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, 1998
Commission file number: 33-18888
ORRSTOWN FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2530374
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
77 East King Street
P. O. Box 250, Shippensburg, Pennsylvania 17257
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (717) 532-6114
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, No Par Value The Common Stock is not
registered on any
exchange.
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X
No
As of February 28, 1999, 2,057,799 shares of the
registrant's common stock were outstanding. The aggregate
market value of such shares held by nonaffiliates on that
date was $ 72,022,965.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year
ended December 31, 1998 are incorporated by reference into
Parts I and II. Portions of the Proxy Statement for 1998
Annual Meeting of Security Holders are incorporated by
reference in Part III of this Form 10-K.
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Item 1. Business.
History and Business
Orrstown Financial Services, Inc. (OFS) is a bank holding
company registered under the Bank Holding Company Act of 1956, as
amended. Orrstown Financial Services, Inc. was organized on November
17, 1987, under the laws of the Commonwealth of Pennsylvania for the
purpose of acquiring Orrstown Bank ("Orrstown"), Shippensburg,
Pennsylvania, and such other banks and bank related activities as are
permitted by law and desirable. On March 8, 1988, Orrstown Financial
Services, Inc. acquired 100% ownership of Orrstown, issuing 131,455
shares of Orrstown Financial Services, Inc.'s common stock to the
former Orrstown shareholders.
Orrstown Financial Services, Inc.'s primary activity
consists of owning and supervising its subsidiary, Orrstown Bank, which
is engaged in providing banking and bank related services in South
Central Pennsylvania, principally Franklin and Cumberland Counties,
where its seven branches are located in Shippensburg (2), Carlisle (2),
Spring Run, Orrstown, and Chambersburg, Pennsylvania. The day-to-day
management of Orrstown Bank is conducted by the subsidiary's officers.
Orrstown Financial Services, Inc. derives a majority of its current
income from Orrstown.
Orrstown Financial Services, Inc. has no employees other
than its six officers who are also employees of Orrstown, its
subsidiary. On December 31, 1998, Orrstown had 76 full-time and 36
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.
- -2-
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 5 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.
Loans secured by equipment and/or other nonreal estate
collateral normally do not exceed 70% of appraised value or cost,
whichever is lower. Loans secured by real estate do not exceed 80% of
the appraised value of the property which is the maximum loan to
collateral value established in the Bank's lending policy. Loan to
collateral values are monitored as part of the loan review, and
appraisals are updated as deemed appropriate in the circumstances.
Administration and supervision over the lending process is
provided by the Bank's Credit Administration Department via loan
reviews. The loan review process is continuous, commencing with the
approval of a loan. Each new loan is reviewed by the Credit
Administration Department for compliance with banking regulations and
lending policy requirements for documentation, collateral standards,
and approvals.
The Credit Administration Department continues to monitor
and evaluate loan customers utilizing risk-rating criteria established
in the lending policy in order to spot deteriorating trends and detect
conditions which might indicate potential problem loans.
- -3-
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, 1998, Orrstown had total assets of
approximately $ 236 million, total shareholders' equity of
approximately $ 21 million and total deposits of approximately $ 184
million.
Regulation and Supervision
Orrstown Financial Services (OFS) is a bank holding company
within the meaning of the Bank Holding Company Act of 1956 (BHC Act),
and is registered as such with the Board of Governors of the Federal
Reserve System (FRB). OFS is subject to examination by the FRB and is
restricted in its acquisitions, certain of which are prohibited and
certain of which are subject to approval by the FRB.
Under the BHC Act, a bank holding company is, with limited
exceptions, prohibited from (i) acquiring direct or indirect ownership
or control of more than 5% of the voting shares of any company which is
not a bank or (ii) engaging in any activity other than managing or
controlling banks. With the prior approval of the FRB, however, a bank
holding company may own shares of a company engaged in activities which
the FRB determines to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In addition,
federal law imposes certain restrictions on transactions between OFS
and its subsidiary, Orrstown Bank. As an affiliate of Orrstown Bank
OFS is subject, with certain exceptions, to provisions of federal law
imposing limitations on, and requiring collateral for, extensions of
credit by Orrstown Bank to its affiliates.
