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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, 1999
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 Identification No.)
incorporation or organization)
77 East King Street, P. O. Box 250, Shippensburg, Pennsylvania 17257
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 532-6114
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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
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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 December 31, 1999, 2,218,291 shares of the registrant's common stock were
outstanding. The aggregate market value of such shares held by nonaffiliates on
that date was $ 88,731,640.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended December 31, 1999
are incorporated by reference into Parts I and II. Portions of the Proxy
Statement for 2000 Annual Meeting of Security Holders are incorporated by
reference in Part III of this Form 10-K.
ORRSTOWN FINANCIAL SERVICES, INC.
FORM 10-K
INDEX
Page
----
Part I
Item 1. Business ............................................................................ 2
Item 2. Properties .......................................................................... 7
Item 3. Legal Proceedings ................................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders ................................. 8
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ............... 10
Item 6. Selected Financial Data ............................................................. 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations ..................................................................... 10
Item 8. Financial Statements and Supplementary Data ......................................... 10
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .............................................................. 19
Part III
Item 10. Directors and Executive Officers of the Registrant .................................. 19
Item 11. Executive Compensation .............................................................. 19
Item 12. Security Ownership of Certain Beneficial Owners and Management ...................... 19
Item 13. Certain Relationships and Related Transactions ...................................... 19
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .................... 19
Signatures ..................................................................................... 21
Part I
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 eight branches are located in Shippensburg
(2), Carlisle (2), Spring Run, Orrstown, and Chambersburg (2), 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,
1999, Orrstown had 84 full-time and 48 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 Pennsylvania,
principally Franklin and Cumberland Counties. The concentrations of credit by
type of loan are set forth on the face of the balance sheet (page 2 of the
annual report to shareholders). The Bank maintains a diversified loan portfolio
and evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon the
extension of credit, is based on management's credit evaluation of the customer
and collateral standards established in the Bank's lending policies and
procedures.
All secured loans are supported with appraisals of collateral. Business
equipment and machinery, inventories, accounts receivable, and farm equipment
are considered appropriate security, provided they meet acceptable standards for
liquidity and marketability.
-2-
Loans secured by equipment and/or other 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.
As of December 31, 1999, Orrstown had total assets of approximately $ 265
million, total shareholders' equity of approximately $ 22 million and total
deposits of approximately $ 204 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.
-3-
The primary supervisory authority of Orrstown is the Pennsylvania
Department of Banking, who regularly examines such areas as reserves, loans,
investments, management practices and other aspects of bank operations. These
examinations are designed primarily for the protection of the Bank depositors.
Federal and state banking laws and regulations govern, among other things,
the scope of a bank's business, the investments a bank may make, the reserves
against deposits a bank must maintain, the loans a bank makes and collateral it
takes, the maximum interest rates a bank may pay on deposits, the activities of
a bank with respect to mergers and consolidations, and the establishment of
branches, and management practices and other aspects of banking operations. See
Note 14 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 12 of the annual report to shareholders under "Capital
Adequacy and Regulatory Matters". 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. FDICIA 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
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.
-4-
FDICIA establishes five capital tiers, ranging from "well capitalized", to
"critically undercapitalized". A depository institution is well capitalized if
it significantly exceeds the minimum level required by regulation for each
relevant capital measure. Under FDICIA, an institution that is not well
capitalized is generally prohibited from accepting brokered deposits and
offering interest rates on deposits higher than the prevailing rate in its
market; in addition, "pass through" insurance coverage may not be available for
certain employee benefit accounts. FDICIA also requires an undercapitalized
depository institution to submit an acceptable capital restoration plan to the
appropriate federal bank regulatory agency. One requisite element of such a plan
is that the institution's parent holding company must guarantee compliance by
the institution with the plan, subject to certain limitations. In the event of
the parent holding company's bankruptcy, the guarantee, and any other
commitments that the parent holding company has made to federal bank regulators
to maintain the capital of its depository institution subsidiaries, would be
assumed by the bankruptcy trustee and entitled to priority in payment.
Based on their respective regulatory capital ratios at December 31, 1999,
the corporation is considered well capitalized, based on the definitions in the
regulations issued by the Federal Reserve Board and the other federal bank
regulatory agencies setting forth the general capital requirements mandated by
FDICIA. See "Capital Adequacy and Regulatory Matters" in management's discussion
and analysis in the corporation's annual report as shown in Exhibit 13.
