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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, 2001
Commission file number: 33-18888
ORRSTOWN FINANCIAL SERVICES, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2530374
- ------------------------------ -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
77 East King Street, P. O. Box 250, Shippensburg, Pennsylvania 17257
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(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, 2001, 2,378,608 shares of the registrant's common stock were
outstanding. The aggregate market value of such shares held by nonaffiliates on
that date was $ 92,765,712.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended December 31, 2001
are incorporated by reference into Parts I and II. Portions of the Proxy
Statement for 2002 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 ten branches are located in Shippensburg (2),
Carlisle (2), Spring Run, Orrstown, Chambersburg (2), Greencastle 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, 2001, Orrstown had 99 full-time and 43 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 non real 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, 2001, Orrstown had total assets of
approximately $ 374 million, total shareholders' equity of approximately $ 31
million and total deposits of approximately $ 281 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 21 of the annual report to shareholders under
"Capital Adequacy and Regulatory Matters". Failure to meet applicable capital
guidelines could subject a bank to a variety of enforcement remedies available
to the regulatory authorities. Depending upon circumstances, the regulatory
agencies may require an institution to develop a "capital plan" to increase its
capital to levels established by the agency.
In 1991, the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") was enacted. FDICIA contains provisions limiting
activities and business methods of depository institutions. FDICIA requires the
primary federal banking regulators to promulgate regulations setting forth
standards relating to, among other things, internal controls and audit systems;
credit underwriting and loan documentation; interest rate exposure and other
off-balance sheet assets and liabilities; and compensation of directors and
officers. FDICIA provides for expanded regulation of depository institutions and
their affiliates, including parent holding companies, by such institutions'
primary federal banking regulator. Each primary federal banking regulator is
required to specify, by regulation, capital standards for measuring the capital
adequacy of the depository institutions it supervises and, depending upon the
extent to which a depository institution does not meet such capital adequacy
measures, 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, 2001, 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.
In 1999, the Gramm-Leach-Bliley Act was enacted. This federal
legislation modernizes 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 "Regulation and Supervision" 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 "Regulation and Supervision", 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, Shippensburg, (2),
Carlisle, Spring Run, Chambersburg, and Mechanicsburg, Pennsylvania. Offices of
the bank are located in each of these buildings. It leases office space for its
Greencastle branch.
-7-
In 2000, the corporation expanded its main offices located on King Street in
Shippensburg, PA.
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
management, the Corporation 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-
Held Employee Age as of
Name/Office Held Since Since 3/15/02
Joel R. Zullinger, Chairman
of the Board 1991 (1) 53
Jeffrey W. Coy, Vice Chairman of
the Board 1988 (1) 50
Kenneth R. Shoemaker, President, CEO 1987 1986 54
Bradley S. Everly, Senior Vice President,
Treasurer 1997 1997 50
Stephen C. Oldt, Executive
Vice President, Assistant Secretary 1987 1987 59
Philip E. Fague, Executive Vice President,
Assistant Treasurer 2001 1988 42
Denver L. Tuckey, Secretary 1999 (1) 67
Jeffrey W. Embly, Vice President 1999 1997 31
(1) These officers are not employees of the Bank.
Senior Operating Officers of the Bank
Held Bank Employee Age as of
Name/Office Held Since Since 3/15/02
Kenneth R. Shoemaker, President,
Chief Executive Officer 1987 1986 54
Stephen C. Oldt, Executive Vice
President, Chief Operating Officer 1987 1987 59
Philip E. Fague, Executive Vice President, 1999/
Chief Sales and Service Officer 2000 1988 42
Bradley S. Everly, Senior Vice
President, Chief Financial Officer 1997 1997 50
Benjamin Stoops, Vice President,
Chief Technology Officer 1998 1998 50
Jeffrey W. Embly, Vice President,
Senior Loan Officer 1999 1997 31
Barbara E. Brobst, Vice President,
Senior Trust Officer 2001 1997 43
Nathan A. Eifert, Assistant Vice President,
Director of Marketing 2001 2000 33
-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, 2001, the
approximate number of shareholders of record was approximately 2,149. 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) 2001 2000
High Low High Low
First Quarter $ 38.10 $ 36.19 $ 0.143 $ 38.10 $ 36.19 $ 0.133
Second Quarter 39.29 35.71 0.143 37.14 35.48 0.134
Third Quarter 44.76 35.00 0.150 36.67 35.71 0.133
Fourth Quarter 40.00 37.00 0.160 41.90 35.84 0.143
(1) Note: All per share data has been restated after giving retroactive
recognition to a 5% stock dividend paid September 15, 2001.