- -4-
The operations of Orrstown are subject to federal and state
statutes applicable to banks chartered under the banking laws of the
United States, and to banks whose deposits are insured by the Federal
Deposit Insurance Corporation. Bank operations are also subject to
regulations of the Pennsylvania Department of Banking, the Federal
Reserve Board and the Federal Deposit Insurance Corporation.
The primary supervisory authority of Orrstown is the
Pennsylvania Department of Banking, who regularly examines such areas
as reserves, loans, investments, management practices and other aspects
of bank operations. These examinations are designed primarily for the
protection of the Bank depositors.
Federal and state banking laws and regulations govern,
among other things, the scope of a bank's business, the investments a
bank may make, the reserves against deposits a bank must maintain, the
loans a bank makes and collateral it takes, the maximum interest rates
a bank may pay on deposits, the activities of a bank with respect to
mergers and consolidations, and the establishment of branches, and
management practices and other aspects of banking operations. See Note
14 of the Notes to Financial Statements for a discussion of the
limitations on the availability of Orrstown Financial Services'
subsidiary's undistributed earnings for the payment of dividends due to
such regulation and other reasons.
The Financial Institutions Reform, Recovery and Enforcement
Act of 1989 (FIRREA) provides that a financial institution insured by
the Federal Deposit Insurance Corporation (FDIC) sharing common
ownership with a failed institution can be required to indemnify the
FDIC for its losses resulting from the insolvency of the failed
institution, even if such indemnification causes the affiliated
institution also to become insolvent. OFS currently has only one
subsidiary and as a result has not been significantly affected by the
aforementioned provisions of FIRREA.
- -5-
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,
- -6-
the primary federal banking regulator may prohibit such institution
from paying dividends or may require such institution to take other
steps to become adequately capitalized.
The earnings of Orrstown Bank, and therefore the earnings
of Orrstown Financial Services, are affected by general economic
conditions, management policies, and the legislative and governmental
actions of various regulatory authorities including the FRB, the FDIC
and the Pennsylvania Department of Banking. In addition, there are
numerous governmental requirements and regulations that affect the
activities of Orrstown Financial Services.
Competition
Orrstown's principal market area consists of 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 Shippensburg and Carlisle,
Pennsylvania.
Orrstown, like other depository institutions, has been
subjected to competition from less heavily regulated entities such as
brokerage firms, money market funds, consumer finance and credit card
companies and other commercial banks, many of which are larger than
Orrstown Bank. Orrstown Bank is generally competitive with all
competing financial institutions in its service area with respect to
interest rates paid on time and savings deposits, service charges on
deposit accounts and interest rates charged on loans.
Item 2. Properties.
Orrstown Bank owns buildings in Orrstown, Pennsylvania,
Shippensburg, Pennsylvania (3), Carlisle, Pennsylvania, Spring Run,
Pennsylvania and Chambersburg, Pennsylvania. Offices of the bank are
located in each of these buildings. One of the offices located in
Shippensburg is an "Operations Center" which does not operate as a
branch, but rather as an accounting office. The bank also
- -7-
owns properties adjacent to the Orrstown and downtown Shippensburg
offices which it intends to hold for future expansion purposes.
Item 3. Legal Proceedings.
Orrstown Financial Services, Inc. is an occasional party to
legal actions arising in the ordinary course of its business. In the
opinion of Orrstown Financial Services, Inc.'s management, Orrstown
Financial Services, Inc. has adequate legal defenses and/or insurance
coverage respecting any and each of these actions and does not believe
that they will materially affect Orrstown Financial Services, Inc.'s
operations or financial position.
Item 4. Submission of Matters to Vote of Security Holders.
None
Executive Officers of Registrant
The following table sets forth selected information about
the principal officers of the holding company, each of whom is elected
by the Board of Directors and each of whom holds office at the
discretion of the Board.
