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, 1999
Commission file number: 33-18888
ORRSTOWN FINANCIAL SERVICES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2530374
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
77 East King Street, P. O. Box 250, Shippensburg, Pennsylvania 17257
-----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 532-6114
-------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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Common Stock, No Par Value The Common Stock is not registered on any exchange.
- --------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
As of December 31, 1999, 2,218,291 shares of the registrant's common stock were
outstanding. The aggregate market value of such shares held by nonaffiliates on
that date was $ 88,731,640.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended December 31, 1999
are incorporated by reference into Parts I and II. Portions of the Proxy
Statement for 2000 Annual Meeting of Security Holders are incorporated by
reference in Part III of this Form 10-K.
<PAGE>
ORRSTOWN FINANCIAL SERVICES, INC.
FORM 10-K
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C> <C> <C>
Part I
Item 1. Business ............................................................................ 2
Item 2. Properties .......................................................................... 7
Item 3. Legal Proceedings ................................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders ................................. 8
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ............... 10
Item 6. Selected Financial Data ............................................................. 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations ..................................................................... 10
Item 8. Financial Statements and Supplementary Data ......................................... 10
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .............................................................. 19
Part III
Item 10. Directors and Executive Officers of the Registrant .................................. 19
Item 11. Executive Compensation .............................................................. 19
Item 12. Security Ownership of Certain Beneficial Owners and Management ...................... 19
Item 13. Certain Relationships and Related Transactions ...................................... 19
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .................... 19
Signatures ..................................................................................... 21
</TABLE>
<PAGE>
Part I
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 eight branches are located in Shippensburg
(2), Carlisle (2), Spring Run, Orrstown, and Chambersburg (2), 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,
1999, Orrstown had 84 full-time and 48 part-time employees.
Business of Orrstown
Orrstown was organized as a state-chartered bank in 1987 as part of an
agreement and plan of merger between Orrstown Financial Services, Inc. and
Orrstown Bank, the predecessor of Orrstown, under which Orrstown became a
wholly-owned subsidiary of Orrstown Financial Services, Inc. As indicated,
Orrstown is the successor to Orrstown Bank which was originally organized in
1919.
Orrstown is engaged in commercial banking and trust business as authorized
by the Pennsylvania Banking Code of 1965. This involves accepting demand, time
and savings deposits and granting loans. The Bank grants agribusiness,
commercial and residential loans to customers in South Central Pennsylvania,
principally Franklin and Cumberland Counties. The concentrations of credit by
type of loan are set forth on the face of the balance sheet (page 2 of the
annual report to shareholders). The Bank maintains a diversified loan portfolio
and evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon the
extension of credit, is based on management's credit evaluation of the customer
and collateral standards established in the Bank's lending policies and
procedures.
All secured loans are supported with appraisals of collateral. Business
equipment and machinery, inventories, accounts receivable, and farm equipment
are considered appropriate security, provided they meet acceptable standards for
liquidity and marketability.
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<PAGE>
Loans secured by equipment and/or other nonreal estate collateral normally
do not exceed 70% of appraised value or cost, whichever is lower. Loans secured
by real estate do not exceed 80% of the appraised value of the property which is
the maximum loan to collateral value established in the Bank's lending policy.
Loan to collateral values are monitored as part of the loan review, and
appraisals are updated as deemed appropriate in the circumstances.
Administration and supervision over the lending process is provided by the
Bank's Credit Administration Department via loan reviews. The loan review
process is continuous, commencing with the approval of a loan. Each new loan is
reviewed by the Credit Administration Department for compliance with banking
regulations and lending policy requirements for documentation, collateral
standards, and approvals.
The Credit Administration Department continues to monitor and evaluate loan
customers utilizing risk-rating criteria established in the lending policy in
order to spot deteriorating trends and detect conditions which might indicate
potential problem loans.
Reports of the results of the loan reviews are submitted quarterly to the
Directors' Credit Administration Committee for approval and provide the basis
for evaluating the adequacy of the allowance for loan losses.
Through its trust department, Orrstown renders services as trustee,
executor, administrator, guardian, managing agent, custodian, investment advisor
and other fiduciary activities authorized by law.
As of December 31, 1999, Orrstown had total assets of approximately $ 265
million, total shareholders' equity of approximately $ 22 million and total
deposits of approximately $ 204 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.
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.
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<PAGE>
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.
Regulatory authorities have issued guidelines that establish risk-based
capital and leverage standards. These capital requirements of bank regulators,
are discussed on page 12 of the annual report to shareholders under "Capital
Adequacy and Regulatory Matters". Failure to meet applicable capital guidelines
could subject a bank to a variety of enforcement remedies available to the
regulatory authorities. Depending upon circumstances, the regulatory agencies
may require an institution to develop a "capital plan" to increase its capital
to levels established by the agency.
In 1991, the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was enacted. FDICIA contains provisions limiting activities and
business methods of depository institutions. FDICIA requires the primary federal
banking regulators to promulgate regulations setting forth standards relating
to, among other things, internal controls and audit systems; credit underwriting
and loan documentation; interest rate exposure and other off-balance sheet
assets and liabilities; and compensation of directors and officers. FDICIA
provides for expanded regulation of depository institutions and their
affiliates, including parent holding companies, by such institutions' primary
federal banking regulator. Each primary federal banking regulator is required to
specify, by regulation, capital standards for measuring the capital adequacy of
the depository institutions it supervises and, depending upon the extent to
which a depository institution does not meet such capital adequacy measures, the
primary federal banking regulator may prohibit such institution from paying
dividends or may require such institution to take other steps to become
adequately capitalized.
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<PAGE>
FDICIA establishes five capital tiers, ranging from "well capitalized", to
"critically undercapitalized". A depository institution is well capitalized if
it significantly exceeds the minimum level required by regulation for each
relevant capital measure. Under FDICIA, an institution that is not well
capitalized is generally prohibited from accepting brokered deposits and
offering interest rates on deposits higher than the prevailing rate in its
market; in addition, "pass through" insurance coverage may not be available for
certain employee benefit accounts. FDICIA also requires an undercapitalized
depository institution to submit an acceptable capital restoration plan to the
appropriate federal bank regulatory agency. One requisite element of such a plan
is that the institution's parent holding company must guarantee compliance by
the institution with the plan, subject to certain limitations. In the event of
the parent holding company's bankruptcy, the guarantee, and any other
commitments that the parent holding company has made to federal bank regulators
to maintain the capital of its depository institution subsidiaries, would be
assumed by the bankruptcy trustee and entitled to priority in payment.
Based on their respective regulatory capital ratios at December 31, 1999,
the corporation is considered well capitalized, based on the definitions in the
regulations issued by the Federal Reserve Board and the other federal bank
regulatory agencies setting forth the general capital requirements mandated by
FDICIA. See "Capital Adequacy and Regulatory Matters" in management's discussion
and analysis in the corporation's annual report as shown in Exhibit 13.
A federal depositor preference statute was enacted in 1993 providing that
deposits and certain claims for administrative expenses and employee
compensation against an insured depository institution would be afforded a
priority over other general claims against such an institution, including
federal funds and letters of credit, in the "liquidation or other resolution" of
such an institution by any receiver.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999, federal legislation intended to modernize the
financial services industry by establishing a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms, and
other financial services providers. As a result of the legislation, bank holding
companies will be permitted to engage in a wider variety of financial activities
than permitted under prior law, particularly with regard to insurance and
securities activities. Moreover, to the extent that it permits banks, securities
firms and insurance companies to affiliate, the financial services industry may
experience further consolidation. This could result in a growing number of
larger financial institutions that offer a wider variety of financial services
than we currently offer and that can aggressively compete in the markets we
serve. This could adversely impact our profitability.
In addition, a bank holding company, which does not qualify or does not
elect to become a financial holding company under the Gramm-Leach-Bliley Act, is
generally prohibited from engaging in, or acquiring direct or indirect control
of any company engaged in nonbanking activities, except for activities found by
the Federal Reserve Board to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. The principal activities
that the Federal Reserve Board has determined by regulation to be so closely
related to banking as to be a proper incident thereto are set forth in Federal
Reserve Board Regulation Y.
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<PAGE>
Bank holding companies that do qualify as a financial holding company may
engage in activities that are of a financial nature or incidental thereto. This
will include activities such as securities and insurance underwriting which are
not permitted nonbanking activities under Regulation Y. A bank holding company
may qualify to become a financial holding company if each of its depository
institution subsidiaries is "well capitalized", "well managed", has at least a
"satisfactory" CRA rating in its most recent examination and the bank holding
company has filed a certification with the Federal Reserve Bank that it elects
to become a financial holding company.
The earnings of Orrstown Bank, and therefore the earnings of Orrstown
Financial Services, are affected by general economic conditions, management
policies, and the legislative and governmental actions of various regulatory
authorities including the FRB, the FDIC and the Pennsylvania Department of
Banking.
In addition to banking and securities laws, regulations and regulatory
agencies, the Corporation also is subject to various other laws, regulations and
regulatory agencies. Furthermore, various proposals, bills and regulations have
been and are being considered in the United States Congress, and various other
governmental regulatory and legislative bodies, which could result in changes in
the profitability and governance of the Corporation. It cannot be predicted
whether new legislation or regulations will be adopted and, if so, how they
would affect the Corporation.
References under the caption "Supervision and Regulation" to applicable
statutes, regulations and orders are brief summaries of portions thereof which
do not purport to be complete and which are qualified in their entirety by
reference thereto.
Important Factors Relating to Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies without fear of litigation so long
as those statements are identified as forward-looking and are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in such statements. In
connection with certain statements made in this report and those that may be
made in the future by or on behalf of the Corporation which are identified as
forward-looking statements, the Corporation notes that the following important
factors, among others, could cause actual results to differ materially from
those set forth in any such forward-looking statements. Further, such
forward-looking statements speak only as of the date on which such statement or
statements are made, and the Corporation undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events.
The business and profitability of a financial services organization such as
the Corporation is influenced by prevailing economic conditions and governmental
policies. The actions and policy directives of the Federal Reserve Board
determine to a significant degree the cost and the availability of funds
obtained from money market sources for lending and investing. Federal Reserve
Board policies and regulations also influence, directly and indirectly, the
rates of interest paid by commercial banks on their interest-bearing deposits
and may also impact the value of financial instruments held by the Corporation.
The nature and
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<PAGE>
impact on the Corporation of future changes in economic and market conditions
and monetary and fiscal policies are not predictable and are beyond the
Corporation's control. In addition, these conditions and policies can impact the
Corporation's customers and counterparties which may increase the risk of
default on their obligations to the Corporation and its affiliates. They can
also affect the competitive conditions in the markets and products within which
the Corporation operates, which can have an adverse impact on the Corporation's
ability to maintain its revenue streams.
As part of its ongoing business, the Corporation assumes financial
exposures to interest rates, currencies, equities and other financial products.
In doing so, the Corporation is subject to unforeseen events which may not have
been anticipated or which may have effects which exceed those assumed within its
risk management processes. This risk can be accentuated by volatility and
reduction in liquidity in those markets which in turn can impact the
Corporation's ability to hedge and trade the positions concerned. In addition,
the Corporation is dependent on its ability to access the financial markets for
its funding needs.
As noted in "Supervision and Regulation", the Corporation is regulated by
and subject to various regulators. The actions of these regulators can have an
impact on the profitability and governance of the Corporation. Increases by
regulatory authorities of minimum capital, reserve, deposit insurance and other
financial viability requirements can also affect the Corporation's
profitability.
The Corporation is subject to operational and control risk which is the
potential for loss caused by a breakdown in communication, information,
processing and settlement systems or processes or a lack of compliance with the
procedures on which they rely either within the Corporation or within the
broader financial systems infrastructure.
As with any financial institution, the Corporation is also subject to the
risk of litigation and to an unexpected or adverse outcome in such litigation.
Competitive pressures in the marketplace and unfavorable or adverse publicity
and news coverage can have the effect of lessening customer demand for the
Corporation's services. Ultimately, the Corporation's businesses and their
success are dependent on the Corporation's ability to attract and retain high
quality employees.
Competition
Orrstown's principal market area consists of Franklin County and Cumberland
County, Pennsylvania. It services a substantial number of depositors in this
market area, with the greatest concentration within a radius of Chambersburg,
Shippensburg and Carlisle, Pennsylvania.
Orrstown, like other depository institutions, has been subjected to
competition from less heavily regulated entities such as brokerage firms, money
market funds, consumer finance and credit card companies and other commercial
banks, many of which are larger than Orrstown Bank. Orrstown Bank is generally
competitive with all competing financial institutions in its service area with
respect to interest rates paid on time and savings deposits, service charges on
deposit accounts and interest rates charged on loans.
Item 2. Properties.
Orrstown Bank owns buildings in Orrstown, Pennsylvania, Shippensburg,
Pennsylvania (3), Carlisle, Pennsylvania, Spring Run, Pennsylvania and
Chambersburg, Pennsylvania. Offices of the bank are located in each of these
buildings. One of the offices located in Shippensburg is an "Operations Center"
which
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<PAGE>
does not operate as a branch, but rather as an accounting office. The
corporation is in the process of expanding its main offices located on King
Street in Shippensburg, PA and has acquired property in Mechanicsburg, PA to be
the site of its ninth branch. Both projects are expected to be completed in
2000. The bank also owns a 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.
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<PAGE>
<TABLE>
<CAPTION>
Age
Held Bank Employee as of
Name/Office Held Since Since 3/15/00
---------------- ----- ----- -------
<S> <C> <C> <C>
Joel R. Zullinger, Chairman
of the Board 1991 (1) 51
Jeffrey W. Coy, Vice Chairman of
The board 1988 (1) 48
Kenneth R. Shoemaker, President & CEO 1987 1986 52
Bradley S. Everly, Senior Vice President
Chief Financial Officer 1997 1997 48
Stephen C. Oldt, Executive
Vice President, Chief Operating
Officer 1987 1987 57
Philip E. Fague, Senior Vice President,
Senior Trust Officer 1990 1988 40
Denver L. Tuckey, Secretary 1999 (1) 65
Benjamin Stoops, Vice President, Senior
Operations Officer 1998 1998 48
Jeffrey W. Embly, Vice President
Senior Loan Officer 1999 1997 29
(1) These officers are not employees of the Bank.
Senior Operating Officers of the Bank
Age
Held Bank Employee as of
Name/Office Held Since Since 3/15/00
---------------- ----- ----- -------
Kenneth R. Shoemaker, President &
Chief Executive Officer 1987 1988 52
Stephen C. Oldt, Executive Vice
President & Chief Operating Officer 1987 1987 57
Philip E. Fague, Vice President/ 1990/
Senior Trust Officer 1993 1988 40
Bradley S. Everly, Senior Vice 1997/
President/Chief Financial Officer 1997 1997 48
Benjamin Stoops, Vice President,
Senior Operations Officer 1998 1998 48
Jeffrey W. Embly, Vice President,
Senior Loan Officer 1999 1997 29
</TABLE>
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<PAGE>
Part II
Item 5. Market for Registrant's Common Stock and Related Security
Holder Matters.
Orrstown Financial Services, Inc.'s common stock is not traded
on a national securities exchange, but is traded through the local and over the
counter local markets. At December 31, 1999, the approximate number of
shareholders of record was approximately 1,848. 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>
<CAPTION>
Market Cash Market Cash
Price Dividend Price Dividend
------------------ --------- -------------------- --------
Dividend (1) 1998 1997
--------------------------------- ---------------------------------
High Low High Low
<S> <C> <C> <C> <C> <C> <C>
First Quarter $ 32.56 $ 25.58 $ .121 $ 22.33 $ 20.93 $ .107
Second Quarter 37.21 25.12 .121 24.19 20.59 .107
Third Quarter 37.21 32.56 .130 27.91 24.19 .112
Fourth Quarter 40.0 32.56 .140 29.77 25.58 .112
</TABLE>
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(1) Note: All per share data has been restated after giving retroactive
recognition to a 7-1/2% stock dividend paid November 19, 1999 and a 2 for 1
stock split effective November 21, 1998.
See Note 14 to the financial statements for restrictions on the payment of
dividends.
Item 6. Selected Financial Data.
The selected five-year financial data on page 20 of the annual
shareholders' report for the year ended December 31, 1999 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 14 through 18 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 20 of the annual shareholders report for the year ended December
31, 1999 and are incorporated herein by reference. Certain statistical
information required in addition to those included in the annual shareholders
report are submitted herewith as follows.
Description of Statistical Information Page
-------------------------------------- ----
Changes in net interest income tax equivalent yields 11
Investment portfolio 12
Loan portfolio 13
Summary of loan loss experience 14
Nonaccrual, delinquent and impaired loans 15
Allocation of allowances for loan losses 16
Deposits and return on equity and assets 17
Consolidated summary of operations 18
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ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CHANGES IN NET INTEREST INCOME TAX EQUIVALENT YIELDS
<TABLE>
<CAPTION>
1999 Versus 1998 1998 Versus 1997
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
------------------------------------ --------------------------------
Total Total
------------------------------------ --------------------------------
Average Average Increase Average Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- --------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
(000 omitted)
Interest Income
Loans (net of unearned discounts) $ 2,280 ($ 469) $ 1,811 $ 2,429 ($ 252) $ 2,177
Taxable investment securities 456 7 463 390 (80) 310
Nontaxable investment securities (3) (3) (6) 170 (17) 153
Other short-term investments 7 (27) (20) 131 (17) 114
------- -------- ------- ------- ------ -------
Total interest income 2,740 (492) 2,248 3,120 (366) 2,754
------- -------- ------- ------- ------ -------
Interest Expense
Interest bearing demand 486 (113) 373 503 156 659
Savings deposits (15) (82) (97) (35) (16) (51)
Time deposits 75 (312) (237) 344 32 376
Short-term borrowings 263 (29) 234 221 (29) 192
Long-term borrowings 501 (48) 453 379 (29) 350
------- ------- ------- ------- ------- -------
Total interest expense 1,310 (584) 726 1,412 114 1,526
------- ------- ------- ------- ------ -------
Net interest income $ 1,522 $ 1,228
======= =======
</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.
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<PAGE>
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, 1999, and weighted average yields of such securities.
Yields are shown on a tax equivalent basis, assuming a 34% federal income tax
rate.
<TABLE>
<CAPTION>
After 1 year After 5 years
Within but within but within After
1 year 5 years 10 years 10 years Total
------ ------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
(000 omitted)
Bonds:
U.S. Treasury
Book value $ 2,999 $ 3,549 $ 0 $ 0 $ 6,548
Yield 6.31% 6.37% 0% 0% 6.35%
U.S. Government
agencies
Book value 0 9,500 12,960 1,982 24,442
Yield 0% 6.15% 6.84% 6.72% 6.56%
State and municipal
Book value 0 1,139 500 15,359 16,998
Yield 0% 9.98% 10.0% 8.67% 8.76%
Total book
value $ 2,999 $ 14,188 $ 13,460 $ 17,341 $47,988
======= ======== ======== ======== =======
Yield 6.31% 6.51% 6.96% 8.45% 7.31%
====== ====== ====== ======= =======
Mortgage-backed
securities:
Total book value $12,603
=======
Yield 6.97%
=======
Equity Securities:
Total book value $ 739
=======
Yield 3.87%
=======
Total Investment Securities $61,330
=======
Yield 7.20%
=======
</TABLE>
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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>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(000 omitted)
Commercial, financial
and agricultural $ 21,503 $ 18,732 $ 10,275 $ 8,401 $ 8,211
Real estate - Construction 15,580 11,182 5,961 4,304 5,706
Real estate - Mortgage 134,046 116,030 97,074 82,687 75,731
Installment and other
personal loans (net of
unearned discount) 9,562 12,688 15,021 13,534 13,209
--------- --------- --------- --------- ---------
Total loans $ 180,691 $ 158,632 $ 128,331 $ 108,926 $ 102,857
========= ========= ========= ========= =========
</TABLE>
Presented below are the approximate maturities of the loan portfolio
(excluding real estate mortgages, installments and credit cards) at December 31,
1999:
<TABLE>
<CAPTION>
Under One One to Over Five
Year Five Years Years Total
---- ---------- ----- -----
<S> <C> <C> <C> <C>
(000 omitted)
Commercial, financial and agricultural $ 3,407 $ 4,087 $ 14,009 $ 21,503
Real estate - Construction 2,159 2,585 10,836 15,580
------- ------- -------- --------
Total $ 5,566 $ 6,672 $ 24,845 $ 37,083
======= ======= ======== ========
</TABLE>
The following table presents the approximate amount of fixed rate loans and
variable rate loans due as of December 31, 1999:
Fixed Rate Variable
Loans Rate Loans
----- ----------
(000 omitted)
Due within one year $ 1,932 $ 63,710
Due after one but within five years 32,602 27,806
Due after five years 54,162 479
-------- --------
Total $ 88,696 $ 91,995
======== ========
-13-
<PAGE>
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(000 omitted)
Average total loans outstanding (net of
unearned income) $ 169,458 $ 144,013 $ 117,403 $ 105,779 $ 97,662
========= ========= ========= ========= ========
Allowance for loan losses, beginning
of period $ 1,971 $ 1,767 $ 1,620 $ 1,433 $ 1,200
Additions to provision for loan losses
charged to operations 547 270 215 240 270
Loans charged off during the year
Commercial 97 15 1 20 0
Personal credit lines 7 23 32 17 3
Installment 24 46 50 31 48
--------- --------- --------- ---------- --------
Total charge-off's 128 84 83 68 51
--------- --------- --------- --------- --------
Recoveries of loans previously charged off:
Commercial 59 3 2 3 0
Installment 1 10 12 12 14
Personal credit lines 5 5 1 0 0
--------- --------- ---------- --------- ----------
Total recoveries 65 18 15 15 14
--------- --------- --------- --------- --------
Net loans charged off (recovered) 63 66 68 53 37
--------- --------- --------- --------- --------
Allowance for loan losses, end of
period $ 2,455 $ 1,971 $ 1,767 $ 1,620 $ 1,433
========= ========= ========= ========= =========
Ratio of net loans charged off to
average loans outstanding .04% .06% .06% .05% .04%
========= ========= ========= ========= ==========
</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-
<PAGE>
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>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(000 omitted)
Nonaccrual loans $ 0 $ 486 $ 473 $ 14 $ 132
========== ======== ======== ======== ========
Accrual loans:
Restructured $ 0 $ 0 $ 0 $ 0 $ 0
30 through 89
days past due 3,420 823 2,398 1,976 1,949
90 days or
more past due 97 284 657 203 417
---------- -------- -------- -------- --------
Total accrual
loans $ 3,517 $ 1,107 $ 3,055 $ 2,179 $ 2,366
========== ======== ======== ======== ========
</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, 1999.
