-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SNOtNNPyGQvyISQAmJPtDBcfLKVnsuSKhsHdJyZj7HT9AkOdT6tE3txfsHGCYgPa /FKhZSRJBVIVCPZfyzTlyA== 0000826154-96-000003.txt : 19960430 0000826154-96-000003.hdr.sgml : 19960430 ACCESSION NUMBER: 0000826154-96-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960331 DATE AS OF CHANGE: 19960429 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORRSTOWN FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0000826154 STANDARD INDUSTRIAL CLASSIFICATION: 6022 IRS NUMBER: 232530374 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 033-18888 FILM NUMBER: 96547713 BUSINESS ADDRESS: STREET 1: 77 E KING STREET STREET 2: P O BOX 250 CITY: SHIPPENSBURG STATE: PA ZIP: 17257 BUSINESS PHONE: 7175326114 MAIL ADDRESS: ZIP: 00000 10-K 1 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, 1995 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 incorporation or organization) Identification No.) 77 East King Street P. O. Box 250, Shippensburg, Pennsylvania 17257 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (717)532-6114 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class Common Stock, No Par Value The Common Stock is not registered on any exchange. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section13 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 January 27, 1996, 976,863 shares of the registrant's common stock were outstanding. The aggregate market value of such shares held by nonaffiliates on that date was $ 29,305,890. DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual shareholders report for the year ended December31, 1995 are incorporated by reference into Parts I and II. Portions of the Proxy Statement for 1996 Annual Meeting of Security Holders are incorporated by reference in Part III of this Form 10-K. - - -1- Item 1. Business. History and Business Orrstown Financial Services, Inc. (OFS) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Orrstown Financial Services, Inc. was organized on November17, 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 March8, 1988, Orrstown Financial Services, Inc. acquired 100% ownership of Orrstown, issuing 131,455 shares of Orrstown Financial Services, Inc.'s common stock to the former Orrstown shareholders. Orrstown Financial Services, Inc.'s primary activity consists of owning and supervising its subsidiary, Orrstown Bank, which is engaged in providing banking and bank related services in South Central Pennsylvania, principally Franklin and Cumberland Counties, where its five branches are located in Shippensburg, (2) Carlisle and Spring Run, and Orrstown, Pennsylvania. The day-to- day management of Orrstown Bank is conducted by the subsidiary's officers. Orrstown Financial Services, Inc. derives its current income from Orrstown. Orrstown Financial Services, Inc. has no employees other than its six officers who are also employees of Orrstown, its subsidiary. On December31, 1995, Orrstown had 61 full-time and 19 part-time employees. - - -2- 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 (as shown on page 15). 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. - - -3- Loans secured by equipment and/or other nonreal estate collateral normally do not exceed 70% of appraised value or cost, whichever is lower. Loans secured by real estate do not exceed 80% of the appraised value of the property which is the maximum loan to collateral value established in the Bank's lending policy. Loan to collateral values are monitored as part of the loan review, and appraisals are updated as deemed appropriate in the circumstances. Administration and supervision over the lending process is provided by the Bank's Credit Administration Department via loan reviews. The loan review process is continuous, commencing with the approval of a loan. Each new loan is reviewed by the Credit Administration Department for compliance with banking regulations and lending policy requirements for documentation, collateral standards, and approvals. The Credit Administration Department continues to monitor and evaluate loan customers utilizing risk-rating criteria established in the lending policy in order to spot deteriorating trends and detect conditions which might indicate potential problem loans. Reports of the results of the loan reviews are submitted quarterly to the Directors' Credit Administration Committee for approval and provide the basis for evaluating the adequacy of the allowance for loan losses. Through its trust department, Orrstown renders services as trustee, executor, administrator, guardian, managing agent, custodian, investment advisor and other fiduciary activities authorized by law. - - -4- As of December31, 1995, Orrstown had total assets of approximately $ 146 million, total shareholders' equity of approximately $ 14.6 million and total deposits of approximately $ 127 million. Regulation and Supervision Orrstown Financial Services (OFS) is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (BHC Act), and is registered as such with the Board of Governors of the Federal Reserve System (FRB). OFS is subject to examination by the FRB and is restricted in its acquisitions, certain of which are prohibited and certain of which are subject to approval by the FRB. The FRB generally is prohibited from approving any application by a bank holding company to acquire voting shares of any bank in another state unless such acquisition is specifically authorized by the laws of such state or unless, under certain circumstances, such bank is a failing bank. Under the BHC Act, a bank holding company is, with limited exceptions, prohibited from (i) acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or (ii) engaging in any activity other than managing or controlling banks. With the prior approval of the FRB, however, a bank holding company may own shares of a company engaged in activities which the FRB determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In addition, federal law imposes certain restrictions on transactions between OFS and its - - -5- 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. 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 Note13 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. - - -6- 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 pages 45 and 46 under "Capital Funds". 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. Among other things, FDICIA provides increased funding for the Bank Insurance Fund of the FDIC by granting authority for special assessments against insured deposits through a general risk-based assessment systems. FDICIA also contains provisions limiting activities and business methods of depository institutions. FDICIA requires the - - -7- 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 also contains provisions limiting the acceptance of brokered deposits by certain depository institutions, placing restrictions on the terms of "bank investment contracts" that may be offered by depository institutions and provisions requiring the FDIC to study the current rules applicable to the aggregation of accounts of depositors at an institution that are entitled to FDIC insurance. Finally, 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. 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 - - -8- the FRB, the FDIC and the Pennsylvania Department of Banking. In addition, there are numerous governmental requirements and regulations that affect the activities of Orrstown Financial Services. Competition Orrstown's principal market area consists of the north central portion of Franklin County, Pennsylvania, and Cumberland County, Pennsylvania. It services a substantial number of depositors in this market area, with the greatest concentration within a radius of Shippensburg and Carlisle, Pennsylvania. Orrstown, like other depository institutions, has been subjected to competition from less heavily regulated entities such as brokerage firms, money market funds, consumer finance and credit card companies and other commercial banks, many of which are larger than Orrstown Bank. Orrstown Bank is generally competitive with all competing financial institutions in its service area with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans. Item 2. Properties. Orrstown Bank owns buildings in Orrstown, Pennsylvania, Shippensburg, Pennsylvania (3), Carlisle, Pennsylvania and Spring Run, Pennsylvania. Offices of the bank are located in each of these buildings. One of the offices located in Shippensburg is an "Operations Center" which does not operate as a branch, but rather as an accounting office. The bank also owns certain other properties which are located adjacent to the downtown office, which are currently being renovated to provide for expansion of the Trust - - -9- Department, and the Orrstown office which it intends to hold for future expansion purposes. Item 3. Legal Proceedings. Orrstown Financial Services, Inc. is an occasional party to legal actions arising in the ordinary course of its business. In the opinion of Orrstown Financial Services, Inc.'s management, Orrstown Financial Services, Inc. has adequate legal defenses and/or insurance coverage respecting any and each of these actions and does not believe that they will materially affect Orrstown Financial Services, Inc.'s operations or financial position. Item 4. Submission of Matters to Vote of Security Holders. None - - -10- 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 inactively through the local and over the counter local markets. At December31, 1995, the approximate number of shareholders of record was 1,422. 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 (1) 1995 1994 First Quarter $ 27.00 $ .15 $ 25.00 $ .13 Second Quarter 27.00 .15 25.00 .13 Third Quarter 30.00 .15 26.00 .14 Fourth Quarter 30.00 .17 27.00 .14
