5.3 6.0 4.0 2.9 3.3
Certificates of deposit 5.6 4.6 4.0 0.0 4.0
Total earning assets 8.5 8.6 7.8 8.2 9.0
AVERAGE RATES PAID
Time & savings deposits 4.2 4.2 3.5 3.7 4.7
Federal funds purchased 0.0 6.1 4.4 3.3 4.0
Liabilities for borrowed money 6.3 6.3 6.3 6.6 0.0
- -46-
Item 9. Disagreements on Accounting and Financial Disclosures.
Not applicable.
- -47-
PART III
Item 10. Directors and Executive Officers of Orrstown Financial
Services, Inc.
The information required by Item 10 of Form 10-K with
respect to identification of directors is incorporated by
reference to the information contained in the section
captioned "Election of Directors" in Orrstown's definitive
proxy statement for the annual meeting of stockholders to be
held April 8, 1997 (the "proxy statement"), a copy of which
has been filed with the Securities and Exchange Commission.
For information with respect to the executive officers of
the registrant, see "executive officers of the registrant"
at the end of Part I of this report.
Item 11. Executive Compensation
The information required by Item 11 of Form 10-K with
respect to directors and executive officers' compensation is
incorporated by reference to the information contained in
the section captioned "executive compensation and other
matters" in the proxy statement. For information with
respect to a change in control agreement with the CEO of
Orrstown, see Exhibit 11 to this report.
The information required by Items 12 and 13 is incorporated
by reference from Orrstown Financial Services, Inc.'s definitive proxy
statement for the 1997 Annual Meeting of shareholders filed pursuant to
Regulation 14A.
- -48-
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).
(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.
- -49-
(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) Change in Control Agreement Between Orrstown Financial
Services, Inc. and its Chief Executive Officer - filed
herewith.
(b) Reports on Form 8-K. None.
- -50-
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 _____, 1997 (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 , 1997
Kenneth R. Shoemaker Executive Officer
and Director
Director March , 1997
Dr. Anthony F. Ceddia
Director March , 1997
Robert T. Henry
Assistant Secretary March , 1997
William O. Hykes and Director
Vice Chairman of the March , 1997
Joel R. Zullinger Board and Director
Secretary and Chairman March ____, 1997
Jeffrey W. Coy of Executive Committee
and Director
Director March , 1997
Ned R. Fogelsonger
Chairman of the March , 1997
Galen L. Myers Board and Director
Director March , 1997
Frank S. Heberlig
Director March , 1997
Raymond I. Pugh
____________________________ Director March ____, 1997
Denver L. Tuckey
____________________________ Director March ____, 1997
Andrea Pugh
- -51-
Exhibit Index
Exhibit No. Sequentially numbered pages
21 Subsidiaries of the Registrant 53
99 Change in Control Agreement between
Orrstown Financial Services, Inc. and
its Chief Executive Officer 54 - 59
- -52-
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
1. Orrstown Bank, Orrstown, Pennsylvania; a state-chartered bank
organized under the Pennsylvania Banking Code of 1965.
- -53-
EXHIBIT 99
CHANGE IN CONTROL AGREEMENT
THIS AGREEMENT is made as of the 23rd day of January, 1997,
between ORRSTOWN FINANCIAL SERVICES, INC., a corporation organized and
existing under the laws of the Commonwealth of Pennsylvania and having
its principal place of business in Orrstown, Pennsylvania (hereinafter
referred to as the "Corporation"), ORRSTOWN BANK, a wholly-owned bank
subsidiary of the Corporation organized and existing under the laws of
the Commonwealth of Pennsylvania and having its principal place of
business in Orrstown, Pennsylvania (hereinafter referred to as the
"Bank"), and KENNETH R. SHOEMAKER, an individual residing at 53 West
King Street, Shippensburg, Pennsylvania 17257 (hereinafter referred to
as the "Executive").
WITNESSETH:
WHEREAS, Executive is now serving as the President and Chief
Executive Officer of the Corporation and of the Bank; and
WHEREAS, the Corporation, Bank and the Executive desire to
enter into an Agreement whereby the Corporation and the Bank will agree
to make certain payments to the Executive under specific conditions in
order to induce the Executive to continue in employment with the
Corporation and the Bank.