-15-
<PAGE>
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>
<CAPTION>
Years Ended December 31
---------------------------------------------------------------------
1999 1998
---------------------------- -------------------------------
Percentage Percentage
Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
(000 omitted)
Commercial, financial
and agricultural $ 45 11.90% $ 255 9.93%
Commercial, real estate secured 609 18.03 416 19.43
Real estate - Construction 0 8.62 0 7.05
Real estate - Mortgage 93 56.16 111 53.77
Installment 27 5.29 34 9.82
Unallocated 1,681 0.00 1,155 0.00
------- ------ ------- ------
Total $ 2,455 100.00% $ 1,971 100.00%
======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------------------------------
1999 1998
---------------------------- -------------------------------
Percentage Percentage
Allowance of Loans to Allowance of Loans to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
(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 0.00 0 0.00
------- ------ ------- ------
Total $ 1,767 100.00% $ 1,620 100.00%
======= ====== ======= ======
</TABLE>
Year Ended December 31
1995
------------------------------
Percentage
Allowance of Loans to
Amount Total Loans
------ -----------
(000 omitted)
Commercial, financial
and agricultural $ 114 7.98%
Commercial - Real estate secured 0 0.00
Real estate - Construction 80 5.55
Real estate - Mortgage 1,055 73.63
Installment 184 12.84
Unallocated 0 0.00
------- ------
Total $ 1,433 100.00%
======= ======
-16-
<PAGE>
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
DEPOSITS
The average amounts of deposits are summarized below:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
(000 omitted)
Demand deposits $ 25,365 $ 20,433 $ 17,665
Interest bearing demand
deposits 71,176 55,454 37,535
Savings deposits 22,888 23,394 24,568
Time deposits 75,859 74,488 68,161
--------- --------- ---------
Total deposits $ 195,288 $ 173,769 $ 147,929
========= ========= =========
</TABLE>
The following is a breakdown of maturities of time deposits of $ 100,000 or
more as of December 31, 1999:
Maturity (000 omitted)
-------- -------------
Certificates of Deposit
Three months or less $ 3,858
Over three months through twelve months 2,245
Over one year through three years 4,349
Over three years 403
--------
$ 10,855
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)
1999 1998 1997
---- ---- ----
Average assets $ 250,529 $ 212,149 $ 172,366
Net income $ 3,755 $ 3,119 $ 2,606
Average equity $ 22,067 $ 19,523 $ 16,956
Cash dividends paid $ 1,134 $ 986 $ 903
Return on assets 1.50% 1.47% 1.51%
Return on equity 17.02% 15.97% 15.37%
Dividend payout ratio 30.20% 31.61% 34.65%
Equity to asset ratio 8.81% 9.2% 9.84%
-17-
<PAGE>
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
CONSOLIDATED SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(000 omitted)
Interest income $ 18,324 $ 16,109 $ 13,450 $ 12,018 $ 10,829
Interest expense 8,074 7,348 5,822 5,139 4,542
-------- -------- -------- -------- --------
Net interest income 10,250 8,761 7,628 6,879 6,287
Provision for loan losses 547 270 215 240 270
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 9,703 8,491 7,413 6,639 6,017
Other income:
Trust and brokerage services 1,230 818 490 384 297
Service charges - Deposits 779 646 601 477 375
Other service charges,
collection and exchange, charges,
commission fees 844 667 341 258 218
Other operating income (loss) 728 122 119 121 45
-------- -------- -------- -------- --------
Total other income 3,581 2,253 1,551 1,240 935
-------- -------- -------- -------- --------
Income before operating expense 13,284 10,744 8,964 7,879 6,952
Operating expenses:
Salaries and employees
benefits 4,297 3,491 2,901 2,621 2,326
Occupancy and
equipment expense 1,099 859 764 665 559
Other operating expenses 2,822 2,095 1,719 1,507 1,371
-------- -------- -------- -------- --------
Total operating expenses 8,218 6,445 5,384 4,793 4,256
-------- -------- -------- -------- --------
Income before income taxes 5,066 4,299 3,580 3,086 2,696
Income tax 1,311 1,180 974 838 742
-------- -------- -------- -------- --------
Net income applicable to
common stock $ 3,755 $ 3,119 $ 2,606 $ 2,248 $ 1,954
======== ======== ======== ======== ========
Per share data:
Earnings per common
share $ 1.70 $ 1.41 $ 1.18 $ 1.02 $ .88
Cash dividend - Common $ .51 $ .45 $ .41 $ .32 $ .27
Weighted average
number of common
shares 2,214,951 2,205,718 2,204,444 2,205,268 2,206,560
</TABLE>
-18-
<PAGE>
Item 9. Disagreements on Accounting and Financial Disclosures.
Not applicable.
PART III
The information required by Items 10, 11, 12 and 13 is incorporated by
reference from Orrstown Financial Services, Inc.'s definitive proxy statement
for the 2000 Annual Meeting of Shareholders filed pursuant to Regulation 14A.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports of Form 8-K.
(a) (1) - List of Financial Statements
The following consolidated financial statements of Orrstown
Financial Services, Inc. and its subsidiary, included in the
annual report of the registrant to its shareholders for the
year ended December 31, 1999, are incorporated by reference in
Item 8:
Consolidated balance sheets - December 31, 1999 and
1998
Consolidated statements of income - Years ended
December 31, 1999, 1998 and 1997
Consolidated statements of shareholders' equity -
Years ended December 31, 1999, 1998, and 1997
Consolidated statements of cash flows - Years ended
December 31, 1999, 1998, and 1997
Notes to consolidated financial statements - December 31,
1999
(2) List of Financial Statement Schedules
All financial statement schedules for which provision
is made in the applicable accounting regulations of
the Securities and Exchange Commission are not
required under the related instructions or are
inapplicable and therefore have been omitted.
(3) Listing of Exhibits
Exhibit (3) (i) Articles of incorporation
Exhibit (3) (ii) Bylaws
Exhibit (4) Instruments defining the rights of
security holders including indentures
Exhibit (10) Material contracts
Exhibit (13) Annual report to security holders
Exhibit (21) Subsidiaries of the registrant
Exhibit (23) Consent of independent auditors
Exhibit (27) Financial data schedule
All other exhibits for which provision is made in the
applicable accounting regulations of the Securities
and Exchange Commission are not required under the
related instructions or are inapplicable and
therefore have been omitted.
-19-
<PAGE>
(b) Reports on Form 8-K filed
None.
(c) Exhibits
(3)(i) Articles of incorporation. Incorporated by
reference to Exhibit 3(i) of the registrant's Form
10-K filed March 26, 1999 for the year ended December
31, 1998.
(ii) By-laws. Incorporated by reference to Exhibit 3.2
to the Registrant's Registration Statement on Form
S-4, Registration No. 33-18888.
(4) Instruments defining the rights of security holders
including indentures. The rights of the holders of
Registrant's common stock are contained in:
(i) Articles of Incorporation of Orrstown Financial
Services, Inc., incorporated by reference to
Exhibit 3(i) of the registrant's Form 10-K filed
March 26, 1999 for the year ended December 31,
1998.
(ii) By-laws of Orrstown Financial Services, Inc.,
incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement on Form S-4
(Registration No. 33-18888).
(10.1) Change in control agreement between Orrstown
Financial Services, Inc. and its chief executive
officer. Incorporated by reference to Exhibit 99
of the registrant's Form 10-K filed March 17,
1997 for the year ended December 31, 1996.
(10.2) Salary continuation plan for selected officers -
filed herewith
(10.3) Officer group term replacement plan for selected
officers - filed herewith
(10.4) Director retirement plan - filed herewith
(10.5) Revenue neutral retirement plan - filed herewith
(13) Annual report to security holders - filed herewith
(21) Subsidiaries of the registrant - filed herewith
(23.1) Consent of independent auditors filed herewith
(27) Financial data schedule - filed herewith
(d) Financial statement schedules
None
-20-
<PAGE>
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 15, 2000 (Duly authorized officer)
By /s/ Bradley S. Everly
-----------------------------
Bradley S. Everly, Chief Financial Officer
(Principal Accounting Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Kenneth R. Shoemaker President, CEO and March 15, 2000
- ------------------------------------- Director
Kenneth R. Shoemaker
/s/ Anthony F. Ceddia Director March 15, 2000
- -------------------------------------
Dr. Anthony F. Ceddia
/s/ Glenn W. Snoke Director March 15, 2000
- -------------------------------------
Glenn W. Snoke
/s/ Gregory A. Rosenberry Director March 15, 2000
- -------------------------------------
Gregory A. Rosenberry
/s/ Joel R. Zullinger Chairman of the March 15, 2000
- ------------------------------------- Board and Director
Joel R. Zullinger
/s/ Jeffrey W. Coy Vice Chairman March 15, 2000
- ------------------------------------- of the Board
Jeffrey W. Coy and Director
/s/ John S. Ward Director March 15, 2000
- -------------------------------------
John S. Ward
/s/ Denver L. Tuckey
- ------------------------------------- Secretary and March 15, 2000
Denver L. Tuckey Director
/s/ Andrea Pugh
- ------------------------------------- Director March 15, 2000
Andrea Pugh
</TABLE>
-21-
EXHIBIT 10.2
ORRSTOWN BANK
SALARY CONTINUATION AGREEMENT
THIS AGREEMENT is made this lst day of October 1998, by and between
ORRSTOWN BANK, a Pennsylvania corporation located in Orrstown, Pennsylvania (the
"Company") and Kenneth R. Shoemaker (the "Executive").
INTRODUCTION
To encourage the Executive to remain an employee of the Company, the
Company is willing to provide salary continuation benefits to the Executive. The
Company will pay the benefits from its general assets.
AGREEMENT
The Executive and the Company agree as follows:
Article 1
Definitions
1.1 Definitions. Whenever used in this Agreement, the following words and
phrases shall have the meanings specified:
1.1.1 "Change of Control" shall mean any of the following:
(A) any person (as such term is used in Sections 13(d) and 14(d)(2) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other
than the Corporation, a subsidiary of the Corporation, an employee benefit
plan (or related trust) of the Corporation or a direct or indirect
subsidiary of the Corporation, or affiliates of the Corporation (as defined
in Rule 12b-2 under the Exchange Act), becomes the beneficial owner (as
determined pursuant to Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation representing more than 20% of
the combined voting power of the Corporation's then outstanding securities
or announces a tender offer or exchange offer for securities of the
Corporation representing more than 20% of the combined voting power of the
Corporation's then outstanding securities; or
(B) the liquidation or dissolution of the Corporation or the Company
or the occurrence of, or execution of an agreement providing for, a sale of
all or substantially all of the assets of the Corporation or the Company to
an entity which is not a direct or indirect subsidiary of the Corporation;
or
(C) the occurrence of, or execution of an agreement providing for, a
reorganization, merger, consolidation or other similar transaction or
connected series of transactions of the Corporation as a result of which
either (a) the Corporation does not survive or (b) pursuant to which shares
of the Corporation common stock ("Common Stock") would be converted into
cash, securities or other property, unless, in case of either (a) or (b)
the holders of Corporation Common Stock immediately prior to such
transaction will, following the consummation of the transaction,
beneficially own, directly or indirectly, more than 50% of the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors of the corporation surviving,
continuing or resulting from such transaction; or
(D) the occurrence of, or execution of an agreement providing for, a
reorganization, merger, consolidation, or similar transaction of the
Corporation, or before any connected series of such transactions, if, upon
consummation of such transaction or transactions, the persons who are
members of the Board of Directors of the Corporation immediately before
such transaction or transactions cease or, in the case of the execution of
an agreement for such transaction or transactions, it is contemplated in
such agreement that upon consummation such persons would cease, to
constitute a majority of the Board of Directors of the Corporation or, in a
case where the Corporation does not survive in such transaction, of the
corporation surviving, continuing or resulting from such transaction or
transactions; or
(E) any other event which is at any time designated as a "Change of
Control" for purposes of this Agreement by a resolution adopted by the
Board of Directors of the Corporation with the affirmative vote of a
majority of the non-employee directors in office at the time the resolution
is adopted; in the event any such resolution is adopted, the Change of
Control event specified thereby shall be deemed incorporated herein by
reference and thereafter may not be amended, modified or revoked without
the written agreement of Executive.
Notwithstanding anything else to the contrary set forth in this
Agreement, if (i) an agreement is executed by the Corporation or the
Company providing for any of the transactions or events constituting a
Change of Control as defined herein, and the agreement subsequently expires
or is terminated without the transaction or event being consummated, and
(ii) Executive's employment did not terminate during the period after the
agreement and prior to such expiration or termination, for purposes of this
Agreement it shall be as though such agreement was never executed and no
Change of Control event shall be deemed to have occurred as a result of the
execution of such agreement.
1.1.2 "Code" means the Internal Revenue Code of 1986, as amended.
1.1.3 "Corporation" means 0rrstown Financial Services, Inc.
1.1.4 "Disability" means the Executive suffering a sickness, accident or
injury which, in the judgment of a physician satisfactory to the Company,
prevents the Executive from performing substantially all of the Executive's
normal duties for the Company. As a condition to any benefits, the Company may
require the Executive to submit to such physical or mental evaluations and tests
as the Company's Board of Directors deems appropriate
1.1.5 "Early Termination" means the Termination of Employment before Normal
Retirement Age for reasons other than death, disability, termination for cause
or following a change of control.
1.1.6 "Early Termination Date" means the month, day and year which early
termination occurs.
1.1.7 "Norma1 Retirement Age" means the Executive's 62nd birthday.
1.1.8 "Normal Retirement Date" means the later of the Normal Retirement Age
or Termination of Employment.
1
<PAGE>
1.1.9 "Plan Year" means a twelve-month period commencing on October 1 and
ending on September 30 of each year. The initial Plan Year shall commence on the
effective date of this Agreement.
1.1.0 "Termination for Cause" See Section 5.2.
1.1.11 "Termination of Employment" means that the Executive ceases to be
employed by the Company for any reason whatsoever other than by reason of a
leave of absence which is approved by the Company. For purposes of this
Agreement, if there is a dispute over the employment status of the Executive or
the date of the Executive's Termination of Employment, the Company shall have
the sole and absolute right to decide the dispute.
Article 2
Lifetime Benefits
2.1 Normal Retirement Benefit. Upon Termination of Employment on or after
the Normal Retirement Age for reasons other than death, the Company shall pay to
the Executive the benefit described in this Section 2.1 in lieu of any other
benefit under this Agreement.
2.1.1 Amount of Benefit. The annual Normal Retirement Benefit under this
section 2.1 is $80,000 (eighty thousand dollars). The Company may increase the
annual benefit under this Section 2.1 at the sole and absolute discretion of the
Company's Board of Directors. Any increase in the annual benefit shall require
the recalculation of all the amounts on Schedule A attached hereto. The annual
benefit amounts on Schedule A are calculated by amortizing the annual normal
retirement benefit using the interest method of accounting, a 7.50% discount
rate, monthly compounding and monthly payments.
2.1.2 Payment of Benefit. The Company shall pay the annual benefit to the
Executive in 12 equal monthly installments payable on the first day of each
month commencing with the month following the Executive's Normal Retirement Date
and continuing for 179 additional months.
2.1.3 Benefit Increases. Commencing on the first anniversary of the first
benefit payment, and continuing on each subsequent anniversary, the Company's
Board of Directors, in its sole discretion, may increase the benefit.
2.2 Early Termination Benefit. Upon Early Termination, the Company shall
pay to the Executive the benefit described in this Section 2.2 in lieu of any
other benefit under this Agreement.
2.2.1 Amount of Benefit. The annual benefit under this Section 2.2 is the
Early Termination Annual Benefit set forth in Schedule A for the Plan Year
ending immediately prior to the Early Termination Date.
2.2.2 Payment of Benefit. The Company shall pay the annual benefit to the
Executive in 12 equal monthly installments payable on the first day of each
month commencing with the month following the Executive's Normal Retirement Age
and continuing for 179 additional months.
2.2.3 Benefit Increases. Benefit payments may be increased as provided in
Section 2.1.3.
2.3 Disability Benefit. If the Executive terminates employment due to
Disability prior to Normal Retirement Age, the Company shall pay to the
Executive the benefit described in this section 2.3 in lieu of any other benefit
under this Agreement.
2.3.1 Amount of Benefit. The annual benefit under this Section 2.3 is the
Disability Benefit amount set forth in Schedule A for the Plan Year ending
immediately prior to the date in which Termination of Employment occurs.
2.3.2 Payment of Benefit. The Company shall pay the benefit to the
Executive in 12 equal monthly installments commencing within 90 days after the
date of the Executive's Termination of Employment and continuing for 179
additional months.
2.3.3 Benefit Increases. Benefit payments may be increased as provided in
Section 2.1.3.
2.4 Change of Control Benefit. If the Executive is in the active service of
the Company at the time of a Change of Control, the Company shall pay to the
Executive the benefit described in this Section 2.4 in lieu of any other benefit
under this Agreement.
2.4.1 Amount of Benefit. The annual benefit under this Section 2.4 is the
Normal Retirement Benefit described in Section 2.1.1.
2.4.2 Payment of Benefit. The Company shall pay the annual benefit amount
to the Executive in 12 equal monthly installments payable on the first day of
each month commencing with the month following the Executive's Normal Retirement
Date and continuing for 179 additional months.
2.4.3 Benefit Increases. Benefit payments may be increased as provided in
Section 2.1.3
Article 3
Death Benefits
3.1 Death During Active Service. If the Executive dies while in the active
service of the Company, the Company shall pay to the Executive's beneficiary the
benefit described in this Section 3. 1. This benefit shall be paid in lieu of
the Lifetime Benefits of Article 2.
3.1.1 Amount of Benefit. The annual benefit under this Section 3.1 is the
Normal Retirement Benefit described Section 2.1.1.
3.1.2 Payment of Benefit. The Company shall pay the annual benefit to the
beneficiary in 12 equal monthly installments payable on the first day of each
month commencing with the month following the Executive's death and continuing
for 179 additional months.
2
<PAGE>
3.2 Death During Benefit Period. If the Executive dies after the benefit
payments have commenced under this Agreement but before receiving all such
payments, the Company shall pay the remaining benefits to the Executive's
beneficiary at the same time and in the sameamounts they would have been paid to
the Executive had the Executive survived.
3.3 Death Following Termination of Employment But Before Benefits Commence.
If the Executive is entitled to benefits under this Agreement, but dies prior to
receiving said benefits, the Company shall pay to the Executive's beneficiary
the same benefits, in the same manner, they would have been paid to the
Executive had the Executive survived; however, said benefit payments will
commence upon the Executive's death.
Article 4
Beneficiaries
4.1 Beneficiary Designations. The Executive shall designate a beneficiary
by filing a written designation with the Company. The Executive may revoke or
modify the designation at any time by filing a new designation. However,
designations will only be effective if signed by the Executive and accepted by
the Company during the Executive's lifetime. The Executive's beneficiary
designation shall be deemed automatically revoked if the beneficiary predeceases
the Executive, or if the Executive names a spouse as beneficiary and the
marriage is subsequently dissolved. If the Executive dies without a valid
beneficiary designation, all payments shall made to the Executive's estate.
