Exhibit 13
Orrstown Financial Services, Inc.
2000 Annual Financial Report
C O N T E N T S
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 - 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 15 - 20
SUMMARY OF QUARTERLY FINANCIAL DATA 21
SELECTED FIVE-YEAR FINANCIAL DATA 22
MARKET, DIVIDEND AND INVESTOR INFORMATION 23
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 subsidiaries as of
December 31, 2000 and 1999 and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the three years
ended December 31, 2000. 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 auditing standards
generally accepted in the United States of America. 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 subsidiaries as of
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America.
/s/ SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, Pennsylvania
January 31, 2001
Consolidated Balance Sheets
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
ASSETS
Dec. 31, 2000 Dec. 31, 1999
(000 omitted) (000 omitted)
Cash and due from banks $ 11,021 $ 8,585
Interest bearing deposits with banks 172 115
Federal funds sold 3,049 0
Securities available for sale 69,919 60,455
Federal Home Loan Bank, Federal Reserve and Atlantic Central
Bankers Bank stock, at cost which approximates market value 2,134 1,509
--------- ---------
86,295 70,664
--------- ---------
Loans
Commercial, financial and agricultural 23,938 21,503
Real estate - Mortgages 157,722 134,046
Real estate - Construction and land development 17,425 15,580
Consumer 10,096 9,562
--------- ---------
209,181 180,691
Less: Allowance for loan losses ( 2,691) ( 2,455)
--------- ---------
206,490 178,236
--------- ---------
Premises and equipment, net 9,269 6,809
Accrued interest receivable 2,016 1,599
Cash surrender value of life insurance 5,636 5,384
Other assets 2,197 2,361
--------- ---------
Total assets $ 311,903 $ 265,053
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing $ 31,716 $ 25,264
Interest bearing 210,292 179,125
--------- ---------
242,008 204,389
--------- ---------
Federal funds purchased and securities sold under agreements
to repurchase 18,426 15,406
Other borrowed funds 21,515 20,822
Accrued interest and other liabilities 3,280 2,568
--------- ---------
Total liabilities 285,229 243,185
--------- ---------
Shareholders' equity
Common stock: No par value - $ .1041 stated value per share,
10,000,000 shares authorized with 2,240,744 shares issued at
December 31, 2000; 2,218,291 shares issued at December 31, 1999 233 231
Additional paid-in capital 19,360 18,498
Retained earnings 6,619 3,717
Accumulated other comprehensive income (loss) 462 ( 578)
--------- ---------
Total shareholders' equity 26,674 21,868
--------- ---------
Total liabilities and shareholders' equity $ 311,903 $ 265,053
========= =========
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 SUBSIDIARIES
Years Ended December 31,
2000 1999 1998
(000 omitted)
Interest and Dividend Income
Interest and fees on loans $ 17,033 $ 14,613 $ 12,836
Interest and dividends on investment securities
U.S. Government and agencies 3,182 2,289 1,840
Exempt from federal income tax 956 1,032 1,036
Other investment income 587 390 397
-------- -------- --------
Total interest and dividend income 21,758 18,324 16,109
-------- -------- --------
Interest Expense
Interest on deposits 7,865 6,519 6,479
Interest on borrowed money 2,453 1,555 869
-------- -------- --------
Total interest expense 10,318 8,074 7,348
-------- -------- --------
Net interest income 11,440 10,250 8,761
-------- -------- --------
Provision for loan losses 360 547 270
-------- -------- --------
Net interest income after provision for loan losses 11,080 9,703 8,491
-------- -------- --------
Other Income
Service charges on deposit accounts 1,174 1,080 846
Other service charges, commissions, and fees 644 543 467
Trust department income 1,125 861 656
Brokerage income 341 369 162
Securities gains (losses) 114 423 ( 9)
Other income 344 305 131
-------- -------- --------
Total other income 3,742 3,581 2,253
-------- -------- --------
Net interest income and other income 14,822 13,284 10,744
-------- -------- --------
Other Expenses
Salaries 3,235 2,945 2,478
Employee benefits 1,520 1,351 1,013
Occupancy expense of bank premises, net, and furniture and
equipment expenses 1,558 1,100 859
Other operating expenses 2,800 2,822 2,095
-------- -------- --------
Total other expenses 9,113 8,218 6,445
-------- -------- --------
Income before income tax 5,709 5,066 4,299
Applicable income tax 1,537 1,311 1,180
-------- -------- --------
Net income $ 4,172 $ 3,755 $ 3,119
======== ======== ========
Per share data
Net income $ 1.87 $ 1.70 $ 1.41
Dividends .57 .51 .45
Weighted average shares outstanding 2,229,366 2,214,951 2,205,718
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 SUBSIDIARIES
Years Ended December 31, 2000, 1999 and 1998
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Shareholders'
Stock Capital Earnings Income Equity
(000 omitted)
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
Comprehensive income
Net income 0 0 4,172 0 4,172
Change in unrealized gain on investment
securities available for sale, net of
tax of $536 0 0 0 1,040 1,040
--------
Total comprehensive income 5,212
--------
Cash dividends ($ .57 per share) 0 0 ( 1,270) 0 ( 1,270)
Issuance of stock through employee stock
purchase plan 0 28 0 0 28
Issuance of stock through dividend
reinvestment plan 2 834 0 0 836
------- -------- ------- ------ --------
Balance, December 31, 2000 $ 233 $ 19,360 $ 6,619 $ 462 $ 26,674
======= ======== ======= ====== ========
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 SUBSIDIARIES
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
(000 omitted)
Cash flows from operating activities:
Net income $ 4,172 $ 3,755 $ 3,119
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 735 528 438
Provision for loan losses 360 547 270
(Gain) loss on disposal of other real estate owned ( 7) 54 0
(Gain) on disposal of bank premises and equipment ( 21) 0 0
Deferred income taxes ( 7) ( 103) 27
Securities (gains) losses ( 114) ( 423) 9
Increase in cash surrender value of life insurance ( 252) ( 285) 0
(Increase) decrease in accrued interest receivable ( 416) ( 364) 64
Increase (decrease) in accrued interest payable 192 ( 1,707) 483
Other net ( 19) 143 ( 152)
-------- -------- --------
Net cash provided by operating activities 4,623 2,145 4,258
-------- -------- --------
Cash flows from investing activities:
Net (increase) in interest bearing deposits
with banks ( 57) ( 88) ( 11)
Sales of available for sale securities 11,786 6,895 8,923
Maturities of available for sale securities 6,820 2,500 2,390
Purchases of available for sale securities ( 26,381) ( 22,763) ( 14,120)
Purchases of FHLB stock ( 625) ( 225) ( 302)