Age
Held Bank Employee as of
Name/Office Held Since Since 3/15/99
Joel R. Zullinger, Chairman
of the Board 1991 (1) 50
Jeffrey W. Coy, Vice Chairman of
The board 1988 (1) 47
Kenneth R. Shoemaker, President & CEO 1987 1986 51
Bradley S. Everly, Senior Vice President
Senior Loan Officer 1997 1997 47
Stephen C. Oldt, Executive
Vice President, Chief Operating
Officer 1987 1987 56
Philip E. Fague, Vice President,
Senior Trust Officer 1990 1988 39
Robert T. Henry, Secretary 1988 (1) 70
Benjamin Stoops, Vice President, Senior
Operations Officer 1998 1998 47
(1) Mr. Henry, Mr. Zullinger and Mr. Coy are not employees
of the Bank.
- -8-
Senior Operating Officers of the Bank
Held Bank Employee Age
Name/Office Held Since Since as of
3/15/99
Kenneth R. Shoemaker, President &
Chief Executive Officer 1987 1988 51
Stephen C. Oldt, Executive Vice
President & Chief Operating
Officer 1987 1987 56
Philip E. Fague, Vice President/ 1990/
Senior Trust Officer 1993 1988 39
Bradley S. Everly, Senior Vice 1997/
President/Senior Loan Officer 1997 1997 47
Benjamin Stoops, Vice President,
Senior Operations Officer 1998 1998 47
Part II
Item 5. Market for Registrant's Common Stock and Related Security
Holder Matters.
Orrstown Financial Services, Inc.'s common stock is not
traded on a national securities exchange, but is traded inactively
through the local and over the counter local markets. At December 31,
1998, the approximate number of shareholders of record was
approximately
1,666. The price ranges for Orrstown Financial Services, Inc. common
stock set forth below are the approximate bid prices obtained from
brokers who make a market in the stock.
Market Cash Market Cash
Price Dividend Price Dividend
Dividend (1) 1998 1997
High Low High Low
First Quarter $ 24.00 $ 22.50 $ .115 $ 17.15 $ 16.19 $ .09
Second Quarter 26.00 22.13 .115 20.00 17.15 .095
Third Quarter 30.00 26.00 .12 21.00 20.00 .10
Fourth Quarter 32.00 27.50 .13 22.50 21.00 .155
(1) Note: Cash dividends per share have been restated after
giving retroactive recognition to a 2 for 1 stock split effective
November 21, 1998 and 5% stock dividend paid May 15, 1997.
See Note 14 to the financial statements for restrictions on
the payment of dividends.
- -9-
Item 6. Selected Financial Data.
The selected five-year financial data on page 22 of the
annual shareholders' report for the year ended December 31, 1998 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 17 through 22 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 5 through 22 of the annual
shareholders report for the year ended December 31, 1998 and are
incorporated herein by reference. Additional schedules required in
addition to those included in the annual shareholders report are
submitted herewith.
- -10-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CHANGES IN NET INTEREST INCOME TAX EQUIVALENT YIELDS
1998 Versus 1997
Increase (Decrease)
Due to Change in
Total
Average Average Increase
Volume Rate (Decrease)
(000 omitted)
Interest Income
Loans (net of unearned discounts) $ 2,429 ($ 252) $ 2,177
Taxable investment securities 390 ( 80) 310
Nontaxable investment securities 170 ( 17) 153
Other short-term investments 131 ( 17) 114
Total interest income 3,120 ( 366) 2,754
Interest Expense
Interest bearing demand 503 156 659
Savings deposits ( 35) ( 16) ( 51)
Time deposits 344 32 376
Short-term borrowings 221 ( 29) 192
Long-term borrowings 379 ( 29) 350
Total interest expense 1,412 114 1,526
Net interest income $ 1,228
- -11-
1997 Versus 1996
Increase (Decrease)
Due to Change in
Total
Average Average Increase
Volume Rate (Decrease)
(000 omitted)
Interest Income
Loans (net of unearned discounts) $ 1,062 ($ 12) $ 1,050
Taxable investment securities 285 6 291
Nontaxable investment securities 563 ( 57) 506
Other short-term investments ( 229) 9 ( 220)
Total interest income 1,681 ( 54) 1,627
Interest Expense
Interest bearing demand 245 130 375
Savings deposits ( 41) ( 4) ( 45)
Time deposits 207 ( 23) 184
Short-term borrowings 12 0 12
Long-term borrowings 180 ( 23) 157
Total interest expense 603 80 683
Net interest income $ 944
Changes which are attributed in part to volume
and in part to rate are allocated in proportion to their
relationships to the amounts of changes.