A federal depositor preference statute was enacted in 1993 providing that
deposits and certain claims for administrative expenses and employee
compensation against an insured depository institution would be afforded a
priority over other general claims against such an institution, including
federal funds and letters of credit, in the "liquidation or other resolution" of
such an institution by any receiver.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999, federal legislation intended to modernize the
financial services industry by establishing a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms, and
other financial services providers. As a result of the legislation, bank holding
companies will be permitted to engage in a wider variety of financial activities
than permitted under prior law, particularly with regard to insurance and
securities activities. Moreover, to the extent that it permits banks, securities
firms and insurance companies to affiliate, the financial services industry may
experience further consolidation. This could result in a growing number of
larger financial institutions that offer a wider variety of financial services
than we currently offer and that can aggressively compete in the markets we
serve. This could adversely impact our profitability.
In addition, a bank holding company, which does not qualify or does not
elect to become a financial holding company under the Gramm-Leach-Bliley Act, is
generally prohibited from engaging in, or acquiring direct or indirect control
of any company engaged in nonbanking activities, except for activities found by
the Federal Reserve Board to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. The principal activities
that the Federal Reserve Board has determined by regulation to be so closely
related to banking as to be a proper incident thereto are set forth in Federal
Reserve Board Regulation Y.
-5-
Bank holding companies that do qualify as a financial holding company may
engage in activities that are of a financial nature or incidental thereto. This
will include activities such as securities and insurance underwriting which are
not permitted nonbanking activities under Regulation Y. A bank holding company
may qualify to become a financial holding company if each of its depository
institution subsidiaries is "well capitalized", "well managed", has at least a
"satisfactory" CRA rating in its most recent examination and the bank holding
company has filed a certification with the Federal Reserve Bank that it elects
to become a financial holding company.
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 to banking and securities laws, regulations and regulatory
agencies, the Corporation also is subject to various other laws, regulations and
regulatory agencies. Furthermore, various proposals, bills and regulations have
been and are being considered in the United States Congress, and various other
governmental regulatory and legislative bodies, which could result in changes in
the profitability and governance of the Corporation. It cannot be predicted
whether new legislation or regulations will be adopted and, if so, how they
would affect the Corporation.
References under the caption "Supervision and Regulation" to applicable
statutes, regulations and orders are brief summaries of portions thereof which
do not purport to be complete and which are qualified in their entirety by
reference thereto.
Important Factors Relating to Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in such statements. In
connection with certain statements made in this report and those that may be
made in the future by or on behalf of the Corporation which are identified as
forward-looking statements, the Corporation notes that the following important
factors, among others, could cause actual results to differ materially from
those set forth in any such forward-looking statements. Further, such
forward-looking statements speak only as of the date on which such statement or
statements are made, and the Corporation undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events.
The business and profitability of a financial services organization such as
the Corporation is influenced by prevailing economic conditions and governmental
policies. The actions and policy directives of the Federal Reserve Board
determine to a significant degree the cost and the availability of funds
obtained from money market sources for lending and investing. Federal Reserve
Board policies and regulations also influence, directly and indirectly, the
rates of interest paid by commercial banks on their interest-bearing deposits
and may also impact the value of financial instruments held by the Corporation.
The nature and
-6-
impact on the Corporation of future changes in economic and market conditions
and monetary and fiscal policies are not predictable and are beyond the
Corporation's control. In addition, these conditions and policies can impact the
Corporation's customers and counterparties which may increase the risk of
default on their obligations to the Corporation and its affiliates. They can
also affect the competitive conditions in the markets and products within which
the Corporation operates, which can have an adverse impact on the Corporation's
ability to maintain its revenue streams.
As part of its ongoing business, the Corporation assumes financial
exposures to interest rates, currencies, equities and other financial products.
In doing so, the Corporation is subject to unforeseen events which may not have
been anticipated or which may have effects which exceed those assumed within its
risk management processes. This risk can be accentuated by volatility and
reduction in liquidity in those markets which in turn can impact the
Corporation's ability to hedge and trade the positions concerned. In addition,
the Corporation is dependent on its ability to access the financial markets for
its funding needs.
