EXHIBIT 13
Orrstown Financial Services, Inc.
1999 Annual Financial Report
CONTENTS
Page
INDEPENDENT AUDITOR'S REPORT ....................................... 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets ................................................ 2
Statements of income .......................................... 3
Statements of changes in shareholders' equity ................. 4
Statements of cash flows ...................................... 5
Notes to consolidated financial statements .................... 6 - 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS .................... 14 - 19
SUMMARY OF QUARTERLY FINANCIAL DATA ................................ 19
SELECTED FIVE-YEAR FINANCIAL DATA .................................. 20
MARKET, DIVIDEND AND INVESTOR INFORMATION .......................... 21
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Orrstown Financial Services, Inc.
Orrstown, Pennsylvania
We have audited the accompanying consolidated balance sheets of Orrstown
Financial Services, Inc. and its wholly-owned subsidiary as of December 31, 1999
and 1998 and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three years ended December
31, 1999. These consolidated financial statements are the responsibility of the
corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Orrstown
Financial Services, Inc. and its wholly-owned subsidiary as of December 31, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/ Smith Elliott Kearns & Company, LLC
Chambersburg, Pennsylvania
January 31, 2000
Consolidated Balance Sheets
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
ASSETS Dec. 31, 1999 Dec. 31, 1998
(000 omitted) (000 omitted)
------------- -------------
Cash and due from banks $ 8,585 $ 7,028
Interest bearing deposits with banks 115 27
Federal funds sold 0 8,072
Securities available for sale 60,455 49,852
Federal Home Loan Bank, Federal Reserve and Atlantic Central
Bankers Bank stock, at cost which approximates market value 1,509 1,285
------------ -----------
70,664 66,264
------------ -----------
Loans
Commercial, financial and agricultural 21,503 18,732
Real estate - Mortgages 134,046 116,030
Real estate - Construction and land development 15,580 11,182
Consumer 9,562 12,688
------------ -----------
180,691 158,632
Less: Allowance for loan losses (2,455) (1,971)
------------ -----------
178,236 156,661
------------ -----------
Premises and equipment, net 6,809 5,224
Accrued interest receivable 1,599 1,235
Cash surrender value of life insurance 5,384 5,099
Other assets 2,361 1,339
------------ -----------
Total assets $ 265,053 $ 235,822
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing $ 25,264 $ 22,020
Interest bearing 179,125 161,744
------------ -----------
204,389 183,764
------------ -----------
Federal funds purchased and securities sold under agreements
to repurchase 15,406 6,234
Other borrowed funds 20,822 20,828
Accrued interest and other liabilities 2,568 3,916
------------ -----------
Total liabilities 243,185 214,742
------------ -----------
Shareholders' equity
Common stock: No par value - $ .1041 stated value per share,
10,000,000 shares authorized with 2,218,291 shares issued at
December 31, 1999; 2,055,315 shares issued at December 31, 1998 231 214
Additional paid-in capital 18,498 12,476
Retained earnings 3,717 6,863
Accumulated other comprehensive income (578) 1,527
------------ -----------
Total shareholders' equity 21,868 21,080
------------ -----------
Total liabilities and shareholders' equity $ 265,053 $ 235,822
============ ===========
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF
THESE STATEMENTS.
2
Consolidated Statements of Income
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Years Ended December 31,
-----------------------------------------------
1999 1998 1997
---- ---- ----
(000 omitted)
Interest and Dividend Income
Interest and fees on loans $ 14,613 $ 12,836 $ 10,702
Interest and dividends on investment securities
U.S. Government and agencies 2,289 1,840 1,548
Exempt from federal income tax 1,032 1,036 935
Other investment income 390 397 265
-------- -------- --------
Total interest and dividend income 18,324 16,109 13,450
-------- -------- --------
Interest Expense
Interest on deposits 6,519 6,479 5,495
Interest on borrowed money 1,555 869 327
-------- -------- --------
Total interest expense 8,074 7,348 5,822
-------- -------- --------
Net interest income 10,250 8,761 7,628
-------- -------- --------
Provision for loan losses 547 270 215
-------- -------- --------
Net interest income after provision for loan losses 9,703 8,491 7,413
-------- -------- --------
Other Income
Service charges on deposit accounts 779 646 601
Other service charges, commissions, and fees 844 667 341
Trust department income 861 656 490
Brokerage income 369 162 59
Securities gains (losses) 423 (9) 3
Other income 305 131 57
-------- -------- --------
Total other income 3,581 2,253 1,551
-------- -------- --------
Net interest income and other income 13,284 10,744 8,964
-------- -------- --------
Other Expenses
Salaries and employee benefits 4,297 3,491 2,901
Occupancy expense of bank premises, net, and furniture and
equipment expenses 1,099 859 764
FDIC insurance premiums 22 20 17
Other operating expenses 2,800 2,075 1,702
-------- -------- --------
Total other expenses 8,218 6,445 5,384
-------- -------- --------
Income before income tax 5,066 4,299 3,580
Applicable income tax 1,311 1,180 974
-------- -------- --------
Net income $ 3,755 $ 3,119 $ 2,606
======== ======== ========
Per share data
Net income $ 1.70 $ 1.41 $ 1.18
Dividends .51 .45 .41
Weighted average shares outstanding 2,214,951 2,205,718 2,204,444
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF
THESE STATEMENTS.
3
Consolidated Statements of Changes in Shareholders' Equity
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Years Ended December 31, 1999, 1998 and 1997
------------------------------------------------------------------------------
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Shareholders'
Stock Capital Earnings Income Equity
----- ------- -------- ------ ------
(000 omitted)
Balance, December 31, 1996 $ 204 $ 10,625 $ 4,786 $ 241 $ 15,856
Comprehensive income
Net income 0 0 2,606 0 2,606
Change in unrealized gain on
investment securities available
for sale, net of tax of $ 375 0 0 0 728 728
--------
Total comprehensive income 3,334
Cash dividends ($ .41 per share) 0 0 (903) 0 (903)
Stock dividends issued 10 1,727 (1,737) 0 0
Cash paid in lieu of fractional stock
dividends 0 0 (22) 0 (22)
------ -------- ------- ----- --------
Balance, December 31, 1997 214 12,352 4,730 969 18,265
Comprehensive income
Net income 0 0 3,119 0 3,119
Change in unrealized gain on
investment securities available
for sale, net of tax of $ 287 0 0 0 558 558
--------
Total comprehensive income 3,677
Cash dividends ($ .45 per share) 0 0 (986) 0 (986)
Issuance of stock through dividend
reinvestment plan 0 124 0 0 124
------ -------- ------- ----- --------
Balance, December 31, 1998 214 12,476 6,863 1,527 21,080
Comprehensive income
Net income 0 0 3,755 0 3,755
Change in unrealized (loss) on
investment securities available
for sale, net of tax of $ 1,084 0 0 0 (2,105) (2,105)
--------
Total comprehensive income 1,650
Cash dividends ($ .51 per share) 0 0 (1,134) 0 (1,134)
Stock dividends issued 16 5,720 (5,736) 0 0
Cash paid in lieu of fractional stock
dividends 0 0 (31) 0 (31)
Issuance of stock through dividend
reinvestment plan 1 302 0 0 303
------ -------- ------- ----- --------
Balance, December 31, 1999 $ 231 $ 18,498 $ 3,717 ($ 578) $ 21,868
====== ======== ======= ====== ========
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF
THESE STATEMENTS.
4
Consolidated Statements of Cash Flows
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Years Ended December 31, 1999, 1998 and 1997
----------------------------------------------
1999 1998 1997
---- ---- ----
(000 omitted)
Cash flows from operating activities:
Net income $ 3,755 $ 3,119 $ 2,606
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 528 438 364
Provision for loan losses 547 270 215
Loss on sale of other real estate owned 54 0 0
Deferred income taxes ( 103) 27 ( 7)
Securities (gains) losses ( 423) 9 ( 3)
Increase in cash surrender value of life insurance ( 285) 0 0
(Increase) decrease in accrued interest receivable ( 364) 64 ( 370)
Increase (decrease) in accrued interest payable ( 1,707) 483 480
Other net 143 ( 152) ( 59)
------- ------- -------
Net cash provided by operating activities 2,145 4,258 3,226
------- ------- -------
Cash flows from investing activities:
Net (increase) decrease in interest bearing deposits
with banks ( 88) ( 11) 1,538
Sales of available for sale securities 6,895 8,923 15
Maturities of available for sale securities 2,500 2,390 3,114
Purchases of available for sale securities (22,763) (14,120) (14,811)
Purchases of FHLB stock ( 225) ( 302) ( 49)
Net (increase) in loans (22,130) (30,367) (19,473)
Purchases of bank premises and equipment ( 2,071) ( 491) ( 1,537)
Investment in cash surrender value of life insurance 0 ( 4,816) 0
Proceeds from sale of other real estate owned 286 0 0
------- ------- -------
Net cash (used) by investing activities (37,596) (38,794) (31,203)
------- ------- -------
Cash flows from financing activities:
Net increase in deposits 20,631 23,184 23,321
Net increase in federal funds purchased
and securities sold under agreements to repurchase 9,173 5,999 235
Proceeds from debt 0 12,500 6,000
Payment on debt ( 6) ( 6) ( 5)
Cash dividends paid ( 1,134) ( 986) ( 903)
Cash paid in lieu of fractional stock dividends ( 31) 0 ( 22)
Proceeds from sale of stock 303 124 0
------- ------- -------
Net cash provided by financing activities 28,936 40,815 28,626
------- ------- -------
Net increase (decrease) in cash and cash equivalents ( 6,515) 6,279 649
Cash and cash equivalents, beginning balance 15,100 8,821 8,172
------- ------- -------
Cash and cash equivalents, ending balance $ 8,585 $15,100 $ 8,821
======= ======= =======
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest $ 9,781 $ 6,865 $ 5,343
Income taxes 1,385 1,200 974
Supplemental schedule of noncash investing and
financing activities:
Other real estate acquired in settlement of loans 0 264 0
Unrealized gain (loss) on investment securities
available for sale (net of tax effects) ( 2,105) 558 728
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF
THESE STATEMENTS.