4.2 Facility of Payment. If a benefit is payable to a minor, to a person
declared incapacitated, or to a person incapable of handling the disposition of
his or her property, the Company may pay such benefit to the guardian , legal
representative or person having the care or custody of such minor, incapacitated
person or incapable person. The Company may require proof of incapacity,
minority or guardianship as it may deem appropriate prior to distribution of the
benefit. Such distribution shall completely discharge the Company from all
liability with respect to such benefit.
Article 5
General Limitations
Notwithstanding any provision of this Agreement to the contrary, the
Company shall not pay any benefit under this Agreement:
5.1 Excess Parachute Payment. To the extent the benefit would be an excess
parachute payment under Section 280G of the Code.
5.2 Termination for Cause. If the Company terminates the Executive's
employment for:
5.2.1 Gross negligence or gross neglect of duties;
5.2.2 Commission of a felony or of a gross misdemeanor involving moral
turpitude; or
5.2.3 Fraud, disloyalty, dishonesty or willful violation of any law or
significant Company policy committed in connection with the Executive's
employment and resulting in an adverse effect on the Company.
5.3 Competition After Termination of Employment. If the Executive, without
the prior written consent of the Company, engages in, becomes interested in,
directly or indirectly, as a sole proprietor, as a partner in a partnership, or
as a substantial shareholder in a corporation, or becomes associated with, in
the capacity of employee, director, officer, principal, agent, trustee or in any
other capacity whatsoever, any enterprise conducted in the trading area (a 50
mile radius of the main office of the Company at the comer of King and Penn
Streets), which enterprise is, or may deemed to be, competitive with any
business carried on by the Company as of the date of termination of the
Executive's employment or his retirement. This section shall not apply following
a Change of Control.
5.4 Suicide or Misstatement. If the Executive commits suicide within two
years after the date of this Agreement, or if the Executive has made any
material misstatement of fact on any application for life insurance purchased by
the Company.
Article 6
Claims and Review Procedures
6.1 Claims Procedure. The Company shall notify any person or entity that
makes a claim against the Agreement (the "Claimant") in writing, within ninety
(90) days of Claimant's written application for benefits, of his or her
eligibility or noneligibility for benefits under the Agreement. If the Company
determines that the Claimant is not eligible for benefits or full benefits, the
notice shall set forth (1) the specific reasons for such denial, (2) a specific
reference to the provisions of the Agreement on which the denial is based, (3) a
description of any additional information or material necessary for the Claimant
to perfect his or her claim, and a description of why it is needed, and (4)
explanation of the Agreement's claims review procedure and other appropriate
information as to the steps to be taken if the Claimant wishes to have the claim
reviewed. If the Company determines that there are special circumstances
requiring additional time to make a decision, the Company shall notify the
Claimant of the special circumstances and the date by which a decision is
expected to be made, and may extend the time for up to an additional ninety-day
period.
6.2 Review Procedure. If the Claimant is determined by the Company not to
be eligible for benefits, or if the Claimant believes that he or she is entitled
to greater or different benefits, the Claimant shall have the opportunity to
have such claim reviewed by the Company by filing a petition for review with the
Company within sixty (60) days after receipt of the notice issued by the
Company. Said petition shall state the specific reasons which the Claimant
believes entitle him or her to benefits or to greater or different benefits.
Within sixty (60) days after receipt by the Company of the petition, the Company
shall afford the Claimant (and counsel, if any) an opportunity to present his or
her position to the Company orally or in writing, and the Claimant (or counsel)
shall have the right to review the pertinent documents. The Company shall notify
the Claimant of its decision in writing within the sixty-day period, stating
specifically the basis of its decision, written a manner calculated to be
understood by the Claimant and the specific provisions of the Agreement on which
the decision is based. If, because of the need for a hearing, the sixty-day
period is not sufficient, the decision may be deferred for up to another
sixty-day period at the election of the Company, but notice of this deferral
shall be given to the Claimant.
3
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Article 7
Amendments and Termination
This Agreement may be amended or terminated only by a written agreement
signed by the Company and the Executive.
Article 8
Miscellaneous
8.1 Binding Effect. This Agreement shall bind the Executive and the
Company, and their beneficiaries, survivors, executors, successors,
administrators and transferees.
8.2 No Guarantee of Employment. This Agreement is not an employment policy
or contract. It does not give the Executive the right to remain an employee of
the Company, nor does it interfere with the Company's right to discharge the
Executive. It also does not require the Executive to remain an employee nor
interfere with the Executive's right to terminate employment at any time.
8.3 Non-Transferability. Benefits under this Agreement cannot be sold,
transferred, assigned, pledged, attached or encumbered in any manner.
8.4 Tax Withholding. The Company shall withhold any taxes that are required
to be withheld from the benefits provided under this Agreement.
8.5 Applicable Law. The Agreement and all rights hereunder shall be
governed by the laws of the Commonwealth of Pennsylvania, except to the extent
preempted by the laws of the United States of America.
8.6 Unfunded Arrangement. The Executive and beneficiary are general
unsecured creditors of the Company for the payment of benefits under this
Agreement. The benefits represent the mere promise by the Company to pay such
benefits. The rights to benefits are not subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by creditors. Any insurance on the Executive's life is a general
asset of the Company to which the Executive and beneficiary have no preferred or
secured claim.
8.7 Recovery of Estate Taxes. If the Executive's gross estate for federal
estate tax purposes includes any amount determined by reference to and on
account of this Agreement, and if the beneficiary is other than the Executive's
estate, then the Executive's estate shall be entitled to recover from the
beneficiary receiving such benefit under the terms of the Agreement, an amount
by which the total estate tax due by the Executive's estate, exceeds the total
estate tax which would have been payable if the value of such benefit had not
been included in the Executive's gross estate. If there is more than one person
receiving such benefit, the right of recovery shall be against each such person.
In the event the beneficiary has a liability hereunder, the beneficiary may
petition the Company for a lump sum payment in an amount not to exceed the
beneficiary's liability hereunder.
8.8 Entire Agreement. This Agreement constitutes the entire agreement
between the Company and the Executive as to the subject matter hereof. No rights
are granted to the Executive by virtue of this Agreement other than those
specifically set forth herein.
8.9 Administration. The Company shall have powers which are necessary to
administer this Agreement, including but not limited to:
8.9.1 Interpreting the provisions of the Agreement;
8.9.2 Establishing and revising the method of accounting for the Agreement;
8.9.3 Maintaining a record of benefit payments; and
8.9.4 Establishing rules and prescribing any forms necessary or desirable
to administer the Agreement,
<PAGE>
IN WITNESS WHEREOF, the Executive and a duly authorized Company officer
have signed this Agreement.
EXECUTIVE: COMPANY:
ORRSTOWN BANK
_____________________________ By _______________________________
Kenneth R. Shoemaker
Title ____________________________
By execution hereof, Orrstown Financial Services, Inc. consents to and
agrees to be bound by the terms and condition of this Agreement.
ATTEST: CORPORATION:
ORRSTOWN FINANCIAL SERVICES, INC.
_____________________________ By ______________________________
Title ___________________________
4
EXHIBIT 10.3
ORRSTOWN BANK
GROUP TERM REPLACEMENT PLAN
THIS PLAN, hereby made and entered into this 19 day of November, 1998, by
and between the ORRSTOWN BANK, a state commercial located in Orrstown,
Pennsylvania (the "Company") and the Participant selected to participate in this
Plan (the "Participant").
INTRODUCTION
The Company wishes to attract and retain highly qualified executives. To
further this objective, the Company is willing to divide the death proceeds of
certain life insurance policies which are owned by the Company on the lives of
the participating executives with the designated beneficiary of each insured
participating executive. The Company will pay the life insurance premiums from
its general assets.
Article I
General Definitions
The following terms shall have the meanings specified:
1.1.l "Change of Control" shall mean any of the following:
(A) any person (as such term is used in Sections 13(d) and 14(d)(2) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other
than the Corporation, a subsidiary of the Corporation, an employee benefit
plan (or related trust) of the Corporation or a direct or indirect
subsidiary of the Corporation, or affiliates of the Corporation (as defined
in Rule 12b-2 under the Exchange Act), becomes the beneficial owner (as
determined pursuant to Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation representing more than 20% of
the combined voting power of the Corporation's then outstanding securities
or announces a tender offer or exchange offer for securities of the
Corporation representing more than 20% of the combined voting power of the
Corporation's then outstanding securities; or
(B) the liquidation or dissolution of the Corporation or the Company
or the occurrence of, or execution of an agreement providing for, a sale of
all or substantially all of the assets of the Corporation or the Company to
an entity which is not a direct or indirect subsidiary of the Corporation;
or
(C) the occurrence of, or execution of an agreement providing for, a
reorganization, merger, consolidation or other similar transaction or
connected series of transactions of the Corporation as a result of which
either (a) the Corporation does not survive or (b) pursuant to which shares
of the Corporation common stock ("Common Stock") would be converted into
cash, securities or other property, unless, in case of either (a) or (b),
the holders of Corporation Common Stock immediately prior to such
transaction will, follow the consummation of the transaction, beneficially
own, directly or indirectly, more than 50% of the combined voting power of
the then outstanding voting securities entitled to vote generally in the
election of directors of the corporation surviving, continuing or resulting
from such transaction; or
(D) the occurrence of, or execution of an agreement providing for, a
reorganization, merger, consolidation, or similar transaction of the
Corporation, or before any connected series of such transactions, if, upon
consummation of such transaction or transactions, the persons who are
members of the Board of Directors of the Corporation immediately before
such transaction or transactions cease or, in the case of the execution of
an agreement for such transaction or transactions, it is contemplated in
such agreement that upon consummation such persons would cease, to
constitute a majority of the Board of Directors of the Corporation or, in a
case where the Corporation does not survive in such transaction, of the
corporation surviving, continuing or resulting from such transaction or
transactions; or
(E) any other event which is at any time designated as a "Change of
Control" for purposes of this Agreement by a resolution adopted by the
Board of Directors of the Corporation with the affirmative vote of a
majority of the non-employee directors in office at the time the resolution
is adopted; in the event any such resolution adopted, the Change of Control
event specified thereby shall be deemed incorporated herein by reference
and thereafter may not be amended, modified or revoked without the written
agreement of Participant.
Notwithstanding anything else to the contrary set forth in this
Agreement, if (i) an agreement is executed by the Corporation or the
Company providing for any of the transactions or events constituting a
Change of Control as defined herein, and the agreement subsequently expires
or is terminated without the transaction or event being consummated, and
(ii) Participant's employment did not terminate during the period after the
agreement and prior to such expiration or termination, for purposes of this
Agreement it shall be as though such agreement was never executed and no
Change of Control event shall deemed to have occurred as a result of the
execution of such agreement.
1.2 "Compensation Committee" means either the Compensation Committee
designated from time to time by the Company's Board of Directors or a majority
of the Company's Board of Directors, either of which shall hereinafter be
referred to as the Compensation Committee.
1.3 "Corporation" means Orrstown Financial Services, Inc.
1.4 "Disability" means the Participant's inability to perform substantially
all normal duties of a employee, as determined by the Company's Board of
Directors in its sole discretion. As a condition to any benefits, the Company
may require the Participant to submit to such physical or mental evaluations and
tests as the Board of Directors deems appropriate.
1.5 "Insured" means the individual whose life is insured.
1.6 "Insurer" means the insurance company issuing the life insurance policy
on the life of the insured.
1.7 "Normal Retirement Age" means the Participant attaining age 65 while
employed with the Company or after reaching a total of 70 or more when age and
Years of Service are combined.
1.8 "Normal Retirement Date" means the later of the Normal Retirement Age
or the date that the Participant terminates or is terminated for any reason
other than being Terminated for Cause.
1
<PAGE>
1.9 "Participant" means the employee who is designated by the Compensation
Committee as eligible to participate in the Plan, elects in writing to
participate in the Plan using the form attached hereto as Exhibit A, and signs a
Split Dollar Endorsement for the Policy in which he or she is the Insured.
1.10 "Policy" or "Policies" means the individual insurance policy (or
policies) adopted by the Compensation Committee for purposes of insuring a
Participant's life under this Plan.
1.11 "Plan" means this instrument, including all amendments thereto.
1.12 "Terminated for Cause" means that the Company has terminated the
Participant's employment for any of the following reasons:
1.11.1 Gross negligence or gross neglect of duties;
1.11.2 Commission of a felony or of a gross misdemeanor involving moral
turpitude; or
1.11.3 Fraud, disloyalty , dishonesty or willful violation of any law or
significant Company policy committed in connection with the Participant's
employment and resulting in an adverse effect on the Company.
1.12 "Two Times Base Annual Salary" means the current base annual salary of
the Participant at the earliest of: (1) the date of the Participant's death; (2)
the date of the Participant's Disability; or (3) the Participant's Normal
Retirement Date, multiplied by a factor of two (2) but not in excess of the
maximum benefit amount specified Exhibit B.
1.13 "Years of Service" means total years of employment with the Company
including any approved leaves of absences.
Article 2
Participation
2.1 Eligibility to Participate. The Compensation Committee in its sole
discretion shall designate from time to time Participants that are eligible to
participate in this Plan. The Compensation Committee will not designate a
Participant as eligible unless he or she either is a participant in the
Company's group term insurance plan as of this date or has been employed by the
Company for at least one year.
2.2 Participation. The eligible executive may participate in this Plan by
executing an Election to Participate and a Split Dollar Endorsement. The Split
Dollar Endorsement shall bind the Participant and his or her beneficiaries,
assigns and transferees, to the terms and conditions of this Plan. An
executive's participation is limited to only Policies where he or she is the
Insured. Exhibit B attached hereto sets forth the original Insured participants
and the Policies on their lives.
2.3 Termination of Participation. A Participant's rights under this Plan
shall cease and his or her participation in this Plan shall terminate if any of
the following events occur: (i) the Participant's employment with the Company is
Terminated for Cause; (ii) the Participant's employment with the Company is
terminated prior to Normal Retirement Age for reasons other than Disability; or
(iii) the Plan or any Participant's rights under the Plan are terminated in
accordance with Article 8. In the event that the Company decides to maintain the
Policy after the Participant's termination of his or her participation in the
Plan, the Company shall be the direct beneficiary of the entire death proceeds
of the Policy.
2.4 Disability. (A) Except as otherwise provided in paragraph (B) of this
section 2.4, if the Participant's employment with the Company is terminated
because of the Participant's Disability, the Company shall maintain the Policy
in full force and effect and, in no event, shall the Company amend, terminate or
otherwise abrogate the Participant's interest in the Policy, provided, however,
that at all times the Policy shall be subject to the claims of the Company's
creditors.
(B) Notwithstanding the provisions of paragraph (A) of this section
2.4, upon the Disabled Participant's gainful employment with an entity
other than the Company, the Company shall have no farther obligation to the
Disabled Participant, and the Disabled Participant's rights pursuant to the
Plan shall cease. In the event the Disabled Participant's rights are
terminated hereunder, the Company shall be the direct beneficiary of the
entire death proceeds of the Policy upon the death of the Disabled
Participant.
2.5 Retirement. Upon the Participant reaching Normal Retirement Date, the
Company shall maintain the Policy in full force and effect and in no event shall
the Company amend, terminate or otherwise abrogate a retired Participant's
interest in the Policy, provided, however that at all times the Policy shall be
subject to the claims of the Company's creditors.
Article 3
Policy Ownership/Interests
3.1 Company Ownership. The Company shall own one or more Policies on each
Participant's life and shall have the right to exercise all incidents of
ownership and, except as provided in sections 2.3, 2.4, 2.5 and 8.2, the Company
may terminate a Policy without the consent of the Insured. With respect to each
Policy, the Company shall be the direct beneficiary of an amount of death
proceeds equal to the greatest of: (1) the cash surrender value of the policy;
(2) the aggregate premiums paid on the Policy by the Company less any
outstanding indebtedness to the Insurer; or (3) the amount in excess of Two
Times Base Annual Salary of the Insured/Participant. If the Company owns more
than one policy on a Participant, the Policies shall be aggregated with respect
to item (3).
3.2 Participant's Interest. Each Participant, or the Participant's
assignee, shall have the right to designate the beneficiary of the death
proceeds of the Policy remaining after the payment to the Company of its
interests. The Participant shall also have the right to elect and change
settlement options with the consent of the Company and the Insurer.
2
<PAGE>
Article 4
Premiums
4.1 Premium Payment. The Company shall pay all premiums due on all
Policies.
4.2 Imputed Income. The Company shall impute income to the Participant in
an amount equal to the current term rate for the Participant's age multiplied by
the aggregate death benefit payable to the Participant's beneficiary. The
"current term rate" is the minimum amount required to be imputed under Revenue
Rulings 64-328 and 66-110, or any subsequent applicable authority. The Company
will provide each participant with an annual statement of the amount of income
reportable by the participant for federal and state income purposes as a result
of such imputed income.
Article 5
Assignment
Any Participant may assign without consideration all interests in his or
her Policy and in this Plan to any person, entity or trust. In the event a
Participant shall transfer all of his/her interest in the Policy, then all of
that Participant's interest in his or her Policy and in the Plan shall be vested
in his/her transferee, subject to such transferee executing agreements binding
them to the provisions of this Plan, who shall be substituted as a party
hereunder, and that Participant shall have no further interest in his or her
Policy or in this Plan.
Article 6
Insurer
The Insurers shall be bound only by the terms of their corresponding
Policies. Any payments an Insurer makes or actions it takes in accordance with a
Policy shall fully discharge it from all claims, suits and demands of all
persons relating to that Policy. The Insurer shall not be bound by the
provisions of this Plan, except to the extent of any endorsement filed with the
Insurer. The Insurer shall have the right to rely on the Company's
representations with regard to any definitions, interpretations, or Policy
interests as specified under this Plan.
Article 7
Claims Procedure
7.1 Claims Procedure. The Company shall notify any person or entity that
makes a claim against this Plan (the "Claimant"), in writing, within ninety (90)
days of Claimant's written application for benefits, of Claimant's eligibility
or ineligibility for benefits under this Plan. If the Company determines that
Claimant is not eligible for benefits or full benefits, the notice shall set
forth (1) the specific reasons for such denial, (2) a specific reference to the
provisions of this Plan on which the denial is based, (3) a description of any
additional information or material necessary for the Claimant to perfect
Claimant's claim, and a description of why it is needed, and (4) an explanation
of this Plan's claim review procedure and other appropriate information as to
the steps to be taken if the Claimant wishes to have the claim reviewed. If the
Company determines that there are special circumstances requiring additional
time to make a decision, the Company shall notify the Claimant of the special
circumstances and the date by which a decision is expected to be made, and may
extend the time for up to an additional ninety-day period. Upon resolution of
all open issues, the Company shall receive the proceeds and upon recovering the
share of the proceeds to which it is entitled, shall distribute the Claimant's
proceeds.
7.2 Review Procedure. If a Claimant is determined by the Company not to be
eligible for benefits, or if the Claimant believes that Claimant is entitled to
greater or different benefits, the Claimant shall have the opportunity to have
such claim reviewed by the Company by filing a petition for review with the
Company within sixty (60) days after receipt of the notice issued by the
Company. Said petition shall state the specific reasons which the Claimant
believes entitle Claimant to benefits or to greater or different benefits.
Within sixty (60) days after receipt by the Company of the petition, the Company
shall afford the Claimant (and counsel, if any) an opportunity to present
Claimant's position to the Company verbally or in writing, and the Claimant (or
counsel) shall have the right to review the pertinent documents. The Company
shall notify the Claimant of its decision in writing within the sixty-day
period, stating specifically the basis of its decision, written in a manner
calculated to be understood by the Claimant and the specific provisions of this
Plan on which the decision is based. If, because of the need for a hearing, the
sixty-day period is not sufficient, the decision may be deferred for up to
another sixty-day period at the election of the Company, but notice of this
deferral shall be given to the Claimant.
Article 8
Amendments and Termination
8.1 Amendment or Termination of Plan. Except as otherwise provided in
sections 2.3, 2.4, 2.5 and 8.2: (i) the Company may amend or terminate the Plan
at any time, and (ii) the Company may amend or terminate a Participant's rights
under the Plan at any time prior to a Participant's death by written notice to
the Participant.
8.2 Amendment or Termination of Plan Upon Change of Control.
Notwithstanding the provisions of section 8. 1, in the event of a Change of
Control, the Company or its successor shall maintain in full force and effect
each Policy that is in existence on the date the Change of Control occurs and,
in no event shall the Company or its successor terminate or otherwise abrogate a
Participant's interest in the Policy, provided, however, that at all times the
Policy shall be subject to the claims of the Company's creditors, provided
further, however, that the Policy shall be canceled, terminated or replaced if
deemed by the Company to be reasonably prudent to do so and if agreed to by
Participant. This section 8.2 shall apply to all Participants in the Plan on the
date the Change of Control occurs, including but not limited to (i) a retired
Participant who has an interest in the Policy pursuant to section 2.5; (ii) a
Disabled Participant who has an interest in the Policy pursuant to section 2.4;
and (iii) a Participant whose Employment is terminated as a result of a Change
of Control.
