-----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, ILYtTVGcFjkoKZ+Uvbf5bXLtC+CZ1tgnZXOO0chqgXDCdANOFd+++Q8sgiLks9i3 /jFLvNZODK9hYk2RADtM7w== 0000950116-02-000516.txt : 20020415 0000950116-02-000516.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950116-02-000516 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ORRSTOWN FINANCIAL SERVICES INC CENTRAL INDEX KEY: 0000826154 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [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: 02592953 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: STREET 1: 77 EAST KING STREET CITY: SHIPPANSBURG STATE: PA ZIP: 17257 10-K 1 tenk.txt 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 Commission file number: 33-18888 ORRSTOWN FINANCIAL SERVICES, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-2530374 - ------------------------------ ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 77 East King Street, P. O. Box 250, Shippensburg, Pennsylvania 17257 -------------------------------------------------------------------- (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 Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of December 31, 2001, 2,378,608 shares of the registrant's common stock were outstanding. The aggregate market value of such shares held by nonaffiliates on that date was $ 92,765,712. DOCUMENTS INCORPORATED BY REFERENCE Portions of the annual shareholders report for the year ended December 31, 2001 are incorporated by reference into Parts I and II. Portions of the Proxy Statement for 2002 Annual Meeting of Security Holders are incorporated by reference in Part III of this Form 10-K. ORRSTOWN FINANCIAL SERVICES, INC. FORM 10-K INDEX
Page Part I Item 1. Business 2 Item 2. Properties 7 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 10 Item 6. Selected Financial Data 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 8. Financial Statements and Supplementary Data 10 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 19 Part III Item 10. Directors and Executive Officers of the Registrant 19 Item 11. Executive Compensation 19 Item 12. Security Ownership of Certain Beneficial Owners and Management 19 Item 13. Certain Relationships and Related Transactions 19 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 19 Signatures 21
Part I Item 1. Business. History and Business Orrstown Financial Services, Inc. (OFS) is a financial holding company registered under the Gramm-Leach-Bliley Act ("the GLB Act"). Orrstown Financial Services, Inc. was organized on November 17, 1987, under the laws of the Commonwealth of Pennsylvania for the purpose of acquiring Orrstown Bank ("Orrstown"), Shippensburg, Pennsylvania, and such other banks and bank related activities as are permitted by law and desirable. On March 8, 1988, Orrstown Financial Services, Inc. acquired 100% ownership of Orrstown, issuing 131,455 shares of Orrstown Financial Services, Inc.'s common stock to the former Orrstown shareholders. Orrstown Financial Services, Inc.'s primary activity consists of owning and supervising its two subsidiaries, Orrstown Bank and Pennbanks Insurance Company Cell P1. Orrstown Bank is engaged in providing banking and bank related services in South Central Pennsylvania, principally Franklin and Cumberland Counties, where its ten branches are located in Shippensburg (2), Carlisle (2), Spring Run, Orrstown, Chambersburg (2), Greencastle and Mechanicsburg, Pennsylvania. The day-to-day management of Orrstown Bank is conducted by the subsidiary's officers. Pennbanks Insurance Company Cell P1 is a reinsurer of credit life, and disability insurance which services customers of Orrstown Bank. Orrstown Financial Services, Inc. derives a majority of its current income from Orrstown Bank. Orrstown Financial Services, Inc. has no employees other than its six officers who are also employees of Orrstown, its subsidiary. On December 31, 2001, Orrstown had 99 full-time and 43 part-time employees. Business of Orrstown Orrstown was organized as a state-chartered bank in 1987 as part of an agreement and plan of merger between Orrstown Financial Services, Inc. and Orrstown Bank, the predecessor of Orrstown, under which Orrstown became a wholly-owned subsidiary of Orrstown Financial Services, Inc. As indicated, Orrstown is the successor to Orrstown Bank which was originally organized in 1919. Orrstown is engaged in commercial banking and trust business as authorized by the Pennsylvania Banking Code of 1965. This involves accepting demand, time and savings deposits and granting loans. The Bank grants agribusiness, commercial and residential loans to customers in South Central Pennsylvania, principally Franklin and Cumberland Counties. The concentrations of credit by type of loan are set forth on the face of the balance sheet (page 2 of the annual report to shareholders). The Bank maintains a diversified loan portfolio and evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon the extension of credit, is based on management's credit evaluation of the customer and collateral standards established in the Bank's lending policies and procedures. All secured loans are supported with appraisals of collateral. Business equipment and machinery, inventories, accounts receivable, and farm equipment are considered appropriate security, provided they meet acceptable standards for liquidity and marketability. -2- Loans secured by equipment and/or other non real estate collateral normally do not exceed 70% of appraised value or cost, whichever is lower. Loans secured by real estate generally do not exceed 80% of the appraised value of the property. Loan to collateral values are monitored as part of the loan review, and appraisals are updated as deemed appropriate in the circumstances. Administration and supervision over the lending process is provided by the Bank's Credit Administration Department via loan reviews. The loan review process is continuous, commencing with the approval of a loan. Each new loan is reviewed by the Credit Administration Department for compliance with banking regulations and lending policy requirements for documentation, collateral standards, and approvals. The Credit Administration Department continues to monitor and evaluate loan customers utilizing risk-rating criteria established in the lending policy in order to spot deteriorating trends and detect conditions which might indicate potential problem loans. Reports of the results of the loan reviews are submitted quarterly to the Directors' Credit Administration Committee for approval and provide the basis for evaluating the adequacy of the allowance for loan losses. Through its trust department, Orrstown renders services as trustee, executor, administrator, guardian, managing agent, custodian, investment advisor and other fiduciary activities authorized by law. As of December 31, 2001, Orrstown had total assets of approximately $ 374 million, total shareholders' equity of approximately $ 31 million and total deposits of approximately $ 281 million. Regulation and Supervision - -------------------------- Orrstown Financial Services (OFS) is a financial holding company, and is registered as such with the Board of Governors of the Federal Reserve System (FRB). OFS is subject to examination by the FRB and is restricted in its acquisitions, certain of which are prohibited and certain of which are subject to approval by the FRB. A financial holding company generally may not acquire ownership or control of any company, including a bank, without prior approval of the Federal Reserve Board. In addition, federal law imposes certain restrictions on transactions between OFS and its subsidiary, Orrstown Bank. As an affiliate of Orrstown Bank, OFS is subject, with certain exceptions, to provisions of federal law imposing limitations on, and requiring collateral for, extensions of credit by Orrstown Bank to its affiliates. The operations of Orrstown are subject to federal and state statutes applicable to banks chartered under the banking laws of the United States, and to banks whose deposits are insured by the Federal Deposit Insurance Corporation. Bank operations are also subject to regulations of the Pennsylvania Department of Banking, the Federal Reserve Board and the Federal Deposit Insurance Corporation. -3- The primary supervisory authority of Orrstown is the Pennsylvania Department of Banking, who regularly examines such areas as reserves, loans, investments, management practices and other aspects of bank operations. These examinations are designed primarily for the protection of the Bank depositors. Federal and state banking laws and regulations govern, among other things, the scope of a bank's business, the investments a bank may make, the reserves against deposits a bank must maintain, the loans a bank makes and collateral it takes, the maximum interest rates a bank may pay on deposits, the activities of a bank with respect to mergers and consolidations, and the establishment of branches, and management practices and other aspects of banking operations. See Note 15 of the Notes to Financial Statements for a discussion of the limitations on the availability of Orrstown Financial Services' subsidiary's undistributed earnings for the payment of dividends due to such regulation and other reasons. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) provides that a financial institution insured by the Federal Deposit Insurance Corporation (FDIC) sharing common ownership with a failed institution can be required to indemnify the FDIC for its losses resulting from the insolvency of the failed institution, even if such indemnification causes the affiliated institution also to become insolvent. OFS currently has only one subsidiary and as a result has not been significantly affected by the aforementioned provisions of FIRREA. Regulatory authorities have issued guidelines that establish risk-based capital and leverage standards. These capital requirements of bank regulators, are discussed on page 21 of the annual report to shareholders under "Capital Adequacy and Regulatory Matters". Failure to meet applicable capital guidelines could subject a bank to a variety of enforcement remedies available to the regulatory authorities. Depending upon circumstances, the regulatory agencies may require an institution to develop a "capital plan" to increase its capital to levels established by the agency. In 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was enacted. FDICIA contains provisions limiting activities and business methods of depository institutions. FDICIA requires the primary federal banking regulators to promulgate regulations setting forth standards relating to, among other things, internal controls and audit systems; credit underwriting and loan documentation; interest rate exposure and other off-balance sheet assets and liabilities; and compensation of directors and officers. FDICIA provides for expanded regulation of depository institutions and their affiliates, including parent holding companies, by such institutions' primary federal banking regulator. Each primary federal banking regulator is required to specify, by regulation, capital standards for measuring the capital adequacy of the depository institutions it supervises and, depending upon the extent to which a depository institution does not meet such capital adequacy measures, the primary federal banking regulator may prohibit such institution from paying dividends or may require such institution to take other steps to become adequately capitalized. -4- FDICIA establishes five capital tiers, ranging from "well capitalized", to "critically undercapitalized". A depository institution is well capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure. Under FDICIA, an institution that is not well capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market; in addition, "pass through" insurance coverage may not be available for certain employee benefit accounts. FDICIA also requires an undercapitalized depository institution to submit an acceptable capital restoration plan to the appropriate federal bank regulatory agency. One requisite element of such a plan is that the institution's parent holding company must guarantee compliance by the institution with the plan, subject to certain limitations. In the event of the parent holding company's bankruptcy, the guarantee, and any other commitments that the parent holding company has made to federal bank regulators to maintain the capital of its depository institution subsidiaries, would be assumed by the bankruptcy trustee and entitled to priority in payment. Based on their respective regulatory capital ratios at December 31, 2001, the corporation is considered well capitalized, based on the definitions in the regulations issued by the Federal Reserve Board and the other federal bank regulatory agencies setting forth the general capital requirements mandated by FDICIA. See "Capital Adequacy and Regulatory Matters" in management's discussion and analysis in the corporation's annual report as shown in Exhibit 13. A federal depositor preference statute was enacted in 1993 providing that deposits and certain claims for administrative expenses and employee compensation against an insured depository institution would be afforded a priority over other general claims against such an institution, including federal funds and letters of credit, in the "liquidation or other resolution" of such an institution by any receiver. In 1999, the Gramm-Leach-Bliley Act was enacted. This federal legislation modernizes the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial services providers. As a result of the legislation, bank holding companies are permitted to engage in a wider variety of financial activities than permitted under prior law, particularly with regard to insurance and securities activities. Moreover, to the extent that it permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This could result in a growing number of larger financial institutions that offer a wider variety of financial services than we currently offer and that can aggressively compete in the markets we serve. This could adversely impact our profitability. In order to remain competitive, Orrstown Financial Services elected to be, and was approved as a financial holding company during March, 2000. A bank holding company, which does not qualify or does not elect to become a financial holding company under the Gramm-Leach-Bliley Act, is generally prohibited from engaging in, or acquiring direct or indirect control of any company engaged in nonbanking activities, except for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking as to be a proper incident thereto are set forth in Federal Reserve Board Regulation Y. -5- Bank holding companies that do qualify as a financial holding company such as Orrstown Financial Services may engage in activities that are of a financial nature or incidental thereto. This will include activities such as securities and insurance underwriting which are not permitted nonbanking activities under Regulation Y. A bank holding company may qualify to become a financial holding company if each of its depository institution subsidiaries is "well capitalized", "well managed", has at least a "satisfactory" CRA rating in its most recent examination and the bank holding company has filed a certification with the Federal Reserve Bank that it elects to become a financial holding company. The earnings of Orrstown Bank, and therefore the earnings of Orrstown Financial Services, are affected by general economic conditions, management policies, and the legislative and governmental actions of various regulatory authorities including the FRB, the FDIC and the Pennsylvania