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
The following table shows the maturities of investment
securities at book value as of December 31, 1998, and weighted
average yields of such securities. Yields are shown on a tax
equivalent basis, assuming a 34% federal income tax rate.
After 1 year After 5 years
Within but within but within After
1 year 5 years 10 years 10 years Total
(000 omitted)
Bonds:
U. S. Treasury
Book value $ 2,511 $ 5,504 $ 1,056 $ 0 $ 9,071
Yield 5.89% 6.41% 6.06% 0% 6.22%
U. S. Government
agencies
Book value 0 0 2,500 0 2,500
Yield 0% 0% 6.63% 0% 6.63%
State and municipal
Book value 0 1,139 0 16,836 17,975
Yield 0% 9.98% 0% 8.67% 8.74%
Total book
value $ 2,511 $ 6,643 $ 3,556 $ 16,836 $ 29,546
Yield 5.89% 7.02% 6.46% 8.67% 7.79%
Mortgage-backed
securities:
Total book value $ 17,306
Yield 6.52%
Equity Securities:
Total book value $ 686
Yield 3.87%
Total Investment Securities $ 47,538
Yield 7.27%
- -12-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
LOAN PORTFOLIO
The following table presents the loan portfolio at the end of
each of the last five years:
1998 1997 1996 1995 1994
(000 omitted)
Commercial, financial
and agricultural $ 18,732 $ 10,275 $ 8,401 $ 8,211 $ 6,970
Real estate -
Construction 11,182 5,961 4,304 5,706 5,038
Real estate - Mortgage 116,030 97,074 82,687 75,731 68,458
Installment and other
personal loans (net of
unearned discount) 12,688 15,021 13,534 13,209
10,373
Total loans $ 158,632 $ 128,331 $ 108,926 $ 102,857 $ 90,839
Presented below are the approximate maturities of the loan
portfolio (excluding real estate mortgages, installments and credit
cards) at December 31, 1998:
Under One One to Over Five
Year Five Years Years Total
(000 omitted)
Commercial, financial
and agricultural $ 2,968 $ 3,560 $ 12,204 $ 18,732
Real estate - Construction 1,522 1,822 7,838 11,182
Total $ 4,490 $ 5,382 $ 20,042 $ 29,914
The following table presents the approximate amount of
fixed rate loans and variable rate loans due as of December 31, 1998:
Fixed Rate Variable
Loans Rate Loans
(000 omitted)
Due within one year $ 15,292 $ 68,150
Due after one but within
five years 27,666 0
Due after five years 47,524 0
Total $ 90,482 $ 68,150
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ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31
1998 1997 1996 1995 1994
(000 omitted)
Average total loans
outstanding (net of
unearned income) $ 144,013 $ 117,403 $ 105,779 $ 97,662 $ 81,740
Allowance for loan
losses, beginning
of period $ 1,767 $ 1,620 $ 1,433 $ 1,200 $ 1,125
Additions to provision
for loan losses
charged to operations 270 215 240 270 71
Loans charged off
during the year
Commercial 15 1 20 0 0
Personal credit lines 23 32 17 3 1
Installment 46 50 31 48 7
Total charge-off's 84 83 68 51 8
Recoveries of loans
previously charged off:
Commercial 3 2 3 0 0
Installment 10 12 12 14 12
Personal credit lines 5 1 0 0 0
Total recoveries 18 15 15 14 12
Net loans charged off
(recovered) 66 68 53 37 ( 4)
Allowance for loan
losses, end of
period $ 1,971 $ 1,767 $ 1,620 $ 1,433 $ 1,200
Ratio of net loans
charged off to
average loans
outstanding .06% .06% .05% .04% 0.0%
The provision is based on an evaluation of the adequacy of the
allowance for possible loan losses. The evaluation includes, but is
not limited to, review of net loan losses for the year, the present and
prospective financial condition of the borrowers and evaluation of
current and projected economic conditions.
