SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 Commission file number: 33-18888 ORRSTOWN FINANCIAL SERVICES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Pennsylvania 23-2530374 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 77 East King Street, P. O. Box 250, Shippensburg, Pennsylvania 17257 ----------------------------------------------------------------------- (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 December 31, 1999, 2,218,291 shares of the registrant's common stock were outstanding. The aggregate market value of such shares held by nonaffiliates on that date was $ 88,731,640. DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual shareholders report for the year ended December 31, 1999 are incorporated by reference into Parts I and II. Portions of the Proxy Statement for 2000 Annual Meeting of Security Holders are incorporated by reference in Part III of this Form 10-K. ORRSTOWN FINANCIAL SERVICES, INC. FORM 10-K INDEX Page ---- Part I Item 1. Business ............................................................................ 2 Item 2. Properties .......................................................................... 7 Item 3. Legal Proceedings ................................................................... 8 Item 4. Submission of Matters to a Vote of Security Holders ................................. 8 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ............... 10 Item 6. Selected Financial Data ............................................................. 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................................................... 10 Item 8. Financial Statements and Supplementary Data ......................................... 10 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .............................................................. 19 Part III Item 10. Directors and Executive Officers of the Registrant .................................. 19 Item 11. Executive Compensation .............................................................. 19 Item 12. Security Ownership of Certain Beneficial Owners and Management ...................... 19 Item 13. Certain Relationships and Related Transactions ...................................... 19 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .................... 19 Signatures ..................................................................................... 21 Part I Item 1. Business. History and Business Orrstown Financial Services, Inc. (OFS) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Orrstown Financial Services, Inc. was organized on November 17, 1987, under the laws of the Commonwealth of Pennsylvania for the purpose of acquiring Orrstown Bank ("Orrstown"), Shippensburg, Pennsylvania, and such other banks and bank related activities as are permitted by law and desirable. On March 8, 1988, Orrstown Financial Services, Inc. acquired 100% ownership of Orrstown, issuing 131,455 shares of Orrstown Financial Services, Inc.'s common stock to the former Orrstown shareholders. Orrstown Financial Services, Inc.'s primary activity consists of owning and supervising its subsidiary, Orrstown Bank, which is engaged in providing banking and bank related services in South Central Pennsylvania, principally Franklin and Cumberland Counties, where its eight branches are located in Shippensburg (2), Carlisle (2), Spring Run, Orrstown, and Chambersburg (2), Pennsylvania. The day-to-day management of Orrstown Bank is conducted by the subsidiary's officers. Orrstown Financial Services, Inc. derives a majority of its current income from Orrstown. Orrstown Financial Services, Inc. has no employees other than its six officers who are also employees of Orrstown, its subsidiary. On December 31, 1999, Orrstown had 84 full-time and 48 part-time employees. Business of Orrstown Orrstown was organized as a state-chartered bank in 1987 as part of an agreement and plan of merger between Orrstown Financial Services, Inc. and Orrstown Bank, the predecessor of Orrstown, under which Orrstown became a wholly-owned subsidiary of Orrstown Financial Services, Inc. As indicated, Orrstown is the successor to Orrstown Bank which was originally organized in 1919. Orrstown is engaged in commercial banking and trust business as authorized by the Pennsylvania Banking Code of 1965. This involves accepting demand, time and savings deposits and granting loans. The Bank grants agribusiness, commercial and residential loans to customers in South Central Pennsylvania, principally Franklin and Cumberland Counties. The concentrations of credit by type of loan are set forth on the face of the balance sheet (page 2 of the annual report to shareholders). The Bank maintains a diversified loan portfolio and evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon the extension of credit, is based on management's credit evaluation of the customer and collateral standards established in the Bank's lending policies and procedures. All secured loans are supported with appraisals of collateral. Business equipment and machinery, inventories, accounts receivable, and farm equipment are considered appropriate security, provided they meet acceptable standards for liquidity and marketability. -2- Loans secured by equipment and/or other nonreal estate collateral normally do not exceed 70% of appraised value or cost, whichever is