(1) Note: Cash dividends per share for 1994 were based on weighted average shares of common stock outstanding in 1994 after giving retroactive recognition to a 5% stock dividend issued in July 1995. See "Notes to Consolidated Financial Statements" for restrictions on the payment of dividends. - - -11- Item 6. Selected Financial Data. 1995 1994 1993 1992 1991 Income (000 omitted) Interest income $ 10,829 $ 8,571 $ 8,250 $ 8,632 $ 8,896 Interest expense 4,542 3,241 3,129 3,800 4,684 Provision for loan losses 270 71 121 366 170 Net interest income after provision for loan losses 6,017 5,259 5,000 4,466 4,042 Securities gains (losses) ( 45) 95 ( 5) 77 ( 8) Other operating income 980 765 607 616 498 Other operating expenses 4,256 3,964 3,593 3,369 3,036 Income before income taxes 2,696 2,155 2,009 1,790 1,496 Applicable income tax 742 520 525 452 354 Net income $ 1,954 $ 1,635 $ 1,484 $ 1,338 $ 1,142
Per share amounts are based on following weighted averages: 1995 - 954,192 1993 - 915,218 1991 - 901,374 1994 - 954,192 1992 - 921,098 Income before income taxes $ 2.83 $ 2.25 $ 2.19 $ 1.94 $ 1.66 Applicable income taxes .78 .54 .57 .49 .39 Net income 2.05 1.71 1.62 1.45 2.27 Cash dividend paid .62 .54 .50 .45 .42 Book value 15.34 12.95 12.67 11.49 11.20 1995 1994 1993 1992 1991 Year-End Balance Sheet Figures (000 omitted) Total assets $ 145,998 $ 123,004 $ 113,581 $ 106,191 $ 97,938 Net loans 101,424 89,639 74,449 69,865 64,667 Total investment securities 31,563 24,318 30,381 28,488 24,946 Deposits-non- interest bearing 13,962 13,262 13,417 11,678 9,360 Deposits-interest bearing 113,368 93,103 85,165 82,553 77,151 Total deposits 127,330 106,365 98,582 94,231 86,511 Liabilities for borrowed money 2,345 2,350 1,000 0 0 Total stockholders' equity 14,633 12,353 11,597 10,583 10,096
- - -12- Ratios 1995 1994 1993 1992 1991 Average equity/ average assets 10.00 10.34 10.23 10.00 10.27 Return on average equity 14.40 13.36 13.24 13.02 11.67 Return on average assets 1.44 1.38 1.36 1.30 1.20
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 38 through 46 of the annual shareholders' report for the year ended December31, 1995 are incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. The report of independent auditors and the following consolidated financial statements and schedules of Orrstown Financial Services, Inc. are submitted herewith: Page Independent auditor's report 14 Consolidated balance sheets December 31, 1995 and 1994 15 Consolidated statements of income for the years ended December 31, 1995, 1994 and 1993 16 Consolidated statements of changes in stockholders' equity for the years ended December 31, 1995, 1994, and 1993 17 Consolidated statements of cash flows for the years ended December 31, 1995, 1994, and 1993 18 and 19 Notes to consolidated financial statements 20 - 36 Summary of quarterly financial data (unaudited) 37 - - -13- INDEPENDENT AUDITOR'S REPORT Board of Directors Orrstown Financial Services, Inc. Orrstown, Pennsylvania We have audited the accompanying consolidated balance sheets of Orrstown Financial Services, Inc. and its wholly-owned subsidiary as of December31, 1995 and 1994 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years ended December31, 1995. These consolidated financial statements are the responsibility of the corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Orrstown Financial Services, Inc. and its wholly-owned subsidiary as of December31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years ended December31, 1995 in conformity with generally accepted accounting principles. SMITH ELLIOTT KEARNS & COMPANY Chambersburg, Pennsylvania January 25, 1996 - - -14- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 1995 and 1994 ASSETS 1995 1994 (000 omitted) Cash and due from banks $ 4,330 $ 4,593 Interest bearing deposits with banks 1,289 250 Federal funds sold 2,317 0 Securities available for sale 30,694 23,510 Federal Home Loan Bank, Federal Reserve and Atlantic Central Bankers Bank stock, at cost which approximates market value 869 808 39,499 29,161 Loans Commercial, financial and agricultural 8,211 6,970 Real estate - Mortgages 75,731 68,458 Real estate - Construction and land development 5,706 5,038 Consumer 13,209 10,373 102,857 90,839 Less: Allowance for loan losses ( 1,433) ( 1,200) 101,424 89,639 Bank premises and equipment, net 3,042 2,512 Accrued interest receivable 993 733 Other assets 1,040 959 Total assets $ 145,998 $ 123,004 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Non-interest bearing $ 13,962 $ 13,262 Interest bearing 113,368 93,103 127,330 106,365 Federal funds purchased 0 644 Liabilities for borrowed money 2,345 2,350 Accrued interest and other liabilities 1,690 1,292 Total liabilities 131,365 110,651 Stockholders' equity Common stock: No par value - $ .2083 stated value per share, 2,000,000 shares authorized with 976,863 and 930,891 shares issued at December 31, 1995 and 1994, respectively 204 194 Additional paid-in capital 10,625 9,393 Retained earnings 3,232 3,133 Unrealized holding gains (losses), net of tax - $ 295 - 1995 and $ 189 - 1994 572 ( 367) Total stockholders' equity 14,633 12,353 Total liabilities and stockholders' equity $ 145,998 $ 123,004 The Notes to Consolidated Financial Statements are an integral part of these statements. - - -15- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 1995, 1994 and 1993 1995 1994 1993 (000 omitted) Interest and Dividend Income Interest and fees on loans $ 8,996 $ 6,882 $ 6,328 Interest and dividends on Investment securities U.S. Government and agencies 1,083 963 1,278 Exempt from federal income tax 529 512 539 Other investment income 221 214 105 Total interest and dividend income 10,829 8,571 8,250 Interest Expense Interest on deposits 4,349 3,092 3,064 Interest on borrowed money 193 149 65 Total interest expense 4,542 3,241 3,129 Net interest income 6,287 5,330 5,121 Provision for loan losses 270 71 121 Net interest income after provision for loan losses 6,017 5,259 5,000 Other Income Service charges on deposit accounts 375 349 308 Other service charges, commissions, and fees 218 180 163 Trust department income 297 185 157 Securities gains (losses) ( 45) 95 ( 5) Other income (loss) 90 51 ( 21) Total other income 935 860 602 Net interest income and other income 6,952 6,119 5,602 Other Expenses Salaries and employee benefits 2,326 2,115 1,908 Occupancy expense of bank premises, net, and furniture and equipment expenses 559 486 405 FDIC insurance premiums 125 221 211 Other operating expenses 1,246 1,142 1,069 Total other expenses 4,256 3,964 3,593 Income before income tax 2,696 2,155 2,009 Applicable income tax 742 520 525 Net income $ 1,954 $ 1,635 $ 1,484 Net income per share $ 2.05 $ 1.71 $ 1.62 The Notes to Consolidated Financial Statements are an integral part of these statements. - - -16- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 1995, 1994 and 1993 Unrealized Additional Holding Common Paid-In Retained Gains Treasury Stock Capital Earnings (Losses) Stock (000 omitted) Balance, December 31, 1992 $ 190 $ 8,737 $ 2,093 $ 0 ($ 437) Net income 0 0 1,484 0 0 Cash dividends ($ .50 per share) 0 0 ( 458) 0 0 Stock dividends issued 4 655 ( 1,095) 0 436 Cash paid in lieu of fractional stock dividends 0 0 ( 14) 0 0 Additional stock issued - 90 shares 0 1 0 0 1 Balance, December 31, 1993 194 9,393 2,010 0 0 Net income 0 0 1,635 0 0 Cash dividends ($ .54 per share) 0 0 ( 512) 0 0 Unrealized loss on investment securities available for sale 0 0 0 ( 367) 0 Balance, December 31, 1994 194 9,393 3,133 ( 367) 0 Net income 0 0 1,954 0 0 Cash dividends ($ .62 per share) 0 0 ( 599) 0 0 Stock dividends issued 10 1,232 ( 1,242) 0 0 Cash paid in lieu of fractional stock dividends 0 0 ( 14) 0 0 Unrealized gain on investment securities available for sale 0 0 0 939 0 Balance, December 31, 1995 $ 204 $ 10,625 $ 3,232 $ 572 $ 0 The Notes to Consolidated Financial Statements are an integral part of these statements. - - -17- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1995, 1994 and 1993 1995 1994 1993 (000 omitted) Cash flows from operating activities: Net income $ 1,954 $ 1,635 $ 1,484 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 265 212 183 Provision for loan losses 270 71 121 Deferred income taxes ( 78) ( 200) ( 19) (Gain) loss on disposal of other real estate ( 4) ( 10) 42 (Gain) loss on disposal of bank premises and equipment 1 4 0 Securities (gains) losses 45 ( 95) 5 (Increase) decrease in accrued interest receivable ( 260) 43 28 Increase (decrease) in accrued interest payable 290 11 ( 82) Other net ( 2) 9 108 Net cash provided by operating activities 2,481 1,680 1,870 Cash flows from investing activities: Net (increase) decrease of interest bearing deposits with banks ( 1,039) ( 250) 0 Purchase of investment securities 0 0 ( 10,796) Sales of investment securities 0 0 1,971 Maturities of investment securities 0 0 6,928 Sales of available for sale securities 6,387 6,945 0 Maturities of available for sale securities 6,694 4,450 0 Purchases of available for sale securities ( 18,843) ( 5,743) 0 Purchases of FHLB stock ( 61) ( 49) 0 Net (increase) in loans ( 12,055) ( 15,261) ( 4,970) Proceeds from disposal of other real estate 22 20 223 Purchases of bank premises, equipment, and other real estate ( 266) ( 691) ( 522) Net cash (used) by investing activities ( 19,161) ( 10,579) ( 7,166) The Notes to Consolidated Financial Statements are an integral part of these statements. - - -18- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years Ended December 31, 1995, 1994 and 1993 1995 1994 1993 (000 omitted) Cash flows from financing activities: Net increase in deposits $ 19,997 $ 7,783 $ 4,351 Net decrease in federal funds purchased ( 644) ( 456) 0 Proceeds from debt 0 1,350 2,053 Payment on debt ( 6) 0 0 Cash dividends paid ( 599) ( 512) ( 472) Proceeds from issuing common stock 0 0 2 Cash paid in lieu of fractional stock dividends ( 14) 0 0 Net cash provided by financing activities 18,734 8,165 5,934 Net increase (decrease) in cash and cash equivalents 2,054 ( 734) 638 Cash and cash equivalents, beginning balance 4,593 5,327 4,689 Cash and cash equivalents, ending balance $ 6,647 $ 4,593 $ 5,327 Supplemental disclosure of cash flows information: Cash paid during the year for: Interest $ 4,252 $ 3,230 $ 3,211 Income taxes 800 543 518 Supplemental schedule of noncash investing and financing activities: Other real estate acquired in settlement of loans 22 27 282 Unrealized gain (loss) on investment securities available for sale (net of tax effects) 572 ( 367) 0 Other real estate transferred to bank premises 136 0 0 Property, equipment and other assets purchased with assumption of deposit liabilities in connection with branch acquisition 968 0 0 The Notes to Consolidated Financial Statements are an integral part of these statements. - - -19- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Summary of Significant Accounting Policies Nature of operations Orrstown Financial Services, Inc.'s primary activity consists of owning and supervising its subsidiary, Orrstown Bank, which is engaged in providing banking and bank related services in South Central Pennsylvania, principally Franklin and Cumberland Counties. Its five branches are located in Shippensburg (2), Carlisle, Spring Run, and Orrstown, Pennsylvania. Principles of consolidation The consolidated financial statements include the accounts of the corporation and its wholly-owned subsidiary, Orrstown Bank. All significant intercompany transactions and accounts have been eliminated. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the corporation's allowances for losses on loans and foreclosed real estate. Such agencies may require the corporation to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Because of these factors, management's estimate of credit losses inherent in the loan portfolio and the related allowance may change in the near term. - - -20- Note 1. Summary of Significant Accounting Policies (Continued) Investment securities In accordance with Statement of Financial Accounting Standards No. 115 (SFAS 115) the Bank 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 net as a separate component of stockholders' equity. Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the corporation has the ability at the time of purchase to hold securities until maturity or on a long- term basis, they are classified as securities held to maturity and carried at amortized historical cost. Securities to be held for indefinite periods of time and not intended to be held to maturity or on a long-term basis are classified as available for sale and carried at fair value. Securities held for indefinite periods of time include securities that management intends to use as part of its asset and liability management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk and other factors related to interest rate and resultant prepayment risk changes. The corporation has classified all of its investment securities as "available for sale". Realized gains and losses on dispositions are based on the net proceeds and the adjusted book value of the securities sold, using the specific identification method. Unrealized gains and losses on investment securities available for sale are based on the difference between book value and fair value of each security. These gains and losses are credited or charged to shareholders' equity, 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 time deposits in the Statements of Cash Flows. - - -21- Note 1. Summary of Significant Accounting Policies (Continued) 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. 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. Loan origination and commitment fees and certain direct costs are deferred and the net amount amortized over the contractual life of the loan as an adjustment of the loan's yield. If a loan is sold, any deferred fees not yet amortized are recognized as an adjustment to the gain or loss on sale. The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for loan losses 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. Nonaccrual loans The accrual of interest income on loans ceases when principal or interest is past due 90 days or more and collateral is inadequate to cover principal and interest or immediately if, in the opinion of management, full collection is unlikely. Interest accrued but not collected as of the date of placement on nonaccrual status - - -22- Note 1. Summary of Significant Accounting Policies (Continued) Nonaccrual loans (Continued) 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. 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 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 of 954,192 shares of common stock outstanding in 1995 and 1994; and 915,218 shares of common stock outstanding in 1993, after giving retroactive recognition to a 5% stock dividend issued in July 1995. 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 Note10 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 - - -23- Note 1. Summary of Significant Accounting Policies (Continued) Fair values of financial instruments (Continued) 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 monthly 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. - - -24- Note 1. Summary of Significant Accounting Policies (Continued) Fair values of financial instruments (Continued) 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. Note 2. Investments At December 31, 1995 and 1994 the investment securities portfolio was comprised of securities classified as available for sale in conjunction with the adoption of SFAS 115, resulting in investment securities being carried at fair value. The amortized cost and fair values of investment securities available for sale at December31 were: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (000 omitted) 1995 U. S. Treasury securities and obligations of U. S. Government corporations and agencies $ 7,912 $ 110 $ 0 $ 8,022 Obligations of states and political subdivisions 11,329 676 0 12,005 Mortgage-backed securities 10,272 88 34 10,326 Equity securities 314 27 0 341 Totals $ 29,827 $ 901 $ 34 $ 30,694
- - -25- Note 2. Investments (Continued) Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (000 omitted) 1994 U. S. Treasury securities and obligations of U. S. Government corporations and agencies $ 7,370 $ 0 $ 154 $ 7,216 Obligations of states and political subdivisions 7,904 152 189 7,867 Mortgage-backed securities 8,530 14 373 8,171 Equity securities 262 0 6 256 Totals $ 24,066 $ 166 $ 722 $ 23,510
The amortized cost and fair values of investment securities available for sale at December31, 1995, by expected maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Cost Fair Value (000 omitted) Due in one year or less $ 2,138 $ 2,153 Due after one year through five years 5,530 5,630 Due after five years through ten years 2,690 2,849 Due after ten years 8,883 9,395 Mortgage-backed securities 10,272 10,326 Equity securities 314 341 $ 29,827 $ 30,694
Proceeds from sales of securities available for sale during 1995 and 1994 were $ 6,369,602 and $6,944,826, respectively. Gross gains and losses on 1995 sales were $37,559 and $53,389, respectively. Gross gains and losses on 1994 sales were $ 222,089 and $ 127,019, respectively. Included in shareholders' equity at December 31, 1995 is $ 572,000 of unrealized holding gains on securities available for sale, net of $ 295,000 in deferred taxes. Included in shareholders' equity at December31, 1994 is $367,000 of unrealized holding losses on securities available for sale, net of $189,000 in deferred taxes. - - -26- Note 2. Investments (Continued) Proceeds from sales of investment securities during 1993 were $1,971,410. Gross gains of $20,573 and gross losses of $0 for 1993 were realized on those sales. The bank owns $625,900 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, 1995. At December31, 1994 the bank's stock ownership was $564,700 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 $10,036,000 and $ 8,323,000 at December31, 1995 and 1994, respectively, were pledged to secure public funds and for other purposes as required or permitted by law. Note 3. Concentration of Credit Risk The bank 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 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. Collateral held varies but generally includes equipment and real estate. Note 4. Allowance for Loan Losses Activity in the allowance for loan losses is summarized as follows: 1995 1994 1993 (000 omitted) Balance at beginning of period $ 1,200 $ 1,125 $ 1,042 Recoveries 14 12 13 Provision for loan losses charged to income 270 71 121 Total 1,484 1,208 1,176 Losses 51 8 51 Balance at the end of period $ 1,433 $ 1,200 $ 1,125
- - -27- Note 5. Bank Premises and Equipment A summary of bank premises and equipment is as follows: 1995 1994 (000 omitted) Land $ 424 $ 375 Buildings and improvements 2,306 1,862 Furniture and equipment 2,006 1,799 Construction in progress 49 0 Total 4,785 4,036 Less accumulated depreciation and amortization 1,743 1,524 Bank premises and equipment, net $ 3,042 $ 2,512
Depreciation expense amounted to $ 250,769 in 1995, $213,000 in 1994, and $180,000 in 1993. Note 6. Loans to Related Parties The bank 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 $1,758,000 and $1,827,000 at December31, 1995 and 1994, respectively. During 1995, $310,000 of new loans were made and repayments totalled $379,000. During 1994, $866,000 of new loans were made and repayments totalled $628,000. Outstanding loans to bank employees totalled $954,000 and $797,000 for years ended December31, 1995 and 1994, respectively. Note 7. Nonaccrual Loans The following table shows the principal balances of nonaccrual loans as of December31: 1995 1994 1993 Nonaccrual loans $ 132,000 $ 27,000 $ 0 Interest income that would have been accrued at original contract rates $ 1,616 $ 401 $ 0 Amount recognized as interest income 0 0 0 Foregone revenue $ 1,616 $ 401 $ 0
