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, 1997
Commission file number: 33-18888
ORRSTOWN FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2530374
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
77 East King Street
P. O. Box 250, Shippensburg, Pennsylvania 17257
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (717) 532-6114
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, No Par Value The Common Stock is not
registered on any
exchange.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by 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 March 19, 1998, 1,025,094 shares of the registrant's common stock
were outstanding. The aggregate market value of such shares held by
nonaffiliates on that date was $ 48,179,418.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended
December 31, 1997 are incorporated by reference into Parts I and II.
Portions of the Proxy Statement for 1997 Annual Meeting of Security
Holders are incorporated by reference in Part III of this Form 10-K.
- -1-
Item 1. Business.
History and Business
Orrstown Financial Services, Inc. (OFS) is a bank holding
company registered under the Bank Holding Company Act of 1956, as
amended. Orrstown Financial Services, Inc. was organized on
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 subsidiary, Orrstown Bank, which
is engaged in providing banking and bank related services in South
Central Pennsylvania, principally Franklin and Cumberland Counties,
where its seven branches are located in Shippensburg (2), Carlisle (2),
Spring Run, Orrstown, and Chambersburg, Pennsylvania. The day-to-day
management of Orrstown Bank is conducted by the subsidiary's officers.
Orrstown Financial Services, Inc. derives a majority of its current
income from Orrstown.
Orrstown Financial Services, Inc. has no employees other
than its six officers who are also employees of Orrstown, its
subsidiary. On December 31, 1997, Orrstown had 72 full-time and 30
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.
- -2-
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.
Loans secured by equipment and/or other nonreal estate
collateral normally do not exceed 70% of appraised value or cost,
whichever is lower. Loans secured by real estate do not exceed 80% of
the appraised value of the property which is the maximum loan to
collateral value established in the Bank's lending policy. Loan to
collateral values are monitored as part of the loan review, and
appraisals are updated as deemed appropriate in the circumstances.
Administration and supervision over the lending process is
provided by the Bank's Credit Administration Department via loan
reviews. The loan review process is continuous, commencing with the
approval of a loan. Each new loan is reviewed by the Credit
Administration Department for compliance with banking regulations and
lending policy requirements for documentation, collateral standards, and
approvals.
The Credit Administration Department continues to monitor
and evaluate loan customers utilizing risk-rating criteria established
in the lending policy in order to spot deteriorating trends and detect
conditions which might indicate potential problem loans.
- -3-
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, 1997, Orrstown had total assets of
approximately $ 190 million, total shareholders' equity of approximately
$ 18.2 million and total deposits of approximately $ 161 million.
Regulation and Supervision
Orrstown Financial Services (OFS) is a bank holding company
within the meaning of the Bank Holding Company Act of 1956 (BHC Act),
and is registered as such with the Board of Governors of the Federal
Reserve System (FRB). OFS is subject to examination by the FRB and is
restricted in its acquisitions, certain of which are prohibited and
certain of which are subject to approval by the FRB.
Under the BHC Act, a bank holding company is, with limited
exceptions, prohibited from (i) acquiring direct or indirect ownership
or control of more than 5% of the voting shares of any company which is
not a bank or (ii) engaging in any activity other than managing or
controlling banks. With the prior approval of the FRB, however, a bank
holding company may own shares of a company engaged in activities which
the FRB determines to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In addition,
federal law imposes certain restrictions on transactions between OFS and
its 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.
- -4-
The operations of Orrstown are subject to federal and state
statutes applicable to banks chartered under the banking laws of the
United States, and to banks whose deposits are insured by the Federal
Deposit Insurance Corporation. Bank operations are also subject to
regulations of the Pennsylvania Department of Banking, the Federal
Reserve Board and the Federal Deposit Insurance Corporation.
The primary supervisory authority of Orrstown is the
Pennsylvania Department of Banking, who regularly examines such areas as
reserves, loans, investments, management practices and other aspects of
bank operations. These examinations are designed primarily for the
protection of the Bank depositors.
Federal and state banking laws and regulations govern, among
other things, the scope of a bank's business, the investments a bank may
make, the reserves against deposits a bank must maintain, the loans a
bank makes and collateral it takes, the maximum interest rates a bank
may pay on deposits, the activities of a bank with respect to mergers
and consolidations, and the establishment of branches, and management
practices and other aspects of banking operations. See Note 14 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.
- -5-
Regulatory authorities have issued guidelines that establish
risk-based capital and leverage standards. These capital requirements
of bank regulators, are discussed on pages 37 to 39 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. Among other things,
FDICIA provides increased funding for the Bank Insurance Fund of the
FDIC by granting authority for special assessments against insured
deposits through a general risk-based assessment systems. FDICIA also
contains provisions limiting activities and business methods of
depository institutions. FDICIA requires the primary federal banking
regulators to promulgate regulations setting forth standards relating
to, among other things, internal controls and audit systems; credit
underwriting and loan documentation; interest rate exposure and other
off-balance sheet assets and liabilities; and compensation of directors
and officers. FDICIA also contains provisions limiting the acceptance
of brokered deposits by certain depository institutions, placing
restrictions on the terms of "bank investment contracts" that may be
offered by depository institutions and provisions requiring the FDIC
to study the current rules applicable to the aggregation of accounts of
depositors at an institution that is entitled to FDIC insurance.
Finally, FDICIA provides for expanded regulation of depository
institutions and their affiliates, including parent holding companies,
by such institutions' primary federal banking regulator. Each primary
federal banking regulator is required to specify, by regulation, capital
standards for measuring the capital adequacy of the depository
institutions it supervises and, depending upon the extent to which a
- -6-
depository institution does not meet such capital adequacy measures, the
primary federal banking regulator may prohibit such institution from
paying dividends or may require such institution to take other steps to
become adequately capitalized.
The earnings of Orrstown Bank, and therefore the earnings of
Orrstown Financial Services, are affected by general economic
conditions, management policies, and the legislative and governmental
actions of various regulatory authorities including the FRB, the FDIC
and the Pennsylvania Department of Banking. In addition, there are
numerous governmental requirements and regulations that affect the
activities of Orrstown Financial Services.
Competition
Orrstown's principal market area consists of 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 Shippensburg and Carlisle, Pennsylvania.
Orrstown, like other depository institutions, has been
subjected to competition from less heavily regulated entities such as
brokerage firms, money market funds, consumer finance and credit card
companies and other commercial banks, many of which are larger than
Orrstown Bank. Orrstown Bank is generally competitive with all
competing financial institutions in its service area with respect to
interest rates paid on time and savings deposits, service charges on
deposit accounts and interest rates charged on loans.
Item 2. Properties.
Orrstown Bank owns buildings in Orrstown, Pennsylvania,
Shippensburg, Pennsylvania (3), Carlisle, Pennsylvania, Spring Run,
Pennsylvania and Chambersburg, Pennsylvania. Offices of the bank are
located in each of these buildings. In 1996 the Bank began
leasing building space for a second office location in Carlisle,
Pennsylvania, which opened in January 1997. One of the offices located
in Shippensburg is an "Operations Center" which does not operate as a
branch, but rather as an accounting office. The bank completed the
- -7-
renovation of a property located adjacent to the downtown office, which
expanded its trust department and certain administrative facilities. In
November 1997, the Bank opened its seventh office, located in
Chambersburg, Pennsylvania. The Bank also owns property adjacent to the
Orrstown office which it intends to hold for future expansion purposes.
Item 3. Legal Proceedings.
Orrstown Financial Services, Inc. is an occasional party to
legal actions arising in the ordinary course of its business. In the
opinion of Orrstown Financial Services, Inc.'s management, Orrstown
Financial Services, Inc. has adequate legal defenses and/or insurance
coverage respecting any and each of these actions and does not believe
that they will materially affect Orrstown Financial Services, Inc.'s
operations or financial position.
Item 4. Submission of Matters to Vote of Security Holders.
None
Executive Officers of Registrant
The following table sets forth selected information about
the principal officers of the holding company, each of whom is elected
by the Board of Directors and each of whom holds office at the
discretion of the Board.
<TABLE>
<S> <C> <C> <C>
Age
Held Bank Employee as of
Name/Office Held Since Since 3/15/98
Galen L. Myers, Chairman of Board 1989 (1) 59
Joel R. Zullinger, Vice Chairman
of the Board 1991 (1) 49
Jeffrey W. Coy, Secretary 1988 (1) 46
Kenneth R. Shoemaker, President 1987 1986 50
Stephen C. Oldt, Executive
Vice President 1987 1987 55
Philip E. Fague, Vice President 1990 1988 38
Robert B. Russell, Vice President
and Treasurer 1988 1982 44
</TABLE>
(1) Mr. Myers, Mr. Zullinger and Mr. Coy are not employees
of the Bank.
- -8-
Senior Operating Officers of the Bank
<TABLE>
<S> <C> <C> <C> <C>
Held Bank Employee Age
Name/Office Held Since Since as of
3/15/98
Kenneth R. Shoemaker, President &
Chief Executive Officer 1987 1988 50
Stephen C. Oldt, Executive Vice
President & Chief Operating
Officer 1987 1987 55
Philip E. Fague, Vice President/ 1990/
Senior Trust Officer 1993 1988 38
Bradley S. Gerlach, Vice President
Director of Sales & Marketing 1995 1995 38
Bradley S. Everly, Senior Vice 1997/
President/Senior Loan Officer 1997 1997 46
Robert B. Russell, Vice President/ 1982/
Chief Accounting Officer 1993 1982 44
Patricia A. Corwell, Vice President
and Assistant Secretary 1982 1954 63
James B. Dubbs, Vice President & 1983/
Cashier/Community Office Manager 1982 1976 39
Charles E. Ferguson, Vice President
Human Resource Manager 1995 1995 61
Barbara E. Brobst, Vice President &
Trust Officer 1997 1997 39
</TABLE>
Part II
Item 5. Market for Registrant's Common Stock and Related Security
Holder Matters.
Orrstown Financial Services, Inc.'s common stock is not
traded on a national securities exchange, but is traded inactively
through the local and over the counter local markets. At December 31,
1997, the approximate number of shareholders of record was approximately
1,600. 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.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Market Cash Market Cash
Price Dividend Price Dividend
Dividend (1) 1997 1996
High Low High Low
First Quarter $ 34.29 $ 32.28 $ .181 $ 30.48 $ 28.57 $ .162
Second Quarter 40.00 34.29 .190 31.43 30.48 .162
Third Quarter 42.00 40.00 .200 32.38 31.43 .171
Fourth Quarter 45.00 42.00 .310 32.38 32.38 .181
</TABLE>
(1) Note: Cash dividends per share prior to the 2nd quarter of
1997 have been restated after giving retroactive recognition to a 5%
stock dividend issued May 15, 1997.
See Note 14 to the financial statements for restrictions on
the payment of dividends.
- -9-
Item 6. Selected Financial Data.