- -14-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
LOANS
The following table sets forth the outstanding balances of
those loans on a nonaccrual status and those on accrual status
which are contractually past due as to principal or interest
payments for 30 days or more at December 31.
1998 1997 1996 1995 1994
(000 omitted)
Nonaccrual loans $ 486 $ 473 $ 14 $ 132 $ 27
Accrual loans:
Restructured $ 0 $ 0 $ 0 $ 0 $ 0
30 through 89
days past due 823 2,398 1,976 1,949 1,553
90 days or
more past due 284 657 203 417 155
Total accrual
loans $ 1,107 $ 3,055 $ 2,179 $ 2,366 $ 1,708
See Note 7 of the notes to consolidated financial
statements for details of income recognized and foregone revenue on
nonaccrual loans for the past three years, and discussion concerning
impaired loans at December 31, 1998.
- -15-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
The following is an allocation by loan categories of the
allowance for loan losses at December 31 for the last five years. In
retrospect the specific allocation in any particular category may prove
excessive or inadequate and consequently may be reallocated in the
future to reflect the then current conditions. Accordingly, the entire
allowance is available to absorb losses in any category:
Years Ended December 31
1998 1997
Percentage Percentage
Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans
(000 omitted)
Commercial, financial
and agricultural $ 255 9.93% $ 31 8.00%
Commercial, real estate
secured 416 19.43 354 35.00
Real estate -
Construction 0 7.05 0 4.64
Real estate -
Mortgage 111 53.77 188 40.64
Installment 34 9.82 12 11.72
Unallocated 1,155 0.00 1,182 0.00
Total $ 1,971 100.00% $ 1,767 100.00%
Years Ended December 31
1996 1995
Percentage Percentage
Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans
(000 omitted)
Commercial, financial
and agricultural $ 125 7.71% $ 114 7.98%
Commercial - Real estate
secured 0 0.00 0 0.0
Real estate -
Construction 64 3.95 80 5.55
Real estate -
Mortgage 1,229 75.91 1,055 73.63
Installment 202 12.43 184 12.84
Unallocated 0 0.00 0 0.00
Total $ 1,620 100.00% $ 1,433 100.00%
- -16-
Year Ended December 31
1994
Percentage
Allowance of Loans to
Amount Total Loans
(000 omitted)
Commercial, financial
and agricultural $ 113 9.42%
Commercial - Real estate
secured 0 0.00
Real estate -
Construction 67 5.58
Real estate -
Mortgage 844 70.33
Installment 176 14.67
Unallocated 0 0.00
Total $ 1,200 100.00%
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
DEPOSITS
The average amounts of deposits are summarized below:
Years Ended December 31
1998 1997 1996
(000 omitted)
Demand deposits $ 20,433 $ 17,665 $ 16,078
Interest bearing demand
deposits 55,454 37,535 27,601
Savings deposits 23,394 24,568 26,555
Time deposits 74,488 68,161 63,767
Total deposits $ 173,769 $ 147,929 $ 134,001
The following is a breakdown of maturities of time deposits
of $ 100,000 or more as of December 31, 1998:
Maturity (000 omitted)
Certificates of Deposit
Three months or less $ 2,605
Over three months through
six months 6,178
Over six months through
twelve months 1,241
Over twelve months 200
$ 10,224
RETURN ON EQUITY AND ASSETS (APPLYING DAILY AVERAGE BALANCES)
The following table presents a summary of significant
earnings and capital ratios: (dollar amounts in thousands)
1998 1997 1996
Average assets $ 212,149 $ 172,366 $ 153,145
Net income $ 3,119 $ 2,606 $ 2,248
Average equity $ 19,523 $ 16,956 $ 15,076
Cash dividends paid $ 986 $ 903 $ 694
Return on assets 1.47% 1.51% 1.47%
Return on equity 15.97% 15.37% 14.90%
Dividend payout ratio 31.59% 34.65% 30.87%
Equity to asset ratio 9.2% 9.84% 9.8%
- -17-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED SUMMARY OF OPERATIONS
Years Ended December 31
1998 1997 1996 1995 1994
(000 omitted)
Interest income $ 16,109 $ 13,450 $ 12,018 $ 10,829 $ 8,571