5
Notes to Consolidated Financial Statements
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
Orrstown Financial Services, Inc.'s primary activity consists of owning and
supervising its subsidiary, Orrstown Bank, which is engaged in providing banking
and bank related services in South Central Pennsylvania, principally Franklin
and Cumberland Counties. Its eight branches are located in Shippensburg (2),
Carlisle (2), Spring Run, Orrstown, and Chambersburg (2), Pennsylvania.
Principles of consolidation
The consolidated financial statements include the accounts of the
corporation and its wholly-owned subsidiary, Orrstown Bank. All significant
intercompany transactions and accounts have been eliminated.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
While management uses available information to recognize losses on loans
and foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the
corporation's allowances for losses on loans and foreclosed real estate. Such
agencies may require the corporation to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination. Because of these factors, management's estimate of credit
losses inherent in the loan portfolio and the related allowance may change in
the near term.
Investment securities
In accordance with Statement of Financial Accounting Standards No. 115
(SFAS 115) the Corporation may segregate their investment portfolio into three
specific categories: "securities held to maturity", "trading securities" and
"securities available for sale". Securities held to maturity are to be accounted
for at their amortized cost; securities classified as trading securities are to
be accounted for at their current market value with unrealized gains and losses
on such securities included in current period earnings; and securities
classified as available for sale are to be accounted for at their current market
value with unrealized gains and losses on such securities to be excluded from
earnings and reported as a net amount in other comprehensive income.
Management determines the appropriate classification of securities at the
time of purchase. If management has the intent and the corporation has the
ability at the time of purchase to hold securities until maturity or on a
long-term basis, they are classified as securities held to maturity and carried
at amortized historical cost. Securities to be held for indefinite periods of
time and not intended to be held to maturity or on a long-term basis are
classified as available for sale and carried at fair value.
Securities held for indefinite periods of time include securities that
management intends to use as part of its asset and liability management strategy
and that may be sold in response to changes in interest rates, resultant
prepayment risk and other factors related to interest rate and resultant
prepayment risk changes.
The corporation has classified all of its investment securities as
"available for sale".
Realized gains and losses on dispositions are based on the net proceeds and
the adjusted book value of the securities sold, using the specific
identification method. Unrealized gains and losses on investment securities
available for sale are based on the difference between book value and fair value
of each security. These gains and losses are credited or charged to other
comprehensive income, whereas realized gains and losses flow through the
corporation's results of operations.
Cash flows
For purposes of the Statements of Cash Flows, the corporation has defined
cash and cash equivalents as those amounts included in the balance sheet
captions "Cash and Due From Banks" and "Federal Funds Sold". As permitted by
Statement of Financial Accounting Standards No. 104, the corporation has elected
to present the net increase or decrease in deposits in banks, loans, and
deposits in the Statements of Cash Flows.
Premises, equipment, furniture and fixtures and depreciation
Buildings, improvements, equipment, furniture and fixtures are carried at
cost less accumulated depreciation. Depreciation has been provided generally on
the straight-line method and is computed over the estimated useful lives of the
various assets as follows:
Years
-----
Buildings and improvements 10-40
Equipment, furniture and fixtures 3-15
Repairs and maintenance are charged to operations as incurred. Computer software
is amortized over 3-5 years.
Intangibles
Intangible costs are amortized on a straight-line basis over fifteen years.
Advertising
The corporation follows the policy of charging costs of advertising to
expense as incurred. Advertising expense was $ 138,000, $ 154,000, and $149,000
for 1999, 1998 and 1997, respectively.
Loans and allowance for loan losses
Loans are stated at the amount of unpaid principal, reduced by an allowance
for loan losses. Interest on loans is calculated by using the simple interest
method on daily balances of the principal amount outstanding. The allowance for
loan losses is established through a provision for loan losses charged to
expenses. Loans are charged against the allowance when management believes that
the collectibility of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb possible losses on existing loans
that may become uncollectible, based on evaluations of the collectibility of
loans and prior loan loss experience. The evaluations take into consideration
such factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current economic
conditions that may affect the borrowers' ability to pay.
6
Nonaccrual loans
The accrual of interest income on loans ceases when principal or interest
is past due 90 days or more and collateral is inadequate to cover principal and
interest or immediately if, in the opinion of management, full collection is
unlikely. Interest accrued but not collected as of the date of placement on
nonaccrual status is reversed and charged against current income unless fully
collateralized. Subsequent payments received either are applied to the
outstanding principal balance or recorded as interest income, depending on
management's assessment of the ultimate collectibility of principal. Interest
income generally is not recognized on specific impaired loans unless the
likelihood of further loss is remote. Interest payments received on such loans
are applied as a reduction of loan principal balance. Interest income on other
impaired loans is recognized only to the extent of interest payments received.
Foreclosed real estate
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold and are initially recorded at the lower of carrying value or fair
value less cost to sell of the underlying collateral. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell.
Earnings per share of common stock
Earnings per share of common stock were computed based on a weighted
average shares of common stock outstanding of 2,214,951 in 1999; 2,205,718 in
1998; and 2,204,444 in 1997 after giving retroactive recognition to a 7-1/2%
stock dividend issued in November 1999, a 2-for-1 stock split in November 1998,
and a 5% stock dividend issued in May 1997.
Federal income taxes
For financial reporting purposes the provision for loan losses charged to
operating expense is based on management's judgment, whereas for federal income
tax purposes, the amount allowable under present tax law is deducted.
Additionally, deferred compensation is charged to operating expense in the
period the liability is incurred for financial reporting purposes, whereas for
federal income tax purposes, these expenses are deducted when paid. As a result
of these and timing differences in depreciation expense, deferred income taxes
are provided in the financial statements. See Note 10 for further details.
Fair values of financial instruments
Statement of Financial Accounting Standards No. 107, Disclosures About
Fair Value of Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the corporation.
The following methods and assumptions were used by the corporation in
estimating fair values of financial instruments as disclosed herein:
Cash and Cash Equivalents. The carrying amounts of cash and short-term
instruments approximate their fair value.
Securities to be Held to Maturity and Securities Available for Sale. Fair values
for investment securities are based on quoted market prices.
Loans Receivable. For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying values.
Fair values for fixed rate loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Fair values for impaired loans are
estimated using discounted cash flow analyses or underlying collateral values,
where applicable.
Deposit Liabilities. The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable-rate, fixed-term
money market accounts and certificates of deposit approximate their fair values
at the reporting date. Fair values for fixed-rate certificates of deposits and
IRA's are estimated using a discounted cash flow calculation that applies
interest rates currently being offered to a schedule of aggregated expected
maturities on time deposits.
Short-Term Borrowings. The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings maturing
within 90 days approximate their fair values. Fair values of other short-term
borrowings are estimated using discounted cash flow analyses based on the Bank's
current incremental borrowing rates for similar types of borrowing arrangements.
Long-Term Borrowings. The fair value of the Bank's long-term debt is estimated
using a discounted cash flow analysis based on the Bank's current incremental
borrowing rate for similar types of borrowing arrangements.
Accrued Interest. The carrying amounts of accrued interest approximate their
fair values.
Off-Balance-Sheet Instruments. The Bank generally does not charge commitment
fees. Fees for standby letters of credit and their off-balance-sheet instruments
are not significant.
Comprehensive income
In 1998 the Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 130 - Reporting Comprehensive Income. Under SFAS No. 130,
comprehensive income is defined as the change in equity from transactions and
other events from nonowner sources. It includes all changes in equity except
those resulting from investments by shareholders and distributions to
shareholders. Comprehensive income includes net income and certain elements of
"other comprehensive income" such as foreign currency transactions; accounting
for futures contracts; employers accounting for pensions; and accounting for
certain investments in debt and equity securities.
The Corporation has elected to report its comprehensive income in the
statement of shareholders' equity. The only element of "other comprehensive
income" that the Corporation has is the unrealized gain or loss on available for
sale securities. The 1997 financial statements have been reclassified to reflect
these changes in reporting format.