The selected five-year financial data on page 21 of the
annual shareholders' report for the year ended December 31, 1997 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 23 through 39 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 39 of the annual shareholders
report for the year ended December 31, 1997 and are incorporated herein
by reference. Additional schedules required in addition to those
included in the annual shareholders report are submitted herewith.
- -10-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CHANGES IN NET INTEREST INCOME TAX EQUIVALENT YIELDS
1997 Versus 1996
Increase (Decrease)
Due to Change in
<TABLE>
<S> <C> <C> <C>
Total
Average Average Increase
Volume Rate
(Decrease)
(000 omitted)
Interest Income
Loans (net of unearned discounts) $ 1,062 ($ 12) $ 1,050
Taxable investment securities 285 6 291
Nontaxable investment securities 563 ( 57) 506
Other short-term investments ( 229) 9 ( 220)
Total interest income 1,681 ( 54) 1,627
Interest Expense
Interest bearing demand 245 130 375
Savings deposits ( 41) ( 4) ( 45)
Time deposits 207 ( 23) 184
Short-term borrowings 12 0 12
Long-term borrowings 180 ( 23) 157
Total interest expense 603 80 683
Net interest income $ 944
</TABLE>
- -11-
1996 Versus 1995
Increase (Decrease)
Due to Change in
<TABLE>
<S> <C> <C> <C>
Total
Average Average Increase
Volume Rate (Decrease)
(000 omitted)
Interest Income
Loans (net of unearned discounts) $ 750 ($ 113) $ 637
Taxable investment securities 150 100 250
Nontaxable investment securities 131 ( 22) 109
Other short-term investments 481 ( 293) 188
Total interest income 1,512 ( 328) 1,184
Interest Expense
Interest bearing demand 63 1 64
Savings deposits 73 ( 40) 33
Time deposits 579 ( 44) 535
Short-term borrowings ( 44) 0 ( 44)
Long-term borrowings ( 1) 10 92
Total interest expense 670 ( 73) 597
Net interest income $ 587
</TABLE>
Changes which are attributed in part to volume and in part to
rate are
allocated in proportion to their relationships to the amounts of changes.
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
The following table shows the maturities of investment securities at
book value as of December 31, 1997, and weighted average yields of such
securities. Yields are shown on a tax equivalent basis, assuming a 34%
federal
income tax rate.
<TABLE>
<S> <C> <C> <C> <C> <C>
After 1 year After 5 years
Within but within but within After
1 year 5 years 10 years 10 years Total
(000 omitted)
Bonds:
U. S. Treasury
Book value $ 1,743 $ 8,030 $ 1,064 $ 0 $ 10,837
Yield 5.92% 6.24% 6.06% 0% 6.17%
U. S. Government
agencies
Book value 0 0 2,000 0 2,000
Yield 0% 0% 7.42% 0% 7.42%
State and municipal
Book value 0 1,784 2,839 12,988 17,611
Yield 0% 9.09% 10.25% 8.78% 8.83%
Total book
value $ 1,743 $ 9,814 $ 5,903 $ 12,988 $ 30,448
Yield 5.92% 6.76% 8.54% 8.78% 7.79%
Mortgage-backed
securities:
Total book value $ 13,812
Yield 7.01%
Equity Securities:
Total book value $ 480
Yield 3.0%
Total Investment Securities $ 44,740
Yield 8.02%
</TABLE>
- -12-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
LOAN PORTFOLIO
The following table presents the loan portfolio at the end of each of
the last five years:
<TABLE>
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
(000 omitted)
Commercial, financial
and agricultural $ 10,275 $ 8,401 $ 8,211 $ 6,970 $ 5,281
Real estate -
Construction 5,961 4,304 5,706 5,038 3,758
Real estate - Mortgage 97,074 82,687 75,731 68,458 57,278
Installment and other
personal loans (net of
unearned discount) 15,021 13,534 13,209 10,373 9,257
Total loans $ 128,331 $ 108,926 $ 102,857 $ 90,839 $ 75,574
</TABLE>
Presented below are the approximate maturities of the loan portfolio
(excluding real estate mortgages, installments and credit cards) at December
31,
1997:
<TABLE>
<S> <C> <C> <C> <C>
Under One One to Over Five
Year Five Years Years Total
(000 omitted)
Commercial, financial
and agricultural $ 1,611 $ 1,932 $ 6,732 $ 10,275
Real estate - Construction 826 989 4,146 5,961
Total $ 2,437 $ 2,921 $ 10,878 $ 16,236
</TABLE>
The following table presents the approximate amount of fixed rate
loans and variable rate loans due as of December 31, 1997:
<TABLE>
<S> <C> <C>
Fixed Rate Variable
Loans Rate Loans
(000 omitted)
Due within one year $ 8,467 $ 76,543
Due after one but within
five years 22,251 0
Due after five years 21,070 0
Total $ 51,788 $ 76,543
</TABLE>
- -13-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<S> <C> <C> <C> <C> <C>
Years Ended December 31
1997 1996 1995 1994 1993
(000 omitted)
Average total loans
outstanding (net of
unearned income) $ 117,403 $ 105,779 $ 97,662 $ 81,740 $ 72,576
Allowance for loan
losses, beginning
of period $ 1,620 $ 1,433 $ 1,200 $ 1,125 $ 1,042
Additions to provision
for loan losses
charged to operations 215 240 270 71 121
Loans charged off
during the year
Commercial 1 20 0 0 17
Personal credit lines 32 17 3 1 3
Installment 50 31 48 7 31
Total charge-off's 83 68 51 8 51
Recoveries of loans
previously charged off:
Commercial 2 3 0 0 0
Installment 12 12 14 12 13
Personal credit
lines 1 0 0 0 0
Total recoveries 15 15 14 12 13
Net loans charged off
(recovered) 68 53 37 ( 4) 38
Allowance for loan
losses, end of
period $ 1,767 $ 1,620 $ 1,433 $ 1,200 $ 1,125
Ratio of net loans
charged off to
average loans
outstanding .06% .05% .04% 0.0% .05%
</TABLE>
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 SUBSIDIARY
LOANS
The following table sets forth the outstanding balances of those
loans on a nonaccrual status and those on accrual status which are
contractually
past due as to principal or interest payments for 30 days or more at December
31.
<TABLE>
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
(000 omitted)
Nonaccrual loans $ 473 $ 14 $ 132 $ 27 $ 0
Accrual loans:
Restructured $ 0 $ 0 $ 0 $ 0 $ 0
30 through 89
days past due 2,398 1,976 1,949 1,553 1,468
90 days or
more past due 657 203 417 155 150
Total accrual
loans $ 3,055 $ 2,179 $ 2,366 $ 1,708 $ 1,618
</TABLE>
See Note 7 of the notes to consolidated financial statements for
details
of income recognized and foregone revenue on nonaccrual loans for the past
three
years, and discussion concerning impaired loans at December 31, 1997.
- -15-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
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:
<TABLE>
<S> <C> <C> <C> <C>
Years Ended December 31
1997 1996
Percentage Percentage
Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans
(000 omitted)
Commercial, financial
and agricultural $ 31 8.00% $ 125 7.71%
Commercial, real estate
secured 354 35.00 0 0.00
Real estate -
Construction 0 4.64 64 3.95
Real estate -
Mortgage 188 40.64 1,229 75.91
Installment 12 11.72 202 12.43
Unallocated 1,182 0 0.00
Total $ 1,767 100.00% $ 1,620 100.00%
Years Ended December 31
1995 1994
Percentage Percentage
Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans
(000 omitted)
Commercial, financial
and agricultural $ 114 7.98% $ 113 9.42%
Commercial - Real estate
secured 0 0.0 0 0.0
Real estate -
Construction 80 5.55 67 5.58
Real estate -
Mortgage 1,055 73.63 844 70.33
Installment 184 12.84 176 14.67
Unallocated 0 0.00 0 0.00
Total $ 1,433 100.00% $ 1,200 100.00%
</TABLE>
- -16-
Year Ended December 31
1993
<TABLE>
<S> <C> <C>
Percentage
Allowance of Loans to
Amount Total Loans
(000 omitted)
Commercial, financial
and agricultural $ 78 6.99%
Commercial - Real estate
secured 0 0.00
Real estate -
Construction 56 4.97
Real estate -
Mortgage 853 75.79
Installment 138 12.25
Unallocated 0 0.00
Total $ 1,042 100.00%
</TABLE>
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
DEPOSITS
The average amounts of deposits are summarized below:
<TABLE>
<S> <C> <C> <C>
Years Ended December 31
1997 1996 1995
(000 omitted)
Demand deposits $ 17,665 $ 16,078 $ 13,833
Interest bearing demand deposits 37,535 27,601 25,048
Savings deposits 24,568 26,555 24,200
Time deposits 68,161 63,767 53,350
Total deposits $ 147,929 $ 134,001 $ 116,431
</TABLE>
The following is a breakdown of maturities of time deposits of
$ 100,000 or more as of December 31, 1997:
<TABLE>
<S> <C> <C>
Maturity (000 omitted)
Certificates of Deposit
Three months or less $ 3,410
Over three months through
six months 2,543
Over six months through
twelve months 4,082
Over twelve months 200
$ 10,235
</TABLE>
RETURN ON EQUITY AND ASSETS (APPLYING DAILY AVERAGE BALANCES)
The following table presents a summary of significant earnings and
capital ratios: (dollar amounts in thousands)
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
Average assets $ 172,366 $ 153,145 $ 135,648
Net income $ 2,606 $ 2,248 $ 1,954
Average equity $ 16,956 $ 15,076 $ 13,570
Cash dividends paid $ 903 $ 694 $ 613
Return on assets 1.51% 1.47% 1.44%
Return on equity 15.37% 14.90% 14.40%
Dividend payout ratio 34.65% 30.90% 30.7%
Equity to asset ratio 9.84% 9.8% 10.0%
</TABLE>
- -17-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED SUMMARY OF OPERATIONS
<TABLE>
<S> <C> <C> <C> <C> <C>
Years Ended December 31
1997 1996 1995 1994 1993
(000 omitted)
Interest income $ 13,450 $ 12,018 $ 10,829 $ 8,571 $ 8,250
Interest expense 5,822 5,139 4,542 3,241 3,129
Net interest income 7,628 6,979 6,287 5,330 5,121
Provision for loan
losses 215 240 270 71 121
Net interest
income after
provision for
loan losses 7,413 6,639 6,017 5,259 5,000
Other income:
Trust 490 384 297 185 157
Service charges -
Deposits 601 477 375 349 308
Other service charges,
collection and
exchange, charges,
commission fees 341 258 218 180 163
Other operating
income (loss) 119 121 45 146 ( 26)
Total other
income 1,551 1,240 935 860 602
Income before
operating expense 8,964 7,879 6,952 6,119 5,602
Operating expenses:
Salaries and
employees benefits 2,901 2,621 2,326 2,115 1,908
Occupancy and
equipment expense 764 665 559 486 405
Other operating
expenses 1,719 1,507 1,371 1,363 1,280
Total operating
expenses 5,384 4,793 4,256 3,964 3,593
Income before income
taxes 3,580 3,086 2,696 2,155 2,009
Income tax 974 838 742 520 525
Net income
applicable to
common stock $ 2,606 $ 2,248 $ 1,954 $ 1,635 $ 1,484
Per share data:
Earnings per common
share $ 2.54 $ 2.19 $ 1.91 $ 1.59 $ 1.45
Cash dividend -
Common $ .88 $ .68 $ .58 $ .50 $ .45
Weighted average
number of common
shares 1,025,323 1,025,706 1,026,307 1,026,307 1,026,812
</TABLE>
- -18-
Item 9. Disagreements on Accounting and Financial Disclosures.
