Part I [Business](index=5&type=section&id=Item%201.%20Business) The company provides diversified banking and wealth management services, expanding through acquisitions while navigating the COVID-19 pandemic and a competitive regulatory environment [General Business and Recent Acquisitions](index=5&type=section&id=Item%201.%20Business-General%20Business%20and%20Recent%20Acquisitions) The bank holding company expanded its footprint through acquisitions, reporting total assets of $2.8 billion in 2020 - Expanded its presence in Franklin County, Pennsylvania, with the acquisition of Mercersburg Financial Corporation on October 1, 2018[17](index=17&type=chunk) - Expanded into the greater Baltimore, Maryland, market with the acquisition of Hamilton Bancorp, Inc. on May 1, 2019[18](index=18&type=chunk) Key Financial Metrics (as of December 31, 2020) | Metric | Amount (Billions) | | :--- | :--- | | Total Assets | $2.8 | | Total Deposits | $2.4 | | Total Shareholders' Equity | $0.246 | [COVID-19 Pandemic Response](index=5&type=section&id=Item%201.%20Business-COVID-19%20Pandemic%20Response) The company implemented client support measures and participated significantly in the SBA's Paycheck Protection Program - The company implemented several client support initiatives in response to COVID-19, including waiving certain ATM and loan late fees, designating loan specialists for assistance, and shifting most operations to a remote work environment[28](index=28&type=chunk) - For the year ended December 31, 2020, the company recognized **$7.7 million of net deferred SBA PPP fees**, with $5.8 million remaining to be recognized[30](index=30&type=chunk) SBA Paycheck Protection Program (PPP) Activity | Program Round | Period | Loans Funded | Gross Loan Amount | Net Fee Income to be Recognized | | :--- | :--- | :--- | :--- | :--- | | First Round | Year ended Dec 31, 2020 | ~3,200 | $467.7 million | $13.5 million | | Second Round | Through Mar 8, 2021 | 1,801 | $168.1 million | $7.9 million | [Lending Activities and Loan Review](index=6&type=section&id=Item%201.%20Business-Lending%20Activities%20and%20Loan%20Review) The bank's lending is focused on commercial loans, which comprise 77% of the portfolio, supported by a robust internal and third-party loan review process - Commercial loans comprised approximately **77% of the total loan portfolio** as of December 31, 2020[27](index=27&type=chunk) - The bank's underwriting policy for loans secured by real estate generally limits the loan-to-value ratio to **85% of the appraised value**[25](index=25&type=chunk) - A majority of residential mortgages originated are sold to secondary market investors like Wells Fargo and Fannie Mae[33](index=33&type=chunk) - The company utilizes both internal reviews for large commercial relationships and an outsourced third-party loan review to monitor credit quality and evaluate the adequacy of the ALL[35](index=35&type=chunk)[36](index=36&type=chunk) [Deposit and Investment Services](index=9&type=section&id=Item%201.%20Business-Deposit%20and%20Investment%20Services) The bank offers a full suite of deposit products and provides investment advisory services managing $1.7 billion in assets - The bank offers a full suite of deposit products and treasury management solutions for commercial clients, including sweep accounts, remote deposit capture, and lockbox services[37](index=37&type=chunk) - Through its Orrstown Financial Advisors (OFA) division, the bank provides fiduciary and investment services, with assets under management totaling **$1.7 billion** at December 31, 2020[38](index=38&type=chunk) [Competition and Strategy](index=9&type=section&id=Item%201.%20Business-Competition%20and%20Strategy) The company competes on service and value while pursuing a strategy of core business expansion and potential acquisitions - The bank competes with a wide range of financial institutions, including other banks, credit unions, mortgage companies, and increasingly, financial technology (FinTech) companies[40](index=40&type=chunk) - The company's competitive strategy is based on a combination of value, service, and convenience, aiming to build strong client relationships[41](index=41&type=chunk) - Strategic initiatives are focused on expanding core businesses and evaluating acquisition, divestiture, and joint venture opportunities to enhance shareholder return and growth potential[42](index=42&type=chunk) [Regulation and Supervision](index=9&type=section&id=Item%201.%20Business-Regulation%20and%20Supervision) The company operates under extensive federal and state supervision, with key regulations governing capital adequacy, dividends, and compliance - The company is a registered bank holding company and has elected Financial Holding Company (FHC) status, subjecting it to supervision by the Federal Reserve Board (FRB)[43](index=43&type=chunk)[51](index=51&type=chunk) - To maintain FHC status, the company and its bank must remain **well-capitalized and well-managed**, and the bank must achieve at least a "Satisfactory" CRA rating[52](index=52&type=chunk) - The company's ability to pay dividends is restricted by various federal laws and FRB policies, which are dependent on earnings, capital levels, and overall financial condition[62](index=62&type=chunk)[64](index=64&type=chunk) - The company and the bank are subject to risk-based capital and leverage ratio requirements under the U.S. Basel III capital rules, with both entities' capital ratios **above the "well-capitalized" standards** as of December 31, 2020[67](index=67&type=chunk)[73](index=73&type=chunk) [Risk Factors](index=16&type=section&id=Item%201A.