lower. Loans secured by real estate do not exceed 80% of the appraised value of the property which is the maximum loan to collateral value established in the Bank's lending policy. Loan to collateral values are monitored as part of the loan review, and appraisals are updated as deemed appropriate in the circumstances. Administration and supervision over the lending process is provided by the Bank's Credit Administration Department via loan reviews. The loan review process is continuous, commencing with the approval of a loan. Each new loan is reviewed by the Credit Administration Department for compliance with banking regulations and lending policy requirements for documentation, collateral standards, and approvals. The Credit Administration Department continues to monitor and evaluate loan customers utilizing risk-rating criteria established in the lending policy in order to spot deteriorating trends and detect conditions which might indicate potential problem loans. Reports of the results of the loan reviews are submitted quarterly to the Directors' Credit Administration Committee for approval and provide the basis for evaluating the adequacy of the allowance for loan losses. Through its trust department, Orrstown renders services as trustee, executor, administrator, guardian, managing agent, custodian, investment advisor and other fiduciary activities authorized by law. As of December 31, 1999, Orrstown had total assets of approximately $ 265 million, total shareholders' equity of approximately $ 22 million and total deposits of approximately $ 204 million. Regulation and Supervision Orrstown Financial Services (OFS) is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (BHC Act), and is registered as such with the Board of Governors of the Federal Reserve System (FRB). OFS is subject to examination by the FRB and is restricted in its acquisitions, certain of which are prohibited and certain of which are subject to approval by the FRB. Under the BHC Act, a bank holding company is, with limited exceptions, prohibited from (i) acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or (ii) engaging in any activity other than managing or controlling banks. With the prior approval of the FRB, however, a bank holding company may own shares of a company engaged in activities which the FRB determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In addition, federal law imposes certain restrictions on transactions between OFS and its subsidiary, Orrstown Bank. As an affiliate of Orrstown Bank OFS is subject, with certain exceptions, to provisions of federal law imposing limitations on, and requiring collateral for, extensions of credit by Orrstown Bank to its affiliates. The operations of Orrstown are subject to federal and state statutes applicable to banks chartered under the banking laws of the United States, and to banks whose deposits are insured by the Federal Deposit Insurance Corporation. Bank operations are also subject to regulations of the Pennsylvania Department of Banking, the Federal Reserve Board and the Federal Deposit Insurance Corporation. -3- The primary supervisory authority of Orrstown is the Pennsylvania Department of Banking, who regularly examines such areas as reserves, loans, investments, management practices and other aspects of bank operations. These examinations are designed primarily for the protection of the Bank depositors. Federal and state banking laws and regulations govern, among other things, the scope of a bank's business, the investments a bank may make, the reserves against deposits a bank must maintain, the loans a bank makes and collateral it takes, the maximum interest rates a bank may pay on deposits, the activities of a bank with respect to mergers and consolidations, and the establishment of branches, and management practices and other aspects of banking operations. See Note 14 of the Notes to Financial Statements for a discussion of the limitations on the availability of Orrstown Financial Services' subsidiary's undistributed earnings for the payment of dividends due to such regulation and other reasons. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) provides that a financial institution insured by the Federal Deposit Insurance Corporation (FDIC) sharing common ownership with a failed institution can be required to indemnify the FDIC for its losses resulting from the insolvency of the failed institution, even if such indemnification causes the affiliated institution also to become insolvent. OFS currently has only one subsidiary and as a result has not been significantly affected by the aforementioned provisions of FIRREA. Regulatory authorities have issued guidelines that establish risk-based capital and leverage standards. These capital requirements of bank regulators, are discussed on page 12 of the annual report to shareholders under "Capital Adequacy and Regulatory Matters". Failure to meet applicable capital guidelines could subject a bank to a variety of enforcement remedies available to the regulatory authorities. Depending upon circumstances, the regulatory agencies may require an institution to develop a "capital plan" to increase its capital to levels established by the agency. In 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted. FDICIA contains provisions limiting activities and business methods of depository institutions. FDICIA requires the