Not applicable.
- -19-
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 1998
Annual Meeting of Shareholders filed pursuant to Regulation
14A.
- -20-
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports of Form 8-K.
(a) (1) - List of Financial Statements
The following consolidated financial statements of
Orrstown Financial Services, Inc. and its
subsidiary, included in the annual report of the
registrant to its shareholders for the year ended
December 31, 1997, are incorporated by reference
in Item 8:
Consolidated balance sheets - December 31,
1997 and 1996
Consolidated statements of income - Years
ended December 31, 1997, 1996 and 1995
Consolidated statements of stockholders'
equity - Years ended December 31, 1997, 1996,
and 1995
Consolidated statements of cash flows - Years
ended December 31, 1997, 1996, and 1995
Notes to consolidated financial statements -
December 31, 1997
(2) List of Financial Statement Schedules
Schedule I - Changes in net interest income
tax equivalent yields
Schedule II - Investment portfolio
Schedule III - Loan portfolio
- -21-
Schedule IV - Summary of loan loss experience
Schedule V - Nonaccrual, delinquent and
impaired loans
Schedule VI - Allocation of allowance for loan
losses
Schedule VII - Deposits and return on equity
and assets
Schedule VIII - Consolidated summary of
operations
All other schedules for which provision is made in
the applicable accounting regulation 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 (13) Annual report to security
holders
Exhibit (21) Subsidiaries of the registrant
Exhibit (27) Financial data schedule
All other exhibits for which provision is made in
the applicable accounting regulation of the
Securities and Exchange Commission are not
required under the related instructions or are
inapplicable and therefore have been omitted.
- -22-
(b) Reports on Form 8-K filed
None.
(c) Exhibits
(3)(i) Articles of incorporation. Incorporated
by reference to Exhibit 3.1 to the
Registrant's Registration Statement on
Form S-4, Registration No. 33-18888.
(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., filed as
Exhibit 3.1 to Registrant's
Registration Statement on Form S-4
(Registration No. 33-18888).
(ii) By-laws of Orrstown Financial
Services, Inc., filed as Exhibit 3.2
to the Registrant's Registration
Statement on Form S-4 (Registration
No. 33-18888).
(13) Annual report to security holders - filed
herewith
- -23-
(21) Subsidiaries of the registrant - filed
herewith
(27) Financial data schedule - filed herewith
(d) Financial statement schedules
The following financial statement schedules
required under Article 9 Industry Guide 3 have
been included on pages 11 to 18 under Item 8
of this report:
Schedule I - Changes in net interest income
tax equivalent yields.
Schedule II - Investment portfolio
Schedule III - Loan portfolio
Schedule IV - Summary of loan loss experience
Schedule V - Nonaccrual delinquent and
impaired loans
Schedule VI - Allocation of allowance for loan
losses
Schedule VII - Deposits and return on equity
and assets
Schedule VIII - Consolidated summary of
operations
- -24-
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 _____, 1998 (Duly authorized officer)
By ______________________________
Robert B. Russell, Controller
(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 and March 26 , 1998
Kenneth R. Shoemaker Director
/s/ Anthony F. Ceddia Director March 26 , 1998
Dr. Anthony F. Ceddia
/s/ Robert T. Henry Director March 26 , 1998
Robert T. Henry
/s/ Gregory A. Rosenberry Director March 26 , 1998
Gregory A. Rosenberry
/s/ Joel R. Zullinger Vice Chairman of the March 26 , 1998
Joel R. Zullinger Board and Director
/s/ Jeffrey W. Coy Secretary and Chairman March 26 , 1998
Jeffrey W. Coy of Executive Committee
and Director
/s/ Ned R. Fogelsonger Director March 26 , 1998
Ned R. Fogelsonger
/s/ Galen L. Myers Chairman of the March 26 , 1998
Galen L. Myers Board and Director
/s/ Denver L. Tuckey________ Director March 26 , 1998
Denver L. Tuckey
/s/ Andrea Pugh_____________ Director March 26 , 1998
Andrea Pugh
- -25-
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
1. Orrstown Bank, Orrstown, Pennsylvania; a state-chartered bank
organized under the Pennsylvania Banking Code of 1965.
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 stockholders' equity 4
Statements of cash flows 5 and 6
Notes to consolidated financial statements 7 - 20
ACCOMPANYING FINANCIAL INFORMATION
Selected five year financial data 21
Summary of quarterly financial data 22
Management's discussion and analysis
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Orrstown Financial Services, Inc.
Orrstown, Pennsylvania
We have audited the accompanying consolidated
balance sheets of Orrstown Financial Services, Inc. and its wholly-
owned subsidiary as of December 31, 1997 and 1996 and the related
consolidated statements of income, changes in stockholders' equity,
and cash flows for each of the three years ended December 31, 1997.
These consolidated financial statements are the responsibility of the
corporation's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Orrstown Financial Services, Inc. and its wholly-owned
subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years ended
December 31, 1997 in conformity with generally accepted accounting
principles.
Chambersburg, Pennsylvania
January 29, 1998
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS 1997
1996
(000 omitted)
Cash and due from banks $ 5,963 $ 5,236
Interest bearing deposits with banks 16 1,554
Federal funds sold 2,858 2,936
Securities available for sale 46,208 33,421
Federal Home Loan Bank, Federal Reserve and Atlantic Central
Bankers Bank stock, at cost which approximates market value 983 934
56,028 44,081
Loans
Commercial, financial and agricultural 10,275 8,401
Real estate - Mortgages 97,074 82,687
Real estate - Construction and land development 5,961 4,304
Consumer 15,021 13,534
128,331 108,926
Less: Allowance for loan losses ( 1,767) ( 1,620)
126,564 107,306
Bank premises and equipment, net 5,130 3,916
Accrued interest receivable 1,299 929
Other assets 1,221 1,324
Total assets $ 190,242 $ 157,556
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 17,649 $ 16,322
Interest bearing 142,931 120,937
160,580 137,259
Federal funds purchased and securities sold under agreements
to repurchase 235 0
Other borrowed funds 8,334 2,339
Accrued interest and other liabilities 2,828 2,102
Total liabilities 171,977 141,700
Stockholders' equity
Common stock: No par value - $ .2083 stated value per share,
10,000,000 shares authorized with 1,025,094 shares issued at
December 31, 1997; 976,863 shares issued at December 31, 1996 214
20
4
Additional paid-in capital 12,352 10,625
Retained earnings 4,730 4,786
Unrealized holding gains, net of tax - $ 499 - 1997
and $ 124 - 1996 969 241
Total stockholders' equity 18,265
15,856
Total liabilities and stockholders' equity $ 190,242 $
157,556
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -2-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996 and 1995
1997 1996
1995
(000 omitted)
Interest and Dividend Income
Interest and fees on loans $ 10,702 $ 9,675 $ 8,996
Interest and dividends on investment securities
U.S. Government and agencies 1,548 1,265 1,083
Exempt from federal income tax 935 601 529
Other investment income 265 477 221
Total interest and dividend income 13,450 12,018
10,829
Interest Expense
Interest on deposits 5,495 4,981 4,349
Interest on borrowed money 327 158 193
Total interest expense 5,822 5,139 4,542
Net interest income 7,628 6,879 6,287
Provision for loan losses 215 240 270
Net interest income after provision for loan losses 7,413
6,639
6,017
Other Income
Service charges on deposit accounts 601 477 375
Other service charges, commissions, and fees 341 258 218
Trust department income 490 384 297
Securities gains (losses) 3 ( 5) ( 45)
Other income 116 126 90
Total other income 1,551 1,240 935
Net interest income and other income 8,964 7,879
6,952
Other Expenses
Salaries and employee benefits 2,901 2,621 2,326
Occupancy expense of bank premises, net, and furniture and
equipment expenses 764 665 559
FDIC insurance premiums 17 2 125
Other operating expenses 1,702 1,505 1,246
Total other expenses 5,384 4,793 4,256
Income before income tax 3,580 3,086 2,696
Applicable income tax 974 838 742
Net income $ 2,606 $ 2,248 $ 1,954
Per share data
Net income $ 2.54 $ 2.19 $ 1.91
Dividends $ .881 $ .676 $ .584
Weighted average shares outstanding 1,025323 1,025,706` 1,026,307
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -3-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
Unrealized
Additional
Holding
Common Paid-In Retained Gains
Stock Capital Earnings
(Losses)
(000 omitted)
Balance, December 31, 1994 $ 194 $ 9,393 $ 3,133 ($ 367)
Net income 0 0 1,954 0
Cash dividends ($ .584 per share) 0 0 ( 599) 0
Stock dividends issued 10 1,232 ( 1,242) 0
Cash paid in lieu of fractional stock
dividends 0 0 ( 14) 0
Unrealized gain on investment securities
available for sale 0 0 0 939
Balance, December 31, 1995 204 10,625 3,232 572
Net income 0 0 2,248 0
Cash dividends ($ .676 per share) 0 0 ( 694) 0
Unrealized loss on investment
securities available for sale 0 0 0 ( 331)
Balance, December 31, 1996 204 10,625 4,786 241
Net income 0 0 2,606 0
Cash dividends ($ .881 per share) 0 0 ( 903) 0
Stock dividends issued 10 1,727 ( 1,737) 0
Cash paid in lieu of fractional stock
dividends 0 0 ( 22) 0
Unrealized gain on investment
securities available for sale 0 0 0 728
Balance, December 31, 1997 $ 214 $ 12,352 $ 4,730 $ 969
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -4-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
(000 omitted)
Cash flows from operating activities:
Net income $ 2,606 $ 2,248 $ 1,954
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 364 329 265
Provision for loan losses 215 240 270
Deferred income taxes ( 7) ( 62) ( 78)
(Gain) loss on disposal of other real estate 0 5 (
4)
(Gain) loss on disposal of bank premises and
equipment 0 ( 20) 1
Securities (gains) losses ( 3) 5 45
(Increase) decrease in accrued interest receivable ( 370)
64
(
260)
Increase (decrease) in accrued interest payable 480 278 290
Other net ( 59) 64 ( 2)
Net cash provided by operating activities 3,226 3,151 2,481
Cash flows from investing activities:
Net (increase) decrease in interest bearing deposits
with banks 1,538 ( 265) ( 1,039)
Sales of available for sale securities 15 2,392 6,387
Maturities of available for sale securities 3,114 3,508 6,694
Purchases of available for sale securities ( 14,811) ( 9,134)
(
18,843)
Purchases of FHLB stock ( 49) ( 65) ( 61)
Net (increase) in loans ( 19,473) ( 6,291) ( 12,055)
Proceeds from sale of bank premises and equipment 0 36 0
Proceeds from disposal of other real estate 0 142 22
Purchases of bank premises and equipment ( 1,537) ( 1,178)
(
266)
Net cash (used) by investing activities ( 31,203) ( 10,855) (
19,161)
Cash flows from financing activities:
Net increase in deposits 23,321 9,929 19,997
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase 235 0 (
644)
Proceeds from debt 6,000 0 0
Payment on debt ( 5) ( 6) ( 6)
Cash dividends paid ( 903) ( 694) ( 599)
Cash paid in lieu of fractional stock dividends ( 22) 0
(
14)
Net cash provided by financing activities 28,626 9,229 18,734
Net increase in cash and cash equivalents 649 1,525 2,054
Cash and cash equivalents, beginning balance 8,172 6,647 4,593
Cash and cash equivalents, ending balance $ 8,821 $ 8,172 $ 6,647
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -5-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
(000 omitted)
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest $ 5,343 $ 5,418 $ 4,252
Income taxes 974 892 800
Supplemental schedule of noncash investing and
financing activities:
Other real estate acquired in settlement of loans 0 169 22
Unrealized gain (loss) on investment securities
available for sale (net of tax effects) 728 ( 331) 939
Other real estate transferred to bank premises 0 0 136
Property, equipment and other assets purchased with
assumption of deposit liabilities in connection with
branch acquisition 0 0 968
The Notes to Consolidated Financial Statements are an integral part of
these statements.