As noted in "Supervision and Regulation", the Corporation is regulated by
and subject to various regulators. The actions of these regulators can have an
impact on the profitability and governance of the Corporation. Increases by
regulatory authorities of minimum capital, reserve, deposit insurance and other
financial viability requirements can also affect the Corporation's
profitability.
The Corporation is subject to operational and control risk which is the
potential for loss caused by a breakdown in communication, information,
processing and settlement systems or processes or a lack of compliance with the
procedures on which they rely either within the Corporation or within the
broader financial systems infrastructure.
As with any financial institution, the Corporation is also subject to the
risk of litigation and to an unexpected or adverse outcome in such litigation.
Competitive pressures in the marketplace and unfavorable or adverse publicity
and news coverage can have the effect of lessening customer demand for the
Corporation's services. Ultimately, the Corporation's businesses and their
success are dependent on the Corporation's ability to attract and retain high
quality employees.
Competition
Orrstown's principal market area consists of Franklin County and Cumberland
County, Pennsylvania. It services a substantial number of depositors in this
market area, with the greatest concentration within a radius of Chambersburg,
Shippensburg and Carlisle, Pennsylvania.
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, Spring Run, Pennsylvania and
Chambersburg, Pennsylvania. Offices of the bank are located in each of these
buildings. One of the offices located in Shippensburg is an "Operations Center"
which
-7-
does not operate as a branch, but rather as an accounting office. The
corporation is in the process of expanding its main offices located on King
Street in Shippensburg, PA and has acquired property in Mechanicsburg, PA to be
the site of its ninth branch. Both projects are expected to be completed in
2000. The bank also owns a 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.
-8-
Age
Held Bank Employee as of
Name/Office Held Since Since 3/15/00
---------------- ----- ----- -------
Joel R. Zullinger, Chairman
of the Board 1991 (1) 51
Jeffrey W. Coy, Vice Chairman of
The board 1988 (1) 48
Kenneth R. Shoemaker, President & CEO 1987 1986 52
Bradley S. Everly, Senior Vice President
Chief Financial Officer 1997 1997 48
Stephen C. Oldt, Executive
Vice President, Chief Operating
Officer 1987 1987 57
Philip E. Fague, Senior Vice President,
Senior Trust Officer 1990 1988 40
Denver L. Tuckey, Secretary 1999 (1) 65
Benjamin Stoops, Vice President, Senior
Operations Officer 1998 1998 48
Jeffrey W. Embly, Vice President
Senior Loan Officer 1999 1997 29
(1) These officers are not employees of the Bank.
Senior Operating Officers of the Bank
Age
Held Bank Employee as of
Name/Office Held Since Since 3/15/00
---------------- ----- ----- -------
Kenneth R. Shoemaker, President &
Chief Executive Officer 1987 1988 52
Stephen C. Oldt, Executive Vice
President & Chief Operating Officer 1987 1987 57
Philip E. Fague, Vice President/ 1990/
Senior Trust Officer 1993 1988 40
Bradley S. Everly, Senior Vice 1997/
President/Chief Financial Officer 1997 1997 48
Benjamin Stoops, Vice President,
Senior Operations Officer 1998 1998 48
Jeffrey W. Embly, Vice President,
Senior Loan Officer 1999 1997 29
-9-
Part II
Item 5. Market for Registrant's Common Stock and Related Security
Holder Matters.
Orrstown Financial Services, Inc.'s common stock is not traded
on a national securities exchange, but is traded through the local and over the
counter local markets. At December 31, 1999, the approximate number of
shareholders of record was approximately 1,848. The price ranges for Orrstown
Financial Services, Inc. common stock set forth below are the approximate bid
prices obtained from brokers who make a market in the stock.
Market Cash Market Cash
Price Dividend Price Dividend
------------------ --------- -------------------- --------
Dividend (1) 1998 1997
--------------------------------- ---------------------------------
High Low High Low
First Quarter $ 32.56 $ 25.58 $ .121 $ 22.33 $ 20.93 $ .107
Second Quarter 37.21 25.12 .121 24.19 20.59 .107
Third Quarter 37.21 32.56 .130 27.91 24.19 .112
Fourth Quarter 40.0 32.56 .140 29.77 25.58 .112
- ----------
(1) Note: All per share data has been restated after giving retroactive
recognition to a 7-1/2% stock dividend paid November 19, 1999 and a 2 for 1
stock split effective November 21, 1998.