primary federal banking regulators to promulgate regulations setting forth standards relating to, among other things, internal controls and audit systems; credit underwriting and loan documentation; interest rate exposure and other off-balance sheet assets and liabilities; and compensation of directors and officers. FDICIA provides for expanded regulation of depository institutions and their affiliates, including parent holding companies, by such institutions' primary federal banking regulator. Each primary federal banking regulator is required to specify, by regulation, capital standards for measuring the capital adequacy of the depository institutions it supervises and, depending upon the extent to which a depository institution does not meet such capital adequacy measures, the primary federal banking regulator may prohibit such institution from paying dividends or may require such institution to take other steps to become adequately capitalized. -4- FDICIA establishes five capital tiers, ranging from "well capitalized", to "critically undercapitalized". A depository institution is well capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure. Under FDICIA, an institution that is not well capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market; in addition, "pass through" insurance coverage may not be available for certain employee benefit accounts. FDICIA also requires an undercapitalized depository institution to submit an acceptable capital restoration plan to the appropriate federal bank regulatory agency. One requisite element of such a plan is that the institution's parent holding company must guarantee compliance by the institution with the plan, subject to certain limitations. In the event of the parent holding company's bankruptcy, the guarantee, and any other commitments that the parent holding company has made to federal bank regulators to maintain the capital of its depository institution subsidiaries, would be assumed by the bankruptcy trustee and entitled to priority in payment. Based on their respective regulatory capital ratios at December 31, 1999, the corporation is considered well capitalized, based on the definitions in the regulations issued by the Federal Reserve Board and the other federal bank regulatory agencies setting forth the general capital requirements mandated by FDICIA. See "Capital Adequacy and Regulatory Matters" in management's discussion and analysis in the corporation's annual report as shown in Exhibit 13. A federal depositor preference statute was enacted in 1993 providing that deposits and certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded a priority over other general claims against such an institution, including federal funds and letters of credit, in the "liquidation or other resolution" of such an institution by any receiver. On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act of 1999, federal legislation intended to modernize the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial services providers. As a result of the legislation, bank holding companies will be permitted to engage in a wider variety of financial activities than permitted under prior law, particularly with regard to insurance and securities activities. Moreover, to the extent that it permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This could result in a growing number of larger financial institutions that offer a wider variety of financial services than we currently offer and that can aggressively compete in the markets we serve. This could adversely impact our profitability. In addition, a bank holding company, which does not qualify or does not elect to become a financial holding company under the Gramm-Leach-Bliley Act, is generally prohibited from engaging in, or acquiring direct or indirect control of any company engaged in nonbanking activities, except for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking as to be a proper incident thereto are set forth in Federal Reserve Board Regulation Y. -5- Bank holding companies that do qualify as a financial holding company may engage in activities that are of a financial nature or incidental thereto. This will include activities such as securities and insurance underwriting which are not permitted nonbanking activities under Regulation Y. A bank holding company may qualify to become a financial holding company if each of its depository institution subsidiaries is "well capitalized", "well managed", has at least a "satisfactory" CRA rating in its most recent examination and the bank holding company has filed a certification with the Federal Reserve Bank that it elects to become a financial holding company. The earnings of Orrstown Bank, and therefore the earnings of Orrstown Financial Services, are affected by general economic conditions, management policies, and the legislative and governmental actions of various regulatory authorities including the FRB, the FDIC and the Pennsylvania Department of Banking. In addition to banking and securities laws, regulations and regulatory agencies, the Corporation also is subject to various other laws, regulations and regulatory agencies. Furthermore, various proposals, bills and regulations have been and are being considered in the United States Congress, and various other governmental regulatory and legislative bodies, which could result in changes in the profitability