- -6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Nature of operations
Orrstown Financial Services, Inc.'s primary activity
consists of owning and supervising its subsidiary, Orrstown
Bank, which is engaged in providing banking and bank related services
in South Central Pennsylvania, principally Franklin and
Cumberland Counties. Its seven branches are located in
Shippensburg (2), Carlisle (2), Spring Run, Orrstown, and
Chambersburg, Pennsylvania.
Principles of consolidation
The consolidated financial statements include the
accounts of the corporation and its wholly-owned
subsidiary, Orrstown Bank. All significant intercompany
transactions and accounts have been eliminated.
Use of estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to
significant change relate to the determination of the
allowance for losses on loans and the valuation of real
estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the
determination of the allowances for losses on loans and
foreclosed real estate, management obtains independent
appraisals for significant properties.
While management uses available information to
recognize losses on loans and foreclosed real estate,
future additions to the allowances may be necessary
based on changes in local economic conditions. In
addition, regulatory agencies, as an integral part of their
examination process, periodically review the
corporation's allowances for losses on loans and
foreclosed real estate. Such agencies may require the
corporation to recognize additions to the allowances
based on their judgments about information available to
them at the time of their examination. Because of these
factors, management's estimate of credit losses inherent
in the loan portfolio and the related allowance may
change in the near term.
Investment securities
In accordance with Statement of Financial Accounting
Standards No. 115 (SFAS 115) the Bank may segregate
their investment portfolio into three specific categories: "securities
held to maturity", "trading securities" and "securities
available for sale". Securities held to maturity are to
be accounted for at their amortized cost; securities classified as trading
securities are to be accounted for at their current
market
value with unrealized gains and losses on such
securities included in current period earnings; and securities classified
as available for sale are to be accounted for at
their
current market value with unrealized gains and losses on
such securities to be excluded from earnings and reported net as a
separate component of stockholders' equity.
- -7-
Note 1. Summary of Significant Accounting Policies (Continued)
Investment securities (Continued)
Management determines the appropriate classification of
securities at the time of purchase. If management has the
intent and the corporation has the ability at the time of
purchase to hold securities until maturity or on a long-
term basis, they are classified as securities held to
maturity and carried at amortized historical cost.
Securities to be held for indefinite periods of time and
not intended to be held to maturity or on a long-term
basis are classified as available for sale and carried at fair
value. Securities held for indefinite periods of time
include securities that management intends to use as part
of its asset and liability management strategy and that
may be sold in response to changes in interest rates,
resultant prepayment risk and other factors related to
interest rate and resultant prepayment risk changes.
The corporation has classified all of its investment
securities as "available for sale".
Realized gains and losses on dispositions are based on
the net proceeds and the adjusted book value of the
securities sold, using the specific identification method.
Unrealized gains and losses on investment securities
available for sale are based on the difference between
book value and fair value of each security. These gains
and losses are credited or charged to shareholders'
equity, whereas realized gains and losses flow through
the corporation's results of operations.
Cash flows
For purposes of the Statements of Cash Flows, the
corporation has defined cash and cash equivalents as
those amounts included in the balance sheet captions
"Cash and Due From Banks" and "Federal Funds Sold".
As permitted by Statement of Financial Accounting
Standards No. 104, the corporation has elected to present
the net increase or decrease in deposits in banks, loans,
and time deposits in the Statements of Cash Flows.
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.
Advertising
The corporation follows the policy of charging costs of
advertising to expense as incurred. Advertising expense
was $ 148,654, $ 86,910 and $ 54,224 for 1997, 1996 and 1995,
respectively.
- -8-
Note 1. Summary of Significant Accounting Policies (Continued)
Loans and allowance for loan losses
Loans are stated at the amount of unpaid principal,
reduced by an allowance for loan losses. Interest on loans
is calculated by using the simple interest method on daily
balances of the principal amount outstanding. Loan
origination and commitment fees and certain direct costs
are deferred and the net amount amortized over the
contractual life of the loan as an adjustment of the loan's
yield. If a loan is sold, any deferred fees not yet
amortized are recognized as an adjustment to the gain or
loss on sale. The allowance for loan losses is established
through a provision for loan losses charged to expenses.
Loans are charged against the allowance when
management believes that the collectibility of the
principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb possible
losses on existing loans that may become uncollectible,
based on evaluations of the collectibility of loans and
prior loan loss experience. The evaluations take into
consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, and current economic
conditions that may affect the borrowers' ability to pay.
Nonaccrual loans
The accrual of interest income on loans ceases when
principal or interest is past due 90 days or more and
collateral is inadequate to cover principal and interest or
immediately if, in the opinion of management, full
collection is unlikely. Interest accrued but not collected
as of the date of placement on nonaccrual status is
reversed and charged against current income unless fully
collateralized. Subsequent payments received either are
applied to the outstanding principal balance or recorded
as interest income, depending on management's
assessment of the ultimate collectibility of principal.
Foreclosed real estate
Real estate properties acquired through, or in lieu of,
loan foreclosure are to be sold and are initially recorded at the
lower of carrying value or fair value less cost to sell of the
underlying collateral. After foreclosure, valuations are
periodically performed by management and the
real estate is carried at the lower of carrying amount or fair value less
cost to sell.
Earnings per share of common stock
Earnings per share of common stock were computed
based on a weighted average shares of common stock
outstanding of 1,025,323 in 1997; 1,025,706 in 1996 and
1,026,307 in 1995 after giving retroactive recognition to
5% stock dividends issued in May 1997, and June 1995.
Federal income taxes
For financial reporting purposes the provision for loan
losses charged to operating expense is based on
management's judgment, whereas for federal income tax
purposes, the amount allowable under present tax law is
deducted. Additionally, deferred compensation is
charged to operating expense in the period the liability is
incurred for financial reporting purposes, whereas for
federal income tax purposes, these expenses are deducted
when paid. As a result of these, and timing differences
in depreciation expense, deferred income taxes are
provided in the financial statements. See Note 10 for
further details.
- -9-
Note 1. Summary of Significant Accounting Policies (Continued)
Fair values of financial instruments
Statement of Financial Accounting Standards No. 107,
Disclosures About Fair Value of Financial Instruments,
requires disclosure of fair value information about
financial instruments, whether or not recognized in the
balance sheet. In cases where quoted market prices are
not available, fair values are based on estimates using
present value or other
valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many
cases, could not be realized in immediate settlement of
the instruments. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent
the underlying value of the corporation.
The following methods and assumptions were used by the
corporation in estimating fair values of financial
instruments as disclosed herein:
Cash and Cash Equivalents. The carrying amounts
of cash and short-term instruments approximate their
fair value.
Securities to be Held to Maturity and Securities
Available for Sale. Fair values for investment
securities are based on quoted market prices.
Loans Receivable. For variable-rate loans that
reprice frequently and have no significant change in
credit risk, fair values are based on carrying values.
Fair values for fixed rate loans are estimated using
discounted cash flow analyses, using interest rates
currently being offered for loans with similar terms
to borrowers of similar credit quality. Fair values
for impaired loans are estimated using discounted
cash flow analyses or underlying collateral values,
where applicable.
Deposit Liabilities. The fair values disclosed for
demand deposits are, by definition, equal to the
amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of
variable-rate, fixed-term money market accounts and
certificates of deposit approximate their fair values at
the reporting date. Fair values for fixed-rate
certificates of deposits and IRA's are estimated using
a discounted cash flow calculation that applies
interest rates currently being offered to a schedule of
aggregated expected maturities on time deposits.
Short-Term Borrowings. The carrying amounts of
federal funds purchased, borrowings under
repurchase agreements, and other short-term
borrowings maturing within 90 days approximate
their fair values. Fair values of other short-term
borrowings are estimated using discounted cash flow
analyses based on the Bank's current incremental
borrowing rates for similar types of borrowing
arrangements.
Long-Term Borrowings. The fair value of the
Bank's long-term debt is estimated using a discounted
cash flow analysis based on the Bank's current
incremental borrowing rate for similar types of
borrowing arrangements.
Accrued Interest. The carrying amounts of accrued
interest approximate their fair values.
Off-Balance-Sheet Instruments. The Bank generally
does not charge commitment fees. Fees for standby
letters of credit and their off-balance-sheet
instruments are not significant.
- -10-
Note 2. Investments
At December 31, 1997 and 1996 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)
1997
U. S. Treasury securities and obligations
of U. S. Government corporations
and agencies $ 12,837 $ 174 $ 1 $ 13,010
Obligations of states and political subdivisions 17,611 961
0 18,572
Mortgage-backed securities 13,812 122 34 13,900
Equity securities 480 246 0
726
Totals $ 44,740 $ 1,503 $ 35 $ 46,208
1996
U. S. Treasury securities and obligations
of U. S. Government corporations
and agencies $ 10,830 $ 65 $ 36 $ 10,859
Obligations of states and political subdivisions 11,397 381
10 11,768
Mortgage-backed securities 10,413 37 149 10,301
Equity securities 417 78 2
493
Totals $ 33,057 $ 561 $ 197 $ 33,421
The amortized cost and fair values of investment securities
available for sale at December 31, 1997, by expected
maturity are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or
prepayment penalties.