%20Risk%20Factors) The company faces material risks related to credit, interest rates, competition, regulation, cybersecurity, and the economic impact of the COVID-19 pandemic [Credit Risks](index=16&type=section&id=Item%201A.%20Risk%20Factors-Credit%20Risks) Key credit risks include the adequacy of the loan loss allowance, concentration in commercial real estate, and potential liabilities from its PPP lending activities - The determination of the Allowance for Loan Losses (ALL) is highly subjective and requires significant estimates; an **insufficient ALL could decrease earnings**[97](index=97&type=chunk) - Lending on commercial real estate exposes the company to **greater risk of loss**, as repayment is often dependent on the income produced by the underlying properties[101](index=101&type=chunk) - Participation in the SBA PPP exposes the company to litigation risk and the credit risk that the **SBA may deny its guarantee** if deficiencies in origination or servicing are identified[104](index=104&type=chunk)[105](index=105&type=chunk) [Interest Rate and Investment Risks](index=18&type=section&id=Item%201A.%20Risk%20Factors-Interest%20Rate%20and%20Investment%20Risks) The company's financial condition is highly sensitive to interest rate changes and the upcoming transition away from LIBOR - Changes in interest rates can adversely affect **net interest margin**, the ability to originate loans, and the value of interest-earning assets[107](index=107&type=chunk)[108](index=108&type=chunk) - The planned discontinuance of LIBOR after 2021 and transition to a new reference rate like SOFR presents risks to financial instruments that use LIBOR, potentially impacting their value and yield[110](index=110&type=chunk)[112](index=112&type=chunk) [Competition and Business Strategy Risks](index=18&type=section&id=Item%201A.%20Risk%20Factors-Competition%20and%20Business%20Strategy%20Risks) Performance is sensitive to economic conditions in its concentrated markets, substantial competition, and significant cybersecurity threats - The business is concentrated in south central Pennsylvania and the greater Baltimore region, making its financial performance **highly dependent on local economic conditions**[116](index=116&type=chunk) - The company faces substantial competition from other financial institutions and FinTech companies, which could **reduce profitability** by affecting loan volumes and interest rates[117](index=117&type=chunk)[118](index=118&type=chunk) - The company is highly dependent on computer systems and is subject to significant security risks, including **cyber attacks**, which could lead to business disruption and financial exposure[123](index=123&type=chunk)[124](index=124&type=chunk) - Volatility in interest rates stemming from the COVID-19 pandemic could **negatively affect net interest income**, lending activities, and profitability[133](index=133&type=chunk) [Mergers and Acquisitions Risks](index=22&type=section&id=Item%201A.%20Risk%20Factors-Mergers%20and%20Acquisitions%20Risks) The company's growth-by-acquisition strategy involves risks related to integration, realizing synergies, potential goodwill impairment, and shareholder dilution - Integrating acquired companies involves significant challenges, including combining personnel, systems, and corporate cultures, which could cause **business interruptions** and loss of key employees[139](index=139&type=chunk)[141](index=141&type=chunk) - Failure to realize the expected benefits from mergers could adversely impact the carrying value of goodwill, potentially leading to **impairment charges**[138](index=138&type=chunk) - Future acquisitions may result in the issuance of additional stock, which would **dilute the ownership interests** of current shareholders[143](index=143&type=chunk) [Regulatory, Legal, and Compliance Risks](index=23&type=section&id=Item%201A.%20Risk%20Factors-Regulatory%2C%20Legal%2C%20and%20Compliance%20Risks) The company is exposed to risks from extensive regulation, accounting policy changes like CECL, anti-money laundering rules, and pending litigation - The company is subject to extensive federal and state regulation that limits how it conducts business, imposes capital requirements, and restricts its ability to pay dividends[144](index=144&type=chunk)[145](index=145&type=chunk) - The upcoming adoption of ASU 2016-13 (CECL) will substantially change the accounting for credit losses and is likely to have a **negative impact on the ALL and the company's capital position**[153](index=153&type=chunk)[155](index=155&type=chunk) - Noncompliance with the Bank Secrecy Act and other anti-money laundering regulations could result in **significant fines and reputational damage**[157](index=157&type=chunk) - The company is involved in pending litigation with SEPTA, and an adverse outcome could result in **material losses**[159](index=159&type=chunk) [Liquidity and Stock Ownership Risks](index=25&type=section&id=Item%201A.