7
The components of the change in net unrealized gains (losses) on securities
were as follows:
1999 1998 1997
---- ---- ----
(000 Omitted)
Gross unrealized holding gains (losses) arising during the year ($ 2,766) $ 836 $ 1,106
Reclassification adjustment for (gains) losses realized in
net income ( 423) 9 ( 3)
------- ----- ------
Net unrealized holding gains (losses) before taxes ( 3,189) 845 1,103
Tax effect 1,084 ( 287) ( 375)
------- ----- ------
Net change ($ 2,105) $ 558 $ 728
======= ===== ======
NOTE 2. INVESTMENTS
At December 31, 1999 and 1998 the investment securities portfolio was
comprised of securities classified as "available for sale", resulting in
investment securities being carried at fair value.
The amortized cost and fair values of investment securities available
for sale at December 31 were:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(000 omitted)
1999
----
U.S. Treasury securities and obligations of U. S. Government
corporations and agencies $ 30,990 $ 22 $ 653 $ 30,359
Obligations of states and political subdivisions 16,998 306 120 17,184
Mortgage-backed securities 12,603 0 526 12,077
Equity securities 739 156 60 835
-------- --------- ------- --------
Totals $ 61,330 $ 484 $ 1,359 $ 60,455
======== ========= ======= ========
1998
----
U.S. Treasury securities and obligations of U. S. Government
corporations and agencies $ 14,508 $ 311 $ 22 $ 14,797
Obligations of states and political subdivisions 17,975 1,087 0 19,062
Mortgage-backed securities 14,369 166 11 14,524
Equity securities 686 804 21 1,469
-------- --------- ------- --------
Totals $ 47,538 $ 2,368 $ 54 $ 49,852
======== ========= ======= ========
The amortized cost and fair values of investment securities available for
sale at December 31, 1999, by contractual maturity are shown below. Contractual
maturities will differ from expected maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Amortized
Cost Fair Value
---- ----------
(000 omitted)
Due in one year or less $ 2,999 $ 3,004
Due after one year through five years 14,188 13,896
Due after five years through ten years 13,460 13,227
Due after ten years 17,341 17,416
Mortgage-backed securities 12,603 12,077
Equity securities 739 835
-------- --------
$ 61,330 $ 60,455
======== ========
Proceeds from sales of securities available for sale during 1999, 1998 and
1997 were $ 6,895,000, $ 8,923,000 and $ 15,000, respectively. Gross gains and
losses on 1999 sales were $ 425,864 and $ 2,340, respectively. Gross gains and
losses on 1998 sales were $ 14,386 and $ 23,779, respectively. Gross gains and
losses on 1997 sales were $ 10,045 and $ 6,660, respectively.
The corporation owns $ 1,266,200 of Federal Home Loan Bank stock, $ 54,000
of Atlantic Central Bankers Bank stock and $ 189,000 of Federal Reserve Bank
stock at December 31, 1999. At December 31, 1998 the corporation's stock
ownership was $ 1,041,500 of Federal Home Loan Bank stock, $ 54,000 of Atlantic
Central Bankers Bank stock and $ 189,000 of Federal Reserve Bank stock. Market
value approximates cost since none of the stocks are actively traded.
Securities carried at $ 43,138,000 and $ 33,436,000 at December 31, 1999
and 1998, respectively, were pledged to secure public funds and for other
purposes as required or permitted by law.
NOTE 3. CONCENTRATION OF CREDIT RISK
The corporation grants agribusiness, commercial, residential and consumer
loans to customers in South Central Pennsylvania, principally Franklin and
Cumberland Counties. The concentrations of credit by type of loan are set forth
on the face of the balance sheet. The corporation 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 corporation
upon the extension of credit, is based on management's credit evaluation of the
customer. Collateral held varies but generally includes equipment and real
estate.
The corporation maintains deposit balances at several correspondent banks,
which provide check collection and item processing services to the corporation.
The balances with these correspondent banks, at times, exceed federally insured
limits, which management considers to be a normal business risk.
8
NOTE 4. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
1999 1998 1997
-------- -------- ---------
(000 omitted)
Balance at beginning of period $ 1,971 $ 1,767 $ 1,620
Recoveries 65 18 15
Provision for loan losses charged to income 547 270 215
------- ------- -------
Total 2,583 2,055 1,850
Losses 128 84 83
------- ------- -------
Balance at the end of period $ 2,455 $ 1,971 $ 1,767
======= ======= =======
NOTE 5. PREMISES AND EQUIPMENT
A summary of bank premises and equipment is as follows:
1999 1998
---- ----
(000 omitted)
Land $ 606 $ 606
Buildings and improvements 3,805 3,785
Leasehold improvements 189 173
Furniture and equipment 4,306 3,050
Construction in progress 1,002 236
------- --------
Total 9,908 7,850
Less accumulated depreciation
and amortization 3,099 2,626
------- --------
Bank premises and equipment, net $ 6,809 $ 5,224
======= ========
Depreciation expense amounted to $ 485,477 in 1999, $ 397,246 in 1998, and
$323,652 in 1997.
NOTE 6. LOANS TO RELATED PARTIES
The corporation has granted loans to the officers and directors of the
corporation and its subsidiary and to their associates. Related party loans are
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with unrelated
persons and do not involve more than normal risk of collectibility. The
aggregate dollar amount of these loans was $ 2,189,000 at December 31, 1999 and
$ 1,888,000 at December 31, 1998. During 1999, $ 781,000 of new loans were made
and repayments totaled $ 480,000. Outstanding loans to employees totaled
$810,353 and $ 1,424,000 at December 31, 1999 and 1998, respectively.
NOTE 7. NONACCRUAL LOANS
The following table shows the principal balances of nonaccrual loans as of
December 31:
1999 1998 1997
---- ---- ----
Nonaccrual loans $ 64,000 $486,000 $ 473,000
======== ======== =========
Interest income that would have been accrued
at original contract rates $ 6,608 $ 39,878 $ 30,835
Amount recognized as interest income 0 5,579 5,829
-------- -------- ---------
Foregone revenue $ 6,608 $ 34,299 $ 25,006
======== ======== =========
Impairment of loans having recorded investments of $ 404,678 at December
31, 1998 and 1997 has been recognized in accordance with Statements of Financial
Accounting Standards No. 114 and 118. The average recorded investment in
impaired loans during 1998 and 1997 was $ 404,678 and $ 405,262, respectively.
Total allowance for loan losses related to impaired loans was $ 60,702 and
$60,750 at December 31, 1998 and 1997. Interest income on impaired loans of $ 0
and $ 5,829 was recognized for cash payments received in 1998 and 1997. During
1999 foreclosure proceedings were concluded on impaired loans resulting in a
loss of $ 39,000 charged to the allowance for loan losses.
The corporation had no impairment of loans as of December 31, 1999 as
defined by Statements of Financial Accounting Standard No. 114 and 118.
NOTE 8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financial needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheets. The contract amounts of those instruments reflect the extent of
involvement the corporation has in particular classes of financial instruments.
The corporation's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
standby letters of credit and financial guarantees written is represented by the
contractual amount of those instruments. The corporation uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Contract or
Notional Amount
---------------------
1999 1998
---- ----
(000 omitted)
Financial instruments whose contract amounts represent credit risk at
December 31:
Commitments to extend credit $32,464 $36,653
Standby letters of credit and financial guarantees written 4,688 3,863
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the corporation upon extension of credit is based on
management's credit evaluation of the customer. Collateral held varies but may
include accounts receivable, inventory, real estate, equipment, and
income-producing commercial properties.
9
Standby letters of credit and financial guarantees written are conditional
commitments issued by the corporation to guarantee the performance of a customer
to a third party. Those guarantees are primarily issued to support public and
private borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loans to customers.
The corporation holds collateral supporting those commitments when deemed
necessary by management.
NOTE 9. BENEFIT PLANS
The corporation maintains a 401(k) profit-sharing plan for those employees
who meet the eligibility requirements set forth in the plan. Employer
contributions to the plan are based on corporate performance and are at the
discretion of the corporation's Board of Directors. In addition, there is a
provision for an employer match of 50 cents on the dollar for employee
contributions up to 6% of the employees' eligible compensation. Substantially
all of the corporation's employees are covered by the plan and the contributions
charged to operations were $ 439,957, $ 371,621 and $ 319,182 for 1999, 1998,
and 1997, respectively.
The corporation has a deferred compensation arrangement with certain
present and former board directors whereby a director or his beneficiaries will
receive a monthly retirement benefit at age 65. The arrangement is funded by an
amount of life insurance on the participating director calculated to meet the
corporation's obligations under the compensation agreement. The cash value of
the life insurance policies is an unrestricted asset of the corporation. The
estimated present value of future benefits to be paid, which is included in
other liabilities, amounted to $ 166,191 and $ 166,214 at December 31, 1999 and
1998, respectively. Total annual expense for this deferred compensation plan was
$ 19,064 for 1999, 1998 and 1997.
The corporation also has a supplemental discretionary deferred compensation
plan for executive officers and directors. The plan is funded annually with
salary and fee reductions which are placed in a trust account invested by the
corporation's trust department. Total amount contributed to the plan was $
42,308, $ 31,975 and $ 46,425 for 1999, 1998 and 1997, respectively.