Amortized
Cost Fair Value
(000 omitted)
Due in one year or less $ 1,743 $
1,747
Due after one year through five years 9,814 10,018
Due after five years through ten years 5,903 6,185
Due after ten years 12,988 13,632
Mortgage-backed securities 13,812 13,900
Equity securities 480 726
$ 44,740 $ 46,208
- -11-
Note 2. Investments (Continued)
Proceeds from sales of securities available for sale during
1997, 1996 and 1995 were
$ 22,371, $ 2,391,746 and $ 6,369,602, respectively. Gross
gains and losses on 1997 sales were $ 10,045 and $ 6,660,
respectively. Gross gains and losses on 1996 sales were $
16,440 and $ 21,455, respectively. Gross gains and losses
on 1995 sales were $ 37,559 and $ 53,389, respectively.
The bank owns $ 739,800 of Federal Home Loan Bank
stock, $ 54,000 of Atlantic Central Bankers Bank stock and $
189,000 of Federal Reserve Bank stock at December 31,
1997. At December 31, 1996 the bank's stock ownership
was $ 691,200 of Federal Home Loan Bank stock, $ 54,000
of Atlantic Central Bankers Bank stock and $ 189,000 of
Federal Reserve Bank stock. Market value approximates cost
since none of the stocks are actively traded.
Securities carried at $ 19,198,000 and $ 10,517,000 at
December 31, 1997 and 1996, respectively, were pledged to
secure public funds and for other purposes as required or
permitted by law.
Note 3. Concentration of Credit Risk
The bank grants agribusiness, commercial, residential and
consumer loans to customers in South Central Pennsylvania,
principally Franklin and Cumberland Counties. The
concentrations of credit by type of loan are set forth on the
face of the balance sheet. The bank maintains a diversified
loan portfolio and evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the bank upon the extension of credit,
is based on management's credit evaluation of the customer.
Collateral held varies but generally includes equipment and
real estate.
Note 4. Allowance for Loan Losses
Activity in the allowance for loan losses is summarized as
follows:
1997
1996 1995
(000 omitted)
Balance at beginning of period $ 1,620 $ 1,433 $ 1,200
Recoveries 15 15 14
Provision for loan losses
charged to income 215 240
270
Total 1,850 1,688 1,484
Losses 83 68 51
Balance at the end of period $ 1,767 $ 1,620 $ 1,433
- -12-
Note 5. Bank Premises and Equipment
A summary of bank premises and equipment is as follows:
1997 1996
(000 omitted)
Land $ 606 $ 424
Buildings and improvements 3,749 3,107
Leasehold improvements 173 0
Furniture and equipment 2,840 2,202
Construction in progress 0 120
Total 7,368 5,853
Less accumulated depreciation and amortization 2,238
1,937
Bank premises and equipment, net $ 5,130
$ 3,916
Depreciation expense amounted to $ 323,652 in 1997,
$ 287,624 in 1996, and $ 250,769 in 1995.
Note 6. Loans to Related Parties
The bank has granted loans to the officers and directors of
the corporation and its subsidiary and to their associates.
Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at
the time for comparable transactions with unrelated persons
and do not involve more than normal risk of collectibility.
The aggregate dollar amount of these loans was $ 2,350,000
and $ 2,005,000 at December 31, 1997 and 1996,
respectively. During 1997, $ 1,313,000 of new loans were
made and repayments totalled
$ 968,000. During 1996, $ 830,000 of new loans were made
and repayments totalled $ 793,000.
Outstanding loans to bank employees totalled $ 750,000 and
$ 610,000 for years ended December 31, 1997 and 1996,
respectively.
Note 7. Nonaccrual Loans
The following table shows the principal balances of
nonaccrual loans as of December 31:
1997
1996 1995
Nonaccrual loans $ 473,000 $ 14,000 $
132,000
Interest income that would have been accrued
at original contract rates $ 30,835 $ 560
$ 1,616
Amount recognized as interest income 5,829
0 0
Foregone revenue $ 25,006 $ 560
$ 1,616
Impairment of loans having recorded investments of $
404,678 at December 31, 1997 has been recognized in
accordance with Statements of Financial Accounting
Standards No. 114 and 118. The average recorded
investment in impaired loans during 1997 was $ 405,262.
Total allowance for loan losses related to impaired loans was
$ 60,750 at December 31, 1997. Interest income on
impaired loans of $ 5,829 was recognized for cash payments
received in 1997.
The corporation had no impairment of loans during 1996 as
defined by Statement of
Financial Accounting Standard No. 114.
- -13-
Note 8. Financial Instruments With Off-Balance-Sheet Risk
The bank is a party to financial instruments with off-balance-
sheet risk in the normal course of business to meet the financial
needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments
include commitments to extend credit and standby letters of credit.
Those instruments involve, to varying degrees, elements of credit
and interest
rate risk in excess of the amount recognized in the balance sheets. The
contract amounts of those instruments reflect the extent of
involvement the bank has in particular classes of financial
instruments.
The bank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument
for commitments to extend credit and standby letters of credit
and financial guarantees written is represented by the
contractual amount of those instruments. The bank uses the
same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
Contract or
Notional Amount
1997 1996
(000 omitted)
Financial instruments whose contract amounts
represent credit risk at December 31:
Commitments to extend credit $
23,852 $ 20,691
Standby letters of credit and financial guarantees
written 2,811 3,014
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The bank evaluates each customer's
creditworthiness on a case- by-case basis. The amount of collateral
obtained if deemed necessary by the bank upon extension of
credit is based on management's credit evaluation of the
customer. Collateral held varies but
may include accounts receivable, inventory, real estate,
equipment, and income-producing commercial properties.
Standby letters of credit and financial guarantees written are
conditional commitments issued by the bank to guarantee the
performance of a customer to a third party. Those
guarantees are primarily issued to support public 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 bank holds collateral
supporting those commitments when deemed necessary by
management.
Note 9. Employee Benefit Plans
The bank maintains a 401(k) profit-sharing plan for those
employees who meet the eligibility requirements set forth in
the plan. Employer contributions to the plan are based on
bank performance and are at the discretion of the bank's
Board of Directors. In addition, there is a provision for an
employer match of 50 cents on the dollar for employee
contributions up to 6% of the employees' eligible
compensation. Substantially all of the bank's employees are
covered by the plan and the contribution charged to
operations was $ 319,182, $ 306,379, and $ 260,334 for
1997, 1996, and 1995, respectively.
The bank has a deferred compensation arrangement with
certain present and former board directors whereby a director
or his beneficiaries will receive a monthly retirement benefit
at age 65. The arrangement is funded by an amount of life
insurance on the participating director calculated to meet the
bank's obligations under the compensation agreement. The
cash value of the life insurance policies is an unrestricted
asset of the bank. The estimated present value of future
benefits to be paid, which are included in other liabilities,
amounted to $ 166,237 and $ 171,331 at December 31, 1997
and 1996, respectively. Total annual expense for this
deferred compensation plan was $ 19,064 for 1997, $ 20,153
for 1996 and $ 19,064 for 1995.
- -14-
Note 9. Employee Benefit Plans (Continued)
The bank 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 Bank's trust department. Total
amount contributed to the plan was $ 46,425, $ 55,950 and $
48,273 for 1997, 1996 and 1995, respectively.
Note 10. Income Taxes
The components of federal income tax expense are
summarized as follows:
1997
1996 1995
(000 omitted)
Current year provision $ 981 $ 900 $ 820
Deferred income taxes (benefits) ( 7) ( 62)
( 78)
Net federal income tax expense $ 974
$ 838 $ 742
Federal income taxes were computed after reducing pretax
accounting income for non-taxable income in the amount of $
969,000, $ 661,000, and $ 599,000 for 1997, 1996, and
1995, respectively.
A reconciliation of the effective applicable income tax rate to
the federal statutory rate is as follows:
1997 1996 1995
Federal income tax rate 34.0% 34.0% 34.0%
Reduction resulting from:
Nontaxable interest income and deferred taxes
6.8 6.8 6.5
Effective income tax rate 27.2% 27.2% 27.5%
Deferred tax liabilities have been provided for taxable
temporary differences related to accumulated depreciation
and unrealized gains on available for sale securities.
Deferred tax assets have been provided for deductible
temporary differences related to the allowance for loan
losses, directors' deferred compensation and unrealized
losses on available for sale securities. The net deferred tax
assets (liabilities) included in the accompanying consolidated
balance sheets include the following components:
1997 1996
Total deferred tax assets $ 625,000 $
553,000
Total deferred tax liabilities ( 696,000) (
256,000)
Net deferred tax asset (liability) ($ 71,000)
$ 297,000
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 11. Deposits
Included in interest bearing deposits at December 31 are
NOW and Super NOW account balances totalling $
22,721,000 and $ 18,163,000 for 1997 and 1996,
respectively. Also included in interest bearing deposits at
December 31, 1997 and 1996 are money market account
balances totalling $ 23,423,000 and $ 10,569,000,
respectively.
At December 31, 1997 and 1996 time deposits of $ 100,000
and over aggregated $ 10,235,000 and $ 7,767,000, respectively.
Interest expense on time deposits of $ 100,000 and over was
$ 497,000; $ 373,000; and
$ 337,000 for 1997, 1996 and 1995, respectively.
- -15-
Note 11. Deposits (Continued)
At December 31, 1997 the scheduled maturities of
certificates of deposit are as follows:
1998 $ 43,378,000
1999 22,193,000
2000 4,518,000
2001 1,158,000
2002 1,036,000
2003 and thereafter 906,000
$ 73,189,000
The bank accepts deposits of the officers and directors of the
corporation and its subsidiary on the same terms, including
interest rates, as those prevailing at the time for comparable
transactions with unrelated persons. The aggregate dollar
amount of deposits of officers and directors totaled $ 965,000
and $ 1,103,000 at December 31, 1997 and 1996,
respectively.
Note 12. 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:
1997 1996
Average balance during the year $ 49,400 $ 0
Average interest rate during the year 4.94% 0
Maximum month-end balance during the year $ 500,000
$ 0
Securities underlying the agreements at year-end:
Carrying value $ 485,280 $ 0
Estimated fair value $ 515,600 $ 0
At December 31, the corporation had long-term notes
outstanding with the Federal Home Loan Bank of Pittsburgh
as follows:
- - - - - - - Amount - - - - - - -
1997 1996 Maturity
Date Interest Rate
$ 1,000,000 $ 1,000,000 1/04 6.42%
1,000,000 1,000,000 4/03 6.58%
3,000,000 0 3/02 5.51%
3,000,000 0 10/02
5.73%
$ 8,000,000 $ 2,000,000
Interest rates are fixed and interest only is paid on a monthly
basis. The notes contain prepayment penalty charges, but
management
has no intention to pay off early.