See Note 14 to the financial statements for restrictions on the payment of
dividends.
Item 6. Selected Financial Data.
The selected five-year financial data on page 20 of the annual
shareholders' report for the year ended December 31, 1999 is incorporated herein
by reference.
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 14 through 18 of the annual shareholders' report are
incorporated herein by reference.
Item 8. Financial Statements and Supplementary
Data.
The financial statements and supplementary data, some of which is required
under Guide 3 (statistical disclosures by bank holding companies) are shown on
pages 2 through 20 of the annual shareholders report for the year ended December
31, 1999 and are incorporated herein by reference. Certain statistical
information required in addition to those included in the annual shareholders
report are submitted herewith as follows.
Description of Statistical Information Page
-------------------------------------- ----
Changes in net interest income tax equivalent yields 11
Investment portfolio 12
Loan portfolio 13
Summary of loan loss experience 14
Nonaccrual, delinquent and impaired loans 15
Allocation of allowances for loan losses 16
Deposits and return on equity and assets 17
Consolidated summary of operations 18
-10-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CHANGES IN NET INTEREST INCOME TAX EQUIVALENT YIELDS
1999 Versus 1998 1998 Versus 1997
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
------------------------------------ --------------------------------
Total Total
------------------------------------ --------------------------------
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- --------- ------ ---- ----------
(000 omitted)
Interest Income
Loans (net of unearned discounts) $ 2,280 ($ 469) $ 1,811 $ 2,429 ($ 252) $ 2,177
Taxable investment securities 456 7 463 390 (80) 310
Nontaxable investment securities (3) (3) (6) 170 (17) 153
Other short-term investments 7 (27) (20) 131 (17) 114
------- -------- ------- ------- ------ -------
Total interest income 2,740 (492) 2,248 3,120 (366) 2,754
------- -------- ------- ------- ------ -------
Interest Expense
Interest bearing demand 486 (113) 373 503 156 659
Savings deposits (15) (82) (97) (35) (16) (51)
Time deposits 75 (312) (237) 344 32 376
Short-term borrowings 263 (29) 234 221 (29) 192
Long-term borrowings 501 (48) 453 379 (29) 350
------- ------- ------- ------- ------- -------
Total interest expense 1,310 (584) 726 1,412 114 1,526
------- ------- ------- ------- ------ -------
Net interest income $ 1,522 $ 1,228
======= =======
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.
-11-
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, 1999, and weighted average yields of such securities.
Yields are shown on a tax equivalent basis, assuming a 34% federal income tax
rate.
After 1 year After 5 years
Within but within but within After
1 year 5 years 10 years 10 years Total
------ ------- -------- -------- -----
(000 omitted)
Bonds:
U.S. Treasury
Book value $ 2,999 $ 3,549 $ 0 $ 0 $ 6,548
Yield 6.31% 6.37% 0% 0% 6.35%
U.S. Government
agencies
Book value 0 9,500 12,960 1,982 24,442
Yield 0% 6.15% 6.84% 6.72% 6.56%
State and municipal
Book value 0 1,139 500 15,359 16,998
Yield 0% 9.98% 10.0% 8.67% 8.76%
Total book
value $ 2,999 $ 14,188 $ 13,460 $ 17,341 $47,988
======= ======== ======== ======== =======
Yield 6.31% 6.51% 6.96% 8.45% 7.31%
====== ====== ====== ======= =======
Mortgage-backed
securities:
Total book value $12,603
=======
Yield 6.97%
=======
Equity Securities:
Total book value $ 739
=======
Yield 3.87%
=======
Total Investment Securities $61,330
=======
Yield 7.20%
=======
-12-
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:
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(000 omitted)
Commercial, financial
and agricultural $ 21,503 $ 18,732 $ 10,275 $ 8,401 $ 8,211
Real estate - Construction 15,580 11,182 5,961 4,304 5,706
Real estate - Mortgage 134,046 116,030 97,074 82,687 75,731
Installment and other
personal loans (net of