Interest expense 7,348 5,822 5,139 4,542 3,241
Net interest income 8,761 7,628 6,879 6,287 5,330
Provision for loan
losses 270 215 240 270 71
Net interest
income after
provision for
loan losses 8,491 7,413 6,639 6,017 5,259
Other income:
Trust and brokerage
services 818 490 384 297 185
Service charges -
Deposits 646 601 477 375 349
Other service charges,
collection and
exchange, charges,
commission fees 667 341 258 218 180
Other operating
income (loss) 122 119 121 45 146
Total other
income 2,253 1,551 1,240 935 860
Income before
operating expense 10,744 8,964 7,879 6,952 6,119
Operating expenses:
Salaries and
employees benefits 3,491 2,901 2,621 2,326 2,115
Occupancy and
equipment expense 859 764 665 559 486
Other operating
expenses 2,095 1,719 1,507 1,371 1,363
Total operating
expenses 6,445 5,384 4,793 4,256 3,964
Income before income
taxes 4,299 3,580 3,086 2,696 2,155
Income tax 1,180 974 838 742 520
Net income
applicable to
common stock $ 3,119 $ 2,606 $ 2,248 $ 1,954 $ 1,635
Per share data:
Earnings per common
share $ 1.52 $ 1.27 $ 1.10 $ .95 $ .80
Cash dividend -
Common $ .48 $ .44 $ .34 $ .29 $ .25
Weighted average
number of common
shares 2,051,831 2,050,646 2,051,412 2,052,614 2,052,614
- -18-
Item 9. Disagreements on Accounting and Financial Disclosures.
Not applicable.
- -19-
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 1999
Annual Meeting of Shareholders filed pursuant to Regulation
14A.
- -20-
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports of Form 8-K.
(a) (1) - List of Financial Statements
The following consolidated financial statements of
Orrstown Financial Services, Inc. and its
subsidiary, included in the annual report of the
registrant to its shareholders for the year ended
December 31, 1998, are incorporated by reference
in Item 8:
Consolidated balance sheets - December 31,
1998 and 1997
Consolidated statements of income - Years
ended December 31, 1998, 1997 and 1996
Consolidated statements of stockholders'
equity - Years ended December 31, 1998, 1997,
and 1996
Consolidated statements of cash flows - Years
ended December 31, 1998, 1997, and 1996
Notes to consolidated financial statements -
December 31, 1998
(2) List of Financial Statement Schedules
Schedule I - Changes in net interest income
tax equivalent yields
Schedule II - Investment portfolio
Schedule III - Loan portfolio
- -21-
Schedule IV - Summary of loan loss experience
Schedule V - Nonaccrual, delinquent and
impaired loans
Schedule VI - Allocation of allowance for loan
losses
Schedule VII - Deposits and return on equity
and assets
Schedule VIII - Consolidated summary of
operations
All other schedules for which provision is made in
the applicable accounting regulation 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 regulation of the
Securities and Exchange Commission are not
required under the related instructions or are
inapplicable and therefore have been omitted.
- -22-
(b) Reports on Form 8-K filed
None.
(c) Exhibits
(3)(i) Articles of incorporation. Filed herewith.
(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., filed herewith.
(ii) By-laws of Orrstown Financial
Services, Inc., filed as Exhibit 3.2
to the Registrant's Registration
Statement on Form S-4 (Registration
No. 33-18888).
(10) Change in control agreement between Orrstown
Financial Services, Inc. and its chief executive
officer. Incorporated by reference to Exhibit 99
of the registrant's Form 10-K filed March 17,
1997 for the year ended December 31, 1996.
(13) Annual report to security holders - filed
herewith
- -23-
(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
The following financial statement schedules
required under Article 9 Industry Guide 3 have
been included on pages 11 to 18 under Item 8
of this report:
Schedule I - Changes in net interest income
tax equivalent yields.
