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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, 2001
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
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, 2001, 2,378,608 shares of the registrant's common stock were
outstanding. The aggregate market value of such shares held by nonaffiliates on
that date was $ 92,765,712.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended December 31, 2001
are incorporated by reference into Parts I and II. Portions of the Proxy
Statement for 2002 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 financial holding
company registered under the Gramm-Leach-Bliley Act ("the GLB Act"). Orrstown
Financial Services, Inc. was organized on November 17, 1987, under the laws of
the Commonwealth of Pennsylvania for the purpose of acquiring Orrstown Bank
("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 two subsidiaries, Orrstown Bank and Pennbanks
Insurance Company Cell P1. Orrstown Bank is engaged in providing banking and
bank related services in South Central Pennsylvania, principally Franklin and
Cumberland Counties, where its ten branches are located in Shippensburg (2),
Carlisle (2), Spring Run, Orrstown, Chambersburg (2), Greencastle and
Mechanicsburg, Pennsylvania. The day-to-day management of Orrstown Bank is
conducted by the subsidiary's officers. Pennbanks Insurance Company Cell P1 is a
reinsurer of credit life, and disability insurance which services customers of
Orrstown Bank. Orrstown Financial Services, Inc. derives a majority of its
current income from Orrstown Bank.
Orrstown Financial Services, Inc. has no employees other than
its six officers who are also employees of Orrstown, its subsidiary. On December
31, 2001, Orrstown had 99 full-time and 43 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 non real estate
collateral normally do not exceed 70% of appraised value or cost, whichever is
lower. Loans secured by real estate generally do not exceed 80% of the appraised
value of the property. Loan to collateral values are monitored as part of the
loan review, and appraisals are updated as deemed appropriate in the
circumstances.
Administration and supervision over the lending process is
provided by the Bank's Credit Administration Department via loan reviews. The
loan review process is continuous, commencing with the approval of a loan. Each
new loan is reviewed by the Credit Administration Department for compliance with
banking regulations and lending policy requirements for documentation,
collateral standards, and approvals.
The Credit Administration Department continues to monitor and
evaluate loan customers utilizing risk-rating criteria established in the
lending policy in order to spot deteriorating trends and detect conditions which
might indicate potential problem loans.
Reports of the results of the loan reviews are submitted
quarterly to the Directors' Credit Administration Committee for approval and
provide the basis for evaluating the adequacy of the allowance for loan losses.
Through its trust department, Orrstown renders services as
trustee, executor, administrator, guardian, managing agent, custodian,
investment advisor and other fiduciary activities authorized by law.
As of December 31, 2001, Orrstown had total assets of
approximately $ 374 million, total shareholders' equity of approximately $ 31
million and total deposits of approximately $ 281 million.
Regulation and Supervision
- --------------------------
Orrstown Financial Services (OFS) is a financial holding
company, 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.
A financial holding company generally may not acquire
ownership or control of any company, including a bank, without prior approval of
the Federal Reserve Board. 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 15 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 21 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, 2001, 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.
In 1999, the Gramm-Leach-Bliley Act was enacted. This federal
legislation modernizes 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 are 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 order to remain competitive, Orrstown Financial Services
elected to be, and was approved as a financial holding company during March,
2000. 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 such as Orrstown Financial Services 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 "Regulation and Supervision" 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 "Regulation and Supervision", 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, Shippensburg, (2),
Carlisle, Spring Run, Chambersburg, and Mechanicsburg, Pennsylvania. Offices of
the bank are located in each of these buildings. It leases office space for its
Greencastle branch.
-7-
In 2000, the corporation expanded its main offices located on King Street in
Shippensburg, PA.
Item 3. Legal Proceedings.
- ----------------------------
Orrstown Financial Services, Inc. is an occasional party to
legal actions arising in the ordinary course of its business. In the opinion of
management, the Corporation has adequate legal defenses and/or insurance
coverage respecting any and each of these actions and does not believe that they
will materially affect 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-
Held Employee Age as of
Name/Office Held Since Since 3/15/02
Joel R. Zullinger, Chairman
of the Board 1991 (1) 53
Jeffrey W. Coy, Vice Chairman of
the Board 1988 (1) 50
Kenneth R. Shoemaker, President, CEO 1987 1986 54
Bradley S. Everly, Senior Vice President,
Treasurer 1997 1997 50
Stephen C. Oldt, Executive
Vice President, Assistant Secretary 1987 1987 59
Philip E. Fague, Executive Vice President,
Assistant Treasurer 2001 1988 42
Denver L. Tuckey, Secretary 1999 (1) 67
Jeffrey W. Embly, Vice President 1999 1997 31
(1) These officers are not employees of the Bank.
Senior Operating Officers of the Bank
Held Bank Employee Age as of
Name/Office Held Since Since 3/15/02
Kenneth R. Shoemaker, President,
Chief Executive Officer 1987 1986 54
Stephen C. Oldt, Executive Vice
President, Chief Operating Officer 1987 1987 59
Philip E. Fague, Executive Vice President, 1999/
Chief Sales and Service Officer 2000 1988 42
Bradley S. Everly, Senior Vice
President, Chief Financial Officer 1997 1997 50
Benjamin Stoops, Vice President,
Chief Technology Officer 1998 1998 50
Jeffrey W. Embly, Vice President,
Senior Loan Officer 1999 1997 31
Barbara E. Brobst, Vice President,
Senior Trust Officer 2001 1997 43
Nathan A. Eifert, Assistant Vice President,
Director of Marketing 2001 2000 33
-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 under the symbol ORRF. At December 31, 2001, the
approximate number of shareholders of record was approximately 2,149. 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) 2001 2000
High Low High Low
First Quarter $ 38.10 $ 36.19 $ 0.143 $ 38.10 $ 36.19 $ 0.133
Second Quarter 39.29 35.71 0.143 37.14 35.48 0.134
Third Quarter 44.76 35.00 0.150 36.67 35.71 0.133
Fourth Quarter 40.00 37.00 0.160 41.90 35.84 0.143
(1) Note: All per share data has been restated after giving retroactive
recognition to a 5% stock dividend paid September 15, 2001.
See Note 15 to the financial statements for restrictions on the payment of
dividends.
Item 6. Selected Financial Data.
- ---------------------------------
The selected five-year financial data on page 23 of the annual
shareholders' report for the year ended December 31, 2001 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 16 through 21 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 23 of the annual shareholders report for the year
ended December 31, 2001 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 SUBSIDIARIES
CHANGES IN NET INTEREST INCOME TAX EQUIVALENT YIELDS
2001 Versus 2000 2000 Versus 1999
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
Total Total
Average Average Increase Average Increase
Volume Rate (Decrease) Volume Average Rate (Decrease)
(000 omitted)
Interest Income
Loans (net of unearned
discounts) $ 3,570 ( $ 1,300) $ 2,270 $ 1,974 $ 456 $ 2,430
Taxable investment securities 121 ( 326) ( 205) 645 433 1,078
Nontaxable investment securities ( 56) ( 29) ( 85) ( 115) ( 1) ( 116)
Other short-term investments 763 ( 557) 206 ( 63) 74 11
--------- --------- ------ ---------- ------- --------
Total interest income 4,398 ( 2,212) 2,186 2,441 962 3,403
--------- --------- ------ ---------- ------- --------
Interest Expense
Interest bearing demand 699 ( 630) 69 160 138 298
Savings deposits 4 ( 169) ( 165) ( 57) ( 57) ( 114)
Time deposits 640 ( 62) 578 780 383 1,163
Short-term borrowings 134 ( 488) ( 354) 552 273 825
Long-term borrowings 371 ( 140) 231 54 18 72
--------- --------- ------ ---------- ------- --------
Total interest expense 1,848 ( 1,489) 359 1,489 755 2,244
--------- --------- ------ ---------- ------- --------
Net interest income $ 1,827 $ 1,159
======= =======
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 SUBSIDIARIES
INVESTMENT PORTFOLIO
The following table shows the maturities of investment
securities at book value as of December 31, 2001, and weighted average yields of
such securities. Yields are shown on a tax equivalent basis, assuming a 34%
federal income tax rate.
After 5
After 1 year years but
but within 5 within 10
Within 1 year years years After 10 years Total
(000 omitted)
Bonds:
U. S. Treasury
Book value $ 51 $ 1,029 $ 0 $ 0 $ 1,080
Yield 6.28% 6.06% 0% 0% 6.07%
U. S. Government agencies
Book value 1,000 0 1,000 0 2,000
Yield 6.42% 0% 6.50% 0% 6.46%
State and municipal
Book value 0 0 983 17,728 18,711
Yield 0% 0% 9.24% 8.31% 8.36%
Corporate
Book value 0 1,993 0 941 2,934
Yield 0% 5.08% 0% 3.02% 4.42%
Trust preferred
Book value 0 0 0 1,000 1,000
Yield 0% 0% 0% 9.25% 9.25%
Total book value $1,051 $3,022 $1,983 $ 19,669 $ 25,725
====== ====== ====== ======== ========
Yield 6.41% 5.41% 7.86% 8.10% 7.70%
====== ====== ====== ======== ========
Mortgage-backed securities:
Total book value $ 41,313
========
Yield 6.27%
========
Equity Securities:
Total book value $ 959
========
Yield 3.45%
========
Total Investment Securities $ 67,997
========
Yield 6.77%
========
-12-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
LOAN PORTFOLIO
The following table presents the loan portfolio at the end of
each of the last five years:
2001 2000 1999 1998 1997
(000 omitted)
Commercial, financial and agricultural $ 28,534 $ 23,938 $ 21,503 $ 18,732 $ 10,275
Real estate - Construction 20,480 17,425 15,580 11,182 5,961
Real estate - Mortgage 192,192 157,722 134,046 116,030 97,074
Installment and other personal loans
(net of unearned discount) 8,610 10,096 9,562 12,688 15,021
--------- --------- --------- --------- ---------
Total loans $ 249,816 $ 209,181 $ 180,691 $ 158,632 $ 128,331
========= ========= ========= ========= =========
Presented below are the approximate maturities of the loan
portfolio (excluding real estate mortgages, installments and credit cards) at
December 31, 2001:
One to Five
Under One Year years Over Five Years Total
(000 omitted)
Commercial, financial and agricultural $ 4,530 $ 5,434 $ 18,570 $ 28,534
Real estate - Construction 2,830 3,389 14,261 20,480
------- ------- -------- --------
Total $ 7,360 $ 8,823 $ 32,831 $ 49,014
======= ======= ======== ========
The following table presents the approximate amount of fixed
rate loans and variable rate loans due as of December 31, 2001:
Fixed Rate Variable
Loans Rate Loans
(000 omitted)
Due within one year $ 2,104 $ 10,148
Due after one but within five years 19,625 7,526
Due after five years 78,594 131,819
--------- ---------
Total $ 100,323 $ 149,493
========= =========
-13-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31
2001 2000 1999 1998 1997
(000 omitted)
Average total loans outstanding
(net of unearned income) $ 233,103 $ 192,902 $ 169,458 $ 144,013 $ 117,403
========= ========= ========= ========= =========
Allowance for loan losses,
beginning of period $ 2,691 $ 2,455 $ 1,971 $ 1,767 $ 1,620
Additions to provision for loan
losses charged to operations 504 360 547 270 215
Loans charged off during the year
Commercial 67 99 97 15 1
Personal credit lines 29 11 7 23 32
Installment 2 19 24 46 50
--------- --------- --------- --------- ---------
Total charge-off's 98 129 128 84 83
--------- --------- --------- --------- ---------
Recoveries of loans previously
charged off:
Commercial 6 1 59 3 2
Installment 1 2 1 10 12
Personal credit lines 0 2 5 5 1
--------- --------- --------- --------- ---------
Total recoveries 7 5 65 18 15
--------- --------- --------- --------- ---------
Net loans charged off (recovered) 91 124 63 66 68
--------- --------- --------- --------- ---------
Allowance for loan losses, end of
period $ 3,104 $ 2,691 $ 2,455 $ 1,971 $ 1,767
========= ========= ========= ========= =========
Ratio of net loans charged off to
average loans outstanding .04% .06% .04% .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.