NOW, THEREFORE, in consideration of the employment of the
Executive and intending to be legally bound hereby, the Executive, the
Corporation and the Bank agree as follows:
SECTION I
COMPENSATION UPON A CHANGE IN CONTROL
(A) Definition: Trigger Event. Executive shall have the
right to receive the compensation provided for in
paragraph (D) of this Section I upon the occurrence of
any of the following events ("Trigger Events") within
three (3) years after the date of any "Change in
Control" (as defined in paragraph (B) of this Section
1):
(i) Executive's employment is terminated by the
Corporation, the Bank or an acquiror or successor
of either without "Good Cause" (as defined
below), or
(ii) One of the following events occurs and Executive
thereafter terminates his employment:
(A) the nature and scope of Executive's duties or
responsibilities with the Corporation, the
Bank or an acquiror or successor of either
are materially reduced from that which he
enjoyed immediately prior to the Change in
Control; or
(B) Executive's base salary immediately prior to
the Change in Control is reduced or material
benefits provided to Executive (excluding the
reduction or curtailment of benefits which
affect all similarly situated employees) are
eliminated; or
(C) Executive is assigned, without his consent,
to a principal place of employment which is
more than fifty (50) miles from Shippensburg,
Pennsylvania.
- -54-
(B) Definition: Change in Control. For purposes of this
Agreement, Change in Control shall mean any of the
following:
(i) any person (as such term is used in Sections
13(d) and 14(d)(2) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act")), other
than the Corporation, a subsidiary of the
Corporation, an employee benefit plan (or related
trust) of the Corporation or a direct or indirect
subsidiary of the Corporation, or affiliates of
the Corporation (as defined in Rule 12b-2 under
the Exchange Act), becomes the beneficial owner
(as determined pursuant to Rule 13d-3 under the
Exchange Act), directly or indirectly, of
securities of the Corporation representing more
than 20% of the combined voting power of the
Corporation's then outstanding securities or
announces a tender offer or exchange offer for
securities of the Corporation representing more
than 20% of the combined voting power of the
Corporation's then outstanding securities; or
(ii) the liquidation or dissolution of the Corporation
or the Bank or the occurrence of, or execution of
an agreement providing for, a sale of all or
substantially all of the assets of the
Corporation or the Bank to an entity which is not
a direct or indirect subsidiary of the
Corporation; or
(iii) the occurrence of, or execution of an agreement
providing for, a reorganization, merger,
consolidation or other similar transaction or
connected series of transactions of the
Corporation as a result of which either (a) the
Corporation does not survive or (b) pursuant to
which shares of the Corporation common stock
("Common Stock") would be converted into cash,
securities or other property, unless, in case of
either (a) or (b), the holders of Corporation
Common Stock immediately prior to such
transaction will, following the consummation of
the transaction, beneficially own, directly or
indirectly, more than 50% of the combined voting
power of the then outstanding voting securities
entitled to vote generally in the election of
directors of the corporation surviving,
continuing or resulting from such transaction; or
(iv) the occurrence of, or execution of an agreement
providing for, a reorganization, merger,
consolidation, or similar transaction or
connected series of transactions of the
Corporation, if, upon consummation of such
transaction or transactions, the persons who are
members of the Board of Directors of the
Corporation immediately before such transaction
or transactions cease or, in the case of the
execution of an agreement for such transaction or
transactions, it is contemplated in such
agreement that upon consummation such persons
would cease, to constitute a majority of the
Board of Directors of the Corporation or, in a
case where the Corporation does not survive in
such transaction, of the corporation surviving,
continuing or resulting from such transaction or
transactions; or
(v) any other event which is at any time designated
as a "Change in Control" for purposes of this
Agreement by a resolution adopted by the Board of
Directors of the Corporation with the affirmative
vote of a majority of the non-employee directors
in office at the time the resolution is adopted;
in the event any such resolution is adopted, the
Change in Control event specified thereby shall
be deemed incorporated herein by reference and
thereafter may not be amended, modified or
revoked without the written agreement of
Executive.
- -55-
Notwithstanding anything else to the contrary set forth in this
Agreement, if (i) an agreement is executed by the Corporation or the
Bank providing for any of the transactions or events constituting a
Change in Control, as defined herein, and the agreement subsequently
expires or is terminated without the transaction or event being
consummated, and (ii) a Trigger Event, as defined herein, has not
occurred prior to such expiration or termination, for purposes of this
Agreement it shall be as though such agreement was never executed and no
Change in Control event shall be deemed to have occurred as a result of
the execution of such agreement.
(C) Definition: "Good Cause". For purposes of this
Agreement, "Good Cause" shall mean: (i) the commission
of gross malfeasance in office constituting dishonesty,
the conviction (or entering a plea of nolo contendere)
of a crime involving fraud, misappropriation,
embezzlement, dishonesty or other violation of law of a
similar nature and severity or (ii) the willful breach
of a fiduciary duty owed to the Corporation or the
Bank. No act, or failure to act, on Executive's part
shall be considered willful unless done, or omitted to
be done, by Executive, not in good faith and without
reasonable belief that Executive's action or omission
was in the best interest of the Corporation or the
Bank. The burden of establishing the validity of any
termination for "Good Cause" shall rest upon the
Corporation or the Bank.