The corporation had no impairment of loans during 1995 or 1994 as defined by Statement of Financial Accounting Standard No. 114. - - -28- Note 8. Financial Instruments With Off-Balance-Sheet Risk The bank 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 bank has in particular classes of financial instruments. The bank'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 bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Contract or Notional Amount 1995 1994 (000 omitted) Financial instruments whose contract amounts represent credit risk at December 31: Commitments to extend credit $ 14,074 $ 12,208 Standby letters of credit and financial guarantees written 2,348 2,035
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 bank evaluates each customer's creditworthiness on a case- by-case basis. The amount of collateral obtained if deemed necessary by the bank 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. Standby letters of credit and financial guarantees written are conditional commitments issued by the bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public private borrowing arrangements. The credit risk - - -29- Note 8. Financial Instruments With Off-Balance-Sheet Risk (Continued) involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The bank holds collateral supporting those commitments when deemed necessary by management. Note 9. Employee Benefit Plans The bank 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 bank performance and are at the discretion of the bank'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 bank's employees are covered by the plan and the contribution charged to operations was $ 260,334, $219,193, and $220,744 for 1995, 1994, and 1993, respectively. The bank 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 bank's obligations under the compensation agreement. The cash value of the life insurance policies is an unrestricted asset of the bank. The estimated present value of future benefits to be paid, which are included in other liabilities, amounted to $ 179,253 and $188,264 at December31, 1995 and 1994, respectively. Total annual expense for this deferred compensation plan was $19,064 for 1995, 1994, and 1993. A supplemental discretionary deferred compensation plan for executive officers and directors was started during 1995. The plan is funded annually with salary and fee reductions which are placed in a trust account invested by the Bank's trust department. Note 10. Income Taxes The components of federal income tax expense are summarized as follows: 1995 1994 1993 (000 omitted) Current year provision $ 820 $ 570 $ 544 Deferred income taxes (benefits) ( 78) ( 13) ( 19) Accrued refund due 0 ( 37) 0 Net federal income tax expense $ 742 $ 520 $ 525
- - -30- Note 10. Income Taxes (Continued) Federal income taxes were computed after reducing pretax accounting income for non-taxable income in the amount of $ 599,000, $589,000, and $601,000 for 1995, 1994, and 1993, respectively. A reconciliation of the effective applicable income tax rate to the federal statutory rate is as follows: 1995 1994 1993 Federal income tax rate 34.0% 34.0% 34.0% Reduction resulting from: Nontaxable interest income and deferred taxes 6.5 9.9 7.9 Effective income tax rate 27.5% 24.1% 26.1%
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 included in other assets in the accompanying consolidated balance sheets include the following components: 1995 1994 Total deferred tax assets $ 472,000 $ 566,000 Total deferred tax liabilities ( 410,000) ( 99,000) Net deferred tax asset $ 62,000 $ 467,000
The corporation has not recorded a valuation allowance for the deferred tax assets as they feel that it is more likely than not that they will be ultimately realized. Note 11. Deposits Included in interest bearing deposits at December31 are NOW and Super NOW account balances totalling $ 13,215,000 and $11,554,000 for 1995 and 1994, respectively. Also included in interest bearing deposits at December31, 1995 and 1994 are money market account balances totalling $ 13,104,000 and $14,971,000, respectively. At December31, 1995 and 1994 time deposits of $100,000 and over aggregated $ 6,447,000 and $4,804,000, respectively. Interest expense on time deposits of $ 100,000 and over was $ 337,000; $ 220,000; and $ 239,000 for 1995, 1994 and 1993, respectively. - - -31- Note 11. Deposits (Continued) The bank 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 $ 1,194,510 and $732,019 at December31, 1995 and 1994, respectively. Note 12. Liabilities For Borrowed Money At December 31, 1995 and 1994 the corporation had two long-term notes with the Federal Home Loan Bank of Pittsburgh as follows: Amount Maturity Date Interest Rate $ 1,000,000 2004 6.42% 1,000,000 2003 6.58% $ 2,000,000
Interest rates are fixed and interest only is paid on a monthly basis. The notes contain prepayment penalty charges, but management has no intention to pay off early. In addition to the aforementioned long-term notes the bank obtained a term loan in 1994 totaling $350,000 with the Federal Home Loan Bank of Pittsburgh. The corporation repaid $ 5,026 in 1995. The maturity dates and applicable fixed interest rates on the remaining balance at December 31, 1995 are as follows: Amount Maturity Date Rate $ 5,291 2/96 4.31% 5,570 2/97 4.61% 5,863 2/98 5.00% 6,173 2/99 5.21% 6,498 2/00 5.48% 315,579 2/01 5.58% $ 344,974
In addition, the bank has available a line of credit with the Federal Home Bank of Pittsburgh which is limited to 10% of the corporation's total assets. Collateral for the line consists of the corporation's 1-4 family mortgage loans totaling $58,953,000 at December31, 1995. The corporation also has available an unused line of credit with Atlantic Central Bankers Bank of $3.5 million at December31, 1995. Total interest on the aforementioned borrowings charged to operations in 1995 and 1994 were $ 149,083 and $146,577, respectively. - - -32- Note 13. Orrstown Financial Services, Inc. (Parent Company Only) Financial Information The following are the condensed balance sheets, income statements and statements of cash flows for the parent company: Balance Sheets December 31 Assets 1995 1994 (000 omitted) Cash $ 186 $ 14 Interest-bearing balances with banks 0 250 Securities available for sale 341 256 Investment in Orrstown Bank 14,154 11,835 Furniture and equipment (net of depreciation) 1 2 Other assets 0 2 Total assets $ 14,682 $ 12,359 Liabilities Accrued management fee 40 0 Accrued taxes and other liabilities 9 6 Total liabilities 49 6 Stockholders' Equity Common stock, no par value - $ .2083 stated value per share, 2,000,000 shares authorized with 976,863 and 930,891 issued at December 31, 1995 and 1994, respectively $ 204 $ 194 Additional paid-in capital 10,625 9,393 Retained earnings 3,232 3,133 Unrealized holding losses 572 ( 367) Total stockholders' equity 14,633 12,353 Total liabilities and stockholders' equity $ 14,682 $ 12,359
Income Statements Years Ended December 31 1995 1994 1993 (000 omitted) Interest and dividend income $ 20 $ 16 $ 11 Net gain on sale of investment 0 112 0 Cash dividends from wholly- owned subsidiary 614 512 560 Equity in undistributed income of subsidiary 1,401 1,077 962 2,035 1,717 1,533 Less: Operating expenses 81 82 49 Net income $ 1,954 $ 1,635 $ 1,484
- - -33- Note 13. Orrstown Financial Services, Inc. (Parent Company Only) Financial Information (Continued) Statements of Cash Flows Years Ended December 31 1995 1994 1993 (000 omitted) Cash flows from operating activities: Net income $ 1,954 $ 1,635 $ 1,484 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 0 0 5 Security (gains) 0 ( 112) 0 Equity in undistributed income of subsidiary ( 1,401) ( 1,077) ( 962) Increase (decrease) in accrued liabilities 34 6 0 Net cash provided by operating activities 587 452 527 Cash flows from investing activities: Net decrease (increase) in interest-bearing deposits with banks 250 ( 250) 0 Purchase of available for sale securities ( 52) ( 60) 0 Sales of available for sale securities 0 315 0 Net cash provided by investing activities 198 5 0 Cash flows from financing activities: Cash dividends paid ( 599) ( 512) ( 472) Cash paid in lieu of fractional shares ( 14) 0 0 Proceeds from stock sales 0 0 2 Net cash (used) by financing activities ( 613) ( 512) ( 470) Net increase (decrease) in cash 172 ( 55) 57 Cash, beginning balance 14 69 12 Cash, ending balance $ 186 $ 14 $ 69 Supplemental disclosure of cash flows information: Cash paid during the year for: Income taxes $ 6 $ 0 $ 0
- - -34- Note 13. Orrstown Financial Services, Inc. (Parent Company Only) Financial Information (Continued) Dividends paid by Orrstown Financial Services, Inc. are 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 $7,301,000 in its retained earnings at December31, 1995 is fully available for cash dividends. Orrstown Financial Services' balance of retained earnings at December31, 1995 is $3,232,000 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. Note 14. Leases The bank leases land and building space associated with its various remote automated teller machines under agreements which expire at various times through 1997. Total rent expense charged to operations in connection with these leases was $ 16,920, $17,520, and $18,120 for 1995, 1994, and 1993, respectively. The total minimum rental commitment under operating leases at December31, 1995 is as follows: Due in the year ending December 31, 1996 $ 9,120 1997 3,660 Note 15. Compensating Balance Arrangements Required deposit balances at the Federal Reserve were $ 65,000 at December31, 1995 and 1994. Required deposit balances at Atlantic Central Bankers Bank were $ 585,000 and $834,000 at December31, 1995 and 1994, respectively. These balances are maintained to cover processing costs and service charges. An additional $16,200 is on deposit with First Union National Bank of Florida as a reserve for potential clearing losses related to the credit card operations. Note 16. Changes in Common Stock In June 1995, the Board of Directors approved a 5% stock dividend with 45,972 new shares issued. In November 1993, the Board of Directors approved a 5% stock dividend with 26,148 shares issued out of treasury stock and 17,658 new shares issued. - - -35- Note 17. Branch Acquisition In September, 1995, the Orrstown Bank acquired a branch of another bank. The acquisition included deposits of $ 12,373,000 and land, building and equipment of $ 376,000. Note 18. Fair Value of Financial Instruments Statement on Financial Accounting Standards (SFAS) No. 107, Disclosure About Fair Value of Financial Instruments, became effective for the corporation's 1995 financial statements. The estimated fair values of the corporation's financial instruments were as follows at December31, 1995: Carrying Amount Fair Value (000 Omitted) FINANCIAL ASSETS Cash and due from banks $ 4,330 $ 4,330 Federal funds sold 2,317 2,317 Interest bearing deposits with banks 1,289 1,289 Securities available for sale 29,827 30,694 Other bank stock 869 869 Loans receivable 102,857 102,621 Accrued interest receivable 993 993 FINANCIAL LIABILITIES Deposits 127,330 127,616 Borrowed funds 2,345 2,353 Accrued interest payable 887 887