Department of Banking. In addition to banking and securities laws, regulations and regulatory agencies, the Corporation also is subject to various other laws, regulations and regulatory agencies. Furthermore, various proposals, bills and regulations have been and are being considered in the United States Congress, and various other governmental regulatory and legislative bodies, which could result in changes in the profitability and governance of the Corporation. It cannot be predicted whether new legislation or regulations will be adopted and, if so, how they would affect the Corporation. References under the caption "Regulation and Supervision" to applicable statutes, regulations and orders are brief summaries of portions thereof which do not purport to be complete and which are qualified in their entirety by reference thereto. Important Factors Relating to Forward Looking Statements - -------------------------------------------------------- The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about their companies without fear of litigation so long as those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those projected in such statements. In connection with certain statements made in this report and those that may be made in the future by or on behalf of the Corporation which are identified as forward-looking statements, the Corporation notes that the following important factors, among others, could cause actual results to differ materially from those set forth in any such forward-looking statements. Further, such forward-looking statements speak only as of the date on which such statement or statements are made, and the Corporation undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. The business and profitability of a financial services organization such as the Corporation is influenced by prevailing economic conditions and governmental policies. The actions and policy directives of the Federal Reserve Board determine to a significant degree the cost and the availability of funds obtained from money market sources for lending and investing. Federal Reserve Board policies and regulations also influence, directly and indirectly, the rates of interest paid by commercial banks on their interest-bearing deposits and may also impact the value of financial instruments held by the Corporation. The nature and -6- impact on the Corporation of future changes in economic and market conditions and monetary and fiscal policies are not predictable and are beyond the Corporation's control. In addition, these conditions and policies can impact the Corporation's customers and counterparties which may increase the risk of default on their obligations to the Corporation and its affiliates. They can also affect the competitive conditions in the markets and products within which the Corporation operates, which can have an adverse impact on the Corporation's ability to maintain its revenue streams. As part of its ongoing business, the Corporation assumes financial exposures to interest rates, currencies, equities and other financial products. In doing so, the Corporation is subject to unforeseen events which may not have been anticipated or which may have effects which exceed those assumed within its risk management processes. This risk can be accentuated by volatility and reduction in liquidity in those markets which in turn can impact the Corporation's ability to hedge and trade the positions concerned. In addition, the Corporation is dependent on its ability to access the financial markets for its funding needs. As noted in "Regulation and Supervision", the Corporation is regulated by and subject to various regulators. The actions of these regulators can have an impact on the profitability and governance of the Corporation. Increases by regulatory authorities of minimum capital, reserve, deposit insurance and other financial viability requirements can also affect the Corporation's profitability. The Corporation is subject to operational and control risk which is the potential for loss caused by a breakdown in communication, information, processing and settlement systems or processes or a lack of compliance with the procedures on which they rely either within the Corporation or within the broader financial systems infrastructure. As with any financial institution, the Corporation is also subject to the risk of litigation and to an unexpected or adverse outcome in such litigation. Competitive pressures in the marketplace and unfavorable or adverse publicity and news coverage can have the effect of lessening customer demand for the Corporation's services. Ultimately, the Corporation's businesses and their success are dependent on the Corporation's ability to attract and retain high quality employees. Competition - ----------- Orrstown's principal market area consists of Franklin County and Cumberland County, Pennsylvania. It services a substantial number of depositors in this market area, with the greatest concentration within a radius of Chambersburg, Shippensburg and Carlisle, Pennsylvania. Orrstown, like other depository institutions, has been subjected to competition from less heavily regulated entities such as brokerage firms, money market funds, consumer finance and credit card companies and other commercial banks, many of which are larger than Orrstown Bank. Orrstown Bank is generally competitive with all competing financial institutions in its service area with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans. Item 2. Properties. - ------------------- Orrstown Bank owns buildings in Orrstown, Shippensburg, (2), Carlisle, Spring Run, Chambersburg, and Mechanicsburg, Pennsylvania. Offices of the bank are located in each of these buildings. It leases office space for its Greencastle branch. -7- In 2000, the corporation expanded its main offices located on King Street in Shippensburg, PA. Item 3. Legal Proceedings. - ---------------------------- Orrstown Financial Services, Inc. is an occasional party to legal actions arising in the ordinary course of its business. In the opinion of management, the Corporation has adequate legal defenses and/or insurance coverage respecting any and each of these actions and does not believe that they will materially affect Orrstown Financial Services, Inc.'s operations or financial position. Item 4. Submission of Matters to Vote of Security Holders. - ----------------------------------------------------------- None Executive Officers of Registrant - -------------------------------- The following table sets forth selected information about the principal officers of the holding company, each of whom is elected by the Board of Directors and each of whom holds office at the discretion of the Board. -8-
Held Employee Age as of Name/Office Held Since Since 3/15/02 Joel R. Zullinger, Chairman of the Board 1991 (1) 53 Jeffrey W. Coy, Vice Chairman of the Board 1988 (1) 50 Kenneth R. Shoemaker, President, CEO 1987 1986 54 Bradley S. Everly, Senior Vice President, Treasurer 1997 1997 50 Stephen C. Oldt, Executive Vice President, Assistant Secretary 1987 1987 59 Philip E. Fague, Executive Vice President, Assistant Treasurer 2001 1988 42 Denver L. Tuckey, Secretary 1999 (1) 67 Jeffrey W. Embly, Vice President 1999 1997 31
(1) These officers are not employees of the Bank. Senior Operating Officers of the Bank
Held Bank Employee Age as of Name/Office Held Since Since 3/15/02 Kenneth R. Shoemaker, President, Chief Executive Officer 1987 1986 54 Stephen C. Oldt, Executive Vice President, Chief Operating Officer 1987 1987 59 Philip E. Fague, Executive Vice President, 1999/ Chief Sales and Service Officer 2000 1988 42 Bradley S. Everly, Senior Vice President, Chief Financial Officer 1997 1997 50 Benjamin Stoops, Vice President, Chief Technology Officer 1998 1998 50 Jeffrey W. Embly, Vice President, Senior Loan Officer 1999 1997 31 Barbara E. Brobst, Vice President, Senior Trust Officer 2001 1997 43 Nathan A. Eifert, Assistant Vice President, Director of Marketing 2001 2000 33
-9- Part II Item 5. Market for Registrant's Common Stock and Related Security Holder Matters. - ------------------------------------------------------------------------ Orrstown Financial Services, Inc.'s common stock is not traded on a national securities exchange, but is traded through the local and over the counter local markets under the symbol ORRF. At December 31, 2001, the approximate number of shareholders of record was approximately 2,149. The price ranges for Orrstown Financial Services, Inc. common stock set forth below are the approximate bid prices obtained from brokers who make a market in the stock.
Market Cash Market Cash Price Dividend Price Dividend Dividend (1) 2001 2000 High Low High Low First Quarter $ 38.10 $ 36.19 $ 0.143 $ 38.10 $ 36.19 $ 0.133 Second Quarter 39.29 35.71 0.143 37.14 35.48 0.134 Third Quarter 44.76 35.00 0.150 36.67 35.71 0.133 Fourth Quarter 40.00 37.00 0.160 41.90 35.84 0.143
(1) Note: All per share data has been restated after giving retroactive recognition to a 5% stock dividend paid September 15, 2001. See Note 15 to the financial statements for restrictions on the payment of dividends. Item 6. Selected Financial Data. - --------------------------------- The selected five-year financial data on page 23 of the annual shareholders' report for the year ended December 31, 2001 is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's discussion and analysis of financial condition and results of operations, on pages 16 through 21 of the annual shareholders' report are incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. The financial statements and supplementary data, some of which is required under Guide 3 (statistical disclosures by bank holding companies) are shown on pages 2 through 23 of the annual shareholders report for the year ended December 31, 2001 and are incorporated herein by reference. Certain statistical information required in addition to those included in the annual shareholders report are submitted herewith as follows. Description of Statistical Information Page Changes in net interest income tax equivalent yields 11 Investment portfolio 12 Loan portfolio 13 Summary of loan loss experience 14 Nonaccrual, delinquent and impaired loans 15 Allocation of allowances for loan losses 16 Deposits and return on equity and assets 17 Consolidated summary of operations 18 -10- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES CHANGES IN NET INTEREST INCOME TAX EQUIVALENT YIELDS
2001 Versus 2000 2000 Versus 1999 Increase (Decrease) Increase (Decrease) Due to Change in Due to Change in Total Total Average Average Increase Average Increase Volume Rate (Decrease) Volume Average Rate (Decrease) (000 omitted) Interest Income Loans (net of unearned discounts) $ 3,570 ( $ 1,300) $ 2,270 $ 1,974 $ 456 $ 2,430 Taxable investment securities 121 ( 326) ( 205) 645 433 1,078 Nontaxable investment securities ( 56) ( 29) ( 85) ( 115) ( 1) ( 116) Other short-term investments 763 ( 557) 206 ( 63) 74 11 --------- --------- ------ ---------- ------- -------- Total interest income 4,398 ( 2,212) 2,186 2,441 962 3,403 --------- --------- ------ ---------- ------- -------- Interest Expense Interest bearing demand 699 ( 630) 69 160 138 298 Savings deposits 4 ( 169) ( 165) ( 57) ( 57) ( 114) Time deposits 640 ( 62) 578 780 383 1,163 Short-term borrowings 134 ( 488) ( 354) 552 273 825 Long-term borrowings 371 ( 140) 231 54 18 72 --------- --------- ------ ---------- ------- -------- Total interest expense 1,848 ( 1,489) 359 1,489 755 2,244 --------- --------- ------ ---------- ------- -------- Net interest income $ 1,827 $ 1,159 ======= =======
Changes which are attributed in part to volume and in part to rate are allocated in proportion to their relationships to the amounts of changes. -11- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES INVESTMENT PORTFOLIO The following table shows the maturities of investment securities at book value as of December 31, 2001, and weighted average yields of such securities. Yields are shown on a tax equivalent basis, assuming a 34% federal income tax rate.
After 5 After 1 year years but but within 5 within 10 Within 1 year years years After 10 years Total (000 omitted) Bonds: U. S. Treasury Book value $ 51 $ 1,029 $ 0 $ 0 $ 1,080 Yield 6.28% 6.06% 0% 0% 6.07% U. S. Government agencies Book value 1,000 0 1,000 0 2,000 Yield 6.42% 0% 6.50% 0% 6.46% State and municipal Book value 0 0 983 17,728 18,711 Yield 0% 0% 9.24% 8.31% 8.36% Corporate Book value 0 1,993 0 941 2,934 Yield 0% 5.08% 0% 3.02% 4.42% Trust preferred Book value 0 0 0 1,000 1,000 Yield 0% 0% 0% 9.25% 9.25% Total book value $1,051 $3,022 $1,983 $ 19,669 $ 25,725 ====== ====== ====== ======== ======== Yield 6.41% 5.41% 7.86% 8.10% 7.70% ====== ====== ====== ======== ======== Mortgage-backed securities: Total book value $ 41,313 ======== Yield 6.27% ======== Equity Securities: Total book value $ 959 ======== Yield 3.45% ======== Total Investment Securities $ 67,997 ======== Yield 6.77% ========
-12- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES LOAN PORTFOLIO The following table presents the loan portfolio at the end of each of the last five years:
2001 2000 1999 1998 1997 (000 omitted) Commercial, financial and agricultural $ 28,534 $ 23,938 $ 21,503 $ 18,732 $ 10,275 Real estate - Construction 20,480 17,425 15,580 11,182 5,961 Real estate - Mortgage 192,192 157,722 134,046 116,030 97,074 Installment and other personal loans (net of unearned discount) 8,610 10,096 9,562 12,688 15,021 --------- --------- --------- --------- --------- Total loans $ 249,816 $ 209,181 $ 180,691 $ 158,632 $ 128,331 ========= ========= ========= ========= =========
Presented below are the approximate maturities of the loan portfolio (excluding real estate mortgages, installments and credit cards) at December 31, 2001:
One to Five Under One Year years Over Five Years Total (000 omitted) Commercial, financial and agricultural $ 4,530 $ 5,434 $ 18,570 $ 28,534 Real estate - Construction 2,830 3,389 14,261 20,480 ------- ------- -------- -------- Total $ 7,360 $ 8,823 $ 32,831 $ 49,014 ======= ======= ======== ========
The following table presents the approximate amount of fixed rate loans and variable rate loans due as of December 31, 2001:
Fixed Rate Variable Loans Rate Loans (000 omitted) Due within one year $ 2,104 $ 10,148 Due after one but within five years 19,625 7,526 Due after five years 78,594 131,819 --------- --------- Total $ 100,323 $ 149,493 ========= =========
-13- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES SUMMARY OF LOAN LOSS EXPERIENCE Years Ended December 31
2001 2000 1999 1998 1997 (000 omitted) Average total loans outstanding (net of unearned income) $ 233,103 $ 192,902 $ 169,458 $ 144,013 $ 117,403 ========= ========= ========= ========= ========= Allowance for loan losses, beginning of period $ 2,691 $ 2,455 $ 1,971 $ 1,767 $ 1,620 Additions to provision for loan losses charged to operations 504 360 547 270 215 Loans charged off during the year Commercial 67 99 97 15 1 Personal credit lines 29 11 7 23 32 Installment 2 19 24 46 50 --------- --------- --------- --------- --------- Total charge-off's 98 129 128 84 83 --------- --------- --------- --------- --------- Recoveries of loans previously charged off: Commercial 6 1 59 3 2 Installment 1 2 1 10 12 Personal credit lines 0 2 5 5 1 --------- --------- --------- --------- --------- Total recoveries 7 5 65 18 15 --------- --------- --------- --------- --------- Net loans charged off (recovered) 91 124 63 66 68 --------- --------- --------- --------- --------- Allowance for loan losses, end of period $ 3,104 $ 2,691 $ 2,455 $ 1,971 $ 1,767 ========= ========= ========= ========= ========= Ratio of net loans charged off to average loans outstanding .04% .06% .04% .05% .06% ========= ========= ========= ========= =========