During 1998 the corporation adopted four new supplemental retirement and
salary continuation plans for directors and executive officers. These plans are
funded with single premium life insurance on the plan participants. The cash
value of the life insurance policies is an unrestricted asset of the
corporation. The estimated present value of future benefits to be paid totaled
$196,625 and $ 41,151 at December 31, 1999 and 1998, respectively which is
included in other liabilities. Total annual expense for these plans amounted to
$155,474 and $41,151 for 1999 and 1998, respectively.
NOTE 10. INCOME TAXES
The components of federal income tax expense are summarized as follows:
1999 1998 1997
---- ---- ----
(000 omitted)
Current year provision $ 1,599 $ 1,153 $ 981
Deferred income taxes (benefits) (288) 27 (7)
------- ------- -----
Net federal income tax expense $ 1,311 $ 1,180 $ 974
======= ======= =====
Federal income taxes were computed after reducing pretax accounting income
for non-taxable income in the amount of $ 1,515,383, $ 1,154,199, and $ 969,000
for 1999, 1998, and 1997, respectively.
A reconciliation of the effective applicable income tax rate to the federal
statutory rate is as follows:
1999 1998 1997
---- ---- ----
Federal income tax rate 34.0% 34.0% 34.0%
Reduction resulting from:
Nontaxable income 8.1 6.5 6.8
----- ----- -----
Effective income tax rate 25.9% 27.5% 27.2%
===== ==== ====
Deferred tax liabilities have been provided for taxable temporary
differences related to accumulated depreciation and unrealized gains on
available for sale securities. Deferred tax assets have been provided for
deductible temporary differences related to the allowance for loan losses,
directors' deferred compensation and unrealized losses on available for sale
securities. The net deferred tax assets (liabilities) included in the
accompanying consolidated balance sheets include the following components:
1999 1998
---- -----
Total deferred tax assets $ 1,262,000 $ 723,000
Total deferred tax liabilities (275,000) (1,108,000)
----------- -----------
Net deferred tax asset (liability) $ 987,000 $ (385,000)
=========== ===========
The corporation has not recorded a valuation allowance for deferred
tax assets as they feel that it is more likely than not that they will be
ultimately realized.
NOTE 11. DEPOSITS
Included in interest bearing deposits at December 31 are NOW and Super NOW
account balances totaling $ 31,663,000 and $ 28,844,000 for 1999 and 1998,
respectively. Also included in interest bearing deposits at December 31, 1999
and 1998 are money market account balances totaling $ 45,444,000 and
$35,299,000, respectively.
At December 31, 1999 and 1998 time deposits of $ 100,000 and over
aggregated $ 10,855,000 and $ 10,224,000, respectively. Interest expense on time
deposits of $ 100,000 and over was $ 484,000; $ 572,000; and $ 497,000 for 1999,
1998 and 1997, respectively.
At December 31, 1999 the scheduled maturities of certificates of deposit
are as follows:
2000 $ 22,179
2001 35,746
2002 11,790
2003 2,588
2004 6,346
2005 and thereafter 1,932
--------
$ 80,581
========
10
The corporation accepts deposits of the officers and directors of the
corporation and its subsidiary on the same terms, including interest rates, as
those prevailing at the time for comparable transactions with unrelated persons.
The aggregate dollar amount of deposits of officers and directors totaled
$1,081,000 and $ 888,000 at December 31, 1999 and 1998, respectively.
NOTE 12. LIABILITIES FOR BORROWED MONEY
Federal funds purchased and securities sold under agreements to repurchase
generally mature within one day from the transaction date. Information
concerning securities sold under agreements to repurchase is summarized as
follows:
1999 1998
---- ----
Average balance during the year $ 8,894,000 $ 4,139,000
Average interest rate during the year 4.61% 4.81%
Maximum month-end balance during the year $ 13,683,000 $ 6,234,000
Securities underlying the agreements at year-end:
Carrying value $ 25,247,000 $ 6,182,000
Estimated fair value $ 24,909,000 $ 6,303,000
At December 31, the corporation had long-term notes outstanding with the
Federal Home Loan Bank of Pittsburgh as follows:
- - - - - - - Amount - - - - -
1999 1998 Maturity Date Interest Rate
---- ---- ------------- -------------
$ 1,000,000 $ 1,000,000 1/04 6.42%
1,000,000 1,000,000 4/03 6.58%
3,000,000 3,000,000 3/02 6.26%
3,000,000 3,000,000 10/02 5.73%
7,500,000 7,500,000 9/08 5.06%
5,000,000 5,000,000 10/08 4.66%
------------ ------------
$ 20,500,000 $ 20,500,000
============ ============
Interest rates are fixed and interest only is paid on a monthly basis. The
notes contain prepayment penalty charges, but management has no intention to pay
off early.
In addition to the aforementioned long-term notes the corporation obtained
a term loan in 1994 totaling $ 350,000 with the Federal Home Loan Bank of
Pittsburgh. The maturity dates and applicable fixed interest rates on the
remaining balance at December 31 are as follows:
- - - - - - Amount - - - - -
1999 1998 Maturity Date Rate
---- ---- ------------- ----
$ 0 $ 6,173 2/99 5.21%
6,498 6,498 2/00 5.48%
315,579 315,579 2/01 5.58%
--------- ---------
$ 322,077 $ 328,250
========= =========
In addition, the corporation has available a $ 5 million line of credit
with the Federal Home Loan Bank of Pittsburgh. Collateral for outstanding
advances and the line consists of certain securities and the corporation's 1-4
family mortgage loans totaling $ 100,207,000 at December 31, 1999. The
corporation also has available an unused line of credit with Atlantic Central
Bankers Bank of $ 6 million at December 31, 1999.
Total interest on the aforementioned borrowings charged to operations was
$1,106,695, $655,025 and $308,405 for 1999, 1998 and 1997, respectively.
NOTE 13. ORRSTOWN FINANCIAL SERVICES, INC. (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
The following are the condensed balance sheets, income statements and
statements of cash flows for the parent company:
Balance Sheets
December 31
1999 1998
---- ----
(000 omitted)
Assets
Cash $ 641 $ 109
Securities available for sale 835 1,469
Investment in Orrstown Bank 20,811 19,740
Furniture and equipment (net of depreciation) 4 2
Other assets 19 26
-------- --------
Total assets $ 22,310 $ 21,346
======== ========
Liabilities
Accrued expenses $ 409 $ 0
Deferred taxes 33 266
-------- --------
Total liabilities 442 266
======== ========
11
Shareholders' Equity
1999 1998
---- ----
(000 Omitted)
Common stock, no par value - $ .1041 stated value per share,
10,000,000 shares authorized with 2,218,291 shares issued
at December 31, 1999; 2,055,315 shares issued at December 31, 1998 $ 231 $ 214
Additional paid-in capital 18,498 12,476
Retained earnings 3,717 6,863
Accumulated other comprehensive income (578) 1,527
-------- --------
Total shareholders' equity 21,868 21,080
-------- --------
Total liabilities and shareholders' equity $ 22,310 $ 21,346
======== ========
Income Statements
Years Ended December 31
1999 1998 1997
---- ----- -----
(000 omitted)
Interest and dividend income $ 38 $ 23 $ 16
Net gain on sale of investment 421 0 10
Cash dividends from wholly-owned subsidiary 910 1,110 1,064
Equity in undistributed income of subsidiary 2,723 2,030 1,570
------- ------- -------
4,092 3,163 2,660
Less: Operating expenses and income tax 337 44 54
------- ------- -------
Net income $ 3,755 $ 3,119 $ 2,606
======= ======= =======
Statements of Cash Flows
Years Ended December 31
1999 1998 1997
---- ---- ----
(000 Omitted)
Cash flows from operating activities:
Net income $ 3,755 $ 3,119 $ 2,606
Adjustments to reconcile net income to cash
provided by operating activities:
Security (gains) (421) 0 (10)
Equity in undistributed income of subsidiary (2,723) (2,030) (1,570)
Increase (decrease) in other liabilities 409 0 (40)
(Increase) decrease in other assets 5 (26) 0
------- ------- -------
Net cash provided by operating activities 1,025 1,063 986
------- ------- -------
Cash flows from investing activities:
Purchase of available for sale securities (255) (207) (75)
Sales of available for sale securities 624 0 22
------- ------- -------
Net cash provided (used) by investing activities 369 (207) (53)
------- ------- -------
Cash flows from financing activities:
Cash dividends paid (1,134) (986) (903)
Cash paid in lieu of fractional stock dividends (31) 0 (22)
Proceeds from sale of stock 303 124 0
------- ------- -------
Net cash (used) by financing activities (862) (862) (925)
------- ------- -------
Net increase (decrease) in cash 532 (6) 8
Cash, beginning balance 109 115 107
------- ------- -------
Cash, ending balance $ 641 $ 109 $ 115
======= ======= =======
NOTE 14. REGULATORY MATTERS
Dividends paid by Orrstown Financial Services, Inc. are generally provided
from the bank's dividends to the parent company. Under provisions of the
Pennsylvania Banking Code, cash dividends may be paid from accumulated net
earnings (retained earnings) as long as minimum capital requirements are met.