In addition to the aforementioned long-term notes the bank
obtained a term loan in 1994 totaling $ 350,000 with the
Federal Home Loan Bank of Pittsburgh. The maturity dates
and applicable fixed interest rates on the remaining balance at
December 31 are as follows:
- - - - - - Amount - - - - - - -
1997 1996 Maturity
Date Rate
$ 0 $ 5,570 2/97 4.61%
5,863 5,863 2/98 5.00%
6,173 6,173 2/99 5.21%
6,498 6,498 2/00 5.48%
315,579 315,579 2/01 5.58%
$ 334,113 $ 339,683
- -16-
Note 12. Liabilities For Borrowed Money (Continued)
In addition, the bank has available a $ 10,000,000 line of
credit with the Federal Home Loan Bank of Pittsburgh.
Collateral for outstanding advances and the line consists of
certain securities and the corporation's 1-4 family mortgage
loans totaling $ 65,971,000 at December 31, 1997. The
corporation also has available an unused line of credit with
Atlantic Central Bankers Bank of $ 3.5 million at
December 31, 1997.
Total interest on the aforementioned borrowings charged to
operations was $ 308,405, $ 148,859 and $ 149,083, for
1997, 1996 and 1995, respectively.
Note 13. Orrstown Financial Services, Inc. (Parent Company
Only)
Financial Information
The following are the condensed balance sheets, income
statements and statements of cash flows for the parent
company:
Balance Sheets
December 31
Assets
1997 1996
(000 omitted)
Cash $ 115 $ 107
Securities available for sale 726 493
Investment in Orrstown Bank 17,507 15,321
Furniture and equipment (net of depreciation) 0
1
Total assets $ 18,348 $ 15,922
Liabilities
Accrued management fee $ 0 $ 40
Other liabilities 83 26
Total liabilities 83 66
Stockholders' Equity
Common stock, no par value - $ .2083 stated
value per share, 10,000,000 shares authorized
with 1,025,094 shares issued at December 31, 1997;
976,863 shares issued at December 31, 1996 214 204
Additional paid-in capital 12,352 10,625
Retained earnings 4,730 4,786
Unrealized holding gains 969 241
Total stockholders' equity 18,265
15,856
Total liabilities and stockholders' equity
$ 18,348 $ 15,922
Income Statements
Years Ended December 31
1997 1996 1995
(000 omitted)
Interest and dividend income $ 16 $ 17 $ 20
Net gain on sale of investment 10 0 0
Cash dividends from wholly-owned subsidiary 1,064
796 614
Equity in undistributed income of subsidiary 1,570
1,531 1,401
2,660 2,344 2,035
Less: Operating expenses 54 96 81
Net income $ 2,606 $ 2,248 $ 1,954
- -17-
Note 13. Orrstown Financial Services, Inc. (Parent Company
Only)
Financial Information (Continued)
Statements of Cash Flows
Years Ended December 31
1997 1996 1995
(000 Omitted)
Cash flows from operating activities:
Net income $ 2,606 $ 2,248 $ 1,954
Adjustments to reconcile net income to cash
provided by operating activities:
Security (gains) ( 10) 0
0
Equity in undistributed income of subsidiary
( 1,570) ( 1,531) ( 1,401)
Increase (decrease) in other liabilities (
40) 0 34
Net cash provided by operating activities 986 717
587
Cash flows from investing activities:
Net decrease in interest-bearing deposits
with banks 0 0 250
Purchase of available for sale securities ( 75)
( 102) ( 52)
Sales of available for sale securities 22 0
0
Net cash provided (used) by investing activities (
53) ( 102) 198
Cash flows from financing activities:
Cash dividends paid ( 903) (
694) ( 599)
Cash paid in lieu of fractional stock dividends (
22) 0 ( 14)
Net cash (used) by financing activities ( 925)
( 694) ( 613)
Net increase (decrease) in cash 8 ( 79)
172
Cash, beginning balance 107 186
14
Cash, ending balance $ 115 $ 107 $ 186
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Income taxes $ 0 $ 8 $ 6
Note 14. Regulatory Matters
Dividends paid by Orrstown Financial Services, Inc. are
generally provided from the bank's dividends to the parent
company. Under provisions of the Pennsylvania Banking
Code, cash dividends may be paid from accumulated net
earnings (retained earnings) as long as minimum capital
requirements are met. The minimum capital requirements
stipulate that the bank's surplus or additional paid-in capital
be equal to the amount of capital. Orrstown Bank is well
above these requirements and the balance of $ 10,402,000 in
its retained earnings at December 31, 1997 is fully available
for cash dividends. Orrstown Financial Services' balance of
retained earnings at December 31, 1997 is $ 4,730,000 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.
- -18-
Note 14. Regulatory Matters (Continued)
Regulatory authorities have established capital guidelines in
the form of the "leverage ratio" and "risk-based capital
ratios". The leverage ratio compares capital to total balance
sheet assets, while the risk-based ratios compare capital to
risk-weighted assets and off-balance-sheet activity in order to
make capital levels more sensitive to risk profiles of
individual banks. A comparison of Orrstown Financial
Services' capital ratios to regulatory minimums at December
31 is as follows:
Orrstown
Financial Services Regulatory Minimum
1997
1996 Requirements
Leverage ratio 9.7% 9.8% 3%
Risk-based capital ratio
Tier I (core capital) 12.7% 13.2% 4%
Combined Tier I and Tier II
(core capital plus allowance
for loan losses) 14.0% 14.6% 8%
Note 15. Leases
The bank leases land and building space associated with its
downtown Carlisle office and various remote automated teller
machines under agreements which expire at various times
from 1998 through 2002. Total rent expense charged to
operations in connection with these leases was
$ 22,350, $ 14,260, and $ 16,920 for 1997, 1996, and 1995,
respectively.
The total minimum rental commitment under operating leases
at December 31, 1997 is as follows:
Due in the year ending December 31:
1998 $ 23,203
1999 24,266
2000 25,228
2001 25,115
2002 5,900
Note 16. Compensating Balance Arrangements
Required deposit balances at the Federal Reserve were $
65,000 at December 31, 1997 and 1996. Required deposit
balances at Atlantic Central Bankers Bank were $ 585,000 at
December 31, 1997 and 1996. These balances are maintained
to cover processing costs and service charges. An
additional $ 22,800 is on deposit with First Union National
Bank of Florida as a reserve
for potential clearing losses related to the credit card operations.
- -19-
Note 17. Fair Value of Financial Instruments
The estimated fair values of the corporation's financial
instruments were as follows at December 31:
- - - - - - 1997 - -
- - - - - - - - - - - 1996 - - - - - -
Carrying
Fair Carrying Fair
Amount
Value Amount Value
(000 Omitted)
FINANCIAL ASSETS
Cash and short-term investments $ 8,837
$ 8,837 $ 9,726 $ 9,726
Securities available for sale 46,208 46,208 33,421
33,421
Restricted bank stocks 983 983 934 934
Loans 128,331 108,926
Allowance for loan loses ( 1,767)
( 1,620)
Net loans 126,564 128,164
107,306 108,774
Accrued interest receivable 1,299
1,299 929 929
Total financial assets $ 183,891 $
185,491 $ 152,316 $ 153,784
FINANCIAL LIABILITIES
Deposits $ 160,580 $ 160,807 $
137,259 $ 137,451
Borrowed funds 8,569 8,604 2,339 2,348
Accrued interest payable 1,645
1,645 1,165 1,165
Total financial liabilities $ 170,794 $
171,056 $ 140,763 $ 140,964
- -20-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
SELECTED FIVE-YEAR FINANCIAL DATA
1997 1996 1995 1994
1993
Income (000 omitted)
Interest income $ 13,450 $ 12,018 $ 10,829 $ 8,571 $ 8,250
Interest expense 5,822 5,139 4,542 3,241
3,129
Provision for loan losses 215 240 270
71
121
Net interest income after
provision for loan losses 7,413 6,639 6,017 5,259
5,000
Securities gains (losses) 3 ( 5) ( 45) 95
(
5)
Other operating income 1,548 1,245 980 765 607
Other operating expenses 5,384 4,793 4,256
3,964
3,593
Income before income taxes 3,580 3,086 2,696 2,155
2,009
Applicable income tax 974 838 742
520
525
Net income $ 2,606 $ 2,248 $ 1,954 $ 1,635
$ 1,484
Per share amounts are based on following weighted averages:
1997 - 1,025,323 1995 - 1,026,307
1993 - 1,026,812
1996 - 1,025,706 1994 - 1,026,307
Income before income taxes $ 3.49 $ 3.01 $ 2.62 $
2.10
$ 1.96
Applicable income taxes .95 .82 .72 .51 .51
Net income 2.54 2.19 1.91 1.59 1.45
Cash dividend paid .88 .68 .58 .50 .45
Book value 17.82 15.46 14.27 12.04
11.31
Year-End Balance Sheet Figures (000 omitted)
Total assets $ 190,242 $ 157,556 $ 145,998 $ 123,004 $
113,581
Total loans 128,331 108,926 102,857 90,839
75,5
74
Total investment securities 47,191 34,355 31,563 24,318
30,3
81
Deposits-noninterest bearing 17,649 16,322 13,962 13,262
13,4
17
Deposits-interest bearing 142,931 120,937 113,368 93,103
85,1
65
Total deposits 160,580 137,259 127,330 106,365
98,582
Liabilities for borrowed money 8,569 2,339 2,345 2,350
1,000
Total stockholders' equity 18,265 15,856 14,633 12,353
11,597
Ratios
Average equity/average assets 9.84 9.80 10.00 10.34 10.23
Return on average equity 15.37 14.90 14.40 13.36
13.24
Return on average assets 1.51 1.47 1.44 1.38 1.36
- -21-
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
SUMMARY OF QUARTERLY FINANCIAL DATA
The unaudited quarterly results of operations for the years ended December
31, 1997 and 1996
are as
follows:
1997
1996
($ 000 omitted Quarter Ended
Quarter Ended
except per share) Mar. 31 June 30 Sept. 30 Dec. 31
Mar. 31 June 30 Sept. 30
Dec. 31
Interest income $ 3,103 $ 3,316 $ 3,474 $ 3,557 $ 2,906 $ 2,994
$
3,054 $ 3,064
Interest expense 1,300 1,418 1,504 1,600 1,260
1,286
1,297 1,296
Net interest income 1,803 1,898 1,970 1,957 1,646 1,708
1,757 1,768
Provision for loan losses 45 45 45 80 60
60 60 60
Net interest income
after provision for
loan losses 1,758 1,853 1,925 1,877 1,586 1,648
1,697
1,708
Securities gains (losses) ( 5) 9 5 ( 6) (
4) 8 (
7) ( 2)
Other income 345 381 351 471 260 293 325 367
Other expenses 1,307 1,254 1,297 1,526 1,101
1,184
1,134 1,374
Operating income
before income taxes 791 989 984 816 741 765 881 699
Applicable income taxes 232 270 256 216 207
227
273 131
Net income $ 559 $ 719 $ 728 $ 600 $ 534
$
538
$ 608 $ 568
Net income applicable
to common stock
Per share data:
Net income $ .55 $ .70 $ .71 $ .58 $ .52 $ .52
$
.60 $ .55
- -22-
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, 1997, Orrstown Financial Services, Inc.