The provision is based on an evaluation of the adequacy of the allowance for possible loan losses. The evaluation includes, but is not limited to, review of net loan losses for the year, the present and prospective financial condition of the borrowers and evaluation of current and projected economic conditions. -14- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES NONACCRUAL, DELINQUENT AND IMPAIRED LOANS The following table sets forth the outstanding balances of those loans on a nonaccrual status and those on accrual status which are contractually past due as to principal or interest payments for 30 days or more at December 31. 2001 2000 1999 1998 1997 ------ ------ ------ ------ ------ (000 omitted) Nonaccrual loans $ 56 $ 12 $ 64 $ 486 $ 473 ====== ====== ====== ====== ====== Accrual loans: Restructured $ 0 $ 0 $ 0 $ 0 $ 0 30 through 89 days past due 2,244 865 3,420 823 2,398 90 days or more past due 644 814 97 284 657 ------ ------ ------ ------ ------ Total accrual loans $2,888 $1,679 $3,517 $1,107 $3,055 ====== ====== ====== ====== ====== See Note 6 of the notes to consolidated financial statements for details of income recognized and foregone revenue on nonaccrual loans for the past three years, and discussion concerning impaired loans at December 31, 2001. -15- ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES ALLOCATION OF ALLOWANCE FOR LOAN LOSSES The following is an allocation by loan categories of the allowance for loan losses at December 31 for the last five years. In retrospect the specific allocation in any particular category may prove excessive or inadequate and consequently may be reallocated in the future to reflect the then current conditions. Accordingly, the entire allowance is available to absorb losses in any category:
Years Ended December 31 2001 2000 Percentage of Percentage of Allowance Loans to Total Allowance Loans to Total Amount Loans Amount Loans (000 omitted) Commercial, financial and agricultural $ 466 11.42% $ 43 11.74% Commercial, real estate secured 563 46.42 786 21.29 Real estate - Construction 0 8.20 0 8.30 Real estate - Mortgage 350 30.51 56 53.86 Installment 33 3.45 34 4.81 Unallocated 1,692 0.0 1,772 0.00 ------- ------ ------- ------ Total $ 3,104 100.00% $ 2,691 100.00% ======= ====== ======= ====== Years Ended December 31 1999 1998 Percentage of Percentage of Allowance Loans to Total Allowance Loans to Total Amount Loans Amount Loans (000 omitted) Commercial, financial and agricultural $ 45 11.90% $ 255 9.93% Commercial, real estate secured 609 18.03 416 19.43 Real estate - Construction 0 8.62 0 7.05 Real estate - Mortgage 93 56.16 111 53.77 Installment 27 5.29 34 9.82 Unallocated 1,681 0.00 1,155 0.00 ------- ------ ------- ------ Total $ 2,455 100.00% $ 1,971 100.00% ======= ====== ======= ====== Years Ended December 31 1997 Percentage of Allowance Loans to Total Amount Loans (000 omitted) $ 31 8.00% Commercial, financial and agricultural 354 35.00 Commercial, real estate secured 0 4.64 Real estate - Construction 188 40.64 Real estate - Mortgage 12 11.72 Installment 1,182 0.00 ------- ------ Unallocated $ 1,767 100.00% ======= ====== Total
16 ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES DEPOSITS The average amounts of deposits are summarized below:
Years Ended December 31 2001 2000 1999 (000 omitted) Demand deposits $ 32,628 $27,650 $ 25,365 Interest bearing demand deposits 99,103 76,631 71,176 Savings deposits 20,787 20,628 22,888 Time deposits 102,856 91,214 75,859 --------- --------- --------- Total deposits $ 255,374 $ 216,123 $ 195,288 ========= ========= =========
The following is a breakdown of maturities of time deposits of $ 100,000 or more as of December 31, 2001: (000 omitted) Three months or less $ 3,405 Over three months through twelve months 9,916 Over one year through three years 2,690 Over three years 1,815 ---------- $ 17,826 ========== RETURN ON EQUITY AND ASSETS (APPLYING DAILY AVERAGE BALANCES) The following table presents a summary of significant earnings and capital ratios: (000 omitted) 2001 2000 1999 Average assets $ 340,428 $ 285,903 $ 250,529 Net income $ 5,092 $ 4,172 $ 3,755 Average equity $ 29,612 $ 23,954 $ 22,067 Cash dividends paid $ 1,411 $ 1,270 $ 1,134 Return on assets 1.50% 1.46% 1.50% Return on equity 17.20% 17.42% 17.02% Dividend payout ratio 27.71% 30.48% 30.20% Equity to asset ratio 8.70% 8.38% 8.81% 17 ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES CONSOLIDATED SUMMARY OF OPERATIONS
Years Ended December 31 2001 2000 1999 1998 1997 (000 omitted) Interest income $ 23,978 $ 21,758 $ 18,324 $ 16,109 $ 13,450 Interest expense 10,677 10,318 8,074 7,348 5,822 -------- -------- -------- -------- -------- Net interest income 13,301 11,440 10,250 8,761 7,628 Provision for loan losses 504 360 547 270 215 -------- -------- -------- -------- -------- Net interest income after provision for loan losses 12,797 11,080 9,703 8,491 7,413 Other income: Trust and brokerage services 1,480 1,466 1,230 818 490 Service charges - Deposits, other service charges, collection and exchange charges, commission and fees 2,634 1,818 1,623 1,313 942 Other operating income 366 458 728 122 119 -------- -------- -------- -------- -------- Total other income 4,480 3,742 3,581 2,253 1,551 -------- -------- -------- -------- -------- Income before operating expense 17,277 14,822 13,284 10,744 8,964 Operating expenses: Salaries and employees benefits 5,151 4,755 4,297 3,491 2,901 Occupancy and equipment expense 1,676 1,558 1,099 859 764 Other operating expenses 3,420 2,800 2,822 2,095 1,719 -------- -------- -------- -------- -------- Total operating expenses 10,247 9,113 8,218 6,445 5,384 -------- -------- -------- -------- -------- Income before income taxes 7,030 5,709 5,066 4,299 3,580 Income tax 1,938 1,537 1,311 1,180 974 -------- -------- -------- -------- -------- Net income applicable to common stock $ 5,092 $ 4,172 $3,755 $3,119 $2,606 ======== ======= ====== ====== ====== Per share data: Basic earnings $ 2.15 $ 1.78 $ 1.61 $ 1.35 $ 1.13 Diluted earnings $ 2.12 $ 1.77 $ 1.61 $ 1.35 $ 1.13 Cash dividends $ .60 $ .54 $ .49 $ .42 $ .39 Weighted average shares: Basic 2,366,707 2,340,834 2,325,699 2,316,004 2,314,666 Diluted 2,398,149 2,352,130 2,325,699 2,316,004 2,314,666
18 Item 9. Disagreements on Accounting and Financial Disclosures. - --------------------------------------------------------------- Not applicable. PART III The information required by Items 10, 11, 12 and 13 is incorporated by reference from Orrstown Financial Services, Inc.'s definitive proxy statement for the 2002 Annual Meeting of Shareholders filed pursuant to Regulation 14A. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports of Form 8-K. - -------------------------------------------------------------------------- (a) (1) - List of Financial Statements The following consolidated financial statements of Orrstown Financial Services, Inc. and its subsidiaries, included in the annual report of the registrant to its shareholders for the year ended December 31, 2001, are incorporated by reference in Item 8: Consolidated balance sheets - December 31, 2001 and 2000 Consolidated statements of income - Years ended December 31, 2001, 2000, and 1999 Consolidated statements of shareholders' equity - Years ended December 31, 2001, 2000, and 1999 Consolidated statements of cash flows - Years ended December 31, 2001, 2000, and 1999 Notes to consolidated financial statements - December 31, 2001 (2) List of Financial Statement Schedules All financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. (3) Listing of Exhibits Exhibit (3) (i) Articles of incorporation Exhibit (3) (ii) Bylaws Exhibit (4) Instruments defining the rights of security holders including indentures Exhibit (10) Material contracts Exhibit (13) Annual report to security holders Exhibit (21) Subsidiaries of the registrant Exhibit (23) Consent of independent auditors Exhibit (27) Financial data schedule All other exhibits for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 19 (b) Reports on Form 8-K filed None. (c) Exhibits (3)(i) Articles of incorporation. Incorporated by reference to Exhibit 3(i) of the registrant's Form 10-K for the year ended December 31, 1998. (ii) By-laws. Incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-4, Registration No. 33-18888. (4) Instruments defining the rights of security holders including indentures. The rights of the holders of Registrant's common stock are contained in: (i) Articles of Incorporation of Orrstown Financial Services, Inc., incorporated by reference to Exhibit 3(i) of the registrant's Form 10-K for the year ended December 31, 1998. (ii) By-laws of Orrstown Financial Services, Inc., incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-4 (Registration No. 33-18888). (10.1) Change in control agreement between Orrstown Financial Services, Inc. and its chief executive officer. Incorporated by reference to Exhibit 99 of the registrant's Form 10-K for the year ended December 31, 1996. (10.2) Salary continuation plan for selected officers - incorporated by reference to the registrant's Form 10-K for the year ended December 31, 1999 (10.3) Officer group term replacement plan for selected officers - incorporated by reference to the registrant's Form 10-K for the year ended December 31, 1999 (10.4) Director retirement plan - incorporated by reference to the registrant's Form 10-K for the year ended December 31, 1999 (10.5) Revenue neutral retirement plan - incorporated by reference to the registrant's Form 10-K for the year ended December 31, 1999 (10.6) Non-employee director stock option plan of 2000 - incorporated by reference to the registrant's registration statement on Form S-8 dated April 11, 2000 (10.7) Employee stock option plan of 2000 - incorporated by reference to the registrant's registration statement on Form S-8 dated March 31, 2000 (13) Annual report to security holders - filed herewith (21) Subsidiaries of the registrant - filed herewith (23.1) Consent of independent auditors filed herewith (27) Financial data schedule - filed herewith (d) Financial statement schedules None 20 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ORRSTOWN FINANCIAL SERVICES, INC. (Registrant) By /s/ Kenneth R. Shoemaker ------------------------------------------ Kenneth R. Shoemaker, President Dated: March 25, 2002 (Duly authorized officer) By /s/ Bradley S. Everly ------------------------------------------ Bradley S. Everly, Chief Financial Officer (Principal Accounting Officer) Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date /s/ Kenneth R. Shoemaker President, CEO and March 25, 2002 - ------------------------------------- Director Kenneth R. Shoemaker /s/ Anthony F. Ceddia Director March 25, 2002 - -------------------------------------- Dr. Anthony F. Ceddia /s/ Glenn W. Snoke Director March 25, 2002 - ------------------------------------- Glenn W. Snoke /s/ Gregory A. Rosenberry Director March 25, 2002 - ------------------------------------ Gregory A. Rosenberry /s/ Joel R. Zullinger Chairman of the March 25, 2002 - ------------------------------------ Board and Director Joel R. Zullinger /s/ Jeffrey W. Coy Vice Chairman March 25, 2002 - ------------------------------------- of the Board Jeffrey W. Coy and Director /s/ John S. Ward Director March 25, 2002 - --------------------------------------- John S. Ward /s/ Denver L. Tuckey Secretary and March 25, 2002 - --------------------------------------- Director Denver L. Tuckey /s/ Andrea Pugh Director March 25, 2002 - --------------------------------------- Andrea Pugh
21 Exhibit 13 Orrstown Financial Services, Inc. 2001 Annual Financial Report C O N T E N T S
Page INDEPENDENT AUDITOR'S REPORT 1 CONSOLIDATED FINANCIAL STATEMENTS Balance sheets 2 Statements of income 3 Statements of changes in shareholders' equity 4 Statements of cash flows 5 Notes to consolidated financial statements 6 - 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16 - 21 SUMMARY OF QUARTERLY FINANCIAL DATA 22 SELECTED FIVE-YEAR FINANCIAL DATA 23 MARKET, DIVIDEND AND INVESTOR INFORMATION 24 INDEPENDENT AUDITOR'S REPORT Board of Directors Orrstown Financial Services, Inc. Orrstown, Pennsylvania We have audited the accompanying consolidated balance sheets of Orrstown Financial Services, Inc. and its wholly-owned subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years ended December 31, 2001. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Orrstown Financial Services, Inc. and its wholly-owned subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. /S/ Smith Elliott Kearns & Company, LLC Chambersburg, Pennsylvania January 29, 2002 Consolidated Balance Sheets ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES ASSETS Dec. 31, 2001 Dec. 31, 2000 (000 omitted) (000 omitted) Cash and due from banks $ 12,650 $ 11,021 Federal funds sold 24,347 3,049 Interest bearing deposits with banks 679 172 Securities available for sale 68,422 69,919 Federal Home Loan Bank, Federal Reserve and Atlantic Central Bankers Bank stock, at cost which approximates market value 1,703 2,134 ------------- ------------- 107,801 86,295 ------------- ------------- Loans Commercial, financial and agricultural 28,534 23,938 Real estate - Mortgages 192,192 157,722 Real estate - Construction and land development 20,480 17,425 Consumer 8,610 10,096 ------------- ------------- 249,816 209,181 Less: Allowance for loan losses ( 3,104) ( 2,691) ------------- ------------- 246,712 206,490 ------------- ------------- Premises and equipment, net 9,019 9,269 Accrued interest receivable 1,541 2,016 Cash surrender value of life insurance 5,923 5,636 Other assets 2,732 2,197 ------------- ------------- Total assets $ 373,728 $ 311,903 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Non-interest bearing $ 39,881 $ 31,716 Interest bearing 241,287 210,292 ------------- ------------- 281,168 242,008 ------------- ------------- Federal funds purchased and securities sold under agreements to repurchase 31,531 18,426 Other borrowed funds 26,512 21,802 Accrued interest and other liabilities 3,355 2,993 ------------- ------------- Total liabilities 342,566 285,229 ------------- ------------- Shareholders' equity Common stock: No par value - $ .1041 stated value per share, 10,000,000 shares authorized with 2,378,608 shares issued at December 31, 2001; 2,240,744 shares issued at December 31, 2000 248 233 Additional paid-in capital 25,077 19,360 Retained earnings 5,557 6,619 Accumulated other comprehensive income 280 462 ------------- ------------- Total shareholders' equity 31,162 26,674 ------------- ------------- Total liabilities and shareholders' equity $ 373,728 $ 311,903 ============= =============
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 2 Consolidated Statements of Income ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