Schedule II - Investment portfolio
Schedule III - Loan portfolio
Schedule IV - Summary of loan loss experience
Schedule V - Nonaccrual delinquent and
impaired loans
Schedule VI - Allocation of allowance for loan
losses
Schedule VII - Deposits and return on equity
and assets
Schedule VIII - Consolidated summary of
operations
- -24-
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 26, 1999 (Duly authorized officer)
By /s/ Robert B. Russell
Robert B. Russell, Controller
(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 and March 26 , 1999
Kenneth R. Shoemaker Director
/s/ Anthony F. Ceddia Director March 26 , 1999
Dr. Anthony F. Ceddia
/s/ Robert T. Henry Secretary and
Robert T. Henry Director March 26 , 1999
/s/ Gregory A. Rosenberry Director March 26 , 1999
Gregory A. Rosenberry
/s/ Joel R. Zullinger Chairman of the March 26 , 1999
Joel R. Zullinger Board and Director
/s/ Jeffrey W. Coy Vice Chairman March 26 , 1999
Jeffrey W. Coy of the Board
and Director
Director Deceased January
Ned R. Fogelsonger 20, 1999
/s/ Denver L. Tuckey________ Director March 26 , 1999
Denver L. Tuckey
/s/ Andrea Pugh_____________ Director March 26 , 1999
Andrea Pugh
- -25-
Exhibit 3(i)
COMMONWEALTH OF PENNSYLVANIA
DEPARTMENT OF STATE
CORPORATION BUREAU
The undersigned desiring to incorporate a business
corporation under the provisions of the Business
Corporation Law of the Commonwealth of Pennsylvania (Act of
May 5, 1933, P.L. 364, as amended) does hereby certify:
ARTICLES OF INCORPORATION:
1. The name of the Corporation is:
Orrstown Financial Services, Inc.
2. The location and post office address of its
initial registered office in the Commonwealth of
Pennsylvania is:
3580 Orrstown Road
Orrstown, Franklin County, Pennsylvania 17244
3. The purpose or purposes for which the
Corporation is incorporated are:
To have unlimited power to engage in and do any
lawful acts concerning any or all lawful business for which
corporations may be incorporated under the provisions of
the Business Corporation Law of the Commonwealth of
Pennsylvania. The Corporation is incorporated under the
provisions of the Business Corporation Law of the
Commonwealth of Pennsylvania (Act of May 5, 1933, P.L. 364,
as amended).
4. The term for which the Corporation is to exist is
perpetual.
5. The shareholders of the Corporation shall not
have the right to cumulate their shares in voting for the
election of directors.
6. (a) The aggregate number of shares which the
Corporation shall have authority to issue is:
(i) 10,000,000 shares of Common Stock with no par
value; and (*)
(ii) 500,000 shares of Preferred Stock with a par
value of $1.25 per share.
(b) The relative rights, preferences and
designations of the Preferred stock shall be as follows:
The Board of Directors may issue, in one or more
series, the shares of Preferred Stock, with full,
limited, multiple, fractional or no voting
rights, and with such designations, preferences,
qualifications, privileges, limitations,
restrictions, options, conversion rights or other
special or relative rights as shall be fixed from
time to time by resolution of the Board of
Directors.
7. A. The Board of Directors may, if it deems
advisable, recommend or oppose a tender or other offer for
the Corporation's securities, whether the offer is in cash
or in the securities of a corporation or otherwise. When
considering whether to recommend or oppose an offer, the
Board of Directors may, but is not legally obligated to,
consider any pertinent issue. By way of illustration, but
not limitation, the Board of Directors may, but shall not
be legally obligated to, consider any or all of the
following:
(1) whether the offer price is acceptable
based on the historical and present operating results or
financial condition of the Corporation;
(2) whether a more favorable price could be
obtained for the Corporation's securities in the future;
(3) the impact which an acquisition of the
Corporation would have on the employees, depositors and
customers of the Corporation and its subsidiaries and the
community which they serve;
(4) the reputation and business practices
of the offeror and its management and affiliates as they
would affect the employees, depositors and customers of the
Corporation and its subsidiaries and the future value of
the Corporation's stock;
(5) the value of the securities (if any)
which the offeror is offering in exchange for the
Corporation's securities, based on an analysis of the worth
of the Corporation as compared to the corporation or other
entity whose securities are being offered;
(6) any antitrust or other legal and
regulatory issues that are raised by the offer.