The minimum capital requirements stipulate that the bank's surplus or additional
paid-in capital be equal to the amount of capital. Orrstown Bank is well above
these requirements and the balance of $ 15,153,000 in its retained earnings at
December 31, 1999 is fully available for cash dividends. Orrstown Financial
Services' balance of retained earnings at December 31, 1999 is $ 3,717,000 and
would be available for cash dividends, although payment of dividends to such
extent would not be prudent or likely. The Federal Reserve Board, which
regulates bank holding companies, establishes guidelines which indicate that
cash dividends should be covered by current period earnings.
The corporation is also subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the corporation's financial statements. Under capital
adequacy guidelines, the corporation is required to maintain minimum capital
ratios. The leverage ratio compares capital to total balance sheet assets, while
the risk-based ratios compare capital to risk-weighted assets and
off-balance-sheet activity in order to make capital levels more sensitive to
risk profiles of individual banks. A comparison of Orrstown Financial Services'
capital ratios to regulatory minimums at December 31 is as follows:
12
Orrstown Financial Services Regulatory Minimum
1999 1998 Requirements
---- ---- ------------------
Leverage ratio 8.2% 8.9% 3%
Risk-based capital ratio
Tier I (core capital) 10.5% 11.8% 4%
Combined Tier I and Tier II
(core capital plus allowance
for loan losses) 11.8% 12.9% 8%
As of December 31, 1999 the most recent notification from the Federal
Reserve Bank categorized the corporation as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the
corporation's category.
NOTE 15. LEASES
The bank leases land and building space associated with certain branch
offices, remote automated teller machines, and certain data processing equipment
under agreements which expire at various times from 2001 through 2004. Total
rent expense charged to operations in connection with these leases was
$118,342, $24,803 and $22,350 for 1999, 1998, and 1997, respectively.
The total minimum rental commitment under operating leases at December 31,
1999 is as follows:
Due in the year ending December 31:
2000 $ 186,452
2001 174,189
2002 60,480
2003 14,326
2004 11,076
NOTE 16. COMPENSATING BALANCE ARRANGEMENTS
Required deposit balance at the Federal Reserve was $ 65,000 at December
31, 1999 and 1998, respectively. Required deposit balance at Atlantic Central
Bankers Bank was $ 585,000 at December 31, 1999 and 1998. These balances are
maintained to cover processing costs and service charges. An additional $ 30,240
is on deposit with First Union National Bank of Florida as a reserve for
potential clearing losses related to the credit card operations.
NOTE 17. COMMITMENTS
The corporation has entered into contracts for the renovation of a property
acquired in 1998 that is adjacent to its downtown Shippensburg office and for
the construction of a new branch office. The total amount of the contracts is
$362,000, of which $ 107,000 remained open at December 31, 1999.
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the corporation's financial instruments were
as follows at December 31:
- - - - - 1999 - - - - - - - - - - - - 1998 - - - - -
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- --------
(000 Omitted)
FINANCIAL ASSETS
Cash and short-term investments $ 8,700 $ 8,700 $ 15,127 $ 15,127
Securities available for sale 60,455 60,455 49,852 49,852
Restricted bank stocks 1,509 1,509 1,285 1,285
Loans 180,691 158,632
Allowance for loan loses (2,455) (1,971)
--------- ---------
Net loans 178,236 177,742 156,661 157,486
Accrued interest receivable 1,599 1,599 1,235 1,235
--------- --------- --------- ---------
Total financial assets $ 250,499 $ 250,005 $ 224,160 $ 224,985
========= ========= ========= =========
FINANCIAL LIABILITIES
Deposits $ 204,389 $ 205,177 $ 183,764 $ 184,131
Short-term borrowed funds 15,406 15,406 6,234 6,234
Long-term borrowed funds 20,822 17,822 20,828 20,903
Accrued interest payable 422 422 2,129 2,129
--------- --------- --------- ---------
Total financial liabilities $ 241,039 $ 238,827 $ 212,955 $ 213,397
========= ========= ========= =========
13
Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations
The following discussion and analysis should be read in conjunction with
the selected supplementary financial information presented in this report.
Summary
For the year ended December 31, 1999, Orrstown Financial Services, Inc.
(the Corporation), and its wholly owned subsidiary, Orrstown Bank (the Bank),
recorded net income of $ 3,755,000, an increase of 20.4% over 1998 earnings of
$3,119,000, which was a 19.7% increase over net income of $2,606,000 in 1997.
Net income per share (EPS) has increased over this time period from $1.18 in
1997 to $1.41 in 1998 and $1.70 in 1999.
The Corporation's earnings performance continues to be well above peer
group averages as measured by various ratio analyses. Two widely recognized
performance indicators are the return on average assets (ROA) and the return on
average equity (ROE). The return on average assets was 1.50% in 1999, 1.47% in
1998 and 1.51% in 1997. The return on average equity has steadily increased from
15.37% in 1997, to 15.97% in 1998 and 17.02% in 1999.
Net Interest Income
Net interest income is the amount by which interest income on earning
assets exceeds interest paid on interest bearing liabilities. The amount of net
interest income is affected by changes in interest rates, account balances or
volume and the mix of earning assets and interest bearing liabilities. Net
interest income is still the primary source of commercial bank profits despite
the continued industry wide push to build noninterest income streams.
For the year ended December 31, 1999, net interest income totaled
$10,250,000, an increase of $1,489,000, or 17.0%, over 1998. The 1998 total was
$8,761,000, or 14.9%, over 1997. On a taxable equivalent basis, net interest
income increased by 16.3% in 1999 and 15.1% in 1998. Marginal tax rates used in
the taxable equivalent equation were 34% for all three years presented.
The Corporation's taxable equivalent net interest spread was 4.32% in 1997,
4.05% in 1998, and 4.14% in 1999. The net interest margin, which factors in
noninterest bearing funds sources, has moved from 5.01% to 4.70% to 4.69%,
respectively. Earning assets represented 94.1% of total assets in 1997, 93.8% in
1998 and 92.6% in 1999.
Volume factors were responsible for essentially all net interest income
growth during 1998 and 1999. On an average daily basis, assets grew 18.1% during
1999 and 23.1% during 1998. Earning assets grew 16.5% and 22.8% during 1999 and
1998, respectively. Average daily loan growth of 17.7% in 1999 and 22.7% in 1998
was achieved without lowering credit standards and allowed net interest margins
to hold at above peer group levels despite pressure on margins generally
throughout the banking industry. The net interest margin generated in 1999
declined by only one basis point from 1998 levels and remained well above peer
averages while net interest spread actually increased by nine basis points.
Continued shifting of the loan portfolio mix toward a heavier commercial loan
weighting helped maintain spreads by affording opportunities to record
noninterest bearing deposit balances along with variable loan balances tied
primarily to prime during a period that saw three 25 basis point increases in
the prime rate over the last half of the year. Management is poised to keep a
very close eye on margins moving into 2000.