Note 19. Commitments In 1995 the corporation began the renovation of a building adjacent to its King Street, Shippensburg office. Total commitments remaining on this project at December 31, 1995 aggregated $ 370,000. In addition, the corporation has entered into a contract for the installation of a computer network. The remaining commitment on the contract was $ 120,000 at December 31, 1995. Both of the aforementioned projects are expected to be completed in 1996. - - -36- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY SUMMARY OF QUARTERLY FINANCIAL DATA The unaudited quarterly results of operations for the years ended December31, 1995 and 1994 are as follows: 1995 ($ 000 omitted Quarter Ended except per share) Mar. 31 June 30 Sept. 30 Dec. 31 Interest income $ 2,430 $ 2,661 $ 2,808 $ 2,930 Interest expense 968 1,089 1,208 1,277 Net interest income 1,462 1,572 1,600 1,653 Provision for loan losses 30 30 30 180 Net interest income after provision for loan losses 1,432 1,542 1,570 1,473 Securities gains (losses) ( 21) ( 2) ( 21) ( 2) Other income 209 236 243 293 Other expenses 1,010 1,082 968 1,196 Operating income before income taxes 610 694 824 568 Applicable income taxes 176 217 231 118 Net income $ 434 $ 477 $ 593 $ 450 Net income applicable to common stock Per share data: Net income $ .46 $ .50 $ .62 $ .47 - - -37- 1994 ($ 000 omitted Quarter Ended except per share) Mar. 31 June 30 Sept. 30 Dec. 31 Interest income $ 1,989 $ 2,036 $ 2,179 $ 2,367 Interest expense 769 783 829 860 Net interest income 1,220 1,253 1,350 1,507 Provision for loan losses 5 0 0 66 Net interest income after provision for loan losses 1,215 1,253 1,350 1,441 Securities gains (losses) 14 45 60 ( 24) Other income 178 208 186 193 Other expenses 915 935 1,023 1,091 Operating income before income taxes 492 571 573 519 Applicable income taxes 121 149 149 101 Net income $ 371 $ 422 $ 424 $ 418 Net income applicable to common stock Per share data: Net income $ .39 $ .44 $ .44 $ .44
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. OPERATING RESULTS Net income was $1,954,000 for 1995, compared to $1,635,000 for 1994, representing an increase of $ 319,000 or 19.5%. Net income on an adjusted per share basis for 1995 was $ 2.05, up $ .34 from the $ 1.71 per share realized during 1994. Interest income for 1995 was $ 10,829,000, up $ 2,258,000, or 26.3% over 1994. The volume of earning assets increased 16.3% in 1995 and 7.5% in 1994. Average rates continued to rebound after steady decreases throughout 1993 and 1992. Loan demand continued to increase significantly in 1995. Total loans at December 31, 1995 stood at $ 102,857,000 compared to $ 90,839,000 as of December 31, 1994. Increases in earning assets in 1995 were primarily in loans which typically produce higher yields than investments. An overall increase of 13.2% in loans was realized with most of the loan growth being concentrated in mortgage and commercial loans. This growth is consistent with management's plans following an expansion into the Carlisle, Pennsylvania market in March of 1994. Net interest margins were maintained at desired levels throughout 1995 by closely monitoring rates. Total interest expense was $ 4,542,000 for 1995, an increase of $ 1,301,000 over the $ 3,241,000 for 1994. The increase in total deposits was 19.7% in 1995 compared to 7.9% in 1994. Approximately 11.3% of the increase was due to the September 1995 purchase of the Spring Run branch from another local bank. This represents a significant increase in deposit growth, but the most important factor is where the deposit growth has occurred, as indicated in the following trends: Noninterest-bearing deposits increased 5.3% over the previous year Average balances of interest-bearing demand and savings decreased 8.0% and .9%, respectively Average balances in time deposits increased 42.2% in 1995 Due to increasing rates, deposits previously maintained in more liquid accounts such as statement savings and money market accounts were moved to longer term certificates. By having a significantly higher portion of the deposit growth occurring in the higher priced deposits, the bank has experienced proportionately higher interest costs as interest rates rose during 1995. Management continues to direct its marketing efforts toward attracting more low cost retail deposits while continuing to competitively price its time deposits in order to maintain favorable net interest margins. - - -38- Net interest income is the difference between total interest income and total interest expense. Interest income is generated through earning assets which include loans, interest on deposits with other banks and investments. The amount of interest income is dependent on many factors including the volume of earning assets, the level of interest rates and the changes in interest rates, and volumes of nonperforming loans. The cost of funds varies with the volume of funds necessary to support earning assets, the rates paid to maintain deposits, rates paid on borrowed funds and the level of interest-free deposits. Net interest income for 1995 totaled $ 6,287,000, up $ 957,000 over 1994. Management continuously monitors liquidity and interest rate risk through its ALCO reporting and reprices products in order to maintain desired net interest margins. Other income represents service charges on deposit accounts; fees received for foreign ATM transactions, loan insurance, credit cards, travelers' checks and other services; fees for trust services; securities gains and losses and other income such as safe deposit box rents and gains (losses) on sales of property and equipment. Other income increased $ 75,000 from 1994 to 1995. The increase in 1995 was due largely to increases in Trust Department income, service charge income, and income from the sale of mutual funds. The corporation initiated a project in 1995 for the purpose of expanding the Trust Department and other administrative facilities by renovating a property adjacent to its King Street, Shippensburg office which management feels will facilitate further growth of its trust activities and provide more opportunities for increased trust revenues. The project is expected to be completed in 1996. The 1994 results reflected a $ 112,000 gain from the sale of stock. The 1993 results reflected a $ 42,000 loss from the sale of property received through loan foreclosure. The loss in 1993 was partially offset by an increase in Trust Department income of $ 38,000. The noninterest expenses are classified into four main categories: salaries and employee benefits; occupancy expenses and furniture and equipment expenses which include depreciation, maintenance, utilities, taxes, insurance, rents and maintenance; FDIC insurance premiums; and other operating expenses which include all other expenses incurred in daily operations. Employee related expenses increased 10.0% and 10.8% for 1995 and 1994, respectively, primarily due to salary and related benefit increases. The largest proportionate increase in noninterest expenses was for occupancy expense which increased 15.0% and 20.0% in 1995 and 1994, respectively. This increase is due to the additional depreciation expense associated with the Carlisle and Spring Run branches and the purchase of new data processing equipment in 1994. Management expects increases in employee related expenses and occupancy expense to continue with the addition of the Spring Run branch and the expansion project at the King Street, Shippensburg, Pennsylvania location which was started - - -39- during the fourth quarter 1995. Other operating expenses were unchanged, largely due to a 43.4% decrease in FDIC insurance premiums offset by an increase in merchant processing charges, the amortization of the deposit premium paid on the Spring Run branch acquisition and personnel training. Applicable income taxes changed between 1993, 1994 and 1995 as a result of changes in pre-tax accounting income and taxable income. The effective tax rate for 1995 increased over 1994 due to the proportionate decrease in nontaxable interest income in relation to total income. FINANCIAL CONDITION Total assets at December 31, 1995 were $ 145,998,000, an 18.7% increase over December 31, 1994. Net loans at December 31, 1995 totaled $ 101,424,000, an increase of $ 11,785,000 over the $ 89,639,000 level at December 31, 1994. The provision for loan losses was $ 270,000 in 1995 compared to $ 71,000 in 1994. The provisions were based on management's evaluation of the adequacy of the reserve balance and represents amounts considered necessary to maintain the reserve at the appropriate level based on the quality of the loan portfolio and economic conditions. The bank's history of net charge-offs has traditionally been better than peer group performance with an average rate of .04% of average loans outstanding over the past five years. While this trend is expected to continue management recognizes the need to build the reserve to meet the expected increased risks associated with a growing loan portfolio and an expanding customer base. Therefore, it is management's intention to maintain the reserve at appropriate levels based on an ongoing evaluation of the loan portfolio. Based on the evaluation performed in the fourth quarter of 1995 and the projected loan growth for 1996, management increased the provision by $ 180,000 in the fourth quarter of 1995. Loans 90 days or more past due (still accruing interest) and those on nonaccrual status were as follows at December 31 (in thousands): 90 Days or More Past Due Nonaccrual Status 1995 1994 1995 1994 Real estate mortgages $ 322 $ 166 $ 92 $ 0 Installment loans 82 95 34 27 Demand and time loans 4 0 0 0 Credit card 9 1 6 0 Total $ 417 $ 262 $ 132 $ 27
