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, 20022004
Commission file number: 33-18888
ORRSTOWN FINANCIAL SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2530374
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(State or other jurisdiction of incorporation (I.R.S. Employer
incorporation
or organization) Identification No.)
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:
Common Stock, No Par Value
--------------------------
Title of each class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405(229.405 of this chapter) is not contained herein and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. X
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
--- ---
As of December 31, 2002, 2,398,4052004, 5,126,205 shares of the registrant's common stock were
outstanding. The aggregate market value of such shares held by nonaffiliatesnon-affiliates
on that date was $ 112,725,035.222,766,785.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended December 31, 20022004
are incorporated by reference into Parts I and II. Portions of the Proxy
Statement for 2003the 2005 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 8
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 20
Item 14. Controls and Procedures 20
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 21
Signatures 24
Certification of Chief Executive Officer required by Form 10-K 25
Certification of Chief Financial Officer required by Form 10-K 26
Part I
Item 1. Business.
HistoryBusiness 3
Item 2. Properties 6
Item 3. LegalProceedings 6
Item 3a. Executive Officers of the Registrant 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Part II
Item 5. Market for Registrant's Common Equity and Related
Security Holder Matters 8
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 8. Financial Statements and Supplementary Data 8
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 16
Item 9a. Controls and Procedures 16
Item 9b. Other Information 16
Part III
Item 10. Directors and Executive Officers of the Registrant 17
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial Owners and
Management 17
Item 13. Certain Relationships and Related Transactions 17
Item 14. Principal Accountant Fees and Services 17
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 18
Signatures 20
Part I
Item 1. Business.History and Business Orrstown Financial Services, Inc. (the
Corporation) is a financial holding company registered under the Gramm-Leach-BlileyGramm-Leach-
Bliley Act. Orrstown Financial Services, Inc. was organized on November 17,
1987, under the laws of the Commonwealth of Pennsylvania for the purpose of
acquiring Orrstown Bank (the Bank), Shippensburg, Pennsylvania, and such other
banks and bank related activities as are permitted by law and desirable. On
March 8, 1988, Orrstown Financial Services, Inc. acquired 100% ownership of
Orrstown Bank, issuing 131,455 shares of Orrstown Financial Services, Inc.'s
common stock to the former Bank shareholders.
The Corporation files periodic reports with the Securities and Exchange
Commission (SEC) in the form of 10-Q's - quarterly reports; 10-K - annual
report; annual proxy statements and Form 8-K for any significant events that may
arise during the year. Copies of the Corporation's filings may be obtained
through the SEC's internet site at www.sec.gov or by accessing the Corporation's
website at www.orrstown.com.
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 elevenfourteen branches are located in Shippensburg (2), Carlisle
(3)(4), Spring Run, Orrstown, Chambersburg (2)(4), 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 sixfive
officers who are also employees of the Bank, its subsidiary. On December 31,
2002,2004, the Bank had 113140 full-time and 3630 part-time employees.
Orrstown Bank was organized as a state-chartered bank in 1987 as part of an
agreement and plan of
merger between Orrstown Financial Services, Inc. and Orrstown Bank, the
predecessor of Orrstown Bank, under which Orrstown Bank became a wholly-owned
subsidiary of Orrstown Financial Services, Inc. As indicated, the Bank is the
successor to Orrstown Bank which was originally organized in 1919.
The Bank is engaged in commercial banking and trust business as authorized by
the Pennsylvania Banking Code of 1965. This involves accepting demand, time and
savings deposits, and granting loans. The Bank grants agribusiness, commercial
and residential loans to customers in South Central Pennsylvania, principally
Franklin and Cumberland Counties. The concentrations of credit by type of loan
are set forth on the face of the balance sheet (page 24 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.Department. The loan review process is continuous,
commencing with the approval of a loan. Each new loan is reviewed by the Credit AdministrationLoan
Department for compliance with banking regulations and lending policy
requirements for documentation, collateral standards, and approvals. The Bank
employees a Loan Review Officer, who is independent from the Loan function and
reports directly to the Chief Operating Officer and the Directors' Credit
Administration Department continues to monitorCommittee. The Loan Review Officer continually monitors and
evaluateevaluates 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 ofThe Loan Review Officer reports the
results of the loan reviews are submitted quarterly to the Directors' Credit Administration
Committee for approval and provideprovides the basis for evaluating the adequacy of the
allowance for loan losses.
Through its trust department, the Bank renders services as trustee, executor,
administrator, guardian, managing agent, custodian, investment advisor, and
other fiduciary activities authorized by law.
As of December 31, 2002,2004, the Corporation had total assets of approximately
$ 410515 million, total shareholders' equity of approximately $ 3849 million and
total deposits of approximately $ 319405 million.
Regulation and Supervision
Orrstown Financial Services, Inc. is a financial holding company, and is
registered as such with the Board of Governors of the Federal Reserve System
(The(the Federal Reserve Board). As a registered bank holding company and financial
holding company, the Corporation is subject to regulation under the Bank Holding
Company Act of 1956 and to inspection, examination, and supervision by the
Federal Reserve Board.
The operations of the Bank are subject to federal and state statutes
applicable to banks chartered under the banking laws of the United States, and
to banks whose deposits are insured by the Federal Deposit Insurance
Corporation. Bank operations are also subject to regulations of the
Pennsylvania Department of Banking, the Federal Reserve Board, and the Federal
Deposit Insurance Corporation.Corporation (FDIC).
Several of the more significant regulatory provisions applicable to banks and
financial holding companies to which the Corporation and its subsidiaries are
subject are discussed below, along with certain regulatory matters concerning
the Corporation and its subsidiaries. To the extent that the following
information describes statutory or regulatory provisions, it is qualified in its
entirety by reference to the particular statutory provisions. Any change in
applicable law or regulation may have a material effect on the business and
prospects of the Corporation and its subsidiaries.
-3-
Financial and Bank Holding Company Activities
"Financial in Nature" Requirement. As a financial holding company, the
Corporation may engage in, and acquire companies engaged in, activities that are
considered "financial in nature", as defined by the Gramm-Leach-Bliley Act and
Federal Reserve Board interpretations. These activities include, among other
things, securities underwriting, dealing and market-making, sponsoring mutual
funds and investment companies, insurance underwriting and agency activities,
and merchant banking. If any banking subsidiary of the Corporation ceases to be
"well capitalized" or "well managed" under applicable regulatory standards, the
Federal Reserve Board may, among other things, place limitations on the
Corporation's ability to conduct the broader financial activities permissible
for financial holding companies or, if the deficiencies persist, require the
Corporation to divest the banking subsidiary. In addition, if any banking
subsidiary of the Corporation receives a Community Reinvestment Act rating of
less than satisfactory, the Corporation would be prohibited from engaging in any
additional activities other than those permissible for bank holding companies
that are not financial holding companies. The Corporation may engage directly
or indirectly in activities considered financial in nature, either de novo or by
acquisition, as long as it gives the Federal Reserve boardBoard after-the-fact notice
of the new activities.