Net (increase) in loans ( 28,562) ( 22,130) ( 30,367)
Purchases of bank premises and equipment ( 3,153) ( 2,071) ( 491)
Investment in cash surrender value of life insurance 0 0 ( 4,816)
Proceeds from disposal of other real estate owned 59 286 0
Proceeds from disposal of bank premises and equipment 50 0 0
-------- -------- --------
Net cash (used) by investing activities ( 40,063) ( 37,596) ( 38,794)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits 37,619 20,631 23,184
Net increase in federal funds purchased
and securities sold under agreements to repurchase 3,019 9,173 5,999
Proceeds from debt 700 0 12,500
Payment on debt ( 7) ( 6) ( 6)
Cash dividends paid ( 1,270) ( 1,134) ( 986)
Cash paid in lieu of fractional stock dividends 0 ( 31) 0
Proceeds from sale of stock 864 303 124
-------- -------- --------
Net cash provided by financing activities 40,925 28,936 40,815
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 5,485 ( 6,515) 6,279
Cash and cash equivalents, beginning balance 8,585 15,100 8,821
-------- -------- --------
Cash and cash equivalents, ending balance $ 14,070 $ 8,585 $ 15,100
======== ======== ========
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest $ 10,081 $ 9,781 $ 6,865
Income taxes 1,565 1,385 1,200
Supplemental schedule of noncash investing and
financing activities:
Other real estate acquired in settlement of loans 53 0 264
Unrealized gain (loss) on investment securities
available for sale (net of tax effects) 1,040 ( 2,105) 558
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 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. Its
nine branches are located in Shippensburg (2), Carlisle (2), Spring Run,
Orrstown, Chambersburg (2), and Mechanicsburg, Pennsylvania. Pennbanks Insurance
Company Cell P1 is a reinsurer of credit, life, and disability insurance which
services customers of Orrstown Bank.
Principles of consolidation
The consolidated financial statements include the accounts of the
corporation and its wholly-owned subsidiaries, Orrstown Bank and Pennbanks
Insurance Company Cell P1. 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, 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 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 10-40
Equipment, furniture and fixtures 3-15 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 $167,000, $138,000, and $154,000
for 2000, 1999 and 1998, 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 /Impaired 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 2,229,366 in 2000; 2,214,951 in
1999; and 2,205,718 in 1998 after giving retroactive recognition to a 7-1/2%
stock dividend issued in November 1999, and a 2-for-1 stock split in November
1998. Fully diluted earnings per share is equal to basic earnings per share
since the amount of stock options that would qualify as dilutive are minimal.
See Note 10 for further information on stock options.
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 11 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
The Corporation has 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.
7
The components of the change in net unrealized gains (losses) on
securities were as follows:
2000 1999 1998
(000 Omitted)
Gross unrealized holding gains (losses) arising during the year $ 1,690 ($ 2,766) $ 836
Reclassification adjustment for (gains) losses realized in net income ( 114) ( 423) 9
------- -------- -----
Net unrealized holding gains (losses) before taxes 1,576 ( 3,189) 845
Tax effect ( 536) 1,084 ( 287)
------- -------- -----
Net change $ 1,040 ($ 2,105) $ 558
======= ======== =====
NOTE 2. INVESTMENTS
At December 31, 2000 and 1999 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)
2000
U. S. Treasury securities and obligations of U. S. Government
corporations and agencies $ 35,501 $ 74 $ 160 $ 35,415
Obligations of states and political subdivisions 15,598 791 14 16,375
Mortgage-backed securities 12,709 14 153 12,570
Corporate bonds 3,413 38 0 3,451
Equity securities 1,998 217 107 2,108
-------- -------- -------- --------
Totals $ 69,219 $ 1,134 $ 434 $ 69,919
======== ======== ======== ========
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
======== ======== ======== ========
The amortized cost and fair values of investment securities available
for sale at December 31, 2000, 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 $ 200 $ 201
Due after one year through five years 18,530 18,489
Due after five years through ten years 16,708 16,813
Due after ten years 19,074 19,738
Mortgage-backed securities 12,709 12,570
Equity securities 1,998 2,108
-------- --------
$ 69,219 $ 69,919
======== ========
Proceeds from sales of securities available for sale during 2000,
1999 and 1998 were $11,786,000, $6,895,000 and $8,923,000, respectively.
Gross gains and losses on 2000 sales were $124,080 and $9,749, 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.
The corporation owns $1,890,800 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, 2000. At December 31, 1999 the corporation's stock
ownership was $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. Market
value approximates cost since none of the stocks are actively traded.
Securities carried at $54,751,000 and $43,138,000 at December 31,
2000 and 1999, 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:
2000 1999 1998
(000 omitted)
Balance at beginning of period $ 2,455 $ 1,971 $ 1,767
Recoveries 5 65 18
Provision for loan losses charged to income 360 547 270
------- ------- -------
Total 2,820 2,583 2,055
Losses 129 128 84
------- ------- -------
Balance at the end of period $ 2,691 $ 2,455 $ 1,971
======= ======= =======
NOTE 5. PREMISES AND EQUIPMENT
A summary of bank premises and equipment is as follows:
2000 1999
(000 omitted)
Land $ 950 $ 606
Buildings and improvements 6,452 3,805
Leasehold improvements 189 189
Furniture and equipment 5,306 4,306
Construction in progress 93 1,002
-------- -------
Total 12,990 9,908
Less accumulated depreciation and amortization 3,721 3,099
-------- -------
Bank premises and equipment, net $ 9,269 $ 6,809
======== =======
Depreciation expense amounted to $670,295 in 2000, $485,477 in
1999 and $397,246 in 1998. During 2000, interest expense of $50,250 was
capitalized for interest costs incurred during the renovation of the Bank's
Shippensburg property and construction of its Mechanicsburg branch office. This
amount was netted against interest expense on borrowed money on the statements
of income.
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 $1,863,000 at December 31, 2000
and $2,189,000 at December 31, 1999. During 2000, $876,000 of new loans were
made and repayments totaled $1,202,000.
Outstanding loans to employees totaled $825,298 and $810,353 at
December 31, 2000 and 1999, respectively.