There were no restructured loans for any of the time periods set forth above. - - -40- Total deposits increased to $ 127,330,000 at December 31, 1995 compared to $ 106,365,000 at December 31, 1994. Increases were largely a result of the Spring Run branch acquisition in September, 1995. Stockholders' equity reached $14,633,000 at December31, 1995 for an 18.5% increase over the prior year. The increase in stockholders' equity was partially due to a $572,000 unrealized holding gain on investment securities categorized "available for sale", in accordance with SFAS 115. Total stockholders' equity represented 10.0% of total assets at the end of 1995 and 1994. The primary source of capital growth in 1995 has been from retained earnings. Cash dividends paid in 1995 were up $87,000 over the previous year. In June 1995 the board approved a 5% stock dividend, issuing 45,972 shares of new stock. It is the management and the Board of Directors' intention to continue paying a fair return on the stockholders' investment while retaining adequate earnings to allow for continued growth. As described in Note 1 of the Notes to Consolidated Financial Statements, deferred income taxes have been provided for timing differences in the recognition of certain expenses between financial reporting and tax purposes. Deferred income taxes have been provided at prevailing tax rates for such items as depreciation, provision for loan losses, deferred compensation and unrealized holding losses on available for sale securities. At December31, 1995, deferred taxes amounted to $62,000. If all timing differences reversed in 1995, the actual income taxes saved by the recognition of the aforementioned expenses would not be significantly different from the deferred income taxes recognized for financial reporting purposes. The current level of nontaxable investment and loan income is such that the bank is not affected by the Alternative Minimum Tax rules. The schedule below reflects comparative changes in income and expense included in the Consolidated Statements of Income for 1995 and 1994 together with changes in asset and liability volumes associated with these income and expense items. - - -41- 1995 Compared to 1994 Average Volumes Income/Expense ($ 000 omitted) $ % $ % Loans 15,922 19.8 2,114 30.7 Investment securities1,469 6.1 137 9.3 Other investments 56 5.1 7 3.3 Total17,447 16.3 2,258 26.3 Interest/borrowed funds 679 28.5 43 28.7 Interest bearing demand deposits( 2,184) ( 8.0) ( 50) ( 7.6) Savings deposits ( 225) ( .9) 43 6.1 Time deposits 15,824 42.2 1,265 74.0 Total 14,094 15.4 1,301 42.1 Net interest income 957 18.0 Provision for loan losses 199 280.3 Net interest income after provision for loan losses 75814.4 Security transactions ( 140)(147.4) Other operating income 215 28.1 Income before operating expense 833 13.6 Salaries & employee benefits 21110.0 Occupancy & equipment expense 7315.0 FDIC insurance premiums ( 96) ( 43.4) Other operating expenses 1049.1 Total operating expenses 292 7.4 Income before income taxes 541 25.1 Applicable income taxes 22242.7 Net income 319 19.5 - - -42- 1994 Compared to 1993 Average Volumes Income/Expense ($ 000 omitted) $ % $ % Loans9,164 12.6 554 8.8 Investment securities(3,867) ( 13.2) (342) ( 18.8) Other investments2,363 229.2 109 103.8 Total7,660 7.5 321 3.9 Interest/borrowed funds1,132 90.6 84 103.1 Interest bearing demand deposits1,486 5.8 ( 65) ( 6.7) Savings deposits2,645 12.1 42 6.1 Time deposits1,528 4.2 51 3.1 Total6,791 8.0 112 3.7 Net interest income 209 4.1 Provision for loan losses ( 50) ( 41.3) Net interest income after provision for loan losses 259 5.2 Security transactions 100 2000.0 Other operating income 158 26.0 Income before operating expense 517 9.2 Salaries & employee benefits 207 10.8 Occupancy & equipment expense 81 20.0 FDIC insurance premiums 10 4.7 Other operating expenses 73 6.8 Total operating expenses 371 10.3 Income before income taxes 146 7.3 Applicable income taxes ( 5) ( 1.0) Net income 151 10.2
FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS The Financial Accounting Standards Board has recently issued two Statements of Financial Accounting Standards. SFAS No. 121 "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" applies to such assets as property, plant and equipment; capital leases; certain intangibles and related goodwill. This statement provides measurement standards when such assets are deemed to be "impaired". SFAS No. 122 "Accounting for Mortgage Servicing Rights" amends SFAS No. 65 and provides expanded requirements for the accounting and measurement of servicing rights for both purchased and originated mortgages. Both statements are effective for fiscal years beginning after December 15, 1995. Management does not anticipate that either of these statements will impact future operations. - - -43- LIQUIDITY Liquidity and interest rate sensitivity are related but distinctly different from one another. Liquidity involves the bank's ability to meet cash withdrawal needs of customers and their credit needs in the form of loans. Liquidity is provided by cash on hand and transaction balances held at correspondent banks. Liquidity available to meet credit demands and/or adverse deposit flows is also made available from sales or maturities of short-term assets. Additional sources of funds to meet credit needs is provided by access to the marketplace to obtain interest-bearing deposits and other borrowings, including special programs available through Federal Home Loan Bank. Interest rate sensitivity is the matching or mismatching of the maturity and rate structure of the interest-bearing assets and liabilities. It is the objective of management to control the difference in the timing of the rate changes for these assets and liabilities to preserve a satisfactory net interest margin. The following table approximately reflects the matching of assets and liabilities maturing within one year and thereafter, which management feels is adequate to meet customer cash and credit needs while maintaining a desired interest rate spread. Due Due Due Due Due 0 -30 31-90 91-180 181-360 After (000 omitted) Days Days Days Days 1 Year Total Rate Sensitive Assets Interest bearing deposits with banks $ 1,289 $ 0 $ 0 $ 0 $ 0 $ 1,289 Other short- term investments 2,317 0 0 0 0 2,317 Investment securities 3,786 59 1,089 1,307 24,453 30,694 Real estate, commercial and consumer loans 25,886 5,960 12,636 25,614 32,761 102,857 $ 33,278 $ 6,019 $ 13,725 $ 26,921 $ 57,214$ 137,157 - - -44- Due Due Due Due Due 0 -30 31-90 91-180 181-360 After (000 omitted) Days Days Days Days 1 Year Total Rate Sensitive Liabilities Certificates of deposit over $ 100,000 $ 600 $ 710 $ 1,308 $ 1,000 $ 2,829 $ 6,447 Other certificates of deposit 3,907 2,862 14,534 9,885 22,56853,756 Money market deposit accounts 1,092 2,184 3,276 6,552 013,104 Other interest-bearing deposits 3,338 6,677 10,015 20,031 040,061 Long-term borrowings 0 5 0 0 2,340 2,345 $ 8,937 $ 12,438 $ 29,133 $ 37,468 $ 27,737$ 115,713 Cumulative GAP $ 24,341 $ 17,922 $ 2,514 ($ 8,033) $ 21,444
Money market accounts totaling $ 13,104,000, interest bearing checking accounts totaling $ 13,215,000, and regular savings totaling $ 25,536,000 have been included proportionately in rate sensitive liabilities of one year or less due to these funds being subject to immediate withdrawal. However, in monitoring and evaluating liquidity throughout the year, management normally does not consider regular savings to be particularly rate sensitive due to the fact that rates are generally consistent among institutions in Orrstown's trading area; nor does management consider all interest bearing checking accounts to be due within one year since it is unlikely that 100% of these deposits will be withdrawn within the next 360 days. Therefore, management generally considers 50% of these funds to be due within one year when repricing deposits and evaluating liquidity. CAPITAL FUNDS Internal capital generation has been the primary method utilized by Orrstown Financial Services, Inc. to increase its capital. Stockholders' equity, which exceeded $14 million at December31, 1995 has steadily increased. Regulatory authorities have established capital guidelines in the form of the "leverage ratio" and "risk-based capital ratios." The leverage ratio compares capital to total balance sheet assets, while the risk- based ratios compare capital to risk-weighted assets and off- balance-sheet activity in order to make capital levels more sensitive to risk profiles of individual banks. A comparison of Orrstown Financial Services' capital ratios to regulatory minimums at December31 is as follows: - - -45- Orrstown Financial Services Regulatory Minimum 1995 1994 Requirements Leverage ratio 10.0% 10.0% 4% Risk-based capital ratio Tier I (core capital) 16.2% 17.1% 4% Combined Tier I and Tier II (core capital plus allowance for loan losses) 17.8% 18.7% 8%