Interstate Banking and Branching. As thea bank holding company, the Corporation
is required to obtain prior Federal Reserve Board approval before acquiring more
than 5% of the voting shares, or substantially all of the assets, of a bank
holding company, bank, or savings association. Under the Riegle-Neal Interstate
Banking and Branching Efficiency Act (Riegle-Neal), subject to certain
concentration limits and other requirements, bank holding companies such as the
Corporation may acquire banks and bank holding companies located in any state.
Riegle-Neal also permits banks to acquire branch offices outside their home
states by merging with out-of-state banks, purchasing branches in other states,
and establishing de novo branch offices in other states. The ability of banks
to acquire branch offices is contingent, however, on the host state having
adopted legislation "opting in" to those provisions of Riegle-Neal. In
addition, the ability of a bank to merge with a bank located in another state is
contingent on the host state not having adopted legislation "opting out" of that
provision of Riegle-Neal.
Control Acquisitions. The Change in Bank Control Act prohibits a person or
group of persons from acquiring "control" of a bank holding company, unless the
Federal Reserve Board has been notified and has not objected to the transaction.
Under a rebuttable presumption established by the Federal Reserve Board, the
acquisition of 10% or more of a class of voting stock of a bank holding company
with a class of securities registered under Section 12 of the Exchange Act, such
as the Corporation, would, under the circumstances set forth in the presumption,
constitute acquisition of control of the bank holding company. In addition, a
company is required to obtain the approval of the Federal Reserve Board under
the Bank Holding Company Act before acquiring 25% (5% in the case of an aquiror
that is a bank holding company) or more of any class of outstanding voting stock
of a bank holding company, or otherwise obtaining control or a "controlling
influence" over that bank holding company.
-4-
Liability for Banking Subsidiaries
Under Federal Reserve Board policy, a bank holding company is expected to act
as a source of financial and managerial strength to each of its subsidiary banks
and to commit resources to their support. This support may be required at times
when the bank holding company may not have the resources to provide it.
Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance
Act, the FDIC can hold any FDIC-insured depository institution liable for any
loss suffered or anticipated by the FDIC in connection with (1) the "default" of
a commonly controlled FDIC-insured depository institution; or (2) any assistance
provided by the FDIC to a commonly controlled FDIC-insured depository
institution "in danger of default".
Capital Requirements
Information concerning the Corporation and its subsidiaries with respect to
capital requirements is incorporated by reference from Note 15, "Regulatory
Matters", of the "Notes to Consolidated Financial Statements" included under
Item 8 of this report, and from the "Capital Adequacy and Regulatory Matters"
section of the "Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations", included under Item 7 of this report.
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),
and the regulations promulgated under FDICIA, among other things, established
five capital categories for insured depository institutions - well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized - and requires federal bank regulatory agencies to
implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements based on these
categories. Unless a bank is well capitalized, it is subject to restrictions on
its ability to offer brokered deposits and on certain other aspects of its
operations. An undercapitalized bank must develop a capital restoration plan
and its parent bank holding company must guarantee the bank's compliance with
the plan up to the lesser of 5% of the bank's assets at the time it became
undercapitalized and the amount needed to comply with the plan. As of December
31, 2002,2004, the Bank was considered well capitalized based on the guidelines
implemented by the bank regulatory agencies.
Dividend Restrictions
The Corporation's funds for cash distributions to its stockholdersshareholders are
derived from a variety of sources, including cash and temporary investments.
One of the principal sources of those funds is dividends received from its
subsidiary Orrstown Bank. Various federal laws limit the amount of dividends
the Bank can pay to the Corporation without regulatory approval. In addition,
federal bank regulatory agencies have authority to prohibit the Bank from
engaging in an unsafe or unsound practice in conducting their business. The
payment of dividends, depending upon the financial condition of the bank in
question, could be deemed to constitute an unsafe or unsound practice. The
ability of the Bank to pay dividends in the future is currently, and could be
further, influenced by bank regulatory policies and capital guidelines.
Additional information concerning the Corporation and its banking subsidiary
with respect to dividends is incorporated by reference from Note 15, "Regulatory
Matters", of the "Notes to Consolidated Financial -5-
Statements" included under
Item 8 of this report, and the "Liquidity, Risk
Sensitivity,"Capital Adequacy and Interest Rate Risk Analysis"Regulatory Matters"
sections of "Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations", included under Item 7 of this report.
Depositor Preference Statute
In the "liquidation or other resolution" of an institution by any receiver,
U.S. federal legislation provides that deposits and certain claims for
administrative expenses and employee compensation against the insured depository
institution would be afforded a priority over the general unsecured claims
against that institution, including federal funds and letters of credit.
Other Federal Laws and Regulations
Our operations are subject to additional federal laws and regulations
applicable to financial institutions, including, without limitation:
o- Privacy provisions of the Gramm-Leach-Bliley Act and related regulations,
which require us to maintain privacy policies intended to safeguard
customer financial information, to disclose the policies to our
customers and to allow customers to "opt out" of having their
financial service providers disclose their confidential financial
information to non-affiliated third parties,
subject to certain exceptions;
o- Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures
for complying with administrative subpoenas of financial records;
o- Consumer protection rules for the sale of insurance products by
depository institutions, adopted pursuant to the requirements of
the Gramm-Leach-Bliley Act; and
o- USA Patriot Act, which requires financial institutions to take certain
actions to help prevent, detect and prosecute international money
laundering and the financing of terrorism.
Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002. The Sarbanes-Oxley Act represents a comprehensive revision of laws
affecting corporate governance, accounting obligations and corporate reporting.
The Sarbanes-Oxley Act is applicable to all companies with equity securities
registered or that file reports under the Securities Exchange Act of 1934. In
particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit
committees, including independence, expertise, and responsibilities; (ii)
additional responsibilities regarding financial statements for the Chief
Executive Officer and Chief Financial Officer of the reporting company; (iii)
new standards for auditors and regulation of audits; (iv) increased disclosure
and reporting obligations for the reporting company and its directors and
executive officers; and (v) new and increased civil and criminal penalties for
violations of the securities laws. Many of the provisions were effective
immediately while other provisions become effective over a period of time and
are subject to rulemaking by the SEC. Because the Corporation's common stock is
registered with the SEC, it is currently subject to this Act. -6-
As an accelerated
filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934, the
Corporation was subject to section 404 of the Sarbanes-Oxley Act for the year
ended December 31, 2004.
