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, 2000
Commission file number: 33-18888
ORRSTOWN FINANCIAL SERVICES, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2530374
- --------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
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
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
-------------------
Common Stock, No Par Value The Common Stock is not registered on any exchange.
- --------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of December 31, 2000, 2,240,744 shares of the registrant's common stock were
outstanding. The aggregate market value of such shares held by nonaffiliates on
that date was $ 89,629,760.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended December 31, 2000
are incorporated by reference into Parts I and II. Portions of the Proxy
Statement for 2001 Annual Meeting of Security Holders are incorporated by
reference in Part III of this Form 10-K.
ORRSTOWN FINANCIAL SERVICES, INC.
FORM 10-K
INDEX
Page
Part I
Item 1. Business 2
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 10
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
Item 8. Financial Statements and Supplementary Data 10
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 19
Part III
Item 10. Directors and Executive Officers of the Registrant 19
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain Beneficial Owners and Management 19
Item 13. Certain Relationships and Related Transactions 19
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 19
Signatures 21
Part I
Item 1. Business.
History and Business
Orrstown Financial Services, Inc. (OFS) is a financial holding
company registered under the Gramm-Leach-Bliley Act ("the GLB Act"). Orrstown
Financial Services, Inc. was organized on November 17, 1987, under the laws of
the Commonwealth of Pennsylvania for the purpose of acquiring Orrstown Bank
("Orrstown"), Shippensburg, Pennsylvania, and such other banks and bank related
activities as are permitted by law and desirable. On March 8, 1988, Orrstown
Financial Services, Inc. acquired 100% ownership of Orrstown, issuing 131,455
shares of Orrstown Financial Services, Inc.'s common stock to the former
Orrstown shareholders.
Orrstown Financial Services, Inc.'s primary activity consists
of owning and supervising its two subsidiaries, Orrstown Bank and Pennbanks
Insurance Company Cell P1. Orrstown Bank is engaged in providing banking and
bank related services in South Central Pennsylvania, principally Franklin and
Cumberland Counties, where its nine branches are located in Shippensburg (2),
Carlisle (2), Spring Run, Orrstown, Chambersburg (2), and Mechanicsburg,
Pennsylvania. The day-to-day management of Orrstown Bank is conducted by the
subsidiary's officers. Pennbanks Insurance Company Cell P1 is a reinsurer of
credit, life, and disability insurance which services customers of Orrstown
Bank. Orrstown Financial Services, Inc. derives a majority of its current income
from Orrstown Bank.
Orrstown Financial Services, Inc. has no employees other than
its six officers who are also employees of Orrstown, its subsidiary. On December
31, 2000, Orrstown had 92 full-time and 38 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 generally do not exceed 80% of the appraised
value of the property. Loan to collateral values are monitored as part of the
loan review, and appraisals are updated as deemed appropriate in the
circumstances.
Administration and supervision over the lending process is
provided by the Bank's Credit Administration Department via loan reviews. The
loan review process is continuous, commencing with the approval of a loan. Each
new loan is reviewed by the Credit Administration Department for compliance with
banking regulations and lending policy requirements for documentation,
collateral standards, and approvals.
The Credit Administration Department continues to monitor and
evaluate loan customers utilizing risk-rating criteria established in the
lending policy in order to spot deteriorating trends and detect conditions which
might indicate potential problem loans.
Reports of the results of the loan reviews are submitted
quarterly to the Directors' Credit Administration Committee for approval and
provide the basis for evaluating the adequacy of the allowance for loan losses.
Through its trust department, Orrstown renders services as
trustee, executor, administrator, guardian, managing agent, custodian,
investment advisor and other fiduciary activities authorized by law.
As of December 31, 2000, Orrstown had total assets of
approximately $312 million, total shareholders' equity of approximately $27
million and total deposits of approximately $242 million.