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 23 of the annual
shareholders' report for the year ended December 31, 2001 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 16 through 21 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 23 of the annual shareholders report for the year
ended December 31, 2001 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
2001 Versus 2000 2000 Versus 1999
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
Total Total
Average Average Increase Average Increase
Volume Rate (Decrease) Volume Average Rate (Decrease)
(000 omitted)
Interest Income
Loans (net of unearned
discounts) $ 3,570 ( $ 1,300) $ 2,270 $ 1,974 $ 456 $ 2,430
Taxable investment securities 121 ( 326) ( 205) 645 433 1,078
Nontaxable investment securities ( 56) ( 29) ( 85) ( 115) ( 1) ( 116)
Other short-term investments 763 ( 557) 206 ( 63) 74 11
--------- --------- ------ ---------- ------- --------
Total interest income 4,398 ( 2,212) 2,186 2,441 962 3,403
--------- --------- ------ ---------- ------- --------
Interest Expense
Interest bearing demand 699 ( 630) 69 160 138 298
Savings deposits 4 ( 169) ( 165) ( 57) ( 57) ( 114)
Time deposits 640 ( 62) 578 780 383 1,163
Short-term borrowings 134 ( 488) ( 354) 552 273 825
Long-term borrowings 371 ( 140) 231 54 18 72
--------- --------- ------ ---------- ------- --------
Total interest expense 1,848 ( 1,489) 359 1,489 755 2,244
--------- --------- ------ ---------- ------- --------
Net interest income $ 1,827 $ 1,159
======= =======
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
INVESTMENT PORTFOLIO
The following table shows the maturities of investment
securities at book value as of December 31, 2001, and weighted average yields of
such securities. Yields are shown on a tax equivalent basis, assuming a 34%
federal income tax rate.
After 5
After 1 year years but
but within 5 within 10
Within 1 year years years After 10 years Total
(000 omitted)
Bonds:
U. S. Treasury
Book value $ 51 $ 1,029 $ 0 $ 0 $ 1,080
Yield 6.28% 6.06% 0% 0% 6.07%
U. S. Government agencies
Book value 1,000 0 1,000 0 2,000
Yield 6.42% 0% 6.50% 0% 6.46%
State and municipal
Book value 0 0 983 17,728 18,711
Yield 0% 0% 9.24% 8.31% 8.36%
Corporate
Book value 0 1,993 0 941 2,934
Yield 0% 5.08% 0% 3.02% 4.42%
Trust preferred
Book value 0 0 0 1,000 1,000
Yield 0% 0% 0% 9.25% 9.25%
Total book value $1,051 $3,022 $1,983 $ 19,669 $ 25,725
====== ====== ====== ======== ========
Yield 6.41% 5.41% 7.86% 8.10% 7.70%
====== ====== ====== ======== ========
Mortgage-backed securities:
Total book value $ 41,313
========
Yield 6.27%
========
Equity Securities:
Total book value $ 959
========
Yield 3.45%
========
Total Investment Securities $ 67,997
========
Yield 6.77%
========
-12-
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:
2001 2000 1999 1998 1997
(000 omitted)
Commercial, financial and agricultural $ 28,534 $ 23,938 $ 21,503 $ 18,732 $ 10,275
Real estate - Construction 20,480 17,425 15,580 11,182 5,961
Real estate - Mortgage 192,192 157,722 134,046 116,030 97,074
Installment and other personal loans
(net of unearned discount) 8,610 10,096 9,562 12,688 15,021
--------- --------- --------- --------- ---------
Total loans $ 249,816 $ 209,181 $ 180,691 $ 158,632 $ 128,331
========= ========= ========= ========= =========
Presented below are the approximate maturities of the loan
portfolio (excluding real estate mortgages, installments and credit cards) at
December 31, 2001:
One to Five
Under One Year years Over Five Years Total
(000 omitted)
Commercial, financial and agricultural $ 4,530 $ 5,434 $ 18,570 $ 28,534
Real estate - Construction 2,830 3,389 14,261 20,480
------- ------- -------- --------
Total $ 7,360 $ 8,823 $ 32,831 $ 49,014
======= ======= ======== ========
The following table presents the approximate amount of fixed
rate loans and variable rate loans due as of December 31, 2001:
Fixed Rate Variable
Loans Rate Loans
(000 omitted)
Due within one year $ 2,104 $ 10,148
Due after one but within five years 19,625 7,526
Due after five years 78,594 131,819
--------- ---------
Total $ 100,323 $ 149,493
========= =========