unearned discount) 9,562 12,688 15,021 13,534 13,209
--------- --------- --------- --------- ---------
Total loans $ 180,691 $ 158,632 $ 128,331 $ 108,926 $ 102,857
========= ========= ========= ========= =========
Presented below are the approximate maturities of the loan portfolio
(excluding real estate mortgages, installments and credit cards) at December 31,
1999:
Under One One to Over Five
Year Five Years Years Total
---- ---------- ----- -----
(000 omitted)
Commercial, financial and agricultural $ 3,407 $ 4,087 $ 14,009 $ 21,503
Real estate - Construction 2,159 2,585 10,836 15,580
------- ------- -------- --------
Total $ 5,566 $ 6,672 $ 24,845 $ 37,083
======= ======= ======== ========
The following table presents the approximate amount of fixed rate loans and
variable rate loans due as of December 31, 1999:
Fixed Rate Variable
Loans Rate Loans
----- ----------
(000 omitted)
Due within one year $ 1,932 $ 63,710
Due after one but within five years 32,602 27,806
Due after five years 54,162 479
-------- --------
Total $ 88,696 $ 91,995
======== ========
-13-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31
--------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(000 omitted)
Average total loans outstanding (net of
unearned income) $ 169,458 $ 144,013 $ 117,403 $ 105,779 $ 97,662
========= ========= ========= ========= ========
Allowance for loan losses, beginning
of period $ 1,971 $ 1,767 $ 1,620 $ 1,433 $ 1,200
Additions to provision for loan losses
charged to operations 547 270 215 240 270
Loans charged off during the year
Commercial 97 15 1 20 0
Personal credit lines 7 23 32 17 3
Installment 24 46 50 31 48
--------- --------- --------- ---------- --------
Total charge-off's 128 84 83 68 51
--------- --------- --------- --------- --------
Recoveries of loans previously charged off:
Commercial 59 3 2 3 0
Installment 1 10 12 12 14
Personal credit lines 5 5 1 0 0
--------- --------- ---------- --------- ----------
Total recoveries 65 18 15 15 14
--------- --------- --------- --------- --------
Net loans charged off (recovered) 63 66 68 53 37
--------- --------- --------- --------- --------
Allowance for loan losses, end of
period $ 2,455 $ 1,971 $ 1,767 $ 1,620 $ 1,433
========= ========= ========= ========= =========
Ratio of net loans charged off to
average loans outstanding .04% .06% .06% .05% .04%
========= ========= ========= ========= ==========
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.
-14-
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.
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(000 omitted)
Nonaccrual loans $ 0 $ 486 $ 473 $ 14 $ 132
========== ======== ======== ======== ========
Accrual loans:
Restructured $ 0 $ 0 $ 0 $ 0 $ 0
30 through 89
days past due 3,420 823 2,398 1,976 1,949
90 days or
more past due 97 284 657 203 417
---------- -------- -------- -------- --------
Total accrual
loans $ 3,517 $ 1,107 $ 3,055 $ 2,179 $ 2,366
========== ======== ======== ======== ========
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, and discussion concerning impaired loans at December 31, 1999.
-15-
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
---------------------------------------------------------------------
1999 1998
---------------------------- -------------------------------
Percentage Percentage
Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(000 omitted)
Commercial, financial
and agricultural $ 45 11.90% $ 255 9.93%
Commercial, real estate secured 609 18.03 416 19.43
Real estate - Construction 0 8.62 0 7.05
Real estate - Mortgage 93 56.16 111 53.77
Installment 27 5.29 34 9.82
Unallocated 1,681 0.00 1,155 0.00
------- ------ ------- ------
Total $ 2,455 100.00% $ 1,971 100.00%
======= ====== ======= ======
Years Ended December 31
---------------------------------------------------------------------
1999 1998
---------------------------- -------------------------------
Percentage Percentage
Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(000 omitted)
Commercial, financial
and agricultural $ 31 8.00% $ 125 7.71%
Commercial - Real estate secured 354 35.00 0 0.00