Future Legislation
Changes to the laws and regulations in the state where the Corporation and
the Bank do business can affect the operating environment of bank holding
companies and their subsidiaries in substantial and unpredictable ways. The
Corporation cannot accurately predict whether those changes in laws and
regulations will occur, and, if those changes occur, the ultimate effect they
would have upon the financial condition or results of operations of the
Corporation.
ImportantForward Looking Statements
Additional information concerning the Corporation and its banking subsidiary
with respect to forward looking statements is incorporated by reference from the
"Important Factors Relating to Forward Looking Statements
The Private Securities Litigation Reform ActStatements" section of 1995 provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fearthe
"Management's Discussion and Analysis of litigation so long
as those statements are identified as forward-lookingFinancial Condition 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 madeResults of
Operations," included 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 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.
-7-
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.Report under Item 7.
Competition
The Bank's principal market area consists of Franklin County and Cumberland
County, Pennsylvania. It services a substantial number of depositors in this
market area, with the greatest concentration within a radius of Chambersburg,
Shippensburg, and Carlisle, Pennsylvania.
The Bank, like other depository institutions, has been subjected to
competition from less heavily regulated entities such as credit unions,
brokerage firms, money market funds, consumer finance and credit card companies,
and other commercial banks, many of which are larger than the Bank. The
principal methods of competing effectively in the financial services industry
include improving customer service through the quality and range of services
provided, improving efficiencies and pricing services competitively. Orrstown
Bank is competitive with all competing financial institutions in its service
area with respect to interest rates paid on time and savings deposits, service
charges on deposit accounts and interest rates charged on loans.
One outgrowth of the competitive environment discussed above has been
significant consolidation within the financial services industry on a global,
national, and regional level. We continue to implement strategic initiatives
focused on expanding our core businesses and to explore, on an ongoing basis,
acquisition, divestiture, and joint venture opportunities. We analyze each of
our products and businesses in the context of customer demands, competitive
advantages, industry dynamics, and growth potential.
Item 2. Properties.
Orrstown Bank owns buildings in Orrstown, Shippensburg (2), Carlisle (2),
Spring Run, Chambersburg (3), and Mechanicsburg, Pennsylvania. Offices of the
Bank are located in each of these buildings. It also leases space for offices
located in Greencastle, Chambersburg, and Carlisle (2), Pennsylvania.
Item 3. Legal Proceedings.
Orrstown Financial Services, Inc. is an occasional party to legal actions
arising in the ordinary course of its business. In the opinion of management,
the Corporation has adequate legal defenses and/or insurance coverage respecting
any and each of these actions and does not believe that they will materially
affect the Corporation's operations or financial position.
Item 4. Submission of Matters to Vote of Security Holders.
None3a. 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-
Name/Office Held Held Employee Age as of
Name/Office Held Since Since 3/15/03
---------------- ----- -------- ---------
10/05
Joel R. Zullinger, Chairman of the Board 1991 (1) 5456
Jeffrey W. Coy, Vice Chairman of the Board 1988 (1) 5153
Kenneth R. Shoemaker, President, CEO 1987 1986 5557
Bradley S. Everly, Senior Vice President, Treasurer 1997 1997 5153
Stephen C. Oldt, Executive Vice President, Assistant Secretary 1987 1987 6062
Assistant Secretary
Philip E. Fague, Executive Vice President, 2002 1988 45
Assistant Treasurer 2001 1988 43
Denver L. Tuckey, Secretary 1999 (1) 6971
Jeffrey W. Embly, Vice President 1999 1997 3234
(1) These officers are not employees of the Corporation
Senior Operating Officers of the Bank
Held Bank Employee Age as of
Name/Office Held Since Since 3/15/03
---------------- ----- ------------- ---------
Name/Office Held Held Bank Age as of
Since Employee 3/10/05
Since
Kenneth R. Shoemaker, President, 1987 1986 57
Chief Executive Officer 1987 1986 55
Stephen C. Oldt, Executive Vice 1987 1987 62
President, Chief Operations Officer 1987 1987 60
Philip E. Fague, Executive Vice President, 1999/ 1988 45
Chief Sales and Service Officer 2000
1988 43
Bradley S. Everly, Senior Vice 1997 1997 53
President, Chief Financial Officer
1997 1997 51
Benjamin S. Stoops, Vice President, 1998 1998 53
Chief Technology Officer 1998 1998 51
Jeffrey W. Embly, Vice President, 1999 1997 34
Senior Loan Officer 1999 1997 32
Barbara E. Brobst, Vice President, 2002 1997 46
Senior Trust Officer 2001 1997 44
Nathan A. Eifert, Vice President, 2003 2000 36
Director of Marketing 2002 2000 34
Stephen C. Caldwell, Vice President, Director of Human Resources2003 2002 2001 5456
Director of Human Resources
-9-
Item 4. Submission of Matters to Vote of Security Holders.
None
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, 2002,2004, the approximate number of
shareholders of record was approximately 2,218.2,555. 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) 2002 2001
High Low High Low
2004 2003
Market Price Quarterly Market Price Quarterly
Dividend (1) High Low Dividend High Low Dividend
First Quarter $ 41.00 $ 38.55 $ 0.17 $ 38.10 $ 36.19 $ 0.143quarter $50.00 $32.50 $0.120 $24.29 $22.38 $0.0955
Second Quarter 50.00 39.25 0.17 39.29 35.71 0.143quarter $44.00 $40.00 $0.120 $29.00 $23.10 $0.1050
Third Quarter 50.00 44.00 0.18 44.76 35.00 0.150quarter $47.00 $40.30 $0.130 $33.75 $30.00 $0.1050
Fourth Quarter 47.00 46.00 0.20 40.00 37.00 0.160quarter $45.25 $42.00 $0.130 $34.00 $31.88 $0.1150
(1)Note: All per share data has been restated after giving retroactive
recognition to a 5% stock dividend paid September 15, 2001.effective May 30, 2004 and a 2-for-1
stock split effective February 10, 2004.
See Note 15 to the financial statements contained in the annual shareholders'
report for the year ended December 31, 20022004 for restrictions on the payment of
dividends.
Item 6. Selected Financial Data.