14
ANALYSIS OF NET INTEREST INCOME
Average Balances and Interest Rates
Taxable Equivalent Basis
(Dollars In Thousands)
- - - - - - - 1999 - - - - - - - - - - - - 1998 - - - - - - - -
Tax Tax Tax Tax
Average Equivalent Equivalent Average Equivalent Equivalent
Balance Interest Rate Balance Interest Rate
ASSETS:
Interest Earning Assets:
Federal funds sold & interest-
bearing bank balances $ 5,834 $ 283 4.85% $ 5,706 $ 303 5.31%
-------- ------- ---- -------- ------- ----
Investment securities:
Taxable investment
securities 38,877 2,397 6.17 31,450 1,934 6.15
Tax-exempt investment
securities 17,852 1,564 8.76 17,890 1,570 8.77
-------- ------- ---- -------- ------- ----
Total investment
securities 56,729 3,961 6.98 49,340 3,504 7.10
-------- ------- ---- -------- ------- ----
Loans:
Taxable loans 166,498 14,433 8.67 142,019 12,717 8.96
Tax-exempt loans 2,960 274 9.26 1,994 179 8.97
-------- ------- ---- -------- ------- ----
Total loans 169,458 14,707 8.68 144,013 12,896 8.96
-------- ------- ---- -------- ------- ----
Total interest-
earning assets 232,021 18,951 8.17 199,059 16,703 8.39
Non-Interest Earning Assets:
Cash and due from banks 6,515 5,699
Bank premises and
equipment 14,110 5,148
Other assets 0 4,158
Less allowance for loan
losses (2,117) (1,915)
-------- --------
Total $250,529 $212,149
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest Bearing Liabilities:
Interest-bearing demand
deposits $ 71,176 $ 2,088 2.93 $ 55,454 $ 1,715 3.09
Savings deposits 22,888 580 2.53 23,394 677 2.89
Time deposits 75,859 3,850 5.08 74,488 4,087 5.49
Short term borrowings 9,713 438 4.51 4,237 204 4.81
Long term borrowings 20,560 1,118 5.44 11,726 665 5.67
-------- ------- ---- -------- ------- ----
Total interest-
bearing liabilities 200,196 8,074 4.03 169,299 7,348 4.34
Non-Interest Bearing Liabilities:
Demand deposits 25,365 20,433
Other 2,901 2,894
-------- --------
Total liabilities 228,462 192,626
Shareholders' equity 22,067 19,523
-------- --------
Total cost of funds $250,529 3.48 $212,149 3.69
======== ---- ======== ----
Net interest income/net
interest spread $10,877 4.14% $ 9,355 4.05%
======= ==== ======= ====
Net interest margin 4.69% 4.70%
==== ====
- - - - - - 1997 -- - - - - -
Tax Tax
Average Equivalent Equivalent
Balance Interest Rate
ASSETS:
Interest Earning Assets:
Federal funds sold & interest-
bearing bank balances $ 3,372 $ 189 5.60%
-------- -------
Investment securities:
Taxable investment
securities 25,360 1,624 6.40
Tax-exempt investment
securities 15,983 1,417 8.86
-------- -------
Total investment
securities 41,343 3,041 7.35
-------- ------- ----
Loans:
Taxable loans 116,811 10,669 9.13
Tax-exempt loans 592 50 8.45
-------- -------
Total loans 117,403 10,719 9.13
-------- ------- ----
Total interest-
earning assets 162,118 13,949 8.60
Non-Interest Earning Assets:
Cash and due from banks 5,008
Bank premises and
equipment 4,443
Other assets 2,486
Less allowance for loan
losses (1,689)
--------
Total $172,366
========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest Bearing Liabilities:
Interest-bearing demand
deposits $ 37,535 $ 1,056 2.81
Savings deposits 24,568 728 2.96
Time deposits 68,161 3,711 5.44
Short term borrowings 218 12 5.50
Long term borrowings 5,322 315 5.92
-------- ------- ----
Total interest-
bearing liabilities 135,804 5,822 4.28
Non-Interest Bearing Liabilities:
Demand deposits 17,665
Other 1,941
--------
Total liabilities 155,410
Shareholders' equity 16,956
--------
Total cost of funds $172,366 3.59
======== ----
Net interest income/net
interest spread $ 8,127 4.32%
======= ====
Net interest margin 5.01%
====
Noninterest Income and Expenses
Other income increased $ 1,328,000, or 59.0% during 1999 due to significant
increases in all noninterest income areas that, at least, mirrored the 18.1%
growth in the Corporation's average daily assets. Growth of 27.7% in deposit
related charges contributed $ 234,000 additional revenue. These gains arose due
to a 12.4% increase in average daily deposits plus an upgrade in various service
charge schedules. Trust and brokerage revenue grew $ 412,000, or 50.4%, as
investment management services continue to grow at a phenomenal rate as measured
by both assets under management and profitability. Securities gains increased $
432,000 due, almost solely, to one transaction. One of the companies held in the
parent's bank stock portfolio was acquired and the resultant sale of the stock
generated a large gain. Other income increased $ 175,000 due to growth in cash
surrender values of life insurance policies used to provide benefits under
various plans. Management has made a concerted effort, in recent years, to
locate new sources of noninterest income and to offer them to the customer base
profitably.
15
Other expenses rose $1,773,000, or 27.7% in 1999. With commercial bank
totals growing at a 20% plus annualized pace over the past two years and trust
department totals growing at a 30% plus annualized pace during the same period,
some growth in operating expenses is to be expected. In addition, a second
Chambersburg branch was opened during 1999 via acquisition of a $5,000,000
deposit base and the assumption of an existing leased facility located in a
Wal-Mart. Additional personnel were added to staff that branch which came under
our control in September. In addition, the robust growth has created the need
for additional operations personnel. Every major data processing system was
converted during 1999 with one-time charges exceeding $300,000 being funded
through operations. The resultant improvements in backroom efficiency and
enhancements to customer service should set the stage for improved efficiency
and ability to handle growth moving forward. Management has been able to
generate across the board improvements in operating systems while still
maintaining an efficiency ratio below 60%, an enviable number for a community
bank with less than $ 500 million of assets. The efficiency ratio increased to
58.2% for 1999, following 55.0% in 1998 and 55.2% in 1997, but the backroom
should be properly positioned to allow improvement of this ratio in 2000.
The Corporation handled the year 2000 date turnover with no incidents and
did not suffer material costs associated with that issue. The ability to focus
the attention of operations personnel totally on customers and products will be
a great relief moving forward however.
The table that follows provides additional information regarding
noninterest income and noninterest expense increases over the past three years:
ANALYSIS OF NONINTEREST INCOME AND EXPENSES
- - Year Ended December 31 - - - - - - - % Change - - - -
1999 1998 1997 1999-1998 1998-1997
(In Thousands)
Other income:
Service charges on deposit accounts $ 1,080 $ 846 $ 679 27.7% 24.6%
Loan service charges and fees 285 243 100 17.3% 143.0%
Other service charges, commissions and fees 258 224 163 15.2% 37.4%
Trust department income 862 656 490 31.4% 33.9%
Brokerage income 368 162 59 127.2% 174.6%
Securities gains (losses) 423 (9) 3 NM NM
Other operating income 305 131 57 133.6% 129.8%
------- ------- ------- ----- -----
$ 3,581 $ 2,253 $ 1,551 59.0% 45.3%
------- ------- ------- ----- ------
Other expenses:
Salaries $ 2,945 $ 2,478 $ 2,076 18.8% 19.4%
Employee benefits 1,351 1,013 825 33.4% 22.8%
Occupancy and equipment expenses 1,100 859 764 28.1% 12.4%
Data processing expenses 671 493 390 36.1% 26.4%
ATM expenses 151 113 59 33.6% 91.5%
Telephone 143 96 77 49.0% 24.7%
Printing and supplies 249 178 161 39.9% 10.6%
Postage 128 117 108 9.4% 8.3%
Directors fees 185 154 151 20.1% 2.0%
Advertising 138 154 149 (10.4)% 3.4%
Pennsylvania shares tax 171 145 132 17.9% 9.8%
Other operating expenses 986 645 492 53.0% 31.1%
------- ------- ------- ----- -----
$ 8,218 $ 6,445 $ 5,384 27.5% 19.7%
------- ------- ------- ----- -----
Noninterest income as a % of noninterest
expense 43.6% 35.0% 28.8%
Federal Income Taxes
The Corporation's effective federal income tax rate for 1999 was 25.9%, as
compared to 27.5% in 1998 and 27.2% in 1997. Corporate income tax rates for 2000
are forecast to stay near 1999 levels. The Corporation is firmly entrenched in
the 34% bracket so all taxable income will be taxed at 34% in 2000. This, along
with anticipated growth, is expected to increase the Corporation's effective
federal income tax rate to approximately 27% in 2000, assuming no retroactive
change in rates during 2000.
Asset Quality and Credit Risk Analysis
The quality of the Corporation's asset structure continues to be strong. A
substantial amount of time is devoted by management to overseeing the investment
of funds in loans and securities and the formulation of policies directed toward
the profitability and minimization of risk associated with the investments.
Credit Risk Analysis
The Bank follows generally conservative lending practices and continues to
carry a high quality loan portfolio with no unusual or undue concentrations of
credit. No loans are extended to nondomestic borrowers or governments,
consistent with past practice and policy. Net charge-offs historically have been
quite low, when compared to industry standards, and represented only .05% of
average outstanding loans during 1999 and .05% of average 1998 loans.
Nonperforming loans, as represented by nonaccrual and restructed items, were
only .04% and .31% of outstanding loans at December 31, 1999 and 1998,
respectively. Loans 90 days or more past due and still accruing represented .05%
and .18% of outstanding loans at December 31, 1999 and 1998, respectively.
Allowance for Loan Losses
Historically, the Corporation has had an enviable record regarding its
control of loan losses, but lending is a banking service that inherently
contains elements of risk. In order to assess this risk, an ongoing loan review
process continually evaluates the current financial condition of commercial
borrowers, local and national economic conditions, and the current level of
delinquencies. Through this process, an amount deemed adequate to meet current
growth and future loss expectations is charged to operations. The provision for
loan losses amounted to $ 547,000, $ 270,000 and $ 215,000 for 1999, 1998 and
1997, respectively. These provisions compared to net charge-offs of $ 63,000, $
66,000 and $ 68,000 for 1999, 1998 and 1997, respectively. The allowance for
loan losses was increased 24.6% during 1999 while loans increased 13.9%. The
reserve at December 31, 1999 represented 1.36% of loans outstanding. Net
charge-offs for 1999 represented only .04% of average loans outstanding. The
reserve at December 31, 1999 represented 39 years of coverage based upon 1999
net charge-offs and 3,836% of nonaccrual loans. In addition, approximately 68%
of the allowance was unallocated under internal evaluation procedures as of
December 31, 1999.