NOTE 7. NONACCRUAL LOANS
The following table shows the principal balances of nonaccrual loans
as of December 31:
2000 1999 1998
Nonaccrual loans $ 12,000 $ 64,000 $ 486,000
======== ======== =========
Interest income that would have been accrued
at original contract rates $ 1,446 $ 6,608 $ 39,878
Amount recognized as interest income 770 0 5,579
-------- -------- ---------
Foregone revenue $ 676 $ 6,608 $ 34,299
======== ======== =========
Impairment of loans having recorded investments of $404,678 at
December 31, 1998 has been recognized in accordance with Statements of Financial
Accounting Standards No. 114 and 118. The average recorded investment in
impaired loans during 1998 was $404,678. Total allowance for loan losses
related to impaired loans was $60,702 at December 31, 1998. No interest income
on impaired loans was recognized in 1998. 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, 2000
and 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
2000 1999
(000 omitted)
Financial instruments whose contract amounts
represent credit risk at December 31:
Commitments to extend credit $ 32,935 $ 32,464
Standby letters of credit and financial
guarantees written 4,541 4,688
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. RETIREMENT 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 $521,029, $439,957 and $371,621 for 2000, 1999,
and 1998, 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 $162,691 and $166,191 at December 31, 2000 and
1999, respectively. Total annual expense for this deferred compensation plan was
$19,064 for 2000, 1999 and 1998.
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 $46,000, $42,308 and $31,975 for 2000, 1999 and 1998, respectively.
In 1998, the corporation adopted four 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
$347,672 and $196,625 at December 31, 2000 and 1999, respectively which is
included in other liabilities. Total annual expense for these plans amounted to
$163,083, $155,474 and $41,151 for 2000, 1999, and 1998, respectively.
NOTE 10. STOCK COMPENSATION PLANS
During 2000 the corporation implemented two stock option plans (one
for employees and one for nonemployee directors). Under the corporation's stock
option plans the corporation may grant options to its directors, officers and
employees for up to 230,000 shares of common stock. Both incentive stock options
and nonqualified stock options may be granted under the plans. The exercise
price of each option equals the market price of the corporation's stock on the
date of grant and an option's maximum term is ten years.
A summary of the status of the corporation's stock option plans at
December 31, 2000 is presented below:
Weighted Average
Shares Exercise Price
Outstanding at beginning of year -- --
Granted 19,232 $ 37.77
Exercised -- --
Forfeited -- --
------
Options exercisable at year end 19,232 $ 37.77
======
Information pertaining to options outstanding at December 31, 2000 is
as follows:
--------------- Options Outstanding -------------- ------ Options Exercisable ------
Weighted Average Weighted
Number Remaining Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
$ 39.50 2,632 9.25 years $ 39.50 2,632 $ 39.50
$ 37.50 16,600 9.5 years $ 37.50 16,600 $ 37.50
------ ------
Outstanding at
end of year 19,232 9.46 years $ 37.77 19,232 $ 37.77
====== ======
During 2000 the corporation implemented an employee stock purchase
plan under which 75,000 shares of common stock have been reserved for issuance
to employees. The number of shares which may be issued to each participant is
determined annually, based on individual earnings, and their cost is equal to
85% of the fair market value as established by the average of the average of the
daily high bid and daily low offer quotations for the shares reported in the OTC
Bulletin Board service, during the ten trading days immediately preceding the
date of purchase. If no bid or offer quotation for the shares is reported
through the OTC Bulletin Board service during the ten business day period, the
fair market value is the price of the last trade reported through the OTC
Bulletin Board service prior to the purchase date. A total of 74,130 shares of
common stock remain reserved at December 31, 2000 for future grants under the
plan. Employees purchased 870 shares at $32.51 per share in 2000.
NOTE 11. INCOME TAXES
The components of federal income tax expense are summarized as
follows:
2000 1999 1998
(000 omitted)
Current year provision $ 1,530 $ 1,599 $ 1,153
Deferred income taxes (benefits) 7 ( 288) 27
------- ------- -------
Net federal income tax expense $ 1,537 $ 1,311 $ 1,180
======= ======= =======
Federal income taxes were computed after reducing pretax accounting
income for non-taxable income in the amount of $1,426,800, $1,515,383, and
$1,154,199 for 2000, 1999, and 1998, respectively.
10
NOTE 11. INCOME TAXES (CONTINUED)
A reconciliation of the effective applicable income tax rate to the
federal statutory rate is as follows:
2000 1999 1998
Federal income tax rate 34.0% 34.0% 34.0%
Reduction resulting from:
Nontaxable income 7.1 8.1 6.5
---- ---- ----
Effective income tax rate 26.9% 25.9% 27.5%
==== ==== ====
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:
(000 Omitted)
2000 1999
Total deferred tax assets $ 1,116 $ 1,262
Total deferred tax liabilities ( 635) ( 275)
------- -------
Net deferred tax asset (liability) $ 481 $ 987
======= =======
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 12. DEPOSITS
Included in interest bearing deposits at December 31 are NOW and
Super NOW account balances totaling $34,439,000 and $31,663,000 for 2000 and
1999, respectively. Also included in interest bearing deposits at December 31,
2000 and 1999 are money market account balances totaling $45,824,000 and
$45,444,000, respectively.
At December 31, 2000 and 1999 time deposits of $100,000 and
over aggregated $30,538,000 and $10,855,000, respectively. Interest expense on
time deposits of $100,000 and over was $1,181,000, $484,000, and $572,000
for 2000, 1999 and 1998, respectively.
At December 31, 2000 the scheduled maturities of certificates of
deposit are as follows:
2001 $ 33,166
2002 31,567
2003 36,089
2004 2,221
2005 4,416
2006 and thereafter 2,032
---------
$ 109,491
=========
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
$1,779,000 and $1,081,000 at December 31, 2000 and 1999, respectively.
NOTE 13. 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:
2000 1999
Average balance during the year $ 17,969,000 $ 8,894,000
Average interest rate during the year 5.86% 4.61%
Maximum month-end balance during the year $ 28,767,000 $ 13,683,000
Securities underlying the agreements at year-end:
Carrying value $ 35,049,000 $ 25,247,000
Estimated fair value $ 35,389,000 $ 24,909,000
At December 31, the corporation had long-term notes outstanding with
the Federal Home Loan Bank of Pittsburgh as follows:
------------ Amount -----------
2000 1999 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 6.54%
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.