-13-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31
2001 2000 1999 1998 1997
(000 omitted)
Average total loans outstanding
(net of unearned income) $ 233,103 $ 192,902 $ 169,458 $ 144,013 $ 117,403
========= ========= ========= ========= =========
Allowance for loan losses,
beginning of period $ 2,691 $ 2,455 $ 1,971 $ 1,767 $ 1,620
Additions to provision for loan
losses charged to operations 504 360 547 270 215
Loans charged off during the year
Commercial 67 99 97 15 1
Personal credit lines 29 11 7 23 32
Installment 2 19 24 46 50
--------- --------- --------- --------- ---------
Total charge-off's 98 129 128 84 83
--------- --------- --------- --------- ---------
Recoveries of loans previously
charged off:
Commercial 6 1 59 3 2
Installment 1 2 1 10 12
Personal credit lines 0 2 5 5 1
--------- --------- --------- --------- ---------
Total recoveries 7 5 65 18 15
--------- --------- --------- --------- ---------
Net loans charged off (recovered) 91 124 63 66 68
--------- --------- --------- --------- ---------
Allowance for loan losses, end of
period $ 3,104 $ 2,691 $ 2,455 $ 1,971 $ 1,767
========= ========= ========= ========= =========
Ratio of net loans charged off to
average loans outstanding .04% .06% .04% .05% .06%
========= ========= ========= ========= =========
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
NONACCRUAL, DELINQUENT AND IMPAIRED 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.
2001 2000 1999 1998 1997
------ ------ ------ ------ ------
(000 omitted)
Nonaccrual loans $ 56 $ 12 $ 64 $ 486 $ 473
====== ====== ====== ====== ======
Accrual loans:
Restructured $ 0 $ 0 $ 0 $ 0 $ 0
30 through 89 days past due 2,244 865 3,420 823 2,398
90 days or more past due 644 814 97 284 657
------ ------ ------ ------ ------
Total accrual loans $2,888 $1,679 $3,517 $1,107 $3,055
====== ====== ====== ====== ======
See Note 6 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,
2001.
-15-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
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
2001 2000
Percentage of Percentage of
Allowance Loans to Total Allowance Loans to Total
Amount Loans Amount Loans
(000 omitted)
Commercial, financial and agricultural $ 466 11.42% $ 43 11.74%
Commercial, real estate secured 563 46.42 786 21.29
Real estate - Construction 0 8.20 0 8.30
Real estate - Mortgage 350 30.51 56 53.86
Installment 33 3.45 34 4.81
Unallocated 1,692 0.0 1,772 0.00
------- ------ ------- ------
Total $ 3,104 100.00% $ 2,691 100.00%
======= ====== ======= ======
Years Ended December 31
1999 1998
Percentage of Percentage of
Allowance Loans to Total Allowance Loans to Total
Amount Loans Amount Loans
(000 omitted)
Commercial, financial and agricultural $ 45 11.90% $ 255 9.93%
Commercial, real estate secured 609 18.03 416 19.43
Real estate - Construction 0 8.62 0 7.05
Real estate - Mortgage 93 56.16 111 53.77
Installment 27 5.29 34 9.82
Unallocated 1,681 0.00 1,155 0.00
------- ------ ------- ------
Total $ 2,455 100.00% $ 1,971 100.00%
======= ====== ======= ======
Years Ended December 31
1997
Percentage of
Allowance Loans to Total
Amount Loans
(000 omitted) $ 31 8.00%
Commercial, financial and agricultural 354 35.00
Commercial, real estate secured 0 4.64
Real estate - Construction 188 40.64
Real estate - Mortgage 12 11.72
Installment 1,182 0.00
------- ------
Unallocated $ 1,767 100.00%
======= ======
Total
16
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
DEPOSITS
The average amounts of deposits are summarized below:
Years Ended December 31
2001 2000 1999
(000 omitted)
Demand deposits $ 32,628 $27,650 $ 25,365
Interest bearing demand deposits 99,103 76,631 71,176
Savings deposits 20,787 20,628 22,888
Time deposits 102,856 91,214 75,859
--------- --------- ---------
Total deposits $ 255,374 $ 216,123 $ 195,288
========= ========= =========
The following is a breakdown of maturities of time deposits of
$ 100,000 or more as of December 31, 2001:
(000 omitted)
Three months or less $ 3,405
Over three months through twelve months 9,916
Over one year through three years 2,690
Over three years 1,815
----------
$ 17,826