-14-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
NONACCRUAL, DELINQUENT AND IMPAIRED LOANS
The following table sets forth the outstanding balances of
those loans on 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.
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(000 omitted)
Nonaccrual loans $ 56 $ 12 $ 64 $ 486 $ 473
====== ====== ====== ====== ======
Accrual loans:
Restructured $ 0 $ 0 $ 0 $ 0 $ 0
30 through 89 days past due 2,244 865 3,420 823 2,398
90 days or more past due 644 814 97 284 657
------ ------ ------ ------ ------
Total accrual loans $2,888 $1,679 $3,517 $1,107 $3,055
====== ====== ====== ====== ======
See Note 6 of the notes to consolidated financial statements
for details of income recognized and foregone revenue on nonaccrual loans for
the past three years, and discussion concerning impaired loans at December 31,
2001.
-15-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
The following is an allocation by loan categories of the allowance for
loan losses at December 31 for the last five years. In retrospect the specific
allocation in any particular category may prove excessive or inadequate and
consequently may be reallocated in the future to reflect the then current
conditions. Accordingly, the entire allowance is available to absorb losses in
any category:
Years Ended December 31
2001 2000
Percentage of Percentage of
Allowance Loans to Total Allowance Loans to Total
Amount Loans Amount Loans
(000 omitted)
Commercial, financial and agricultural $ 466 11.42% $ 43 11.74%
Commercial, real estate secured 563 46.42 786 21.29
Real estate - Construction 0 8.20 0 8.30
Real estate - Mortgage 350 30.51 56 53.86
Installment 33 3.45 34 4.81
Unallocated 1,692 0.0 1,772 0.00
------- ------ ------- ------
Total $ 3,104 100.00% $ 2,691 100.00%
======= ====== ======= ======
Years Ended December 31
1999 1998
Percentage of Percentage of
Allowance Loans to Total Allowance Loans to Total
Amount Loans Amount 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
1997
Percentage of
Allowance Loans to Total
Amount Loans
(000 omitted) $ 31 8.00%
Commercial, financial and agricultural 354 35.00
Commercial, real estate secured 0 4.64
Real estate - Construction 188 40.64
Real estate - Mortgage 12 11.72
Installment 1,182 0.00
------- ------
Unallocated $ 1,767 100.00%
======= ======
Total
16
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
DEPOSITS
The average amounts of deposits are summarized below:
Years Ended December 31
2001 2000 1999
(000 omitted)
Demand deposits $ 32,628 $27,650 $ 25,365
Interest bearing demand deposits 99,103 76,631 71,176
Savings deposits 20,787 20,628 22,888
Time deposits 102,856 91,214 75,859
--------- --------- ---------
Total deposits $ 255,374 $ 216,123 $ 195,288
========= ========= =========
The following is a breakdown of maturities of time deposits of
$ 100,000 or more as of December 31, 2001:
(000 omitted)
Three months or less $ 3,405
Over three months through twelve months 9,916
Over one year through three years 2,690
Over three years 1,815
----------
$ 17,826
==========
RETURN ON EQUITY AND ASSETS (APPLYING DAILY AVERAGE BALANCES)
The following table presents a summary of significant earnings
and capital ratios: (000 omitted)
2001 2000 1999
Average assets $ 340,428 $ 285,903 $ 250,529
Net income $ 5,092 $ 4,172 $ 3,755
Average equity $ 29,612 $ 23,954 $ 22,067
Cash dividends paid $ 1,411 $ 1,270 $ 1,134
Return on assets 1.50% 1.46% 1.50%
Return on equity 17.20% 17.42% 17.02%
Dividend payout ratio 27.71% 30.48% 30.20%
Equity to asset ratio 8.70% 8.38% 8.81%
17
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED SUMMARY OF OPERATIONS
Years Ended December 31
2001 2000 1999 1998 1997
(000 omitted)
Interest income $ 23,978 $ 21,758 $ 18,324 $ 16,109 $ 13,450
Interest expense 10,677 10,318 8,074 7,348 5,822
-------- -------- -------- -------- --------
Net interest income 13,301 11,440 10,250 8,761 7,628
Provision for loan losses 504 360 547 270 215
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 12,797 11,080 9,703 8,491 7,413
Other income:
Trust and brokerage services 1,480 1,466 1,230 818 490
Service charges - Deposits, other
service charges, collection and
exchange charges, commission and
fees 2,634 1,818 1,623 1,313 942
Other operating income 366 458 728 122 119
-------- -------- -------- -------- --------
Total other income 4,480 3,742 3,581 2,253 1,551
-------- -------- -------- -------- --------
Income before operating expense 17,277 14,822 13,284 10,744 8,964
Operating expenses:
Salaries and employees benefits 5,151 4,755 4,297 3,491 2,901
Occupancy and equipment expense 1,676 1,558 1,099 859 764
Other operating expenses 3,420 2,800 2,822 2,095 1,719
-------- -------- -------- -------- --------
Total operating expenses 10,247 9,113 8,218 6,445 5,384
-------- -------- -------- -------- --------
Income before income taxes 7,030 5,709 5,066 4,299 3,580
Income tax 1,938 1,537 1,311 1,180 974
-------- -------- -------- -------- --------
Net income applicable to common stock $ 5,092 $ 4,172 $3,755 $3,119 $2,606
======== ======= ====== ====== ======
Per share data:
Basic earnings $ 2.15 $ 1.78 $ 1.61 $ 1.35 $ 1.13
Diluted earnings $ 2.12 $ 1.77 $ 1.61 $ 1.35 $ 1.13
Cash dividends $ .60 $ .54 $ .49 $ .42 $ .39
Weighted average shares:
Basic 2,366,707 2,340,834 2,325,699 2,316,004 2,314,666
Diluted 2,398,149 2,352,130 2,325,699 2,316,004 2,314,666
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 2002 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 subsidiaries, included in the
annual report of the registrant to its shareholders for the
year ended December 31, 2001, are incorporated by reference in
Item 8:
Consolidated balance sheets - December 31, 2001 and
2000
Consolidated statements of income - Years ended
December 31, 2001, 2000, and 1999
Consolidated statements of shareholders' equity -
Years ended December 31, 2001, 2000, and 1999
Consolidated statements of cash flows - Years ended
December 31, 2001, 2000, and 1999
Notes to consolidated financial statements -
December 31, 2001
(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 for the year ended December 31, 1998.
(ii) By-laws. Incorporated by reference to Exhibit 3.2
to the Registrant's Registration Statement on Form
S-4, Registration No. 33-18888.
(4) Instruments defining the rights of security holders
including indentures.
The rights of the holders of Registrant's common
stock are contained in:
(i) Articles of Incorporation of Orrstown
Financial Services, Inc., incorporated by
reference to Exhibit 3(i) of the registrant's
Form 10-K for the year ended December 31,
1998.
(ii) By-laws of Orrstown Financial Services, Inc.,
incorporated by reference to Exhibit 3.2 to
the Registrant's Registration Statement on
Form S-4 (Registration No. 33-18888).
(10.1) Change in control agreement between Orrstown
Financial Services, Inc. and its chief
executive officer. Incorporated by reference
to Exhibit 99 of the registrant's Form 10-K
for the year ended December 31, 1996.
(10.2) Salary continuation plan for selected
officers - incorporated by reference to the
registrant's Form 10-K for the year ended
December 31, 1999
(10.3) Officer group term replacement plan for
selected officers - incorporated by reference
to the registrant's Form 10-K for the year
ended December 31, 1999
(10.4) Director retirement plan - incorporated by
reference to the registrant's Form 10-K for
the year ended December 31, 1999 (10.5)
Revenue neutral retirement plan -
incorporated by reference to the registrant's
Form 10-K for the year ended December 31,
1999
(10.6) Non-employee director stock option plan of
2000 - incorporated by reference to the
registrant's registration statement on Form
S-8 dated April 11, 2000
(10.7) Employee stock option plan of 2000 -
incorporated by reference to the registrant's
registration statement on Form S-8 dated
March 31, 2000
(13) Annual report to security holders - filed
herewith
(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 25, 2002 (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 25, 2002
- ------------------------------------- Director
Kenneth R. Shoemaker
/s/ Anthony F. Ceddia Director March 25, 2002
- --------------------------------------
Dr. Anthony F. Ceddia
/s/ Glenn W. Snoke Director March 25, 2002
- -------------------------------------
Glenn W. Snoke
/s/ Gregory A. Rosenberry Director March 25, 2002
- ------------------------------------
Gregory A. Rosenberry
/s/ Joel R. Zullinger Chairman of the March 25, 2002
- ------------------------------------ Board and Director
Joel R. Zullinger
/s/ Jeffrey W. Coy Vice Chairman March 25, 2002
- ------------------------------------- of the Board
Jeffrey W. Coy and Director
/s/ John S. Ward Director March 25, 2002
- ---------------------------------------
John S. Ward
/s/ Denver L. Tuckey Secretary and March 25, 2002
- --------------------------------------- Director
Denver L. Tuckey
/s/ Andrea Pugh Director March 25, 2002
- ---------------------------------------
Andrea Pugh
21
Exhibit 13
Orrstown Financial Services, Inc.
2001 Annual Financial Report
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets 2
Statements of income 3
Statements of changes in shareholders' equity 4
Statements of cash flows 5
Notes to consolidated financial statements 6 - 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 16 - 21
SUMMARY OF QUARTERLY FINANCIAL DATA 22
SELECTED FIVE-YEAR FINANCIAL DATA 23
MARKET, DIVIDEND AND INVESTOR INFORMATION 24
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Orrstown Financial Services, Inc.
Orrstown, Pennsylvania
We have audited the accompanying consolidated balance sheets
of Orrstown Financial Services, Inc. and its wholly-owned subsidiaries as of
December 31, 2001 and 2000 and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the three years
ended December 31, 2001. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Orrstown Financial Services, Inc. and its wholly-owned subsidiaries as of
December 31, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
/S/ Smith Elliott Kearns & Company, LLC
Chambersburg, Pennsylvania
January 29, 2002
Consolidated Balance Sheets
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
ASSETS
Dec. 31, 2001 Dec. 31, 2000
(000 omitted) (000 omitted)
Cash and due from banks $ 12,650 $ 11,021
Federal funds sold 24,347 3,049
Interest bearing deposits with banks 679 172
Securities available for sale 68,422 69,919
Federal Home Loan Bank, Federal Reserve and Atlantic Central
Bankers Bank stock, at cost which approximates market value 1,703 2,134
------------- -------------
107,801 86,295
------------- -------------
Loans
Commercial, financial and agricultural 28,534 23,938
Real estate - Mortgages 192,192 157,722
Real estate - Construction and land development 20,480 17,425
Consumer 8,610 10,096
------------- -------------
249,816 209,181
Less: Allowance for loan losses ( 3,104) ( 2,691)
------------- -------------
246,712 206,490
------------- -------------
Premises and equipment, net 9,019 9,269
Accrued interest receivable 1,541 2,016
Cash surrender value of life insurance 5,923 5,636
Other assets 2,732 2,197
------------- -------------
Total assets $ 373,728 $ 311,903
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing $ 39,881 $ 31,716
Interest bearing 241,287 210,292
------------- -------------
281,168 242,008
------------- -------------
Federal funds purchased and securities sold under agreements
to repurchase 31,531 18,426
Other borrowed funds 26,512 21,802
Accrued interest and other liabilities 3,355 2,993
------------- -------------
Total liabilities 342,566 285,229
------------- -------------
Shareholders' equity
Common stock: No par value - $ .1041 stated value per share,
10,000,000 shares authorized with 2,378,608 shares issued at
December 31, 2001; 2,240,744 shares issued at December 31, 2000 248 233
Additional paid-in capital 25,077 19,360
Retained earnings 5,557 6,619
Accumulated other comprehensive income 280 462
------------- -------------
Total shareholders' equity 31,162 26,674
------------- -------------
Total liabilities and shareholders' equity $ 373,728 $ 311,903
============= =============
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE STATEMENTS.