8.3 Participant's Waiver. A Participant may, in the Participant's sole and
absolute discretion, waive his or her rights under the Plan at any time. Any
waiver permitted under this section 8.3 shall be in writing and delivered to the
Board of Directors of the Company.
3
<PAGE>
Article 9
Miscellaneous
9.1 Competition After Termination of Employment. No benefits shall be
payable if the Participant, without the prior written consent of the Company,
engages in, becomes interested in, directly or indirectly, as a sole proprietor,
as a partner in a partnership, or as a substantial shareholder in a corporation,
or becomes associated with, in the capacity of employee, director, officer,
principal, agent, trustee or in any other capacity whatsoever, any enterprise
conducted in the trading area (a 50 mile radius of the main office of the
Company at the corner of King and Penn Streets), which enterprise is, or may
deemed to be, competitive with any business carried on by the Company as of the
date of termination of the Participant's employment or his retirement. This
section shall not apply following a Change of Control.
9.2 Suicide or Misstatement. No benefits shall be payable if the
Participant commits suicide within two years after the date of this Agreement,
or if the Participant has made any material misstatement of fact on any
application for life insurance purchased by the Company.
Article 10
Miscellaneous
10.1 Binding Effect. This Plan in conjunction with each Split Dollar
Endorsement shall bind each Participant and the Company, their beneficiaries,
survivors, executors, administrators and transferees and any Policy beneficiary.
10.2 No Guarantee of Employment. This Plan is not an employment policy or
contract. It does not give a Participant the right to remain an employee of the
Company, nor does it interfere with the Company's right to discharge a
Participant. It also does not require a Participant to remain an employee nor
interfere with a Participant's right to terminate employment at any time.
10.3 Named Fiduciary. For purposes of the Employee Retirement Income
Security Act of 1974, if applicable, the Company shall be the named fiduciary
and plan administrator under the Plan. The named fiduciary may delegate to
others certain aspects of the management and operation responsibilities of the
plan including the employment of advisors and the delegation of ministerial
duties to qualified individuals.
10.4 Applicable Law. The Plan and all rights hereunder shall be governed by
and construed according to the laws of the Commonwealth of Pennsylvania, except
to the extent preempted by the laws of the United States of America.
10.5 Notice. Any notice, consent or demand required or permitted to be
given under the provisions of this Plan by one party to another shall be in
writing, shall be signed by the party giving or making the same, and may be
given either by delivering the same to such other party personally, or by
mailing the same, by United States certified mail, postage prepaid, to such
party, addressed to his/her last known address as shown on the records of the
Company. The date of such mailing shall be deemed the date of such mailed
notice, consent or demand.
10.6 Entire Agreement. This Plan constitutes the entire agreement between
the Company and the Participant to the subject matter hereof. No rights are
granted to the Participant by virtue of this Plan other those specifically set
forth herein.
10.7 Administration. The Company shall have powers which are necessary to
administer this Plan, including but not limited to:
10.7.1 Interpreting the provisions of the Plan;
10.7.2 Establishing and revising the method of accounting for the Plan;
10.7.3 Maintaining a record of benefit payments; and
10.7.4 Establishing rules and prescribing any forms necessary or desirable
to administer the Plan.
10.7 Designated Fiduciary. For purposes of the Employee Retirement Income
Security Act of 1974, if applicable, the Company shall be the named fiduciary
and plan administrator under the Agreement. The named fiduciary may delegate to
others certain aspects of the management and operation responsibilities of the
plan 'including the employment of advisors and the delegation of ministerial
duties to qualified individuals.
IN WITNESS WHEREOF, the Company executes this Plan as of the date indicated
above.
COMPANY;
ORRSTOWN BANK
By _______________________________
Title ____________________________
By execution hereof, 0rrstown Financial Services, Inc., consents to and
agrees to be bound by the terms and condition of this Agreement.
ATTEST: CORPORATION:
ORRSTOWN FINANCIAL SERVICES, INC.
___________________________________ By _______________________________
Title ____________________________
4
EXHIBIT 10.4
ORRSTOWN BANK
DIRECTOR RETIREMENT AGREEMENT
THIS AGREEMENT is made this 1st day of October 1998, by and between
ORRSTOWN BANK, a state commercial bank located in Orrstown, Pennsylvania (the
"Company"), and Kenneth R. Shoemaker (the "Director").
INTRODUCTION
To encourage the Director to remain a member of the Company's Board of
Directors, the Company is willing to provide retirement benefits to the
Director. The Company will pay the retirement benefits from its general assets
according to the terms of this Agreement.
AGREEMENT
The Director and the Company agree as follows:
Article 1
Definitions
1.1 Definitions. Whenever used in this Agreement, the following words and
phrases shall have the meanings specified:
1.1.1 "Change of Control" shall mean any of the following:
(A) any person (as such term is used in Section 13(d) and 14(d)(2) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other
than the Corporation, a subsidiary of the Corporation, an employee benefit
plan (or related trust) of the Corporation or a direct or indirect
subsidiary of the Corporation, or affiliates of the Corporation (as defined
in Rule 12b-2 under the Exchange Act), becomes the beneficial owner (as
determined pursuant to Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation representing more than 20% of
the combined voting power of the Corporation's then outstanding securities
or announces a tender offer or exchange offer for securities of the
Corporation representing more than 20% of the combined voting power of the
Corporation's then outstanding securities; or
(B) the liquidation or dissolution of the Corporation or the Company
or the occurrence of, or execution of an agreement providing for, a sale of
all or substantially all of the assets of the Corporation or the Company to
entity which is not a direct or indirect subsidiary of the Corporation; or
(C) the occurrence of, or execution of an agreement providing for, a
reorganization, merger, consolidation or other similar transaction or
connected series of transactions of the Corporation as a result of which
either (a) the Corporation does not survive or (b) pursuant to which shares
of the Corporation common stock ("Common Stock") would be converted into
cash, securities or other property, unless, in case of either (a) or (b),
the holders of Corporation Common Stock immediately prior to such
transaction will, following the consummation of the transaction.
beneficially own, directly or indirectly, more than 50% of the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors of the corporation surviving,
continuing or resulting from such transaction; or
(D) the occurrence of, or execution of an agreement providing for, a
reorganization, merger, consolidation, or similar transaction of the
Corporation, or before any connected series of such transactions, if, upon
consummation of such transaction or transactions, the persons who are
members of the Board of Directors of the Corporation immediately before
such transaction or transactions cease or, the case of the execution of an
agreement for such transaction or transactions, it is contemplated in such
agreement that upon consummation such persons would cease, to constitute a
majority of the Board of Directors of the Corporation or, in a case where
the Corporation does not survive in such transaction, of the corporation
surviving, continuing or resulting from such transaction or transactions;
or
(E) any other event which is at any time designated as a "Change of
Control" for purposes of this Agreement by a resolution adopted by the
Board of Directors of the Corporation with the affirmative vote of a
majority of the non-employee directors in office at the time the resolution
is adopted; in the event any such resolution is adopted, the Change of
Control event specified thereby shall be deemed incorporated herein by
reference and thereafter may not be amended, modified or revoked without
the written agreement of Director.
Notwithstanding anything else to the contrary set forth in this
Agreement, if (i) an agreement is executed by the Corporation or the
Company providing for any of the transactions or events constituting a
Change of Control as defined herein, and the agreement subsequently expires
or is terminated without the transaction or event being consummated, and
(ii) Director's service did not terminate during the period after the
agreement and prior to such expiration or termination, for purposes of this
Agreement it shall as though such agreement was never executed and no
Change of Control event shall be deemed to have occurred as a result of the
execution of such agreement.
1.1.2 "Code" means the Internal Revenue Code of 1986, as amended.
1.1.3 "Corporation" means 0rrstown Financial Services, Inc.
1.1.4 "Disability" means the Director suffering a sickness, accident or
injury which, in the judgment of a physician satisfactory to the Company,
prevents the Director from performing substantially all of the Director's normal
duties for the Company. As a condition to any benefits, the Company may require
the Director to submit to such physical or mental evaluations and tests as the
Company's Board of Directors deems appropriate.
1.1.5 "Early Termination" means the Termination of Service before Normal
Retirement Age for reasons other than death, Disability, Termination for Cause
or following a Change of Control.
1.1.6 "Early Termination Date" means the month, day and year which Early
Termination occurs.
1.1.7 "Normal Retirement Age" means the Director's 65th birthday.
1.1. 8 "Normal Retirement Date" means the later of the Normal Retirement
Age or Termination of Service.
1.1.9 "Plan Year" means a twelve-month period commencing on October 1 and
ending on September 30 of each year. The initial Plan Year shall commence on the
effective date of this Agreement.
1
<PAGE>
1.1.10 "Termination for Cause" See Section 5.2.
1.1.11 "Termination of Service" means that the Director ceases to be
employed by the company for any reason whatsoever other than by reason of a
leave of absence which is approved by the company. For purposes of this
Agreement, if there is a dispute over the service status of the Director or the
date of the Director's Termination of Service, the Company shall have the sole
and absolute right to decide the dispute.
Article 2
Lifetime Benefits
2.1 Normal Retirement Benefit. Upon Termination of Service on or after the
Normal Retirement Age for reasons other than death, the Company shall pay to the
Director the benefit described in this Section 2.1 in lieu of any other benefit
under this Agreement.
2.1.1 Amount of Benefit. The annual Normal Retirement Benefit under this
Section 2.1 is $24,308 (twenty-four thousand three hundred eight dollars). The
Company may increase the annual benefit under this Section 2.1 at the sole and
absolute discretion of the Company's Board of Directors. Any increase in the
annual benefit shall require the recalculation of all the amounts on Schedule A
attached hereto. The annual benefit amounts on Schedule A are calculated by
amortizing the annual normal retirement benefit using the interest method of
accounting, a 7.50% discount rate, monthly compounding and monthly payments.
2.1.2 Payment of Benefit. The Company shall pay the annual benefit to the
Director in 12 equal monthly installments payable on the first day of each month
commencing with the month following the Director's Normal Retirement Date and
continuing for 119 additional months.
2.1.3 Benefit Increases. Commencing on the first anniversary of the first
benefit payment, and continuing on each subsequent anniversary, the Company's
Board of Directors, in its sole discretion, may increase the benefit.
2.2 Early Termination Benefit. Upon Early Termination, the Company shall
pay to the Director the benefit described in this Section 2.2 in lieu of any
other benefit under this Agreement.
2.2.1 Amount of Benefit. The annual benefit under this Section 2.2 is the
Early Termination Annual Benefit set forth in Schedule A for the Plan Year
ending immediately prior to the Early Termination Date.
2.2.2 Payment of Benefit. The Company shall pay the annual benefit to the
Director in 12 equal monthly installments payable on the first day of each month
commencing with the month following the Director's Normal Retirement Age and
continuing for 119 additional months.
2.2.3 Benefit Increases. Benefit payments may be increased as provided in
Section 2.1.3.
2.3 Disability Benefit. If the Director terminates service due to
Disability prior to Normal Retirement Age, the Company shall pay to the Director
the benefit described in this Section 2.3 in lieu of any other benefit under
this Agreement.
2.3.1 Amount of Benefit. The annual benefit under this Section 2.3 is the
Disability Benefit amount set forth in Schedule A for the Plan Year ending
immediately prior to the date in which Termination of Service occurs.
2.3.2 Payment of Benefit. The Company shall pay the benefit to the Director
in 12 equal monthly installments commencing within 90 days after the date of the
Director's Termination of Service and continuing for 119 additional months.
2.3.3 Benefit Increases. Benefit payments may be increased as provided in
Section 2.1.3.
2.4 Change of Control Benefit. If the Director is in the active service of
the Company at the time of a Change of Control, the Company shall pay to the
Director the benefit described in this Section 2.4 in lieu of any other benefit
under this Agreement.
2.4.1 Amount of Benefit. The annual benefit under this Section 2.4 is the
Normal Retirement Benefit described in Section 2.1.1.
2.4.2 Payment of Benefit. The Company shall pay the annual benefit amount
to the Director in 12 equal monthly installments payable on the first day of
each month commencing with the month following the Director's Normal Retirement
Date and continuing for 119 additional months.
2.4.3 Benefit Increases. Benefit payments may be increased provided in
Section 2.1.3
Article 3
Death Benefits
3.1 Death During Active Service. If the Director dies while in the active
service of the Company, the Company shall pay to the Director's beneficiary the
benefit described this Section 3. 1. This benefit shall be paid in lieu of the
Lifetime Benefits of Article 2.
3.1.1 Amount of Benefit. The annual benefit under this Section 3. 1 is the
Normal Retirement Benefit described in Section 2.1.1.
3.1.2 Payment of Benefit. The Company shall pay the annual benefit to the
beneficiary in 12 equal monthly installments payable on the first day of each
month commencing with the month following the Director's death and continuing
for 119 additional months.
3.2 Death During Benefit Period. If the Director dies after the benefit
payments have commenced under this Agreement but before receiving all such
payments, the Company shall pay the remaining benefits to the Director's
beneficiary at the same time and in the same amounts they would have been paid
to the Director had the Director survived.
3.3 Death Following Termination of Service But Before Benefits Commence. If
the Director is entitled to benefits under this Agreement, but dies prior to
receiving said benefits, the Company shall pay to the Director's beneficiary the
same benefits, in the same manner, they would have been paid to the Director had
the Director survived; however, said benefit payments will commence upon the
Director's death.
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Article 4
Beneficiaries
4.1 Beneficiary Designations. The Director shall designate a beneficiary by
filing a written designation with the Company. The Director may revoke or modify
the designation at any time by filing a new designation. However, designations
will only be effective if signed by the Director and accepted by the Company
during the Director's lifetime. The Director's beneficiary designation shall be
deemed automatically revoked if the beneficiary predeceases the Director, or if
the Director names a spouse as beneficiary and the marriage is subsequently
dissolved. If the Director dies without a valid beneficiary designation, all
payments shall be made to the Director's estate.
4.2 Facility of Payment. If a benefit is payable to a minor, to a person
declared incapacitated, or to a person incapable of handling the disposition of
his or her property, the Company may pay such benefit to the guardian, legal
representative or person having the care or custody of such minor, incapacitated
person or incapable person. The Company may require proof of incapacity,
minority or guardianship as it may deem appropriate prior to distribution of the
benefit. Such distribution shall completely discharge the Company from all
liability with respect to such benefit.
Article 5
General Limitations
Notwithstanding any provision of this Agreement to the contrary, the
Company shall not pay any benefit under this Agreement:
5.1 Excess Parachute Payment. To the extent the benefit would be an excess
parachute payment under Section 280G of the Code.
5.2 Termination for Cause. If the Company terminates the Director's service
for:
5.2.1 Gross negligence or gross neglect of duties;
5.2.2 Commission of a felony or of a gross misdemeanor involving moral
turpitude; or
5.2.3 Fraud, disloyalty, dishonesty or willful violation of any law or
significant Company policy committed in connection with the Director's service
and resulting in an adverse effect on the Company.
5.3 Competition After Termination of Service. If the Director, without the
prior written consent of the Company, engages in, becomes interested in,
directly or indirectly, as a sole proprietor, as a partner in a partnership, or
as a substantial shareholder in a corporation, or becomes associated with, in
the capacity of employee, director, officer, principal, agent, trustee or in any
other capacity whatsoever, any enterprise conducted in the trading area (a 50
mile radius of the main office of the Company at the comer of King and Penn
Streets), which enterpise is, or may deemed to be, competitive with any business
carried on by the Company as of the date of termination of the Director's
service or his retirement. This section shall not apply following a Change of
Control.
5.4 Suicide or Misstatement. If the Director commits suicide within two
years after the date of this Agreement, or if the Director has made any material
misstatement of fact on any application for life insurance purchased by the
Company.
Article 6
Claims and Review Procedures
6.1 Claims Procedure. The Company shall notify any person or entity that
makes a claim against the Agreement (the "Claimant") in writing, within ninety
(90) days of Claimant's written application for benefits, of his or her
eligibility or noneligibility for benefits under the Agreement. If the Company
determines that the Claimant is not eligible for benefits or full benefits, the
notice shall set forth (1) the specific reasons for such denial, (2) a specific
reference to the provisions of the Agreement on which the denial is based, (3) a
description of any additional information or material necessary for the Claimant
to perfect his or her claim, and a description of why it is needed, and (4) an
explanation of the Agreement's claims review procedure and other appropriate
information as to the steps to be taken if the Claimant wishes to have the claim
reviewed. If the Company determines that there are special circumstances
requiring additional time to make a decision, the Company shall notify the
Claimant of the special circumstances and the date by which a decision is
expected to be made, and may extend the time for up to an additional ninety-day
period.
6.2 Review Procedure. If the Claimant is determined by the Company not to
be eligible for benefits, or if the Claimant believes that he or she is entitled
to greater or different benefits, the Claimant shall have the opportunity to
have such claim reviewed by the Company by filing a petition for review with the
Company within sixty (60) days after receipt of the notice issued by the
Company. Said petition shall state the specific reasons which the Claimant
believes entitle him or her to benefits or to greater or different benefits.
Within sixty (60) days after receipt by the Company of the petition, the Company
shall afford the Claimant (and counsel, if any) an opportunity to present his or
her position to the Company orally or in writing, and the Claimant (or counsel)
shall have the right to review the pertinent documents. The Company shall notify
the Claimant of its decision in writing within the sixty-day period, stating
specifically the basis of its decision, written in a manner calculated to be
understood by the Claimant and the specific provisions of the Agreement on which
the decision is based. If, because of the need for a hearing, the sixty-day
period is not sufficient, the decision may be deferred for up to another
sixty-day period at the election of the Company, but notice of this deferral
shall be given to the Claimant.
Article 7
Amendments and Termination
This Agreement may be amended or terminated only by a written agreement
signed by the Company and the Director.
Article 8
Miscellaneous
8.1 Binding Effect. This Agreement shall bind the Director and the Company,
and their beneficiaries, survivors, executors, successors, administrators and
transferees.
8.1 No Guarantee of Service. This Agreement does not give the Director the
right to remain a member of the Company's Board of Directors, nor does it
interfere with the Company's right to terminate the service of the Director. It
also does not interfere with the Director's right. to terminate his or her
service at any time.
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8.3 Non-Transferability. Benefits under this Agreement cannot be sold,
transferred, assigned, pledged, attached or encumbered in any manner.
8.4 Tax Withholding. The Company shall withhold any taxes that are required
to be withheld from the benefits provided under this Agreement.
8.5 Applicable Law. The Agreement and all rights hereunder shall be
governed by the laws of the Commonwealth of Pennsylvania, except to the extent
preempted by the laws of the United States of America.
8.6 Unfunded Arrangement. The Director and beneficiary are general
unsecured creditors of the Company for the payment of benefits under this
Agreement. The benefits represent the mere promise by the Company to pay such
benefits. The rights to benefits are not subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by creditors. Any insurance on the Director's life is a general
asset of the Company to which the Director and beneficiary have no preferred or
secured claim.
8.7 Recovery of Estate Taxes. If the Director's gross estate for federal
estate tax purposes includes any amount determined by reference to and on
account of this Agreement, and if the beneficiary is other than the Director's
estate, then the Director's estate shall be entitled to recover from the
beneficiary receiving such benefit under the terms of the Agreement, an amount
by which the total estate tax due by the Director's estate, exceeds the total
estate tax which would have been payable if the value of such benefit had not
been included in the Director's gross estate. If there is more than one person
receiving such benefit, the right of recovery shall be against each such person.
In the event the beneficiary has a liability hereunder, the beneficiary may
petition the Company for a lump sum payment in an amount not to exceed the
beneficiary's liability hereunder.
8.8 Entire Agreement. This Agreement constitutes the entire agreement
between the Company and the Director as to the subject matter hereof. No rights
are granted to the Director by virtue of this Agreement other than those
specifically set forth herein.
8.9 Administration. The Company shall have powers which are necessary to
administer this Agreement, including but not limited to:
8.9.1 Interpreting the provisions of the Agreement;
8.9.2 Establishing and revising the method of accounting for the Agreement;
8.9.3 Maintaining a record of benefit payments; and
8.9.4 Establishing rules and prescribing any forms necessary or desirable
to administer the Agreement
IN WITNESS WHEREOF, the Director and a duly authorized Company officer have
signed this Agreement.
DIRECTOR: COMPANY:
ORRSTOWN BANK
__________________________ By ___________________________
Kenneth R. Shoemaker
Title ________________________
By execution hereof, Orrstown Financial Services, Inc. consents to and
agrees to be bound by the terms and condition of this Agreement.
ATTEST: CORPORATION:
ORRSTOWN FINANCIAL SERVICES, INC.
__________________________ By ___________________________
Title ________________________
4
EXHIBIT 10.5
ORRSTOWN BANK
DIRECTOR REVENUE NEUTRAL RETIREMENT AGREEMENT
THIS AGREEMENT is made this 11th day of November 1998 by and between
ORRSTOWN BANK (the "Company"), and ROBERT HENRY (the "Director").
INTRODUCTION
To help promote orderly succession of its Board of Directors, the Company
is willing to provide the Director with an opportunity for retirement income.