and governance of the Corporation. It cannot be predicted whether new legislation or regulations will be adopted and, if so, how they would affect the Corporation. References under the caption "Supervision and Regulation" to applicable statutes, regulations and orders are brief summaries of portions thereof which do not purport to be complete and which are qualified in their entirety by reference thereto. Important Factors Relating to Forward Looking Statements The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. In connection with certain statements made in this report and those that may be made in the future by or on behalf of the Corporation which are identified as forward-looking statements, the Corporation notes that the following important factors, among others, could cause actual results to differ materially from those set forth in any such forward-looking statements. Further, such forward-looking statements speak only as of the date on which such statement or statements are made, and the Corporation undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. The business and profitability of a financial services organization such as the Corporation is influenced by prevailing economic conditions and governmental policies. The actions and policy directives of the Federal Reserve Board determine to a significant degree the cost and the availability of funds obtained from money market sources for lending and investing. Federal Reserve Board policies and regulations also influence, directly and indirectly, the rates of interest paid by commercial banks on their interest-bearing deposits and may also impact the value of financial instruments held by the Corporation. The nature and -6- impact on the Corporation of future changes in economic and market conditions and monetary and fiscal policies are not predictable and are beyond the Corporation's control. In addition, these conditions and policies can impact the Corporation's customers and counterparties which may increase the risk of default on their obligations to the Corporation and its affiliates. They can also affect the competitive conditions in the markets and products within which the Corporation operates, which can have an adverse impact on the Corporation's ability to maintain its revenue streams. As part of its ongoing business, the Corporation assumes financial exposures to interest rates, currencies, equities and other financial products. In doing so, the Corporation is subject to unforeseen events which may not have been anticipated or which may have effects which exceed those assumed within its risk management processes. This risk can be accentuated by volatility and reduction in liquidity in those markets which in turn can impact the Corporation's ability to hedge and trade the positions concerned. In addition, the Corporation is dependent on its ability to access the financial markets for its funding needs. As noted in "Supervision and Regulation", the Corporation is regulated by and subject to various regulators. The actions of these regulators can have an impact on the profitability and governance of the Corporation. Increases by regulatory authorities of minimum capital, reserve, deposit insurance and other financial viability requirements can also affect the Corporation's profitability. The Corporation is subject to operational and control risk which is the potential for loss caused by a breakdown in communication, information, processing and settlement systems or processes or a lack of compliance with the procedures on which they rely either within the Corporation or within the broader financial systems infrastructure. As with any financial institution, the Corporation is also subject to the risk of litigation and to an unexpected or adverse outcome in such litigation. Competitive pressures in the marketplace and unfavorable or adverse publicity and news coverage can have the effect of lessening customer demand for the Corporation's services. Ultimately, the Corporation's businesses and their success are dependent on the Corporation's ability to attract and retain high quality employees. Competition Orrstown's principal market area consists of Franklin County and Cumberland County, Pennsylvania. It services a substantial number of depositors in this market area, with the greatest concentration within a radius of Chambersburg, Shippensburg and Carlisle, Pennsylvania. Orrstown, like other depository institutions, has been subjected to competition from less heavily regulated entities such as brokerage firms, money market funds, consumer finance and credit card companies and other commercial banks, many of which are larger than Orrstown Bank. Orrstown Bank is generally competitive with all competing financial institutions in its service area with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans. Item 2. Properties. Orrstown Bank owns buildings in Orrstown, Pennsylvania, Shippensburg, Pennsylvania (3), Carlisle, Pennsylvania, Spring Run, Pennsylvania and Chambersburg, Pennsylvania. Offices of the bank are located in each of these buildings. One of the offices located in Shippensburg is an "Operations Center" which -7- does not operate as a branch, but rather as an accounting office. The corporation is in the process of expanding its main offices located on King Street in Shippensburg, PA and has acquired property in Mechanicsburg, PA