Orrstown Financial Services, Inc. has traditionally been well above required levels and expects equity capital to continue to exceed regulatory guidelines and industry averages. Certain ratios are useful in measuring the ability of a company to generate capital internally. The following chart indicates the growth in equity capital for the past three years. 1995 1994 1993 Equity capital at December 31 ($ 000 omitted) $ 14,633 $ 12,353 $ 11,597 Equity capital as a percent of assets at December 31 10.0%10.0% 10.2% Return on average assets 1.44%1.38% 1.36% Return on average equity 14.40%13.36% 13.24% Cash dividend payout ratio 30.7%31.3% 30.9%
STOCK MARKET ANALYSIS AND DIVIDENDS The corporation's common stock is traded inactively in the over-the-counter market. As of December31, 1995 the approximate number of shareholders of record was 1,422. Market Cash Market Cash Price Dividend Price Dividend(1) 1995 1994 First Quarter $ 27.00 $ .15 $ 25.00 $ .13 Second Quarter 27.00 .15 25.00 .13 Third Quarter 30.00 .15 26.00 .14 Fourth Quarter 30.00 .17 27.00 .14
(1) Note: Cash dividends per share for 1994 were based on weighted average shares of common stock outstanding in 1994 after giving retroactive recognition to a 5% stock dividend issued in July 1995. - - -46- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY For additional information concerning liquidity, refer to statistical disclosures applicable to the investment and loan portfolio. Closely related to the management of liquidity is the management of rate sensitivity which focuses on maintaining stability in the net interest margin. As illustrated in the table below the tax equivalent net interest margin ranged from 4.8% to 5.0% of average earning assets during the past 3 years. An asset/liability committee monitors and coordinates overall the asset/liability strategy. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY Interest Rates and Interest Differential Tax Equivalent Yields Years Ended December 31 ASSETS 1995 1994 Average Average (000 omitted) Balance Interest Rate Balance Interest Rate Investment securities: Taxable interest income $ 18,355 $ 1,083 5.9% $ 17,170 $ 963 5.6% Nontaxable interest income 8,488 529 6.2 8,148 512 6.3 Total investment securities 26,843 1,612 6.0 25,318 1,475 5.8 Loans (net of unearned discounts) 97,662 8,996 9.2 81,740 6,882 8.4 Other short-term investments 2,406 221 9.2 3,394 214 6.3 Total interest earning assets 126,911 $ 10,829 8.5 110,452 $ 8,571 7.8% Allowance for loan losses ( 1,257) ( 1,136) Cash and due from banks 3,143 4,208 Bank premises and equipment 2,727 2,530 Other assets 4,124 2,334 Total assets $ 135,648 $ 118,388 LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing demand deposits $ 25,048 $ 617 2.5% $ 27,232 $ 668 2.5% Savings deposits 24,200 758 3.1 24,425 714 2.9 Time deposits 53,350 2,974 5.6 37,526 1,710 4.6 Short-term borrowings 715 44 6.1 77 3 3.9 Long-term borrowings 2,345 149 6.3 2,304 146 6.3 Total interest bearing liabilities 105,658 $ 4,542 4.3% 91,564 $ 3,241 3.5% Demand deposits 13,833 12,991 Other liabilities 2,587 1,595 Total liabilities 122,078 106,150 Stockholders' equity 13,570 12,238 Total liabilities & stockholders' equity $ 135,648 $ 118,388 Net interest income/net yield on average earning assets $ 6,287 5.0% $ 5,330 4.8% - - -47- Year Ended December 31 ASSETS 1993 Average (000 omitted) Balance Interest Rate Investment securities: Taxable interest income $ 20,734 $ 1,278 6.2% Nontaxable interest income 8,451 539 6.4 Total investment securities 29,185 1,817 6.2 Loans (net of unearned discounts) 72,576 6,328 8.7 Other short-term investments 1,031 105 10.2 Total interest earning assets 102,792 $ 8,250 8.0% Allowance for loan losses ( 1,080) Cash and due from banks 4,278 Bank premises and equipment 1,666 Other assets 1,896 Total assets $ 109,552 LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing demand deposits $ 25,746 $ 735 2.8% Savings deposits 21,780 672 3.1 Time deposits 35,998 1,657 4.6 Short-term borrowings 521 17 3.3 Long-term borrowings 728 48 6.6 Total interest bearing liabilities 84,773 $ 3,129 3.7% Demand deposits 12,052 Other liabilities 1,518 Total liabilities 98,343 Stockholders' equity 11,209 Total liabilities & stockholders' equity $ 109,552 Net interest income/net yield on average earning assets $ 5,121 5.0%
For purposes of calculating loan yields, the average loan volume includes nonaccrual loans. For purposes of calculating yields on nontaxable interest income, the taxable equivalent adjustment is made to equate nontaxable interest on the same basis as taxable interest. The marginal tax rate was 34% for 1995, 1994 and 1993. ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY CHANGES IN NET INTEREST INCOME TAX EQUIVALENT YIELDS 1995 Versus 1994 Increase (Decrease) Due to Change in Total Average Average Increase Volume Rate (Decrease) (000 omitted) Interest Income Loans (net of unearned discounts) $ 1,337 $ 777 $ 2,114 Taxable investment securities 66 54 120 Nontaxable investment securities 21 ( 4) 17 Other short-term investments ( 62) 69 7 Total interest income 1,362 896 2,258 Interest Expense Interest bearing demand ( 53) 3 ( 50) Savings deposits ( 9) 52 43 Time deposits 728 537 1,265 Short-term borrowings 25 16 41 Long-term borrowings 2 0 2 Total interest expense 693 608 1,301 Net interest income $ 957 - - -48- 1994 Versus 1993 Increase (Decrease) Due to Change in Total Average Average Increase Volume Rate (Decrease) (000 omitted) Interest Income Loans (net of unearned discounts) $ 770 ($ 216) $ 554 Taxable investment securities ( 211) ( 104) ( 315) Nontaxable investment securities ( 29) 2 ( 27) Other short-term investments 96 13 109 Total interest income 626 ( 305) 321 Interest Expense Interest bearing demand 37 ( 85) ( 48) Savings deposits 77 ( 35) 42 Time deposits 70 ( 19) 51 Short-term borrowings ( 19) 5 ( 14) Long-term borrowings 100 ( 19) 81 Total interest expense 265 ( 153) 112 Net interest income $ 209
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. ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY The following table shows the maturities of investment securities at book value as of December31, 1995, and weighted average yields of such securities. Yields are shown on a tax equivalent basis, assuming a 34% federal income tax rate. After 1 year After 5 years Within but within but within After 1 year 5 years 10 years 10 years Total (000 omitted) Bonds: U. S. Treasury Book value $ 2,008 $ 4,826 $ 1,078 $ 0 $ 7,912 Yield 6.17% 5.82% 6.06% 0% 5.95% U. S. Government agencies Book value 0 1,812 1,921 6,539 10,272 Yield 0% 6.32% 6.62% 6.57% 6.77% State and municipal Book value 130 704 1,611 8,884 11,329 Yield 7.9% 6.49% 6.42% 5.98% 6.06% Total book value $ 2,138 $ 7,342 $ 4,610 $ 15,423 $ 29,513 Yield 6.27% 6.01% 6.42% 6.23% 6.28% Equity Securities: Total Equity Securities $ 1,183 Yield 5.4% Total Investment Securities $ 30,696 Yield 6.25%
- - -49- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY LOAN PORTFOLIO The following table presents the loan portfolio at the end of each of the last five years: 1995 1994 1993 1992 1991 (000 omitted) Commercial, financial and agricultural $ 8,211 $ 6,970 $ 5,281 $ 5,630 $ 5,503 Real estate - Construction 5,706 5,038 3,758 3,493 2,419 Real estate - Mortgage 75,731 68,458 57,278 52,711 45,384 Installment and other personal loans (net of unearned discount) 11,880 8,698 9,257 9,073 12,077 Credit cards 1,329 1,675 0 0 0 Total loans $ 102,857 $ 90,839 $ 75,574 $ 70,907 $ 65,383
Presented below are the approximate maturities of the loan portfolio (excluding real estate mortgages, installments and credit cards) at December31, 1995: Under One One to Over Five Year Five Years Years Total (000 omitted) Commercial, financial and agricultural $ 1,232 $ 1,478$ 5,501 $ 8,211 Real estate - Construction 856 1,027 3,823 5,706 Total $ 2,088 $ 2,505 $ 9,324 $ 13,917
The following table presents the approximate amount of fixed rate loans and variable rate loans due as of December31, 1995: Fixed Rate Variable Loans Rate Loans (000 omitted) Due within one year $ 6,490 $ 11,151 Due after one but within five years 16,778 15,742 Due after five years 12,510 40,186 Total $ 35,778 $ 67,079
- - -50- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY SUMMARY OF LOAN LOSS EXPERIENCE Years Ended December31 1995 1994 1993 1992 1991 (000 omitted) Average total loans outstanding (net of unearned income) $ 97,662 $ 81,740 $ 72,576 $ 67,871 $ 62,701 Allowance for loan losses, beginning of period $ 1,200 $ 1,125 $ 1,042 $ 716$ 575 Additions to provision for loan losses charged to operations 270 71 121 366170 Loans charged off during the year Commercial 0 0 17 06 Personal credit lines 3 1 3 66 Installment 48 7 31 45 35 Total charge-off's 51 8 51 51 47 Recoveries of loans previously charged off: Commercial 0 0 0 00 Installment 14 12 13 1017 Personal credit lines 0 0 0 1 1 Total recoveries 14 12 13 11 18 Net loans charged off (recovered) 37 ( 4) 38 40 29 Allowance for loan losses, end of period $ 1,433 $ 1,200 $ 1,125 $ 1,042 $ 716 Ratio of net loans charged off to average loans outstanding .04% 0.0% .05% .06% .05%
The provision is based on an evaluation of the adequacy of the allowance for possible loan losses. The evaluation includes, but is not limited to, review of net loan losses for the year, the present and prospective financial condition of the borrowers and evaluation of current and projected economic conditions. - - -51- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY LOANS The following table sets forth the outstanding balances of those loans on a nonaccrual status and those on accrual status which are contractually past due as to principal or interest payments for 30 days or more at December31. 1995 1994 1993 1992 1991 (000 omitted) Nonaccrual loans $ 132 $ 27 $ 0 $ 781 $ 814 Accrual loans: Restructured $ 0 $ 0 $ 0 $ 0 $ 0 30 through 89 days past due 1,949 1,553 1,468 1,974 2,063 90 days or more past due 417 155 150 63 165 Total accrual loans $ 2,366 $ 1,708 $ 1,618 $ 2,037 $ 2,228