==========
RETURN ON EQUITY AND ASSETS (APPLYING DAILY AVERAGE BALANCES)
The following table presents a summary of significant earnings
and capital ratios: (000 omitted)
2001 2000 1999
Average assets $ 340,428 $ 285,903 $ 250,529
Net income $ 5,092 $ 4,172 $ 3,755
Average equity $ 29,612 $ 23,954 $ 22,067
Cash dividends paid $ 1,411 $ 1,270 $ 1,134
Return on assets 1.50% 1.46% 1.50%
Return on equity 17.20% 17.42% 17.02%
Dividend payout ratio 27.71% 30.48% 30.20%
Equity to asset ratio 8.70% 8.38% 8.81%
17
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
CONSOLIDATED SUMMARY OF OPERATIONS
Years Ended December 31
2001 2000 1999 1998 1997
(000 omitted)
Interest income $ 23,978 $ 21,758 $ 18,324 $ 16,109 $ 13,450
Interest expense 10,677 10,318 8,074 7,348 5,822
-------- -------- -------- -------- --------
Net interest income 13,301 11,440 10,250 8,761 7,628
Provision for loan losses 504 360 547 270 215
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 12,797 11,080 9,703 8,491 7,413
Other income:
Trust and brokerage services 1,480 1,466 1,230 818 490
Service charges - Deposits, other
service charges, collection and
exchange charges, commission and
fees 2,634 1,818 1,623 1,313 942
Other operating income 366 458 728 122 119
-------- -------- -------- -------- --------
Total other income 4,480 3,742 3,581 2,253 1,551
-------- -------- -------- -------- --------
Income before operating expense 17,277 14,822 13,284 10,744 8,964
Operating expenses:
Salaries and employees benefits 5,151 4,755 4,297 3,491 2,901
Occupancy and equipment expense 1,676 1,558 1,099 859 764
Other operating expenses 3,420 2,800 2,822 2,095 1,719
-------- -------- -------- -------- --------
Total operating expenses 10,247 9,113 8,218 6,445 5,384
-------- -------- -------- -------- --------
Income before income taxes 7,030 5,709 5,066 4,299 3,580
Income tax 1,938 1,537 1,311 1,180 974
-------- -------- -------- -------- --------
Net income applicable to common stock $ 5,092 $ 4,172 $3,755 $3,119 $2,606
======== ======= ====== ====== ======
Per share data:
Basic earnings $ 2.15 $ 1.78 $ 1.61 $ 1.35 $ 1.13
Diluted earnings $ 2.12 $ 1.77 $ 1.61 $ 1.35 $ 1.13
Cash dividends $ .60 $ .54 $ .49 $ .42 $ .39
Weighted average shares:
Basic 2,366,707 2,340,834 2,325,699 2,316,004 2,314,666
Diluted 2,398,149 2,352,130 2,325,699 2,316,004 2,314,666
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 2002 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 subsidiaries, included in the
annual report of the registrant to its shareholders for the
year ended December 31, 2001, are incorporated by reference in
Item 8:
Consolidated balance sheets - December 31, 2001 and
2000
Consolidated statements of income - Years ended
December 31, 2001, 2000, and 1999
Consolidated statements of shareholders' equity -
Years ended December 31, 2001, 2000, and 1999
Consolidated statements of cash flows - Years ended
December 31, 2001, 2000, and 1999
Notes to consolidated financial statements -
December 31, 2001
(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 25, 2002 (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 25, 2002
- ------------------------------------- Director
Kenneth R. Shoemaker
/s/ Anthony F. Ceddia Director March 25, 2002
- --------------------------------------
Dr. Anthony F. Ceddia
/s/ Glenn W. Snoke Director March 25, 2002
- -------------------------------------
Glenn W. Snoke
/s/ Gregory A. Rosenberry Director March 25, 2002
- ------------------------------------
Gregory A. Rosenberry
/s/ Joel R. Zullinger Chairman of the March 25, 2002
- ------------------------------------ Board and Director
Joel R. Zullinger
/s/ Jeffrey W. Coy Vice Chairman March 25, 2002
- ------------------------------------- of the Board
Jeffrey W. Coy and Director
/s/ John S. Ward Director March 25, 2002
- ---------------------------------------
John S. Ward
/s/ Denver L. Tuckey Secretary and March 25, 2002
- --------------------------------------- Director
Denver L. Tuckey
/s/ Andrea Pugh Director March 25, 2002
- ---------------------------------------
Andrea Pugh
21
Exhibit 13
Orrstown Financial Services, Inc.