to be the site of its ninth branch. Both projects are expected to be completed in 2000. The bank also owns a property adjacent to the Orrstown office which it intends to hold for future expansion purposes. Item 3. Legal Proceedings. Orrstown Financial Services, Inc. is an occasional party to legal actions arising in the ordinary course of its business. In the opinion of Orrstown Financial Services, Inc.'s management, Orrstown Financial Services, Inc. has adequate legal defenses and/or insurance coverage respecting any and each of these actions and does not believe that they will materially affect Orrstown Financial Services, Inc.'s operations or financial position. Item 4. Submission of Matters to Vote of Security Holders. None Executive Officers of Registrant The following table sets forth selected information about the principal officers of the holding company, each of whom is elected by the Board of Directors and each of whom holds office at the discretion of the Board. -8- Age Held Bank Employee as of Name/Office Held Since Since 3/15/00 ---------------- ----- ----- ------- Joel R. Zullinger, Chairman of the Board 1991 (1) 51 Jeffrey W. Coy, Vice Chairman of The board 1988 (1) 48 Kenneth R. Shoemaker, President & CEO 1987 1986 52 Bradley S. Everly, Senior Vice President Chief Financial Officer 1997 1997 48 Stephen C. Oldt, Executive Vice President, Chief Operating Officer 1987 1987 57 Philip E. Fague, Senior Vice President, Senior Trust Officer 1990 1988 40 Denver L. Tuckey, Secretary 1999 (1) 65 Benjamin Stoops, Vice President, Senior Operations Officer 1998 1998 48 Jeffrey W. Embly, Vice President Senior Loan Officer 1999 1997 29 (1) These officers are not employees of the Bank. Senior Operating Officers of the Bank Age Held Bank Employee as of Name/Office Held Since Since 3/15/00 ---------------- ----- ----- ------- Kenneth R. Shoemaker, President & Chief Executive Officer 1987 1988 52 Stephen C. Oldt, Executive Vice President & Chief Operating Officer 1987 1987 57 Philip E. Fague, Vice President/ 1990/ Senior Trust Officer 1993 1988 40 Bradley S. Everly, Senior Vice 1997/ President/Chief Financial Officer 1997 1997 48 Benjamin Stoops, Vice President, Senior Operations Officer 1998 1998 48 Jeffrey W. Embly, Vice President, Senior Loan Officer 1999 1997 29 -9- Part II Item 5. Market for Registrant's Common Stock and Related Security Holder Matters. Orrstown Financial Services, Inc.'s common stock is not traded on a national securities exchange, but is traded through the local and over the counter local markets. At December 31, 1999, the approximate number of shareholders of record was approximately 1,848. The price ranges for Orrstown Financial Services, Inc. common stock set forth below are the approximate bid prices obtained from brokers who make a market in the stock. Market Cash Market Cash Price Dividend Price Dividend ------------------ --------- -------------------- -------- Dividend (1) 1998 1997 --------------------------------- --------------------------------- High Low High Low First Quarter $ 32.56 $ 25.58 $ .121 $ 22.33 $ 20.93 $ .107 Second Quarter 37.21 25.12 .121 24.19 20.59 .107 Third Quarter 37.21 32.56 .130 27.91 24.19 .112 Fourth Quarter 40.0 32.56 .140 29.77 25.58 .112 - ---------- (1) Note: All per share data has been restated after giving retroactive recognition to a 7-1/2% stock dividend paid November 19, 1999 and a 2 for 1 stock split effective November 21, 1998. See Note 14 to the financial statements for restrictions on the payment of dividends. Item 6. Selected Financial Data. The selected five-year financial data on page 20 of the annual shareholders' report for the year ended December 31, 1999 is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's discussion and analysis of financial condition and results of operations, on pages 14 through 18 of the annual shareholders' report are incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. The financial statements and supplementary data, some of which is required under Guide 3 (statistical disclosures by bank holding companies) are shown on pages 2 through 20 of the annual shareholders report for the year ended December 31, 1999 and are incorporated herein by reference. Certain statistical information required in addition to those included in the annual shareholders report are submitted herewith as follows. Description of Statistical Information Page -------------------------------------- ---- Changes in net interest income tax equivalent yields 11 Investment portfolio 12 Loan portfolio 13 Summary of loan loss experience 14 Nonaccrual, delinquent and impaired loans 15 Allocation of allowances for loan losses 16 Deposits and return on equity and assets 17 Consolidated summary of operations 18 -10- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY CHANGES IN NET INTEREST INCOME TAX EQUIVALENT YIELDS 1999 Versus 1998 1998 Versus 1997 Increase (Decrease) Increase (Decrease) Due to Change in Due to Change in ------------------------------------ -------------------------------- Total Total ------------------------------------ -------------------------------- Average Average Increase Average Average Increase Volume Rate (Decrease) Volume Rate (Decrease) ------ ---- --------- ------ ---- ---------- (000 omitted) Interest Income Loans (net of unearned discounts) $ 2,280 ($ 469) $ 1,811 $ 2,429 ($ 252) $ 2,177 Taxable investment