2
Consolidated Statements of Income
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
Years Ended December 31,
2001 2000 1999
---------- ---------- ----------
(000 omitted)
Interest and Dividend Income
Interest and fees on loans $ 19,308 $ 17,033 $ 14,613
Interest and dividends on investment securities
U.S. Government and agencies 2,869 3,182 2,289
Exempt from federal income tax 899 956 1,032
Other investment income 902 587 390
---------- ---------- ----------
Total interest and dividend income 23,978 21,758 18,324
---------- ---------- ----------
Interest Expense
Interest on deposits 8,347 7,865 6,519
Interest on borrowed money 2,330 2,453 1,555
---------- ---------- ----------
Total interest expense 10,677 10,318 8,074
---------- ---------- ----------
Net interest income 13,301 11,440 10,250
---------- ---------- ----------
Provision for loan losses 504 360 547
---------- ---------- ----------
Net interest income after provision for loan losses 12,797 11,080 9,703
---------- ---------- ----------
Other Income
Service charges on deposit accounts 1,890 1,174 1,080
Other service charges, commissions, and fees 744 644 543
Trust department income 1,219 1,125 861
Brokerage income 261 341 369
Securities gains 11 114 423
Other income 355 344 305
---------- ---------- ----------
Total other income 4,480 3,742 3,581
---------- ---------- ----------
Net interest income and other income 17,277 14,822 13,284
---------- ---------- ----------
Other Expenses
Salaries 3,506 3,235 2,945
Employee benefits 1,645 1,520 1,351
Occupancy expense of bank premises, net, and furniture and
equipment expenses 1,676 1,558 1,100
Other operating expenses 3,420 2,800 2,822
---------- ---------- ----------
Total other expenses 10,247 9,113 8,218
---------- ---------- ----------
Income before income tax 7,030 5,709 5,066
Applicable income tax 1,938 1,537 1,311
---------- ---------- ----------
Net income $ 5,092 $ 4,172 $ 3,755
========== ========== ==========
Earnings per share
Basic earnings per share $ 2.15 $ 1.78 $ 1.61
Weighted average shares outstanding 2,366,707 2,340,834 2,325,699
Diluted earnings per share $ 2.12 $ 1.77 $ 1.61
Weighted average shares outstanding 2,398,149 2,352,130 2,325,699
Dividends per share $ .60 $ .54 $ .49
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE
AN INTEGRAL PART OF THESE STATEMENTS.
3
Consolidated Statements of Changes in Shareholders' Equity
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
Years Ended December 31, 2001, 2000, and 1999
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Shareholders'
Stock Capital Earnings Income Equity
(000 omitted)
Balance, December 31, 1998 214 12,476 6,863 1,527 21,080
Comprehensive income
Net income 0 0 3,755 0 3,755
Change in unrealized (loss) on
investment securities available
for sale, net of tax of $ 1,084 0 0 0 ( 2,105) ( 2,105)
---------
Total comprehensive income 1,650
---------
Cash dividends ($ .49 per share) 0 0 ( 1,134) 0 ( 1,134)
Stock dividends issued 16 5,720 ( 5,736) 0 0
Cash paid in lieu of fractional
stock dividends 0 0 ( 31) 0 ( 31)
Issuance of stock through dividend
reinvestment plan 1 302 0 0 303
------- --------- ---------- --------- ---------
Balance, December 31, 1999 231 18,498 3,717 ( 578) 21,868
Comprehensive income
Net income 0 0 4,172 0 4,172
Change in unrealized gain on
investment securities available
for sale, net of tax of $ 536 0 0 0 1,040 1,040
---------
Total comprehensive income 5,212
---------
Cash dividends ($ .54 per share) 0 0 ( 1,270) 0 ( 1,270)
Issuance of stock through employee
stock purchase plan 0 28 0 0 28
Issuance of stock through dividend
reinvestment plan 2 834 0 0 836
------- --------- ---------- --------- ---------
Balance, December 31, 2000 233 19,360 6,619 462 26,674
Comprehensive income
Net income 0 0 5,092 0 5,092
Change in unrealized gain on
investment securities available
for sale, net of tax of $ 94 0 0 0 ( 182) ( 182)
---------
Total comprehensive income 4,910
---------
Cash dividends ($ .60 per share) 0 0 ( 1,411) 0 ( 1,411)
Stock dividends issued 12 4,711 ( 4,723) 0 0
Cash paid in lieu of fractional
stock dividends 0 0 ( 20) 0 ( 20)
Issuance of stock through
employee stock purchase plan/
stock option plan 1 73 0 0 74
Issuance of stock through dividend
reinvestment plan 2 933 0 0 935
------- --------- ---------- --------- ---------
Balance, December 31, 2001 $ 248 $ 25,077 $ 5,557 $ 280 $ 31,162
======= ========= ========== ========= =========
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE
AN INTEGRAL PART OF THESE STATEMENTS.
4
Consolidated Statements of Cash Flows
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
Years Ended December 31
2001 2000 1999
----------- ------------- ------------
(000 omitted)
Cash flows from operating activities:
Net income $ 5,092 $ 4,172 $ 3,755
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 828 735 528
Provision for loan losses 504 360 547
(Gain) loss on disposal of other real estate owned ( 4) ( 7) 54
(Gain) loss on disposal of bank premises and equipment 3 ( 21) 0
Deferred income taxes ( 113) ( 7) ( 103)
Securities (gains) losses ( 11) ( 114) ( 423)
Increase in cash surrender value of life insurance ( 286) ( 252) ( 285)
(Increase) decrease in accrued interest receivable 474 ( 416) ( 364)
Increase (decrease) in accrued interest payable ( 210) 192 ( 1,707)
Other net 387 ( 19) 143
----------- ------------- ------------
Net cash provided by operating activities 6,664 4,623 2,145
----------- ------------- ------------
Cash flows from investing activities:
Net (increase) in interest bearing deposits
with banks ( 507) ( 57) ( 88)
Sales of available for sale securities 5,427 11,786 6,895
Maturities of available for sale securities 36,239 6,820 2,500
Purchases of available for sale securities ( 40,433) ( 26,381) ( 22,763)
(Purchases) redemption of FHLB stock 431 ( 625) ( 225)
Net (increase) in loans ( 41,118) ( 28,562) ( 22,130)
Purchases of bank premises and equipment ( 512) ( 3,153) ( 2,071)
Proceeds from disposal of other real estate owned 180 59 286
Proceeds from disposal of bank premises and equipment 4 50 0
----------- ------------- ------------
Net cash (used) by investing activities ( 40,289) ( 40,063) ( 37,596)
----------- ------------- ------------
Cash flows from financing activities:
Net increase in deposits 39,160 37,619 20,631
Net increase in federal funds purchased
and securities sold under agreements to repurchase 13,105 3,019 9,173
Proceeds from debt 8,025 700 0
Payment on debt ( 3,316) ( 7) ( 6)
Cash dividends paid ( 1,411) ( 1,270) ( 1,134)
Cash paid in lieu of fractional stock dividends ( 20) 0 ( 31)
Proceeds from sale of stock 1,009 864 303
----------- ------------- ------------
Net cash provided by financing activities 56,552 40,925 28,936
----------- ------------- ------------
Net increase (decrease) in cash and cash equivalents 22,927 5,485 ( 6,515)
Cash and cash equivalents, beginning balance 14,070 8,585 15,100
----------- ------------- ------------
Cash and cash equivalents, ending balance $ 36,997 $ 14,070 $ 8,585
=========== ============= ============
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest $ 10,887 $ 10,081 $ 9,781
Income taxes 2,200 1,565 1,385
Supplemental schedule of noncash investing and
financing activities:
Other real estate acquired in settlement of loans 392 53 0
Unrealized gain (loss) on investment securities
available for sale (net of tax effects) ( 182) 1,040 ( 2,105)
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE
AN INTEGRAL PART OF THESE STATEMENTS.
5
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 subsidiaries, Orrstown Bank, and Pennbanks Insurance Company
Cell P1. Orrstown Bank is engaged in providing banking and bank related services
in South Central Pennsylvania, principally Franklin and Cumberland Counties. Its
ten branches are located in Shippensburg (2), Carlisle (2), Spring Run,
Orrstown, Chambersburg (2), Mechanicsburg and Greencastle, Pennsylvania.
Pennbanks Insurance Company Cell P1 is a reinsurer of credit, life, and
disability insurance which services customers of Orrstown Bank.
Principles of consolidation
The consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiaries, Orrstown Bank and Pennbanks
Insurance Company Cell P1. All significant intercompany transactions and
accounts have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the 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 Corporation may segregate their investment portfolio into three
specific categories: "securities held to maturity", "trading securities" and
"securities available for sale". Securities held to maturity are to be accounted
for at their amortized cost; securities classified as trading securities are to
be accounted for at their current market value with unrealized gains and losses
on such securities included in current period earnings; and securities
classified as available for sale are to be accounted for at their current market
value with unrealized gains and losses on such securities to be excluded from
earnings and reported as a net amount in other comprehensive income.
Management determines the appropriate classification of securities at the
time of purchase. If management has the intent and the Corporation has the
ability at the time of purchase to hold securities until maturity, they are
classified as securities held to maturity and carried at amortized historical
cost. Securities to be held for indefinite periods of time and not intended to
be held to maturity are classified as available for sale and carried at fair
value. Securities held for indefinite periods of time include securities that
management intends to use as part of its asset and liability management strategy
and that may be sold in response to changes in interest rates, resultant
prepayment risk and other factors related to interest rate and resultant
prepayment risk changes.
The Corporation has classified all of its investment securities as
"available for sale".
Realized gains and losses on dispositions are based on the net proceeds and
the adjusted book value of the securities sold, using the specific
identification method. Unrealized gains and losses on investment securities
available for sale are based on the difference between book value and fair value
of each security. These gains and losses are credited or charged to other
comprehensive income, whereas realized gains and losses flow through the
Corporation's results of operations.
Cash flows
For purposes of the Statements of Cash Flows, the Corporation has defined
cash and cash equivalents as those amounts included in the balance sheet
captions "Cash and Due From Banks" and "Federal Funds Sold". 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
deposits in the Statements of Cash Flows.
Premises, equipment, furniture and fixtures and depreciation
Buildings, improvements, equipment, furniture and fixtures are carried at
cost less accumulated depreciation. Depreciation has been provided generally on
the straight-line method and is computed over the estimated useful lives of the
various assets as follows:
Years
Buildings and improvements 10-40
Equipment, furniture and fixtures 3-15
Repairs and maintenance are charged to operations as incurred. Computer software
is amortized over 3-5 years.
Intangibles
Intangible costs are amortized on a straight-line basis over fifteen years.
Advertising
The Corporation follows the policy of charging costs of advertising to
expense as incurred. Advertising expense was $ 196,000, $ 167,000, and $ 138,000
for 2001, 2000, and 1999, respectively.