Regulation and Supervision
Orrstown Financial Services (OFS) is a financial holding
company, and is registered as such with the Board of Governors of the Federal
Reserve System (FRB). OFS is subject to examination by the FRB and is restricted
in its acquisitions, certain of which are prohibited and certain of which are
subject to approval by the FRB.
A financial holding company generally may not acquire
ownership or control of any company, including a bank, without prior approval of
the Federal Reserve Board. In addition, federal law imposes certain restrictions
on transactions between OFS and its subsidiary, Orrstown Bank. As an affiliate
of Orrstown Bank OFS is subject, with certain exceptions, to provisions of
federal law imposing limitations on, and requiring collateral for, extensions of
credit by Orrstown Bank to its affiliates.
The operations of Orrstown are subject to federal and state
statutes applicable to banks chartered under the banking laws of the United
States, and to banks whose deposits are insured by the Federal Deposit Insurance
Corporation. Bank operations are also subject to regulations of the Pennsylvania
Department of Banking, the Federal Reserve Board and the Federal Deposit
Insurance Corporation.
-3-
The primary supervisory authority of Orrstown is the
Pennsylvania Department of Banking, who regularly examines such areas as
reserves, loans, investments, management practices and other aspects of bank
operations. These examinations are designed primarily for the protection of the
Bank depositors.
Federal and state banking laws and regulations govern, among
other things, the scope of a bank's business, the investments a bank may make,
the reserves against deposits a bank must maintain, the loans a bank makes and
collateral it takes, the maximum interest rates a bank may pay on deposits, the
activities of a bank with respect to mergers and consolidations, and the
establishment of branches, and management practices and other aspects of banking
operations. See Note 15 of the Notes to Financial Statements for a discussion of
the limitations on the availability of Orrstown Financial Services' subsidiary's
undistributed earnings for the payment of dividends due to such regulation and
other reasons.
The Financial Institutions Reform, Recovery and Enforcement
Act of 1989 (FIRREA) provides that a financial institution insured by the
Federal Deposit Insurance Corporation (FDIC) sharing common ownership with a
failed institution can be required to indemnify the FDIC for its losses
resulting from the insolvency of the failed institution, even if such
indemnification causes the affiliated institution also to become insolvent. OFS
currently has only one subsidiary and as a result has not been significantly
affected by the aforementioned provisions of FIRREA.
Regulatory authorities have issued guidelines that establish
risk-based capital and leverage standards. These capital requirements of bank
regulators, are discussed on page 19 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, 2000, 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 are permitted to engage in a wider variety of financial activities
than permitted under prior law, particularly with regard to insurance and
securities activities. Moreover, to the extent that it permits banks, securities
firms and insurance companies to affiliate, the financial services industry may
experience further consolidation. This could result in a growing number of
larger financial institutions that offer a wider variety of financial services
than we currently offer and that can aggressively compete in the markets we
serve. This could adversely impact our profitability.
In order to remain competitive Orrstown Financial Services
elected to be, and was approved as a financial holding company during March,
2000. A bank holding company, which does not qualify or does not elect to become
a financial holding company under the Gramm-Leach-Bliley Act, is generally
prohibited from engaging in, or acquiring direct or indirect control of any
company engaged in nonbanking activities, except for activities found by the
Federal Reserve Board to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. The principal activities
that the Federal Reserve Board has determined by regulation to be so closely
related to banking as to be a proper incident thereto are set forth in Federal
Reserve Board Regulation Y.
-5-
Bank holding companies that do qualify as a financial holding
company such as Orrstown Financial Services may engage in activities that are of
a financial nature or incidental thereto. This will include activities such as
securities and insurance underwriting which are not permitted nonbanking
activities under Regulation Y. A bank holding company may qualify to become a
financial holding company if each of its depository institution subsidiaries is
"well capitalized", "well managed", has at least a "satisfactory" CRA rating in
its most recent examination and the bank holding company has filed a
certification with the Federal Reserve Bank that it elects to become a financial
holding company.