Real estate - Construction 0 4.64 64 3.95
Real estate - Mortgage 188 40.64 1,229 75.91
Installment 12 11.72 202 12.43
Unallocated 1,182 0.00 0 0.00
------- ------ ------- ------
Total $ 1,767 100.00% $ 1,620 100.00%
======= ====== ======= ======
Year Ended December 31
1995
------------------------------
Percentage
Allowance of Loans to
Amount Total Loans
------ -----------
(000 omitted)
Commercial, financial
and agricultural $ 114 7.98%
Commercial - Real estate secured 0 0.00
Real estate - Construction 80 5.55
Real estate - Mortgage 1,055 73.63
Installment 184 12.84
Unallocated 0 0.00
------- ------
Total $ 1,433 100.00%
======= ======
-16-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
DEPOSITS
The average amounts of deposits are summarized below:
Years Ended December 31
------------------------------------------------------
1999 1998 1997
---- ---- ----
(000 omitted)
Demand deposits $ 25,365 $ 20,433 $ 17,665
Interest bearing demand
deposits 71,176 55,454 37,535
Savings deposits 22,888 23,394 24,568
Time deposits 75,859 74,488 68,161
--------- --------- ---------
Total deposits $ 195,288 $ 173,769 $ 147,929
========= ========= =========
The following is a breakdown of maturities of time deposits of $ 100,000 or
more as of December 31, 1999:
Maturity (000 omitted)
-------- -------------
Certificates of Deposit
Three months or less $ 3,858
Over three months through twelve months 2,245
Over one year through three years 4,349
Over three years 403
--------
$ 10,855
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)
1999 1998 1997
---- ---- ----
Average assets $ 250,529 $ 212,149 $ 172,366
Net income $ 3,755 $ 3,119 $ 2,606
Average equity $ 22,067 $ 19,523 $ 16,956
Cash dividends paid $ 1,134 $ 986 $ 903
Return on assets 1.50% 1.47% 1.51%
Return on equity 17.02% 15.97% 15.37%
Dividend payout ratio 30.20% 31.61% 34.65%
Equity to asset ratio 8.81% 9.2% 9.84%
-17-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED SUMMARY OF OPERATIONS
Years Ended December 31
---------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(000 omitted)
Interest income $ 18,324 $ 16,109 $ 13,450 $ 12,018 $ 10,829
Interest expense 8,074 7,348 5,822 5,139 4,542
-------- -------- -------- -------- --------
Net interest income 10,250 8,761 7,628 6,879 6,287
Provision for loan losses 547 270 215 240 270
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 9,703 8,491 7,413 6,639 6,017
Other income:
Trust and brokerage services 1,230 818 490 384 297
Service charges - Deposits 779 646 601 477 375
Other service charges,
collection and exchange, charges,
commission fees 844 667 341 258 218
Other operating income (loss) 728 122 119 121 45
-------- -------- -------- -------- --------
Total other income 3,581 2,253 1,551 1,240 935
-------- -------- -------- -------- --------
Income before operating expense 13,284 10,744 8,964 7,879 6,952
Operating expenses:
Salaries and employees
benefits 4,297 3,491 2,901 2,621 2,326
Occupancy and
equipment expense 1,099 859 764 665 559
Other operating expenses 2,822 2,095 1,719 1,507 1,371
-------- -------- -------- -------- --------
Total operating expenses 8,218 6,445 5,384 4,793 4,256
-------- -------- -------- -------- --------
Income before income taxes 5,066 4,299 3,580 3,086 2,696
Income tax 1,311 1,180 974 838 742
-------- -------- -------- -------- --------
Net income applicable to
common stock $ 3,755 $ 3,119 $ 2,606 $ 2,248 $ 1,954
======== ======== ======== ======== ========
Per share data:
Earnings per common
share $ 1.70 $ 1.41 $ 1.18 $ 1.02 $ .88
Cash dividend - Common $ .51 $ .45 $ .41 $ .32 $ .27
Weighted average
number of common
shares 2,214,951 2,205,718 2,204,444 2,205,268 2,206,560
-18-
Item 9. Disagreements on Accounting and Financial Disclosures.
Not applicable.
PART III
The information required by Items 10, 11, 12 and 13 is incorporated by
reference from Orrstown Financial Services, Inc.'s definitive proxy statement
for the 2000 Annual Meeting of Shareholders filed pursuant to Regulation 14A.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports of Form 8-K.