Loans and allowance for loan losses
Loans are stated at the amount of unpaid principal, reduced by an allowance
for loan losses. Interest on loans is calculated by using the simple interest
method on daily balances of the principal amount outstanding. The allowance for
loan losses is established through a provision for loan losses charged to
expenses. Loans are charged against the allowance when management believes that
the collectibility of the principal is 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.
6
Nonaccrual /Impaired loans
The accrual of interest income on loans ceases when principal or interest
is past due 90 days or more and collateral is inadequate to cover principal and
interest or immediately if, in the opinion of management, full collection is
unlikely. Interest accrued but not collected as of the date of placement on
nonaccrual status is reversed and charged against current income unless fully
collateralized. Subsequent payments received either are applied to the
outstanding principal balance or recorded as interest income, depending on
management's assessment of the ultimate collectibility of principal. Interest
income generally is not recognized on specific impaired loans unless the
likelihood of further loss is remote. Interest payments received on such loans
are applied as a reduction of loan principal balance. Interest income on other
impaired loans is recognized only to the extent of interest payments received.
Foreclosed real estate
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold and are initially recorded at the lower of carrying value or fair
value less estimated cost to sell 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 estimated
cost to sell.
Earnings per share of common stock
Earnings per share of common stock were computed based on a weighted
average shares of common stock outstanding of 2,366,707 in 2001; 2,340,834 in
2000; and 2,325,699 in 1999 after giving retroactive recognition to a 5% stock
dividend in September 2001 and a 7-1/2% stock dividend issued in November 1999.
Fully diluted earnings per share were computed based on a weighed average shares
of common stock outstanding of 2,398,149 in 2001, 2,352,130 in 2000 and
2,325,699 in 1999 after giving retroactive recognition to the stock dividends
mentioned above. See Note 10 for further information on stock options.
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 11 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 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
Corporation's current incremental borrowing rates for similar types of borrowing
arrangements.
Long-Term Borrowings. The fair value of the Corporation's long-term debt is
estimated using a discounted cash flow analysis based on the Corporation's
current incremental borrowing rate for similar types of borrowing arrangements.
Accrued Interest. The carrying amounts of accrued interest approximate their
fair values.
Off-Balance-Sheet Instruments. The Corporation generally does not charge
commitment fees. Fees for standby letters of credit and their off-balance-sheet
instruments are not significant.
Comprehensive income
The Corporation has adopted Statement of Financial Accounting Standards
(SFAS) No. 130 - Reporting Comprehensive Income. Under SFAS No. 130,
comprehensive income is defined as the change in equity from transactions and
other events from nonowner sources. It includes all changes in equity except
those resulting from investments by shareholders and distributions to
shareholders. Comprehensive income includes net income and certain elements of
"other comprehensive income" such as foreign currency transactions; accounting
for futures contracts; employers accounting for pensions; and accounting for
certain investments in debt and equity securities.
The Corporation has elected to report its comprehensive income in the
statement of shareholders' equity. The only element of "other comprehensive
income" that the Corporation has is the unrealized gain or loss on available for
sale securities.
7
The components of the change in net unrealized gains (losses) on
securities were as follows:
2001 2000 1999
(000 Omitted)
Gross unrealized holding gains (losses) arising during the year ($ 265) $ 1,690 ($ 2,766)
Reclassification adjustment for (gains) losses realized in net income ( 11) ( 114) ( 423)
--------- --------- --------
Net unrealized holding gains (losses) before taxes ( 276) 1,576 ( 3,189)
Tax effect 94 ( 536) 1,084
---------- ---------- --------
Net change ($ 182) $ 1,040 ($ 2,105)
========== ========== ========
NOTE 2. INVESTMENTS
At December 31, 2001 and 2000 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)
2001
U. S. Treasury securities and obligations of U. S. Government
corporations and agencies $ 3,079 $ 63 $ 0 $ 3,142
Obligations of states and political subdivisions 18,712 644 87 19,269
Mortgage-backed securities 41,312 91 469 40,934
Corporate bonds 3,934 33 30 3,937
Equity securities 960 259 79 1,140
-------- -------- -------- --------
Totals $ 67,997 $ 1,090 $ 665 $ 68,422
======== ======== ======== ========
2000
U. S. Treasury securities and obligations of U. S. Government
corporations and agencies $ 35,501 $ 74 $ 160 $ 35,415
Obligations of states and political subdivisions 15,598 791 14 16,375
Mortgage-backed securities 12,709 14 153 12,570
Corporate bonds 4,413 38 0 4,451
Equity securities 998 217 107 1,108
-------- -------- -------- --------
Totals $ 69,219 $ 1,134 $ 434 $ 69,919
======== ======== ======== ========
The amortized cost and fair values of investment securities available
for sale at December 31, 2001, by contractual maturity are shown below.
Contractual maturities will differ from expected 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 $ 1,051 $ 1,057
Due after one year through five years 3,021 3,072
Due after five years through ten years 2,545 2,633
Due after ten years 19,108 19,586
Mortgage-backed securities 41,312 40,934
Equity securities 960 1,140
-------- --------
$ 67,997 $ 68,422
======== ========
Proceeds from sales of securities available for sale during 2001, 2000,
and 1999 were $ 5,427,000, $ 11,786,000, and $ 6,895,000, respectively. Gross
gains and losses on 2001 sales were $ 57,840 and $ 46,394, respectively. Gross
gains and losses on 2000 sales were $ 124,080 and $ 9,749, respectively. Gross
gains and losses on 1999 sales were $ 425,864 and $ 2,340, respectively.
The Corporation owns $ 1,460,000 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, 2001. At December 31, 2000 the Corporation's stock
ownership was $ 1,890,800 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 $ 48,332,000 and $ 55,257,000 at December 31,
2001 and 2000, respectively, were pledged to secure public funds and for other
purposes as required or permitted by law.
NOTE 3.CONCENTRATION OF CREDIT RISK
The Corporation grants agribusiness, commercial, residential and
consumer loans to customers in South Central Pennsylvania, principally Franklin
and Cumberland Counties. Although the Corporation maintains a diversified loan
portfolio, a significant portion of its customers' ability to honor their
contracts is dependent upon economic sectors for construction contractors,
non-residential building operators, and hotel and motel operators. Management
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Corporation 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.
8
NOTE 4. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
2001 2000 1999
(000 omitted)
Balance at beginning of period $ 2,691 $ 2,455 $ 1,971
Recoveries 7 5 65
Provision for loan losses charged to income 504 360 547
------- ------- -------
Total 3,202 2,820 2,583
Losses 98 129 128
------- ------- -------
Balance at the end of period $ 3,104 $ 2,691 $ 2,455
======= ======= =======
NOTE 5. LOANS TO RELATED PARTIES
The Corporation has granted loans to the officers and directors of
the Corporation and its subsidiary and to their associates. Related party loans
are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than normal risk of collectibility.
The aggregate dollar amount of these loans was $ 1,601,000 at December 31, 2001,
and $ 1,863,000 at December 31, 2000. During 2001, $ 655,000 of new loans were
made and repayments totaled $ 1,017,000.
Outstanding loans to employees totaled $ 1,405,462 and $ 825,298 at
December 31, 2001 and 2000, respectively.
NOTE 6. NONACCRUAL LOANS
The following table shows the principal balances of nonaccrual loans
as of December 31:
2001 2000 1999
Nonaccrual loans $ 56,000 $ 12,000 $ 64,000
======== ======== ========
Interest income that would have been accrued
at original contract rates $ 8,636 $ 1,446 $ 6,608
Amount recognized as interest income 4,028 770 0
-------- --------- ---------
Foregone revenue $ 4,608 $ 676 $ 6,608
======== ======== ========
The Corporation had no impairment of loans as of December 31, 2001,
2000, and 1999 as defined by Statements of Financial Accounting Standard No. 114
and 118.
During 2001, the Corporation foreclosed on loans secured by three real
estate properties. Two of these properties were sold during 2001 at a gain of $
4,150, which is included in other income on the statement of income. The
remaining property has a recorded value of $ 211,317 and is included in other
assets on the balance sheet at December 31, 2001.
NOTE 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation 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 Corporation has in particular classes of financial
instruments.
The Corporation'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 Corporation uses
the same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments.
Contract or
Notional Amount
2001 2000
(000 omitted)
Financial instruments whose contract amounts represent credit risk at December 31:
Commitments to extend credit $ 46,732 $ 32,935
Standby letters of credit and financial guarantees written 4,758 4,541
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 Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Corporation 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 Corporation 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 Corporation holds collateral supporting those commitments when
deemed necessary by management.
NOTE 8. PREMISES AND EQUIPMENT
A summary of bank premises and equipment is as follows:
2001 2000
(000 omitted)
Land $ 851 $ 950
Buildings and improvements 6,526 6,452
Leasehold improvements 199 189
Furniture and equipment 5,823 5,306
Construction in progress 89 93
--------- ---------
Total 13,488 12,990
Less accumulated depreciation and amortization 4,469 3,721
--------- ---------
Bank premises and equipment, net $ 9,019 $ 9,269
========= =========
9
Depreciation expense amounted to $ 755,174 in 2001, $ 670,295 in
2000, and $ 485,477 in 1999. During 2000, interest expense of $ 50,250 was
capitalized for interest costs incurred during the renovation of the
Corporation's Shippensburg property and construction of its Mechanicsburg branch
office. This amount was netted against interest expense on borrowed money on the
statements of income.
NOTE 9. RETIREMENT PLANS
The Corporation 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 corporate performance and are at the
discretion of the Corporation'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 Corporation's employees are covered by the plan and the contributions
charged to operations were $ 538,062, $ 521,029, and $ 439,957 for 2001, 2000,
and 1999, respectively.
The Corporation 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
Corporation's obligations under the compensation agreement. The cash value of
the life insurance policies is an unrestricted asset of the Corporation. The
estimated present value of future benefits to be paid, which is included in
other liabilities, amounted to $ 155,118 and $ 162,691 at December 31, 2001 and
2000, respectively. Total annual expense for this deferred compensation plan was
$ 19,064 for 2001, 2000, and 1999.
The Corporation also has a supplemental discretionary deferred
compensation plan for executive officers and directors. The plan is funded
annually with salary and fee reductions which are placed in a trust account
invested by the Corporation's trust department. Total amount contributed to the
plan was $ 44,300, $ 46,000, and $ 42,308 for 2001, 2000, and 1999,
respectively.
The Corporation adopted four supplemental retirement and salary
continuation plans for directors and executive officers. These plans are funded
with single premium life insurance on the plan participants. The cash value of
the life insurance policies is an unrestricted asset of the Corporation. The
estimated present value of future benefits to be paid totaled $ 516,952 and $
347,672 at December 31, 2001 and 2000, respectively which is included in other
liabilities. Total annual expense for these plans amounted to $ 175,460, $
163,083, and $ 155,474 for 2001, 2000, and 1999, respectively.
NOTE 10. STOCK COMPENSATION PLANS
During 2000 the Corporation implemented two stock option plans (one
for employees and one for nonemployee directors). Under the Corporation's stock
option plans the Corporation may grant options to its directors, officers and
employees for up to 241,500 shares of common stock. Both incentive stock options
and nonqualified stock options may be granted under the plans. The exercise
price of each option equals the market price of the Corporation's stock on the
date of grant and an option's maximum term is ten years.
