UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended: December 31, 20062007

or

Commission file number: 33-18888

ORRSTOWN FINANCIAL SERVICES, INC.

(Exact name of registrant as specified in its charter)

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:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One)

Large accelerated filer  ¨Accelerated filer  x            Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)    Yes  ¨    No  x

Aggregate market value of the Common Stock held by non-affiliates computed by reference to the price at which the common equity was last sold on December 31, 20062007 was $217,225,714.$186,147,060.

Number of shares outstanding of the registrant’s common stock as of December 31, 2006: 6,134,332.2007: 6,419,542.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Financial Report to shareholders for the year ended December 31, 2006 are incorporated by reference into Parts I and II.

Portions of the Proxy Statement for the 20072008 Annual Meeting of Security Holders are incorporated by reference in Part III of this Form 10-K.

ORRSTOWN FINANCIAL SERVICES, INC.

FORM 10-K

INDEX

Part I

Item 1. Business.1 - Business

Orrstown Financial Services, Inc. (the Corporation) is a financial holding company registered under the Gramm-Leach-Bliley Act. The executive offices of Orrstown Financial Services, IncInc. are located at 77 East King Street, Shippensburg, Pennsylvania, 17257. 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, Shippensburg, Pennsylvania, and such other banks and bank related activities as are permitted by law and desirable.

The Corporation files periodic reports with the Securities and Exchange Commission (SEC) in the form of 10-Q’s - 10-Q’s—quarterly reports; 10-K - 10-K—annual report; annual proxy statements and Form 8-K for any significant events that may arise during the year. Copies of the Corporation’s filings may be obtained free of charge through the SEC’s internet site at www.sec.gov or by accessing the Corporation’s website atwww.orrstown.com. Copies of the Corporation’s filings also are available to be read and copied at the SEC’s Public Reference Room at 100 F Street N.W., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

History and Acquisitions

On March 8, 1988, Orrstown Financial Services, Inc. acquired 100% ownership of Orrstown Bank, issuing 131,455 shares of Orrstown Financial Services, Inc.’s common stock to the former Orrstown Bank shareholders. Orrstown Bank 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 Bank, under which Orrstown Bank became a wholly-owned subsidiary of Orrstown Financial Services, Inc. As indicated, Orrstown Bank is the successor to Orrstown Bank which was originally organized in 1919. Orrstown Bank is engaged in providing banking and bank related services in South Central Pennsylvania, principally Franklin, Perry and Cumberland Counties in Pennsylvania and in Washington County Maryland. The sixteentwenty offices of Orrstown Bank are located in Shippensburg (2), Carlisle (4), Spring Run, Orrstown, Chambersburg (3), Greencastle, Mechanicsburg (2), Camp Hill, Newport (2), Duncannon, and Camp Hill,New Bloomfield, Pennsylvania and Hagerstown, Maryland.

From its inception in January 2000 to December 31, 2005, Pennbanks Insurance Company Cell P1 (Pennbanks) was a wholly-owned subsidiary of the Corporation. As of January 1, 2006, the Corporation has divested the Pennbanks Insurance Company Cell P1 insurance book of business. The liabilities associated with the insurance business were assumed by American General under a contractual arrangement. Pennbanks is a reinsurer of credit, life, and disability insurance.

On May 1, 2006, Orrstown Financial Services, Inc. acquired 100% ownership of The First National Bank of Newport (First National) a national banking institution with $120 million in assets at the time of the merger. The Corporation issued 699,949 shares of Orrstown Financial Services, Inc.’s common stock to the former First National shareholders. Each share of First National common stock outstanding at the time of the transaction was exchanged for 1.75 shares of Orrstown Financial Services, Inc. common stock and $22.20 in cash. The purchase price for shares exchanged for common stock was $35.49 with 400,000 shares of First National common stock outstanding. Fractional shares were paid out in cash at the time of the transaction. First National iswas engaged in providing banking and bank related services in Perry County, Pennsylvania with four branches, and was originally organized on May 23, 1893. As of the close of business on June 15, 2007, The First National has four branches located inBank of Newport (2), Duncannon, and New Bloomfield, Pennsylvania. Further discussion related toOrrstown Bank collapsed the acquisition is included intwo bank charters into one bank with Orrstown Bank as the Annual Financial Report under Note 2 Acquisition, in the Notes to Consolidated Financial Statements.surviving bank.