2001 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 - 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 16 - 21
SUMMARY OF QUARTERLY FINANCIAL DATA 22
SELECTED FIVE-YEAR FINANCIAL DATA 23
MARKET, DIVIDEND AND INVESTOR INFORMATION 24
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, 2001 and 2000 and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the three years
ended December 31, 2001. 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, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
/S/ Smith Elliott Kearns & Company, LLC
Chambersburg, Pennsylvania
January 29, 2002
Consolidated Balance Sheets
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
ASSETS
Dec. 31, 2001 Dec. 31, 2000
(000 omitted) (000 omitted)
Cash and due from banks $ 12,650 $ 11,021
Federal funds sold 24,347 3,049
Interest bearing deposits with banks 679 172
Securities available for sale 68,422 69,919
Federal Home Loan Bank, Federal Reserve and Atlantic Central
Bankers Bank stock, at cost which approximates market value 1,703 2,134
------------- -------------
107,801 86,295
------------- -------------
Loans
Commercial, financial and agricultural 28,534 23,938
Real estate - Mortgages 192,192 157,722
Real estate - Construction and land development 20,480 17,425
Consumer 8,610 10,096
------------- -------------
249,816 209,181
Less: Allowance for loan losses ( 3,104) ( 2,691)
------------- -------------
246,712 206,490
------------- -------------
Premises and equipment, net 9,019 9,269
Accrued interest receivable 1,541 2,016
Cash surrender value of life insurance 5,923 5,636
Other assets 2,732 2,197
------------- -------------
Total assets $ 373,728 $ 311,903
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing $ 39,881 $ 31,716
Interest bearing 241,287 210,292
------------- -------------
281,168 242,008
------------- -------------
Federal funds purchased and securities sold under agreements
to repurchase 31,531 18,426
Other borrowed funds 26,512 21,802
Accrued interest and other liabilities 3,355 2,993
------------- -------------
Total liabilities 342,566 285,229
------------- -------------
Shareholders' equity
Common stock: No par value - $ .1041 stated value per share,
10,000,000 shares authorized with 2,378,608 shares issued at
December 31, 2001; 2,240,744 shares issued at December 31, 2000 248 233
Additional paid-in capital 25,077 19,360
Retained earnings 5,557 6,619
Accumulated other comprehensive income 280 462
------------- -------------
Total shareholders' equity 31,162 26,674
------------- -------------
Total liabilities and shareholders' equity $ 373,728 $ 311,903
============= =============
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,
2001 2000 1999
---------- ---------- ----------
(000 omitted)
Interest and Dividend Income
Interest and fees on loans $ 19,308 $ 17,033 $ 14,613
Interest and dividends on investment securities
U.S. Government and agencies 2,869 3,182 2,289
Exempt from federal income tax 899 956 1,032
Other investment income 902 587 390
---------- ---------- ----------
Total interest and dividend income 23,978 21,758 18,324
---------- ---------- ----------
Interest Expense
Interest on deposits 8,347 7,865 6,519
Interest on borrowed money 2,330 2,453 1,555
---------- ---------- ----------
Total interest expense 10,677 10,318 8,074
---------- ---------- ----------
Net interest income 13,301 11,440 10,250
---------- ---------- ----------
Provision for loan losses 504 360 547
---------- ---------- ----------
Net interest income after provision for loan losses 12,797 11,080 9,703
---------- ---------- ----------
Other Income
Service charges on deposit accounts 1,890 1,174 1,080
Other service charges, commissions, and fees 744 644 543
Trust department income 1,219 1,125 861
Brokerage income 261 341 369
Securities gains 11 114 423
Other income 355 344 305
---------- ---------- ----------
Total other income 4,480 3,742 3,581