A summary of the status of the Corporation's stock option plans at
December 31, 2001 and 2000 is presented below:
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------------------------------ ----------------------------
2001 2000
Outstanding at beginning of year 20,190 $ 35.95 -- --
Granted 21,127 38.13 20,190 $ 35.95
Exercised 257 37.62 -- --
Forfeited -- -- -- --
------ ------- ------- -------
Options exercisable at year end 41,060 $ 37.07 20,190 $ 35.95
====== ======= ====== =======
Weighted-average fair value of options
granted during the year $ 13.75 $ 10.03
======= =======
Information pertaining to options outstanding at December 31, 2001 is
as follows:
Options Outstanding Options Exercisable
-------------------------------------------------- --------------------------------
Weighted Average Weighted
Number Remaining Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$ 37.62 2,503 8.25 years $ 37.62 2,503 $ 37.62
$ 35.71 17,430 8.50 years $ 35.71 17,430 $ 35.71
$ 37.74 2,752 9.25 years $ 37.74 2,752 $ 37.74
$ 38.19 18,375 9.50 years $ 38.19 18,375 $ 38.19
------ ------
Outstanding at
end of year 41,060 8.98 years $ 37.07 41,060 $ 37.07
====== ======
The Corporation applies APB Opinion 25 and related Interpretations in
accounting for the stock option plan. Accordingly, no compensation cost has been
recognized. Had compensation cost for the Corporation's stock option plan been
determined based on the fair value at the grant dates for awards under the plan
consistent with the method prescribed by FASB Statement No. 123, the
Corporation's net income and earnings per share would have been adjusted to the
pro forma amounts indicated below:
Years Ended December 31,
2001 2000
(In thousands, except per share data)
Net income As reported $ 5,092 $ 4,172
Pro forma 4,900 4,040
Earnings per share As reported $ 2.15 $ 1.78
Pro forma 2.07 1.73
Earnings per share - As reported $ 2.12 $ 1.77
assuming dilution Pro forma 2.04 1.72
10
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
Years Ended December 31,
2001 2000
Dividend yield 1.5% 1.5%
Expected life 9.47 years 8.47 years
Expected volatility 19.77% 16.06%
Risk-free interest rate 5.33% 5.60%
During 2000 the Corporation implemented an employee stock purchase
plan under which 78,750 shares of common stock have been reserved for issuance
to employees. The number of shares which may be issued to each participant is
determined annually, based on individual earnings, and their cost is equal to
85% of the fair market value as established by the average of the average of the
daily high bid and daily low offer quotations for the shares reported in the OTC
Bulletin Board service, during the ten trading days immediately preceding the
date of purchase. If no bid or offer quotation for the shares is reported
through the OTC Bulletin Board service during the ten business day period, the
fair market value is the price of the last trade reported through the OTC
Bulletin Board service prior to the purchase date. A total of 75,806 shares of
common stock remained reserved at December 31, 2001 for future grants under the
plan. Employees purchased 2,030 and 914 shares at a weighted average price of $
31.00 and $ 30.94 per share in 2001 and 2000, respectively.
Shares of common stock registered and available for issuance through
approved plans at December 31, 2001 are as follows:
Number
of Shares
Stock option plans 200,183
Employee stock purchase plan 75,806
Dividend reinvestment plan 388,867
-------
664,856
NOTE 11. INCOME TAXES
The components of federal income tax expense are summarized as
follows:
2001 2000 1999
(000 omitted)
Current year provision $ 2,051 $ 1,530 $ 1,599
Deferred income taxes (benefits) ( 113) 7 (288)
------- ------- -------
Net federal income tax expense $ 1,938 $ 1,537 $ 1,311
======= ======= =======
Federal income taxes were computed after reducing pretax accounting
income for non-taxable income in the amount of $ 1,392,288, $ 1,426,800, and $
1,515,383 for 2001, 2000, and 1999, respectively.
A reconciliation of the effective applicable income tax rate to the
federal statutory rate is as follows:
2001 2000 1999
Federal income tax rate 34.0% 34.0% 34.0%
Reduction resulting from:
Nontaxable income 6.4 7.1 8.1
---- ---- ----
Effective income tax rate 27.6% 26.9% 25.9%
==== ==== ====
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 (liabilities) included in the
accompanying consolidated balance sheets include the following components:
(000 Omitted)
2001 2000
Total deferred tax assets $ 1,330 $ 1,116
Total deferred tax liabilities (615) (635)
------- -------
Net deferred tax asset (liability) $ 715 $ 481
======= =======
The Corporation has not recorded a valuation allowance for deferred
tax assets as they feel that it is more likely than not that they will be
ultimately realized.
NOTE 12. DEPOSITS
Included in interest bearing deposits at December 31 are NOW account
products with balances totaling $ 108,228,000, and $ 69,994,000 for 2001 and
2000, respectively. Also included in interest bearing deposits at December 31,
2001 and 2000 are money market account products with balances totaling $
11,680,000 and $ 10,269,000, respectively.
At December 31, 2001 and 2000 time deposits of $ 100,000 and over
aggregated $ 17,826,000 and $ 30,538,000, respectively. Interest expense on time
deposits of $ 100,000 and over was $ 1,336,000, $ 1,181,000, and $ 484,000, for
2001, 2000, and 1999, respectively.
At December 31, 2001 the scheduled maturities of certificates of
deposit are as follows:
2002 $ 73,298
2003 10,674
2004 8,354
2005 3,872
2006 2,742
Thereafter 988
--------
$ 99,928
11
The Corporation 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 $
1,186,000 and $ 1,201,000 at December 31, 2001 and 2000, respectively.
NOTE 13. LIABILITIES FOR BORROWED MONEY
Federal funds purchased and securities sold under agreements to
repurchase generally mature within one day from the transaction date.
Information concerning securities sold under agreements to repurchase is
summarized as follows:
2001 2000
Average balance during the year $ 23,311,000 $ 17,969,000
Average interest rate during the year 3.66% 5.86%
Maximum month-end balance during the year $ 35,714,000 $ 28,767,000
Securities underlying the agreements at year-end:
Carrying value $ 27,118,000 $ 35,049,000
Estimated fair value $ 26,559,000 $ 35,389,000
At December 31, the Corporation had long-term notes outstanding with
the Federal Home Loan Bank of Pittsburgh as follows:
Amount Convertible Frequency & Basis
------------------------------- Maturity Interest to Adjustable for Adjustable
2001 2000 Date Rate Rate Rate
$ 1,000,000 $ 1,000,000 1/04 6.42%
1,000,000 1,000,000 4/03 6.58%
0 3,000,000 3/02 6.54%
3,000,000 3,000,000 10/02 5.73% (1)
7,500,000 7,500,000 9/08 5.06% 9/15/03 Quarterly based on 3 months
LIBOR plus .15%
5,000,000 5,000,000 10/08 4.66% 10/7/03 Quarterly based on 3 months
LIBOR plus .15%
5,000,000 0 2/11 4.50% 2/7/02 Quarterly based on 3 months
LIBOR plus .19%
3,000,000 0 3/11 3.94% 3/25/02 Quarterly based on 3 months
------------ ------------ LIBOR plus .13%
$ 25,500,000 $ 20,500,000
============ ============
(1) The 3 month LIBOR is evaluated quarterly and the loan converts to an
adjustable rate if the 3 month LIBOR is greater than 7%. The rate would then
adjust quarterly based on 3 month LIBOR plus .08%.
Interest rates are fixed, but, as indicated above, some of the notes
can convert to adjustable rates. 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 Corporation
obtained a term loan in 1994 of $ 350,000 and two additional $ 350,000 term
loans in 2000 with the Federal Home Loan Bank of Pittsburgh. The maturity dates
and applicable fixed interest rates on the remaining balance at December 31 are
as follows:
Amount
------------------------------
2001 2000 Maturity Date Rate
$ 0 $ 315,579 2/01 5.58%
350,000 350,000 4/20 7.40%
350,000 350,000 4/05 7.35%
---------- -------------
$ 700,000 $ 1,015,579
========= ===========
In addition, the Corporation has available a $ 5 million line of
credit with the Federal Home Loan Bank of Pittsburgh. The interest rate is
variable and can change daily based on FHLR's cost of borrowing. Collateral for
all outstanding advances and the line consists of certain securities and the
Corporation's 1-4 family mortgage loans totaling $ 98,712,000 and $ 85,868,000
at December 31, 2001 and 2000, respectively. The Corporation also has available
a line of credit with Atlantic Central Bankers Bank of $ 6 million at December
31, 2001 and 2000. The ACBB line of credit is unsecured and the rate is based on
the daily Federal Funds rate. There were no borrowings under either line of
credit at December 31, 2001 or 2000.
Also included in other borrowed funds are borrowings against certain
life insurance policies that are used to fund deferred compensation benefits for
certain directors. Interest rates are fixed at 8%. Collateral is the cash
surrender value of the policies as disclosed in Note 9. Total balance of these
loans was $ 312,000 and $ 287,000 at December 31, 2001 and 2000, respectively.
Total interest on the aforementioned borrowings charged to operations
was $ 1,420,799, $ 1,189,847, and $ 1,106,695 for 2001, 2000, and 1999,
respectively.
12
NOTE 14. 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 2001 2000
(000 omitted)
Cash $ 1,264 $ 579
Securities available for sale 2,112 2,022
Investment in wholly-owned subsidiaries 28,882 24,968
Property and equipment (net of depreciation) 6 104
Other assets 57 84
-------- --------
Total assets $ 32,321 $ 27,757
======== ========
Liabilities
Accrued expenses $ 393 $ 345
Deferred taxes 66 38
Notes payable 700 700
-------- --------
Total liabilities 1,159 1,083
-------- --------
Shareholders' Equity
Common stock, no par value - $ .1041 stated value per share,
10,000,000 shares authorized with 2,378,608 shares issued
at December 31, 2001; 2,240,744 shares issued at December 31, 2000 248 233
Additional paid-in capital 25,077 19,360
Retained earnings 5,557 6,619
Accumulated other comprehensive income 280 462
-------- -----------
Total shareholders' equity 31,162 26,674
-------- ---------
Total liabilities and shareholders' equity $ 32,321 $ 27,757
======== ========
Income Statements
Years Ended December 31
2001 2000 1999
(000 omitted)
Income
Dividends from wholly-owned subsidiary $ 1,000 $ 1,069 $ 910
Other interest and dividend income 115 102 38
Gain on sale of investment securities 1 45 421
------- ------- -------
Total Income 1,116 1,216 1,369
------- ------- -------
Expenses
Interest on borrowings 52 36 0
Other expenses 161 156 281
------- ------- -------
Total Expenses 213 192 281
------- ------- -------
Income before income taxes and equity in
undistributed income of subsidiaries 903 1,024 1,088
Income tax expense (benefit) (39) (22) 56
------- ------- -------
Income before equity in undistributed income
of subsidiaries 942 1,046 1,032
------- ------- -------
Equity in undistributed income of
Subsidiaries
Net income of subsidiaries 5,150 4,195 3,633
Less: dividends (1,000) (1,069) (910)
------- ------- -------
Equity in undistributed net income of subsidiaries 4,150 3,126 2,723
------- ------- -------
Net income $ 5,092 $ 4,172 $ 3,755
======= ======= =======
13
Statements of Cash Flows
Years Ended December 31
2001 2000 1999
(000 omitted)
Cash flows from operating activities:
Net income $ 5,092 $ 4,172 $ 3,755
Adjustments to reconcile net income to cash
provided by operating activities:
Security (gains) (1) (45) (421)
Equity in undistributed income of subsidiary (4,150) (3,126) (2,723)
Increase (decrease) in other liabilities 48 (64) 409
(Increase) decrease in other assets 27 (64) 5
------- ------- -------
Net cash provided by operating activities 1,016 873 1,025
------- ------- -------
Cash flows from investing activities:
Purchase of available for sale securities (127) (1,209) (255)
Sales of available for sale securities 120 80 624
Purchases of property and equipment (2) (100) 0
Sales of property and equipment 100 0 0
------- ------- -------
Net cash provided (used) by investing activities 91 (1,229) 369
------- ------- -------
Cash flows from financing activities:
Cash dividends paid (1,411) (1,270) (1,134)
Cash paid in lieu of fractional stock dividends (20) 0 (31)
Proceeds from sale of stock 1,009 864 303
Proceeds from debt 0 700 0
------- ------- -------
Net cash provided (used) by financing activities (422) 294 (862)
------- ------- -------
Net increase (decrease) in cash 685 (62) 532
Cash, beginning balance 579 641 109
------- ------- -------
Cash, ending balance $ 1,264 $ 579 $ 641
======= ======= =======
NOTE 15. REGULATORY MATTERS
Dividends paid by Orrstown Financial Services, Inc. are generally
provided from the subsidiary 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 $ 22,353,000
in its retained earnings at December 31, 2001 is fully available for cash
dividends. Orrstown Financial Services' balance of retained earnings at December
31, 2001 is $ 5,557,000 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.