Business

Orrstown Financial Services, Inc.’s primary activity consists of owning and supervising its two subsidiaries,subsidiary, Orrstown Bank and The First National Bank of Newport (the Banks)Bank). The day-to-day management of the BanksBank is conducted by the subsidiaries’subsidiary’s officers. Orrstown Financial Services, Inc. derives a majority of its current income from Orrstown Bank.

Orrstown Financial Services, Inc. has no employees other than its six officers who are also employees of its subsidiary banks.bank. On December 31, 2006,2007, Orrstown Bank had 184221 full-time and 4145 part-time employees, while First National had 36 full-time and 13 part time employees.

The Banks areBank 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 Banks grant agribusiness, commercial and residential loans to customers in their market area of Franklin, Perry and Cumberland Counties of Pennsylvania and Washington County, Maryland. The concentrations of credit by type of loan are set forth on the face of the balance sheet (page 4 of the annual report to shareholders)filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data”. The Banks maintainBank maintains a diversified loan portfolio and evaluateevaluates each customer’s credit- worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the BanksBank upon the extension of credit, is based on management’s credit evaluation of the customer and collateral standards established in the Banks’Bank’s lending policies and procedures.

All secured loans are supported with appraisals of collateral. Business equipment and machinery, inventories, accounts receivable, and farm equipment are considered appropriate security, provided they meet acceptable standards for liquidity and marketability. Loans secured by equipment and/or other non real estate collateral normally do not exceed 70% of appraised value or cost, whichever is lower. Loans secured by real estate generally do not exceed 80% of the appraised value of the property. Loan to collateral values are monitored as part of the loan review, and appraisals are updated as deemed appropriate in the circumstances.

Administration and supervision over the lending process is provided by the Banks’Bank’s Credit Administration Committee which is comprised of outside directors. Executive officers and loan department personalpersonnel regularly meet with and report to the Credit Administration Committee. The loan review process is continuous, commencing with the approval of a loan. Each new loan is reviewed by the Loan Department for compliance with banking regulations and lending policy requirements for documentation, collateral standards, and approvals. Orrstown Bank employs a Loan Review Officer, who is independent from the loan function and reports directly to the Credit Administration Committee. The Loan Review Officer continually monitors and evaluates loan customers utilizing risk-rating criteria established in the Loan Review Policy in order to spot deteriorating trends and detect conditions which might indicate potential problem loans. The Loan Review Officer reports the results of the loan reviews at least quarterly to the Credit Administration Committee for approval and provides the basis for evaluating the adequacy of the allowance for loan losses.

Through its trust department, Orrstown Bank renders services as trustee, executor, administrator, guardian, managing agent, custodian, investment advisor, and other fiduciary activities authorized by law.

As of December 31, 2006,2007, the Corporation had total assets of approximately $809$885 million, total shareholders’ equity of approximately $89$96 million and total deposits of approximately $639$646 million.

Regulation and Supervision

Orrstown Financial Services, Inc. is a financial holding company, and is registered as such with the Board of Governors of the Federal Reserve System (the Federal Reserve Board). As a registered bank holding company and financial holding company, the Corporation is subject to regulation under the Bank Holding Company Act of 1956 and to inspection, examination, and supervision by the Federal Reserve Board.

The operationoperations of the BanksBank 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. The Banks’ operations areBank’s operation is also subject to regulations of the Pennsylvania Department of Banking, the Federal Reserve Board and the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC).

Several of the more significant regulatory provisions applicable to banks and financial holding companies to which the Corporation and its subsidiariessubsidiary are subject, are discussed below, along with certain regulatory matters concerning the Corporation and its subsidiaries.subsidiary. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory provisions. Any change in applicable law or regulation may have a material effect on the business and prospects of the Corporation and its subsidiaries.subsidiary.