%20Risk%20Factors-Liquidity%20and%20Stock%20Ownership%20Risks) The parent company depends on bank dividends for liquidity, while stock price volatility and potential credit downgrades pose risks to capital access - The Parent Company is a holding company that **depends on dividends from its bank subsidiary** to fund its operations and shareholder dividends, and these payments are subject to regulatory restrictions[161](index=161&type=chunk)[168](index=168&type=chunk) - The ability to raise additional capital in the future is not guaranteed and may not be available on favorable terms, potentially **diluting the ownership of current investors**[163](index=163&type=chunk)[164](index=164&type=chunk) - The market price of the company's common stock is **subject to volatility** due to factors including operational results, market conditions, and general economic trends[166](index=166&type=chunk) [General Risk Factors](index=27&type=section&id=Item%201A.%20Risk%20Factors-General%20Risk%20Factors) General risks include the uncertain impact of the COVID-19 pandemic, reliance on key personnel, potential internal control failures, and reputational damage - The COVID-19 pandemic has caused a significant economic downturn and its **future impact on the company's business remains uncertain**[169](index=169&type=chunk)[170](index=170&type=chunk) - The company's success depends on its ability to **attract and retain skilled management and key personnel**[174](index=174&type=chunk)[175](index=175&type=chunk) - Failures in internal controls, whether from human error or misconduct, could result in significant harm, including client remediation costs, regulatory fines, and reputational damage[176](index=176&type=chunk)[178](index=178&type=chunk) [Unresolved Staff Comments](index=29&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports that it has no unresolved staff comments from the SEC - None[182](index=182&type=chunk) [Properties](index=29&type=section&id=Item%202.%20Properties) The company is consolidating its physical branch network to improve efficiency in response to evolving client preferences for digital channels - The company's principal executive offices are in Shippensburg, PA, with additional administrative offices in Harrisburg, PA[183](index=183&type=chunk) - The company is actively consolidating its branch network to improve efficiency, with **five branches consolidated in January 2020** and an additional **six branch locations closed in the first quarter of 2021**[185](index=185&type=chunk) [Legal Proceedings](index=29&type=section&id=Item%203.%20Legal%20Proceedings) Information regarding the company's legal proceedings is incorporated by reference from the Consolidated Financial Statements - Details on legal proceedings are provided in Note 23 to the Consolidated Financial Statements[186](index=186&type=chunk) [Mine Safety Disclosures](index=29&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[186](index=186&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=30&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's stock trades on NASDAQ, with increased dividends in 2020, an active share repurchase program, and stock performance trailing key indices - As of December 31, 2020, **261,320 shares may yet be purchased** under the company's authorized share repurchase program[191](index=191&type=chunk) Dividend Per Share | Year | Dividend per Share | | :--- | :--- | | 2020 | $0.68 | | 2019 | $0.60 | Stock Performance Comparison (Value of $100 Invested on 12/31/15) | Index | 12/31/20 Value | | :--- | :--- | | Orrstown Financial Services, Inc. | $105.80 | | SNL Bank $1B-$5B Index | $138.81 | | S&P 500 Index | $203.04 | | NASDAQ Composite Index | $271.64 | [Selected Financial Data](index=32&type=section&id=Item%206.%20Selected%20Financial%20Data) The company shows significant five-year growth in assets, loans, and deposits, with marked improvement in net income and key performance ratios in 2020 Selected Financial Highlights (2018-2020) | Metric (in thousands, except per share data) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net Interest Income | $83,607 | $69,295 | $52,157 | | Net Income | $26,463 | $16,924 | $12,805 | | Diluted EPS | $2.40 | $1.61 | $1.50 | | Total Assets | $2,750,572 | $2,383,274 | $1,934,388 | | Total Loans | $1,979,690 | $1,644,330 | $1,247,657 | | Total Deposits | $2,356,880 | $1,875,522 | $1,558,756 | | Return on Average Equity | 11.66% | 8.21% | 8.56% | | Return on Average Assets | 1.00% | 0.76% | 0.75% | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=33&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Net income increased significantly in 2020, driven by loan growth and PPP fees, despite higher provisions for loan losses due to pandemic-related uncertainty [Results of Operations](index=36&type=section&id=Item%207.