11
NOTE 13. LIABILITIES FOR BORROWED MONEY (CONTINUED)
In addition to the aforementioned long-term notes the corporation
obtained a term loan in 1994 of $350,000 and two additional $350,000 term
loans in 2000 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 -----------
2000 1999 Maturity Date Interest Rate
$ 0 $ 6,498 2/00 5.48%
315,579 315,579 2/01 5.58%
350,000 0 4/20 7.40%
350,000 0 4/05 7.35%
----------- ---------
$ 1,015,579 $ 322,077
=========== =========
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 $85,868,000 at December 31, 2000. The
corporation also has available an unused line of credit with Atlantic Central
Bankers Bank of $6 million at December 31, 2000.
Total interest on the aforementioned borrowings charged to operations
was $1,177,779, $1,106,695 and $655,025 for 2000, 1999 and 1998, respectively.
NOTE 14. 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
Assets
2000 1999
(000 omitted)
Cash $ 579 $ 641
Securities available for sale 2,022 835
Investment in wholly-owned subsidiaries 24,968 20,811
Property and equipment (net of depreciation) 104 4
Other assets 84 19
-------- --------
Total assets $ 27,757 $ 22,310
======== ========
Liabilities
Accrued expenses $ 345 $ 409
Deferred taxes 38 33
Notes payable 700 0
-------- --------
Total liabilities 1,083 442
-------- --------
Shareholders' Equity
Common stock, no par value - $ .1041 stated value per share,
10,000,000 shares authorized with 2,240,744 shares issued at
December 31, 2000; 2,218,291 shares issued at December 31, 1999 233 231
Additional paid-in capital 19,360 18,498
Retained earnings 6,619 3,717
Accumulated other comprehensive income 462 ( 578)
-------- --------
Total shareholders' equity 26,674 21,868
-------- --------
Total liabilities and shareholders' equity $ 27,757 $ 22,310
======== ========
Income Statements
Years Ended December 31
2000 1999 1998
(000 omitted)
Interest and dividend income $ 102 $ 38 $ 23
Net gain on sale of investments 45 421 0
Cash dividends from wholly-owned subsidiary 1,069 910 1,110
Equity in undistributed income of subsidiaries 3,126 2,723 2,030
------- ------- -------
4,342 4,092 3,163
Less: Operating expenses and income tax 170 337 44
------- ------- -------
Net income $ 4,172 $ 3,755 $ 3,119
======= ======= =======
12
NOTE 14. ORRSTOWN FINANCIAL SERVICES, INC. (PARENT COMPANY ONLY) FINANCIAL
INFORMATION (CONTINUED)
Statements of Cash Flows
Years Ended December 31
2000 1999 1998
(000 Omitted)
Cash flows from operating activities:
Net income $ 4,172 $ 3,755 $ 3,119
Adjustments to reconcile net income to cash
provided by operating activities:
Security (gains) ( 45) ( 421) 0
Equity in undistributed income of subsidiary ( 3,126) ( 2,723) ( 2,030)
Increase (decrease) in other liabilities ( 64) 409 0
(Increase) decrease in other assets ( 64) 5 ( 26)
------- ------- -------
Net cash provided by operating activities 873 1,025 1,063
------- ------- -------
Cash flows from investing activities:
Purchase of available for sale securities ( 1,209) ( 255) ( 207)
Sales of available for sale securities 80 624 0
Purchases of property and equipment ( 100) 0 0
------- ------- -------
Net cash provided (used) by investing activities ( 1,229) 369 ( 207)
------- ------- -------
Cash flows from financing activities:
Cash dividends paid ( 1,270) ( 1,134) ( 986)
Cash paid in lieu of fractional stock dividends 0 ( 31) 0
Proceeds from sale of stock 864 303 124
Proceeds from debt 700 0 0
------- ------- -------
Net cash provided (used) by financing activities 294 ( 862) ( 862)
------- ------- -------
Net increase (decrease) in cash ( 62) 532 ( 6)
Cash, beginning balance 641 109 115
------- ------- -------
Cash, ending balance $ 579 $ 641 $ 109
======= ======= =======
NOTE 15. 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 $18,194,000 in its retained earnings at
December 31, 2000 is fully available for cash dividends. Orrstown Financial
Services' balance of retained earnings at December 31, 2000 is $6,619,000 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:
Orrstown Financial Services Regulatory Minimum
2000 1999 Requirements
Leverage ratio 8.55% 8.29% 3%
Risk-based capital ratio
Tier I (core capital) 12.35% 12.84% 4%
Combined Tier I and Tier II
(core capital plus allowance
for loan losses) 13.60% 14.07% 8%
As of December 31, 2000 the most recent notification, from the
Pennsylvania Department of Banking, 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 16. 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 2005.
Total rent expense charged to operations in connection with these leases was
$219,255, $118,342 and $24,803 for 2000, 1999, and 1998, respectively.
13
NOTE 16. LEASES (CONTINUED)
The total minimum rental commitment under operating leases at
December 31, 2000 is as follows:
Due in the year ending December 31:
2001 $ 158,690
2002 94,833
2003 37,221
2004 13,854
2005 6,000
NOTE 17. COMPENSATING BALANCE ARRANGEMENTS
Required deposit balance at the Federal Reserve was $65,000 at
December 31, 2000 and 1999, respectively. Required deposit balance at Atlantic
Central Bankers Bank was $540,000 and $585,000 at December 31, 2000 and 1999,
respectively. These balances are maintained to cover processing costs and
service charges. An additional $41,587 is on deposit with Independent Community
Bankers of America, Inc. as a reserve for potential clearing losses related to
the credit card operations.
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the corporation's financial instruments
were as follows at December 31:
---------- 2000 --------- ---------- 1999 ----------
Carrying Fair Carrying Fair
Amount Value Amount Value
(000 Omitted)
FINANCIAL ASSETS
Cash and short-term investments $ 11,193 $ 11,193 $ 8,700 $ 8,700
Securities available for sale 69,919 69,919 60,455 60,455
Restricted bank stocks 2,134 2,134 1,509 1,509
Loans 209,181 180,691
Allowance for loan loses ( 2,691) ( 2,455)
--------- ---------
Net loans 206,490 198,628 178,236 177,742
Accrued interest receivable 2,016 2,016 1,599 1,599
--------- --------- --------- ---------
Total financial assets $ 291,752 $ 283,890 $ 250,499 $ 250,005
========= ========= ========= =========
FINANCIAL LIABILITIES
Deposits $ 242,008 $ 242,655 $ 204,389 $ 205,177
Short-term borrowed funds 18,426 18,426 15,406 15,406
Long-term borrowed funds 21,515 18,282 20,822 17,822
Accrued interest payable 708 708 422 422
--------- --------- --------- ---------
Total financial liabilities $ 282,657 $ 280,071 $ 241,039 $ 238,827
========= ========= ========= =========
14
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, 2000, Orrstown Financial Services, Inc.