See Note 7 of the notes to consolidated financial statements for details of income recognized and foregone revenue on nonaccrual loans for the past three years. Management has not identified any significant problem loans in the accrual loan categories shown above. - - -52- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY The following is an allocation by loan categories of the allowance for loan losses at December31 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 December31 1995 1994 Percentage Percentage Allowance of Loans to Allowance of Loans to Amount Total Loans Amount Total Loans (000 omitted) Commercial, financial and agricultural $ 114 7.98% $ 113 9.42% Real estate - Construction 80 5.55 67 5.58 Real estate - Mortgage 1,055 73.63 844 70.33 Installment 166 11.55 114 9.50 Credit card 18 1.29 62 5.17 Total $ 1,433 100.00% $ 1,200 100.00% Years Ended December31 1993 1992 Percentage Percentage Allowance of Loans to Allowance of Loans to Amount Total Loans Amount Total Loans (000 omitted) Commercial, financial and agricultural $ 78 6.99% $ 76 7.24% Real estate - Construction 56 4.97 51 4.93 Real estate - Mortgage 853 75.79 763 73.22 Installment 138 12.25 152 14.61 Credit card 0 0.00 0 0.00 Total $ 1,125 100.00% $ 1,042 100.00% - - -53- Year Ended December31 1991 Percentage Allowance of Loans to Amount Total Loans (000 omitted) Commercial, financial and agricultural $ 60 8.42% Real estate - Construction 26 3.70 Real estate - Mortgage 497 69.25 Installment 133 18.63 Credit card 0 0.00 Total $ 716 100.00%
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY DEPOSITS The average amounts of deposits are summarized below: Years Ended December31 1995 1994 1993 (000 omitted) Demand deposits $ 13,833 $ 12,991 $ 12,052 Interest bearing demand deposits 25,048 27,232 25,746 Savings deposits 24,200 24,425 21,780 Time deposits 53,350 37,526 35,998 Total deposits $ 116,431 $ 102,174 $ 95,576
The following is a breakdown of maturities of time deposits of $100,000 or more as of December31, 1995: Maturity (000 omitted) Certificates of Deposit Three months or less $ 1,310 Over three months through six months 1,308 Over six months through twelve months 1,000 Over twelve months 2,829 $ 6,447
RETURN ON EQUITY AND ASSETS (APPLYING DAILY AVERAGE BALANCES) The following table presents a summary of significant earnings and capital ratios: (dollar amounts in thousands) 1995 1994 1993 Average assets $ 135,648 $ 118,388 $ 109,552 Net income $ 1,954 $ 1,635 $ 1,484 Average equity $ 13,570 $ 12,238 $ 11,209 Cash dividends paid $ 613 $ 512 $ 472 Return on assets 1.44% 1.38% 1.36% Return on equity 14.40% 13.36% 13.24% Dividend payout ratio 30.7% 31.3% 30.9% Equity to asset ratio 10.0% 10.34% 10.23%
- - -54- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY CONSOLIDATED SUMMARY OF OPERATIONS Years Ended December31 1995 1994 1993 1992 1991 (000 omitted) Interest income $ 10,829 $ 8,571 $ 8,250 $ 8,632 $ 8,896 Interest expense 4,542 3,241 3,129 3,800 4,684 Net interest income 6,287 5,330 5,121 4,832 4,212 Provision for loan losses 270 71 121 366 170 Net interest income after provision for loan losses 6,017 5,259 5,000 4,466 4,042 Other income: Trust 297 185 157 119 70 Service charges - Deposits 375 349 308 294 238 Other service charges, collection and exchange, charges, commission fees 218 180 163 170 172 Other operating income (loss) 45 146 ( 26) 110 10 Total other income 935 860 602 693 490 Income before operating expense 6,952 6,119 5,602 5,159 4,532 Operating expenses: Salaries and employees benefits 2,326 2,115 1,908 1,725 1,562 Occupancy and equipment expense 559 486 405 394 359 Other operating expenses 1,371 1,363 1,280 1,250 1,115 Total operating expenses 4,256 3,964 3,593 3,369 3,036 Income before income taxes 2,696 2,155 2,009 1,790 1,496 Income tax 742 520 525 452 354 Net income applicable to common stock $ 1,954 $ 1,635 $ 1,484 $ 1,338 $ 1,142 Per share data: Earnings per common share $ 2.05$ 1.71 $ 1.62 $ 1.45 $ 1.27 Cash dividend - Common $ .62$ .54 $ .50 $ .45 $ .42 Weighted average number of common shares 954,192 954,192 915,218 921,098 901,374
- - -55- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY STATEMENTS OF AVERAGE BALANCES AND AVERAGE RATES ($ 000 omitted) 1995 1994 1993 1992 1991 LOANS Personal credit lines $ 4,425 $ 4,113 $ 3,710 $ 3,556 $ 3,559 Tax free 1,207 1,229 1,215 1,092 1,117 Commercial 28,725 21,512 16,958 15,048 13,080 Mortgage 46,728 42,919 39,874 37,006 34,260 Consumer 16,329 11,888 10,819 11,169 10,685 Credit card 248 79 0 0 0 Total loans 97,662 81,740 72,576 67,871 62,701 INVESTMENT SECURITIES U.S. Government 7,378 7,891 10,385 10,273 11,031 U.S. Government agencies 9,815 8,173 9,201 7,257 6,086 State & municipal 8,488 8,148 8,451 7,069 5,967 Other 1,162 1,106 1,148 1,110 886 Total investment securities 26,843 25,318 29,185 25,709 23,970 OTHER SHORT-TERM INVESTMENTS Interest-bearing deposits 1,006 0 0 0 0 Federal funds sold 1,328 3,196 1,031 2,668 2,643 Certificates of deposit 72 198 0 19 144 Total other short-term investments 2,406 3,394 1,031 2,687 2,787 TOTAL EARNING ASSETS 126,911 110,452 102,792 96,267 89,458 TOTAL ASSETS $ 135,648 $ 118,388 $ 109,552 $ 102,761 $ 95,231 Percent increase 14.6% 8.1% 6.6%7.9% 4.2% DEPOSITS Demand $ 13,833 $ 12,991 $ 12,052 $ 10,406 $ 8,778 Interest-bearing demand 25,048 27,232 25,746 23,553 19,091 Savings 24,200 24,425 21,780 17,090 12,807 Time 53,350 37,526 35,998 39,629 43,373 Total deposits 116,431 102,174 95,576 90,678 84,049 OTHER BORROWINGS Federal funds purchased 715 77 521 288 0 Liabilities for borrowed money 2,345 2,304 728 0 0 TOTAL INTEREST-BEARING LIABILITIES 105,658 91,564 84,773 80,560 75,271
- - -56- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY STATEMENTS OF AVERAGE BALANCES AND AVERAGE RATES (CONTINUED) 1995 1994 1993 1992 1991 AVERAGE RATES EARNED % % % % % Loans Commercial 10.1 9.0 8.4 8.7 10.3 Mortgage 7.9 7.6 8.0 9.1 10.3 Consumer 9.6 10.0 11.6 11.9 12.5 Tax free 8.8 9.5 7.8 9.2 12.5 Personal credit lines 10.5 8.8 8.2 8.7 10.8 Credit card 9.0 6.5 0.0 0.0 0.0 Total 9.0 8.4 8.7 9.4 10.7 Investment Securities U.S. Government 5.7 5.6 6.7 7.8 8.0 U.S. Government agencies 6.8 6.3 6.4 7.6 8.9 State & municipal 9.5 9.5 9.6 10.4 10.8 Other 5.4 4.5 5.2 4.3 3.2 Total 7.3 7.1 7.4 8.4 8.9 Other Short-Term Investments Interest-bearing deposits 6.0 0.0 0.0 0.0 0.0 Federal funds sold 6.0 4.0 2.9 3.3 5.8 Certificates of deposit 4.6 4.0 0.0 4.0 9.9 Total earning assets 8.6 7.8 8.2 9.0 10.1 AVERAGE RATES PAID Time & savings deposits 4.2 3.5 3.7 4.7 6.2 Federal funds purchased 6.1 4.4 3.3 4.0 0.0 Liabilities for borrowed money 6.3 6.3 6.6 0.0 0.0
- - -57- Item 9. Disagreements on Accounting and Financial Disclosures. Not applicable. - - -58- 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 1996 Annual Meeting of shareholders filed pursuant to Regulation 14A. - - -59- PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. Financial Statement Schedules and Exhibits (1) Financial statements. See Item 8 of this report for the index to financial statements. (2) Financial statement schedules. Not applicable. (3) Exhibits. Exhibit Numbers (2) Plan of acquisition, reorganization, arrangement, liquidation or succession. Not applicable. (3) (a) Articles of incorporation. Incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-4, Registration No. 33-18888. (b) 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., filed as Exhibit 3.1 to Registrant's Registration Statement on Form S-4 (Registration No. 33-18888). (ii) By-laws of Orrstown Financial Services, Inc., filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-18888). - - -60- (iii) Amendment to by-laws of Orrstown Financial Services, Inc. - filed herewith (9) Voting trust agreement. Not applicable. (10) Material contracts. None. (11) Statement re: computation of per share earnings. Not applicable. (12) Statements re: computation of ratios. Not applicable. (13) Annual report to security holders. Form 10-Q or quarterly report to security holders. Not applicable. (16) Letter re: change in certifying accountant. Not applicable. (18) Letter re: change in accounting principles. Not applicable. (21) Subsidiaries of the registrant. Filed herewith. (22) Published report regarding matters submitted to vote of security holders. Not applicable. (23) Consents of experts and counsel. Not applicable. (24) Power of attorney. Not applicable. (27) Financial data schedule. Filed herewith. (28) Information from reports furnished to state insurance regulatory authorities. Not applicable. (99) Additional exhibits. Not applicable. (b) Reports on Form 8-K. None. - - -61- 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 Kenneth R. Shoemaker, President Dated: March _____, 1996 (Duly authorized officer) By ______________________________ Robert B. Russell, Controller (Principal Financial 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 President and Chief March , 1996 Kenneth R. Shoemaker Executive Officer and Director Secretary and March , 1996 Richard M. Diffenbaugh Director Director March , 1996 Robert T. Henry Assistant Secretary March , 1996 William O. Hykes and Director Vice Chairman of the March , 1996 Joel R. Zullinger Board and Director Chairman of Executive March , 1996 Jeffrey W. Coy Committee and Director Director March , 1996 Ned R. Fogelsonger Chairman of the March , 1996 Galen L. Myers Board and Director Director March , 1996 Frank S. Heberlig Director March , 1996 Raymond I. Pugh - - -62- Exhibit Index Exhibit No. Sequentially numbered pages 21 Subsidiaries of the Registrant 64 - - -63- EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT 1. Orrstown Bank, Orrstown, Pennsylvania; a state-chartered bank organized under the Pennsylvania Banking Code of 1965. EX-27 2 ARTICLE 9 FDS FOR 10-K
9 1,000 12-MOS DEC-31-1995 DEC-31-1995 4,330 1,289 2,317 869 29,827 29,827 30,694 102,857 1,433 145,998 127,330 0 1,690 2,345 204 0 0 13,857 145,998 8,996 1,612 221 10,829 4,349 4,542 6,287 270 (45) 4,256 2,696 1,954 0 0 1,954 2.05 2.05 5.0 132 417 0 0 1,200 51 14 1,433 1,433 0 0
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