%20MD&A-Results%20of%20Operations) Net income rose to $26.5 million in 2020, driven by higher net interest income from loan growth and PPP fees, partially offset by an increased provision for loan losses - The increase in net interest income in 2020 was driven by **organic commercial loan growth** and the recognition of **SBA PPP processing fee income**[212](index=212&type=chunk) - The provision for loan losses increased significantly in 2020 primarily as a result of increased uncertainty related to the **COVID-19 pandemic**[216](index=216&type=chunk) - Noninterest expenses decreased in 2020 due to **lower merger-related and branch consolidation expenses** ($1.3 million in 2020 vs. $9.0 million in 2019)[217](index=217&type=chunk) Key Operating Results (2019 vs. 2020) | Metric (in millions) | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Net Income | $26.5 | $16.9 | +$9.6 | | Diluted EPS | $2.40 | $1.61 | +$0.79 | | Net Interest Income | $83.6 | $69.3 | +$14.3 | | Provision for Loan Losses | $5.3 | $0.9 | +$4.4 | | Noninterest Expenses | $74.1 | $77.3 | -$3.2 | [Financial Condition](index=45&type=section&id=Item%207.%20MD&A-Financial%20Condition) Total assets grew 15.4% to $2.75 billion in 2020, driven by PPP loan originations and related deposit growth, while capital ratios remained strong - The loan portfolio increased by **$335.4 million (20.4%)** in 2020, primarily due to the origination of $403.3 million in SBA PPP loans[275](index=275&type=chunk) - Total deposits grew by **$481.4 million (25.7%)** in 2020, largely due to deposits generated through the SBA PPP program[319](index=319&type=chunk) - The Allowance for Loan Losses (ALL) increased by $5.5 million to $20.2 million at year-end 2020, reflecting a **$2.8 million qualitative reserve** specifically for COVID-19 related risks[285](index=285&type=chunk)[286](index=286&type=chunk) Balance Sheet Highlights (as of Dec 31) | Metric (in millions) | 2020 | 2019 | | :--- | :--- | :--- | | Total Assets | $2,750.6 | $2,383.3 | | Net Loans | $1,959.5 | $1,629.7 | | Total Deposits | $2,356.9 | $1,875.5 | | Total Shareholders' Equity | $246.2 | $223.2 | [Quantitative and Qualitative Disclosures About Market Risk](index=64&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate risk, which is managed via simulation analysis showing different sensitivities for short-term earnings and long-term value - The company's primary market risk is interest rate risk, managed by an asset/liability committee using tools like simulation analysis and net present value analysis[354](index=354&type=chunk)[355](index=355&type=chunk)[358](index=358&type=chunk) Interest Rate Sensitivity Analysis (as of Dec 31, 2020) | Change in Market Interest Rates | % Change in Net Interest Income (Earnings at Risk) | % Change in Market Value (Value at Risk) | | :--- | :--- | :--- | | -100 bps | -0.8% | -99.6% | | +100 bps | +1.7% | +70.7% | | +200 bps | +2.4% | +116.4% | [Financial Statements and Supplementary Data](index=66&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section contains the company's audited consolidated financial statements, accompanying notes, and independent auditor's report for the year ended December 31, 2020 [Financial Statements](index=72&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data-Financial%20Statements) The financial statements show significant growth in assets to $2.75 billion and a 56% increase in net income to $26.5 million for 2020 Consolidated Balance Sheet Highlights (as of Dec 31) | (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Total Assets | $2,750,572 | $2,383,274 | | Net Loans | $1,959,539 | $1,629,675 | | Total Deposits | $2,356,880 | $1,875,522 | | Total Liabilities | $2,504,323 | $2,160,025 | | Total Shareholders' Equity | $246,249 | $223,249 | Consolidated Income Statement Highlights (Year Ended Dec 31) | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net Interest Income | $83,607 | $69,295 | $52,157 | | Provision for Loan Losses | $5,325 | $900 | $800 | | Noninterest Income | $28,309 | $28,539 | $21,024 | | Noninterest Expenses | $74,080 | $77,300 | $57,936 | | Net Income | $26,463 | $16,924 | $12,805 | [Notes to Consolidated Financial Statements](index=79&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data-Notes%20to%20Consolidated%20Financial%20Statements) The notes detail accounting policies, acquisitions, loan portfolio quality, capital adequacy, and the company's decision to delay adoption of the CECL standard - The company has **delayed the implementation of ASU No. 2016-13 (CECL)** until the extended deadline for smaller reporting companies, which is for fiscal years beginning after December 15, 2022[201](index=201&type=chunk)[461](index=461&type=chunk) - The May 2019 acquisition of Hamilton Bancorp, Inc. involved total consideration of **$50.8 