(the Corporation), and its wholly owned subsidiary, Orrstown Bank (the Bank),
recorded net income of $4,172,000, an increase of 11.1% over 1999 earnings of
$3,755,000, which was a 20.4% increase over net income of $3,119,000 in 1998.
Net income per share (EPS) has increased over this time period from $1.41 in
1998 to $1.70 in 1999 and $1.87 in 2000.The Corporation's earnings excluded
tax effected securities gains and losses made more impressive gains rising by
17.9% during 2000 to $4,097,000 from $3,476,000 in 1999 which had been an
11.2% increase over 1998's $3,125,000.
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 equity has steadily increased from
15.97% in 1998 to 17.02% in 1999 and 17.42% in 2000. The return on average
assets was 1.46% in 2000, 1.50% in 1999, and 1.47% in 1998.
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, 2000, net interest income totaled
$11,440,000, an increase of $1,190,000, or 11.6%, over 1999. The 1999 total was
$10,250,000, or 17.0%, over 1998. On a taxable equivalent basis, net interest
income increased by 10.7% in 2000 and 16.3% in 1999. 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 4.05% in 1998,
4.14% in 1999, and 4.05% in 2000. The net interest margin, which factors in
noninterest bearing funds sources, has moved from 4.70% to 4.69% to 4.57%,
respectively. Earning assets represented 93.8% of total assets in 1998, 92.6% in
1999 and 92.1% in 2000.
Volume factors were responsible for essentially all net interest income
growth during 1999 and 2000. On an average daily basis, assets grew 14.1% during
2000 and 18.1% during 1999. Earning assets grew 13.5% and 16.5% during 2000 and
1999, respectively. Average daily loan growth of 13.8% in 2000 and 17.7% in 1999
was achieved without lowering credit standards and allowed net interest margins
to hold at above peer group levels despite pressure on margins throughout the
banking industry in general. The net interest margin generated in 2000 declined
by only twelve basis points from 1999 levels but remained above peer averages.
Loan growth was funded more with purchased funds and time deposits than in
previous years when core deposit growth had been more robust. The use of these
more costly funding sources served to tighten margins but profit was still
generated on incremental transactions. Continued shifting of the loan portfolio
mix toward a heavier commercial loan weighting helped maintain spreads at the
levels achieved during the year by affording opportunities to record noninterest
bearing deposit balances along with variable loan balances tied primarily to
prime during a year that saw four 25 basis point increases in the prime lending
rate. Management is poised to keep a very close eye on margins moving into 2001
where a declining interest rate environment is anticipated.
15
ANALYSIS OF NET INTEREST INCOME
Average Balances and Interest Rates
Taxable Equivalent Basis
(Dollars In Thousands)
------------- 2000 ------------- ------------ 1999 --------------
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 $ 4,527 $ 294 6.49% $ 5,834 $ 283 4.85%
--------- ------- ---- --------- -------- ----
Investment securities:
Taxable investment
securities 49,337 3,475 7.04 38,877 2,397 6.17
Tax-exempt investment
securities 16,530 1,448 8.76 17,852 1,564 8.76
--------- ------- ---- --------- -------- ----
Total investment
securities 65,867 4,923 7.47 56,729 3,961 6.98
--------- ------- ---- --------- -------- ----
Loans:
Taxable loans 189,452 16,832 8.88 166,498 14,433 8.67
Tax-exempt loans 3,450 305 8.84 2,960 274 9.26
--------- ------- ---- --------- -------- ----
Total loans 192,902 17,137 8.88 169,458 14,707 8.68
--------- ------- ---- --------- -------- ----
Total interest-
earning assets 263,296 22,354 8.49 232,021 18,951 8.17
Non-Interest Earning Assets:
Cash and due from banks 7,052 6,515
Bank premises and
equipment 8,398 5,858
Other assets 9,722 8,252
Less allowance for loan
losses ( 2,565) ( 2,117)
--------- ---------
Total $ 285,903 $ 250,529
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest Bearing Liabilities:
Interest-bearing demand
deposits $ 76,631 2,386 3.11 $ 71,176 $ 2,088 2.93
Savings deposits 20,628 466 2.26 22,888 580 2.53
Time deposits 91,214 5,013 5.50 75,859 3,850 5.08
Short term borrowings 21,942 1,263 5.76 9,713 438 4.51
Long term borrowings 21,556 1,190 5.52 20,560 1,118 5.44
--------- ------- ---- --------- -------- ----
Total interest-
bearing liabilities 231,971 10,318 4.44 200,196 8,074 4.03
Non-Interest Bearing Liabilities:
Demand deposits 27,650 25,365
Other 2,328 2,901
--------- ---------
Total liabilities 261,949 228,462
Shareholders' equity 23,954 22,067
--------- ---------
Total cost of funds $ 285,903 3.92 $ 250,529 3.48
========= ---- ========= ----
Net interest income/net
interest spread $12,036 4.05% $ 10,877 4.14%
======= ==== ======== ====
Net interest margin 4.57% 4.69%
==== ====
------------- 1998 -------------
Tax Tax
Average Equivalent Equivalent
Balance Interest Rate
ASSETS:
Interest Earning Assets:
Federal funds sold & interest-
bearing bank balances $ 5,706 $ 303 5.31%
--------- ------- ----
Investment securities:
Taxable investment
securities 31,450 1,934 6.15
Tax-exempt investment
securities 17,890 1,570 8.77
--------- ------- ----
Total investment
securities 49,340 3,504 7.10
--------- ------- ----
Loans:
Taxable loans 142,019 12,717 8.96
Tax-exempt loans 1,994 179 8.97
--------- ------- ----
Total loans 144,013 12,896 8.96
--------- ------- ----
Total interest-
earning assets 199,059 16,703 8.39
Non-Interest Earning Assets:
Cash and due from banks 5,699
Bank premises and
equipment 5,148
Other assets 4,158
Less allowance for loan
losses ( 1,915)
---------
Total $ 212,149
=========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest Bearing Liabilities:
Interest-bearing demand
deposits $ 55,454 $ 1,715 3.00
Savings deposits 23,394 677 2.89
Time deposits 74,488 4,087 5.49
Short term borrowings 4,237 204 4.81
Long term borrowings 11,726 665 5.67
--------- ------- ----
Total interest-
bearing liabilities 169,299 7,348 4.34
Non-Interest Bearing Liabilities:
Demand deposits 20,433
Other 2,894
---------
Total liabilities 192,626
Shareholders' equity 19,523
---------
Total cost of funds $ 212,149 3.69
========= ----
Net interest income/net
interest spread $ 9,355 4.05%
======= ====
Net interest margin 4.70%
====
Noninterest Income and Expenses
Other income, excluding security gains, increased $470,000 or 14.9% during
2000 due primarily to increases in trust department income, which increased
$263,000, credit life and disability insurance fees and service charges on
deposit accounts. The 14.9% growth mirrors the 14.1% asset growth of the year.