The earnings of Orrstown Bank, and therefore the earnings of
Orrstown Financial Services, are affected by general economic conditions,
management policies, and the legislative and governmental actions of various
regulatory authorities including the FRB, the FDIC and the Pennsylvania
Department of Banking.
In addition to banking and securities laws, regulations and
regulatory agencies, the Corporation also is subject to various other laws,
regulations and regulatory agencies. Furthermore, various proposals, bills and
regulations have been and are being considered in the United States Congress,
and various other governmental regulatory and legislative bodies, which could
result in changes in the profitability and governance of the Corporation. It
cannot be predicted whether new legislation or regulations will be adopted and,
if so, how they would affect the Corporation.
References under the caption "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 (2), Carlisle, Pennsylvania, Spring Run,
Pennsylvania, Chambersburg, and Mechanicsburg, Pennsylvania. Offices of the bank
are located in each of these buildings.
-7-
In 2000, the corporation expanded its main offices located on King Street in
Shippensburg, PA. 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 3/15/01
Joel R. Zullinger, Chairman
of the Board 1991 (1) 52
Jeffrey W. Coy, Vice Chairman of
The board 1988 (1) 49
Kenneth R. Shoemaker, President & CEO 1987 1986 53
Bradley S. Everly, Executive Vice President
Chief Financial Officer 1997 1997 49
Stephen C. Oldt, Executive
Vice President, Chief Operating
Officer 1987 1987 58
Philip E. Fague, Senior Vice President,
Senior Trust Officer 1990 1988 41
Denver L. Tuckey, Secretary 1999 (1) 66
Benjamin Stoops, Vice President, Senior
Operations Officer 1998 1998 49
Jeffrey W. Embly, Vice President
Senior Loan Officer 1999 1997 30
(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 3/15/01
Kenneth R. Shoemaker, President &
Chief Executive Officer 1987 1986 53
Stephen C. Oldt, Executive Vice
President & Chief Operating Officer 1987 1987 58
Philip E. Fague, Executive President/ 1990/
Sales and Service Manager 1993 1988 41
Bradley S. Everly, Senior Vice 1997/
President/Chief Financial Officer 1997 1997 49
Benjamin Stoops, Vice President,
Senior Operations Officer 1998 1998 49
Jeffrey W. Embly, Vice President,
Senior Loan Officer 1999 1997 30
-9-
Part II
Item 5. Market for Registrant's Common Stock and Related Security Holder
Matters.
Orrstown Financial Services, Inc.'s common stock is not traded
on a national securities exchange, but is traded through the local and over the
counter local markets under the symbol ORRF. At December 31, 2000, the
approximate number of shareholders of record was approximately 2,025. 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) 2000 1999
High Low High Low
First Quarter $ 40.00 $ 38.00 $ 0.14 $ 32.56 $ 25.58 $ 0.12
Second Quarter 39.00 37.25 0.14 37.21 25.12 0.12
Third Quarter 38.50 37.50 0.14 37.21 32.56 0.13
Fourth Quarter 44.00 37.63 0.15 40.00 32.56 0.14
(1) Note: All per share data has been restated after giving
retroactive recognition to a 7-1/2% stock dividend paid November 19,
1999.
See Note 15 to the financial statements for restrictions on
the payment of dividends.
Item 6. Selected Financial Data.
The selected five-year financial data on page 22 of the annual
shareholders' report for the year ended December 31, 2000 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 15 through 20 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 22 of the annual shareholders report for the year
ended December 31, 2000 and are incorporated herein by reference. Certain
statistical information required in addition to those included in the annual
shareholders report are submitted herewith as follows.