The Company will pay the benefits from its general assets.
AGREEMENT The Director and the Company agree as follows:
Article I
Definitions
Whenever used in this Agreement, the following words and phrases shall have
the meanings specified:
1.1.1 "Change of Control" shall mean any of the following:
(A) any person (as such term is used in Sections 13(d) and 14(d)(2) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other
than the Corporation, a subsidiary of the Corporation, an employee benefit
plan (or related trust) of the Corporation or a direct or indirect
subsidiary of the Corporation, or affiliates of the Corporation (as defined
in Rule 12b-2 under the Exchange Act), becomes the beneficial owner (as
determined pursuant to Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation representing more than 20% of
the combined voting power of the Corporation's then outstanding securities
or announces a tender offer or exchange offer for securities of the
Corporation representing more than 20% of the combined voting power of the
Corporation's then outstanding securities; or
(B) the liquidation or dissolution of the Corporation or the Company
or the occurrence of, or execution of an agreement providing for, a sale of
all or substantially all of the assets of the Corporation or the Company to
an entity which is not a direct or indirect subsidiary of the Corporation;
or
(C) the occurrence of, or execution of an agreement providing for, a
reorganization, merger, consolidation or other similar transaction or
connected series of transactions of the Corporation as a result of which
either (a) the Corporation does not survive or (b) pursuant to which shares
of the Corporation common stock ("Common Stock") would be converted into
cash, securities or other property, unless, in case of either (a) or (b),
the holders of Corporation Common Stock immediately prior to such
transaction will, following the consummation of the transaction,
beneficially own, directly or indirectly, more than 50% of the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors of the corporation surviving,
continuing or resulting from such transaction; or
(D) the occurrence of, or execution of an agreement providing for, a
reorganization, merger, consolidation, or similar transaction of the
Corporation, or before any connected series of such transactions, if, upon
consummation of such transaction or transactions, the persons who are
members of the Board of Directors of the Corporation immediately before
such transaction or transactions cease or, in the case of the execution of
an agreement for such transaction or transactions, it is contemplated in
such agreement that upon consummation such persons would cease, to
constitute a majority of the Board of Directors of the Corporation or, in a
case where the Corporation does not survive in such transaction, of the
corporation surviving, continuing or resulting from such transaction or
transactions; or
(E) any other event which is at any time designated as a "Change of
Control" for purposes of this Agreement by a resolution adopted by the
Board of Directors of the Corporation with the affirmative vote of a
majority of the non-employee directors in office at the time the resolution
is adopted; in the event any such resolution is adopted, the Change of
Control event specified thereby shall be deemed incorporated herein by
reference and thereafter may not be amended, modified or revoked without
the written agreement of Executive.
Notwithstanding anything else to the contrary set forth in this
Agreement, if an agreement is executed by the Corporation or the Company
providing for any of the transactions or events constituting a Change of
Control as defined herein, and the agreement subsequently expires or is
terminated without the transaction or event being consummated, for purposes
of this Agreement it shall be as though such agreement was never executed
and no Change of Control event shall be deemed to have occurred as a result
of the execution of such agreement.
1.1.2 "Corporation" means Orrstown Financial Services, Inc.
1.1.3 "Normal Retirement Date" means the benefit described in Article 3.
1.1.4 "Normal Retirement Date" means the Date of the Director's Termination
of Service on or after attaining age 70.
1.1.5 "Plan Anniversary" means each twelve month period from the date set
forth in Section 2.1.
1.1.6 "Retirement Account" means the account maintained on the books of the
Company as described in Section 2.2.
1.1.7 "Simulated Investments" means investments specified by the Company
for use in measuring the Retirement Benefit. Subject to Article 2, the Company
can change the Simulated Investments only with the Director's written agreement.
The Simulated Investments shall be of equal initial amounts.
1.1.8 "Simulated Investment Rate" means the after-tax rate of return on a
Simulated Investment. If the Simulated Investment is a life insurance policy,
the Simulated Investment Rate shall track cash surrender value and not include
receipt of the policy's death benefits.
1.1.9 "Termination of Service" means the Director's ceasing to serve on the
Board of the Company or its successor for any reason other than death.
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Article 2
Retirement Account
2.1 SimuLated Investments. The Company shall establish two Simulated
Investments, in the amount of $655,000 as of October 1, 1998 as follows:
2.1.1 Simulated Investment Number One shall be equal to the cash surrender
value of one or more life insurance policies, as described in Appendix A.
2.1.2 Simulated Investment Number Two shall be equal to the principal and
the accumulated net after-tax interest earnings on an alternative investment.
For purpose of this Agreement, Simulated Investment Number Two assumes an
investment in one year U.S. Treasury Bills, assumes the applicable income rate
to be the Company's highest marginal tax rate for the previous calendar year,
assumes that after-tax interest shall accrue monthly and be compounded at each
Plan Anniversary Date, and assumes that the accumulated balance shall be
reinvested in one year U.S. Treasury Bills at each Plan Anniversary Date.
2.2 Retirement Account. The Company shall establish a Retirement Account on
its books for the Director. The Retirement Account as of any date shall be
determined by: (1) subtracting the value of Simulated Investment Number Two from
the value of Simulated Investment Number One, (2) dividing the difference by the
"adjustment rate", and (3) subtracting the sum of all previous distributions.
For purposes of this Section 2.2 the term "adjustment rate" shall mean the
figure equal to one minus the Company's highest marginal tax rate for the
previous calendar year.
2.3 Statement of Accounts. The Company shall provide to the Director,
within 90 days after each Plan Anniversary, a statement setting forth the
Retirement Account balance.
2.4 Accounting Device Only. The Retirement Account and Simulated
Investments are solely devices for measuring amounts to be paid under this
Agreement. They are not a trust fund of any kind. The Director is a general
unsecured creditor of the Company for the payment of benefits. The benefits
represent the mere Company promise to pay such benefits. The Director's rights
not subject in any manner to anticipation, alienation, transfer, assignment,
pledge, encumbrance, attachment, or garnishment by the Director's creditors.
Article 3
Lifetime Benefits
3.1 Retirement Benefit. Subject to the general limitations of Article 6,
the Company shall pay to the Director the Normal Retirement Benefit described in
Section 3.1.1.
3.1.1 Normal Retirement Benefit. Commencing on April 15, 2000 and
continuing each April 15 until the earlier of (1) the Director's death or (2)
the date the Director has received total payments of $120,000, the Company shall
pay a Normal Retirement Benefit to the Director. The Normal Retirement Benefit
shall be paid annually in an amount equal to the hypothetical growth, if any, of
the Director's Retirement Account from the immediately preceding Plan
Anniversary Date, determined pursuant to the method set forth in Section 2.1 and
2.2 hereof.
3.2 Change of Control Benefit. Following a Change of Control, the Director
shall continue to receive the Normal Retirement Benefit payable in accordance
with Article 3 herein until the Director or his beneficiary has received total
payments of $120,000.
Article 4
Death Benefits
Upon the Director's death prior to termination of this Agreement, the
Company shall pay to the Director's beneficiary a benefit equal to the
difference between $120,000 and the total payments previously distributed to the
Director under this Agreement. The Company shall pay the benefit to the
beneficiary in a lump sum within 60 days following the Director's death. This
shall terminate any further obligations the Company has to the Director or his
beneficiary.
Article 5
Beneficiaries
5.1 Beneficiary Designations. The Director shall designate a beneficiary by
filing a written designation with the Company. The Director may revoke or modify
the designation at any time by filing a new designation. However, designations
will only be effective if signed by the Director and accepted by the Company
during the Director's lifetime. The Director's beneficiary designation shall be
deemed automatically revoked if the beneficiary predeceases the Director, or if
the Director names a spouse as beneficiary and the marriage is subsequently
dissolved. If the Director dies without a valid beneficiary designation, all
payments shall be made to the Director's surviving spouse, if any, and if none,
to the Director's surviving children and the descendants of any deceased child
by right of representation, and if no children or descendants survive, to the
Director's estate.
5.2 Facility of Payment. If a benefit is payable to a minor, to a person
declared incompetent, or to a person incapable of handling the disposition of
his or her property the Company may pay such benefit to the guardian, legal
representative or person having the care or custody of such minor, incompetent
person or incapable person. The Company may require proof of incompetence,
minority or guardianship as it may deem appropriate prior to distribution of the
benefit. Such distribution shall completely discharge the Company from all
liability with respect to such benefit.
Article 6 General Limitations
Notwithstanding any provision of this Agreement to the contrary, the
Company shall not pay any benefit under this Agreement:
6.1 Termination for Cause. If the Company terminates the Director's service
for:
6.1.1 Gross negligence or gross neglect of duties;
6.1.2 Commission of a felony or of a gross misdemeanor involving moral
turpitude; or
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6.1.3 Fraud, disloyalty, dishonesty or willful violation of any law or
significant Company policy resulting in an adverse effect on the Company.
6.2 Suicide. If the Director commits suicide within two years after the
date of this Agreement, or if the Director has made any material misstatement of
fact on any application for life insurance purchased by the Company.
6.3 Competition After Termination of Service. If the Director, without the
prior written consent of the Company, engages in, becomes interested in,
directly or indirectly, a sole proprietor, as a partner in a partnership, or as
a substantial shareholder in a corporation, or becomes associated with, in the
capacity of employee, director, officer, principal, agent, trustee or in any
other capacity whatsoever, any enterprise conducted in the trading area (a 50
mile radius of the main office of the Company at the comer of King and Penn
Streets), which enterprise is, or may deemed to be competitive with any business
carried on by the Company as of the date of the Director's termination of
service. This Section 6.3 shall not apply following a Change of Control.
Article 7
Claims and Review Procedures
7.1 Claims Procedure. The Company shall notify the Director's beneficiary
in writing, within ninety (90) days of his or her written application for
benefits, of his or her eligibility or noneligibility for benefits under the
Agreement. If the Company determines that the beneficiary is not eligible for
benefits or full benefits, the notice shall set forth (1) the specific reasons
for such denial, (2) a specific reference to the provisions of the Agreement on
which the denial is based, (3) a description of any additional information or
material necessary for the claimant to perfect his or her claim, and a
description of why it is needed, and (4) an explanation of the Agreement's
claims review procedure and other appropriate information as to the steps to be
taken if the beneficiary wishes to have the claim reviewed. If the Company
determines that there are special circumstances requiring additional time to
make a decision, the Company shall notify the beneficiary of the special
circumstances and the date by which a decision is expected to be made, and may
extend the time for up to an additional 90-day period.
7.2 Review Procedure. If the beneficiary is determined by the Company not
to be eligible for benefits, or if the beneficiary believes that he or she is
entitled to greater or different benefits, the beneficiary shall have the
opportunity to have such claim reviewed by the Company by filing a petition for
review with the Company within sixty (60) days after receipt of the notice
issued by the Company. Said petition shall state the specific reasons which the
beneficiary believes entitle or her to benefits or to greater or different
benefits. Within sixty (60) days after receipt by the Company of the petition,
the Company shall afford the beneficiary (and counsel, if any) an opportunity to
present his or her position to the Company orally or in writing, and the
beneficiary (or counsel) shall have the right to review the pertinent documents.
The Company shall notify the beneficiary of its decision in writing within the
60-day period, stating specifically the basis of its decision, written in a
manner calculated to understood by the beneficiary and the specific provisions
of the Agreement on which the decision is based. If, because of the need for a
hearing, the 60-day period is not sufficient, the decision may be deferred for
up to another 60-day period at the election of the Company, but notice of this
deferral shall be given to the beneficiary.
Article 8
Amendments and Termination
This Agreement may be amended or terminated only by a written agreement
signed by the Company and the Director.
Article 9
Administration
9.1 Administration. Unless otherwise determined by the Company's Board of
Directors ("Board"), the Board or its designee shall be the named fiduciary and
shall act for the Company under this Agreement.
9.2 Powers of the Company. The Company shall have all powers necessary to
administer this Agreement, including, without limitation, powers:
9.2.1 to interpret the provisions of the Agreement; and
9.2.2 to establish rules for the administration of the Agreement and to
prescribe any forms required to administer the Agreement.
9.3 Actions of the Company. All determinations, interpretations, rules, and
decisions of the Company shall be conclusive and binding upon all persons having
or claiming to have any interest or right under this Agreement.
Article 10
Miscellaneous
10.1 Binding Effect. This Agreement shall bind the Director and the
Company, and their beneficiaries, survivors, executors, administrators and
transferees.
10.2 Non-Transferability. Benefits under this Agreement cannot be sold,
transferred, assigned, pledged. attached or encumbered in any manner.
10.3 Tax Withholding. The Company shall withhold any taxes that are
required to be withheld from the benefits provided under this Agreement.
10.4 Applicable Law. The Agreement and all rights hereunder shall be
governed by the laws of the Commonwealth of Pennsylvania except to the extent
preempted by the laws of the United States of America.
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10. 5 Unfunded Arrangement. The Director is a general unsecured creditor of
the Company for the payment of benefits under this Agreement. The benefits
represent the mere promise by the Company to pay such benefits. The rights to
benefits are not subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance, attachment, or garnishment by
creditors. Any insurance on the Director's life or any other asset held in
connection with this Agreement is a general asset of the Company to which the
Director has no preferred or secured claim.
IN WITNESS WHEREOF, the Director and a duly authorized Company officer have
signed this Agreement.
DIRECTOR: COMPANY:
ORRSTOWN BANK
_____________________________ By ______________________________
Title ___________________________
By execution hereof, 0rrstown Financial Services, Inc. consents to and
agrees to be bound by the terms and conditions of this Agreement.
ATTEST: CORPORATION:
ORRSTOWN FINANCIAL SERVICES, INC.
_____________________________ By ______________________________
Title ___________________________
4
EXHIBIT 13
Orrstown Financial Services, Inc.
1999 Annual Financial Report
CONTENTS
Page
INDEPENDENT AUDITOR'S REPORT ....................................... 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets ................................................ 2
Statements of income .......................................... 3
Statements of changes in shareholders' equity ................. 4
Statements of cash flows ...................................... 5
Notes to consolidated financial statements .................... 6 - 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS .................... 14 - 19
SUMMARY OF QUARTERLY FINANCIAL DATA ................................ 19
SELECTED FIVE-YEAR FINANCIAL DATA .................................. 20
MARKET, DIVIDEND AND INVESTOR INFORMATION .......................... 21
<PAGE>
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, 1999
and 1998 and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three years ended December
31, 1999. 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, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years ended December 31, 1999 in conformity with generally accepted
accounting principles.
/s/ Smith Elliott Kearns & Company, LLC
Chambersburg, Pennsylvania
January 31, 2000
<PAGE>
Consolidated Balance Sheets
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
<TABLE>
<CAPTION>
ASSETS Dec. 31, 1999 Dec. 31, 1998
(000 omitted) (000 omitted)
------------- -------------
<S> <C> <C>
Cash and due from banks $ 8,585 $ 7,028
Interest bearing deposits with banks 115 27
Federal funds sold 0 8,072
Securities available for sale 60,455 49,852
Federal Home Loan Bank, Federal Reserve and Atlantic Central
Bankers Bank stock, at cost which approximates market value 1,509 1,285
------------ -----------
70,664 66,264
------------ -----------
Loans
Commercial, financial and agricultural 21,503 18,732
Real estate - Mortgages 134,046 116,030
Real estate - Construction and land development 15,580 11,182
Consumer 9,562 12,688
------------ -----------
180,691 158,632
Less: Allowance for loan losses (2,455) (1,971)
------------ -----------
178,236 156,661
------------ -----------
Premises and equipment, net 6,809 5,224
Accrued interest receivable 1,599 1,235
Cash surrender value of life insurance 5,384 5,099
Other assets 2,361 1,339
------------ -----------
Total assets $ 265,053 $ 235,822
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing $ 25,264 $ 22,020
Interest bearing 179,125 161,744
------------ -----------
204,389 183,764
------------ -----------
Federal funds purchased and securities sold under agreements
to repurchase 15,406 6,234
Other borrowed funds 20,822 20,828
Accrued interest and other liabilities 2,568 3,916
------------ -----------
Total liabilities 243,185 214,742
------------ -----------
Shareholders' equity
Common stock: No par value - $ .1041 stated value per share,
10,000,000 shares authorized with 2,218,291 shares issued at
December 31, 1999; 2,055,315 shares issued at December 31, 1998 231 214
Additional paid-in capital 18,498 12,476
Retained earnings 3,717 6,863
Accumulated other comprehensive income (578) 1,527
------------ -----------
Total shareholders' equity 21,868 21,080
------------ -----------
Total liabilities and shareholders' equity $ 265,053 $ 235,822
============ ===========
</TABLE>
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF
THESE STATEMENTS.
2
<PAGE>
Consolidated Statements of Income
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1999 1998 1997
---- ---- ----
(000 omitted)
<S> <C> <C> <C>
Interest and Dividend Income
Interest and fees on loans $ 14,613 $ 12,836 $ 10,702
Interest and dividends on investment securities
U.S. Government and agencies 2,289 1,840 1,548
Exempt from federal income tax 1,032 1,036 935
Other investment income 390 397 265
-------- -------- --------
Total interest and dividend income 18,324 16,109 13,450
-------- -------- --------
Interest Expense
Interest on deposits 6,519 6,479 5,495
Interest on borrowed money 1,555 869 327
-------- -------- --------
Total interest expense 8,074 7,348 5,822
-------- -------- --------
Net interest income 10,250 8,761 7,628
-------- -------- --------
Provision for loan losses 547 270 215
-------- -------- --------
Net interest income after provision for loan losses 9,703 8,491 7,413
-------- -------- --------
Other Income
Service charges on deposit accounts 779 646 601
Other service charges, commissions, and fees 844 667 341
Trust department income 861 656 490
Brokerage income 369 162 59
Securities gains (losses) 423 (9) 3
Other income 305 131 57
-------- -------- --------
Total other income 3,581 2,253 1,551
-------- -------- --------
Net interest income and other income 13,284 10,744 8,964
-------- -------- --------
Other Expenses
Salaries and employee benefits 4,297 3,491 2,901
Occupancy expense of bank premises, net, and furniture and
equipment expenses 1,099 859 764
FDIC insurance premiums 22 20 17
Other operating expenses 2,800 2,075 1,702
-------- -------- --------
Total other expenses 8,218 6,445 5,384
-------- -------- --------
Income before income tax 5,066 4,299 3,580
Applicable income tax 1,311 1,180 974
-------- -------- --------
Net income $ 3,755 $ 3,119 $ 2,606
======== ======== ========
Per share data
Net income $ 1.70 $ 1.41 $ 1.18
Dividends .51 .45 .41
Weighted average shares outstanding 2,214,951 2,205,718 2,204,444
</TABLE>
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF
THESE STATEMENTS.
3
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
<TABLE>
<CAPTION>
Years Ended December 31, 1999, 1998 and 1997
------------------------------------------------------------------------------
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Shareholders'
Stock Capital Earnings Income Equity
----- ------- -------- ------ ------
(000 omitted)
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 204 $ 10,625 $ 4,786 $ 241 $ 15,856
Comprehensive income
Net income 0 0 2,606 0 2,606
Change in unrealized gain on
investment securities available
for sale, net of tax of $ 375 0 0 0 728 728
--------
Total comprehensive income 3,334
Cash dividends ($ .41 per share) 0 0 (903) 0 (903)
Stock dividends issued 10 1,727 (1,737) 0 0
Cash paid in lieu of fractional stock
dividends 0 0 (22) 0 (22)
------ -------- ------- ----- --------
Balance, December 31, 1997 214 12,352 4,730 969 18,265
Comprehensive income
Net income 0 0 3,119 0 3,119
Change in unrealized gain on
investment securities available
for sale, net of tax of $ 287 0 0 0 558 558
--------
Total comprehensive income 3,677
Cash dividends ($ .45 per share) 0 0 (986) 0 (986)
Issuance of stock through dividend
reinvestment plan 0 124 0 0 124
------ -------- ------- ----- --------
Balance, December 31, 1998 214 12,476 6,863 1,527 21,080
Comprehensive income
Net income 0 0 3,755 0 3,755
Change in unrealized (loss) on
investment securities available
for sale, net of tax of $ 1,084 0 0 0 (2,105) (2,105)
--------
Total comprehensive income 1,650
Cash dividends ($ .51 per share) 0 0 (1,134) 0 (1,134)
Stock dividends issued 16 5,720 (5,736) 0 0
Cash paid in lieu of fractional stock
dividends 0 0 (31) 0 (31)
Issuance of stock through dividend
reinvestment plan 1 302 0 0 303
------ -------- ------- ----- --------
Balance, December 31, 1999 $ 231 $ 18,498 $ 3,717 ($ 578) $ 21,868
====== ======== ======= ====== ========
</TABLE>
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF
THESE STATEMENTS.