Securities gains decreased by $309,000, from $413,000 to $114,000. The
securities gains that had been realized during 1999 were unusually large due
primarily to one transaction involving a bank stock held in the parent company's
investment portfolio. Management continues to search for new sources of
noninterest income.
16
Other expenses rose $895,000, or 10.9% during 2000. The 10.9% increase
appears reasonable given the 14.1% asset growth of the company for the year plus
the fact that 2000 saw the launch of internet banking services, the opening of
the bank's ninth full service branch at Silver Spring, near Mechanicsburg,
Pennsylvania as well as the expansion of the King Street facility in
Shippensburg to include a new operations center enabling consolidation of
operations, human resources, finance, marketing, and trust services under one
roof. Additional personnel were needed to staff the Silver Spring branch and to
help operations handle the growth that has been realized. Every major data
processing system within the company had been replaced during 1999 and the
operations center building project of 2000 provides the infrastructure needed to
cope with substantial growth. In spite of the capital outlays during the past
two years management has been able to generate an efficiency ratio below 60%, an
enviable number for a community bank with less than $500 million in assets. The
efficiency ratio improved to 57.8% for 2000, following 58.2% in 1999 and 55.0%
in 1998.
The table that follows provides additional information regarding
noninterest income and noninterest expense changes over the past three years:
ANALYSIS OF NONINTEREST INCOME AND EXPENSES
---- Year Ended December 31 ---- ------- % Change --------
2000 1999 1998 1999-2000 1999-1998
(In Thousands)
Other income:
Service charges on deposit accounts $ 1,174 $ 1,080 $846 8.7% 27.7%
Loan service charges and fees 256 285 243 (10.2)% 17.3%
ATM fees 166 159 153 4.4% 3.9%
Loan insurance fees 164 49 32 234.7% 53.1%
Other service charges, commissions and fees 58 50 39 16.0% 28.2%
Trust department income 1,125 862 656 30.5% 31.4%
Brokerage income 341 368 162 (7.3)% 127.2%
Other operating income 344 305 131 12.8% 133.6%
------- ------- ------- ----- -----
Subtotal before securities transactions 3,628 3,158 2,262 14.9% 39.6%
Securities gains (losses) 114 423 (9) (73.0)% NM
------- ------- ------- ----- -----
Total other income $ 3,742 $ 3,581 $ 2,253 4.5% 59.0%
======= ======= ======= ===== =====
Other expenses:
Salaries $ 3,235 $ 2,945 $ 2,478 9.8% 18.8%
Employee benefits 1,520 1,351 1,013 12.5% 33.4%
Occupancy and equipment expenses 1,558 1,100 859 41.6% 28.1%
Data processing expenses 324 671 493 (51.7)% 36.1%
ATM expenses 178 151 113 17.9% 33.6%
Telephone 198 143 96 38.5% 49.0%
Printing and supplies 227 249 178 (8.8)% 39.9%
Postage 135 128 117 5.5% 9.4%
Directors fees 206 185 154 11.4% 20.1%
Advertising 167 138 154 20.9% (10.4)%
Pennsylvania shares tax 193 171 145 12.9% 17.9%
Other operating expenses 1,172 986 645 18.9% 53.0%
------- ------- ------- ----- -----
Total operating expenses $ 9,113 $ 8,218 $ 6,445 10.9% 27.5%
======= ======= ======= ===== =====
Noninterest income as a % of noninterest
expense 41.1% 43.6% 35.0%
Federal Income Taxes
The Corporation's effective federal income tax rate for 2000 was 26.9%, as
compared to 25.9% in 1999 and 27.5% in 1998. 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 28% in 2001, assuming no retroactive
change in rates during 2001.
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 .06% of
average outstanding loans during 2000 and .04% of average 1999 loans.
Nonperforming loans, as represented by nonaccrual and restructed items, were
only .01% and .04% of outstanding loans at December 31, 2000 and 1999,
respectively. Loans 90 days or more past due and still accruing represented .39%
and .05% of outstanding loans at December 31, 2000 and 1999, 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 $360,000, $547,000, and $270,000 for 2000, 1999, and
1998, respectively. These provisions compared to net charge-offs of $124,000,
$63,000, and $66,000 for 2000, 1999, and 1998, respectively. The allowance for
loan losses was increased 9.6% during 2000 while loans increased 15.8%. The
reserve at December 31, 2000 represented 1.29% of loans outstanding. Net
charge-offs for 2000 represented only .06% of average loans outstanding. The
reserve at December 31, 2000 represented 21.7 years of coverage based upon 2000
net charge-offs and 22,425% of nonaccrual loans. In addition, approximately 66%
of the allowance was unallocated under internal evaluation procedures as of
December 31, 2000.