---------- ---------- ----------
Net interest income and other income 17,277 14,822 13,284
---------- ---------- ----------
Other Expenses
Salaries 3,506 3,235 2,945
Employee benefits 1,645 1,520 1,351
Occupancy expense of bank premises, net, and furniture and
equipment expenses 1,676 1,558 1,100
Other operating expenses 3,420 2,800 2,822
---------- ---------- ----------
Total other expenses 10,247 9,113 8,218
---------- ---------- ----------
Income before income tax 7,030 5,709 5,066
Applicable income tax 1,938 1,537 1,311
---------- ---------- ----------
Net income $ 5,092 $ 4,172 $ 3,755
========== ========== ==========
Earnings per share
Basic earnings per share $ 2.15 $ 1.78 $ 1.61
Weighted average shares outstanding 2,366,707 2,340,834 2,325,699
Diluted earnings per share $ 2.12 $ 1.77 $ 1.61
Weighted average shares outstanding 2,398,149 2,352,130 2,325,699
Dividends per share $ .60 $ .54 $ .49
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, 2001, 2000, and 1999
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Shareholders'
Stock Capital Earnings Income Equity
(000 omitted)
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 ($ .49 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 ($ .54 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
Comprehensive income
Net income 0 0 5,092 0 5,092
Change in unrealized gain on
investment securities available
for sale, net of tax of $ 94 0 0 0 ( 182) ( 182)
---------
Total comprehensive income 4,910
---------
Cash dividends ($ .60 per share) 0 0 ( 1,411) 0 ( 1,411)
Stock dividends issued 12 4,711 ( 4,723) 0 0
Cash paid in lieu of fractional
stock dividends 0 0 ( 20) 0 ( 20)
Issuance of stock through
employee stock purchase plan/
stock option plan 1 73 0 0 74
Issuance of stock through dividend
reinvestment plan 2 933 0 0 935
------- --------- ---------- --------- ---------
Balance, December 31, 2001 $ 248 $ 25,077 $ 5,557 $ 280 $ 31,162
======= ========= ========== ========= =========
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
2001 2000 1999
----------- ------------- ------------
(000 omitted)
Cash flows from operating activities:
Net income $ 5,092 $ 4,172 $ 3,755
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 828 735 528
Provision for loan losses 504 360 547
(Gain) loss on disposal of other real estate owned ( 4) ( 7) 54
(Gain) loss on disposal of bank premises and equipment 3 ( 21) 0
Deferred income taxes ( 113) ( 7) ( 103)
Securities (gains) losses ( 11) ( 114) ( 423)
Increase in cash surrender value of life insurance ( 286) ( 252) ( 285)
(Increase) decrease in accrued interest receivable 474 ( 416) ( 364)
Increase (decrease) in accrued interest payable ( 210) 192 ( 1,707)
Other net 387 ( 19) 143
----------- ------------- ------------
Net cash provided by operating activities 6,664 4,623 2,145
----------- ------------- ------------
Cash flows from investing activities:
Net (increase) in interest bearing deposits
with banks ( 507) ( 57) ( 88)
Sales of available for sale securities 5,427 11,786 6,895
Maturities of available for sale securities 36,239 6,820 2,500
Purchases of available for sale securities ( 40,433) ( 26,381) ( 22,763)
(Purchases) redemption of FHLB stock 431 ( 625) ( 225)
Net (increase) in loans ( 41,118) ( 28,562) ( 22,130)
Purchases of bank premises and equipment ( 512) ( 3,153) ( 2,071)
Proceeds from disposal of other real estate owned 180 59 286
Proceeds from disposal of bank premises and equipment 4 50 0
----------- ------------- ------------
Net cash (used) by investing activities ( 40,289) ( 40,063) ( 37,596)
----------- ------------- ------------
Cash flows from financing activities:
Net increase in deposits 39,160 37,619 20,631
Net increase in federal funds purchased
and securities sold under agreements to repurchase 13,105 3,019 9,173
Proceeds from debt 8,025 700 0
Payment on debt ( 3,316) ( 7) ( 6)
Cash dividends paid ( 1,411) ( 1,270) ( 1,134)