The selected five-year financial data on page 2534 of the annual shareholders'
report for the year ended December 31, 20022004 is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Management's discussionContractual obligation payments due by period of the Corporation as of
December 31, 2004 are as follows:
Less than 1 - 3 3 - 5 More than Total
1 year years years 5 years
(Dollars in Thousands)
Contractual obligations
Long-term debt obligations $ 2,020 $ 6,392 $ 13,282 $ 13,875 $ 35,569
Operating lease obligations 127 213 177 0 517
----------- ---------- --------- --------- ---------
Total $ 2,147 $ 6,605 $ 13,459 $ 13,875 $ 36,086
=========== ========== ========= ========= =========
All other information required by Item 7 is included in "Management's
Discussion and analysisAnalysis of financial conditionFinancial Condition and resultsResults of operations,Operations", on
pages 1724 through 2333 of the annual shareholders' report which are incorporated
herein by reference.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data, some of which is required
under Guide 3 (statistical disclosures by bank holding companies) are shown on
pages 24 through 2634 of the annual shareholdersshareholders' report for the year ended
December 31, 20022004 and are incorporated herein by reference. Certain statistical
information required in addition to those included in the annual shareholdersshareholders'
report are submitted herewith as follows.
Description of Statistical Information Page
Changes in net interest income tax equivalent yields 119
Investment portfolio 1210
Loan portfolio 1311
Summary of loan loss experience 1412
Nonaccrual, delinquent and impaired loans 1512
Allocation of allowances for loan losses 1613
Deposits and return14
Return on equity and assets 1714
Consolidated summary of operations 18
-10-
15
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
CHANGES IN NET INTEREST INCOME TAX EQUIVALENT YIELDS
2004 Versus 2003 2003 Versus 2002 Versus 2001 2001 Versus 2000
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
Total(Dollars in Thousands) Average Average Total Average Average Increase Average AverageTotal
Volume Rate Increase Volume Rate Increase
(Decrease) Volume Rate (Decrease)
(000 omitted)
Interest Income
Loans (net of unearned discounts) $ 2,5983,493 ($ 3,287)850) $ 2,643 $ 3,507 ($ 689)2,529) $ 3,570 ($ 1,300) $ 2,270978
discounts)
Taxable investment (115) 11 (104) 494 (1,004) (510)
securities 230 (609) (379) 121 (326) (205)
Nontaxable investment (122) (72) (194) (29) (25) (54)
securities 769 (56) 713 (56) 29) (85)
Other short-term (21) 41 20 (36) (83) (119)
investments
17 (240) (223) 763 (557) 206
------- ------- ------- ------- ------- ------------------ ---------- ---------- ---------- -------- ----------
Total interest income 3,614 (4,192) (578) 4,398 (2,212) 2,186
------- ------- ------- ------- ------- -------3,235 (870) 2,365 3,936 (3,641) 295
----------- ---------- ---------- ---------- -------- ----------
Interest Expense
Interest bearing 153 (246) (93) 553 (720) (167)
demand 927 (1,180) (253) 699 (630) 69
Savings deposits 40 (140) (100) 4 (169) (165)17 (22) (5) 26 (87) (61)
Time deposits (479) (1,446) (1,925) 640 62) 578485 (201) 284 136 (962) (826)
Short-term borrowings (8) (503) (511) 134 (488) (354)10 51 61 (13) (142) (155)
Long-term borrowings 106 (9) 97 371 (140) 231
------- ------- ------- ------- ------- -------83 (101) (18) 180 (199) (19)
----------- ---------- ---------- ---------- -------- ----------
Total interest expense 586 (3,278) (2,692) 1,848 (1,489) 359
------- ------- ------- ------- ------- -------748 (519) 229 882 (2,110) (1,228)
----------- ---------- ---------- ---------- -------- ----------
Net interest income $ 2,1142,136 $ 1,827
======= =======1,523
---------- ----------
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, 2002,2004, 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
Within 1 but within 5 within 10 After 10
(000 omitted) year years years years Total
(Dollars in Thousands) Within 1 After 1 After 5 After 10 Total
year year but years but years
within 5 within 10
years years
Bonds:
U. S. Treasury
Book value $ 028 $ 1,0181,378 $ 0 $ 0 $ 1,0181,406
Yield 0% 6.06%5.75% 4.51% 0% 0% 6.06%4.53%
U. S. Government agencies
Book value 0 4,00010,964 0 0 4,00010,964
Yield 0% 3.63%3.23% 0% 0% 3.63%3.23%
State and municipal
Book value 1,364 0 0 1,183 24,508 25,6912,018 20,503 23,885
Yield 8.70% 0% 0% 9.17% 8.10% 8.13%
Corporate
Book value 0 1,000 0 943 1,943
Yield 0% 3.08% 0% 2.09% 2.60%7.36% 7.83% 7.84%
Trust preferred
Book value 0 0 0 1,000 1,000
Yield 0% 0% 0% 9.25% 9.25%
---------- ---------- ---------- --------- ----------
Total book value $ 01,392 $ 6,01812,342 $ 1,183 $26,4512,018 $ 33,652
==== ======= ======= ======== ========21,503 $ 37,255
Yield 0% 3.95% 9.17% 7.93% 7.25%
==== ======= ======= ======== ========8.64% 3.37% 7.36% 7.90% 6.40%
---------- ---------- ---------- --------- ----------
Mortgage-backed securities:
Total book value $ 52,238
========39,663
Yield 5.13%
========4.02%
Equity Securities:
Total book value $ 1,112
========1,660
Yield 4.05%
========4.53%
---------- ---------- ---------- --------- ----------
Total Investment Securities $ 87,002
========78,578
Yield 5.94%
========5.16%
---------- ---------- ---------- --------- ----------
-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:
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(000 omitted)(Dollars in Thousands) 2004 2003 2002 2001 2000
Commercial, financial and
agricultural $ 33,806 $ 28,534 $ 23,938 $ 21,503 $ 18,73238,659 $38,186 $33,806 $28,534 $23,938
Real estate - Construction18,744 21,016 22,048 20,480 17,425
15,580 11,182Construction
Real estate - Mortgage 217,719324,703 277,985 217,791 192,192 157,722
134,046 116,030
Installment and other personal loansConsumer (net of unearned discount)7,162 7,867 7,746 8,610 10,096
9,562 12,688discount)
--------- --------- --------- --------- ----------------- -------- -------- --------
Total loans
$ 281,391 $ 249,816 $ 209,181 $ 180,691 $ 158,632
========= ========= ========= ========= =========$389,268 $345,054 $281,391 $249,816 $209,181