(D) Compensation Upon a Change in Control. If a Trigger
Event shall occur pursuant to a Change in Control, then
the Corporation or the Bank (or any acquiror or
successor thereto) shall provide the following to the
Executive:
(i) Executive's compensation shall be continued for a
period of three (3) years, commencing as of the
Trigger Event, but not beyond the date on which
Executive dies. For purposes hereof,
compensation shall mean the greater of (a)
Executive's base salary in effect immediately
prior to the Trigger Event, plus any cash bonuses
or annual incentive cash compensation earned by
Executive with respect to the calendar year
immediately preceding the date of the Trigger
Event, or (b) Executive's base salary in effect
immediately prior to the Change in Control, plus
any cash bonuses or annual incentive cash
compensation earned by Executive with respect to
the calendar year immediately preceding the
Change in Control. Each payment during the three
(3) year payment period shall be reduced by
Executive's earned income from all sources during
the three (3) year payment period; provided,
however, that Executive shall have no duty to
mitigate damages by earning income during the
period; and
(ii) Executive shall be provided, for a period of
three (3) years, commencing as of the Trigger
Event, but not beyond the date on which Executive
dies, with life, disability and accident and
health insurance coverages comparable to employer
sponsored plan coverages in effect for Executive
immediately preceding the Trigger Event.
Executive shall continue to be responsible for
the cost of comparable insurance coverages
following the Trigger Event to the same extent as
other similarly situated active employees of the
Corporation or the Bank as of the Trigger Event
or, if there are no similarly situated employees,
then to the same extent, on a percentage of total
cost basis, that Executive was responsible for
the cost of available insurance coverages prior
to the Trigger Event. With respect to health
insurance coverage, Executive's spouse
- -56-
and/or eligible dependents, if covered under any
employer sponsored accident and health insurance
plan in effect for Executive as of the Trigger
Event, shall also be provided with health
insurance coverage for the three (3) year term
set forth above (regardless of Executive's death
or attainment of age 65 prior to the end of the
three (3) year term), and under the same cost
sharing method as described above.
(iii) Should the total of all payments made hereunder
to Executive upon the occurrence of a Trigger
Event, together with any other payments which
Executive has a right to receive from the
Corporation, the Bank, any of the other
subsidiaries of the Corporation, or any
successors of any of the foregoing, result in the
imposition of an excise tax under Internal
Revenue Code Section 4999 (or any successor
thereto), Executive shall be entitled to an
additional "excise tax" adjustment payment in an
amount such that, after the payment of all
federal and state income and excise taxes,
Executive will be in the same after-tax position
as if no excise tax had been imposed. Any
payment or benefit which is required to be
included under Internal Revenue Code Sections
28OG or 4999 (or any successor provisions
thereto) for purposes of determining whether an
excise tax is payable shall be deemed a payment
"made to Executive" or a payment "which Executive
has a right to receive" for purposes of this
provision. The Corporation (or its successor)
shall be responsible for the costs of calculation
of the excise tax by the Corporation's
independent certified accountant and tax counsel
and shall notify Executive of the amount of
excise tax due prior to the time such excise tax
is due. If at any time it is determined that the
additional "excise tax" adjustment payment
previously made to Executive was insufficient to
cover the effect of the excise tax, the gross-up
payment pursuant to this provision shall be
increased to make Executive whole, including an
amount to cover the payment of any penalties
resulting from any incorrect or late payment of
the excise tax resulting from the prior
calculation.
(E) Payments Not Exclusive. The payments provided by
paragraph (D) of this Section I shall not affect
Executive's rights to receive any payments or benefits
to which Executive may be or become entitled under any
other existing or future agreement or arrangement of
the Corporation. The Bank or any successor with the
Executive, or under any existing or future benefit plan
or arrangement of the Corporation, the Bank or any
successor in which Executive is or becomes a
participant, or under which Executive has or obtains
rights, including without limitation, any qualified or
nonqualified deferred compensation or retirement plans
or programs. Any such rights of Executive shall be
determined in accordance with the terms and conditions
of the applicable agreement, arrangement or plan.
(F) Withholding for Taxes. All payments required to be
made under this Agreement will be made in accordance
with the Corporation's or the Bank's normal payroll
schedule and will be subject to withholding of such
amounts relating to tax and/or other payroll deductions
as may be required by law.