(the
Corporation) and its wholly-owned subsidiary Orrstown Bank (the Bank) recorded
net
income of $2,606,000, an increase of 15.9% over 1996 earnings of $2,248,000,
which
was a 15.0% increase over net income of $1,954,000 in 1995. Net income per
share
has increased over this time period from $1.91 in 1995 to $2.19 in 1996 and
$2.54 in
1997.
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 and the return on average equity.
The return
on average assets was 1.51% in 1997, 1.47% in 1996 and 1.44% in 1995. The
return
on average equity was 15.37% in 1997, 14.90% in 1996 and 14.40% in 1995.
A detailed discussion of elements contributing to the above average and
improving earnings performance is contained in the paragraphs that follow.
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 bank profits despite the industry wide push to enhance noninterest
income
over the past several years.
For the year ended December 31, 1997, net interest income totaled
$7,413,000, an increase of $774,000, or 11.7%, over 1996. The 1996 total was
$6,639,000, or 10.3%, over 1995. On a taxable equivalent basis, net interest
income
increased by 13.1% in 1997 to $8,127,000, following an 8.9% increase in 1996.
1997
gains are enhanced by increased utilization of tax exempt investments versus
previous
years. Marginal tax rates used in the taxable equivalent equation were 34% for
all
three years presented.
- -23-
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996
1995
Average Tax Tax Tax
Tax Tax Tax
(Dollars in Average Equivalent Equivalent Average Equivalent
Interest Average Equivalent
Equivalent
thousands) Balance Interest Rate Balance Interest
Rate
Balance Interest Rate
ASSETS:
Interest earning Assets:
Federal funds
sold and
interest bearing
bank balances 3,372 189 5.60% 7,637
409
5.36% 2,406 221 9.19%
Investment securities:
Taxable
investment
securities 25,360 1,624 6.40% 20,899 1,333 6.38%
18,35
5 1,083 5.90%
Tax exempt
investment
securities 15,983 1,417 8.86% 9,881 911
9.22% 8,488 802 9.44%
Total
investment
securities 41,343 3,041 7.35% 30,780
2,244 7.29% 26,843 1,885 7.02%
LOANS:
Taxable loans 116,811 10,669 9.13% 104,783 9,578 9.14%
96,45
5 8,926
9.25%
Tax exempt
loans 592 50 8.45% 996
91
9.13% 1,207 106 8.79%
Total loans 117,403 10,719 9.13% 105,779
9,669 9.14% 97,662 9,032 9.25%
Total interest
earning
assets 162,118 13,949 8.60% 144,196 12,322 8.55%
126,9
11
11,138 8.78%
Noninterest
earning Assets:
Cash and due
from banks 5,008 4,520 3,143
Bank premises
and equipment 4,443 3,486 2,727
Other assets 2,486 2,471 4,124
Less allowance
for loan losses ( 1,689) ( 1,528) (
1,257)
Total 172,366 153,145 135,648
Liabilities &
Stockholders' Equity
Interest bearing Liabilities:
Interest bearing
demand deposits 37,535 1,056 2.81% 27,601 681 2.47%
25,04
8 617 2.46%
Savings deposits 24,568 728 2.96% 25,934 773 2.98% 23,597
740 3.14%
Time deposits 68,161 3,711 5.44% 64,388 3,527 5.48%
53,95
3 2,992 5.55%
Short term
borrowings 218 12 5.50% 0 0 0 715 44 6.15%
- -24-
1997 1996
1995
Average Tax Tax Tax
Tax Tax Tax
(Dollars in Average Equivalent Equivalent Average Equivalent Interest
Average Equivalent
Equivalent
thousands) Balance Interest Rate Balance Interest
Rate
Balance Interest Rate
Long term
borrowings 5,322 315 5.92% 2,486
158
6.36% 2,474 149 6.02%
Total interest
bearing
liabilities 135,804 5,822 4.28% 120,409 5,139 4.27%
105,787 4,542 4.30%
Noninterest
bearing Liabilities:
Demand
deposits 17,665 16,078 13,833
Other 1,941 1,582 2,458
Total
liabilities 155,410 138,069
122,078
Stockholders'
Equity 16,956 15,076 13,570
TOTAL /
Cost of funds 172,366 3.59% 153,145
3.57% 135,648 3.58%
Net interest income/net
interest spread 8,127 4.32% 7,183 4.28%
6,596 4.48%
Net interest margin 5.01% 4.98%
5.20%
</TABLE>
- -25-
The Corporation's taxable equivalent net interest spread was 4.48% in 1995,
4.28% in 1996, and 4.32% in 1997. The net interest margin, which factors in
noninterest bearing funds sources, has moved from 5.20% to 4.98% to 5.01%,
respectively. Earning assets represented 94.1% of total assets in 1997, 94.2%
in 1996
and 93.6% in 1995. The allocation of growth dollars to interest bearing
categories has
been maintained at a very steady pace even while opening two new branch
banking
offices during 1997.
Volume factors were responsible for essentially all net interest income
growth
during 1996 and 1997. The successful establishment of two new offices in
1997, a
second Carlisle office in January and a Chambersburg office in November,
helped fuel
record deposit growth. Each new office exceeded its 1997 deposit goal and the
five
previously existing offices also enjoyed a good growth year. Deposits were up
10.4%
during 1997 on an average daily basis but increased 17.0% between December 31,
1996 and December 31, 1997 yearends. Interest bearing liabilities increased
12.8% on
average but 22.9% between December 31, 1996 and 1997. Noninterest demand
deposits grew 9.9% on average during 1997 and 8.1% between yearends. Interest
bearing liabilities, representing deposits and purchased funds, increased 12.8%
on
average during 1997 but 22.9% between yearends. Growth escalated in the latter
half
of 1997, as demonstrated by the aforementioned statistics. Mergers of local
competitors
have provided market opportunities for a solid community bank with a
competitive
array of products and the Bank has been able to fill that role.
On an average daily basis, assets grew 12.6% during 1997 and 12.9% during
1996. Earning assets grew 12.4% and 13.6% during 1997 and 1996, respectively.
Average daily loan growth represented only 47.0% of interest bearing asset
growth
and 46.4% of total asset growth during 1996 but increased to 64.9% of
interest bearing
asset growth and 60.5% of total asset growth during 1997. The increased flow
of funds
to the loan portfolio during 1997 fueled the 4 basis point increase in net
interest spread
and the 3 basis point increase in net interest margin. Loans outstanding
increased by
$11.6 million, or 11%, during 1997 and the loan portfolio yield held at 9.13%
versus
the 9.14% returned in 1996, despite significant refinancing activity during
the last half
of 1997. The slower loan portfolio growth realized in 1996 helped to account
for the
tightening of 1996's net interest margin by 22 basis points from 1995 levels.
Increased
use of tax exempt securities at attractive taxable equivalent yields and 10.6%
growth in
average daily free funds (interest earning assets less interest paying
liabilities) also
contributed to 1997's spread and margin increases.
Noninterest Income and Expense
Peer group data available within the industry show the Corporation
operating
annually with overhead expenditures near industry averages. The generation of
noninterest income at above average levels and the growth of such income at a
rate
exceeding the growth rate of noninterest expenses have enabled the Corporation
to
increase its net noninterest position as measured by the percentage coverage
that
noninterest income achieves versus noninterest expense. In addition, the
Corporation
has been able to improve its efficiency ratio (operating expenses as a
percentage of
noninterest income and tax equivalent net interest income thus, a lower
percentage is
better) to 55.2%, for 1997, versus 56.4% and 56.0% for 1996 and 1995,
respectively.
- -26-
Many banking industry analysts consider this the single best indicator of
operating
performance and the Corporation has succeeded in improving this ratio to an
above
average level when compared to both size and geographic peers.
- -27-
Other income increased $311,000, or 25.1% in 1997 due primarily to similar
increases in fees from fiduciary activities, service charges on deposit
accounts and
other service charges. The Corporation typically has very little securities
gain or loss
activity. The growth of trust department revenue has been steady and
significant in
recent years. All service charges and other sources of noninterest income are
reviewed
annually to help maintain current pricing levels.
Other expenses rose $591,000, or 12.3% in 1997 with roughly similar
increases across all categories. This represents a lower rate of growth than
the
Corporation has experienced in its balance sheet and has contributed to the
aforementioned efficiency ratio improvement. Noninterest expense growth
during 1997
was due primarily to the opening of two new full service branches and the
increased
furniture, equipment and staffing requirements that come with such a move.
Robust
growth at previously existing branches and an expanded computer network
have also
contributed to operating expense increases.
The Corporation has begun to prepare for year 2000 data processing issues.
A
year 2000 task force has been formed and began working during the second
quarter of
1997. The Corporation maintains no software source code. All operating
software is
licensed from third party providers. Vendors that provide software have been
contacted
and evaluation and testing has begun. Currently, there are neither material
problems
nor material expenditures anticipated. In addition, the Bank has sponsored a
year 2000
seminar for commercial customers and may sponsor more during 1998.
- -28-
ANALYSIS OF NONINTEREST INCOME AND EXPENSE
<TABLE>
<S> <C> <C> <C> <C>
<C>
Year Ended December 31
% Change
(Dollars in thousands) 1997 1996 1995
1997-1996 1996-1995
OTHER INCOME:
Service charges on deposit
accounts $ 601 $ 477 $ 375 26.0% 27.2%
Other service charges,
commissions and fees 341 258 218 32.2% 18.3%
Fiduciary income 490 384 297 27.6% 29.3%
Securities gains (losses) 3 (5) (45) -160.0% -88.9%
Other operating income 116 126 90 -7.9%
40.0%
$ 1,551 $ 1,240 $ 935 25.1% 32.6%
OTHER EXPENSE:
Salaries $ 2,076 $ 1,847 $ 1,628 12.4% 13.5%
Employee benefits 825 774 698 6.6% 10.9%
Occupancy and equipment expense 764 665 559 14.9% 19.0%
FDIC insurance premiums 17 2 125 850.0% -98.4%
Pennsylvania shares tax 132 119 107 10.9% 11.2%
Other operating expense 1,570 1,386 1,139 13.3%
21.7%
$ 5,384 $ 4,793 $ 4,256 12.3% 12.6%
Noninterest income as a %
of noninterest expense 28.8% 25.9% 22.0%
</TABLE>
- -29-
Federal Income Taxes
The Corporation's effective federal income tax rate for 1997 was 27.2%, as
compared to 27.2% in 1996 and 27.5% in 1995. Corporate income tax rates for
1998
are scheduled to stay at 1997 levels. The Corporation is firmly entrenched in
the 34%
bracket so all taxable income will be taxed at 34% in 1998. This, along with
anticipated growth, is expected to increase the Corporation's effective
federal income
tax rate to approximately 28% in 1998, assuming no retroactive change in
rates during
1998.