--------- -------- -------- -------- ---------
Presented below are the approximate maturities of the loan portfolio
(excluding real estate mortgages, installments, and credit cards) at
December
31, 2002:December31, 2004:
One to Five
Under One Year years Over Five Years Total
-------------- -------- --------------- -------
(000 omitted)Under One to Over
One Five Five
(Dollars in Thousands) Year Years Years Total
Commercial, financial and
agricultural $ 5,3401,568 $ 6,40610,612 $ 22,06026,479 $ 33,80638,659
Real estate - Construction 3,047 3,648 15,353 22,048
------- -------- -------- --------3,835 2,349 12,560 18,744
----------- ----------- --------- ---------
Total loans $ 8,3875,403 $ 10,05412,961 $ 37,41339,039 $ 55,854
======= ======== ======== ========57,403
----------- ----------- --------- ---------
The following table presents the approximate amount of fixed rate loans and
variable rate loans due as of December 31, 2002:
Fixed Rate Variable
Loans Rate Loans
---------2004:
Fixed Variable
Rate
(Dollars in Thousands) Loans Rate Loans
Due within one year $ 1,332 $ 26,871
Due after one but within five years 19,475 16,298
Due after five years 76,418 248,874
---------- ----------
Total loans $ 97,225 $ 292,043
---------- ----------
(000 omitted)
Due within one year $ 1,690 $ 10,989
Due after one but within five years 18,289 10,654
Due after five years 76,316 163,453
-------- ---------
Total $ 96,295 $ 185,096
======== =========
-13-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31
2002 2001 2000 1999 1998
---- ----- ---- ---- ----
(000 omitted)Years Ended December 31
(Dollars in Thousands) 2004 2003 2002 2001 2000
Average total loans outstanding $369,409 $313,833 $264,296 $233,103 $192,902
(net of unearned income) $ 264,296 $ 233,103 $ 192,902 $ 169,458 $ 144,013
========= ========= ========= ========= =========
Allowance for loan losses, beginning
of period $4,161 3,734 3,104 $ 2,691 $ 2,455 $ 1,971 $ 1,767
Additions to provision for loan losses charged to operations210 491 720 504 360
547 270charged to operations
Loans charged off during the year
Mortgages 9 12 0 0 0
Commercial 21 4 48 67 99
97 15Installment 39 33 36 2 19
Personal credit lines and credit cards 16 32 17 29 11
7 23
Installment 36 2 19 24 46
--------- ------------------- ---------- --------- --------- ---------
Total charge-off's 85 81 101 98 129
128 84
--------- ------------------- ---------- --------- --------- ---------
Recoveries of loans previously charged off:
Mortgages 3 3 0 0 0
Commercial 0 0 3 6 1
59 3
Installment 25 8 8 1 2
1 10
Personal credit lines and credit cards 4 6 0 0 2
5 5
--------- ------------------- ---------- --------- --------- ---------
Total recoveries 32 17 11 7 5
65 18
--------- ------------------- ---------- --------- --------- ---------
Net loans charged off (recovered) 53 64 90 91 124
63 66
--------- ------------------- ---------- --------- --------- ---------
Allowance for loan losses, end of period $ 4,318 $ 4,161 $ 3,734 $ 3,104 $ 2,691 $ 2,455 $ 1,971
========= ========= ========= ========= =========
Ratio of net loans charged off to 0.01% 0.02% 0.03% 0.04% 0.06%
average loans outstanding .03% .04% .06% .04% .05%
========= ========= ========= ========= =========
The provision is based on an evaluation of the adequacy of the allowance for
possible loan losses. The evaluation includes, but is not limited to, review of
net loan losses for the year, the present and prospective financial condition of
the borrowers, and evaluation of current and projected economic conditions.
-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.
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(000 omitted)(Dollars in Thousands) 2004 2003 2002 2001 2000
Nonaccrual loans $ 314 $ 130 $ 85 $ 56 $ 12
$ 64 $ 486
======= ======= ======= ======= =======
Accrual loans:loans
Restructured $0 1,410 1,428 $ 0 $ 0 $ 0 $ 0
30 through 89 days past due 1,643 1,440 1,419 2,244 865 3,420 823
90 days or more past due 1,4462,550 2,743 1446 644 814
97 284
------- ------- ------- ------- ----------------- ---------- ---------- ---------- ---------
Total accrual loans $ 4,193 $ 5,593 $ 4,293 $ 2,888 $ 1,679
$ 3,517 $ 1,107
======= ======= ======= ======= =======---------- ---------- ---------- ---------- ---------
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, 2002.
-15-
2004.
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 Endedcategory. The following is an allocation by
loan categories of the allowance for loan losses for the last five years at
December 31,
2002 2001
Percentage of Percentage of
Allowance Loans to Total Allowance Loans to Total
Amount Loans Amount Loans
(000 omitted)2004 2003
Percentage Percentage
Allowance of Loans to Allowance of Loans to
(Dollars in Thousands) Amount Total Amount Total
Loans Loans
Commercial, financial and $ 1,381 10% $ 928 11%
agricultural
$ 806 12.01% $ 466 11.42%Real estate - Commercial real estate secured 545 41.37 563 46.42617 39% 828 44%
Real estate - Construction 0 7.845% 0 8.206%
Real estate - Mortgage 330 44% 326 36%
Consumer 105 2% 9 3%
Unallocated 1,885 0% 2,070 0%
------------ -------- ----------- --------
Total $ 4,318 100% $ 4,161 100%
------------ -------- ----------- --------
2002 2001
Percentage Percentage
Allowance of Loans to Allowance of Loans to
(Dollars in Thousands) Amount Total Amount Total
Loans Loans
Commercial, financial and $ 806 12% $ 466 11%
agricultural 466
Real estate - Commercial 545 41% 563 46%
Real estate - Construction 0 8% 0 8%
Real estate - Mortgage 255 36.0336% 350 30.51
Installment31%
Consumer 28 2.753% 33 3.454%
Unallocated 2,100 0.00% 1,692 0.00
------- ------ ------- ------0%
------------ -------- ----------- --------
Total $ 3,734 100.00%100% $ 3,104 100.00%
======= ====== ======= ======
Years Ended December 31100%
------------ -------- ----------- --------
2000
1999
Percentage
Allowance of Percentage of
Allowance Loans to
(Dollars in Thousands) Amount Total
Allowance Loans to Total
Amount Loans Amount Loans
(000 omitted)
Commercial, financial and agricultural $ 43 11.74% $ 45 11.90%12%
agricultural 43