- -57-
SECTION II
EXPENSES
(A) Legal Action. If Executive determines in good faith
that the Corporation, the Bank, or any successor to
either of them, has failed to comply with its
obligations under this Agreement, or if the
Corporation, the Bank, or any successor to either of
them, or any other person takes any action to declare
this Agreement void or unenforceable, or institutes any
legal action or arbitration proceeding with respect to
this Agreement, each of the Corporation and the Bank
hereby irrevocably authorizes Executive from time to
time to retain counsel of Executive's choice, at the
expense of the Corporation and the Bank, to represent
Executive in connection with any and all actions and
proceedings, whether by or against the Corporation, the
Bank, any acquiror or successor, or any director,
officer, stockholder or other person affiliated with
any of the foregoing, which may adversely affect
Executive's rights hereunder.
(B) Excise Tax Matters. It is the intention of the
Corporation and the Bank that Executive not be required
to incur any expenses associated with determination of
the amount of any "excess parachute payment" under
Internal Revenue Code Section 280G or the amount of any
excise tax imposed on Executive pursuant to Internal
Revenue Code Section 4999 (or any successor provisions
thereto). Therefore, the Corporation and the Bank
agree to pay all expenses, including the expenses of
the Corporation's independent certified accountant and
tax counsel, related to the determination of any excess
parachute payment and excise tax, and to pay the legal
costs and expenses of any tax audit of Executive to the
extent such expenses relate to the amount of the excise
tax determined by the Corporation or the Bank.
SECTION III
MISCELLANEOUS
(A) Termination of Employment. This Agreement shall not in
any way obligate either the Corporation or the Bank to
continue the employment of the Executive, nor shall
this Agreement limit the right of the Corporation or
the Bank to terminate Executive's employment for any
reason. Prior to the occurrence of a Change in
Control, as defined herein, Executive's employment may
be terminated at any time by the Corporation or the
Bank, in which case Executive shall have no further
rights under this Agreement.
(B) Binding Effect. This Agreement shall be binding upon
and inure to the benefit of the parties hereto, their
respective heirs, executors, administrators, successors
and, to the extent permitted hereunder, assigns. All
of the obligations of the Corporation and the Bank
hereunder shall be legally binding on any successor to
the Corporation or the Bank, including without
limitation, any successor as a result of the
consummation of a Change in Control. The right of
Executive to receive payments hereunder may not be
assigned, alienated, pledged or otherwise encumbered by
Executive and any attempt to do so shall be void and of
no force or effect.
(C) Entire Agreement. This Agreement contains the entire
agreement of the parties hereto with respect to the
subject matter hereof and supersedes all prior
agreements among the parties hereto with respect to
said subject matter including, without limitation, that
certain Agreement dated May 7, 1986 between Executive
and the Bank. This Agreement may be amended only by an
instrument in writing signed by all of the parties
hereto.
- -58-
(D) Jurisdiction. The parties hereto consent to the
exclusive jurisdiction of the courts of the
Commonwealth of Pennsylvania in any and all actions
arising hereunder.
(E) Governing Laws. This Agreement shall be governed and
construed under the laws of the Commonwealth of
Pennsylvania, without regard to the conflicts of laws
principles thereof.
(F) Unfunded Obligations. The obligations to make payments
hereunder shall be unfunded and Executive's rights to
receive any payments hereunder shall be the same as
those of any other unsecured general creditor.
(G) Individual Agreement. This Agreement constitutes an
agreement solely between the Corporation, the Bank and
Executive named herein. This Agreement is intended to
constitute a nonqualified arrangement for the benefit
of a key management employee and shall be construed and
interpreted in a manner consistent with such intention.
(H) Headings. All headings preceding the text of the
several paragraphs hereof are inserted solely for
reference and shall not constitute a part of this
Agreement, nor affect its meaning, construction or
effect.
(I) Waiver. Failure by either party to insist upon strict
compliance with any of the terms, covenants or
conditions hereof shall not be deemed a waiver of such
terms, covenants or conditions, nor shall any waiver or
relinquishment of any right or power hereunder at any
time or from time to time be deemed a waiver or
relinquishment of such right or power at any other time
or times.
IN WITNESS WHEREOF, the Corporation and Bank have caused
this Agreement to be executed and attested to on their respective behalf
by their duly authorized officers, and the Executive hereunto has set
his hand and seal, all as of the day and year first above written.
ATTEST: ORRSTOWN FINANCIAL SERVICES, INC.
_________________________ By: ______________________________
(Assistant) Secretary Chairman
(SEAL)
ATTEST: ORRSTOWN BANK
_________________________ By: ______________________________
(Assistant) Secretary Chairman
(SEAL)
WITNESS: EXECUTIVE:
__________________________ ______________________________(SEAL)
Kenneth R. Shoemaker