Description of Statistical Information Page
Changes in net interest income tax equivalent yields 11
Investment portfolio 12
Loan portfolio 13
Summary of loan loss experience 14
Nonaccrual, delinquent and impaired loans 15
Allocation of allowances for loan losses 16
Deposits and return on equity and assets 17
Consolidated summary of operations 18
-10-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
CHANGES IN NET INTEREST INCOME TAX EQUIVALENT YIELDS
2000 Versus 1999 1999 Versus 1998
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) $ 1,974 $ 456 $ 2,430 $ 2,280 ($ 469) $ 1,811
Taxable investment securities 645 433 1,078 456 7 463
Nontaxable investment securities ( 115) ( 1) ( 116) ( 3) ( 3) ( 6)
Other short-term investments ( 63) 74 11 7 ( 27) ( 20)
-------- ------ ------- ------- -------- -------
Total interest income 2,441 962 3,403 2,740 ( 492) 2,248
-------- ------ ------- ------- -------- -------
Interest Expense
Interest bearing demand 160 138 298 486 ( 113) 373
Savings deposits ( 57) ( 57) ( 114) ( 15) ( 82) ( 97)
Time deposits 780 383 1,163 75 ( 312) ( 237)
Short-term borrowings 552 273 825 263 ( 29) 234
Long-term borrowings 54 18 72 501 ( 48) 453
-------- ------ ------- ------- -------- -------
Total interest expense 1,489 755 2,244 1,310 ( 584) 726
-------- ------ ------- ------- -------- -------
Net interest income $ 1,159 $ 1,522
======= =======
Changes which are attributed in part to volume and in part to
rate are allocated in proportion to their relationships to the amounts of
changes.
-11-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
The following table shows the maturities of investment securities at
book value as of December 31, 2000, 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 $ 0 $ 1,038 $ 0 $ 0 $ 1,038
Yield 0% 6.06% 0% 0% 6.06%
U.S. Government
agencies
Book value 0 10,500 18,000 5,964 34,464
Yield 0% 6.56% 7.60% 7.57% 7.28%
State and municipal
Book value 200 519 500 14,379 15,598
Yield 10.08% 10.02% 10.0% 8.61% 8.73%
Corporate
Book value 0 1,972 0 1,440 3,412
Yield 0% 7.83% 0% 8.02% 7.91%
Trust preferred
Book value 0 0 0 1,000 1,000
Yield 0% 0% 0% 9.25% 9.25%
Total book
value $ 200 $ 14,029 $ 18,500 $ 22,783 $ 55,512
====== ======== ======== ======== ========
Yield 10.08% 6.83% 7.66% 8.33% 7.73%
====== ======== ======== ======== ========
Mortgage-backed
securities:
Total book value $ 12,709
========
Yield 6.63%
========
Equity Securities:
Total book value $ 998
========
Yield 3.56%
========
Total Investment Securities $ 69,219
========
Yield 7.47%
========
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ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
LOAN PORTFOLIO
The following table presents the loan portfolio at the end of each of
the last five years:
2000 1999 1998 1997 1996
(000 omitted)
Commercial, financial
and agricultural $ 23,938 $ 21,503 $ 18,732 $ 10,275 $ 8,401
Real estate - Construction 17,425 15,580 11,182 5,961 4,304
Real estate - Mortgage 157,722 134,046 116,030 97,074 82,687
Installment and other
personal loans (net of
unearned discount) 10,096 9,562 12,688 15,021 13,534
--------- --------- --------- --------- ---------
Total loans $ 209,181 $ 180,691 $ 158,632 $ 128,331 $ 108,926
========= ========= ========= ========= =========
Presented below are the approximate maturities of the loan portfolio
(excluding real estate mortgages, installments and credit cards) at December 31,
2000:
Under One One to Over Five
Year Five Years Years Total
(000 omitted)
Commercial, financial and agricultural $ 3,800 $ 4,559 $ 15,579 $ 23,938
Real estate - Construction 2,408 2,883 12,134 17,425
------- ------- -------- --------
Total $ 6,208 $ 7,442 $ 27,713 $ 41,363
======= ======= ======== ========
The following table presents the approximate amount of fixed rate loans
and variable rate loans due as of December 31, 2000:
Fixed Rate Variable
Loans Rate Loans
(000 omitted)
Due within one year $ 1,198 $ 8,342
Due after one but within five years 19,530 4,740
Due after five years 77,263 98,108
-------- ---------
Total $ 97,991 $ 111,190
======== =========
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ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31
2000 1999 1998 1997 1996
(000 omitted)
Average total loans outstanding (net of
unearned income) $ 192,902 $ 169,458 $ 144,013 $ 117,403 $ 105,779
========= ========= ========= ========= =========
Allowance for loan losses, beginning
of period $ 2,455 $ 1,971 $ 1,767 $ 1,620 $ 1,433
Additions to provision for loan losses
charged to operations 360 547 270 215 240
Loans charged off during the year
Commercial 99 97 15 1 20
Personal credit lines 11 7 23 32 17
Installment 19 24 46 50 31
--------- --------- --------- --------- ---------
Total charge-off's 129 128 84 83 68
--------- --------- --------- --------- ---------
Recoveries of loans previously charged off:
Commercial 1 59 3 2 3
Installment 2 1 10 12 12
Personal credit lines 2 5 5 1 0
--------- --------- --------- --------- ---------
Total recoveries 5 65 18 15 15
--------- --------- --------- --------- ---------
Net loans charged off (recovered) 124 63 66 68 53
--------- --------- --------- --------- ---------
Allowance for loan losses, end of
period $ 2,691 $ 2,455 $ 1,971 $ 1,767 $ 1,620
========= ========= ========= ========= =========
Ratio of net loans charged off to
average loans outstanding .06% .04% .06% .06% .05%
========= ========= ========= ========= =========
The provision is based on an evaluation of the adequacy of the
allowance for possible loan losses. The evaluation includes, but is not limited
to, review of net loan losses for the year, the present and prospective
financial condition of the borrowers and evaluation of current and projected
economic conditions.
-14-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
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.
2000 1999 1998 1997 1996
(000 omitted)
Nonaccrual loans $ 12 $ 64 $ 486 $ 473 $ 14
======= ======= ======= ======= =======
Accrual loans:
Restructured $ 0 $ 0 $ 0 $ 0 $ 0
30 through 89
days past due 865 3,420 823 2,398 1,976
90 days or
more past due 814 97 284 657 203
------- ------- ------- ------- -------
Total accrual
loans $ 1,679 $ 3,517 $ 1,107 $ 3,055 $ 2,179
======= ======= ======= ======= =======
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, 2000.
-15-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
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
2000 1999
Percentage Percentage
Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans
(000 omitted)
Commercial, financial
and agricultural $ 43 11.74% $ 45 11.90%
Commercial, real estate secured 786 21.29 609 18.03
Real estate - Construction 0 8.30 0 8.62
Real estate - Mortgage 56 53.86 93 56.16
Installment 34 4.81 27 5.29
Unallocated 1,772 0.00 1,681 0.00
------- ------ ------- ------
Total $ 2,691 100.00% $ 2,455 100.00%
======= ====== ======= ======
Years Ended December 31
1998 1997
Percentage Percentage
Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans
(000 omitted)
Commercial, financial
and agricultural $ 255 9.93% $ 31 8.00%
Commercial - Real estate secured 416 19.43 354 35.00
Real estate - Construction 0 7.05 0 4.64
Real estate - Mortgage 111 53.77 188 40.64
Installment 34 9.82 12 11.72
Unallocated 1,155 0.00 1,182 0.00
------- ------ ------- ------
Total $ 1,971 100.00% $ 1,767 100.00%
======= ====== ======= ======
Year Ended December 31
1996
Percentage
Allowance of Loans to
Amount Total Loans
(000 omitted)
Commercial, financial
and agricultural $ 125 7.71%
Commercial - Real estate secured 0 0.00
Real estate - Construction 64 3.95
Real estate - Mortgage 1,229 75.91