Real estate - Commercial real estate secured 786 21.29 609 18.0321%
Real estate - Construction 0 8.30 0 8.628%
Real estate - Mortgage 56 53.86 93 56.16
Installment54%
Consumer 34 4.81 27 5.295%
Unallocated 1,772 0.00 1,681 0.00
------- ------ ------- ------0%
------------- --------
Total $ 2,691 100.00% $ 2,455 100.00%
======= ====== ======= ======
Years Ended December 31
1998
Percentage of
Allowance Loans to Total
Amount Loans
(000 omitted)
Commercial, financial and agricultural $ 255 9.93%
Commercial, real estate secured 416 19.43
Real estate - Construction 0 7.05
Real estate - Mortgage 111 53.77
Installment 34 9.82
1,155 0.00
Unallocated ------- ------
Total $ 1,971 100.00%
======= ======100%
------------- --------
-16-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
DEPOSITS
The average amounts of deposits are summarized below:
Years Ended December 31,
(Dollars in Thousands) 2004 2003 2002 2001 2000
(000 omitted)
Demand deposits $ 39,68857,762 $ 32,62847,416 $ 27,65039,688
Interest bearing demand deposits 183,649 170,832 136,500 99,103 76,631
Savings deposits 29,752 26,602 23,558 20,787 20,628
Time deposits 114,181 97,539 94,043
102,856 91,214
-------- -------- ---------------------- ------------- -------------
Total deposits $293,789 $255,374 $216,123
======== ======== ========$ 385,344 $ 342,389 $ 293,789
-------------- ------------- -------------
The following is a breakdown of maturities of time deposits of $100,000$ 100,000 or
more as of December 31, 2002:
(000 omitted)
Three months or less $ 8,876
Over three months through twelve months 3,288
Over one year through three years 4,220
Over three years 1,462
--------
$ 17,846
========2004:
(Dollars in Thousands)
Three months or less $ 16,962
Over three months through twelve 4,930
months
over one year through three years 8,767
Over three years 3,027
--------------
Total $ 33,686
--------------
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
RETURN ON EQUITY AND ASSETS (APPLYING DAILY AVERAGE BALANCES)
The following table presents a summary of significant earnings and capital
ratios: (000 omitted)ratios applying daily average balances for the years ended December 31,
(Dollars in Thousands) 2004 2003 2002 2001 2000
Average assets $ 385,765 $ 340,428 $ 285,903
Net income $ 5,915 $ 5,092 $ 4,172
Average equity $ 34,408 $ 29,612 $ 23,954
Cash dividends paid $ 495,919 $ 443,737 $ 385,765
Net income 7,770 6,980 5,915
Average equity 46,309 40,491 34,408
Cash dividends paid 2,556 2,126 1,722 $ 1,411 $ 1,270
Return on assets 1.57% 1.57% 1.53% 1.50% 1.46%
Return on equity 16.78% 17.24% 17.19% 17.20% 17.42%
Dividend payout ratio 32.89% 30.45% 29.12% 27.71% 30.48%
Equity to asset ratio 9.34% 9.12% 8.92%
8.70% 8.38%
-17-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED SUMMARY OF OPERATIONS
Years Ended December 31
2002 2001 2000 1999 1998
(000 omitted)Years Ended December 31,
(Dollars in Thousands) 2004 2003 2002 2001 2000
Interest income $ 25,892 $ 23,484 $ 23,173 $ 23,978 $ 21,758
$ 18,324 $ 16,109
Interest expense 6,986 6,757 7,985 10,677 10,318
8,074 7,348
-------- -------- -------- -------- ------------------- ----------- ---------- ---------- -----------
Net interest income 18,906 16,727 15,188 13,301 11,440 10,250 8,761
Provision for loan losses 210 491 720 504 360
547 270
-------- -------- -------- -------- ------------------- ----------- ---------- ---------- -----------
Net interest income after
provision for loan losses 18,696 16,236 14,468 12,797 11,080
9,703 8,491----------- ----------- ---------- ---------- -----------
Other income:
Trust and brokerage services 2,471 1,948 1,780 1,480 1,466
1,230 818
Service charges - Deposits,on deposits, other
service charges, collection and
exchange
charges, commissioncommissions and fees 4,082 3,866 3,171 2,634 1,818
1,623 1,313
Other operating income 416 618 409 366 458
728 122
-------- -------- -------- -------- ------------------- ----------- ---------- ---------- -----------
Total other income 6,969 6,432 5,360 4,480 3,742
3,581 2,253
-------- -------- -------- -------- ------------------- ----------- ---------- ---------- -----------
Income before operating expense 25,665 22,668 19,828 17,277 14,822 13,284 10,744
Operating expenses:
Salaries and employees benefits 7,909 6,787 5,993 5,151 4,755 4,297 3,491
Occupancy and equipment expense 2,398 2,109 1,800 1,676 1,558
1,099 859
Other operating expenses 4,411 4,114 3,895 3,420 2,800
2,822 2,095
-------- -------- -------- -------- ------------------- ----------- ---------- ---------- -----------
Total operating expenses 14,718 13,010 11,688 10,247 9,113
8,218 6,445
-------- -------- -------- -------- ------------------- ----------- ---------- ---------- -----------
Income before income taxes 10,947 9,658 8,140 7,030 5,709
5,066 4,299
Income tax 3,177 2,678 2,225 1,938 1,537
1,311 1,180
-------- -------- -------- -------- ------------------- ----------- ---------- ---------- -----------
Net income applicable to common
stock $ 7,770 $ 6,980 $ 5,915 $ 5,092 $ 4,172
$ 3,755 $ 3,119
======== ======== ======== ======== ========----------- ----------- ---------- ---------- -----------
Per share data: (1)
Basic earnings $ 2.471.52 $ 2.151.38 $ 1.781.18 $ 1.611.02 $ 1.350.85
Diluted earnings $ 2.421.47 $ 2.121.34 $ 1.771.15 $ 1.611.01 $ 1.350.84
Cash dividends $ .720.50 $ .600.42 $ .540.34 $ .490.28 $ .420.26
Weighted average shares:
Basic 2,390,614 2,366,707 2,340,834 2,325,699 2,316,0045,106,683 5,054,370 5,020,288 4,970,084 4,915,753
Diluted 2,444,484 2,398,149 2,352,130 2,325,699 2,316,0045,294,165 5,215,538 5,133,363 5,036,082 4,939,464
-18-
(1) Per share amounts have been restated to reflect::
The 2-for-1 stock split paid February 10, 2004
The 5% stock dividend paid May 30, 2003
The 5% stock dividend paid September 15, 2001
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosures.Disclosure
Not applicable.
Item 9a. Controls and Procedures
The Corporation's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Corporation's disclosure controls and
procedures (as such term is defined in Rules 13a-14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of December 31, 2004.