securities 456 7 463 390 (80) 310 Nontaxable investment securities (3) (3) (6) 170 (17) 153 Other short-term investments 7 (27) (20) 131 (17) 114 ------- -------- ------- ------- ------ ------- Total interest income 2,740 (492) 2,248 3,120 (366) 2,754 ------- -------- ------- ------- ------ ------- Interest Expense Interest bearing demand 486 (113) 373 503 156 659 Savings deposits (15) (82) (97) (35) (16) (51) Time deposits 75 (312) (237) 344 32 376 Short-term borrowings 263 (29) 234 221 (29) 192 Long-term borrowings 501 (48) 453 379 (29) 350 ------- ------- ------- ------- ------- ------- Total interest expense 1,310 (584) 726 1,412 114 1,526 ------- ------- ------- ------- ------ ------- Net interest income $ 1,522 $ 1,228 ======= ======= Changes which are attributed in part to volume and in part to rate are allocated in proportion to their relationships to the amounts of changes. -11- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY The following table shows the maturities of investment securities at book value as of December 31, 1999, and weighted average yields of such securities. Yields are shown on a tax equivalent basis, assuming a 34% federal income tax rate. After 1 year After 5 years Within but within but within After 1 year 5 years 10 years 10 years Total ------ ------- -------- -------- ----- (000 omitted) Bonds: U.S. Treasury Book value $ 2,999 $ 3,549 $ 0 $ 0 $ 6,548 Yield 6.31% 6.37% 0% 0% 6.35% U.S. Government agencies Book value 0 9,500 12,960 1,982 24,442 Yield 0% 6.15% 6.84% 6.72% 6.56% State and municipal Book value 0 1,139 500 15,359 16,998 Yield 0% 9.98% 10.0% 8.67% 8.76% Total book value $ 2,999 $ 14,188 $ 13,460 $ 17,341 $47,988 ======= ======== ======== ======== ======= Yield 6.31% 6.51% 6.96% 8.45% 7.31% ====== ====== ====== ======= ======= Mortgage-backed securities: Total book value $12,603 ======= Yield 6.97% ======= Equity Securities: Total book value $ 739 ======= Yield 3.87% ======= Total Investment Securities $61,330 ======= Yield 7.20% ======= -12- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY LOAN PORTFOLIO The following table presents the loan portfolio at the end of each of the last five years: 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (000 omitted) Commercial, financial and agricultural $ 21,503 $ 18,732 $ 10,275 $ 8,401 $ 8,211 Real estate - Construction 15,580 11,182 5,961 4,304 5,706 Real estate - Mortgage 134,046 116,030 97,074 82,687 75,731 Installment and other personal loans (net of unearned discount) 9,562 12,688 15,021 13,534 13,209 --------- --------- --------- --------- --------- Total loans $ 180,691 $ 158,632 $ 128,331 $ 108,926 $ 102,857 ========= ========= ========= ========= ========= Presented below are the approximate maturities of the loan portfolio (excluding real estate mortgages, installments and credit cards) at December 31, 1999: Under One One to Over Five Year Five Years Years Total ---- ---------- ----- ----- (000 omitted) Commercial, financial and agricultural $ 3,407 $ 4,087 $ 14,009 $ 21,503 Real estate - Construction 2,159 2,585 10,836 15,580 ------- ------- -------- -------- Total $ 5,566 $ 6,672 $ 24,845 $ 37,083 ======= ======= ======== ======== The following table presents the approximate amount of fixed rate loans and variable rate loans due as of December 31, 1999: Fixed Rate Variable Loans Rate Loans ----- ---------- (000 omitted) Due within one year $ 1,932 $ 63,710 Due after one but within five years 32,602 27,806 Due after five years 54,162 479 -------- -------- Total $ 88,696 $ 91,995 ======== ======== -13- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY SUMMARY OF LOAN LOSS EXPERIENCE Years Ended December 31 -------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (000 omitted) Average total loans outstanding (net of unearned income) $ 169,458 $ 144,013 $ 117,403 $ 105,779 $ 97,662 ========= ========= ========= ========= ======== Allowance for loan losses, beginning of period $ 1,971 $ 1,767 $ 1,620 $ 1,433 $ 1,200 Additions to provision for loan losses charged to operations 547 270 215 240 270 Loans charged off during the year Commercial 97 15 1 20 0 Personal credit lines 7 23 32 17 3 Installment 24 46 50 31 48 --------- --------- --------- ---------- -------- Total charge-off's 128 84 83 68 51 --------- --------- --------- --------- -------- Recoveries of loans previously charged off: Commercial 59 3 2 3 0 Installment 1 10 12 12 14 Personal credit lines 5 5 1 0 0 --------- --------- ---------- --------- ---------- Total recoveries 65 18 15 15 14 --------- --------- --------- --------- -------- Net loans charged off (recovered) 63 66 68 53 37 --------- --------- --------- --------- -------- Allowance for loan losses, end of period $ 2,455 $ 1,971 $ 1,767 $ 1,620 $ 1,433 ========= ========= ========= ========= ========= Ratio of net loans charged off to average loans outstanding .04% .06% .06% .05% .04% ========= ========= ========= ========= ========== The provision is based on an evaluation of the adequacy of the allowance for possible loan losses. The evaluation includes, but is not limited to, review of net loan losses for the year, the present and prospective financial condition of the borrowers and evaluation of current and projected economic conditions. -14- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY LOANS The following table sets forth the outstanding balances of those loans on a nonaccrual status and those on accrual status which are contractually past due as to principal or interest payments for 30 days or more at December 31. 