The Corporation is also subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines, the Corporation is required to maintain minimum capital
ratios. The leverage ratio compares capital to total adjusted 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
2001 2000 Requirements
Leverage ratio 8.24% 8.55% 3%
Risk-based capital ratio
Tier I (core capital) 12.31% 12.35% 4%
Combined Tier I and Tier II
(core capital plus allowance
for loan losses) 13.56% 13.60% 8%
As of December 31, 2001 the most recent notification, from the
Federal Reserve Board, categorized the Corporation as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the
Corporation's category.
14
NOTE 16. LEASES
The Corporation leases land and building space associated with
certain branch offices, remote automated teller machines, and certain data
processing equipment under agreements which expire at various times from 2002
through 2006. Total rent expense charged to operations in connection with these
leases was $ 172,309, $ 219,255, and $ 118,342 for 2001, 2000, and 1999,
respectively.
The total minimum rental commitment under operating leases at
December 31, 2001 is as follows: Due in the year ending December 31:
2002 $ 94,833
2003 37,221
2004 13,854
2005 6,000
2006 6,000
---------
$ 157,908
NOTE 17. COMPENSATING BALANCE ARRANGEMENTS
The Corporation maintains deposit balances at several correspondent banks, which
provide check collection and item processing services to the Corporation. The
balances with these correspondent banks, at times, exceed federally insured
limits, which management considers to be a normal business risk.
Required deposit balance at the Federal Reserve was $ 65,000 at
December 31, 2001 and 2000. Required deposit balance at Atlantic Central Bankers
Bank was $ 540,000 at December 31, 2001 and 2000. An additional $ 44,234 and $
41,587 were on deposit at December 31, 2001 and 2000, respectively, with
Independent Community Bankers of America, Inc. as a reserve for potential
clearing losses related to the credit card operations.
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Corporation's financial instruments
were as follows at December 31:
2001 2000
-------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
(000 Omitted)
FINANCIAL ASSETS
Cash and short-term investments $ 13,329 $ 13,329 $ 11,193 $ 11,193
Federal Funds Sold 24,347 24,347 3,049 3,049
Securities available for sale 68,422 68,422 69,919 69,919
Restricted bank stocks 1,703 1,703 2,134 2,134
Loans 249,816 209,181
Allowance for loan loses (3,104) (2,691)
--------- ---------
Net loans 246,712 252,035 206,490 198,628
Accrued interest receivable 1,541 1,541 2,016 2,016
--------- --------- --------- ---------
Total financial assets $ 356,054 $ 361,377 $ 294,801 $ 286,939
========= ========= ========= =========
FINANCIAL LIABILITIES
Deposits $ 281,168 $ 283,037 $ 242,008 $ 242,655
Short-term borrowed funds 31,531 31,531 18,426 18,426
Long-term borrowed funds 26,512 25,949 21,802 18,569
Accrued interest payable 769 769 708 708
--------- --------- --------- ---------
Total financial liabilities $ 339,980 $ 341,286 $ 282,944 $ 280,358
========= ========= ========= =========
15
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.
Summary
For the year ended December 31, 2001, Orrstown Financial Services, Inc.
(the Corporation) and its wholly owned subsidiary Orrstown Bank (the Bank)
recorded net income of $5,092,000, an increase of 22.1% over 2000 earnings of
$4,172,000, which was a 11.1% increase over net income of $3,755,000 in 1999.
Net income per share (EPS) has increased over this time period from $1.61 in
1999 to $1.78 in 2000 and $2.15 in 2001. The per share amounts have been
restated to reflect the 5% stock dividend paid to shareholders on September 15,
2001.
The Corporation's earnings performance continues to be well above peer
group averages as measured by various ratio analyses. Two widely recognized
performance indicators are the return on average assets (ROA) and the return on
average equity (ROE). The return on average assets was 1.50% in 2001, 1.46% in
2000 and 1.50% in 1999. The return on average equity was 17.02% in 1999, to
17.42% in 2000 and 17.20% in 2001.
Net Interest Income
Net interest income is the amount by which interest income on earning
assets exceeds interest paid on interest bearing liabilities. The amount of net
interest income is affected by changes in interest rates, account balances or
volume and the mix of earning assets and interest bearing liabilities. Net
interest income is still the primary source of commercial bank profits despite
the continued industry wide push to build non-interest income streams.
For the year ended December 31, 2001 , net interest income totaled $
13,301,000, an increase of $1,861,000, or 16.3%, over 2000. The 2000 total was
$11,440,000, or 11.6%, over 1999. On a taxable equivalent basis, net interest
income increased by 15.2% in 2001 and 10.7% in 2000. Marginal tax rates used in
the taxable equivalent equation were 34% for all three years presented.
The Corporation's taxable equivalent net interest spread was 4.14% in
1999, 4.05% in 2000, and 3.88% in 2001. The net interest margin, which factors
in non-interest bearing funds sources, has moved from 4.69% to 4.57% to 4.38%,
respectively. Earning assets represented 92.9% of total assets in 2001, 92.1% in
2000 and 92.6% in 1999.
Volume factors were responsible for essentially all net interest income
growth during 2001 and 2000. On an average daily basis assets grew 19.1% during
2001 and 14.1% during 2000. Earning assets grew 20.1% and 13.5% during 2001 and
2000, respectively. Average daily loan growth of 20.8% in 2001 and 13.8% in 2000
was achieved without lowering credit standards and allowed net interest margins
to hold at above peer group levels despite increased pressure on margins
throughout the banking industry in general. The declining interest rate
environment, highlighted by eleven cuts to the prime lending rate totaling 4.75%
made it difficult to hold net interest margin during 2001. The net interest
margin generated in 2001 declined by nineteen basis points from 2000 levels but
remained above peer averages. Loan growth was funded primarily with core deposit
growth during 2001, unlike 2000 when purchased funds and jumbo certificates of
deposits were material funding sources. The core deposit growth during 2001
served to enhance the net interest margin. Management is poised to keep a close
watch on margins moving into 2002 where the economic consensus calls for a flat
rate environment the first half year and slightly rising rates during the second
half.
16
ANALYSIS OF NET INTEREST INCOME
Average Balances and Interest Rates
Taxable Equivalent Basis
(Dollars in Thousands)
2001 2000 1999
----------------------------------- ------------------------------- --------------------------------
Tax Tax Tax Tax Tax Tax
Average Equivalent Equivalent Average Equivalent Average Equivalent Equivalent Equivalent
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS:
Interest Earning Assets:
Federal funds sold
& interest bearing
bank balances $ 16,291 $ 500 3.07% $ 4,527 $ 294 6.49% $ 5,834 $ 283 4.85%
-------- ------ ----- ------- ------ ----- ------- ------ ----
Investment securities:
Taxable investment
Securities 51,056 3,270 6.40 49,337 3,475 7.04 38,877 2,397 6.17
Tax-exempt investment
Securities 15,891 1,363 8.58 16,530 1,448 8.76 17,852 1,564 8.76
Total investment
securities 66,947 4,633 6.92 65,867 4,923 7.47 56,729 3,961 6.98
-------- ------ ----- ------- ------ ----- ------- ------ ----
Loans:
Taxable loans 229,815 19,117 8.32 189,452 16,832 8.88 166,498 14,433 8.67
Tax-exempt loans 3,288 290 8.82 3,450 305 8.84 2,960 274 9.26
-------- ------ ----- ------- ------ ----- ------- ------ ----
Total Loans 233,103 19,407 8.33 192,902 17,137 8.88 169,458 14,707 8.68
-------- ------ ----- ------- ------ ----- ------- ------ ----
Total interest-
earning assets 316,341 24,540 7.76 263,296 22,354 8.49 232,021 18,951 8.17
Non-Interest Earning
Assets:
Cash and due
from banks 8,242 7,052 6,515
Bank premises and
equipment 9,136 8,398 5,858
Other assets 9,542 9,722 8,252
Less allowance for
loan losses (2,833) (2,565) (2,117)
-------- -------- --------
Total $340,428 $285,903 $250,529
======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Interest Bearing
Liabilities:
Interest bearing
demand deposits $99,103 $2,455 2.48 $ 76,631 $ 2,386 3.11 $ 71,176 $ 2,088 2.93
Savings deposits 20,787 301 1.45 20,628 466 2.26 22,888 580 2.53
Time deposits 102,856 5,591 5.44 91,214 5,013 5.50 75,859 3,850 5.08
Short term borrowings 24,275 909 3.74 21,942 1,263 5.76 9,713 438 4.51
Long term borrowings 28,279 1,421 5.02 21,556 1,190 5.52 20,560 1,118 5.44
------- ------ ---- -------- ------- ---- -------- ------- ----
Total interest
bearing 275,300 10,677 3.88 231,971 10,318 4.44 200,196 8,074 4.03
liabilities
Non-Interest Bearing
Liabilities:
Demand deposits 32,628 27,650 25,365
Other 2,888 2,328 2,901
--------- --------- ---------
Total Liabilities 310,816 261,949 228,462
Shareholders' Equity 29,612 23,954 22,067
--------- --------- ---------
Total $ 340,428 3.38 $ 285,903 3.92 $ 250,529 3.48
========= ==== ========= ==== ========= ====
Net interest income / net
interest spread $ 13,863 3.88% $ 12,036 4.05% $ 10,877 4.14%
======== ==== ======== ==== ======== ====
Net interest margin 4.38% 4.57% 4.69%
==== ==== ====
Non-Interest Income and Expenses
Other income, excluding security gains, increased $ 841,000, or 23.2%
in 2001 due primarily to the popularity of our "bounce protection" program and
increases in loan fees. Service charges on deposit accounts grew $ 716,000
during 2001. Securities gains decreased $ 103,000, from $ 114,000 to $ 11,000.
Management continually searches for new sources of non-interest income,
including insurance opportunities which were broadened during 2001 via entry
into a property and casualty insurance agency joint venture.
17
Other expenses rose $1,134,000, or 12.4% in 2001. The 12.4% increase
appears reasonable given the 19.1% asset growth of the company for the year,
plus the fact that 2001 saw the opening of the bank's tenth branch in
Greencastle, Pennsylvania. Additional personnel were needed for this expansion
as well as to accommodate the growth of the bank as a whole. In spite of these
capital expenditures, the Corporation's efficiency ratio is below 60%, an
enviable number for a community bank with less than $500 million in assets. The
efficiency ratio improved to 55.6% for 2001, following 57.8% in 2000 and 58.2%
in 1999.