Based on such evaluation, such officers have concluded that the Corporation's
disclosure controls and procedures are effective in alerting them on a timely
basis to material information relating to the Corporation (including its
consolidated subsidiaries) required to be included in the Corporation's periodic
filings under the Exchange Act. Management's report on internal control over
financial reporting as of December 31, 2004 is shown on Page 3 of the annual
shareholders' report for the year ended December 31, 2004 and is incorporated
herein by reference. The attestation report of the registered public accounting
firm on management's assessment of internal control over financial reporting is
show non Pages 1 and 2 of the annual shareholders' report for the year ended
December 31, 2004 and is incorporated herein by reference. There have not been
any significant changes in the Corporation's internal control over financial
reporting or in other factors that could significantly affect such control
during the fourth quarter of 2004.
Item 9b. Other Information
The Corporation had no other events that should have been disclosed on form
8K that were not already disclosed on such form.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Corporation has adopted a code of ethics that applies to all senior
financial officers (including its chief executive officer, chief financial
officer, chief accounting officer, controller, and any person performing similar
functions). The Corporation's Code of Ethics for Senior Financial Officers is
available on Orrstown Bank's website at http://www.orrstown.com.
All other information required by Item 10 is incorporated by reference from
Orrstown Financial Services, Inc.'s definitive proxy statement for the 20032005
Annual Meeting of Shareholders filed pursuant to Regulation 14A.
Item 11. Executive Compensation
The information required by Item 11 is incorporated by reference from
Orrstown Financial Services, Inc.'s definitive proxy statement for the 20032005
Annual Meeting of Shareholders filed pursuant to Regulation 14A.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Equity Compensation Plan Information
Plan Category Number of securities to Weighted-average Number of
be issued upon exercise exercise price of securities
of outstanding options outstanding options remaining available
for future issuance
Number of securities to be Weighted-average exercise under equity
compensation plans
issued upon exercise of price of outstanding (excluding
securities
reflected in
outstanding options options column
(a))
(a) (b) (c)
Equity compensation 178,260 $ 26.42 234,854
plan approved by
security holders
56,280Equity compensation 23,516 $ 39.62 153,720
Equity compensation21.65 42,094
plan not approved by
security holders (1)
7,903--------- ------- ---------
Total 201,776 $ 38.20 23,340
------25.87 276,948
--------- ------- -------
Total 64,183 $ 39.44 177,060
====== ======= =======---------
(1)(3) Non-Employee Director Stock Option Plan of 2000. On January 27, 2000,
the Board of Directors of the Corporation approved the Orrstown Financial
Services, Inc. Non-Employee Director Stock Option Plan of 2000. The
Directors' Option Plan is a formula plan under which options to purchase
shares of the Corporation's Common Stock are granted each year to
directors in office on April 1. The number of options granted each
year is based on the Corporation's return on average equity for the
most recent fiscal year. All options have a term of 10 years from the
regular grant date, are fully exercisable from the regular grant date,
and have an exercise price equal to the "fairfair market value"value of the
Corporation's Common Stock as of the date of the grant of the option. As longoption
based upon criteria as shares ofoutlined in the Corporation's Common Stock
are traded over-the-counter and quotations for the shares appear on the
National Association of Securities Dealers, Inc.'s OTC Bulletin Board
service, "fair market value" will mean the average of the average of the
daily high bid and low offer quotation for shares of the Corporation's
Common Stock reported through the OTC Bulletin Board Service for the 10
trading days immediately preceding the date of the grant of the option. If
no bid or no offer quotations are available during the 10 day pricing
period, then "fair market value" will mean the price of the last trade
reported for the shares through the OTC Bulletin Board service.plan. If a director "retires",
whether as a result of reaching mandatory retirement age, or under
any other circumstances, the Board of Directors, in its discretion,
may determine to constitute retirement, the options previously granted
to the director will expire at their scheduled expiration date. If a
director's service as a director terminates for any other reason,
the options previously granted to the director will expire six months
after the date of termination of service unless scheduled to expire sooner.
All other information required by Item 12 is incorporated by reference from
Orrstown Financial Services, Inc.'s definitive proxy statement for the 20032005
Annual Meeting of Shareholders filed pursuant to Regulation 14A.
-19-
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by reference from
Orrstown Financial Services, Inc.'s definitive proxy statement for the 20032005
Annual Meeting of Shareholders filed pursuant to Regulation 14A.
Item 14. ControlsPrincipal Accountant Fees and ProceduresServices
The Corporation's Chief Executive Officer and Chiefinformation required by Item 14 is incorporated by reference from
Orrstown Financial Officer
have evaluatedServices, Inc.'s definitive proxy statement for the effectiveness2005
Annual Meeting of the Corporation's disclosure controls and
procedures (as such term is defined in Rules 13a-14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90
days priorShareholders filed pursuant to the filing date of this annual report (the "Evaluation Date").
Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, the Corporation's disclosure controls and procedures are
effective in alerting them on a timely basis to material information relating to
the Corporation (including its consolidated subsidiaries) required to be
included in the Corporation's periodic filings under the Exchange Act.
CHANGES IN INTERNAL CONTROLS
Since the Evaluation Date, there have not been any significant changes
in the Corporation's internal controls or in other factors that could
significantly affect such controls.
-20-
Regulation 14A.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports of Form 8-K.
(a) The following documents are filed as part of this report:
(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, 2002,2004, are incorporated by reference in Item 8:
Consolidated balance sheets - December 31, 20022004 and 20012003
Consolidated statements of income - Years ended December 31, 2002, 2001,2004,
2003, and 20002002
Consolidated statements of shareholders' equity - Years ended December
31, 2002, 2001,2004, 2003, and 20002002
Consolidated statements of cash flows - Years ended December 31, 2002, 2001,2004,
2003, and 20002002
Notes to consolidated financial statements - December 31, 20022004
(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 (99.1) Certification pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit (99.2) Certification pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. All other exhibits for which
provision is made in the applicable accounting regulations
of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and
therefore have been omitted.
(b) Reports on Form 8-K filed
None.
-21-
(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.
(3)(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-K10-
K for the year ended December 31, 1999
(10.4) Director retirement plan - incorporated by reference to
the registrant's Form 10-K for the year ended December 31, 1999
(10.5) Revenue neutral retirement plan - incorporated by
reference to the registrant's Form 10-K for the year ended
December 31, 1999
(10.6) Non-employee director stock option plan of 2000 -
incorporated by reference to the registrant's registration
statement on Form S-8 dated April 11, 2000
(10.7) Employee stock option plan of 2000 - incorporated by
reference to the registrant's registration statement on Form S-8
dated March 31, 2000
(13) Annual report to security holders - filed herewith
(14) Code of Ethics Policy for Senior Financial Officers -
Incorporated by reference under Item 10 of this annual report
(21) Subsidiaries of the registrant - filed herewith
(23.1) Consent of independent auditors - filed herewith
(99.1)(31.1) Rule 13a - 14(a)/15d-14(a) Certification of Chief(Chief
Executive Officer pursuant to
18 U.S.C.Officer) - Filed herewith.
(31.2) Rule 13a - 14(a)/15d-14(a) Certifications (Chief
Financial Officer) - Filed herewith.