Installment 202 12.43
Unallocated 0 0.00
------- ------
Total $ 1,620 100.00%
======= ======
-16-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
DEPOSITS
The average amounts of deposits are summarized below:
Years Ended December 31
2000 1999 1998
(000 omitted)
Demand deposits $ 27,650 $ 25,365 $ 20,433
Interest bearing demand
deposits 76,631 71,176 55,454
Savings deposits 20,628 22,888 23,394
Time deposits 91,214 75,859 74,488
--------- --------- ---------
Total deposits $ 216,123 $ 195,288 $ 173,769
========= ========= =========
The following is a breakdown of maturities of time deposits of $100,000
or more as of December 31, 2000:
Maturity (000 omitted)
Certificates of Deposit
Three months or less $ 14,366
Over three months through twelve months 8,694
Over one year through three years 6,825
Over three years 653
--------
$ 30,538
========
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)
2000 1999 1998
Average assets $ 285,903 $ 250,529 $ 212,149
Net income $ 4,172 $ 3,755 $ 3,119
Average equity $ 23,954 $ 22,067 $ 19,523
Cash dividends paid $ 1,270 $ 1,134 $ 986
Return on assets 1.46% 1.50% 1.47%
Return on equity 17.42% 17.02% 15.97%
Dividend payout ratio 30.48% 30.20% 31.61%
Equity to asset ratio 8.38% 8.81% 9.2%
-17-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED SUMMARY OF OPERATIONS
Years Ended December 31
2000 1999 1998 1997 1996
(000 omitted)
Interest income $ 21,758 $ 18,324 $ 16,109 $ 13,450 $ 12,018
Interest expense 10,318 8,074 7,348 5,822 5,139
-------- -------- -------- -------- --------
Net interest income 11,440 10,250 8,761 7,628 6,879
Provision for loan losses 360 547 270 215 240
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 11,080 9,703 8,491 7,413 6,639
Other income:
Trust and brokerage services 1,466 1,230 818 490 384
Service charges - Deposits,
other service charges,
collection and exchange charges,
commission and fees 1,818 1,623 1,313 942 735
Other operating income (loss) 458 728 122 119 121
-------- -------- -------- -------- --------
Total other income 3,742 3,581 2,253 1,551 1,240
-------- -------- -------- -------- --------
Income before operating expense 14,822 13,284 10,744 8,964 7,879
Operating expenses:
Salaries and employees
benefits 4,755 4,297 3,491 2,901 2,621
Occupancy and
equipment expense 1,558 1,099 859 764 665
Other operating expenses 2,800 2,822 2,095 1,719 1,507
-------- -------- -------- -------- --------
Total operating expenses 9,113 8,218 6,445 5,384 4,793
-------- -------- -------- -------- --------
Income before income taxes 5,709 5,066 4,299 3,580 3,086
Income tax 1,537 1,311 1,180 974 838
-------- -------- -------- -------- --------
Net income applicable to
common stock $ 4,172 $ 3,755 $ 3,119 $ 2,606 $ 2,248
======== ======== ======== ======== ========
Per share data:
Earnings per common
share $ 1.87 $ 1.70 $ 1.41 $ 1.18 $ 1.02
Cash dividend - Common $ .57 $ .51 $ .45 $ .41 $ .32
Weighted average
number of common
shares 2,229,366 2,214,951 2,205,718 2,204,444 2,205,268
-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 2001 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, 2000, are incorporated by reference in
Item 8:
Consolidated balance sheets - December 31, 2000 and
1999 Consolidated statements of income - Years ended
December 31, 2000, 1999 and
1998
Consolidated statements of shareholders' equity -
Years ended December 31, 2000, 1999, and 1998
Consolidated statements of cash flows - Years ended
December 31, 2000, 1999, and 1998
Notes to consolidated financial statements - December
31, 2000
(2) List of Financial Statement Schedules
All financial statement schedules for which provision
is made in the applicable accounting regulations of
the Securities and Exchange Commission are not
required under the related instructions or are
inapplicable and therefore have been omitted.