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (000 omitted) Nonaccrual loans $ 0 $ 486 $ 473 $ 14 $ 132 ========== ======== ======== ======== ======== Accrual loans: Restructured $ 0 $ 0 $ 0 $ 0 $ 0 30 through 89 days past due 3,420 823 2,398 1,976 1,949 90 days or more past due 97 284 657 203 417 ---------- -------- -------- -------- -------- Total accrual loans $ 3,517 $ 1,107 $ 3,055 $ 2,179 $ 2,366 ========== ======== ======== ======== ======== See Note 7 of the notes to consolidated financial statements for details of income recognized and foregone revenue on nonaccrual loans for the past three years, and discussion concerning impaired loans at December 31, 1999. -15- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY The following is an allocation by loan categories of the allowance for loan losses at December 31 for the last five years. In retrospect the specific allocation in any particular category may prove excessive or inadequate and consequently may be reallocated in the future to reflect the then current conditions. Accordingly, the entire allowance is available to absorb losses in any category: Years Ended December 31 --------------------------------------------------------------------- 1999 1998 ---------------------------- ------------------------------- Percentage Percentage Allowance of Loans to Allowance of Loans to Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- (000 omitted) Commercial, financial and agricultural $ 45 11.90% $ 255 9.93% Commercial, real estate secured 609 18.03 416 19.43 Real estate - Construction 0 8.62 0 7.05 Real estate - Mortgage 93 56.16 111 53.77 Installment 27 5.29 34 9.82 Unallocated 1,681 0.00 1,155 0.00 ------- ------ ------- ------ Total $ 2,455 100.00% $ 1,971 100.00% ======= ====== ======= ====== Years Ended December 31 --------------------------------------------------------------------- 1999 1998 ---------------------------- ------------------------------- Percentage Percentage Allowance of Loans to Allowance of Loans to Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- (000 omitted) Commercial, financial and agricultural $ 31 8.00% $ 125 7.71% Commercial - Real estate secured 354 35.00 0 0.00 Real estate - Construction 0 4.64 64 3.95 Real estate - Mortgage 188 40.64 1,229 75.91 Installment 12 11.72 202 12.43 Unallocated 1,182 0.00 0 0.00 ------- ------ ------- ------ Total $ 1,767 100.00% $ 1,620 100.00% ======= ====== ======= ====== Year Ended December 31 1995 ------------------------------ Percentage Allowance of Loans to Amount Total Loans ------ ----------- (000 omitted) Commercial, financial and agricultural $ 114 7.98% Commercial - Real estate secured 0 0.00 Real estate - Construction 80 5.55 Real estate - Mortgage 1,055 73.63 Installment 184 12.84 Unallocated 0 0.00 ------- ------ Total $ 1,433 100.00% ======= ====== -16- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY DEPOSITS The average amounts of deposits are summarized below: Years Ended December 31 ------------------------------------------------------ 1999 1998 1997 ---- ---- ---- (000 omitted) Demand deposits $ 25,365 $ 20,433 $ 17,665 Interest bearing demand deposits 71,176 55,454 37,535 Savings deposits 22,888 23,394 24,568 Time deposits 75,859 74,488 68,161 --------- --------- --------- Total deposits $ 195,288 $ 173,769 $ 147,929 ========= ========= ========= The following is a breakdown of maturities of time deposits of $ 100,000 or more as of December 31, 1999: Maturity (000 omitted) -------- ------------- Certificates of Deposit Three months or less $ 3,858 Over three months through twelve months 2,245 Over one year through three years 4,349 Over three years 403 -------- $ 10,855 RETURN ON EQUITY AND ASSETS (APPLYING DAILY AVERAGE BALANCES) The following table presents a summary of significant earnings and capital ratios: (dollar amounts in thousands) 1999 1998 1997 ---- ---- ---- Average assets $ 250,529 $ 212,149 $ 172,366 Net income $ 3,755 $ 3,119 $ 2,606 Average equity $ 22,067 $ 19,523 $ 16,956 Cash dividends paid $ 1,134 $ 986 $ 903 Return on assets 1.50% 1.47% 1.51% Return on equity 17.02% 15.97% 15.37% Dividend payout ratio 30.20% 31.61% 34.65% Equity to asset ratio 8.81% 9.2% 9.84% -17- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY CONSOLIDATED SUMMARY OF OPERATIONS Years Ended December 31 --------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (000 omitted) Interest income $ 18,324 $ 16,109 $ 13,450 $ 12,018 $ 10,829 Interest expense 8,074 7,348 5,822 5,139 4,542 -------- -------- -------- -------- -------- Net interest income 10,250 8,761 7,628 6,879 6,287 Provision for loan losses 547 270 215 240 270 -------- -------- -------- -------- -------- Net interest income after provision for loan losses 9,703 8,491 7,413 6,639 6,017 Other income: Trust and brokerage services 1,230 818 490 384 297 Service charges - Deposits 779 646 601 477 375 Other service charges, collection and exchange, charges, commission fees 844 667 341 258 218 Other operating income (loss) 728 122 119 121 45 -------- -------- -------- -------- -------- Total other income 3,581 2,253 1,551 1,240 935 -------- -------- -------- -------- -------- Income before operating expense 13,284 10,744 8,964 7,879 6,952 Operating expenses: Salaries