Years Ended December 31, 2001 2000 1999 ---------- ---------- ---------- (000 omitted) Interest and Dividend Income Interest and fees on loans $ 19,308 $ 17,033 $ 14,613 Interest and dividends on investment securities U.S. Government and agencies 2,869 3,182 2,289 Exempt from federal income tax 899 956 1,032 Other investment income 902 587 390 ---------- ---------- ---------- Total interest and dividend income 23,978 21,758 18,324 ---------- ---------- ---------- Interest Expense Interest on deposits 8,347 7,865 6,519 Interest on borrowed money 2,330 2,453 1,555 ---------- ---------- ---------- Total interest expense 10,677 10,318 8,074 ---------- ---------- ---------- Net interest income 13,301 11,440 10,250 ---------- ---------- ---------- Provision for loan losses 504 360 547 ---------- ---------- ---------- Net interest income after provision for loan losses 12,797 11,080 9,703 ---------- ---------- ---------- Other Income Service charges on deposit accounts 1,890 1,174 1,080 Other service charges, commissions, and fees 744 644 543 Trust department income 1,219 1,125 861 Brokerage income 261 341 369 Securities gains 11 114 423 Other income 355 344 305 ---------- ---------- ---------- Total other income 4,480 3,742 3,581 ---------- ---------- ---------- Net interest income and other income 17,277 14,822 13,284 ---------- ---------- ---------- Other Expenses Salaries 3,506 3,235 2,945 Employee benefits 1,645 1,520 1,351 Occupancy expense of bank premises, net, and furniture and equipment expenses 1,676 1,558 1,100 Other operating expenses 3,420 2,800 2,822 ---------- ---------- ---------- Total other expenses 10,247 9,113 8,218 ---------- ---------- ---------- Income before income tax 7,030 5,709 5,066 Applicable income tax 1,938 1,537 1,311 ---------- ---------- ---------- Net income $ 5,092 $ 4,172 $ 3,755 ========== ========== ========== Earnings per share Basic earnings per share $ 2.15 $ 1.78 $ 1.61 Weighted average shares outstanding 2,366,707 2,340,834 2,325,699 Diluted earnings per share $ 2.12 $ 1.77 $ 1.61 Weighted average shares outstanding 2,398,149 2,352,130 2,325,699 Dividends per share $ .60 $ .54 $ .49
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 3 Consolidated Statements of Changes in Shareholders' Equity ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
Years Ended December 31, 2001, 2000, and 1999 Accumulated Additional Other Total Common Paid-In Retained Comprehensive Shareholders' Stock Capital Earnings Income Equity (000 omitted) Balance, December 31, 1998 214 12,476 6,863 1,527 21,080 Comprehensive income Net income 0 0 3,755 0 3,755 Change in unrealized (loss) on investment securities available for sale, net of tax of $ 1,084 0 0 0 ( 2,105) ( 2,105) --------- Total comprehensive income 1,650 --------- Cash dividends ($ .49 per share) 0 0 ( 1,134) 0 ( 1,134) Stock dividends issued 16 5,720 ( 5,736) 0 0 Cash paid in lieu of fractional stock dividends 0 0 ( 31) 0 ( 31) Issuance of stock through dividend reinvestment plan 1 302 0 0 303 ------- --------- ---------- --------- --------- Balance, December 31, 1999 231 18,498 3,717 ( 578) 21,868 Comprehensive income Net income 0 0 4,172 0 4,172 Change in unrealized gain on investment securities available for sale, net of tax of $ 536 0 0 0 1,040 1,040 --------- Total comprehensive income 5,212 --------- Cash dividends ($ .54 per share) 0 0 ( 1,270) 0 ( 1,270) Issuance of stock through employee stock purchase plan 0 28 0 0 28 Issuance of stock through dividend reinvestment plan 2 834 0 0 836 ------- --------- ---------- --------- --------- Balance, December 31, 2000 233 19,360 6,619 462 26,674 Comprehensive income Net income 0 0 5,092 0 5,092 Change in unrealized gain on investment securities available for sale, net of tax of $ 94 0 0 0 ( 182) ( 182) --------- Total comprehensive income 4,910 --------- Cash dividends ($ .60 per share) 0 0 ( 1,411) 0 ( 1,411) Stock dividends issued 12 4,711 ( 4,723) 0 0 Cash paid in lieu of fractional stock dividends 0 0 ( 20) 0 ( 20) Issuance of stock through employee stock purchase plan/ stock option plan 1 73 0 0 74 Issuance of stock through dividend reinvestment plan 2 933 0 0 935 ------- --------- ---------- --------- --------- Balance, December 31, 2001 $ 248 $ 25,077 $ 5,557 $ 280 $ 31,162 ======= ========= ========== ========= =========
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 4 Consolidated Statements of Cash Flows ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES
Years Ended December 31 2001 2000 1999 ----------- ------------- ------------ (000 omitted) Cash flows from operating activities: Net income $ 5,092 $ 4,172 $ 3,755 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 828 735 528 Provision for loan losses 504 360 547 (Gain) loss on disposal of other real estate owned ( 4) ( 7) 54 (Gain) loss on disposal of bank premises and equipment 3 ( 21) 0 Deferred income taxes ( 113) ( 7) ( 103) Securities (gains) losses ( 11) ( 114) ( 423) Increase in cash surrender value of life insurance ( 286) ( 252) ( 285) (Increase) decrease in accrued interest receivable 474 ( 416) ( 364) Increase (decrease) in accrued interest payable ( 210) 192 ( 1,707) Other net 387 ( 19) 143 ----------- ------------- ------------ Net cash provided by operating activities 6,664 4,623 2,145 ----------- ------------- ------------ Cash flows from investing activities: Net (increase) in interest bearing deposits with banks ( 507) ( 57) ( 88) Sales of available for sale securities 5,427 11,786 6,895 Maturities of available for sale securities 36,239 6,820 2,500 Purchases of available for sale securities ( 40,433) ( 26,381) ( 22,763) (Purchases) redemption of FHLB stock 431 ( 625) ( 225) Net (increase) in loans ( 41,118) ( 28,562) ( 22,130) Purchases of bank premises and equipment ( 512) ( 3,153) ( 2,071) Proceeds from disposal of other real estate owned 180 59 286 Proceeds from disposal of bank premises and equipment 4 50 0 ----------- ------------- ------------ Net cash (used) by investing activities ( 40,289) ( 40,063) ( 37,596) ----------- ------------- ------------ Cash flows from financing activities: Net increase in deposits 39,160 37,619 20,631 Net increase in federal funds purchased and securities sold under agreements to repurchase 13,105 3,019 9,173 Proceeds from debt 8,025 700 0 Payment on debt ( 3,316) ( 7) ( 6) Cash dividends paid ( 1,411) ( 1,270) ( 1,134) Cash paid in lieu of fractional stock dividends ( 20) 0 ( 31) Proceeds from sale of stock 1,009 864 303 ----------- ------------- ------------ Net cash provided by financing activities 56,552 40,925 28,936 ----------- ------------- ------------ Net increase (decrease) in cash and cash equivalents 22,927 5,485 ( 6,515) Cash and cash equivalents, beginning balance 14,070 8,585 15,100 ----------- ------------- ------------ Cash and cash equivalents, ending balance $ 36,997 $ 14,070 $ 8,585 =========== ============= ============ Supplemental disclosure of cash flows information: Cash paid during the year for: Interest $ 10,887 $ 10,081 $ 9,781 Income taxes 2,200 1,565 1,385 Supplemental schedule of noncash investing and financing activities: Other real estate acquired in settlement of loans 392 53 0 Unrealized gain (loss) on investment securities available for sale (net of tax effects) ( 182) 1,040 ( 2,105)
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 5 Notes to Consolidated Financial Statements NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of operations Orrstown Financial Services, Inc.'s primary activity consists of owning and supervising its subsidiaries, Orrstown Bank, and Pennbanks Insurance Company Cell P1. Orrstown Bank is engaged in providing banking and bank related services in South Central Pennsylvania, principally Franklin and Cumberland Counties. Its ten branches are located in Shippensburg (2), Carlisle (2), Spring Run, Orrstown, Chambersburg (2), Mechanicsburg and Greencastle, Pennsylvania. Pennbanks Insurance Company Cell P1 is a reinsurer of credit, life, and disability insurance which services customers of Orrstown Bank. Principles of consolidation The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiaries, Orrstown Bank and Pennbanks Insurance Company Cell P1. All significant intercompany transactions and accounts have been eliminated. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowances for losses on loans and foreclosed real estate. Such agencies may require the Corporation to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Because of these factors, management's estimate of credit losses inherent in the loan portfolio and the related allowance may change in the near term. Investment securities In accordance with Statement of Financial Accounting Standards No. 115 (SFAS 115) the Corporation may segregate their investment portfolio into three specific categories: "securities held to maturity", "trading securities" and "securities available for sale". Securities held to maturity are to be accounted for at their amortized cost; securities classified as trading securities are to be accounted for at their current market value with unrealized gains and losses on such securities included in current period earnings; and securities classified as available for sale are to be accounted for at their current market value with unrealized gains and losses on such securities to be excluded from earnings and reported as a net amount in other comprehensive income. Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Corporation has the ability at the time of purchase to hold securities until maturity, they are classified as securities held to maturity and carried at amortized historical cost. Securities to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and carried at fair value. Securities held for indefinite periods of time include securities that management intends to use as part of its asset and liability management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk and other factors related to interest rate and resultant prepayment risk changes. The Corporation has classified all of its investment securities as "available for sale". Realized gains and losses on dispositions are based on the net proceeds and the adjusted book value of the securities sold, using the specific identification method. Unrealized gains and losses on investment securities available for sale are based on the difference between book value and fair value of each security. These gains and losses are credited or charged to other comprehensive income, whereas realized gains and losses flow through the Corporation's results of operations. Cash flows For purposes of the Statements of Cash Flows, the Corporation has defined cash and cash equivalents as those amounts included in the balance sheet captions "Cash and Due From Banks" and "Federal Funds Sold". As permitted by Statement of Financial Accounting Standards No. 104, the Corporation has elected to present the net increase or decrease in deposits in banks, loans, and deposits in the Statements of Cash Flows. Premises, equipment, furniture and fixtures and depreciation Buildings, improvements, equipment, furniture and fixtures are carried at cost less accumulated depreciation. Depreciation has been provided generally on the straight-line method and is computed over the estimated useful lives of the various assets as follows: Years Buildings and improvements 10-40 Equipment, furniture and fixtures 3-15 Repairs and maintenance are charged to operations as incurred. Computer software is amortized over 3-5 years. Intangibles Intangible costs are amortized on a straight-line basis over fifteen years. Advertising The Corporation follows the policy of charging costs of advertising to expense as incurred. Advertising expense was $ 196,000, $ 167,000, and $ 138,000 for 2001, 2000, and 1999, respectively. Loans and allowance for loan losses Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay. 6 Nonaccrual /Impaired loans The accrual of interest income on loans ceases when principal or interest is past due 90 days or more and collateral is inadequate to cover principal and interest or immediately if, in the opinion of management, full collection is unlikely. Interest accrued but not collected as of the date of placement on nonaccrual status is reversed and charged against current income unless fully collateralized. Subsequent payments received either are applied to the outstanding principal balance or recorded as interest income, depending on management's assessment of the ultimate collectibility of principal. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are applied as a reduction of loan principal balance. Interest income on other impaired loans is recognized only to the extent of interest payments received. Foreclosed real estate Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at the lower of carrying value or fair value less estimated cost to sell of the underlying collateral. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less estimated cost to sell. Earnings per share of common stock Earnings per share of common stock were computed based on a weighted average shares of common stock outstanding of 2,366,707 in 2001; 2,340,834 in 2000; and 2,325,699 in 1999 after giving retroactive recognition to a 5% stock dividend in September 2001 and a 7-1/2% stock dividend issued in November 1999. Fully diluted earnings per share were computed based on a weighed average shares of common stock outstanding of 2,398,149 in 2001, 2,352,130 in 2000 and 2,325,699 in 1999 after giving retroactive recognition to the stock dividends mentioned above. See Note 10 for further information on stock options. Federal income taxes For financial reporting purposes the provision for loan losses charged to operating expense is based on management's judgment, whereas for federal income tax purposes, the amount allowable under present tax law is deducted. Additionally, deferred compensation is charged to operating expense in the period the liability is incurred for financial reporting purposes, whereas for federal income tax purposes, these expenses are deducted when paid. As a result of these and timing differences in depreciation expense, deferred income taxes are provided in the financial statements. See Note 11 for further details. Fair values of financial instruments Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Corporation. The following methods and assumptions were used by the Corporation in estimating fair values of financial instruments as disclosed herein: Cash and Cash Equivalents. The carrying amounts of cash and short-term instruments approximate their fair value. Securities to be Held to Maturity and Securities Available for Sale. Fair values for investment securities are based on quoted market prices. Loans Receivable. For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Deposit Liabilities. The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposits and IRA's are estimated using a discounted cash flow calculation that applies interest rates currently being offered to a schedule of aggregated expected maturities on time deposits. Short-Term Borrowings. The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the Corporation's current incremental borrowing rates for similar types of borrowing arrangements. Long-Term Borrowings. The fair value of the Corporation's long-term debt is estimated using a discounted cash flow analysis based on the Corporation's current incremental borrowing rate for similar types of borrowing arrangements. Accrued Interest. The carrying amounts of accrued interest approximate their fair values. Off-Balance-Sheet Instruments. The Corporation generally does not charge commitment fees. Fees for standby letters of credit and their off-balance-sheet instruments are not significant. Comprehensive income The Corporation has adopted Statement of Financial Accounting Standards (SFAS) No. 130 - Reporting Comprehensive Income. Under SFAS No. 130, comprehensive income is defined as the change in equity from transactions and other events from nonowner sources. It includes all changes in equity except those resulting from investments by shareholders and distributions to shareholders. Comprehensive income includes net income and certain elements of "other comprehensive income" such as foreign currency transactions; accounting for futures contracts; employers accounting for pensions; and accounting for certain investments in debt and equity securities. The Corporation has elected to report its comprehensive income in the statement of shareholders' equity. The only element of "other comprehensive income" that the Corporation has is the unrealized gain or loss on available for sale securities. 7 The components of the change in net unrealized gains (losses) on securities were as follows:
2001 2000 1999 (000 Omitted) Gross unrealized holding gains (losses) arising during the year ($ 265) $ 1,690 ($ 2,766) Reclassification adjustment for (gains) losses realized in net income ( 11) ( 114) ( 423) --------- --------- -------- Net unrealized holding gains (losses) before taxes ( 276) 1,576 ( 3,189) Tax effect 94 ( 536) 1,084 ---------- ---------- -------- Net change ($ 182) $ 1,040 ($ 2,105) ========== ========== ========
NOTE 2. INVESTMENTS At December 31, 2001 and 2000 the investment securities portfolio was comprised of securities classified as "available for sale", resulting in investment securities being carried at fair value. The amortized cost and fair values of investment securities available for sale at December 31 were:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- -------- -------- -------- (000 omitted) 2001 U. S. Treasury securities and obligations of U. S. Government corporations and agencies $ 3,079 $ 63 $ 0 $ 3,142 Obligations of states and political subdivisions 18,712 644 87 19,269 Mortgage-backed securities 41,312 91 469 40,934 Corporate bonds 3,934 33 30 3,937 Equity securities 960 259 79 1,140 -------- -------- -------- -------- Totals $ 67,997 $ 1,090 $ 665 $ 68,422 ======== ======== ======== ======== 2000 U. S. Treasury securities and obligations of U. S. Government corporations and agencies $ 35,501 $ 74 $ 160 $ 35,415 Obligations of states and political subdivisions 15,598 791 14 16,375 Mortgage-backed securities 12,709 14 153 12,570 Corporate bonds 4,413 38 0 4,451 Equity securities 998 217 107 1,108 -------- -------- -------- -------- Totals $ 69,219 $ 1,134 $ 434 $ 69,919 ======== ======== ======== ========
The amortized cost and fair values of investment securities available for sale at December 31, 2001, by contractual maturity are shown below. Contractual maturities will differ from expected maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Cost Fair Value (000 omitted) Due in one year or less $ 1,051 $ 1,057 Due after one year through five years 3,021 3,072 Due after five years through ten years 2,545 2,633 Due after ten years 19,108 19,586 Mortgage-backed securities 41,312 40,934 Equity securities 960 1,140 -------- -------- $ 67,997 $ 68,422 ======== ======== Proceeds from sales of securities available for sale during 2001, 2000, and 1999 were $ 5,427,000, $ 11,786,000, and $ 6,895,000, respectively. Gross gains and losses on 2001 sales were $ 57,840 and $ 46,394, respectively. Gross gains and losses on 2000 sales were $ 124,080 and $ 9,749, respectively. Gross gains and losses on 1999 sales were $ 425,864 and $ 2,340, respectively. The Corporation owns $ 1,460,000 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, 2001. At December 31, 2000 the Corporation's stock ownership was $ 1,890,800 of Federal Home Loan Bank stock, $ 54,000 of Atlantic Central Bankers Bank stock and $ 189,000 of Federal Reserve Bank stock. Market value approximates cost since none of the stocks are actively traded. Securities carried at $ 48,332,000 and $ 55,257,000 at December 31, 2001 and 2000, respectively, were pledged to secure public funds and for other purposes as required or permitted by law. NOTE 3.CONCENTRATION OF CREDIT RISK The Corporation grants agribusiness, commercial, residential and consumer loans to customers in South Central Pennsylvania, principally Franklin and Cumberland Counties. Although the Corporation maintains a diversified loan portfolio, a significant portion of its customers' ability to honor their contracts is dependent upon economic sectors for construction contractors, non-residential building operators, and hotel and motel operators. Management evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon the extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but generally includes equipment and real estate. 8 NOTE 4. ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses is summarized as follows:
2001 2000 1999 (000 omitted) Balance at beginning of period $ 2,691 $ 2,455 $ 1,971 Recoveries 7 5 65 Provision for loan losses charged to income 504 360 547 ------- ------- ------- Total 3,202 2,820 2,583 Losses 98 129 128 ------- ------- ------- Balance at the end of period $ 3,104 $ 2,691 $ 2,455 ======= ======= =======
NOTE 5. LOANS TO RELATED PARTIES The Corporation has granted loans to the officers and directors of the Corporation and its subsidiary and to their associates. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than normal risk of collectibility. The aggregate dollar amount of these loans was $ 1,601,000 at December 31, 2001, and $ 1,863,000 at December 31, 2000. During 2001, $ 655,000 of new loans were made and repayments totaled $ 1,017,000. Outstanding loans to employees totaled $ 1,405,462 and $ 825,298 at December 31, 2001 and 2000, respectively. NOTE 6. NONACCRUAL LOANS The following table shows the principal balances of nonaccrual loans as of December 31:
2001 2000 1999 Nonaccrual loans $ 56,000 $ 12,000 $ 64,000 ======== ======== ======== Interest income that would have been accrued at original contract rates $ 8,636 $ 1,446 $ 6,608 Amount recognized as interest income 4,028 770 0 -------- --------- --------- Foregone revenue $ 4,608 $ 676 $ 6,608 ======== ======== ========
The Corporation had no impairment of loans as of December 31, 2001, 2000, and 1999 as defined by Statements of Financial Accounting Standard No. 114 and 118. During 2001, the Corporation foreclosed on loans secured by three real estate properties. Two of these properties were sold during 2001 at a gain of $ 4,150, which is included in other income on the statement of income. The remaining property has a recorded value of $ 211,317 and is included in other assets on the balance sheet at December 31, 2001. NOTE 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financial needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments. The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Contract or Notional Amount 2001 2000 (000 omitted) Financial instruments whose contract amounts represent credit risk at December 31: Commitments to extend credit $ 46,732 $ 32,935 Standby letters of credit and financial guarantees written 4,758 4,541
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Corporation upon extension of credit is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, real estate, equipment, and income-producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Corporation holds collateral supporting those commitments when deemed necessary by management. NOTE 8. PREMISES AND EQUIPMENT A summary of bank premises and equipment is as follows:
2001 2000 (000 omitted) Land $ 851 $ 950 Buildings and improvements 6,526 6,452 Leasehold improvements 199 189 Furniture and equipment 5,823 5,306 Construction in progress 89 93 --------- --------- Total 13,488 12,990 Less accumulated depreciation and amortization 4,469 3,721 --------- --------- Bank premises and equipment, net $ 9,019 $ 9,269 ========= =========
9 Depreciation expense amounted to $ 755,174 in 2001, $ 670,295 in 2000, and $ 485,477 in 1999. During 2000, interest expense of $ 50,250 was capitalized for interest costs incurred during the renovation of the Corporation's Shippensburg property and construction of its Mechanicsburg branch office. This amount was netted against interest expense on borrowed money on the statements of income. NOTE 9. RETIREMENT PLANS The Corporation maintains a 401(k) profit-sharing plan for those employees who meet the eligibility requirements set forth in the plan. Employer contributions to the plan are based on corporate performance and are at the discretion of the Corporation's Board of Directors. In addition, there is a provision for an employer match of 50 cents on the dollar for employee contributions up to 6% of the employees' eligible compensation. Substantially all of the Corporation's employees are covered by the plan and the contributions charged to operations were $ 538,062, $ 521,029, and $ 439,957 for 2001, 2000, and 1999, respectively. The Corporation has a deferred compensation arrangement with certain present and former board directors whereby a director or his beneficiaries will receive a monthly retirement benefit at age 65. The arrangement is funded by an amount of life insurance on the participating director calculated to meet the Corporation's obligations under the compensation agreement. The cash value of the life insurance policies is an unrestricted asset of the Corporation. The estimated present value of future benefits to be paid, which is included in other liabilities, amounted to $ 155,118 and $ 162,691 at December 31, 2001 and 2000, respectively. Total annual expense for this deferred compensation plan was $ 19,064 for 2001, 2000, and 1999. The Corporation also has a supplemental discretionary deferred compensation plan for executive officers and directors. The plan is funded annually with salary and fee reductions which are placed in a trust account invested by the Corporation's trust department. Total amount contributed to the plan was $ 44,300, $ 46,000, and $ 42,308 for 2001, 2000, and 1999, respectively. The Corporation adopted four supplemental retirement and salary continuation plans for directors and executive officers. These plans are funded with single premium life insurance on the plan participants. The cash value of the life insurance policies is an unrestricted asset of the Corporation. The estimated present value of future benefits to be paid totaled $ 516,952 and $ 347,672 at December 31, 2001 and 2000, respectively which is included in other liabilities. Total annual expense for these plans amounted to $ 175,460, $ 163,083, and $ 155,474 for 2001, 2000, and 1999, respectively. NOTE 10. STOCK COMPENSATION PLANS During 2000 the Corporation implemented two stock option plans (one for employees and one for nonemployee directors). Under the Corporation's stock option plans the Corporation may grant options to its directors, officers and employees for up to 241,500 shares of common stock. Both incentive stock options and nonqualified stock options may be granted under the plans. The exercise price of each option equals the market price of the Corporation's stock on the date of grant and an option's maximum term is ten years. A summary of the status of the Corporation's stock option plans at December 31, 2001 and 2000 is presented below:
Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price ------------------------------ ---------------------------- 2001 2000 Outstanding at beginning of year 20,190 $ 35.95 -- -- Granted 21,127 38.13 20,190 $ 35.95 Exercised 257 37.62 -- -- Forfeited -- -- -- -- ------ ------- ------- ------- Options exercisable at year end 41,060 $ 37.07 20,190 $ 35.95 ====== ======= ====== ======= Weighted-average fair value of options granted during the year $ 13.75 $ 10.03 ======= =======
Information pertaining to options outstanding at December 31, 2001 is as follows:
Options Outstanding Options Exercisable -------------------------------------------------- -------------------------------- Weighted Average Weighted Number Remaining Average Number Weighted Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price $ 37.62 2,503 8.25 years $ 37.62 2,503 $ 37.62 $ 35.71 17,430 8.50 years $ 35.71 17,430 $ 35.71 $ 37.74 2,752 9.25 years $ 37.74 2,752 $ 37.74 $ 38.19 18,375 9.50 years $ 38.19 18,375 $ 38.19 ------ ------ Outstanding at end of year 41,060 8.98 years $ 37.07 41,060 $ 37.07 ====== ======
The Corporation applies APB Opinion 25 and related Interpretations in accounting for the stock option plan. Accordingly, no compensation cost has been recognized. Had compensation cost for the Corporation's stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method prescribed by FASB Statement No. 123, the Corporation's net income and earnings per share would have been adjusted to the pro forma amounts indicated below:
Years Ended December 31, 2001 2000 (In thousands, except per share data) Net income As reported $ 5,092 $ 4,172 Pro forma 4,900 4,040 Earnings per share As reported $ 2.15 $ 1.78 Pro forma 2.07 1.73 Earnings per share - As reported $ 2.12 $ 1.77 assuming dilution Pro forma 2.04 1.72
10 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: Years Ended December 31, 2001 2000 Dividend yield 1.5% 1.5% Expected life 9.47 years 8.47 years Expected volatility 19.77% 16.06% Risk-free interest rate 5.33% 5.60% During 2000 the Corporation implemented an employee stock purchase plan under which 78,750 shares of common stock have been reserved for issuance to employees. The number of shares which may be issued to each participant is determined annually, based on individual earnings, and their cost is equal to 85% of the fair market value as established by the average of the average of the daily high bid and daily low offer quotations for the shares reported in the OTC Bulletin Board service, during the ten trading days immediately preceding the date of purchase. If no bid or offer quotation for the shares is reported through the OTC Bulletin Board service during the ten business day period, the fair market value is the price of the last trade reported through the OTC Bulletin Board service prior to the purchase date. A total of 75,806 shares of common stock remained reserved at December 31, 2001 for future grants under the plan. Employees purchased 2,030 and 914 shares at a weighted average price of $ 31.00 and $ 30.94 per share in 2001 and 2000, respectively. Shares of common stock registered and available for issuance through approved plans at December 31, 2001 are as follows: Number of Shares Stock option plans 200,183 Employee stock purchase plan 75,806 Dividend reinvestment plan 388,867 ------- 664,856 NOTE 11. INCOME TAXES The components of federal income tax expense are summarized as follows:
2001 2000 1999 (000 omitted) Current year provision $ 2,051 $ 1,530 $ 1,599 Deferred income taxes (benefits) ( 113) 7 (288) ------- ------- ------- Net federal income tax expense $ 1,938 $ 1,537 $ 1,311 ======= ======= =======
Federal income taxes were computed after reducing pretax accounting income for non-taxable income in the amount of $ 1,392,288, $ 1,426,800, and $ 1,515,383 for 2001, 2000, and 1999, respectively. A reconciliation of the effective applicable income tax rate to the federal statutory rate is as follows:
2001 2000 1999 Federal income tax rate 34.0% 34.0% 34.0% Reduction resulting from: Nontaxable income 6.4 7.1 8.1 ---- ---- ---- Effective income tax rate 27.6% 26.9% 25.9% ==== ==== ====
Deferred tax liabilities have been provided for taxable temporary differences related to accumulated depreciation and unrealized gains on available for sale securities. Deferred tax assets have been provided for deductible temporary differences related to the allowance for loan losses, directors' deferred compensation and unrealized losses on available for sale securities. The net deferred tax assets (liabilities) included in the accompanying consolidated balance sheets include the following components:
(000 Omitted) 2001 2000 Total deferred tax assets $ 1,330 $ 1,116 Total deferred tax liabilities (615) (635) ------- ------- Net deferred tax asset (liability) $ 715 $ 481 ======= =======