(a) (1) - List of Financial Statements
The following consolidated financial statements of Orrstown
Financial Services, Inc. and its subsidiary, included in the
annual report of the registrant to its shareholders for the
year ended December 31, 1999, are incorporated by reference in
Item 8:
Consolidated balance sheets - December 31, 1999 and
1998
Consolidated statements of income - Years ended
December 31, 1999, 1998 and 1997
Consolidated statements of shareholders' equity -
Years ended December 31, 1999, 1998, and 1997
Consolidated statements of cash flows - Years ended
December 31, 1999, 1998, and 1997
Notes to consolidated financial statements - December 31,
1999
(2) List of Financial Statement Schedules
All financial statement schedules for which provision
is made in the applicable accounting regulations of
the Securities and Exchange Commission are not
required under the related instructions or are
inapplicable and therefore have been omitted.
(3) Listing of Exhibits
Exhibit (3) (i) Articles of incorporation
Exhibit (3) (ii) Bylaws
Exhibit (4) Instruments defining the rights of
security holders including indentures
Exhibit (10) Material contracts
Exhibit (13) Annual report to security holders
Exhibit (21) Subsidiaries of the registrant
Exhibit (23) Consent of independent auditors
Exhibit (27) Financial data schedule
All other exhibits for which provision is made in the
applicable accounting regulations of the Securities
and Exchange Commission are not required under the
related instructions or are inapplicable and
therefore have been omitted.
-19-
(b) Reports on Form 8-K filed
None.
(c) Exhibits
(3)(i) Articles of incorporation. Incorporated by
reference to Exhibit 3(i) of the registrant's Form
10-K filed March 26, 1999 for the year ended December
31, 1998.
(ii) By-laws. Incorporated by reference to Exhibit 3.2
to the Registrant's Registration Statement on Form
S-4, Registration No. 33-18888.
(4) Instruments defining the rights of security holders
including indentures. The rights of the holders of
Registrant's common stock are contained in:
(i) Articles of Incorporation of Orrstown Financial
Services, Inc., incorporated by reference to
Exhibit 3(i) of the registrant's Form 10-K filed
March 26, 1999 for the year ended December 31,
1998.
(ii) By-laws of Orrstown Financial Services, Inc.,
incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-4
(Registration No. 33-18888).
(10.1) Change in control agreement between Orrstown
Financial Services, Inc. and its chief executive
officer. Incorporated by reference to Exhibit 99
of the registrant's Form 10-K filed March 17,
1997 for the year ended December 31, 1996.
(10.2) Salary continuation plan for selected officers -
filed herewith
(10.3) Officer group term replacement plan for selected
officers - filed herewith
(10.4) Director retirement plan - filed herewith
(10.5) Revenue neutral retirement plan - filed herewith
(13) Annual report to security holders - filed herewith
(21) Subsidiaries of the registrant - filed herewith
(23.1) Consent of independent auditors filed herewith
(27) Financial data schedule - filed herewith
(d) Financial statement schedules
None
-20-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ORRSTOWN FINANCIAL SERVICES, INC.
---------------------------------
(Registrant)
By /s/ Kenneth R. Shoemaker
-----------------------------
Kenneth R. Shoemaker, President
Dated: March 15, 2000 (Duly authorized officer)
By /s/ Bradley S. Everly
-----------------------------
Bradley S. Everly, Chief Financial Officer
(Principal Accounting Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Kenneth R. Shoemaker President, CEO and March 15, 2000
- ------------------------------------- Director
Kenneth R. Shoemaker
/s/ Anthony F. Ceddia Director March 15, 2000
- -------------------------------------
Dr. Anthony F. Ceddia
/s/ Glenn W. Snoke Director March 15, 2000
- -------------------------------------
Glenn W. Snoke
/s/ Gregory A. Rosenberry Director March 15, 2000
- -------------------------------------
Gregory A. Rosenberry
/s/ Joel R. Zullinger Chairman of the March 15, 2000
- ------------------------------------- Board and Director
Joel R. Zullinger
/s/ Jeffrey W. Coy Vice Chairman March 15, 2000
- ------------------------------------- of the Board
Jeffrey W. Coy and Director
/s/ John S. Ward Director March 15, 2000
- -------------------------------------
John S. Ward
/s/ Denver L. Tuckey
- ------------------------------------- Secretary and March 15, 2000
Denver L. Tuckey Director
/s/ Andrea Pugh
- ------------------------------------- Director March 15, 2000
Andrea Pugh
-21-