Financial and Bank Holding Company Activities

“Financial in Nature” Requirement.requirement. As a financial holding company, the Corporation may engage in, and acquire companies engaged in, activities that are considered “financial in nature”, as defined by the Gramm-Leach-Bliley Act and Federal Reserve Board interpretations. These activities include, among other things, securities underwriting, dealing and market-making, sponsoring mutual funds and investment companies, insurance underwriting and agency activities, and merchant banking. If any banking subsidiary of the Corporation ceases to be “well capitalized” or “well managed” under applicable regulatory standards, the Federal Reserve Board may, among other things, place limitations on the Corporation’s ability to conduct the broader financial activities permissible for financial holding companies or, if the deficiencies persist, require the Corporation to divest the banking subsidiary. In addition, if any banking subsidiary of the Corporation receives a Community Reinvestment Act rating of less than satisfactory, the Corporation would be prohibited from engaging in any additional activities other than those permissible for bank holding companies that are not financial holding companies. The Corporation may engage directly or indirectly in activities considered financial in nature, either de novo or by acquisition, as long as it gives the Federal Reserve Board after-the-fact notice of the new activities.

Interstate Banking and Branching

As a bank holding company, the Corporation is required to obtain prior Federal Reserve Board approval before acquiring more than 5% of the voting shares, or substantially all of the assets, of a bank holding company, bank, or savings association. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act (Riegle-Neal), subject to certain concentration limits and other requirements, bank holding companies such as the Corporation may acquire banks and bank holding companies located in any state. Riegle-Neal also permits banks to acquire branch offices outside their home states by merging with out-of-state banks, purchasing branches in other states, and establishing de novo branch offices in other states. The ability of banks to acquire branch offices is contingent, however, on the host state having adopted legislation “opting in” to those provisions of Riegle-Neal. In addition, the ability of a bank to merge with a bank located in another state is contingent on the host state not having adopted legislation “opting out” of that provision of Riegle-Neal. The Corporation has expanded its market south into Hagerstown, Maryland with its first branch opening in March 2006. Orrstown Bank entered into an agreement to lease an existing banking office at 201 South Cleveland Avenue in Hagerstown.

Control Acquisitions

The Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of a bank holding company, unless the Federal Reserve Board has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act, such as the Corporation, would, under the circumstances set forth in the presumption, constitute acquisition of control of the bank holding company. In addition, a company is required to obtain the approval of the Federal Reserve Board under the Bank Holding Company Act before acquiring 25% (5% in the case of an aquiroracquirer that is a bank holding company) or more of any class of outstanding voting stock of a bank holding company, or otherwise obtaining control or a “controlling influence” over that bank holding company.

Liability for Banking Subsidiaries

Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial and managerial strength to each of its subsidiary banks and to commit resources to their support. This support may be required at times when the bank holding company may not have the resources to provide it. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, the FDIC can hold any FDIC-insured depository institution liable for any loss suffered or anticipated by the FDIC in connection with (1) the “default” of a commonly controlled FDIC-insured depository institution; or (2) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution “in danger of default”.

Capital Requirements

Information concerning the Corporation and its subsidiariessubsidiary with respect to capital requirements is incorporated by reference from Note 16,15, “Regulatory Matters”, of the “Notes to Consolidated Financial Statements” included under Item 8 of this report, and from the “Capital Adequacy and Regulatory Matters” section of the “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations”, included under Item 7 of this report.

FDICIA

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), and the regulations promulgated under FDICIA, among other things, established five capital categories for insured depository institutions – well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized – and requires federal bank regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements based on these categories. Unless a bank is well capitalized, it is subject to restrictions on its ability to offer brokered deposits and on certain other aspects of its operations. An undercapitalized bank must develop a capital restoration plan and its parent bank holding company must guarantee the bank’s compliance with the plan up to the lesser of 5% of the bank’s assets at the time it became undercapitalized and the amount needed to comply with the plan. As of December 31, 2006, both Banks were2007, the Bank was considered well capitalized based on the guidelines implemented by the banks’bank’s regulatory agencies.