The table that follows provides additional information regarding
non-interest income and non-interest expense changes over the past three years:
ANALYSES OF NON-INTEREST INCOME AND EXPENSES
(Dollars in Thousands) Year Ended December 31 % Change
2001 2000 1999 2001-2000 2000-1999
OTHER INCOME:
Service charges on deposit accounts $1,890 $1,174 $1,080 61.0% 8.7%
Loan service charges and fees 445 256 285 73.8% (10.2%)
ATM fees 186 166 159 12.0% 4.4%
Other service charges, commissions and fees 113 222 99 (49.1%) 124.2%
Trust department income 1,219 1,125 862 8.4% 30.5%
Brokerage income 261 341 368 (23.5%) (7.3%)
Cash surrender value increases 302 269 302 12.3 (10.9%)
Other operating income 53 75 3 (29.3%) 2400.0%
----- ------ ------ ----- -------
Subtotal before securities transactions 4,469 3,628 3,158 23.2% 14.9%
----- ------ ------ ----- -------
Securities gains (losses) 11 114 423 (90.4%) (73.0%)
----- ------ ------ ----- -------
Total other income $4,480 $3,742 $3,581 19.7% 4.5%
====== ====== ===== ====== =======
OTHER EXPENSES:
Salaries 3,506 3,235 2,945 8.4% 9.8%
Employee benefits 1,645 1,520 1,351 8.2% 12.5%
Occupancy and equipment expenses 1,676 1,558 1,100 7.6% 41.6%
Data processing expenses 435 324 671 34.3% (51.7%)
ATM expenses 200 178 151 12.4% 17.9%
Telephone 249 198 143 25.8% 38.5%
Printing and supplies 232 227 249 2.2% (8.8%)
Postage 174 135 128 28.9% 5.5%
Directors Fees 241 206 185 17.0% 11.4%
Advertising 196 167 138 17.4% 21.0%
Pennsylvania shares tax 211 193 171 9.3% 12.9%
Other operating expenses 1,482 1,172 986 26.5% 18.9%
----- ------ ------ ----- -------
Total operating expenses $10,247 $9,113 $8,218 12.4% 10.9%
====== ====== ===== ====== =======
Non-interest income as a % of non-interest expense 43.7% 41.1% 43.6%
Federal Income Taxes
The Corporation's effective federal income tax rate for 2001 was 27.6%
, as compared to 26.9% in 2000 and 25.9% in 1999. Corporate income tax rates for
2002 are forecast to stay near 2001 levels. The Corporation is firmly entrenched
in the 34% bracket so all taxable income will be taxed at 34% in 2002. This,
along with anticipated growth, is expected to increase the Corporation's
effective federal income tax rate to approximately 28% in 2002, assuming no
retroactive change in rates during 2002.
Asset Quality and Credit Risk Analysis
The quality of the Corporation's asset structure continues to be strong. A
substantial amount of time is devoted by management to overseeing the investment
of funds in loans and securities and the formulation of policies directed toward
the profitability and minimization of risk associated with the investments.
Credit Risk Analysis
The Bank follows generally conservative lending practices and continues to
carry a high quality loan portfolio with no unusual or undue concentrations
of credit. No loans are extended to non-domestic borrowers or governments,
consistent with past practice and policy. Net charge-offs historically have
been quite low, when compared to industry standards, and represented only
.04% of average outstanding loans during 2001 and .06% of average 2000
loans. Nonperforming loans, as represented by nonaccrual and restructured
items, were only .02% and .01% of outstanding loans at December 31, 2001
and 2000, respectively. Loans 90 days or more past due and still accruing
represented .26% and .39% of outstanding loans at December 31, 2001 and
2000, respectively.
18
Allowance for Loan Losses
Historically, the Corporation has had an enviable record regarding its
control of loan losses, but lending is a banking service that inherently
contains elements of risk. In order to assess this risk, an ongoing loan
review process continually evaluates the current financial condition of
commercial borrowers, local and national economic conditions, and the
current level of delinquencies. Through this process, an amount deemed
adequate to meet current growth and future loss expectations is charged to
operations. The provision for loan losses amounted to $504,000, $360,000
and $547,000 for 2001, 2000 and 1999, respectively. These provisions
compared to net charge-offs of $91,000, $124,000 and $63,000 for 2001, 2000
and 1999, respectively. The allowance for loan losses was increased 15.3%
during 2001 while loans increased 19.4%. The reserve at December 31, 2001
represented 1.24% of loans outstanding. Net charge-offs for 2001
represented only .04% of average loans outstanding. The reserve at December
31, 2001 represented 34.1 years of coverage based upon 2001 net charge-offs
and 5,543% of nonaccrual loans. In addition, approximately 54% of the
allowance was unallocated under internal evaluation procedures as of
December 31, 2001.
SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in Thousands) Year Ended December 31
2001 2000 1999 1998 1997
Amount of loans outstanding at end of period $249,816 $209,181 $180,691 $158,632 $128,331
======== ======== ======== ======== ========
Daily average loans outstanding $233,103 $192,902 $169,458 $144,013 $117,403
======== ======== ======== ======== ========
Balance of allowance for possible loan losses
at beginning of period $ 2,691 $ 2,455 $ 1,971 $ 1,767 $ 1,620
Loans charged off 98 129 128 84 83
Recoveries of loans previously charged off 7 7 65 18 15
-------- -------- -------- -------- --------
Net loans charged off (recovered) 91 124 63 66 68
Additions to allowance charged to expense 504 360 547 270 215
-------- -------- -------- -------- --------
Balance at end of period $ 3,104 $ 2,691 $ 2,455 $ 1,971 $ 1,767
======== ======== ======== ======== ========
Ratio of net charge-offs to
average loans outstanding 0.04% 0.06% 0.04% 0.05% 0.06%
======== ======== ======== ======== ========
Ratio of reserve to gross loans
outstanding at December 31 1.24% 1.29% 1.36% 1.24% 1.38%
======== ======== ======== ======== ========
Risk Elements
Nonperforming assets are comprised of nonaccrual and restructured loans
and real estate owned other than bank premises (OREO). OREO represents property
acquired through foreclosure or settlements of loans and is carried at the lower
of the principal amount of the loan outstanding at the time acquired or the
estimated fair value of the property. The excess, if any, of the principal
balance at the time acquired over the carrying amount is charged against the
reserve for loan losses. The Bank's loan loss history has been much better than
peer standards and analysis of the current credit risk position is favorable.
The allowance for loan losses is ample given the current composition of the loan
portfolio and adequately covers the credit risk management sees under present
economic conditions. Management is prepared to make any reserve adjustments that
may become necessary as economic conditions change.
NONPERFORMING ASSETS
(Dollars in Thousands) December 31
2001 2000 1999 1998 1997
Loans on nonaccrual (cash) basis $ 56 $ 12 $ 64 $ 486 $ 473
Loans whose terms have been renegotiated to provide a
reduction or deferral of interest or principal because of a
deterioration in the financial position of the borrower 0 0 0 0 0
OREO 211 0 0 311 49
----- ----- ------ ------- --------
Total nonperforming loans and OREO $ 267 $ 12 $ 64 $ 797 $ 522
===== ===== ===== ======= =======
Ratio of nonperforming assets to total loans
and OREO 0.11% 0.01% 0.04% 0.50% 0.41%
===== ===== ===== ======= =======
Ratio of nonperforming assets to total assets 0.07% 0.00% 0.02% 0.34% 0.27%
===== ===== ===== ======= =======
OTHER CREDIT RISK ELEMENTS:
Loans past due 90 or more days and still accruing $ 644 $ 814 $ 97 $ 284 $ 657
------ ------ ----- ------ -----
Ratio of other credit risk elements to total
loans and OREO 0.26% 0.39% 0.05% 0.18% 0.51%
===== ===== ===== ======= =======
Ratio of other credit risk elements to total assets 0.17% 0.26% 0.04% 0.12% 0.35%
===== ===== ===== ======= =======
TOTAL NONPERFORMING AND OTHER RISK ASSETS: $ 911 $ 826 $ 161 $ 1,081 $ 1,179
===== ===== ===== ======= =======
Ratio of total risk assets to total loans and OREO 0.36% 0.39% 0.09% 0.68% 0.92%
===== ===== ===== ======= =======
Ratio of total risk assets to total assets 0.24% 0.26% 0.06% 0.46% 0.62%
===== ===== ===== ======= =======
19
Future Impact of Recently Issued Accounting Standards
Financial Accounting Standards Board (FASB) issued Statement No. 133 as
amended by SFAS No. 138, Accounting for Derivative Instruments and Hedging
Activities, effective for fiscal years beginning after June 15, 2000. This
Statement establishes accounting and reporting standards for derivative
instruments and hedging activities, including certain derivative instruments
embedded in other contracts, and requires that an entity recognize all
derivatives as assets or liabilities in the balance sheet and measure them at
fair value. If certain conditions are met, an entity may elect to designate a
derivative as follows: (a) a hedge of the exposure to changes in the fair value
of a recognized asset or liability of an unrecognized firm commitment, (b) a
hedge of the exposure to variable cash flows of a forecasted transaction, or (c)
a hedge of the foreign currency exposure of an unrecognized firm commitment, an
available-for-sale security, a foreign currency denominated forecasted
transaction, or a net investment in a foreign operation. The Statement generally
provides for matching the timing of the recognition of the gain or loss on
derivatives designated a hedging instruments with the recognition of the changes
in the fair value of the item being hedged. Depending on the type of hedge, such
recognition will be either net income or other comprehensive income. For a
derivative not designated as a hedging instrument, changes in fair value will be
recognized in net income in the period of change. Management has evaluated the
impact of adopting this Statement on the consolidated financial statements, but
does not anticipate that it will have a material impact.
Financial Accounting Standards Board (FASB) Standard 142, which is
effective for years beginning after December 15, 2001, addresses the financial
accounting and reporting for acquired goodwill and other intangible assets. It
does not address intangibles acquired as part of business combinations which is
addressed by FASB 141. This statement also addresses how goodwill and
intangibles are accounted for after they have been initially recognized.
Management is currently evaluating the impact this statement would have on the
consolidated financial statements when adopted, but does not anticipate that it
will have a material impact.
Liquidity, Rate Sensitivity and Interest Rate Risk Analysis The primary function
of asset/liability management is to assure
adequate liquidity and rate sensitivity. Liquidity management involves the
ability to meet the cash flow requirements of customers who may be either
depositors wanting to withdraw funds or borrowers needing assurance that
sufficient funds will be available to meet their credit needs. Interest rate
sensitivity management requires the maintenance of an appropriate balance
between interest sensitive assets and liabilities. Interest bearing assets and
liabilities that are maturing or repricing should be adequately balanced to
avoid fluctuating net interest margins and to enhance consistent growth of net
interest income through periods of changing interest rates.
The Corporation has consistently followed a strategy of pricing assets
and liabilities according to prevailing market rates while largely matching
maturities , within the guidelines of sound marketing and competitive practices.
The goal is to maintain a predominantly matched position with very few planned
mismatches. Rate spreads will be sacrificed at times in order to enable the
overall rate sensitivity position to stay within the guidelines called for by
asset/liability management policy. Rate sensitivity is measured by monthly gap
analysis, quarterly rate shocks and periodic simulation. Investment and pricing
decisions are made using both liquidity and sensitivity analyses as tools. The
schedule that follows reflects the degree to which the Corporation can adjust
its various portfolios to meet interest rate changes. Additionally, the Bank is
a Federal Home Loan Bank (FHLB) member, and standard credit arrangements
available to FHLB members provide increased liquidity.
RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 2001
(Dollars in Thousands)
Interest Sensitivity Period
After 3 After 6
Within 3 Within 6 Within 12 After
Months Months Months 1 Year Total
RATE SENSITIVE ASSETS (RSA):
Loans 92,132 13,300 21,246 123,138 249,816
Investment securities 2,823 51 468 66,783 70,125
Other earning assets 25,026 0 0 0 25,026
------- ------ ------ ------- -------
Total RSA 119,981 13,351 21,714 189,921 344,967
------- ------ ------ ------- -------
RATE SENSITIVE LIABILITIES (RSL):
Interest bearing deposits 57,985 20,775 26,789 135,738 241,287
Short term borrowed funds 31,531 0 0 0 31,531
Long term borrowed funds 0 0 3,000 23,512 26,512
------- ------ ------ ------- -------
Total RSL 89,516 20,775 29,789 159,250 299,330
------- ------ ------ ------- -------
RATE SENSITIVITY GAP:
Period 30,465 (7,424) (8,075) 30,671 45,637
Cumulative 30,465 23,041 14,966 45,637
GAP AS A PERCENT OF TOTAL ASSETS:
Period 8.15% -1.99% -2.16%
Cumulative 8.15% 6.17% 4.00%
RSA/RSL Cumulative 1.34 1.21 1.11
20
The asset biased, or positive, gap position indicates that earnings are
naturally enhanced, or more easily maintained, in a rising rate environment.
This indicates that the balance sheet is well positioned to react to anticipated
rate increases during late 2002 and positioned adequately to avoid material
earnings damage if rates do not rise.
Capital Adequacy and Regulatory Matters
The Corporation maintains a strong capital base which provides adequate
resources to absorb both normal and unusual risks inherent to the banking
business. Internal capital generation, net income retained after the declaration
of dividends, plus dividend reinvestment participation, have been the primary
method employed to increase capital accounts. Total stockholders' equity rose
$4,488,000 during 2001, an increase of 16.8% for the year. This followed growth
of 22.0% and 3.7% during 2000 and 1999, respectively. The increasing earnings
stream during this period has allowed the Corporation to steadily increase cash
dividends paid to stockholders. In 2001 cash dividends rose $141,000, or 11.1%
over 2000 levels while net income rose 22.0% during the period. This followed a
12.0% increase in dividend payout for 2000 versus 1999. Dividends per share have
moved from $0.49 to $0.54 to $0.60 for 1999 through 2001, respectively. The
dividends per share have been restated to reflect the 5% stock dividend paid to
shareholders on September 15, 2001.
CAPITAL AND DIVIDEND RATIOS
(Dollars in Thousands)
2001 2000 1999
At December 31:
Shareholders' Equity $31,162 $26,674 $21,868
Equity/Assets 8.34% 8.55% 8.25%
For the Year:
Average Equity/Average Assets 8.70% 8.38% 8.81%
Dividend payout 27.71% 30.48% 30.20%
Return on Average Equity 17.20% 17.42% 17.02%
Dividends paid $1,411 $1,270 $1,134
Regulatory
Regulatory Capital Measures: Minimums
Tier I Capital Ratio 12.3% 12.4% 12.8% 4.0%
Total (Tier II) Capital Ratio 13.6% 13.6% 14.1% 8.0%
Leverage Ratio 8.2% 8.6% 8.3% 3.0%
The maintenance of a strong capital base, above regulatory risk based
minimums and industry averages, has been an integral part of the Corporation's
operating philosophy. Management foresees no problem in maintaining capital
ratios well in excess of regulatory requirements.
The Corporation and its banking subsidiary are subject to periodic
examinations by the Federal Reserve Bank and the Pennsylvania Department of
Banking. During 2001, three examinations were conducted at the parent and
subsidiary levels. The examinations included, but were not limited to,
procedures designed to review trust operations, data processing operations
lending practices, credit quality, liquidity, and capital adequacy. No comments
were received from regulatory agencies which, if implemented, would have a
material effect on Orrstown Financial Services, Inc.'s liquidity, capital
resources or operations.
21
Summary of Quarterly Financial Data
The unaudited quarterly results of operations for the years ended December 31,
2001 and 2000 are as follows:
(Dollars in Thousands)
2001 2000
Quarter Ended Quarter Ended
------------------------------- -------------------------------
March June September December March June September December
Interest income $ 5,882 $ 5,932 $ 6,207 $ 5,957 $ 4,988 $ 5,323 $ 5,577 $ 5,870
Interest expense 2,835 2,694 2,681 2,467 2,293 2,471 2,715 2,839
------- ------- ------- ------- ----- ------- ------- -------
Net interest income 3,047 3,238 3,526 3,490 2,695 2,852 2,862 3,031
Provision for loan losses 60 60 170 214 75 75 75 135
------- ------- ------- ------- ----- ------- ------- -------
Net interest income after
provision for loan losses 2,987 3,178 3,356 3,276 2,620 2,777 2,787 2,896
Securities gains (losses) 33 (2) (9) (11) (2) (1) 36 81
Other income 998 1,270 1,001 1,200 803 899 866 1,060
Other expense 2,457 2,655 2,464 2,671 2,137 2,196 2,320 2,460
------- ------- ------- ------- ----- ------- ------- -------
Income before income
taxes 1,561 1,791 1,884 1,794 1,284 1,479 1,369 1,577
Applicable income taxes 436 500 501 501 335 405 342 455
------- ------- ------- ------- ----- ------- ------- -------
Net income $ 1,125 $ 1,291 $ 1,383 $ 1,293 $ 949 $ 1,074 $ 1,027 $ 1,122
======= ======= ======= ======= ===== ======= ======= =======
PER COMMON SHARE DATA:
Net income $ 0.48 $ 0.55 $ 0.58 $ 0.54 $ 0.40 $ 0.46 $ 0.44 $ 0.48
Diluted net income 0.47 0.54 0.57 0.54 0.40 0.46 0.44 0.47
Dividends 0.143 0.143 0.150 0.160 0.133 0.134 0.133 0.143
PERFORMANCE STATISTICS:
Return on average assets 1.47% 1.58% 1.57% 1.38% 1.42% 1.54% 1.40% 1.48%
Return on average equity 16.61% 17.82% 18.34% 16.10% 16.99% 18.53% 16.85% 17.32%
Average equity / avg. assets 8.84% 8.89% 8.54% 8.56% 8.33% 8.30% 8.32% 8.55%
All per share amounts have been adjusted to give retroactive recognition to a 5%
stock dividend effective September 15, 2001.
22
Selected Five -Year Financial Data
Orrstown Financial Services, Inc. and its wholly-owned subsidiary
(Dollars in Thousands)
Year Ended December 31 2001 2000 1999 1998 1997
Summary of Operations
Interest income $ 23,978 $ 21,758 $ 18,324 $ 16,109 $ 13,450
Interest expense 10,677 10,318 8,074 7,348 5,822
-------- --------- -------- -------- --------
Net interest income 13,301 11,440 10,250 8,761 7,628
Provision for loan losses 504 360 547 270 215
-------- --------- -------- -------- --------
Net interest income after provision for
loan losses 12,797 11,080 9,703 8,491 7,413
Securities gains (losses) 11 114 423 (9) 3
Other operating income 4,469 3,628 3,158 2,262 1,548
Other operating expenses 10,247 9,113 8,218 6,445 5,384
-------- --------- -------- -------- --------
Income before income taxes 7,030 5,709 5,066 4,299 3,580
Applicable income tax 1,938 1,537 1,311 1,180 974
-------- --------- -------- -------- --------
Net income $ 5,092 $ 4,172 $ 3,755 $ 3,119 $ 2,606
======== ========= ======== ======== ========
Per Common Share Data*
Income before taxes $2.97 $2.44 $2.18 $1.86 $1.55
Applicable income taxes 0.82 0.66 0.56 0.51 0.42
Net income 2.15 1.78 1.61 1.35 1.13
Diluted net income 2.12 1.77 1.61 1.35 1.13
Cash dividend paid 0.60 0.54 0.49 0.42 0.39
Book value at December 31 13.10 11.34 9.39 9.09 7.89
Average shares outstanding - basic 2,366,707 2,340,834 2,325,699 2,316,004 2,314,666
Average shares outstanding - diluted 2,398,149 2,352,130 2,325,699 2,316,004 2,314,666
Stock Price Statistics*
Close $39.00 $38.10 $36.19 $24.81 $19.93
High 40.00 41.90 38.10 28.35 19.93
Low 37.00 35.48 23.92 19.61 14.34
Price earnings ratio at close 18.1 21.4 22.4 18.5 17.7
Price to book at close 3.0 3.4 3.9 2.7 2.5
Year-End Balance Sheet Data
Total assets $373,728 $311,903 $265,053 $235,822 $190,242
Total loans 249,816 209,181 180,691 158,632 128,331
Total investment securities 70,125 72,053 61,964 51,137 47,191
Deposits - non-interest bearing 39,881 31,716 25,264 22,020 17,649
Deposits - interest bearing 241,287 210,292 179,125 161,744 142,931
Total deposits 281,168 242,008 204,389 183,764 160,580
Liabilities for borrowed money 58,043 40,228 36,228 27,062 8,569
Total shareholders' equity 31,162 26,674 21,868 21,080 18,265
Trust assets under management -
market value 221,000 206,000 182,000 152,000 108,000
Performance Statistics
Average equity / average assets 8.70% 8.38% 8.81% 9.20% 9.84%
Return on average equity 17.20% 17.42% 17.02% 15.97% 15.37%
Return on average assets 1.50% 1.46% 1.50% 1.47% 1.51%
* Per share amounts have been restated to reflect:
The 5% stock dividend effective September 15, 2001.
The 7-1/2% stock dividend effective November 19,1999.
The 2 for 1 stock split effective November 21,1998.
The 5% stock dividend effective May115,1997.
23
Market and Dividend Information
The common stock of Orrstown Financial Services, Inc. is traded in the over-the
- -counter market under the symbol ORRF. At the close of business December 31,
2001, there were approximately 2,149 shareholders of record, with a total of
2,378,608 shares outstanding. The table below sets forth the range of high and
low quarterly sales prices and dividends declared per common share. All per
share data has been restated to reflect the 5% stock dividend paid to
shareholders on September 15, 2001.
2001 2000
Market Price Market Price
---------------------------------- -----------------------------------
Quarterly Quarterly
High Low Dividend High Low Dividend
First quarter $38.10 $36.19 $0.143 $38.10 $36.19 $0.133
Second quarter $39.29 $35.71 $0.143 $37.14 $35.48 $0.134
Third quarter $44.76 $35.00 $0.150 $36.67 $35.71 $0.133
Fourth quarter $40.00 $37.00 $0.160 $41.90 $35.84 $0.143
------ ------
$0.596 $0.543
Investor Information
Annual Meeting
The annual meeting of Orrstown Financial Services, Inc. stockholders is
scheduled for May 7, 2001 at 9:00 a.m. at Orrstown Bank, 77 East King Street,
Shippensburg, PA 17257. All stockholders are cordially invited to attend.
Annual and Quarterly Reports
Copies of the annual and quarterly reports may be obtained at any office of
Orrstown Bank, or by writing to Patricia A. Corwell, Vice President & Assistant
Secretary, Orrstown Bank, P.O. Box 250, Shippensburg, PA 17257.
Form 10-K
A copy of the corporation's Form 10-K, as filed with the Securities and Exchange
Commission, may be obtained by writing to Orrstown Bank, P.O. Box 250,
Shippensburg, PA 17257.
Transfer Agent
The transfer agent for Orrstown Financial Services, Inc. is Orrstown Bank, 77
East King Street, P.O. Box 250, Shippensburg, PA 17257.
Market Makers
E.E. Powell & Co., Inc. Janney Montgomery Scott F.J. Morrissey & Co., Inc.
1100 Gulf Tower 1 North Church Street 1700 Market Street - Suite 1420
Pittsburgh, PA 15219 P.O. Box 3129 Philadelphia, PA 19103
1-800-289-7865 West Chester, PA 19380 1-800-842-8928
1-800-777-0131
Ryan, Beck & Co., Inc. Ferris Baker Watts, Inc.
220 South Orange Avenue 100 Light Street
Livingston, NJ 07039 Baltimore, MD 21202
1-800-342-2325 1-800-436-2000
24