The Corporation has not recorded a valuation allowance for deferred tax assets as they feel that it is more likely than not that they will be ultimately realized. NOTE 12. DEPOSITS Included in interest bearing deposits at December 31 are NOW account products with balances totaling $ 108,228,000, and $ 69,994,000 for 2001 and 2000, respectively. Also included in interest bearing deposits at December 31, 2001 and 2000 are money market account products with balances totaling $ 11,680,000 and $ 10,269,000, respectively. At December 31, 2001 and 2000 time deposits of $ 100,000 and over aggregated $ 17,826,000 and $ 30,538,000, respectively. Interest expense on time deposits of $ 100,000 and over was $ 1,336,000, $ 1,181,000, and $ 484,000, for 2001, 2000, and 1999, respectively. At December 31, 2001 the scheduled maturities of certificates of deposit are as follows: 2002 $ 73,298 2003 10,674 2004 8,354 2005 3,872 2006 2,742 Thereafter 988 -------- $ 99,928 11 The Corporation accepts deposits of the officers and directors of the Corporation and its subsidiary on the same terms, including interest rates, as those prevailing at the time for comparable transactions with unrelated persons. The aggregate dollar amount of deposits of officers and directors totaled $ 1,186,000 and $ 1,201,000 at December 31, 2001 and 2000, respectively. NOTE 13. LIABILITIES FOR BORROWED MONEY Federal funds purchased and securities sold under agreements to repurchase generally mature within one day from the transaction date. Information concerning securities sold under agreements to repurchase is summarized as follows:
2001 2000 Average balance during the year $ 23,311,000 $ 17,969,000 Average interest rate during the year 3.66% 5.86% Maximum month-end balance during the year $ 35,714,000 $ 28,767,000 Securities underlying the agreements at year-end: Carrying value $ 27,118,000 $ 35,049,000 Estimated fair value $ 26,559,000 $ 35,389,000
At December 31, the Corporation had long-term notes outstanding with the Federal Home Loan Bank of Pittsburgh as follows:
Amount Convertible Frequency & Basis ------------------------------- Maturity Interest to Adjustable for Adjustable 2001 2000 Date Rate Rate Rate $ 1,000,000 $ 1,000,000 1/04 6.42% 1,000,000 1,000,000 4/03 6.58% 0 3,000,000 3/02 6.54% 3,000,000 3,000,000 10/02 5.73% (1) 7,500,000 7,500,000 9/08 5.06% 9/15/03 Quarterly based on 3 months LIBOR plus .15% 5,000,000 5,000,000 10/08 4.66% 10/7/03 Quarterly based on 3 months LIBOR plus .15% 5,000,000 0 2/11 4.50% 2/7/02 Quarterly based on 3 months LIBOR plus .19% 3,000,000 0 3/11 3.94% 3/25/02 Quarterly based on 3 months ------------ ------------ LIBOR plus .13% $ 25,500,000 $ 20,500,000 ============ ============
(1) The 3 month LIBOR is evaluated quarterly and the loan converts to an adjustable rate if the 3 month LIBOR is greater than 7%. The rate would then adjust quarterly based on 3 month LIBOR plus .08%. Interest rates are fixed, but, as indicated above, some of the notes can convert to adjustable rates. Interest only is paid on a monthly basis. The notes contain prepayment penalty charges, but management has no intention to pay off early. In addition to the aforementioned long-term notes the Corporation obtained a term loan in 1994 of $ 350,000 and two additional $ 350,000 term loans in 2000 with the Federal Home Loan Bank of Pittsburgh. The maturity dates and applicable fixed interest rates on the remaining balance at December 31 are as follows:
Amount ------------------------------ 2001 2000 Maturity Date Rate $ 0 $ 315,579 2/01 5.58% 350,000 350,000 4/20 7.40% 350,000 350,000 4/05 7.35% ---------- ------------- $ 700,000 $ 1,015,579 ========= ===========
In addition, the Corporation has available a $ 5 million line of credit with the Federal Home Loan Bank of Pittsburgh. The interest rate is variable and can change daily based on FHLR's cost of borrowing. Collateral for all outstanding advances and the line consists of certain securities and the Corporation's 1-4 family mortgage loans totaling $ 98,712,000 and $ 85,868,000 at December 31, 2001 and 2000, respectively. The Corporation also has available a line of credit with Atlantic Central Bankers Bank of $ 6 million at December 31, 2001 and 2000. The ACBB line of credit is unsecured and the rate is based on the daily Federal Funds rate. There were no borrowings under either line of credit at December 31, 2001 or 2000. Also included in other borrowed funds are borrowings against certain life insurance policies that are used to fund deferred compensation benefits for certain directors. Interest rates are fixed at 8%. Collateral is the cash surrender value of the policies as disclosed in Note 9. Total balance of these loans was $ 312,000 and $ 287,000 at December 31, 2001 and 2000, respectively. Total interest on the aforementioned borrowings charged to operations was $ 1,420,799, $ 1,189,847, and $ 1,106,695 for 2001, 2000, and 1999, respectively. 12 NOTE 14. ORRSTOWN FINANCIAL SERVICES, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION The following are the condensed balance sheets, income statements and statements of cash flows for the parent company:
Balance Sheets December 31 Assets 2001 2000 (000 omitted) Cash $ 1,264 $ 579 Securities available for sale 2,112 2,022 Investment in wholly-owned subsidiaries 28,882 24,968 Property and equipment (net of depreciation) 6 104 Other assets 57 84 -------- -------- Total assets $ 32,321 $ 27,757 ======== ======== Liabilities Accrued expenses $ 393 $ 345 Deferred taxes 66 38 Notes payable 700 700 -------- -------- Total liabilities 1,159 1,083 -------- -------- Shareholders' Equity Common stock, no par value - $ .1041 stated value per share, 10,000,000 shares authorized with 2,378,608 shares issued at December 31, 2001; 2,240,744 shares issued at December 31, 2000 248 233 Additional paid-in capital 25,077 19,360 Retained earnings 5,557 6,619 Accumulated other comprehensive income 280 462 -------- ----------- Total shareholders' equity 31,162 26,674 -------- --------- Total liabilities and shareholders' equity $ 32,321 $ 27,757 ======== ========
Income Statements Years Ended December 31 2001 2000 1999 (000 omitted) Income Dividends from wholly-owned subsidiary $ 1,000 $ 1,069 $ 910 Other interest and dividend income 115 102 38 Gain on sale of investment securities 1 45 421 ------- ------- ------- Total Income 1,116 1,216 1,369 ------- ------- ------- Expenses Interest on borrowings 52 36 0 Other expenses 161 156 281 ------- ------- ------- Total Expenses 213 192 281 ------- ------- ------- Income before income taxes and equity in undistributed income of subsidiaries 903 1,024 1,088 Income tax expense (benefit) (39) (22) 56 ------- ------- ------- Income before equity in undistributed income of subsidiaries 942 1,046 1,032 ------- ------- ------- Equity in undistributed income of Subsidiaries Net income of subsidiaries 5,150 4,195 3,633 Less: dividends (1,000) (1,069) (910) ------- ------- ------- Equity in undistributed net income of subsidiaries 4,150 3,126 2,723 ------- ------- ------- Net income $ 5,092 $ 4,172 $ 3,755 ======= ======= =======
13
Statements of Cash Flows Years Ended December 31 2001 2000 1999 (000 omitted) Cash flows from operating activities: Net income $ 5,092 $ 4,172 $ 3,755 Adjustments to reconcile net income to cash provided by operating activities: Security (gains) (1) (45) (421) Equity in undistributed income of subsidiary (4,150) (3,126) (2,723) Increase (decrease) in other liabilities 48 (64) 409 (Increase) decrease in other assets 27 (64) 5 ------- ------- ------- Net cash provided by operating activities 1,016 873 1,025 ------- ------- ------- Cash flows from investing activities: Purchase of available for sale securities (127) (1,209) (255) Sales of available for sale securities 120 80 624 Purchases of property and equipment (2) (100) 0 Sales of property and equipment 100 0 0 ------- ------- ------- Net cash provided (used) by investing activities 91 (1,229) 369 ------- ------- ------- Cash flows from financing activities: Cash dividends paid (1,411) (1,270) (1,134) Cash paid in lieu of fractional stock dividends (20) 0 (31) Proceeds from sale of stock 1,009 864 303 Proceeds from debt 0 700 0 ------- ------- ------- Net cash provided (used) by financing activities (422) 294 (862) ------- ------- ------- Net increase (decrease) in cash 685 (62) 532 Cash, beginning balance 579 641 109 ------- ------- ------- Cash, ending balance $ 1,264 $ 579 $ 641 ======= ======= =======
NOTE 15. REGULATORY MATTERS Dividends paid by Orrstown Financial Services, Inc. are generally provided from the subsidiary 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 $ 22,353,000 in its retained earnings at December 31, 2001 is fully available for cash dividends. Orrstown Financial Services' balance of retained earnings at December 31, 2001 is $ 5,557,000 and would be available for cash dividends, although payment of dividends to such extent would not be prudent or likely. The Federal Reserve Board, which regulates bank holding companies, establishes guidelines which indicate that cash dividends should be covered by current period earnings. The Corporation is also subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines, the Corporation is required to maintain minimum capital ratios. The leverage ratio compares capital to total adjusted balance sheet assets, while the risk-based ratios compare capital to risk-weighted assets and off-balance-sheet activity in order to make capital levels more sensitive to risk profiles of individual banks. A comparison of Orrstown Financial Services' capital ratios to regulatory minimums at December 31 is as follows:
Orrstown Financial Services Regulatory Minimum 2001 2000 Requirements Leverage ratio 8.24% 8.55% 3% Risk-based capital ratio Tier I (core capital) 12.31% 12.35% 4% Combined Tier I and Tier II (core capital plus allowance for loan losses) 13.56% 13.60% 8%
As of December 31, 2001 the most recent notification, from the Federal Reserve Board, categorized the Corporation as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Corporation's category. 14 NOTE 16. LEASES The Corporation leases land and building space associated with certain branch offices, remote automated teller machines, and certain data processing equipment under agreements which expire at various times from 2002 through 2006. Total rent expense charged to operations in connection with these leases was $ 172,309, $ 219,255, and $ 118,342 for 2001, 2000, and 1999, respectively. The total minimum rental commitment under operating leases at December 31, 2001 is as follows: Due in the year ending December 31: 2002 $ 94,833 2003 37,221 2004 13,854 2005 6,000 2006 6,000 --------- $ 157,908 NOTE 17. COMPENSATING BALANCE ARRANGEMENTS The Corporation maintains deposit balances at several correspondent banks, which provide check collection and item processing services to the Corporation. The balances with these correspondent banks, at times, exceed federally insured limits, which management considers to be a normal business risk. Required deposit balance at the Federal Reserve was $ 65,000 at December 31, 2001 and 2000. Required deposit balance at Atlantic Central Bankers Bank was $ 540,000 at December 31, 2001 and 2000. An additional $ 44,234 and $ 41,587 were on deposit at December 31, 2001 and 2000, respectively, with Independent Community Bankers of America, Inc. as a reserve for potential clearing losses related to the credit card operations. NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Corporation's financial instruments were as follows at December 31:
2001 2000 -------------------------- ---------------------------- Carrying Fair Carrying Fair Amount Value Amount Value (000 Omitted) FINANCIAL ASSETS Cash and short-term investments $ 13,329 $ 13,329 $ 11,193 $ 11,193 Federal Funds Sold 24,347 24,347 3,049 3,049 Securities available for sale 68,422 68,422 69,919 69,919 Restricted bank stocks 1,703 1,703 2,134 2,134 Loans 249,816 209,181 Allowance for loan loses (3,104) (2,691) --------- --------- Net loans 246,712 252,035 206,490 198,628 Accrued interest receivable 1,541 1,541 2,016 2,016 --------- --------- --------- --------- Total financial assets $ 356,054 $ 361,377 $ 294,801 $ 286,939 ========= ========= ========= ========= FINANCIAL LIABILITIES Deposits $ 281,168 $ 283,037 $ 242,008 $ 242,655 Short-term borrowed funds 31,531 31,531 18,426 18,426 Long-term borrowed funds 26,512 25,949 21,802 18,569 Accrued interest payable 769 769 708 708 --------- --------- --------- --------- Total financial liabilities $ 339,980 $ 341,286 $ 282,944 $ 280,358 ========= ========= ========= =========
15 Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the selected supplementary financial information presented in this report. Summary For the year ended December 31, 2001, Orrstown Financial Services, Inc. (the Corporation) and its wholly owned subsidiary Orrstown Bank (the Bank) recorded net income of $5,092,000, an increase of 22.1% over 2000 earnings of $4,172,000, which was a 11.1% increase over net income of $3,755,000 in 1999. Net income per share (EPS) has increased over this time period from $1.61 in 1999 to $1.78 in 2000 and $2.15 in 2001. The per share amounts have been restated to reflect the 5% stock dividend paid to shareholders on September 15, 2001. The Corporation's earnings performance continues to be well above peer group averages as measured by various ratio analyses. Two widely recognized performance indicators are the return on average assets (ROA) and the return on average equity (ROE). The return on average assets was 1.50% in 2001, 1.46% in 2000 and 1.50% in 1999. The return on average equity was 17.02% in 1999, to 17.42% in 2000 and 17.20% in 2001. Net Interest Income Net interest income is the amount by which interest income on earning assets exceeds interest paid on interest bearing liabilities. The amount of net interest income is affected by changes in interest rates, account balances or volume and the mix of earning assets and interest bearing liabilities. Net interest income is still the primary source of commercial bank profits despite the continued industry wide push to build non-interest income streams. For the year ended December 31, 2001 , net interest income totaled $ 13,301,000, an increase of $1,861,000, or 16.3%, over 2000. The 2000 total was $11,440,000, or 11.6%, over 1999. On a taxable equivalent basis, net interest income increased by 15.2% in 2001 and 10.7% in 2000. Marginal tax rates used in the taxable equivalent equation were 34% for all three years presented. The Corporation's taxable equivalent net interest spread was 4.14% in 1999, 4.05% in 2000, and 3.88% in 2001. The net interest margin, which factors in non-interest bearing funds sources, has moved from 4.69% to 4.57% to 4.38%, respectively. Earning assets represented 92.9% of total assets in 2001, 92.1% in 2000 and 92.6% in 1999. Volume factors were responsible for essentially all net interest income growth during 2001 and 2000. On an average daily basis assets grew 19.1% during 2001 and 14.1% during 2000. Earning assets grew 20.1% and 13.5% during 2001 and 2000, respectively. Average daily loan growth of 20.8% in 2001 and 13.8% in 2000 was achieved without lowering credit standards and allowed net interest margins to hold at above peer group levels despite increased pressure on margins throughout the banking industry in general. The declining interest rate environment, highlighted by eleven cuts to the prime lending rate totaling 4.75% made it difficult to hold net interest margin during 2001. The net interest margin generated in 2001 declined by nineteen basis points from 2000 levels but remained above peer averages. Loan growth was funded primarily with core deposit growth during 2001, unlike 2000 when purchased funds and jumbo certificates of deposits were material funding sources. The core deposit growth during 2001 served to enhance the net interest margin. Management is poised to keep a close watch on margins moving into 2002 where the economic consensus calls for a flat rate environment the first half year and slightly rising rates during the second half. 16 ANALYSIS OF NET INTEREST INCOME Average Balances and Interest Rates Taxable Equivalent Basis (Dollars in Thousands)