4
<PAGE>
Consolidated Statements of Cash Flows
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
<TABLE>
<CAPTION>
Years Ended December 31, 1999, 1998 and 1997
----------------------------------------------
1999 1998 1997
---- ---- ----
(000 omitted)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,755 $ 3,119 $ 2,606
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 528 438 364
Provision for loan losses 547 270 215
Loss on sale of other real estate owned 54 0 0
Deferred income taxes ( 103) 27 ( 7)
Securities (gains) losses ( 423) 9 ( 3)
Increase in cash surrender value of life insurance ( 285) 0 0
(Increase) decrease in accrued interest receivable ( 364) 64 ( 370)
Increase (decrease) in accrued interest payable ( 1,707) 483 480
Other net 143 ( 152) ( 59)
------- ------- -------
Net cash provided by operating activities 2,145 4,258 3,226
------- ------- -------
Cash flows from investing activities:
Net (increase) decrease in interest bearing deposits
with banks ( 88) ( 11) 1,538
Sales of available for sale securities 6,895 8,923 15
Maturities of available for sale securities 2,500 2,390 3,114
Purchases of available for sale securities (22,763) (14,120) (14,811)
Purchases of FHLB stock ( 225) ( 302) ( 49)
Net (increase) in loans (22,130) (30,367) (19,473)
Purchases of bank premises and equipment ( 2,071) ( 491) ( 1,537)
Investment in cash surrender value of life insurance 0 ( 4,816) 0
Proceeds from sale of other real estate owned 286 0 0
------- ------- -------
Net cash (used) by investing activities (37,596) (38,794) (31,203)
------- ------- -------
Cash flows from financing activities:
Net increase in deposits 20,631 23,184 23,321
Net increase in federal funds purchased
and securities sold under agreements to repurchase 9,173 5,999 235
Proceeds from debt 0 12,500 6,000
Payment on debt ( 6) ( 6) ( 5)
Cash dividends paid ( 1,134) ( 986) ( 903)
Cash paid in lieu of fractional stock dividends ( 31) 0 ( 22)
Proceeds from sale of stock 303 124 0
------- ------- -------
Net cash provided by financing activities 28,936 40,815 28,626
------- ------- -------
Net increase (decrease) in cash and cash equivalents ( 6,515) 6,279 649
Cash and cash equivalents, beginning balance 15,100 8,821 8,172
------- ------- -------
Cash and cash equivalents, ending balance $ 8,585 $15,100 $ 8,821
======= ======= =======
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest $ 9,781 $ 6,865 $ 5,343
Income taxes 1,385 1,200 974
Supplemental schedule of noncash investing and
financing activities:
Other real estate acquired in settlement of loans 0 264 0
Unrealized gain (loss) on investment securities
available for sale (net of tax effects) ( 2,105) 558 728
</TABLE>
THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF
THESE STATEMENTS.
5
<PAGE>
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 eight branches are located in Shippensburg (2),
Carlisle (2), Spring Run, Orrstown, and Chambersburg (2), 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 Corporation may segregate their investment portfolio into three
specific categories: "securities held to maturity", "trading securities" and
"securities available for sale". Securities held to maturity are to be accounted
for at their amortized cost; securities classified as trading securities are to
be accounted for at their current market value with unrealized gains and losses
on such securities included in current period earnings; and securities
classified as available for sale are to be accounted for at their current market
value with unrealized gains and losses on such securities to be excluded from
earnings and reported as a net amount in other comprehensive income.
Management determines the appropriate classification of securities at the
time of purchase. If management has the intent and the corporation has the
ability at the time of purchase to hold securities until maturity 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 other
comprehensive income, whereas realized gains and losses flow through the
corporation's results of operations.
Cash flows
For purposes of the Statements of Cash Flows, the corporation has defined
cash and cash equivalents as those amounts included in the balance sheet
captions "Cash and Due From Banks" and "Federal Funds Sold". As permitted by
Statement of Financial Accounting Standards No. 104, the corporation has elected
to present the net increase or decrease in deposits in banks, loans, and
deposits in the Statements of Cash Flows.
Premises, equipment, furniture and fixtures and depreciation
Buildings, improvements, equipment, furniture and fixtures are carried at
cost less accumulated depreciation. Depreciation has been provided generally on
the straight-line method and is computed over the estimated useful lives of the
various assets as follows:
Years
-----
Buildings and improvements 10-40
Equipment, furniture and fixtures 3-15
Repairs and maintenance are charged to operations as incurred. Computer software
is amortized over 3-5 years.
Intangibles
Intangible costs are amortized on a straight-line basis over fifteen years.
Advertising
The corporation follows the policy of charging costs of advertising to
expense as incurred. Advertising expense was $ 138,000, $ 154,000, and $149,000
for 1999, 1998 and 1997, respectively.
Loans and allowance for loan losses
Loans are stated at the amount of unpaid principal, reduced by an allowance
for loan losses. Interest on loans is calculated by using the simple interest
method on daily balances of the principal amount outstanding. The allowance for
loan losses is established through a provision for loan losses charged to
expenses. Loans are charged against the allowance when management believes that
the collectibility of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb possible losses on existing loans
that may become uncollectible, based on evaluations of the collectibility of
loans and prior loan loss experience. The evaluations take into consideration
such factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current economic
conditions that may affect the borrowers' ability to pay.
6
<PAGE>
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. Interest
income generally is not recognized on specific impaired loans unless the
likelihood of further loss is remote. Interest payments received on such loans
are applied as a reduction of loan principal balance. Interest income on other
impaired loans is recognized only to the extent of interest payments received.
Foreclosed real estate
Real estate properties acquired through, or in lieu of, loan foreclosure
are to be sold and are initially recorded at the lower of carrying value or fair
value less cost to sell of the underlying collateral. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell.
Earnings per share of common stock
Earnings per share of common stock were computed based on a weighted
average shares of common stock outstanding of 2,214,951 in 1999; 2,205,718 in
1998; and 2,204,444 in 1997 after giving retroactive recognition to a 7-1/2%
stock dividend issued in November 1999, a 2-for-1 stock split in November 1998,
and a 5% stock dividend issued in May 1997.
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.
Fair values of financial instruments
Statement of Financial Accounting Standards No. 107, Disclosures About
Fair Value of Financial Instruments, requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. Statement No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the corporation.
The following methods and assumptions were used by the corporation in
estimating fair values of financial instruments as disclosed herein:
Cash and Cash Equivalents. The carrying amounts of cash and short-term
instruments approximate their fair value.
Securities to be Held to Maturity and Securities Available for Sale. Fair values
for investment securities are based on quoted market prices.
Loans Receivable. For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying values.
Fair values for fixed rate loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Fair values for impaired loans are
estimated using discounted cash flow analyses or underlying collateral values,
where applicable.
Deposit Liabilities. The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable-rate, fixed-term
money market accounts and certificates of deposit approximate their fair values
at the reporting date. Fair values for fixed-rate certificates of deposits and
IRA's are estimated using a discounted cash flow calculation that applies
interest rates currently being offered to a schedule of aggregated expected
maturities on time deposits.
Short-Term Borrowings. The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings maturing
within 90 days approximate their fair values. Fair values of other short-term
borrowings are estimated using discounted cash flow analyses based on the Bank's
current incremental borrowing rates for similar types of borrowing arrangements.
Long-Term Borrowings. The fair value of the Bank's long-term debt is estimated
using a discounted cash flow analysis based on the Bank's current incremental
borrowing rate for similar types of borrowing arrangements.
Accrued Interest. The carrying amounts of accrued interest approximate their
fair values.
Off-Balance-Sheet Instruments. The Bank generally does not charge commitment
fees. Fees for standby letters of credit and their off-balance-sheet instruments
are not significant.
Comprehensive income
In 1998 the Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 130 - Reporting Comprehensive Income. Under SFAS No. 130,
comprehensive income is defined as the change in equity from transactions and
other events from nonowner sources. It includes all changes in equity except
those resulting from investments by shareholders and distributions to
shareholders. Comprehensive income includes net income and certain elements of
"other comprehensive income" such as foreign currency transactions; accounting
for futures contracts; employers accounting for pensions; and accounting for
certain investments in debt and equity securities.
The Corporation has elected to report its comprehensive income in the
statement of shareholders' equity. The only element of "other comprehensive
income" that the Corporation has is the unrealized gain or loss on available for
sale securities. The 1997 financial statements have been reclassified to reflect
these changes in reporting format.
7
<PAGE>
The components of the change in net unrealized gains (losses) on securities
were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(000 Omitted)
<S> <C> <C> <C>
Gross unrealized holding gains (losses) arising during the year ($ 2,766) $ 836 $ 1,106
Reclassification adjustment for (gains) losses realized in
net income ( 423) 9 ( 3)
------- ----- ------
Net unrealized holding gains (losses) before taxes ( 3,189) 845 1,103
Tax effect 1,084 ( 287) ( 375)
------- ----- ------
Net change ($ 2,105) $ 558 $ 728
======= ===== ======
</TABLE>
NOTE 2. INVESTMENTS
At December 31, 1999 and 1998 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:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(000 omitted)
1999
----
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U. S. Government
corporations and agencies $ 30,990 $ 22 $ 653 $ 30,359
Obligations of states and political subdivisions 16,998 306 120 17,184
Mortgage-backed securities 12,603 0 526 12,077
Equity securities 739 156 60 835
-------- --------- ------- --------
Totals $ 61,330 $ 484 $ 1,359 $ 60,455
======== ========= ======= ========
1998
----
U.S. Treasury securities and obligations of U. S. Government
corporations and agencies $ 14,508 $ 311 $ 22 $ 14,797
Obligations of states and political subdivisions 17,975 1,087 0 19,062
Mortgage-backed securities 14,369 166 11 14,524
Equity securities 686 804 21 1,469
-------- --------- ------- --------
Totals $ 47,538 $ 2,368 $ 54 $ 49,852
======== ========= ======= ========
</TABLE>
The amortized cost and fair values of investment securities available for
sale at December 31, 1999, by contractual maturity are shown below. Contractual
maturities will differ from expected maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
Amortized
Cost Fair Value
---- ----------
(000 omitted)
Due in one year or less $ 2,999 $ 3,004
Due after one year through five years 14,188 13,896
Due after five years through ten years 13,460 13,227
Due after ten years 17,341 17,416
Mortgage-backed securities 12,603 12,077
Equity securities 739 835
-------- --------
$ 61,330 $ 60,455
======== ========
Proceeds from sales of securities available for sale during 1999, 1998 and
1997 were $ 6,895,000, $ 8,923,000 and $ 15,000, respectively. Gross gains and
losses on 1999 sales were $ 425,864 and $ 2,340, respectively. Gross gains and
losses on 1998 sales were $ 14,386 and $ 23,779, respectively. Gross gains and
losses on 1997 sales were $ 10,045 and $ 6,660, respectively.
The corporation owns $ 1,266,200 of Federal Home Loan Bank stock, $ 54,000
of Atlantic Central Bankers Bank stock and $ 189,000 of Federal Reserve Bank
stock at December 31, 1999. At December 31, 1998 the corporation's stock
ownership was $ 1,041,500 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 $ 43,138,000 and $ 33,436,000 at December 31, 1999
and 1998, respectively, were pledged to secure public funds and for other
purposes as required or permitted by law.
NOTE 3. CONCENTRATION OF CREDIT RISK
The corporation grants agribusiness, commercial, residential and consumer
loans to customers in South Central Pennsylvania, principally Franklin and
Cumberland Counties. The concentrations of credit by type of loan are set forth
on the face of the balance sheet. The corporation maintains a diversified loan
portfolio and evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the corporation
upon the extension of credit, is based on management's credit evaluation of the
customer. Collateral held varies but generally includes equipment and real
estate.
The corporation maintains deposit balances at several correspondent banks,
which provide check collection and item processing services to the corporation.
The balances with these correspondent banks, at times, exceed federally insured
limits, which management considers to be a normal business risk.
8
<PAGE>
NOTE 4. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ---------
(000 omitted)
<S> <C> <C> <C>
Balance at beginning of period $ 1,971 $ 1,767 $ 1,620
Recoveries 65 18 15
Provision for loan losses charged to income 547 270 215
------- ------- -------
Total 2,583 2,055 1,850
Losses 128 84 83
------- ------- -------
Balance at the end of period $ 2,455 $ 1,971 $ 1,767
======= ======= =======
</TABLE>
NOTE 5. PREMISES AND EQUIPMENT
A summary of bank premises and equipment is as follows:
1999 1998
---- ----
(000 omitted)
Land $ 606 $ 606
Buildings and improvements 3,805 3,785
Leasehold improvements 189 173
Furniture and equipment 4,306 3,050
Construction in progress 1,002 236
------- --------
Total 9,908 7,850
Less accumulated depreciation
and amortization 3,099 2,626
------- --------
Bank premises and equipment, net $ 6,809 $ 5,224
======= ========
Depreciation expense amounted to $ 485,477 in 1999, $ 397,246 in 1998, and
$323,652 in 1997.
NOTE 6. LOANS TO RELATED PARTIES
The corporation has granted loans to the officers and directors of the
corporation and its subsidiary and to their associates. Related party loans are
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with unrelated
persons and do not involve more than normal risk of collectibility. The
aggregate dollar amount of these loans was $ 2,189,000 at December 31, 1999 and
$ 1,888,000 at December 31, 1998. During 1999, $ 781,000 of new loans were made
and repayments totaled $ 480,000. Outstanding loans to employees totaled
$810,353 and $ 1,424,000 at December 31, 1999 and 1998, respectively.
NOTE 7. NONACCRUAL LOANS
The following table shows the principal balances of nonaccrual loans as of
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Nonaccrual loans $ 64,000 $486,000 $ 473,000
======== ======== =========
Interest income that would have been accrued
at original contract rates $ 6,608 $ 39,878 $ 30,835
Amount recognized as interest income 0 5,579 5,829
-------- -------- ---------
Foregone revenue $ 6,608 $ 34,299 $ 25,006
======== ======== =========
</TABLE>
Impairment of loans having recorded investments of $ 404,678 at December
31, 1998 and 1997 has been recognized in accordance with Statements of Financial
Accounting Standards No. 114 and 118. The average recorded investment in
impaired loans during 1998 and 1997 was $ 404,678 and $ 405,262, respectively.
Total allowance for loan losses related to impaired loans was $ 60,702 and
$60,750 at December 31, 1998 and 1997. Interest income on impaired loans of $ 0
and $ 5,829 was recognized for cash payments received in 1998 and 1997. During
1999 foreclosure proceedings were concluded on impaired loans resulting in a
loss of $ 39,000 charged to the allowance for loan losses.
The corporation had no impairment of loans as of December 31, 1999 as
defined by Statements of Financial Accounting Standard No. 114 and 118.
NOTE 8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financial needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheets. The contract amounts of those instruments reflect the extent of
involvement the corporation has in particular classes of financial instruments.
The corporation's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit and
standby letters of credit and financial guarantees written is represented by the
contractual amount of those instruments. The corporation uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
<TABLE>
<CAPTION>
Contract or
Notional Amount
---------------------
1999 1998
---- ----
(000 omitted)
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk at
December 31:
Commitments to extend credit $32,464 $36,653
Standby letters of credit and financial guarantees written 4,688 3,863
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the corporation upon extension of credit is based on
management's credit evaluation of the customer. Collateral held varies but may
include accounts receivable, inventory, real estate, equipment, and
income-producing commercial properties.
9
<PAGE>
Standby letters of credit and financial guarantees written are conditional
commitments issued by the corporation to guarantee the performance of a customer
to a third party. Those guarantees are primarily issued to support public and
private borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loans to customers.
The corporation holds collateral supporting those commitments when deemed
necessary by management.
NOTE 9. BENEFIT PLANS
The corporation maintains a 401(k) profit-sharing plan for those employees
who meet the eligibility requirements set forth in the plan. Employer
contributions to the plan are based on corporate performance and are at the
discretion of the corporation's Board of Directors. In addition, there is a
provision for an employer match of 50 cents on the dollar for employee
contributions up to 6% of the employees' eligible compensation. Substantially
all of the corporation's employees are covered by the plan and the contributions
charged to operations were $ 439,957, $ 371,621 and $ 319,182 for 1999, 1998,
and 1997, respectively.
The corporation has a deferred compensation arrangement with certain
present and former board directors whereby a director or his beneficiaries will
receive a monthly retirement benefit at age 65. The arrangement is funded by an
amount of life insurance on the participating director calculated to meet the
corporation's obligations under the compensation agreement. The cash value of
the life insurance policies is an unrestricted asset of the corporation. The
estimated present value of future benefits to be paid, which is included in
other liabilities, amounted to $ 166,191 and $ 166,214 at December 31, 1999 and
1998, respectively. Total annual expense for this deferred compensation plan was
$ 19,064 for 1999, 1998 and 1997.
The corporation also has a supplemental discretionary deferred compensation
plan for executive officers and directors. The plan is funded annually with
salary and fee reductions which are placed in a trust account invested by the
corporation's trust department. Total amount contributed to the plan was $
42,308, $ 31,975 and $ 46,425 for 1999, 1998 and 1997, respectively.
During 1998 the corporation adopted four new supplemental retirement and
salary continuation plans for directors and executive officers. These plans are
funded with single premium life insurance on the plan participants. The cash
value of the life insurance policies is an unrestricted asset of the
corporation. The estimated present value of future benefits to be paid totaled
$196,625 and $ 41,151 at December 31, 1999 and 1998, respectively which is
included in other liabilities. Total annual expense for these plans amounted to
$155,474 and $41,151 for 1999 and 1998, respectively.
NOTE 10. INCOME TAXES
The components of federal income tax expense are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(000 omitted)
<S> <C> <C> <C>
Current year provision $ 1,599 $ 1,153 $ 981
Deferred income taxes (benefits) (288) 27 (7)
------- ------- -----
Net federal income tax expense $ 1,311 $ 1,180 $ 974
======= ======= =====
</TABLE>
Federal income taxes were computed after reducing pretax accounting income
for non-taxable income in the amount of $ 1,515,383, $ 1,154,199, and $ 969,000
for 1999, 1998, and 1997, respectively.
A reconciliation of the effective applicable income tax rate to the federal
statutory rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal income tax rate 34.0% 34.0% 34.0%
Reduction resulting from:
Nontaxable income 8.1 6.5 6.8
----- ----- -----
Effective income tax rate 25.9% 27.5% 27.2%
===== ==== ====
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998
---- -----
<S> <C> <C>
Total deferred tax assets $ 1,262,000 $ 723,000
Total deferred tax liabilities (275,000) (1,108,000)
----------- -----------
Net deferred tax asset (liability) $ 987,000 $ (385,000)
=========== ===========
</TABLE>
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 totaling $ 31,663,000 and $ 28,844,000 for 1999 and 1998,
respectively. Also included in interest bearing deposits at December 31, 1999
and 1998 are money market account balances totaling $ 45,444,000 and
$35,299,000, respectively.
At December 31, 1999 and 1998 time deposits of $ 100,000 and over
aggregated $ 10,855,000 and $ 10,224,000, respectively. Interest expense on time
deposits of $ 100,000 and over was $ 484,000; $ 572,000; and $ 497,000 for 1999,
1998 and 1997, respectively.
At December 31, 1999 the scheduled maturities of certificates of deposit
are as follows:
2000 $ 22,179
2001 35,746
2002 11,790
2003 2,588
2004 6,346
2005 and thereafter 1,932
--------
$ 80,581
========
10
<PAGE>
The corporation accepts deposits of the officers and directors of the
corporation and its subsidiary on the same terms, including interest rates, as
those prevailing at the time for comparable transactions with unrelated persons.
The aggregate dollar amount of deposits of officers and directors totaled
$1,081,000 and $ 888,000 at December 31, 1999 and 1998, 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:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Average balance during the year $ 8,894,000 $ 4,139,000
Average interest rate during the year 4.61% 4.81%
Maximum month-end balance during the year $ 13,683,000 $ 6,234,000
Securities underlying the agreements at year-end:
Carrying value $ 25,247,000 $ 6,182,000
Estimated fair value $ 24,909,000 $ 6,303,000
</TABLE>
At December 31, the corporation had long-term notes outstanding with the
Federal Home Loan Bank of Pittsburgh as follows:
- - - - - - - Amount - - - - -
1999 1998 Maturity Date Interest Rate
---- ---- ------------- -------------
$ 1,000,000 $ 1,000,000 1/04 6.42%
1,000,000 1,000,000 4/03 6.58%
3,000,000 3,000,000 3/02 6.26%
3,000,000 3,000,000 10/02 5.73%
7,500,000 7,500,000 9/08 5.06%
5,000,000 5,000,000 10/08 4.66%
------------ ------------
$ 20,500,000 $ 20,500,000
============ ============
Interest rates are fixed and interest only is paid on a monthly basis. The
notes contain prepayment penalty charges, but management has no intention to pay
off early.
In addition to the aforementioned long-term notes the corporation 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 - - - - -
1999 1998 Maturity Date Rate
---- ---- ------------- ----
$ 0 $ 6,173 2/99 5.21%
6,498 6,498 2/00 5.48%
315,579 315,579 2/01 5.58%
--------- ---------
$ 322,077 $ 328,250
========= =========
In addition, the corporation has available a $ 5 million line of credit
with the Federal Home Loan Bank of Pittsburgh. Collateral for outstanding
advances and the line consists of certain securities and the corporation's 1-4
family mortgage loans totaling $ 100,207,000 at December 31, 1999. The
corporation also has available an unused line of credit with Atlantic Central
Bankers Bank of $ 6 million at December 31, 1999.