Dividend Restrictions

The Corporation’s funding for cash distributions to its shareholders is derived from a variety of sources, including cash and temporary investments. One of the principal sources of those funds is dividends received from its subsidiariessubsidiary Orrstown BankBank. Various federal and First National. Various federalstate laws limit the amount of dividends the BanksBank can pay to the Corporation without regulatory approval. In addition, federal bank regulatory agencies have authority to prohibit the BanksBank from engaging in an unsafe or unsound practice in conducting their business. The payment of dividends, depending upon the financial condition of the bank in question, could be deemed to constitute an unsafe or unsound practice. The ability of the BanksBank to pay dividends in the future is currently, and could be further, influenced by bank regulatory policies and capital guidelines. Additional information concerning the Corporation and its banking subsidiariessubsidiary with respect to dividends is incorporated by reference from Note 16,15, “Regulatory Matters”, of the “Notes to Consolidated Financial Statements” included under Item 8 of this report, and the “Capital Adequacy and Regulatory Matters” sectionssection of “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations”, included under Item 7 of this report.

Depositor Preference Statute

In the “liquidation or other resolution” of an institution by any receiver, U.S. federal legislation provides that deposits and certain claims for administrative expenses and employee compensation against the insured depository institution would be afforded a priority over the general unsecured claims against that institution, including federal funds and letters of credit.

Other Federal Laws and Regulations

The Corporation’s operations are subject to additional federal laws and regulations applicable to financial institutions, including, without limitation:

Sarbanes-Oxley Act of 2002

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002.2002 was enacted. The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity securities registered or that file reports under the Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and its directors and executive officers; and (v) new and increased civil and criminal penalties for violations of the securities laws. Many of the provisions were effective immediately while other provisions become effective over a period of time and are subject to rulemaking by the SEC. Because the Corporation’s common stock is registered with the SEC, it is currently subject to this Act. As an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934, the Corporation was subject to section 404 of the Sarbanes-Oxley Act forstarting in the year ended December 31, 2004.

FDIC Insurance and Assessments

Deposit accounts in the Company’s subsidiary banks are insured by the Federal Deposit Insurance Corporation generally up to a maximum of $100,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. The Banks’ deposits, therefore, are subject to FDIC deposit insurance assessments.

On February 15, 2006, federal legislation to reform federal deposit insurance was enacted. This new legislation required, among other things, that the FDIC adopt regulations for considering an increase in the insurance limits on all deposit accounts (including retirement accounts) every five years starting in 2011 based, in part, on inflation, and modifying the deposit fund’s reserve ratio for a range between 1.15% and 1.50% of estimated insured deposits.

On November 2, 2006, the FDIC adopted final regulations establishing a risk-based assessment system that will enable the Federal Deposit Insurance Corporation to more closely tie each financial institution’s premiums to the risk it poses to the deposit insurance fund. Under the new risk-based assessment system, which becomesbecame effective in the beginning of 2007, the FDIC will evaluate the risk of each financial institution based on three primary sources of information: (1) its supervisory rating, (2) its financial ratios, and (3) its long-term debt issuer rating, if the institution has one. The new rates for nearly all of the financial institution industry will vary between five and seven cents for every $100 of domestic deposits. At the same time, the FDIC also adopted final regulations designating the reserve ratio for the deposit insurance fund during 2007 at 1.25% of estimated insured deposits.

Effective March 31, 2006, the FDIC merged the Bank Insurance Fund (“BIF”) and the Savings Association Insurance Fund (“SAIF”) into a single insurance fund called the Deposit Insurance Fund. As a result of the merger, the BIF and SAIF were abolished. The merger of the BIF and SAIF into the Deposit Insurance Fund does not affect the authority of the Financing Corporation (“FICO”) to impose and collect, with approval of the FDIC, assessments for anticipated payments, insurance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended June 30, 2006, the FICO assessment was equal to 1.28 basis points for each $100 in domestic deposits maintained at an institution.

In 2006,2007, the FDIC assessment for Orrstown Bank was $59,000, and for First National $13,000.$113,000.

Future Legislation

Changes to the laws and regulations in the state where the Corporation and the Banks do business can affect the operating environment of bank holding companies and their subsidiaries in substantial and unpredictable ways. The Corporation cannot accurately predict whether those changes in laws and regulations will occur, and, if those changes occur, the ultimate effect they would have upon the financial condition or results of operations of the Corporation.

Forward Looking Statements

Additional information concerning the Corporation and its banking subsidiaries with respect to forward looking statements is incorporated by reference from the “Important Factors Relating to Forward Looking Statements” section of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in this Report under Item 7.