17
SUMMARY OF LOAN LOSS EXPERIENCE
---------------------- Year Ended December 31 ---------------------
2000 1999 1998 1997 1996
Amount of loans outstanding at end of period $ 209,181 $ 180,691 $ 158,632 $ 128,331 $ 108,926
========== ========= ========= ========= =========
Daily average loans outstanding $ 192,902 $ 169,458 $ 144,013 $ 117,403 $ 105,779
========== ========= ========= ========= =========
Balance of allowance for possible loan losses at
beginning of period $ 2,455 $ 1,971 $ 1,767 $ 1,620 $ 1,433
Loans charged off 129 128 84 83 68
Recoveries of loans previously charged off 5 65 18 15 15
---------- --------- --------- --------- ---------
Net loans charged off (recovered) 124 63 66 68 53
Additions to allowance charged to expense 360 547 270 215 240
---------- --------- --------- --------- ---------
Balance at end of period $ 2,691 $ 2,455 $ 1,971 $ 1,767 $ 1,620
========== ========= ========= ========= =========
Ratio of net charge-offs to average loans
outstanding 0.06% 0.04% 0.05% 0.06% 0.05%
========== ========= ========= ========= =========
Ratio of reserve to gross loans outstanding
at December 31 1.29% 1.36% 1.24% 1.38% 1.49%
========== ========= ========= ========= =========
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 66% 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 -------------------------
2000 1999 1998 1997 1996
(In Thousands)
Loans on nonaccrual (cash) basis $ 12 $ 64 $ 486 $ 473 $ 14
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 0 311 49 49
----- ----- ------- ------- -----
Total nonperforming loans and OREO $ 12 $ 64 $ 797 $ 522 $ 63
===== ===== ======= ======= =====
Ratio of nonperforming assets to total loans and OREO 0.01% 0.04% 0.50% 0.41% 0.06%
===== ===== ======= ======= =====
Ratio of nonperforming assets to total assets 0.00% 0.02% 0.34% 0.27% 0.04%
===== ===== ======= ======= =====
OTHER CREDIT RISK ELEMENTS
Loans past due 90 or more days and still accruing $ 814 $ 97 $ 284 $ 657 $ 203
----- ----- ------- ------- -----
Ratio of other credit risk elements to total loans and OREO 0.39% 0.05% 0.18% 0.51% 0.19%
===== ===== ======= ======= =====
Ratio of other credit risk elements to total assets 0.26% 0.04% 0.12% 0.35% 0.13%
===== ===== ======= ======= =====
TOTAL NONPERFORMING AND OTHER RISK ASSETS $ 826 $ 161 $ 1,081 $ 1,179 $ 266
===== ===== ======= ======= =====
Ratio of total risk assets to total loans and OREO 0.39% 0.09% 0.68% 0.92% 0.24%
===== ===== ======= ======= =====
Ratio of total risk assets to total assets 0.26% 0.06% 0.46% 0.62% 0.17%
===== ===== ======= ======= =====
Future Impact of Recently Issued Accounting Standards
The Financial Accounting Standards Board (FASB) issued Statement No. 133 as
amended by SFAS No. 138, Accounting For Derivative Instruments and Hedging
Activities, effective for fiscal years beginning after June 15, 2000. 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 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 fair value of the item being hedged. Depending on the type of hedge,
such recognition will be 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.
In September 2000, the FASB issued Statement No. 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. It replaces
previously issued statement No. 125. Statement No. 140 revises accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but otherwise carries over most of Statement No.
125's provisions without reconsideration. Statement No. 140 is effective for
transfers, servicing and extinguishments occurring after March 31, 2001.
Management is evaluating the impact of this statement, but does not anticipate
that it will have 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.
18
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, 2000
(Dollars in Thousands)
-------------------------- Interest Sensitivity Period ---------------------
After 3 After 6
Within 3 Within 6 Within 12 After
Months Months Months 1 Year Total
RATE SENSITIVE ASSETS (RSA):
Loans $ 57,190 $ 6,987 $ 13,481 $ 131,523 $ 209,181
Investment securities 15,596 5,025 10,570 40,862 72,053
Other earning assets 3,221 0 0 0 3,221
-------- -------- -------- --------- ---------
Total RSA 76,007 12,012 24,051 172,385 284,455
-------- -------- -------- --------- ---------
RATE SENSITIVE LIABILITIES (RSL):
Interest bearing deposits 55,832 16,775 18,867 118,998 210,292
Short term borrowed funds 16,676 1,750 0 0 18,426
Long term borrowed funds 0 0 316 21,199 21,515
-------- -------- -------- --------- ---------
Total RSL 72,508 18,525 19,003 140,197 250,233
-------- -------- -------- --------- ---------
RATE SENSITIVE GAP:
Period 3,499 ( 6,513) 5,048 32,188 34,222
Cumulative 3,499 ( 3,014) 2,034 34,222
GAP AS A PERCENT OF TOTAL ASSETS:
Period 1.12% ( 2.09)% 1.62%
Cumulative 1.12% ( 0.97)% 0.65%
RSA/RSL Cumulative 1.05 0.97 1.02
The rate sensitivity information shown above indicates a very balanced
position, near a 1.00 RSA/RSL, at all intervals. This indicates that the balance
sheet is positioned adequately to react to rate movements 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, plus dividend reinvestment participation, have been the primary
methods employed to increase capital accounts. Total stockholders' equity rose
$4,806,000 during 2000, an increase of 22.0% for the year. This followed growth
of 3.7% and 15.4% during 1999 and 1998, respectively. The 2000 increase was
enhanced by an equity markup of $1,040,000 attributable to the available for
sale investment securities portfolio. The increasing earnings stream during this
period has allowed the Corporation to steadily increase cash dividends paid to
stockholders. In 2000 cash dividends rose $136,000, or 12.0% over 1999 levels
while net income rose 11.1% during the period. This followed a 15.0% increase in
dividend payout for 1999 versus 1998. Dividends per share have moved from $0.45
to $0.51 to $0.57 for 1998 through 2000, respectively.
CAPITAL AND DIVIDEND RATIOS
2000 1999 1998
(Amounts in Thousands)
At December 31:
Shareholders' equity $ 26,674 $ 21,868 $ 21,080
Equity/assets 8.55% 8.25% 8.94%
For the Year:
Average equity/average assets 8.38% 8.81% 9.20%
Dividend payout 30.48% 30.20% 31.61%
Return on average equity 17.42% 17.02% 15.97%
Dividends paid $ 1,270 $ 1,134 $ 986
Regulatory
Capital Measures: Minimums
Tier I Capital Ratio 12.4% 12.8% 11.8% 4.0%
Total (Tier II) Capital Ratio 13.6% 14.1% 12.9% 8.0%
Leverage Ratio 8.6% 8.3% 8.9% 3.0%
19
The Corporation and its banking subsidiary are subject to periodic
examinations by the Federal Reserve Bank and the Pennsylvania Department of
Banking. During 2000 two examinations were conducted at the subsidiary level.
The examinations included, but were not limited to, procedures designed to
review trust operations, lending practices, credit quality, liquidity, and
capital adequacy. No comments were received from the regulatory agencies which,
if implemented, would have a material effect on Orrstown Financial Services,
Inc.'s liquidity, capital resources or operations.