Total interest on the aforementioned borrowings charged to operations was
$1,106,695, $655,025 and $308,405 for 1999, 1998 and 1997, 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
<TABLE>
<CAPTION>
1999 1998
---- ----
(000 omitted)
<S> <C> <C>
Assets
Cash $ 641 $ 109
Securities available for sale 835 1,469
Investment in Orrstown Bank 20,811 19,740
Furniture and equipment (net of depreciation) 4 2
Other assets 19 26
-------- --------
Total assets $ 22,310 $ 21,346
======== ========
Liabilities
Accrued expenses $ 409 $ 0
Deferred taxes 33 266
-------- --------
Total liabilities 442 266
======== ========
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Shareholders' Equity
1999 1998
---- ----
(000 Omitted)
<S> <C> <C>
Common stock, no par value - $ .1041 stated value per share,
10,000,000 shares authorized with 2,218,291 shares issued
at December 31, 1999; 2,055,315 shares issued at December 31, 1998 $ 231 $ 214
Additional paid-in capital 18,498 12,476
Retained earnings 3,717 6,863
Accumulated other comprehensive income (578) 1,527
-------- --------
Total shareholders' equity 21,868 21,080
-------- --------
Total liabilities and shareholders' equity $ 22,310 $ 21,346
======== ========
</TABLE>
<TABLE>
<CAPTION>
Income Statements
Years Ended December 31
1999 1998 1997
---- ----- -----
(000 omitted)
<S> <C> <C> <C>
Interest and dividend income $ 38 $ 23 $ 16
Net gain on sale of investment 421 0 10
Cash dividends from wholly-owned subsidiary 910 1,110 1,064
Equity in undistributed income of subsidiary 2,723 2,030 1,570
------- ------- -------
4,092 3,163 2,660
Less: Operating expenses and income tax 337 44 54
------- ------- -------
Net income $ 3,755 $ 3,119 $ 2,606
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Statements of Cash Flows
Years Ended December 31
1999 1998 1997
---- ---- ----
(000 Omitted)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,755 $ 3,119 $ 2,606
Adjustments to reconcile net income to cash
provided by operating activities:
Security (gains) (421) 0 (10)
Equity in undistributed income of subsidiary (2,723) (2,030) (1,570)
Increase (decrease) in other liabilities 409 0 (40)
(Increase) decrease in other assets 5 (26) 0
------- ------- -------
Net cash provided by operating activities 1,025 1,063 986
------- ------- -------
Cash flows from investing activities:
Purchase of available for sale securities (255) (207) (75)
Sales of available for sale securities 624 0 22
------- ------- -------
Net cash provided (used) by investing activities 369 (207) (53)
------- ------- -------
Cash flows from financing activities:
Cash dividends paid (1,134) (986) (903)
Cash paid in lieu of fractional stock dividends (31) 0 (22)
Proceeds from sale of stock 303 124 0
------- ------- -------
Net cash (used) by financing activities (862) (862) (925)
------- ------- -------
Net increase (decrease) in cash 532 (6) 8
Cash, beginning balance 109 115 107
------- ------- -------
Cash, ending balance $ 641 $ 109 $ 115
======= ======= =======
</TABLE>
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 $ 15,153,000 in its retained earnings at
December 31, 1999 is fully available for cash dividends. Orrstown Financial
Services' balance of retained earnings at December 31, 1999 is $ 3,717,000 and
would be available for cash dividends, although payment of dividends to such
extent would not be prudent or likely. The Federal Reserve Board, which
regulates bank holding companies, establishes guidelines which indicate that
cash dividends should be covered by current period earnings.
The corporation is also subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the corporation's financial statements. Under capital
adequacy guidelines, the corporation is required to maintain minimum capital
ratios. The leverage ratio compares capital to total balance sheet assets, while
the risk-based ratios compare capital to risk-weighted assets and
off-balance-sheet activity in order to make capital levels more sensitive to
risk profiles of individual banks. A comparison of Orrstown Financial Services'
capital ratios to regulatory minimums at December 31 is as follows:
12
<PAGE>
<TABLE>
<CAPTION>
Orrstown Financial Services Regulatory Minimum
1999 1998 Requirements
---- ---- ------------------
<S> <C> <C> <C>
Leverage ratio 8.2% 8.9% 3%
Risk-based capital ratio
Tier I (core capital) 10.5% 11.8% 4%
Combined Tier I and Tier II
(core capital plus allowance
for loan losses) 11.8% 12.9% 8%
</TABLE>
As of December 31, 1999 the most recent notification from the Federal
Reserve Bank categorized the corporation as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the
corporation's category.
NOTE 15. LEASES
The bank leases land and building space associated with certain branch
offices, remote automated teller machines, and certain data processing equipment
under agreements which expire at various times from 2001 through 2004. Total
rent expense charged to operations in connection with these leases was
$118,342, $24,803 and $22,350 for 1999, 1998, and 1997, respectively.
The total minimum rental commitment under operating leases at December 31,
1999 is as follows:
Due in the year ending December 31:
2000 $ 186,452
2001 174,189
2002 60,480
2003 14,326
2004 11,076
NOTE 16. COMPENSATING BALANCE ARRANGEMENTS
Required deposit balance at the Federal Reserve was $ 65,000 at December
31, 1999 and 1998, respectively. Required deposit balance at Atlantic Central
Bankers Bank was $ 585,000 at December 31, 1999 and 1998. These balances are
maintained to cover processing costs and service charges. An additional $ 30,240
is on deposit with First Union National Bank of Florida as a reserve for
potential clearing losses related to the credit card operations.
NOTE 17. COMMITMENTS
The corporation has entered into contracts for the renovation of a property
acquired in 1998 that is adjacent to its downtown Shippensburg office and for
the construction of a new branch office. The total amount of the contracts is
$362,000, of which $ 107,000 remained open at December 31, 1999.
<PAGE>
NOTE 18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the corporation's financial instruments were
as follows at December 31:
<TABLE>
<CAPTION>
- - - - - 1999 - - - - - - - - - - - - 1998 - - - - -
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- --------
(000 Omitted)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and short-term investments $ 8,700 $ 8,700 $ 15,127 $ 15,127
Securities available for sale 60,455 60,455 49,852 49,852
Restricted bank stocks 1,509 1,509 1,285 1,285
Loans 180,691 158,632
Allowance for loan loses (2,455) (1,971)
--------- ---------
Net loans 178,236 177,742 156,661 157,486
Accrued interest receivable 1,599 1,599 1,235 1,235
--------- --------- --------- ---------
Total financial assets $ 250,499 $ 250,005 $ 224,160 $ 224,985
========= ========= ========= =========
FINANCIAL LIABILITIES
Deposits $ 204,389 $ 205,177 $ 183,764 $ 184,131
Short-term borrowed funds 15,406 15,406 6,234 6,234
Long-term borrowed funds 20,822 17,822 20,828 20,903
Accrued interest payable 422 422 2,129 2,129
--------- --------- --------- ---------
Total financial liabilities $ 241,039 $ 238,827 $ 212,955 $ 213,397
========= ========= ========= =========
</TABLE>
13
<PAGE>
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, 1999, Orrstown Financial Services, Inc.
(the Corporation), and its wholly owned subsidiary, Orrstown Bank (the Bank),
recorded net income of $ 3,755,000, an increase of 20.4% over 1998 earnings of
$3,119,000, which was a 19.7% increase over net income of $2,606,000 in 1997.
Net income per share (EPS) has increased over this time period from $1.18 in
1997 to $1.41 in 1998 and $1.70 in 1999.
The Corporation's earnings performance continues to be well above peer
group averages as measured by various ratio analyses. Two widely recognized
performance indicators are the return on average assets (ROA) and the return on
average equity (ROE). The return on average assets was 1.50% in 1999, 1.47% in
1998 and 1.51% in 1997. The return on average equity has steadily increased from
15.37% in 1997, to 15.97% in 1998 and 17.02% in 1999.
Net Interest Income
Net interest income is the amount by which interest income on earning
assets exceeds interest paid on interest bearing liabilities. The amount of net
interest income is affected by changes in interest rates, account balances or
volume and the mix of earning assets and interest bearing liabilities. Net
interest income is still the primary source of commercial bank profits despite
the continued industry wide push to build noninterest income streams.
For the year ended December 31, 1999, net interest income totaled
$10,250,000, an increase of $1,489,000, or 17.0%, over 1998. The 1998 total was
$8,761,000, or 14.9%, over 1997. On a taxable equivalent basis, net interest
income increased by 16.3% in 1999 and 15.1% in 1998. Marginal tax rates used in
the taxable equivalent equation were 34% for all three years presented.
The Corporation's taxable equivalent net interest spread was 4.32% in 1997,
4.05% in 1998, and 4.14% in 1999. The net interest margin, which factors in
noninterest bearing funds sources, has moved from 5.01% to 4.70% to 4.69%,
respectively. Earning assets represented 94.1% of total assets in 1997, 93.8% in
1998 and 92.6% in 1999.
Volume factors were responsible for essentially all net interest income
growth during 1998 and 1999. On an average daily basis, assets grew 18.1% during
1999 and 23.1% during 1998. Earning assets grew 16.5% and 22.8% during 1999 and
1998, respectively. Average daily loan growth of 17.7% in 1999 and 22.7% in 1998
was achieved without lowering credit standards and allowed net interest margins
to hold at above peer group levels despite pressure on margins generally
throughout the banking industry. The net interest margin generated in 1999
declined by only one basis point from 1998 levels and remained well above peer
averages while net interest spread actually increased by nine basis points.
Continued shifting of the loan portfolio mix toward a heavier commercial loan
weighting helped maintain spreads by affording opportunities to record
noninterest bearing deposit balances along with variable loan balances tied
primarily to prime during a period that saw three 25 basis point increases in
the prime rate over the last half of the year. Management is poised to keep a
very close eye on margins moving into 2000.
14
<PAGE>
ANALYSIS OF NET INTEREST INCOME
Average Balances and Interest Rates
Taxable Equivalent Basis
(Dollars In Thousands)
<TABLE>
<CAPTION>
- - - - - - - 1999 - - - - - - - - - - - - 1998 - - - - - - - -
Tax Tax Tax Tax
Average Equivalent Equivalent Average Equivalent Equivalent
Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest Earning Assets:
Federal funds sold & interest-
bearing bank balances $ 5,834 $ 283 4.85% $ 5,706 $ 303 5.31%
-------- ------- ---- -------- ------- ----
Investment securities:
Taxable investment
securities 38,877 2,397 6.17 31,450 1,934 6.15
Tax-exempt investment
securities 17,852 1,564 8.76 17,890 1,570 8.77
-------- ------- ---- -------- ------- ----
Total investment
securities 56,729 3,961 6.98 49,340 3,504 7.10
-------- ------- ---- -------- ------- ----
Loans:
Taxable loans 166,498 14,433 8.67 142,019 12,717 8.96
Tax-exempt loans 2,960 274 9.26 1,994 179 8.97
-------- ------- ---- -------- ------- ----
Total loans 169,458 14,707 8.68 144,013 12,896 8.96
-------- ------- ---- -------- ------- ----
Total interest-
earning assets 232,021 18,951 8.17 199,059 16,703 8.39
Non-Interest Earning Assets:
Cash and due from banks 6,515 5,699
Bank premises and
equipment 14,110 5,148
Other assets 0 4,158
Less allowance for loan
losses (2,117) (1,915)
-------- --------
Total $250,529 $212,149
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest Bearing Liabilities:
Interest-bearing demand
deposits $ 71,176 $ 2,088 2.93 $ 55,454 $ 1,715 3.09
Savings deposits 22,888 580 2.53 23,394 677 2.89
Time deposits 75,859 3,850 5.08 74,488 4,087 5.49
Short term borrowings 9,713 438 4.51 4,237 204 4.81
Long term borrowings 20,560 1,118 5.44 11,726 665 5.67
-------- ------- ---- -------- ------- ----
Total interest-
bearing liabilities 200,196 8,074 4.03 169,299 7,348 4.34
Non-Interest Bearing Liabilities:
Demand deposits 25,365 20,433
Other 2,901 2,894
-------- --------
Total liabilities 228,462 192,626
Shareholders' equity 22,067 19,523
-------- --------
Total cost of funds $250,529 3.48 $212,149 3.69
======== ---- ======== ----
Net interest income/net
interest spread $10,877 4.14% $ 9,355 4.05%
======= ==== ======= ====
Net interest margin 4.69% 4.70%
==== ====
</TABLE>
<TABLE>
<CAPTION>
- - - - - - 1997 -- - - - - -
Tax Tax
Average Equivalent Equivalent
Balance Interest Rate
<S> <C> <C> <C>
ASSETS:
Interest Earning Assets:
Federal funds sold & interest-
bearing bank balances $ 3,372 $ 189 5.60%
-------- -------
Investment securities:
Taxable investment
securities 25,360 1,624 6.40
Tax-exempt investment
securities 15,983 1,417 8.86
-------- -------
Total investment
securities 41,343 3,041 7.35
-------- ------- ----
Loans:
Taxable loans 116,811 10,669 9.13
Tax-exempt loans 592 50 8.45
-------- -------
Total loans 117,403 10,719 9.13
-------- ------- ----
Total interest-
earning assets 162,118 13,949 8.60
Non-Interest Earning Assets:
Cash and due from banks 5,008
Bank premises and
equipment 4,443
Other assets 2,486
Less allowance for loan
losses (1,689)
--------
Total $172,366
========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest Bearing Liabilities:
Interest-bearing demand
deposits $ 37,535 $ 1,056 2.81
Savings deposits 24,568 728 2.96
Time deposits 68,161 3,711 5.44
Short term borrowings 218 12 5.50
Long term borrowings 5,322 315 5.92
-------- ------- ----
Total interest-
bearing liabilities 135,804 5,822 4.28
Non-Interest Bearing Liabilities:
Demand deposits 17,665
Other 1,941
--------
Total liabilities 155,410
Shareholders' equity 16,956
--------
Total cost of funds $172,366 3.59
======== ----
Net interest income/net
interest spread $ 8,127 4.32%
======= ====
Net interest margin 5.01%
====
</TABLE>
Noninterest Income and Expenses
Other income increased $ 1,328,000, or 59.0% during 1999 due to significant
increases in all noninterest income areas that, at least, mirrored the 18.1%
growth in the Corporation's average daily assets. Growth of 27.7% in deposit
related charges contributed $ 234,000 additional revenue. These gains arose due
to a 12.4% increase in average daily deposits plus an upgrade in various service
charge schedules. Trust and brokerage revenue grew $ 412,000, or 50.4%, as
investment management services continue to grow at a phenomenal rate as measured
by both assets under management and profitability. Securities gains increased $
432,000 due, almost solely, to one transaction. One of the companies held in the
parent's bank stock portfolio was acquired and the resultant sale of the stock
generated a large gain. Other income increased $ 175,000 due to growth in cash
surrender values of life insurance policies used to provide benefits under
various plans. Management has made a concerted effort, in recent years, to
locate new sources of noninterest income and to offer them to the customer base
profitably.
15
<PAGE>
Other expenses rose $1,773,000, or 27.7% in 1999. With commercial bank
totals growing at a 20% plus annualized pace over the past two years and trust
department totals growing at a 30% plus annualized pace during the same period,
some growth in operating expenses is to be expected. In addition, a second
Chambersburg branch was opened during 1999 via acquisition of a $5,000,000
deposit base and the assumption of an existing leased facility located in a
Wal-Mart. Additional personnel were added to staff that branch which came under
our control in September. In addition, the robust growth has created the need
for additional operations personnel. Every major data processing system was
converted during 1999 with one-time charges exceeding $300,000 being funded
through operations. The resultant improvements in backroom efficiency and
enhancements to customer service should set the stage for improved efficiency
and ability to handle growth moving forward. Management has been able to
generate across the board improvements in operating systems while still
maintaining an efficiency ratio below 60%, an enviable number for a community
bank with less than $ 500 million of assets. The efficiency ratio increased to
58.2% for 1999, following 55.0% in 1998 and 55.2% in 1997, but the backroom
should be properly positioned to allow improvement of this ratio in 2000.
The Corporation handled the year 2000 date turnover with no incidents and
did not suffer material costs associated with that issue. The ability to focus
the attention of operations personnel totally on customers and products will be
a great relief moving forward however.
The table that follows provides additional information regarding
noninterest income and noninterest expense increases over the past three years:
ANALYSIS OF NONINTEREST INCOME AND EXPENSES
<TABLE>
<CAPTION>
- - Year Ended December 31 - - - - - - - % Change - - - -
1999 1998 1997 1999-1998 1998-1997
(In Thousands)
<S> <C> <C> <C> <C> <C>
Other income:
Service charges on deposit accounts $ 1,080 $ 846 $ 679 27.7% 24.6%
Loan service charges and fees 285 243 100 17.3% 143.0%
Other service charges, commissions and fees 258 224 163 15.2% 37.4%
Trust department income 862 656 490 31.4% 33.9%
Brokerage income 368 162 59 127.2% 174.6%
Securities gains (losses) 423 (9) 3 NM NM
Other operating income 305 131 57 133.6% 129.8%
------- ------- ------- ----- -----
$ 3,581 $ 2,253 $ 1,551 59.0% 45.3%
------- ------- ------- ----- ------
Other expenses:
Salaries $ 2,945 $ 2,478 $ 2,076 18.8% 19.4%
Employee benefits 1,351 1,013 825 33.4% 22.8%
Occupancy and equipment expenses 1,100 859 764 28.1% 12.4%
Data processing expenses 671 493 390 36.1% 26.4%
ATM expenses 151 113 59 33.6% 91.5%
Telephone 143 96 77 49.0% 24.7%
Printing and supplies 249 178 161 39.9% 10.6%
Postage 128 117 108 9.4% 8.3%
Directors fees 185 154 151 20.1% 2.0%
Advertising 138 154 149 (10.4)% 3.4%
Pennsylvania shares tax 171 145 132 17.9% 9.8%
Other operating expenses 986 645 492 53.0% 31.1%
------- ------- ------- ----- -----
$ 8,218 $ 6,445 $ 5,384 27.5% 19.7%
------- ------- ------- ----- -----
Noninterest income as a % of noninterest
expense 43.6% 35.0% 28.8%
</TABLE>
Federal Income Taxes
The Corporation's effective federal income tax rate for 1999 was 25.9%, as
compared to 27.5% in 1998 and 27.2% in 1997. Corporate income tax rates for 2000
are forecast to stay near 1999 levels. The Corporation is firmly entrenched in
the 34% bracket so all taxable income will be taxed at 34% in 2000. This, along
with anticipated growth, is expected to increase the Corporation's effective
federal income tax rate to approximately 27% in 2000, assuming no retroactive
change in rates during 2000.
Asset Quality and Credit Risk Analysis
The quality of the Corporation's asset structure continues to be strong. A
substantial amount of time is devoted by management to overseeing the investment
of funds in loans and securities and the formulation of policies directed toward
the profitability and minimization of risk associated with the investments.
Credit Risk Analysis
The Bank follows generally conservative lending practices and continues to
carry a high quality loan portfolio with no unusual or undue concentrations of
credit. No loans are extended to nondomestic borrowers or governments,
consistent with past practice and policy. Net charge-offs historically have been
quite low, when compared to industry standards, and represented only .05% of
average outstanding loans during 1999 and .05% of average 1998 loans.
Nonperforming loans, as represented by nonaccrual and restructed items, were
only .04% and .31% of outstanding loans at December 31, 1999 and 1998,
respectively. Loans 90 days or more past due and still accruing represented .05%
and .18% of outstanding loans at December 31, 1999 and 1998, 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 $ 547,000, $ 270,000 and $ 215,000 for 1999, 1998 and
1997, respectively. These provisions compared to net charge-offs of $ 63,000, $
66,000 and $ 68,000 for 1999, 1998 and 1997, respectively. The allowance for
loan losses was increased 24.6% during 1999 while loans increased 13.9%. The
reserve at December 31, 1999 represented 1.36% of loans outstanding. Net
charge-offs for 1999 represented only .04% of average loans outstanding. The
reserve at December 31, 1999 represented 39 years of coverage based upon 1999
net charge-offs and 3,836% of nonaccrual loans. In addition, approximately 68%
of the allowance was unallocated under internal evaluation procedures as of
December 31, 1999.