(32.1) Section 1350 as adopted pursuant toCertifications (Chief Executive Officer) -
Filed herewith.
(32.1) Section 9061350 Certifications (Chief Financial Officer) -
Filed herewith.
All other exhibits for which provision is made in the applicable accounting
regulations of the Sarbanes-Oxley ActSecurities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
(b) The registrant filed the following reports on Form 8-K during the calendar
year ended December 31, 2004:
Report filed January 2, 2004
Registrant announced a 2-for-1 Stock Split payable February 10, 2004.
Report filed July 15, 2004
Registrant announced purchase of 2002an investment management business.
Report filed July 22, 2004
Registrant announced its earnings for the period ended June 30, 2004
Report filed October 25, 2004
Registrant announced its earnings for the period ended September 30, 2004
(c) Exhibits - The exhibits required to be filed herewith.
(99.2) Certificationas part of Chief Financial Officer pursuant to
18 U.S.C. Section 1350this report are
submitted as adopted pursuant to Section
906a separate section of the Sarbanes-Oxley Act of 2002 - filed
herewith.this report.
(d) Financial statement schedules - None -22-
required.
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, 200310, 2005 (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, 2003
- ----------------------------- Director10, 2005
Kenneth R. Shoemaker Director
/s/ Anthony F. Ceddia Director March 25, 2003
- -----------------------------10, 2005
Dr. Anthony F. Ceddia
/s/ Glenn W. Snoke Director March 25, 2003
- -----------------------------10, 2005
Glenn W. Snoke
/s/ Gregory A. Rosenberry Director March 25, 2003
- -----------------------------10, 2005
Gregory A. Rosenberry
/s/ Joel R. Zullinger Chairman of the March 25, 2003
- -----------------------------10, 2005
Joel R. Zullinger Board and Director
Joel R. Zullinger
/s/ Jeffrey W. Coy Vice Chairman March 25, 2003
- -----------------------------10, 2005
Jeffrey W. Coy of the Board
Jeffrey W. Coy
and Director
/s/ John S. Ward Director March 25, 2003
- -----------------------------10, 2005
John S. Ward
/s/ Denver L. Tuckey Secretary and March 25, 2003
- ----------------------------- Director10, 2005
Denver L. Tuckey Director
/s/ Andrea Pugh Director March 25, 2003
- -----------------------------10, 2005
Andrea Pugh
-23-
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
1. Orrstown Bank, Orrstown, Pennsylvania; a state-chartered bank organized
under Pennsylvania Banking Code of 1965.
2. Pennbanks Insurance Company Cell P1 is a reinsurer of credit, life and
disability insurance, which services customers of Orrstown Bank.
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Orrstown Financial Services, Inc.
We consent to the incorporation by reference in to previously filed
Registration Statements (Form S-4 No. 33-18888, Form S-3 No. 333-53405, Form S-8
No. 333-33714, Form S-8 No. 333-34504, and Form S-8 No. 333-33712) of Orrstown
Financial Services, Inc. of our report dated February 11, 2005, appearing in the
2004 annual report to shareholders incorporated by reference in this Form 10-K
of Orrstown Financial Services, Inc. for the year ended December 31, 2004.
/S/ SMITH ELLIOTT KEARNS & COMPANY, LLC
--------------------------------------------------
SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, Pennsylvania
March 10, 2005
Exhibit 31.1
CERTIFICATION
I, Kenneth R. Shoemaker, President and CEO, certify, that:
1. I have reviewed this annual report on Form 10-K of Orrstown Financial
Services, Inc.;
2. Based on my knowledge, the annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-1413a-15(e) and 15d-14)15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act rules 13a-15(f) and 15d-15(f)) for the
registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
(b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures, based on our
evaluation as of the Evaluation Date.end of the
period covered by this annual report based on such evaluation; and
(d) disclosed in this annual report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors:directors
(or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or
operation of the internal controlscontrol over financial reporting which couldare reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls;information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls.
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 25, 2003control over
financial reporting.
By: /s/ Kenneth R. Shoemaker
----------------------------
Kenneth R. Shoemaker
President and ChiefCEO
(Principal Executive Officer,
Director
-24-
Officer)
March 10, 2005
Exhibit 31.2
CERTIFICATION
I, Bradley S. Everly, Sr. Vice President and CFO, certify, that:
1. I have reviewed this annual report on Form 10-K of Orrstown Financial
Services, Inc.;
2. Based on my knowledge, the annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-1413a-15(e) and 15d-14)15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act rules 13a-15(f) and 15d-15(f)) for the
registrant and we have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
(b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures, based on our
evaluation as of the Evaluation Date.end of the
period covered by this annual report based on such evaluation; and
(d) disclosed in this annual report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors:directors
(or persons performing the equivalent function):
(a) all significant deficiencies and material weaknesses in the design or
operation of the internal controlscontrol over financial reporting which couldare reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial data and
have identified for the registrant's auditors any material weaknesses
in internal controls;information; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls.
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: March 25, 2003control over
financial reporting.
By: /s/ Bradley S. Everly
--------------------------Bradley S. Everly
Sr. Vice President and CFO
(Principal Financial Officer)
March 10, 2005
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Orrstown Financial Services, Inc.
(the Corporation) on Form 10-K for the period ending December 31, 2004 as filed
with the Securities and Exchange Commission on the date therein specified (the
"Report"), I, Kenneth R. Shoemaker, President and Chief Executive Officer of the
Corporation, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Corporation as of and for the period covered by the report.
/s/ Kenneth R. Shoemaker
Kenneth R. Shoemaker
President and Chief Executive Officer
Dated: March 10, 2005
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Orrstown Financial Services, Inc.
(the Corporation) on Form 10-K for the period ending December 31, 2004 as filed
with the Securities and Exchange Commission on the date therein specified (the
"Report"), I, Bradley S. Everly, Senior Vice President and Chief Financial
Officer -25-of the Corporation, certify, pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Corporation as of and for the period covered by the report.
/s/ Bradley S. Everly
Bradley S. Everly
Senor Vice President and
Chief Financial Officer
Dated: March 10, 2005