- -2-
(B) If the Board of Directors determines that an
offer should be opposed, it may take any lawful action for
that purpose, including, but not limited to, any, or all of
the following: advising shareholders not to accept the
offer; litigation against the offeror; filing complaints
with all governmental and regulatory authorities; acquiring
the Corporation's securities; selling or otherwise issuing
authorized but unissued securities or treasury stock or
granting options, warrants or rights with respect thereto;
making defensive acquisitions; and obtaining a more
favorable offer from another individual or entity.
8. Any business combination (including a plan of
merger or consolidation) or sale or transfer of all or
substantially all of the assets of the Corporation with or
to a shareholder of the Corporation who, directly or
indirectly, has voting control over 10% or more of any
class of shares of the Corporation or with or to an entity
which, directly or indirectly, is controlled by such a
shareholder, shall require the approval by the Board of
Directors of the Corporation and approval by shareholders
entitled to cast at least three-fourths of the votes which
all shareholders are entitled to cast thereon; provided,
however, if such business combination or sale or transfer
is approved by at least three-fourths of the Directors of
the Corporation, then approval by shareholders entitled to
cast a majority of the votes which all shareholders are
entitled to cast shall be sufficient.
9. If any person (including any individual,
corporation, partnership or other entity) directly or
indirectly acquires shares of the Corporation entitling
the owner to cast at least 10% of the votes which all
shareholders would be entitled to cast in the election of
Directors of the Corporation, then any business
combination (including a plan of merger or consolidation)
with such person or an entity directly or indirectly
controlled by such person shall require such person to
offer to pay the other shareholders of the Corporation at
least the highest price paid directly or indirectly by
such person for any of the shares then directly or
indirectly owned by such person. For purposes of this
provision "price" shall mean the sum of any cash and the
fair value of any other consideration paid for any of such
shares.
10. These Articles of Incorporation may be
amended by the affirmative vote of shareholders entitled
to cast at least three-fourths of the votes which all
shareholders are entitled to cast unless approved by
three-fourths of the Directors of the Corporation, in
which case approval by shareholders entitled to cast a
majority of the votes which all shareholders are entitled
to cast shall be sufficient.
- -3-
11. Section 910 of the Pennsylvania Business
Corporation Law shall not be applicable to the Corporation.
12. The name and post office address of the
incorporator and the number and class of shares subscribed
by him are:
Name Address Number & Class of
Share
Michael A. Budin, 12th Floor Packard
Esq. Bldg. One share of
Philadelphia, PA 19102 common stock
IN TESTIMONY WHEREOF, the incorporator has signed and
sealed these Articles of Incorporation this 12th day of
November, 1987.
/s/ Michael A. Budin(SEAL)
Incorporator
Filed this 17th day of November A.D. 1987
Commonwealth of Pennsylvania
Department of State
/s/ James J. Hagerty
Secretary of the Commonwealth
(*) Amended May 24, 1989 to eliminate par value as to
shares of common stock; amended May 27, 1998 to
increase number of authorized shares of common stock
from 2,000,000 shares to 10,000,000 shares.
- -4-
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
1. Orrstown Bank, Orrstown, Pennsylvania; a state-chartered
bank organized under the Pennsylvania Banking Code of 1965.
Exhibit 23.1
Independent Auditor's Consent
Board of Directors and Shareholders
Orrstown Financial Services, Inc.
We consent to the incorporation by reference in
Registration Statements (Form S-4 No. 33-18888 and Form S-3 No.
333-53405) of Orrstown Financial Services, Inc. of our report
dated January 29, 1999, appearing in this annual report on Form
10-K of Orrstown Financial Services, Inc. for the year ended
December 31, 1998.
SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, Pennsylvania
March 24, 1999