Landmark legislation in the financial services area was signed into law by
the President on November 12, 1999. The Gramm-Leach-Bliley Act dramatically
changed certain banking laws that had been in effect since the early part of the
20th century. The most radical changes were the removal of the separation
between banking and the securities businesses that had been mandated by the
Glass-Steagall Act and the preemption of provisions of any state law that
prohibited affiliation between banking and insurance entities. Accordingly, the
new legislation permitted securities firms and insurance companies to own
banking entities, and permitted bank holding companies (and in some cases,
banks) to own securities firms and insurance companies. The provisions of
federal law that precluded banking entities from engaging in nonfinancially
related activities, such as manufacturing, were not changed. For example, a
manufacturing company cannot own a bank and become a bank holding company, and a
bank holding company cannot own a subsidiary that is not engaged in financial
activities, as defined by regulators.
The legislation created a new category of banking holding company called a
"financial holding company." In order to avail itself of the expanded financial
activities permitted under the law, a bank holding company must notify the
Federal Reserve that it elects to be a financial holding company. A bank holding
company can make this election if it, and all its bank subsidiaries, are well
capitalized, well managed, and have at least a satisfactory Community
Reinvestment Act rating, each in accordance with the definitions prescribed by
the Federal Reserve and the regulators of the subsidiary banks. Once a bank
holding company makes such an election, and provided that the Federal Reserve
does not object to such election by such bank holding company, the financial
holding company may engage in financial activities (i.e., securities
underwriting, insurance underwriting, and certain other activities that are
financial in nature as to be determined by the Federal Reserve) by simply giving
a notice to the Federal Reserve within thirty days after beginning such business
or acquiring a company engaged in such business. This makes the regulatory
approval process to engage in financial activities much more streamlined than it
was under prior law.
The Corporation elected to be, and was approved as, a financial holding
company during March, 2000.
20
SUMMARY OF QUARTERLY FINANCIAL DATA
The unaudited quarterly results of operations for the years ended December
31, 2000 and 1999 are as follows:
2000 1999
--------------- Quarter Ended ---------------- ---------------- Quarter Ended -----------------
March June September December March June September December
Interest income $ 4,988 $ 5,323 $ 5,577 $ 5,870 $ 4,309 $ 4,433 $ 4,672 $ 4,910
Interest expense 2,293 2,471 2,715 2,839 1,922 1,941 2,033 2,178
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 2,695 2,852 2,862 3,031 2,387 2,492 2,639 2,732
Provision for loan losses 75 75 75 135 90 90 90 277
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses 2,620 2,777 2,787 2,896 2,297 2,402 2,549 2,455
Securities gains (losses) ( 2) ( 1) 36 81 ( 9) ( 6) 271 167
Other income 803 899 866 1,060 713 862 801 782
Other expenses 2,137 2,196 2,320 2,460 1,829 1,920 2,302 2,167
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes 1,284 1,479 1,369 1,577 1,172 1,338 1,319 1,237
Applicable income taxes 335 405 342 455 323 349 345 294
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 949 $ 1,074 $ 1,027 $ 1,122 $ 849 $ 989 $ 974 $ 943
======= ======= ======= ======= ======= ======= ======= =======
Per common share data:
Net income $ 0.43 $ 0.48 $ 0.46 $ 0.50 $ 0.38 $ 0.45 $ 0.44 $ 0.43
Dividends 0.14 0.14 0.14 0.15 0.12 0.12 0.13 0.14
Performance statistics:
Return on average assets 1.42% 1.54% 1.40% 1.48% 1.45% 1.62% 1.52% 1.41%
Return on average equity 16.99% 18.53% 16.85% 17.32% 15.95% 17.92% 17.38% 16.78%
Average equity/average assets 8.33% 8.30% 8.32% 8.55% 9.09% 9.04% 8.73% 8.41%
21
Selected Five-Year Financial Data
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
Year Ended December 31 2000 1999 1998 1997 1996
Summary of Operations (000 omitted)
Interest income $ 21,758 $ 18,324 $ 16,109 $ 13,450 $ 12,018
Interest expense 10,318 8,074 7,348 5,822 ,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
Securities gains (losses) 114 423 ( 9) 3 ( 5)
Other operating income 3,628 3,158 2,262 1,548 1,245
Other 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
Applicable income tax 1,537 1,311 1,180 974 838
-------- -------- -------- -------- --------
Net income $ 4,172 $ 3,755 $ 3,119 $ 2,606 $ 2,248
======== ======== ======== ======== ========
Per Common Share Data *
Income before taxes $ 2.56 $ 2.29 $ 1.94 $ 1.63 $ 1.40
Applicable income taxes 0.69 0.59 0.53 0.45 0.38
Net income 1.87 1.70 1.41 1.18 1.02
Cash dividend paid 0.57 0.51 0.45 0.41 0.32
Book value 11.90 9.85 9.54 8.29 7.19
Average shares outstanding 2,229,366 2,214,951 2,205,718 2,204,444 2,205,268
Stock Price Statistics *
Close $ 40.00 $ 38.00 $ 26.05 $ 20.93 $ 15.06
High 44.00 40.00 29.77 20.93 15.06
Low 37.25 25.12 20.59 15.06 13.29
Price earnings ratio at close 21.4 22.4 18.5 17.7 14.8
Year-End Balance Sheet Data (000 omitted)
Total assets $311,903 $265,053 $235,822 $190,242 $157,556
Total loans 209,181 180,691 158,632 128,331 108,926
Total investment securities 72,053 61,964 51,137 47,191 34,355
Deposits - noninterest bearing 31,716 25,264 22,020 17,649 16,322
Deposits - interest bearing 210,292 179,125 161,744 142,931 120,937
Total deposits 242,008 204,389 183,764 160,580 137,259
Liabilities for borrowed money 39,941 36,228 27,062 8,569 2,339
Total shareholders' equity 26,674 21,868 21,080 18,265 15,856
Trust assets under management - market value 206,000 182,000 152,000 108,000 83,000
Performance Statistics
Average equity/average assets 8.38% 8.81% 9.20% 9.84% 9.84%
Return on average equity 17.42% 17.02% 15.97% 15.37% 14.90%
Return on average assets 1.46% 1.50% 1.47% 1.51% 1.47%
* 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.
22
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, 2000, there were approximately 2,025 shareholders of record, with a total of
2,240,744 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.
2000 1999
Market Price Market Price
Quarterly Quarterly
High Low Dividend High Low Dividend
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
------ ------
$ 0.57 $ 0.51
Investor Information
Annual Meeting
The annual meeting of Orrstown Financial Services, Inc. stockholders is
scheduled for May 1, 2001 at 9:00 a.m. at Orrstown Bank, 77 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
23