(3) Listing of Exhibits
Exhibit (3) (i) Articles of incorporation
Exhibit (3) (ii) Bylaws
Exhibit (4) Instruments defining the rights of
security holders including indentures Exhibit (10)
Material contracts Exhibit (13) Annual report to
security holders Exhibit (21) Subsidiaries of the
registrant Exhibit (23) Consent of independent
auditors Exhibit (27) Financial data schedule All
other exhibits for which provision is made in the
applicable accounting regulations of the Securities
and Exchange Commission are not required under the
related instructions or are inapplicable and
therefore have been omitted.
-19-
(b) Reports on Form 8-K filed
None.
(c) Exhibits
(3)(i) Articles of incorporation. Incorporated by
reference to Exhibit 3(i) of the registrant's Form
10-K for the year ended December 31, 1998.
(ii) By-laws. Incorporated by reference to Exhibit 3.2 to
the Registrant's Registration Statement on Form S-4,
Registration No. 33-18888.
(4) Instruments defining the rights of security holders
including indentures. The rights of the holders of
Registrant's common stock are contained in:
(i) Articles of Incorporation of Orrstown Financial
Services, Inc., incorporated by reference to Exhibit
3(i) of the registrant's Form 10-K for the year ended
December 31, 1998.
(ii) By-laws of Orrstown Financial Services, Inc.,
incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-4
(Registration No. 33-18888).
(10.1) Change in control agreement between Orrstown Financial
Services, Inc. and its chief executive officer.
Incorporated by reference to Exhibit 99 of the
registrant's Form 10-K for the year ended December 31,
1996.
(10.2) Salary continuation plan for selected officers -
incorporated by reference to the registrant's Form 10-K
for the year ended December 31, 1999
(10.3) Officer group term replacement plan for selected officers
- incorporated by reference to the registrant's Form 10-K
for the year ended December 31, 1999
(10.4) Director retirement plan - incorporated by reference to
the registrant's Form 10-K for the year ended December
31, 1999 (10.5) Revenue neutral retirement plan -
incorporated by reference to the registrant's Form 10-K
for the year ended December 31, 1999
(10.6) Non-employee director stock option plan of 2000 -
incorporated by reference to the registrant's
registration statement on Form S-8 dated April 11, 2000
(10.7) Employee stock option plan of 2000 - incorporated by
reference to the registrant's registration statement on
Form S-8 dated March 31, 2000
(13) Annual report to security holders - filed herewith
(21) Subsidiaries of the registrant - filed herewith
(23.1) Consent of independent auditors filed herewith
(27) Financial data schedule - filed herewith
(d) Financial statement schedules
None
-20-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ORRSTOWN FINANCIAL SERVICES, INC.
(Registrant)
By /s/ Kenneth R. Shoemaker
------------------------------
Kenneth R. Shoemaker, President
Dated: March 20, 2001 (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 20, 2001
- ------------------------------------- Director
Kenneth R. Shoemaker
/s/ Anthony F. Ceddia Director March 20, 2001
- --------------------------------------
Dr. Anthony F. Ceddia
/s/ Glenn W. Snoke Director March 20, 2001
- -------------------------------------
Glenn W. Snoke
/s/ Gregory A. Rosenberry Director March 20, 2001
- ------------------------------------
Gregory A. Rosenberry
/s/ Joel R. Zullinger Chairman of the March 20, 2001
- ------------------------------------ Board and Director
Joel R. Zullinger
/s/ Jeffrey W. Coy Vice Chairman March 20, 2001
- ------------------------------------- of the Board
Jeffrey W. Coy and Director
/s/ John S. Ward Director March 20, 2001
- ---------------------------------------
John S. Ward
/s/ Denver L. Tuckey Secretary and March 20, 2001
- --------------------------------------- Director
Denver L. Tuckey
/s/ Andrea Pugh Director March 20, 2001
- ---------------------------------------
Andrea Pugh
-21-