16
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
- - - - - - - - - - - - Year Ended December 31 - - - - - - - - -
1999 1998 1997 1996 1995
--------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Amount of loans outstanding at end of period $ 180,691 $158,632 $128,331 $ 108,926 $102,857
========= ======== ======== ========= ========
Daily average loans outstanding $ 169,458 $144,013 $117,403 $ 105,779 $ 97,662
========= ======== ======== ========= =========
Balance of allowance for possible loan losses at
beginning of period $ 1,971 $ 1,767 $ 1,620 $ 1,433 $ 1,200
Loans charged off 128 84 83 68 51
Recoveries of loans previously charged off 65 18 15 15 14
--------- --------
Net loans charged off (recovered) 63 66 68 53 37
Additions to allowance charged to expense 547 270 215 240 270
--------- -------- -------- --------- --------
Balance at end of period $ 2,455 $ 1,971 $ 1,767 $ 1,620 $ 1,433
========= ======== ======== ========= ========
Ratio of net charge-offs to average loans outstanding 0.04% 0.05% 0.06% 0.05% 0.04%
========= ======== ======== ========= ========
Ratio of reserve to gross loans outstanding at December 31 1.36% 1.24% 1.38% 1.49% 1.39%
========= ======== ======== ========= ========
</TABLE>
Risk Elements
Nonperforming assets are comprised of nonaccrual and restructured loans and
real estate owned other than bank premises (OREO). OREO represents property
acquired through foreclosure or settlements of loans and is carried at the lower
of the principal amount of the loan outstanding at the time acquired or the
estimated fair value of the property. The excess, if any, of the principal
balance at the time acquired over the carrying amount is charged against the
reserve for loan losses. The Bank's loan loss history has been much better than
peer standards and analysis of the current credit risk position is favorable.
The allowance for loan losses is adequate given the current composition of the
loan portfolio and adequately covers the credit risk management sees under
present economic conditions. Approximately 68% of the reserve balance is
unallocated under current procedures. Management is prepared to make any reserve
adjustments that may become necessary as economic conditions change.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
- - - - - - - - - - - -December 31 - - - - - - - - - - - - -
1999 1998 1997 1996 1995
----- -------- -------- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans on nonaccrual (cash) basis $ 64 $ 486 $ 473 $ 14 $ 132
Loans whose terms have been renegotiated to
provide a reduction or deferral of interest or
principal because of a deterioration in the
financial position of the borrower 0 0 0 0 0
OREO 0 311 49 49 27
----- -------- -------- ----- -----
Total nonperforming loans and OREO $ 64 $ 797 $ 522 $ 63 $ 159
===== ======== ======== ===== =====
Ratio of nonperforming assets to total loans and OREO 0.04% 0.50% 0.41% 0.06% 0.15%
==== ======== ======== ==== ====
Ratio of nonperforming assets to total assets 0.02% 0.34% 0.27% 0.04% 0.11%
==== ======== ======== ==== ====
OTHER CREDIT RISK ELEMENTS
Loans past due 90 or more days and still accruing $ 97 $ 284 $ 657 $ 203 $ 417
----- -------- -------- ----- -----
Ratio of other credit risk elements to total loans
and OREO 0.05% 0.18% 0.51% 0.19% 0.41%
==== ======== ======== ==== ====
Ratio of other credit risk elements to total assets 0.04% 0.12% 0.35% 0.13% 0.29%
==== ======== ======== ==== ====
TOTAL NONPERFORMING AND OTHER RISK ASSETS $ 161 $ 1,081 $ 1,179 $ 266 $ 576
----- ------- ------- ----- -----
Ratio of total risk assets to total loans and OREO 0.09% 0.68% 0.92% 0.24% 0.56%
==== ======== ======== ==== ====
Ratio of total risk assets to total assets 0.06% 0.46% 0.62% 0.17% 0.39%
==== ======== ======== ==== ====
</TABLE>
Future Impact of Recently Issued Accounting Standards
In June, 1998 the Financial Accounting Standards Board (FASB) issued SFAS
No. 133 - "Accounting for Derivative Instruments and Hedging Activities"
effective for fiscal years beginning after June 15, 1999. This Statement
establishes accounting and reporting standards for derivative instruments and
hedging activities, including certain derivative instruments embedded in other
contracts, and requires that an entity recognize all derivatives as assets or
liabilities in the balance sheet and measure them at fair value. If certain
conditions are met, an entity may elect to designate a derivative as follows:
(a) a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of an unrecognized firm commitment, an available-for-sale
security, a foreign currency denominated forecasted transaction, or a net
investment in a foreign operation. The statement generally provides for matching
the timing of the recognition of the gain or loss on derivatives designated as
hedging instruments with the recognition of the changes in the fair value of the
item being hedged. Depending on the type of hedge, such recognition will be in
either net income or other comprehensive income. For a derivative not designated
as a hedging instrument, changes in fair value will be recognized in net income
in the period of change. Management is currently evaluating the impact of
adopting this Statement on the consolidated financial statements, but does not
anticipate that it will have a material impact.
Liquidity, Rate Sensitivity and Interest Rate Risk Analysis
The primary function of asset/liability management is to assure adequate
liquidity and rate sensitivity. Liquidity management involves the ability to
meet the cash flow requirements of customers who may be either depositors
wanting to withdraw funds or borrowers needing assurance that sufficient funds
will be available to meet their credit needs. Interest rate sensitivity
management requires the maintenance of an appropriate balance between interest
sensitive assets and liabilities. Interest bearing assets and liabilities that
are maturing or repricing should be adequately balanced to avoid fluctuating net
interest margins and to enhance consistent growth of net interest income through
periods of changing interest rates.
17
<PAGE>
The Corporation has consistently followed a strategy of pricing assets and
liabilities according to prevailing market rates while largely matching
maturities, within the guidelines of sound marketing and competitive practices.
The goal is to maintain a predominantly matched position with very few planned
mismatches. Rate spreads will be sacrificed at times in order to enable the
overall rate sensitivity position to stay within the guidelines called for by
asset/liability management policy. Rate sensitivity is measured by monthly gap
analysis, quarterly rate shocks and periodic simulation. Investment and pricing
decisions are made using both liquidity and sensitivity analyses as tools. The
schedule that follows reflects the degree to which the Corporation can adjust
its various portfolios to meet interest rate changes. Additionally, the Bank is
a Federal Home Loan Bank (FHLB) member, and standard credit arrangements
available to FHLB members provide increased liquidity.
RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
- - - - - - - - - - - - - - - - Interest Sensitivity Period - - - - - - - - - - - - - - - - -
After 1 After 3 After 6
Within Within 3 Within 6 Within 12 After
1 Month Months Months Months 1 Year Total
<S> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS (RSA):
Loans $ 49,060 $ 12,492 $ 20,411 $ 36,551 $ 62,177 $ 180,691
Investment securities 4,576 1,248 4,930 6,460 44,750 61,964
Other earning assets 115 0 0 0 0 115
----------- ------------ ------------- ------------- -------------- -------------
Total RSA 53,751 13,740 25,341 43,011 106,927 242,770
--------- -------- --------- -------- --------- ----------
RATE SENSITIVE LIABILITIES (RSL):
Interest bearing deposits 41,001 17,163 11,602 13,715 95,644 179,125
Short term borrowed funds 15,406 0 0 0 0 15,406
Long term borrowed funds 0 6,000 6 0 14,816 20,822
------------ --------- ------------ ------------ ---------- -----------
Total RSL 56,407 23,163 11,608 13,715 110,460 215,353
-------- -------- -------- -------- --------- ----------
RATE SENSITIVE GAP:
Period (2,656) (9,423) 13,733 29,296 (3,533) 27,417
Cumulative (2,656) (12,079) 1,654 30,950 27,417
GAP AS A PERCENT OF TOTAL ASSETS:
Period (1.13)% (4.00)% 5.82% 12.42%
Cumulative (1.13)% (5.12)% 0.70% 13.12%
RSA/RSL Cumulative 0.95 0.85 1.02 1.30
</TABLE>
The liability biased, or negative, gap position during the first three
months indicates that earnings would be naturally enhanced, or more easily
maintained, in a falling rate environment. The gap position becomes asset
biased, or positive, by the sixth month. This indicates that the position is
balanced adequately to react to a rate movement in either direction without
material damage to earnings.
Capital Adequacy and Regulatory Matters
The Corporation maintains a strong capital base which provides adequate
resources to absorb both normal and unusual risks inherent to the banking
business. Internal capital generation, net income retained after the declaration
of dividends, has been the primary method employed to increase capital accounts.
Total stockholders' equity rose $ 788,000 during 1999, an increase of 3.7% for
the year. This followed growth of 15.4% and 15.2% during 1998 and 1997,
respectively. The 1999 increase was tempered by an equity writedown of $
2,105,000 attributable to the available for sale debt securities portfolio. This
writedown was due simply to the rising interest rate environment during the
second half of the year and was not attributable to portfolio quality issues.
The increasing earnings stream during this period has allowed the Corporation to
steadily increase cash dividends paid to stockholders. In 1999 cash dividends
rose $ 148,000, or 15.0% over 1998 levels while net income rose 20.4% during the
period. This followed a 9.0% increase in dividend payout for 1998 versus 1997.
The Bank enjoyed rapid asset growth during 1999 which caused a moderation in the
Corporation's dividend payout percentage for the year in order to assure an
adequate capital base to accommodate such growth in the future. Dividends per
share have moved from .41 to .45 to .51 for 1997 through 1999, respectively.
CAPITAL AND DIVIDEND RATIOS
<TABLE>
<CAPTION>
1999 1998 1997
(Amounts in Thousands)
<S> <C> <C> <C> <C>
At December 31:
Shareholders' equity $ 21,868 $21,080 $ 18,265
Equity/assets 8.25% 8.94% 9.60%
For the Year:
Average equity/average assets 8.81% 9.20% 9.84%
Dividend payout 30.20% 31.61% 34.65%
Return on average equity 17.02% 15.97% 15.37%
Dividends paid $ 1,134 $ 986 $ 903
Regulatory
Regulatory Capital Measures: Minimums
Tier I Capital Ratio 10.5% 11.8% 12.7% 4.0%
Total (Tier II) Capital Ratio 11.8% 12.9% 14.0% 8.0%
Leverage Ratio 8.2% 8.9% 10.0% 3.0%
</TABLE>
18
<PAGE>
The maintenance of a strong capital base, above regulatory risk based
minimums and industry averages, has been an integral part of the Corporation's
operating philosophy. Management foresees no problem in maintaining capital
ratios in excess of regulatory requirements. Capital has been purposely
leveraged in recent years by the use of matched investment securities
transactions approximating $8 million. These transactions are generating
approximately $100,000 of annual net income while still maintaining a
comfortable capital base.
The Corporation and the Bank are subject to periodic examinations by one or
more of the various regulatory agencies. During 1999, four examinations were
conducted that included, but were not limited to, procedures designed to review
Year 2000 (Y2K) preparedness, trust operations, compliance Community
Reinvestment Act (CRA) activities. No comments were received from regulatory
bodies which, if implemented, would have a material effect on the Corporation's
liquidity, capital resources or operations.
SUMMARY OF QUARTERLY FINANCIAL DATA
The unaudited quarterly results of operations for the years ended December
31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
- - - - - - - - - Quarter Ended - - - - - - - - - - - - - - - Quarter Ended - - - - - - - - -
March June September December March June September December
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 4,309 $ 4,433 $ 4,672 $ 4,910 $ 3,715 $ 3,979 $ 4,138 $ 4,277
Interest expense 1,922 1,941 2,033 2,178 1,707 1,800 1,857 1,984
------- ------- ------- -------- ------- ------- ------- -------
Net interest income 2,387 2,492 2,639 2,732 2,008 2,179 2,281 2,293
Provision for loan
losses 90 90 90 277 75 75 75 45
------- ------- ------- -------- ------- ------- ------- -------
Net interest income
after provision for
loan losses 2,297 2,402 2,549 2,455 1,933 2,104 2,206 2,248
Securities gains
(losses) (9) (6) 271 167 (10) (2) 11 (8)
Other income 713 862 801 782 491 535 550 686
Other expenses 1,829 1,920 2,302 2,167 1,527 1,556 1,567 1,795
------- ------- ------- -------- ------- ------- ------- -------
Other income before
income taxes 1,172 1,338 1,319 1,237 887 1,081 1,200 1,131
Applicable income
taxes 323 349 345 294 245 296 335 304
------- ------- ------- -------- ------- ------- ------- -------
Net income $ 849 $ 989 $ 974 $ 943 $ 642 $ 785 $ 865 $ 827
======= ======= ======= ======== ======= ======= ======= =======
Per common share data:
Net income $ 0.38 $ 0.45 $ 0.44 $ 0.43 $ 0.30 $ 0.35 $ 0.39 $ 0.37
Dividends 0.12 0.12 0.13 0.14 0.11 0.11 0.11 0.12
Performance statistics:
Return on average assets 1.45% 1.62% 1.52% 1.41% 1.33% 1.51% 1.60% 1.42%
Return on average equity 15.95% 17.92% 17.38% 16.78% 13.99% 16.61% 17.42% 15.77%
Average equity/average
assets 9.09% 9.04% 8.73% 8.41% 9.52% 9.11% 9.19% 9.04%
</TABLE>
19
<PAGE>
Selected Five-Year Financial Data
ORRSTOWN FINANCIAL SERVICES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Summary of Operations (000 omitted)
Interest income ................................... $ 18,324 $ 16,109 $ 13,450 $ 12,018 $ 10,829
Interest expense .................................. 8,074 7,348 5,822 5,139 4,542
----------- ----------- ----------- ----------- -----------
Net interest income ............................... 10,250 8,761 7,628 6,879 6,287
Provision for loan losses ......................... 547 270 215 240 270
----------- ----------- ----------- ----------- -----------
Net interest income after provision for loan losses 9,703 8,491 7,413 6,639 6,017
Securities gains (losses) ......................... 423 (9) 3 (5) (45)
Other operating income ............................ 3,158 2,262 1,548 1,245 980
Other operating expenses .......................... 8,218 6,445 5,384 4,793 4,256
----------- ----------- ----------- ----------- -----------
Income before income taxes ........................ 5,066 4,299 3,580 3,086 2,696
Applicable income tax ............................. 1,311 1,180 974 838 742
----------- ----------- ----------- ----------- -----------
Net income ................................... $ 3,755 $ 3,119 $ 2,606 $ 2,248 $ 1,954
=========== =========== =========== =========== ===========
Per Common Share Data*
Income before taxes ............................... $ 2.29 $ 1.94 $ 1.63 $ 1.40 $ 1.22
Applicable income taxes ........................... 0.59 0.53 0.45 0.38 0.34
Net income ........................................ 1.70 1.41 1.18 1.02 0.88
Cash dividend paid ................................ 0.51 0.45 0.41 0.32 0.27
Book value ........................................ 9.85 9.54 8.29 7.19 6.64
Average shares outstanding ........................ 2,214,951 2,205,718 2,204,444 2,205,268 2,206,560
Stock Price Statistics*
Close ............................................. $ 38.00 $ 26.05 $ 20.93 $ 15.06 $ 13.29
High .............................................. 40.00 29.77 20.93 15.06 13.29
Low ............................................... 25.12 20.59 15.06 13.29 11.96
Price earnings ratio at close ..................... 22.4 18.5 17.7 14.8 15.1
Year-End Balance Sheet Data (000 omitted)
Total assets ...................................... $ 265,053 $ 235,822 $ 190,242 $ 157,556 $ 145,998
Total loans ....................................... 180,691 158,632 128,331 108,926 102,857
Total investment securities ....................... 61,964 51,137 47,191 34,355 31,563
Deposits - noninterest bearing .................... 25,264 22,020 17,649 16,322 13,962
Deposits - interest bearing ....................... 179,125 161,744 142,931 120,937 113,368
Total deposits .................................... 204,389 183,764 160,580 137,259 127,330
Liabilities for borrowed money .................... 36,228 27,062 8,569 2,339 2,345
Total shareholders' equity ........................ 21,868 21,080 18,265 15,856 14,633
Trust assets under management - market value ...... 182,000 152,000 108,000 83,000 66,000
Performance Statistics
Average equity/average assets ..................... 8.81% 9.20% 9.84% 9.84% 10.00%
Return on average equity .......................... 17.02% 15.97% 15.37% 14.90% 14.40%
Return on average assets .......................... 1.50% 1.47% 1.51% 1.47% 1.44%
</TABLE>
* Per share amounts have been restated to reflect:
The 7 1/2% stock dividend effective November 19, 1999.
The 2 for 1 stock split effective November 21, 1998.
The 5% stock dividend effective May 15, 1997.
The 5% stock dividend effective July 21, 1995.
20
<PAGE>
Market, Dividend & Investor Information
Market and Dividend Information
The common stock of Orrstown Financial Services, Inc. is traded in the
over-the-counter market under the symbol ORRF. At the close of business December
31, 1999, there were approximately 1,848 shareholders of record, with a total of
2,218,291 shares outstanding. The table below sets forth the range of high and
low quarterly sales prices and dividends declared per common share. All per
share data has been restated to reflect the 7 1/2% stock dividend paid November
19, 1999 to shareholders of record November 1, 1999.
<TABLE>
<CAPTION>
1999 1998
Market Price Market Price
Quarterly Quarterly
High Low Dividend High Low Dividend
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
First quarter $ 32.56 $ 25.58 $ 0.121 $ 22.33 $ 20.93 $ 0.107
Second quarter $ 37.21 $ 25.12 $ 0.121 $ 24.19 $ 20.59 $ 0.107
Third quarter $ 37.21 $ 32.56 $ 0.130 $ 27.91 $ 24.19 $ 0.112
Fourth quarter $ 40.00 $ 32.56 $ 0.140 $ 29.77 $ 25.58 $ 0.121
------- -------
$ 0.512 $ 0.447
</TABLE>
Investor Information
Annual Meeting
The annual meeting of Orrstown Financial Services, Inc. stockholders is
scheduled for April 11, 2000 at 9:00 a.m. at Shippen Place Hotel and Restaurant,
32 East King Street, Shippensburg, PA 17257. All stockholders are cordially
invited to attend.
Annual and Quarterly Reports
Copies of the annual and quarterly reports may be obtained at any office of
Orrstown Bank, or by writing to Patricia A. Corwell, Vice President & Assistant
Secretary, Orrstown Bank, P. O. Box 250, Shippensburg, PA 17257.
Form 10-K
A copy of the corporation's Form 10-K, as filed with the Securities and
Exchange Commission, may be obtained by writing to Orrstown Bank, P. O. Box 250,
Shippensburg, PA 17257.
Transfer Agent
The transfer agent for Orrstown Financial Services, Inc. is Orrstown Bank,
77 East King Street, P.O. Box 250, Shippensburg, PA 17257.
Market Makers
<TABLE>
<S> <C> <C>
E.E. Powell & Co., Inc. Janney Montgomery Scott F.J. Morrissey & Co., Inc.
1100 Gulf Tower 1 North Church Street 1700 Market Street - Suite 1420
Pittsburgh, PA 15219 P. O. Box 3129 Philadelphia, PA 19103
1-800-289-7865 West Chester, PA 19380 1-800-842-8928
1-800-777-0131
</TABLE>
21
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
1. Orrstown Bank, Orrstown, Pennsylvania; a state-chartered bank organized
under the Pennsylvania Banking Code of 1965.
EXHIBIT 23.1
Independent Auditor's Consent
Board of Directors and Shareholders
Orrstown Financial Services, Inc.
We consent to the incorporation by reference in to previously filed
Registration Statements (Form S-4 No. 33-18888 and Form S-3 No. 333-53405) of
Orrstown Financial Services, Inc. of our report dated January 31, 2000,
appearing in the 1999 annual report to shareholders incorporated by reference in
this Form 10-K of Orrstown Financial Services, Inc. for the year ended December
31, 1999.
SMITH ELLIOTT KEARNS & COMPANY, LLC
Chambersburg, Pennsylvania
March 15, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,585
<INT-BEARING-DEPOSITS> 115
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 61,330
<INVESTMENTS-CARRYING> 61,330
<INVESTMENTS-MARKET> 60,455
<LOANS> 180,691
<ALLOWANCE> 2,455
<TOTAL-ASSETS> 265,053
<DEPOSITS> 204,389
<SHORT-TERM> 15,406
<LIABILITIES-OTHER> 2,568
<LONG-TERM> 20,822
0
0
<COMMON> 231
<OTHER-SE> 21,637
<TOTAL-LIABILITIES-AND-EQUITY> 265,053
<INTEREST-LOAN> 14,613
<INTEREST-INVEST> 3,321
<INTEREST-OTHER> 390
<INTEREST-TOTAL> 18,324
<INTEREST-DEPOSIT> 6,519
<INTEREST-EXPENSE> 8,074
<INTEREST-INCOME-NET> 10,250
<LOAN-LOSSES> 547
<SECURITIES-GAINS> 423
<EXPENSE-OTHER> 8,218
<INCOME-PRETAX> 5,066
<INCOME-PRE-EXTRAORDINARY> 3,755
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,755
<EPS-BASIC> 1.70
<EPS-DILUTED> 1.70
<YIELD-ACTUAL> 4.69
<LOANS-NON> 64
<LOANS-PAST> 97
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,971
<CHARGE-OFFS> 128
<RECOVERIES> 65
<ALLOWANCE-CLOSE> 2,455
<ALLOWANCE-DOMESTIC> 2,455
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