Cash paid in lieu of fractional stock dividends ( 20) 0 ( 31)
Proceeds from sale of stock 1,009 864 303
----------- ------------- ------------
Net cash provided by financing activities 56,552 40,925 28,936
----------- ------------- ------------
Net increase (decrease) in cash and cash equivalents 22,927 5,485 ( 6,515)
Cash and cash equivalents, beginning balance 14,070 8,585 15,100
----------- ------------- ------------
Cash and cash equivalents, ending balance $ 36,997 $ 14,070 $ 8,585
=========== ============= ============
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest $ 10,887 $ 10,081 $ 9,781
Income taxes 2,200 1,565 1,385
Supplemental schedule of noncash investing and
financing activities:
Other real estate acquired in settlement of loans 392 53 0
Unrealized gain (loss) on investment securities
available for sale (net of tax effects) ( 182) 1,040 ( 2,105)
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
ten branches are located in Shippensburg (2), Carlisle (2), Spring Run,
Orrstown, Chambersburg (2), Mechanicsburg and Greencastle, 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
Equipment, furniture and fixtures 3-15
Repairs and maintenance are charged to operations as incurred. Computer software
is amortized over 3-5 years.
Intangibles
Intangible costs are amortized on a straight-line basis over fifteen years.
Advertising
The Corporation follows the policy of charging costs of advertising to
expense as incurred. Advertising expense was $ 196,000, $ 167,000, and $ 138,000
for 2001, 2000, and 1999, 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 estimated 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 estimated
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 2,366,707 in 2001; 2,340,834 in
2000; and 2,325,699 in 1999 after giving retroactive recognition to a 5% stock
dividend in September 2001 and a 7-1/2% stock dividend issued in November 1999.
Fully diluted earnings per share were computed based on a weighed average shares
of common stock outstanding of 2,398,149 in 2001, 2,352,130 in 2000 and
2,325,699 in 1999 after giving retroactive recognition to the stock dividends
mentioned above. 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
Corporation's current incremental borrowing rates for similar types of borrowing
arrangements.
Long-Term Borrowings. The fair value of the Corporation's long-term debt is
estimated using a discounted cash flow analysis based on the Corporation'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 Corporation 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:
2001 2000 1999
(000 Omitted)
Gross unrealized holding gains (losses) arising during the year ($ 265) $ 1,690 ($ 2,766)
Reclassification adjustment for (gains) losses realized in net income ( 11) ( 114) ( 423)
--------- --------- --------
Net unrealized holding gains (losses) before taxes ( 276) 1,576 ( 3,189)
Tax effect 94 ( 536) 1,084
---------- ---------- --------
Net change ($ 182) $ 1,040 ($ 2,105)
========== ========== ========
NOTE 2. INVESTMENTS
At December 31, 2001 and 2000 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)
2001
U. S. Treasury securities and obligations of U. S. Government
corporations and agencies $ 3,079 $ 63 $ 0 $ 3,142
Obligations of states and political subdivisions 18,712 644 87 19,269
Mortgage-backed securities 41,312 91 469 40,934
Corporate bonds 3,934 33 30 3,937
Equity securities 960 259 79 1,140
-------- -------- -------- --------
Totals $ 67,997 $ 1,090 $ 665 $ 68,422
======== ======== ======== ========
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 4,413 38 0 4,451
Equity securities 998 217 107 1,108
-------- -------- -------- --------
Totals $ 69,219 $ 1,134 $ 434 $ 69,919
======== ======== ======== ========
The amortized cost and fair values of investment securities available
for sale at December 31, 2001, 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 omitte