and employees benefits 4,297 3,491 2,901 2,621 2,326 Occupancy and equipment expense 1,099 859 764 665 559 Other operating expenses 2,822 2,095 1,719 1,507 1,371 -------- -------- -------- -------- -------- Total operating expenses 8,218 6,445 5,384 4,793 4,256 -------- -------- -------- -------- -------- Income before income taxes 5,066 4,299 3,580 3,086 2,696 Income tax 1,311 1,180 974 838 742 -------- -------- -------- -------- -------- Net income applicable to common stock $ 3,755 $ 3,119 $ 2,606 $ 2,248 $ 1,954 ======== ======== ======== ======== ======== Per share data: Earnings per common share $ 1.70 $ 1.41 $ 1.18 $ 1.02 $ .88 Cash dividend - Common $ .51 $ .45 $ .41 $ .32 $ .27 Weighted average number of common shares 2,214,951 2,205,718 2,204,444 2,205,268 2,206,560 -18- Item 9. Disagreements on Accounting and Financial Disclosures. Not applicable. PART III The information required by Items 10, 11, 12 and 13 is incorporated by reference from Orrstown Financial Services, Inc.'s definitive proxy statement for the 2000 Annual Meeting of Shareholders filed pursuant to Regulation 14A. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports of Form 8-K. (a) (1) - List of Financial Statements The following consolidated financial statements of Orrstown Financial Services, Inc. and its subsidiary, included in the annual report of the registrant to its shareholders for the year ended December 31, 1999, are incorporated by reference in Item 8: Consolidated balance sheets - December 31, 1999 and 1998 Consolidated statements of income - Years ended December 31, 1999, 1998 and 1997 Consolidated statements of shareholders' equity - Years ended December 31, 1999, 1998, and 1997 Consolidated statements of cash flows - Years ended December 31, 1999, 1998, and 1997 Notes to consolidated financial statements - December 31, 1999 (2) List of Financial Statement Schedules All financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (3) Listing of Exhibits Exhibit (3) (i) Articles of incorporation Exhibit (3) (ii) Bylaws Exhibit (4) Instruments defining the rights of security holders including indentures Exhibit (10) Material contracts Exhibit (13) Annual report to security holders Exhibit (21) Subsidiaries of the registrant Exhibit (23) Consent of independent auditors Exhibit (27) Financial data schedule All other exhibits for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. -19- (b) Reports on Form 8-K filed None. (c) Exhibits (3)(i) Articles of incorporation. Incorporated by reference to Exhibit 3(i) of the registrant's Form 10-K filed March 26, 1999 for the year ended December 31, 1998. (ii) By-laws. Incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-4, Registration No. 33-18888. (4) Instruments defining the rights of security holders including indentures. The rights of the holders of Registrant's common stock are contained in: (i) Articles of Incorporation of Orrstown Financial Services, Inc., incorporated by reference to Exhibit 3(i) of the registrant's Form 10-K filed March 26, 1999 for the year ended December 31, 1998. (ii) By-laws of Orrstown Financial Services, Inc., incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-18888). (10.1) Change in control agreement between Orrstown Financial Services, Inc. and its chief executive officer. Incorporated by reference to Exhibit 99 of the registrant's Form 10-K filed March 17, 1997 for the year ended December 31, 1996. (10.2) Salary continuation plan for selected officers - filed herewith (10.3) Officer group term replacement plan for selected officers - filed herewith (10.4) Director retirement plan - filed herewith (10.5) Revenue neutral retirement plan - filed herewith (13) Annual report to security holders - filed herewith (21) Subsidiaries of the registrant - filed herewith (23.1) Consent of independent auditors filed herewith (27) Financial data schedule - filed herewith (d) Financial statement schedules None -20- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ORRSTOWN FINANCIAL SERVICES, INC. --------------------------------- (Registrant) By /s/ Kenneth R. Shoemaker ----------------------------- Kenneth R. Shoemaker, President Dated: March 15, 2000 (Duly authorized officer) By /s/ Bradley S. Everly ----------------------------- Bradley S. Everly, Chief Financial Officer (Principal Accounting Officer) Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ Kenneth R. Shoemaker President, CEO and March 15, 2000 - ------------------------------------- Director Kenneth R. Shoemaker /s/ Anthony F. Ceddia Director March 15, 2000 - ------------------------------------- Dr. Anthony F. Ceddia /s/ Glenn W. Snoke Director March 15, 2000 - ------------------------------------- Glenn W. Snoke /s/ Gregory A. Rosenberry Director March 15, 2000 - ------------------------------------- Gregory A. Rosenberry /s/ Joel R. Zullinger Chairman of the March 15, 2000 - ------------------------------------- Board and Director Joel R. Zullinger /s/ Jeffrey W. Coy Vice Chairman March 15, 2000 - ------------------------------------- of the Board Jeffrey W. Coy and Director /s/ John S. Ward Director March 15, 2000 - ------------------------------------- John S. Ward /s/ Denver L. Tuckey - ------------------------------------- Secretary and March 15, 2000 Denver L. Tuckey Director /s/ Andrea Pugh - ------------------------------------- Director March 15, 2000 Andrea Pugh -21-