16
SUMMARY OF LOAN LOSS EXPERIENCE
- - - - - - - - - - - - Year Ended December 31 - - - - - - - - -
1999 1998 1997 1996 1995
--------- -------- -------- --------- --------
Amount of loans outstanding at end of period $ 180,691 $158,632 $128,331 $ 108,926 $102,857
========= ======== ======== ========= ========
Daily average loans outstanding $ 169,458 $144,013 $117,403 $ 105,779 $ 97,662
========= ======== ======== ========= =========
Balance of allowance for possible loan losses at
beginning of period $ 1,971 $ 1,767 $ 1,620 $ 1,433 $ 1,200
Loans charged off 128 84 83 68 51
Recoveries of loans previously charged off 65 18 15 15 14
--------- --------
Net loans charged off (recovered) 63 66 68 53 37
Additions to allowance charged to expense 547 270 215 240 270
--------- -------- -------- --------- --------
Balance at end of period $ 2,455 $ 1,971 $ 1,767 $ 1,620 $ 1,433
========= ======== ======== ========= ========
Ratio of net charge-offs to average loans outstanding 0.04% 0.05% 0.06% 0.05% 0.04%
========= ======== ======== ========= ========
Ratio of reserve to gross loans outstanding at December 31 1.36% 1.24% 1.38% 1.49% 1.39%
========= ======== ======== ========= ========
Risk Elements
Nonperforming assets are comprised of nonaccrual and restructured loans and
real estate owned other than bank premises (OREO). OREO represents property
acquired through foreclosure or settlements of loans and is carried at the lower
of the principal amount of the loan outstanding at the time acquired or the
estimated fair value of the property. The excess, if any, of the principal
balance at the time acquired over the carrying amount is charged against the
reserve for loan losses. The Bank's loan loss history has been much better than
peer standards and analysis of the current credit risk position is favorable.
The allowance for loan losses is adequate given the current composition of the
loan portfolio and adequately covers the credit risk management sees under
present economic conditions. Approximately 68% of the reserve balance is
unallocated under current procedures. Management is prepared to make any reserve
adjustments that may become necessary as economic conditions change.
NONPERFORMING ASSETS
- - - - - - - - - - - -December 31 - - - - - - - - - - - - -
1999 1998 1997 1996 1995
----- -------- -------- ----- -----
(In Thousands)
Loans on nonaccrual (cash) basis $ 64 $ 486 $ 473 $ 14 $ 132
Loans whose terms have been renegotiated to
provide a reduction or deferral of interest or
principal because of a deterioration in the
financial position of the borrower 0 0 0 0 0
OREO 0 311 49 49 27
----- -------- -------- ----- -----
Total nonperforming loans and OREO $ 64 $ 797 $ 522 $ 63 $ 159
===== ======== ======== ===== =====
Ratio of nonperforming assets to total loans and OREO 0.04% 0.50% 0.41% 0.06% 0.15%
==== ======== ======== ==== ====
Ratio of nonperforming assets to total assets 0.02% 0.34% 0.27% 0.04% 0.11%
==== ======== ======== ==== ====
OTHER CREDIT RISK ELEMENTS
Loans past due 90 or more days and still accruing $ 97 $ 284 $ 657 $ 203 $ 417
----- -------- -------- ----- -----
Ratio of other credit risk elements to total loans
and OREO 0.05% 0.18% 0.51% 0.19% 0.41%
==== ======== ======== ==== ====
Ratio of other credit risk elements to total assets 0.04% 0.12% 0.35% 0.13% 0.29%
==== ======== ======== ==== ====
TOTAL NONPERFORMING AND OTHER RISK ASSETS $ 161 $ 1,081 $ 1,179 $ 266 $ 576
----- ------- ------- ----- -----
Ratio of total risk assets to total loans and OREO 0.09% 0.68% 0.92% 0.24% 0.56%
==== ======== ======== ==== ====
Ratio of total risk assets to total assets 0.06% 0.46% 0.62% 0.17% 0.39%
==== ======== ======== ==== ====
Future Impact of Recently Issued Accounting Standards
In June, 1998 the Financial Accounting Standards Board (FASB) issued SFAS
No. 133 - "Accounting for Derivative Instruments and Hedging Activities"
effective for fiscal years beginning after June 15, 1999. This Statement
establishes accounting and reporting standards for derivative instruments and
hedging activities, including certain derivative instruments embedded in other
contracts, and requires that an entity recognize all derivatives as assets or
liabilities in the balance sheet and measure them at fair value. If certain
conditions are met, an entity may elect to designate a derivative as follows:
(a) a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of an unrecognized firm commitment, an available-for-sale
security, a foreign currency denominated forecasted transaction, or a net
investment in a foreign operation. The statement generally provides for matching
the timing of the recognition of the gain or loss on derivatives designated as
hedging instruments with the recognition of the changes in the fair value of the
item being hedged. Depending on the type of hedge, such recognition will be in
either net income or other comprehensive income. For a derivative not designated
as a hedging instrument, changes in fair value will be recognized in net income
in the period of change. Management is currently evaluating the impact of
adopting this Statement on the consolidated financial statements, but does not
anticipate that it will have a material impact.
Liquidity, Rate Sensitivity and Interest Rate Risk Analysis
The primary function of asset/liability management is to assure adequate
liquidity and rate sensitivity. Liquidity management involves the ability to
meet the cash flow requirements of customers who may be either depositors
wanting to withdraw funds or borrowers needing assurance that sufficient funds
will be available to meet their credit needs. Interest rate sensitivity
management requires the maintenance of an appropriate balance between interest
sensitive assets and liabilities. Interest bearing assets and liabilities that
are maturing or repricing should be adequately balanced to avoid fluctuating net
interest margins and to enhance consistent growth of net interest income through
periods of changing interest rates.
17
The Corporation has consistently followed a strategy of pricing assets and
liabilities according to prevailing market rates while largely matching
maturities, within the guidelines of sound marketing and competitive practices.
The goal is to maintain a predominantly matched position with very few planned
mismatches. Rate spreads will be sacrificed at times in order to enable the
overall rate sensitivity position to stay within the guidelines called for by
asset/liability management policy. Rate sensitivity is measured by monthly gap
analysis, quarterly rate shocks and periodic simulation. Investment and pricing
decisions are made using both liquidity and sensitivity analyses as tools. The
schedule that follows reflects the degree to which the Corporation can adjust
its various portfolios to meet interest rate changes. Additionally, the Bank is
a Federal Home Loan Bank (FHLB) member, and standard credit arrangements
available to FHLB members provide increased liquidity.
RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 1999
(Dollars in Thousands)
- - - - - - - - - - - - - - - - Interest Sensitivity Period - - - - - - - - - - - - - - - - -
After 1 After 3 After 6
Within Within 3 Within 6 Within 12 After
1 Month Months Months Months 1 Year Total
RATE SENSITIVE ASSETS (RSA):
Loans $ 49,060 $ 12,492 $ 20,411 $ 36,551 $ 62,177 $ 180,691
Investment securities 4,576 1,248 4,930 6,460 44,750 61,964
Other earning assets 115 0 0 0 0 115
----------- ------------ ------------- ------------- -------------- -------------
Total RSA 53,751 13,740 25,341 43,011 106,927 242,770
--------- -------- --------- -------- --------- ----------
RATE SENSITIVE LIABILITIES (RSL):
Interest bearing deposits 41,001 17,163 11,602 13,715 95,644 179,125
Short term borrowed funds 15,406 0 0 0 0 15,406
Long term borrowed funds 0 6,000 6 0 14,816 20,822
------------ --------- ------------ ------------ ---------- -----------
Total RSL 56,407 23,163 11,608 13,715 110,460 215,353
-------- -------- -------- -------- --------- ----------
RATE SENSITIVE GAP:
Period (2,656) (9,423) 13,733 29,296 (3,533) 27,417
Cumulative (2,656) (12,079) 1,654 30,950 27,417
GAP AS A PERCENT OF TOTAL ASSETS:
Period (1.13)% (4.00)% 5.82% 12.42%
Cumulative (1.13)% (5.12)% 0.70% 13.12%
RSA/RSL Cumulative 0.95 0.85 1.02 1.30
The liability biased, or negative, gap position during the first three
months indicates that earnings would be naturally enhanced, or more easily
maintained, in a falling rate environment. The gap position becomes asset
biased, or positive, by the sixth month. This indicates that the position is
balanced adequately to react to a rate movement in either direction without
material damage to earnings.
Capital Adequacy and Regulatory Matters
The Corporation maintains a strong capital base which provides adequate
resources to absorb both normal and unusual risks inherent to the banking
business. Internal capital generation, net income retained after the declaration
of dividends, has been the primary method employed to increase capital accounts.
Total stockholders' equity rose $ 788,000 during 1999, an increase of 3.7% for
the year. This followed growth of 15.4% and 15.2% during 1998 and 1997,
respectively. The 1999 increase was tempered by an equity writedown of $
2,105,000 attributable to the available for sale debt securities portfolio. This
writedown was due simply to the rising interest rate environment during the
second half of the year and was not attributable to portfolio quality issues.
The increasing earnings stream during this period has allowed the Corporation to
steadily increase cash dividends paid to stockholders. In 1999 cash dividends
rose $ 148,000, or 15.0% over 1998 levels while net income rose 20.4% during the
period. This followed a 9.0% increase in dividend payout for 1998 versus 1997.
The Bank enjoyed rapid asset growth during 1999 which caused a moderation in the
Corporation's dividend payout percentage for the year in order to assure an
adequate capital base to accommodate such growth in the future. Dividends per
share have moved from .41 to .45 to .51 for 1997 through 1999, respectively.