2001 2000 1999 ----------------------------------- ------------------------------- -------------------------------- Tax Tax Tax Tax Tax Tax Average Equivalent Equivalent Average Equivalent Average Equivalent Equivalent Equivalent Balance Interest Rate Balance Interest Rate Balance Interest Rate ASSETS: Interest Earning Assets: Federal funds sold & interest bearing bank balances $ 16,291 $ 500 3.07% $ 4,527 $ 294 6.49% $ 5,834 $ 283 4.85% -------- ------ ----- ------- ------ ----- ------- ------ ---- Investment securities: Taxable investment Securities 51,056 3,270 6.40 49,337 3,475 7.04 38,877 2,397 6.17 Tax-exempt investment Securities 15,891 1,363 8.58 16,530 1,448 8.76 17,852 1,564 8.76 Total investment securities 66,947 4,633 6.92 65,867 4,923 7.47 56,729 3,961 6.98 -------- ------ ----- ------- ------ ----- ------- ------ ---- Loans: Taxable loans 229,815 19,117 8.32 189,452 16,832 8.88 166,498 14,433 8.67 Tax-exempt loans 3,288 290 8.82 3,450 305 8.84 2,960 274 9.26 -------- ------ ----- ------- ------ ----- ------- ------ ---- Total Loans 233,103 19,407 8.33 192,902 17,137 8.88 169,458 14,707 8.68 -------- ------ ----- ------- ------ ----- ------- ------ ---- Total interest- earning assets 316,341 24,540 7.76 263,296 22,354 8.49 232,021 18,951 8.17 Non-Interest Earning Assets: Cash and due from banks 8,242 7,052 6,515 Bank premises and equipment 9,136 8,398 5,858 Other assets 9,542 9,722 8,252 Less allowance for loan losses (2,833) (2,565) (2,117) -------- -------- -------- Total $340,428 $285,903 $250,529 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Interest Bearing Liabilities: Interest bearing demand deposits $99,103 $2,455 2.48 $ 76,631 $ 2,386 3.11 $ 71,176 $ 2,088 2.93 Savings deposits 20,787 301 1.45 20,628 466 2.26 22,888 580 2.53 Time deposits 102,856 5,591 5.44 91,214 5,013 5.50 75,859 3,850 5.08 Short term borrowings 24,275 909 3.74 21,942 1,263 5.76 9,713 438 4.51 Long term borrowings 28,279 1,421 5.02 21,556 1,190 5.52 20,560 1,118 5.44 ------- ------ ---- -------- ------- ---- -------- ------- ---- Total interest bearing 275,300 10,677 3.88 231,971 10,318 4.44 200,196 8,074 4.03 liabilities Non-Interest Bearing Liabilities: Demand deposits 32,628 27,650 25,365 Other 2,888 2,328 2,901 --------- --------- --------- Total Liabilities 310,816 261,949 228,462 Shareholders' Equity 29,612 23,954 22,067 --------- --------- --------- Total $ 340,428 3.38 $ 285,903 3.92 $ 250,529 3.48 ========= ==== ========= ==== ========= ==== Net interest income / net interest spread $ 13,863 3.88% $ 12,036 4.05% $ 10,877 4.14% ======== ==== ======== ==== ======== ==== Net interest margin 4.38% 4.57% 4.69% ==== ==== ====
Non-Interest Income and Expenses Other income, excluding security gains, increased $ 841,000, or 23.2% in 2001 due primarily to the popularity of our "bounce protection" program and increases in loan fees. Service charges on deposit accounts grew $ 716,000 during 2001. Securities gains decreased $ 103,000, from $ 114,000 to $ 11,000. Management continually searches for new sources of non-interest income, including insurance opportunities which were broadened during 2001 via entry into a property and casualty insurance agency joint venture. 17 Other expenses rose $1,134,000, or 12.4% in 2001. The 12.4% increase appears reasonable given the 19.1% asset growth of the company for the year, plus the fact that 2001 saw the opening of the bank's tenth branch in Greencastle, Pennsylvania. Additional personnel were needed for this expansion as well as to accommodate the growth of the bank as a whole. In spite of these capital expenditures, the Corporation's efficiency ratio is below 60%, an enviable number for a community bank with less than $500 million in assets. The efficiency ratio improved to 55.6% for 2001, following 57.8% in 2000 and 58.2% in 1999. The table that follows provides additional information regarding non-interest income and non-interest expense changes over the past three years:
ANALYSES OF NON-INTEREST INCOME AND EXPENSES (Dollars in Thousands) Year Ended December 31 % Change 2001 2000 1999 2001-2000 2000-1999 OTHER INCOME: Service charges on deposit accounts $1,890 $1,174 $1,080 61.0% 8.7% Loan service charges and fees 445 256 285 73.8% (10.2%) ATM fees 186 166 159 12.0% 4.4% Other service charges, commissions and fees 113 222 99 (49.1%) 124.2% Trust department income 1,219 1,125 862 8.4% 30.5% Brokerage income 261 341 368 (23.5%) (7.3%) Cash surrender value increases 302 269 302 12.3 (10.9%) Other operating income 53 75 3 (29.3%) 2400.0% ----- ------ ------ ----- ------- Subtotal before securities transactions 4,469 3,628 3,158 23.2% 14.9% ----- ------ ------ ----- ------- Securities gains (losses) 11 114 423 (90.4%) (73.0%) ----- ------ ------ ----- ------- Total other income $4,480 $3,742 $3,581 19.7% 4.5% ====== ====== ===== ====== ======= OTHER EXPENSES: Salaries 3,506 3,235 2,945 8.4% 9.8% Employee benefits 1,645 1,520 1,351 8.2% 12.5% Occupancy and equipment expenses 1,676 1,558 1,100 7.6% 41.6% Data processing expenses 435 324 671 34.3% (51.7%) ATM expenses 200 178 151 12.4% 17.9% Telephone 249 198 143 25.8% 38.5% Printing and supplies 232 227 249 2.2% (8.8%) Postage 174 135 128 28.9% 5.5% Directors Fees 241 206 185 17.0% 11.4% Advertising 196 167 138 17.4% 21.0% Pennsylvania shares tax 211 193 171 9.3% 12.9% Other operating expenses 1,482 1,172 986 26.5% 18.9% ----- ------ ------ ----- ------- Total operating expenses $10,247 $9,113 $8,218 12.4% 10.9% ====== ====== ===== ====== ======= Non-interest income as a % of non-interest expense 43.7% 41.1% 43.6%
Federal Income Taxes The Corporation's effective federal income tax rate for 2001 was 27.6% , as compared to 26.9% in 2000 and 25.9% in 1999. Corporate income tax rates for 2002 are forecast to stay near 2001 levels. The Corporation is firmly entrenched in the 34% bracket so all taxable income will be taxed at 34% in 2002. This, along with anticipated growth, is expected to increase the Corporation's effective federal income tax rate to approximately 28% in 2002, assuming no retroactive change in rates during 2002. Asset Quality and Credit Risk Analysis The quality of the Corporation's asset structure continues to be strong. A substantial amount of time is devoted by management to overseeing the investment of funds in loans and securities and the formulation of policies directed toward the profitability and minimization of risk associated with the investments. Credit Risk Analysis The Bank follows generally conservative lending practices and continues to carry a high quality loan portfolio with no unusual or undue concentrations of credit. No loans are extended to non-domestic borrowers or governments, consistent with past practice and policy. Net charge-offs historically have been quite low, when compared to industry standards, and represented only .04% of average outstanding loans during 2001 and .06% of average 2000 loans. Nonperforming loans, as represented by nonaccrual and restructured items, were only .02% and .01% of outstanding loans at December 31, 2001 and 2000, respectively. Loans 90 days or more past due and still accruing represented .26% and .39% of outstanding loans at December 31, 2001 and 2000, respectively. 18 Allowance for Loan Losses Historically, the Corporation has had an enviable record regarding its control of loan losses, but lending is a banking service that inherently contains elements of risk. In order to assess this risk, an ongoing loan review process continually evaluates the current financial condition of commercial borrowers, local and national economic conditions, and the current level of delinquencies. Through this process, an amount deemed adequate to meet current growth and future loss expectations is charged to operations. The provision for loan losses amounted to $504,000, $360,000 and $547,000 for 2001, 2000 and 1999, respectively. These provisions compared to net charge-offs of $91,000, $124,000 and $63,000 for 2001, 2000 and 1999, respectively. The allowance for loan losses was increased 15.3% during 2001 while loans increased 19.4%. The reserve at December 31, 2001 represented 1.24% of loans outstanding. Net charge-offs for 2001 represented only .04% of average loans outstanding. The reserve at December 31, 2001 represented 34.1 years of coverage based upon 2001 net charge-offs and 5,543% of nonaccrual loans. In addition, approximately 54% of the allowance was unallocated under internal evaluation procedures as of December 31, 2001.
SUMMARY OF LOAN LOSS EXPERIENCE (Dollars in Thousands) Year Ended December 31 2001 2000 1999 1998 1997 Amount of loans outstanding at end of period $249,816 $209,181 $180,691 $158,632 $128,331 ======== ======== ======== ======== ======== Daily average loans outstanding $233,103 $192,902 $169,458 $144,013 $117,403 ======== ======== ======== ======== ======== Balance of allowance for possible loan losses at beginning of period $ 2,691 $ 2,455 $ 1,971 $ 1,767 $ 1,620 Loans charged off 98 129 128 84 83 Recoveries of loans previously charged off 7 7 65 18 15 -------- -------- -------- -------- -------- Net loans charged off (recovered) 91 124 63 66 68 Additions to allowance charged to expense 504 360 547 270 215 -------- -------- -------- -------- -------- Balance at end of period $ 3,104 $ 2,691 $ 2,455 $ 1,971 $ 1,767 ======== ======== ======== ======== ======== Ratio of net charge-offs to average loans outstanding 0.04% 0.06% 0.04% 0.05% 0.06% ======== ======== ======== ======== ======== Ratio of reserve to gross loans outstanding at December 31 1.24% 1.29% 1.36% 1.24% 1.38% ======== ======== ======== ======== ========
Risk Elements Nonperforming assets are comprised of nonaccrual and restructured loans and real estate owned other than bank premises (OREO). OREO represents property acquired through foreclosure or settlements of loans and is carried at the lower of the principal amount of the loan outstanding at the time acquired or the estimated fair value of the property. The excess, if any, of the principal balance at the time acquired over the carrying amount is charged against the reserve for loan losses. The Bank's loan loss history has been much better than peer standards and analysis of the current credit risk position is favorable. The allowance for loan losses is ample given the current composition of the loan portfolio and adequately covers the credit risk management sees under present economic conditions. Management is prepared to make any reserve adjustments that may become necessary as economic conditions change.
NONPERFORMING ASSETS (Dollars in Thousands) December 31 2001 2000 1999 1998 1997 Loans on nonaccrual (cash) basis $ 56 $ 12 $ 64 $ 486 $ 473 Loans whose terms have been renegotiated to provide a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower 0 0 0 0 0 OREO 211 0 0 311 49 ----- ----- ------ ------- -------- Total nonperforming loans and OREO $ 267 $ 12 $ 64 $ 797 $ 522 ===== ===== ===== ======= ======= Ratio of nonperforming assets to total loans and OREO 0.11% 0.01% 0.04% 0.50% 0.41% ===== ===== ===== ======= ======= Ratio of nonperforming assets to total assets 0.07% 0.00% 0.02% 0.34% 0.27% ===== ===== ===== ======= ======= OTHER CREDIT RISK ELEMENTS: Loans past due 90 or more days and still accruing $ 644 $ 814 $ 97 $ 284 $ 657 ------ ------ ----- ------ ----- Ratio of other credit risk elements to total loans and OREO 0.26% 0.39% 0.05% 0.18% 0.51% ===== ===== ===== ======= ======= Ratio of other credit risk elements to total assets 0.17% 0.26% 0.04% 0.12% 0.35% ===== ===== ===== ======= ======= TOTAL NONPERFORMING AND OTHER RISK ASSETS: $ 911 $ 826 $ 161 $ 1,081 $ 1,179 ===== ===== ===== ======= ======= Ratio of total risk assets to total loans and OREO 0.36% 0.39% 0.09% 0.68% 0.92% ===== ===== ===== ======= ======= Ratio of total risk assets to total assets 0.24% 0.26% 0.06% 0.46% 0.62% ===== ===== ===== ======= =======
19 Future Impact of Recently Issued Accounting Standards Financial Accounting Standards Board (FASB) issued Statement No. 133 as amended by SFAS No. 138, Accounting for Derivative Instruments and Hedging Activities, effective for fiscal years beginning after June 15, 2000. This Statement establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other contracts, and requires that an entity recognize all derivatives as assets or liabilities in the balance sheet and measure them at fair value. If certain conditions are met, an entity may elect to designate a derivative as follows: (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability of an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of an unrecognized firm commitment, an available-for-sale security, a foreign currency denominated forecasted transaction, or a net investment in a foreign operation. The Statement generally provides for matching the timing of the recognition of the gain or loss on derivatives designated a hedging instruments with the recognition of the changes in the fair value of the item being hedged. Depending on the type of hedge, such recognition will be either net income or other comprehensive income. For a derivative not designated as a hedging instrument, changes in fair value will be recognized in net income in the period of change. Management has evaluated the impact of adopting this Statement on the consolidated financial statements, but does not anticipate that it will have a material impact. Financial Accounting Standards Board (FASB) Standard 142, which is effective for years beginning after December 15, 2001, addresses the financial accounting and reporting for acquired goodwill and other intangible assets. It does not address intangibles acquired as part of business combinations which is addressed by FASB 141. This statement also addresses how goodwill and intangibles are accounted for after they have been initially recognized. Management is currently evaluating the impact this statement would have on the consolidated financial statements when adopted, but does not anticipate that it will have a material impact. Liquidity, Rate Sensitivity and Interest Rate Risk Analysis The primary function of asset/liability management is to assure adequate liquidity and rate sensitivity. Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Interest rate sensitivity management requires the maintenance of an appropriate balance between interest sensitive assets and liabilities. Interest bearing assets and liabilities that are maturing or repricing should be adequately balanced to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. The Corporation has consistently followed a strategy of pricing assets and liabilities according to prevailing market rates while largely matching maturities , within the guidelines of sound marketing and competitive practices. The goal is to maintain a predominantly matched position with very few planned mismatches. Rate spreads will be sacrificed at times in order to enable the overall rate sensitivity position to stay within the guidelines called for by asset/liability management policy. Rate sensitivity is measured by monthly gap analysis, quarterly rate shocks and periodic simulation. Investment and pricing decisions are made using both liquidity and sensitivity analyses as tools. The schedule that follows reflects the degree to which the Corporation can adjust its various portfolios to meet interest rate changes. Additionally, the Bank is a Federal Home Loan Bank (FHLB) member, and standard credit arrangements available to FHLB members provide increased liquidity.
RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 2001 (Dollars in Thousands) Interest Sensitivity Period After 3 After 6 Within 3 Within 6 Within 12 After Months Months Months 1 Year Total RATE SENSITIVE ASSETS (RSA): Loans 92,132 13,300 21,246 123,138 249,816 Investment securities 2,823 51 468 66,783 70,125 Other earning assets 25,026 0 0 0 25,026 ------- ------ ------ ------- ------- Total RSA 119,981 13,351 21,714 189,921 344,967 ------- ------ ------ ------- ------- RATE SENSITIVE LIABILITIES (RSL): Interest bearing deposits 57,985 20,775 26,789 135,738 241,287 Short term borrowed funds 31,531 0 0 0 31,531 Long term borrowed funds 0 0 3,000 23,512 26,512 ------- ------ ------ ------- ------- Total RSL 89,516 20,775 29,789 159,250 299,330 ------- ------ ------ ------- ------- RATE SENSITIVITY GAP: Period 30,465 (7,424) (8,075) 30,671 45,637 Cumulative 30,465 23,041 14,966 45,637 GAP AS A PERCENT OF TOTAL ASSETS: Period 8.15% -1.99% -2.16% Cumulative 8.15% 6.17% 4.00% RSA/RSL Cumulative 1.34 1.21 1.11
20 The asset biased, or positive, gap position indicates that earnings are naturally enhanced, or more easily maintained, in a rising rate environment. This indicates that the balance sheet is well positioned to react to anticipated rate increases during late 2002 and positioned adequately to avoid material earnings damage if rates do not rise. Capital Adequacy and Regulatory Matters The Corporation maintains a strong capital base which provides adequate resources to absorb both normal and unusual risks inherent to the banking business. Internal capital generation, net income retained after the declaration of dividends, plus dividend reinvestment participation, have been the primary method employed to increase capital accounts. Total stockholders' equity rose $4,488,000 during 2001, an increase of 16.8% for the year. This followed growth of 22.0% and 3.7% during 2000 and 1999, respectively. The increasing earnings stream during this period has allowed the Corporation to steadily increase cash dividends paid to stockholders. In 2001 cash dividends rose $141,000, or 11.1% over 2000 levels while net income rose 22.0% during the period. This followed a 12.0% increase in dividend payout for 2000 versus 1999. Dividends per share have moved from $0.49 to $0.54 to $0.60 for 1999 through 2001, respectively. The dividends per share have been restated to reflect the 5% stock dividend paid to shareholders on September 15, 2001.
CAPITAL AND DIVIDEND RATIOS (Dollars in Thousands) 2001 2000 1999 At December 31: Shareholders' Equity $31,162 $26,674 $21,868 Equity/Assets 8.34% 8.55% 8.25% For the Year: Average Equity/Average Assets 8.70% 8.38% 8.81% Dividend payout 27.71% 30.48% 30.20% Return on Average Equity 17.20% 17.42% 17.02% Dividends paid $1,411 $1,270 $1,134 Regulatory Regulatory Capital Measures: Minimums Tier I Capital Ratio 12.3% 12.4% 12.8% 4.0% Total (Tier II) Capital Ratio 13.6% 13.6% 14.1% 8.0% Leverage Ratio 8.2% 8.6% 8.3% 3.0%
The maintenance of a strong capital base, above regulatory risk based minimums and industry averages, has been an integral part of the Corporation's operating philosophy. Management foresees no problem in maintaining capital ratios well in excess of regulatory requirements. The Corporation and its banking subsidiary are subject to periodic examinations by the Federal Reserve Bank and the Pennsylvania Department of Banking. During 2001, three examinations were conducted at the parent and subsidiary levels. The examinations included, but were not limited to, procedures designed to review trust operations, data processing operations lending practices, credit quality, liquidity, and capital adequacy. No comments were received from regulatory agencies which, if implemented, would have a material effect on Orrstown Financial Services, Inc.'s liquidity, capital resources or operations. 21 Summary of Quarterly Financial Data The unaudited quarterly results of operations for the years ended December 31, 2001 and 2000 are as follows:
(Dollars in Thousands) 2001 2000 Quarter Ended Quarter Ended ------------------------------- ------------------------------- March June September December March June September December Interest income $ 5,882 $ 5,932 $ 6,207 $ 5,957 $ 4,988 $ 5,323 $ 5,577 $ 5,870 Interest expense 2,835 2,694 2,681 2,467 2,293 2,471 2,715 2,839 ------- ------- ------- ------- ----- ------- ------- ------- Net interest income 3,047 3,238 3,526 3,490 2,695 2,852 2,862 3,031 Provision for loan losses 60 60 170 214 75 75 75 135 ------- ------- ------- ------- ----- ------- ------- ------- Net interest income after provision for loan losses 2,987 3,178 3,356 3,276 2,620 2,777 2,787 2,896 Securities gains (losses) 33 (2) (9) (11) (2) (1) 36 81 Other income 998 1,270 1,001 1,200 803 899 866 1,060 Other expense 2,457 2,655 2,464 2,671 2,137 2,196 2,320 2,460 ------- ------- ------- ------- ----- ------- ------- ------- Income before income taxes 1,561 1,791 1,884 1,794 1,284 1,479 1,369 1,577 Applicable income taxes 436 500 501 501 335 405 342 455 ------- ------- ------- ------- ----- ------- ------- ------- Net income $ 1,125 $ 1,291 $ 1,383 $ 1,293 $ 949 $ 1,074 $ 1,027 $ 1,122 ======= ======= ======= ======= ===== ======= ======= ======= PER COMMON SHARE DATA: Net income $ 0.48 $ 0.55 $ 0.58 $ 0.54 $ 0.40 $ 0.46 $ 0.44 $ 0.48 Diluted net income 0.47 0.54 0.57 0.54 0.40 0.46 0.44 0.47 Dividends 0.143 0.143 0.150 0.160 0.133 0.134 0.133 0.143 PERFORMANCE STATISTICS: Return on average assets 1.47% 1.58% 1.57% 1.38% 1.42% 1.54% 1.40% 1.48% Return on average equity 16.61% 17.82% 18.34% 16.10% 16.99% 18.53% 16.85% 17.32% Average equity / avg. assets 8.84% 8.89% 8.54% 8.56% 8.33% 8.30% 8.32% 8.55%
All per share amounts have been adjusted to give retroactive recognition to a 5% stock dividend effective September 15, 2001. 22 Selected Five -Year Financial Data Orrstown Financial Services, Inc. and its wholly-owned subsidiary (Dollars in Thousands)
Year Ended December 31 2001 2000 1999 1998 1997 Summary of Operations Interest income $ 23,978 $ 21,758 $ 18,324 $ 16,109 $ 13,450 Interest expense 10,677 10,318 8,074 7,348 5,822 -------- --------- -------- -------- -------- Net interest income 13,301 11,440 10,250 8,761 7,628 Provision for loan losses 504 360 547 270 215 -------- --------- -------- -------- -------- Net interest income after provision for loan losses 12,797 11,080 9,703 8,491 7,413 Securities gains (losses) 11 114 423 (9) 3 Other operating income 4,469 3,628 3,158 2,262 1,548 Other operating expenses 10,247 9,113 8,218 6,445 5,384 -------- --------- -------- -------- -------- Income before income taxes 7,030 5,709 5,066 4,299 3,580 Applicable income tax 1,938 1,537 1,311 1,180 974 -------- --------- -------- -------- -------- Net income $ 5,092 $ 4,172 $ 3,755 $ 3,119 $ 2,606 ======== ========= ======== ======== ======== Per Common Share Data* Income before taxes $2.97 $2.44 $2.18 $1.86 $1.55 Applicable income taxes 0.82 0.66 0.56 0.51 0.42 Net income 2.15 1.78 1.61 1.35 1.13 Diluted net income 2.12 1.77 1.61 1.35 1.13 Cash dividend paid 0.60 0.54 0.49 0.42 0.39 Book value at December 31 13.10 11.34 9.39 9.09 7.89 Average shares outstanding - basic 2,366,707 2,340,834 2,325,699 2,316,004 2,314,666 Average shares outstanding - diluted 2,398,149 2,352,130 2,325,699 2,316,004 2,314,666 Stock Price Statistics* Close $39.00 $38.10 $36.19 $24.81 $19.93 High 40.00 41.90 38.10 28.35 19.93 Low 37.00 35.48 23.92 19.61 14.34 Price earnings ratio at close 18.1 21.4 22.4 18.5 17.7 Price to book at close 3.0 3.4 3.9 2.7 2.5 Year-End Balance Sheet Data Total assets $373,728 $311,903 $265,053 $235,822 $190,242 Total loans 249,816 209,181 180,691 158,632 128,331 Total investment securities 70,125 72,053 61,964 51,137 47,191 Deposits - non-interest bearing 39,881 31,716 25,264 22,020 17,649 Deposits - interest bearing 241,287 210,292 179,125 161,744 142,931 Total deposits 281,168 242,008 204,389 183,764 160,580 Liabilities for borrowed money 58,043 40,228 36,228 27,062 8,569 Total shareholders' equity 31,162 26,674 21,868 21,080 18,265 Trust assets under management - market value 221,000 206,000 182,000 152,000 108,000 Performance Statistics Average equity / average assets 8.70% 8.38% 8.81% 9.20% 9.84% Return on average equity 17.20% 17.42% 17.02% 15.97% 15.37% Return on average assets 1.50% 1.46% 1.50% 1.47% 1.51%
* Per share amounts have been restated to reflect: The 5% stock dividend effective September 15, 2001. The 7-1/2% stock dividend effective November 19,1999. The 2 for 1 stock split effective November 21,1998. The 5% stock dividend effective May115,1997. 23 Market and Dividend Information The common stock of Orrstown Financial Services, Inc. is traded in the over-the - -counter market under the symbol ORRF. At the close of business December 31, 2001, there were approximately 2,149 shareholders of record, with a total of 2,378,608 shares outstanding. The table below sets forth the range of high and low quarterly sales prices and dividends declared per common share. All per share data has been restated to reflect the 5% stock dividend paid to shareholders on September 15, 2001.
2001 2000 Market Price Market Price ---------------------------------- ----------------------------------- Quarterly Quarterly High Low Dividend High Low Dividend First quarter $38.10 $36.19 $0.143 $38.10 $36.19 $0.133 Second quarter $39.29 $35.71 $0.143 $37.14 $35.48 $0.134 Third quarter $44.76 $35.00 $0.150 $36.67 $35.71 $0.133 Fourth quarter $40.00 $37.00 $0.160 $41.90 $35.84 $0.143 ------ ------ $0.596 $0.543
Investor Information Annual Meeting The annual meeting of Orrstown Financial Services, Inc. stockholders is scheduled for May 7, 2001 at 9:00 a.m. at Orrstown Bank, 77 East King Street, Shippensburg, PA 17257. All stockholders are cordially invited to attend. Annual and Quarterly Reports Copies of the annual and quarterly reports may be obtained at any office of Orrstown Bank, or by writing to Patricia A. Corwell, Vice President & Assistant Secretary, Orrstown Bank, P.O. Box 250, Shippensburg, PA 17257. Form 10-K A copy of the corporation's Form 10-K, as filed with the Securities and Exchange Commission, may be obtained by writing to Orrstown Bank, P.O. Box 250, Shippensburg, PA 17257. Transfer Agent The transfer agent for Orrstown Financial Services, Inc. is Orrstown Bank, 77 East King Street, P.O. Box 250, Shippensburg, PA 17257.
Market Makers E.E. Powell & Co., Inc. Janney Montgomery Scott F.J. Morrissey & Co., Inc. 1100 Gulf Tower 1 North Church Street 1700 Market Street - Suite 1420 Pittsburgh, PA 15219 P.O. Box 3129 Philadelphia, PA 19103 1-800-289-7865 West Chester, PA 19380 1-800-842-8928 1-800-777-0131 Ryan, Beck & Co., Inc. Ferris Baker Watts, Inc. 220 South Orange Avenue 100 Light Street Livingston, NJ 07039 Baltimore, MD 21202 1-800-342-2325 1-800-436-2000
24 EX-21 3 ex21.txt EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT 1. Orrstown Bank, Orrstown, Pennsylvania; a state-chartered bank organized under the Pennsylvania Banking Code of 1965. 2. Pennbanks Insurance Company Cell P1 is a reinsurer of credit, life, and disability insurance, which services customers of Orrstown Bank. EX-23 4 ex23.txt EXHIBIT 23 EXHIBIT 23.1 Independent Auditor's Consent Board of Directors and Shareholders Orrstown Financial Services, Inc. We consent to the incorporation by reference in to previously filed Registration Statements (Form S-4 No. 33-18888, Form S-3 No. 333-53405, Form S-8 No. 333-33714, Form S-8 No. 333-34504 and Form S-8 No. 333-33712) of Orrstown Financial Services, Inc. of our report dated January 29, 2002, appearing in the 2001 annual report to shareholders incorporated by reference in this Form 10-K of Orrstown Financial Services, Inc. for the year ended December 31, 2001. /s/ SMITH ELLIOTT KEARNS & COMPANY, LLC Chambersburg, Pennsylvania March 22, 2002 EX-99 5 ex99.txt EXHIBIT 99 FINANCIAL DATA SCHEDULE TYPE EX-27 ARTICLE 9 PERIOD-TYPE 12-MOS FISCAL YEAR-END DEC-31-2001 PERIOD-END DEC-31-2001 CASH 12,650 INT-BEARING-DEPOSITS 679 FED-FUNDS-SOLD 24,347 TRADING-ASSETS 0 INVESTMENTS-HELD-FOR-SALE 68,422 INVESTMENTS-CARRYING 0 INVESTMENTS-MARKET 0 LOANS 249,816 ALLOWANCE 3,104 TOTAL-ASSETS 373,728 DEPOSITS 281,168 SHORT-TERM 31,531 LIABILITIES-OTHER 3,355 LONG-TERM 26,512 PREFERRED-MANDATORY 0 PREFERRED 0 COMMON 248 OTHER-SE 30,914 TOTAL-LIABILITIES AND EQUITY 373,728 INTEREST-LOAN 19,308 INTEREST-INVEST 3,768 INTEREST-OTHER 902 INTEREST-TOTAL 23,978 INTEREST-DEPOSIT 8,347 INTEREST-EXPENSE 10,677 INTEREST-INCOME-NET 13,301 LOAN-LOSSES 504 SECURITIES-GAINS 11 EXPENSE-OTHER 10,247 INCOME-PRETAX 7,030 INCOME-PRE-EXTRAORDINARY 5,092 EXTRAORDINARY 0 CHANGES 0 NET-INCOME 5,092 EPS-PRIMARY 2.15 EPS-DILUTED 2.12 YIELD-ACTUAL 4.38 LOANS-NON 56 LOANS-PAST 644 LOANS-TROUBLED 0 LOANS-PROBLEM 0 ALLOWANCE-OPEN 2,691 CHARGE-OFFS 98 RECOVERIES 7 ALLOWANCE-CLOSE 3,104 ALLOWANCE-DOMESTIC 3,104 ALLOWANCE-FOREIGN 0 ALLOWANCE-UNALLOCATED 1,692 -----END PRIVACY-ENHANCED MESSAGE-----