Asset Quality/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 such investments.
Loan 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 .06% of average outstanding loans
during
1997 and .05% of average 1996 loans. Nonperforming loans, as represented by
nonaccrual and restructured items, were only .36% and .01% of outstanding
loans at
December 31, 1997 and 1996, respectively. Loans 90 days or more past due and
still
accruing represented .51% and .19% of outstanding loans at December 31, 1997
and
1996, respectively.
Allowance for Loan Losses
Historically, the Corporation has had an enviable record regarding its
control
of loan losses, but lending is a banking service that inherently contains
elements of
risk. In order to assess this risk, an ongoing loan review process continually
evaluates
the current financial condition of commercial borrowers, local and national
economic
conditions, and the current level of delinquencies. Through this process, an
amount
deemed adequate to meet current growth and future loss expectations is
charged to
operations. The provision for loan losses amounted to $215,000, $240,000 and
$270,000 for 1997, 1996 and 1995, respectively. These provisions compared to
net
charge-offs of $83,000, $68,000 and $51,000 for 1997, 1996 and 1995,
respectively.
The allowance for loan losses was increased 9.1% during 1997 while loans
increased
17.8%. The reserve at December 31, 1997 represented 1.38% of loans
outstanding.
Net charge-offs for 1997 represented only .06% of average loans outstanding.
The
reserve at December 31, 1997 represented 26 years of coverage based upon 1997
net
charge-offs and 374% of nonaccrual loans. In addition, approximately 65% of
the
allowance was unallocated under internal evaluation techniques at December
31, 1997.
- -30-
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<S> <C> <C> <C> <C>
<C>
Year Ended
December 31
(Dollars in thousands) 1997 1996 1995
1994
1993
Amount of loans outstanding
at end of period $ 128,331 $ 108,926 $ 102,857 $ 90,839
$ 75,574
Daily average loans
outstanding $ 117,403 $ 105,779 $ 97,662 $ 81,740
$
72,576
Balance of allowance for
possible loan losses
at beginning of period $ 1,620 $ 1,433 $ 1,200 $
1,125
$
1,042
Loans charged off 83 68 51 8 51
Recoveries of loans
previously charged off 15 15 14
12
13
Net loans charged off
(recovered) 68 53 37 (4) 38
Additions to allowance
charged to expense 215 240 270
71
121
Balance at end of period $ 1,767 $ 1,620 $ 1,433 $
1,200
$ 1,125
Ratio of net charge-offs
to average loans
outstanding 0.06% 0.05% 0.04% -0.01% 0.05%
Ratio of reserve to gross
loans outstanding at
December 31 1.38% 1.49% 1.39% 1.32% 1.49%
</TABLE>
- -31-
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 quite good compared to industry
standards and current risk analysis appears favorable. The allowance for loan
losses is
consistent with the current composition of the loan portfolio and adequately
covers the
risks management sees under present economic conditions. Approximately 65% of
the
reserve balance is unallocated under current techniques. Management is
prepared to
make any reserve adjustments that become necessary as economic conditions
change.
- -32-
<TABLE>
<S> <C> <C> <C> <C>
<C>
December 31
(Dollars in thousands) 1997 1996 1995
1994 1993
NONPERFORMING ASSETS
Loans on nonaccrual
(cash) basis $ 473 $ 14 $ 132 $ 1 $
0
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 49 49 27 27 27
Total nonperforming assets $ 522 $ 63 $ 159
$
28
$ 27
Ratio of nonperforming assets
to total loans and OREO 0.41% 0.06% 0.15% 0.03% 0.04%
Ratio of nonperforming assets
to total assets 0.27% 0.04% 0.11% 0.02% 0.02%
OTHER RISK ELEMENTS
Loans past due 90 or more days
and still accruing $ 657 $ 203 $ 417 $ 262 $
267
Percentage of total loans
and OREO 0.51% 0.19% 0.41% 0.29% 0.35%
Percentage of total assets 0.35% 0.13% 0.29% 0.21%
0.24%
</TABLE>
- -33-
Future Impact of Recently Issued Accounting Standards
In June, 1997 the Financial Accounting Standards Board (FASB) issued SFAS
30 OReporting Comprehensive IncomeO, with the objective of disclosing an
d reporting
all changes in equity that result from recognized transactions; and other
economic
events of the period being reported. This statement is effective for fiscal
years
beginning after December 15, 1997, with quarterly reporting to begin March
31, 1998.
The impact of this statement on the Corporation appears to be limited to
reporting
market value adjustments under SFAS 115 and disclosure of treasury stock
activity.
The adoption of the standard is not expected to have a material impact on the
Corporation's operating results or capital resources.
Liquidity and Rate Sensitivity
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 and matching maturities as
prudently as
possible, 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 and periodic simulation.
- -34-
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. Standard
credit
arrangements available to FHLB members provide increased liquidity.
The following table presents all interest bearing assets and liabilities at
December 31, 1997. Nonaccrual loans are included as nonrate sensitive.
Noninterest
bearing assets and liabilities are not included. An asset sensitive, or
positive gap,
position is demonstrated at all time intervals, on a cumulative basis. The
asset sensitive
positions are all within guidelines and afford the opportunity to react
effectively to
interest rate movements in either direction.
- -35-
RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Interest Sensitivity Period
After 1 After 3 After 6
Within Within 3 Within 6 Within 12 After
(Dollars in thousands) 1 Month Months Months Months 1 Year
Total
RATE SENSITIVE ASSETS (RSA):
Loans $ 38,774 $ 9,419 $ 17,832 $ 33,137 $ 29,169 $
128,331
Investment securities 2,706 226 749 1,410 42,100 47,191
Other earning assets 2,874 0 0
0
0 2,874
Total RSA 44,354 9,645 18,581 34,547 71,269
178,396
RATE SENSITIVE LIABILITIES (RSL):
Interest bearing
deposits 35,199 8,833 9,408 15,308 74,183 142,931
Other interest bearing
liabilities 235 3,006 0 3,000
2,328
8,569
Total RSL 35,434 11,839 9,408 18,308 76,511
151,500
RATE SENSITIVITY GAP:
Period 8,920 ( 2,194) 9,173 16,239 ( 5,242) 26,896
Cumulative 8,920 6,726 15,899 32,138 26,896
GAP AS A PERCENT OF TOTAL ASSETS:
Period 4.69% -1.15% 4.82% 8.54%
Cumulative 4.69% 3.54% 8.36% 16.89%
RSA/RSL Cumulative 1.25 1.14 1.28 1.43
</TABLE>
- -36-
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, has
been the primary method employed to increase capital accounts. Total
stockholders'
equity rose $2,409,000 during 1997, an increase of 15.2% for the year. This
followed
growth of 8.4% and 18.5% during 1996 and 1995, respectively. The steadily
increasing earnings stream during this period has allowed the Corporation to
significantly increase cash dividends paid to stockholders. In 1997 cash
dividends rose
$209,000, or 30.1% over 1996 levels while net income rose 15.9% during
- -37-
the period. This followed a 15.9% increase in dividend payout for 1996 versus
1995.
Dividends per share have moved from .58 to .68 to .88 for 1995 through 1997,
respectively. The Corporation's Board of Directors made a conscious decision to
raise
the annual dividend payout from approximately the 30D31% of earnings level to
the
35% level early in 1997. This decision accounted for steadily increasing
quarterly
dividends during 1997. Internal capital generation has been adequate to
support the
Corporation's recent robust growth and fund the increased dividend payout
with very
little erosion to capital ratios.
The maintenance of a strong capital base, well 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 the Bank are subject to periodic examinations by one or
more of the various regulatory agencies. During 1997, two examinations were
conducted that included,
but were not limited to, procedures designed to review lending practices,
credit
quality, liquidity, capital adequacy and trust operations. No comments were
received
from regulatory bodies which, if implemented, would have a material effect on
the
Corporation's liquidity, capital resources or operations.
- -38-
<TABLE>
<S> <C> <C> <C>
CAPITAL AND DIVIDEND RATIOS
(Dollars in thousands)
AT DECEMBER 31: 1997 1996
1995
Stockholders' Equity $ 18,265 $ 15,856 $ 14,633
Equity/Assets 9.60% 10.06% 10.02%
FOR THE YEAR:
Average Equity/Average Assets 9.84% 9.80% 10.00%
Dividend Payout 34.65% 30.87% 30.66%
Return on Average Equity 15.37% 14.90% 14.40%
Dividends Paid $ 903 $ 694 $ 599
Regulatory
REGULATORY CAPITAL MEASURES: Minimums
Tier I Capital Ratio 12.7% 13.2% 15.4% 4.0%
Total (Tier II) Capital Ratio 14.0% 14.6% 17.1% 8.0%
Leverage Ratio 9.7% 9.8% 10.0% 3.0%
</TABLE>
- -39-
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,963
<INT-BEARING-DEPOSITS> 16
<FED-FUNDS-SOLD> 2,858
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 44,740
<INVESTMENTS-CARRYING> 44,740
<INVESTMENTS-MARKET> 46,208
<LOANS> 128,331
<ALLOWANCE> 1,767
<TOTAL-ASSETS> 190,242
<DEPOSITS> 160,580
<SHORT-TERM> 235
<LIABILITIES-OTHER> 2,828
<LONG-TERM> 8,334
0
0
<COMMON> 214
<OTHER-SE> 17,082
<TOTAL-LIABILITIES-AND-EQUITY> 190,242
<INTEREST-LOAN> 10,702
<INTEREST-INVEST> 2,483
<INTEREST-OTHER> 265
<INTEREST-TOTAL> 13,450
<INTEREST-DEPOSIT> 5,495
<INTEREST-EXPENSE> 5,822
<INTEREST-INCOME-NET> 7,628
<LOAN-LOSSES> 215
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 5,384
<INCOME-PRETAX> 3,580
<INCOME-PRE-EXTRAORDINARY> 2,606
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,606
<EPS-PRIMARY> 2.54
<EPS-DILUTED> 2.54
<YIELD-ACTUAL> 5.01
<LOANS-NON> 473
<LOANS-PAST> 657
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 405
<ALLOWANCE-OPEN> 1,620
<CHARGE-OFFS> 83
<RECOVERIES> 15
<ALLOWANCE-CLOSE> 1,767
<ALLOWANCE-DOMESTIC> 1,767
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