CAPITAL AND DIVIDEND RATIOS
1999 1998 1997
(Amounts in Thousands)
At December 31:
Shareholders' equity $ 21,868 $21,080 $ 18,265
Equity/assets 8.25% 8.94% 9.60%
For the Year:
Average equity/average assets 8.81% 9.20% 9.84%
Dividend payout 30.20% 31.61% 34.65%
Return on average equity 17.02% 15.97% 15.37%
Dividends paid $ 1,134 $ 986 $ 903
Regulatory
Regulatory Capital Measures: Minimums
Tier I Capital Ratio 10.5% 11.8% 12.7% 4.0%
Total (Tier II) Capital Ratio 11.8% 12.9% 14.0% 8.0%
Leverage Ratio 8.2% 8.9% 10.0% 3.0%
18
The maintenance of a strong capital base, above regulatory risk based
minimums and industry averages, has been an integral part of the Corporation's
operating philosophy. Management foresees no problem in maintaining capital
ratios in excess of regulatory requirements. Capital has been purposely
leveraged in recent years by the use of matched investment securities
transactions approximating $8 million. These transactions are generating
approximately $100,000 of annual net income while still maintaining a
comfortable capital base.
The Corporation and the Bank are subject to periodic examinations by one or
more of the various regulatory agencies. During 1999, four examinations were
conducted that included, but were not limited to, procedures designed to review
Year 2000 (Y2K) preparedness, trust operations, compliance Community
Reinvestment Act (CRA) activities. No comments were received from regulatory
bodies which, if implemented, would have a material effect on the Corporation's
liquidity, capital resources or operations.
SUMMARY OF QUARTERLY FINANCIAL DATA
The unaudited quarterly results of operations for the years ended December
31, 1999 and 1998 are as follows:
1999 1998
- - - - - - - - - Quarter Ended - - - - - - - - - - - - - - - Quarter Ended - - - - - - - - -
March June September December March June September December
Interest income $ 4,309 $ 4,433 $ 4,672 $ 4,910 $ 3,715 $ 3,979 $ 4,138 $ 4,277
Interest expense 1,922 1,941 2,033 2,178 1,707 1,800 1,857 1,984
------- ------- ------- -------- ------- ------- ------- -------
Net interest income 2,387 2,492 2,639 2,732 2,008 2,179 2,281 2,293
Provision for loan
losses 90 90 90 277 75 75 75 45
------- ------- ------- -------- ------- ------- ------- -------
Net interest income
after provision for
loan losses 2,297 2,402 2,549 2,455 1,933 2,104 2,206 2,248
Securities gains
(losses) (9) (6) 271 167 (10) (2) 11 (8)
Other income 713 862 801 782 491 535 550 686
Other expenses 1,829 1,920 2,302 2,167 1,527 1,556 1,567 1,795
------- ------- ------- -------- ------- ------- ------- -------
Other income before
income taxes 1,172 1,338 1,319 1,237 887 1,081 1,200 1,131
Applicable income
taxes 323 349 345 294 245 296 335 304
------- ------- ------- -------- ------- ------- ------- -------
Net income $ 849 $ 989 $ 974 $ 943 $ 642 $ 785 $ 865 $ 827
======= ======= ======= ======== ======= ======= ======= =======
Per common share data:
Net income $ 0.38 $ 0.45 $ 0.44 $ 0.43 $ 0.30 $ 0.35 $ 0.39 $ 0.37
Dividends 0.12 0.12 0.13 0.14 0.11 0.11 0.11 0.12
Performance statistics:
Return on average assets 1.45% 1.62% 1.52% 1.41% 1.33% 1.51% 1.60% 1.42%
Return on average equity 15.95% 17.92% 17.38% 16.78% 13.99% 16.61% 17.42% 15.77%
Average equity/average
assets 9.09% 9.04% 8.73% 8.41% 9.52% 9.11% 9.19% 9.04%
19
Selected Five-Year Financial Data
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Year Ended December 31 1999 1998 1997 1996 1995
Summary of Operations (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
Securities gains (losses) ......................... 423 (9) 3 (5) (45)
Other operating income ............................ 3,158 2,262 1,548 1,245 980
Other 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
Applicable income tax ............................. 1,311 1,180 974 838 742
----------- ----------- ----------- ----------- -----------
Net income ................................... $ 3,755 $ 3,119 $ 2,606 $ 2,248 $ 1,954
=========== =========== =========== =========== ===========
Per Common Share Data*
Income before taxes ............................... $ 2.29 $ 1.94 $ 1.63 $ 1.40 $ 1.22
Applicable income taxes ........................... 0.59 0.53 0.45 0.38 0.34
Net income ........................................ 1.70 1.41 1.18 1.02 0.88
Cash dividend paid ................................ 0.51 0.45 0.41 0.32 0.27
Book value ........................................ 9.85 9.54 8.29 7.19 6.64
Average shares outstanding ........................ 2,214,951 2,205,718 2,204,444 2,205,268 2,206,560
Stock Price Statistics*
Close ............................................. $ 38.00 $ 26.05 $ 20.93 $ 15.06 $ 13.29
High .............................................. 40.00 29.77 20.93 15.06 13.29
Low ............................................... 25.12 20.59 15.06 13.29 11.96
Price earnings ratio at close ..................... 22.4 18.5 17.7 14.8 15.1
Year-End Balance Sheet Data (000 omitted)
Total assets ...................................... $ 265,053 $ 235,822 $ 190,242 $ 157,556 $ 145,998
Total loans ....................................... 180,691 158,632 128,331 108,926 102,857
Total investment securities ....................... 61,964 51,137 47,191 34,355 31,563
Deposits - noninterest bearing .................... 25,264 22,020 17,649 16,322 13,962
Deposits - interest bearing ....................... 179,125 161,744 142,931 120,937 113,368
Total deposits .................................... 204,389 183,764 160,580 137,259 127,330
Liabilities for borrowed money .................... 36,228 27,062 8,569 2,339 2,345
Total shareholders' equity ........................ 21,868 21,080 18,265 15,856 14,633
Trust assets under management - market value ...... 182,000 152,000 108,000 83,000 66,000
Performance Statistics
Average equity/average assets ..................... 8.81% 9.20% 9.84% 9.84% 10.00%
Return on average equity .......................... 17.02% 15.97% 15.37% 14.90% 14.40%
Return on average assets .......................... 1.50% 1.47% 1.51% 1.47% 1.44%
* Per share amounts have been restated to reflect:
The 7 1/2% stock dividend effective November 19, 1999.
The 2 for 1 stock split effective November 21, 1998.
The 5% stock dividend effective May 15, 1997.
The 5% stock dividend effective July 21, 1995.
20
Market, Dividend & Investor Information
Market and Dividend Information
The common stock of Orrstown Financial Services, Inc. is traded in the
over-the-counter market under the symbol ORRF. At the close of business December
31, 1999, there were approximately 1,848 shareholders of record, with a total of
2,218,291 shares outstanding. The table below sets forth the range of high and
low quarterly sales prices and dividends declared per common share. All per
share data has been restated to reflect the 7 1/2% stock dividend paid November
19, 1999 to shareholders of record November 1, 1999.
1999 1998
Market Price Market Price
Quarterly Quarterly
High Low Dividend High Low Dividend
------- ------- ------- ------- ------- -------
First quarter $ 32.56 $ 25.58 $ 0.121 $ 22.33 $ 20.93 $ 0.107
Second quarter $ 37.21 $ 25.12 $ 0.121 $ 24.19 $ 20.59 $ 0.107
Third quarter $ 37.21 $ 32.56 $ 0.130 $ 27.91 $ 24.19 $ 0.112
Fourth quarter $ 40.00 $ 32.56 $ 0.140 $ 29.77 $ 25.58 $ 0.121
------- -------
$ 0.512 $ 0.447
Investor Information
Annual Meeting
The annual meeting of Orrstown Financial Services, Inc. stockholders is
scheduled for April 11, 2000 at 9:00 a.m. at Shippen Place Hotel and Restaurant,
32 East King Street, Shippensburg, PA 17257. All stockholders are cordially
invited to attend.
Annual and Quarterly Reports
Copies of the annual and quarterly reports may be obtained at any office of
Orrstown Bank, or by writing to Patricia A. Corwell, Vice President & Assistant
Secretary, Orrstown Bank, P. O. Box 250, Shippensburg, PA 17257.
Form 10-K
A copy of the corporation's Form 10-K, as filed with the Securities and
Exchange Commission, may be obtained by writing to Orrstown Bank, P. O. Box 250,
Shippensburg, PA 17257.
Transfer Agent
The transfer agent for Orrstown Financial Services, Inc. is Orrstown Bank,
77 East King Street, P.O. Box 250, Shippensburg, PA 17257.
Market Makers
E.E. Powell & Co., Inc. Janney Montgomery Scott F.J. Morrissey & Co., Inc.
1100 Gulf Tower 1 North Church Street 1700 Market Street - Suite 1420
Pittsburgh, PA 15219 P. O. Box 3129 Philadelphia, PA 19103
1-800-289-7865 West Chester, PA 19380 1-800-842-8928
1-800-777-0131
21