million** and resulted in **$6.1 million of goodwill**[468](index=468&type=chunk)[469](index=469&type=chunk) - As of December 31, 2020, the company had **$18.2 million in loans under COVID-19 related payment deferral programs**, down significantly from $78.4 million at September 30, 2020[293](index=293&type=chunk)[294](index=294&type=chunk) - At December 31, 2020, the Bank was categorized as **"well capitalized"** under regulatory standards, with a total risk-based capital ratio of 14.7% against a 10.0% requirement[616](index=616&type=chunk)[619](index=619&type=chunk) [Changes in and Disagreements With Accountants on Accounting and Financial Disclosure](index=122&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[683](index=683&type=chunk) [Controls and Procedures](index=122&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective as of year-end 2020 - Based on an evaluation as of December 31, 2020, the CEO and CFO concluded that the company's **disclosure controls and procedures were effective**[684](index=684&type=chunk) - **No changes in internal control over financial reporting** occurred during the fourth quarter of 2020 that have materially affected, or are reasonably likely to materially affect, internal controls[684](index=684&type=chunk) [Other Information](index=122&type=section&id=Item%209B.%20Other%20Information) The company reports no other information for this item - None[686](index=686&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=122&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information is incorporated by reference from the 2021 proxy statement, and the company confirms adoption of a code of ethics for senior financial officers - Information regarding directors, executive officers, and corporate governance is **incorporated by reference** from the 2021 Annual Meeting of Shareholders proxy statement[688](index=688&type=chunk) - The company has adopted a **code of ethics for senior financial officers**, available on its website[687](index=687&type=chunk) [Executive Compensation](index=122&type=section&id=Item%2011.%20Executive%20Compensation) All information regarding executive compensation is incorporated by reference from the company's 2021 proxy statement - Information regarding executive compensation is **incorporated by reference** from the 2021 Annual Meeting of Shareholders proxy statement[689](index=689&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=123&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) As of year-end 2020, 881,920 securities remained available for future issuance under equity compensation plans Equity Compensation Plan Information (as of Dec 31, 2020) | Plan Category | Securities to be issued upon exercise | Weighted-average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plan approved by security holders | 0 | n/a | 881,920 | [Certain Relationships and Related Transactions, and Director Independence](index=123&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) All information regarding related party transactions and director independence is incorporated by reference from the 2021 proxy statement - Information regarding certain relationships, related transactions, and director independence is **incorporated by reference** from the 2021 Annual Meeting of Shareholders proxy statement[692](index=692&type=chunk) [Principal Accountant Fees and Services](index=123&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) All information regarding fees paid to the principal accountant is incorporated by reference from the 2021 proxy statement - Information regarding principal accountant fees and services is **incorporated by reference** from the 2021 Annual Meeting of Shareholders proxy statement[693](index=693&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=124&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists all documents filed with the Form 10-K, including financial statements, material contracts, and required certifications - The consolidated financial statements are **incorporated by reference** from Item 8[695](index=695&type=chunk) - All financial statement schedules have been **omitted** as they are not required or are inapplicable[695](index=695&type=chunk) - A comprehensive list of exhibits filed with the report is provided, including material contracts and required certifications[697](index=697&type=chunk)[698](index=698&type=chunk) [Form 10-K Summary](index=126&type=section&id=Item%2016.%20Form%2010-K%20Summary) This item is not applicable - Not applicable[700](index=700&type=chunk)

Orrstown Financial Services, Inc. MISSION: "We create value for our shareholders by providing outstanding client experiences through community engagement and local decisions from people you know and trust." VISION: "We aspire to be the financial institution of choice focused on quality client service, innovative solutions and sound financial advice." Presentations Given Third Quarter 2020 1 Cautionary Note Regarding Forward Looking Statements | Non-GAAP Disclosures Cautionary Note Regarding Forward Looking ...