Competition

The Banks’Bank’s principal market area consists of Franklin County, Perry County and Cumberland County, Pennsylvania, with a presence in Washington County, Maryland. It services a substantial number of depositors in this market area, with the greatest concentration within a radius of Chambersburg, Shippensburg, and Carlisle, Pennsylvania.

The Banks,Bank, like other depository institutions, havehas been subjected to competition from less heavily regulated entities such as credit unions, brokerage firms, money market funds, consumer finance and credit card companies, and other commercial banks, many of which are larger than the Banks.Bank. The principal methods of competing effectively in the financial services industry include improving customer service through the quality and range of services provided, improving efficiencies and pricing services competitively. Orrstown Bank and First National areis competitive with the financial institutions in theirits service areas with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans.

One outgrowth of the competitive environment discussed above has been significant consolidation within the financial services industry on a global, national, and regional level. We continue to implement strategic initiatives focused on expanding our core businesses and to explore, on an ongoing basis, acquisition, divestiture, and joint venture opportunities. We analyze each of our products and businesses in the context of customer demands, competitive advantages, industry dynamics, and growth potential.

Item 1A - Risk Factors

There are a number of significant risks and uncertainties, including those specified below, that may adversely affect the Corporation’s business, financial results or stock price. Additional risks that the Corporation currently does not know about or currently views as immaterial may also impair the Corporation’s business or adversely impact its financial results or stock price.

Factors that might cause such differences include, but are not limited to the following: (1) competitive pressures among financial institutions increasing significantly in the markets where the Corporation operates; (2) general business and economic conditions, either nationally or locally being less favorable than expected; (3) changes in the domestic interest rate environment could reduce the Corporation’s net interest income; (4) legislation or regulatory changes which adversely affect the ability of the Corporation to conduct its current or

future operations; (5) acts or threats of terrorism and political or military actions taken by the United States or other governments and natural disasters globally or nationally could adversely affect general economic or industry conditions; (6) operational losses related to or resulting from: the risk of fraud by employees or persons outside of the Corporation, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of the internal control system, business continuation and disaster recovery, as well as security risks associated with “hacking” and “identity theft”; (7) negative publicity could damage the Corporation’s reputation and adversely impact its business and/or stock trades and prices; (8) acquisitions may not produce revenue enhancements or cost savings at levels or within timeframes originally anticipated and may result in unforeseen integration difficulties; (9) the Corporation relies on other companies to provide key components of business infrastructure in the form of third party vendors. Third party vendors could adversely affect the ability of the Corporation to perform its normal course of business or deliver products and services to its customers; (10) and other risk factors that may occur in current or future operations.

Item 1B - Unresolved Staff Comments

None

Item 2. Properties.2 - Properties

Orrstown Bank owns buildings in Orrstown, Shippensburg (2), Carlisle (2), Spring Run, Chambersburg (3), and Mechanicsburg (2), Newport (2), Duncannon, and New Bloomfield, Pennsylvania. Offices of Orrstown Bank are located in each of these buildings. It also leases space for offices located in Greencastle, Carlisle (2) and Camp Hill, Pennsylvania and in Hagerstown, Maryland. First National owns buildings in Newport (2), Duncannon, and New Bloomfield, Pennsylvania. Offices of First National are located in each of these buildings

Item 3.3 - Legal Proceedings.Proceedings

Orrstown Financial Services, Inc. is an occasional party to legal actions arising in the ordinary course of its business. In the opinion of management, the Corporation has adequate legal defenses and/or insurance coverage respecting any and each of these actions and does not believe that they will materially affect the Corporation’s operations or financial position.

Item 4.4 - Submission of Matters to Vote of Security Holders.Holders

None

Part II

Item 5.5 - Market for Registrant’s Common Equity and Related Security Holder Matters and Issuer Purchases of Equity Securities.Securities

Market Information

Orrstown Financial Services, Inc.’s common stock is not traded on a national securities exchange. Quotations for shares of the Corporation’s common stock are reported through the OTC Bulletin Board service under the symbol ORRF, and are traded over the counter with brokers who make a market in the stock. At December 31, 2006,2007, the number of shareholders of record was approximately 3,022.3,261. 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 and does not reflectrepresent prices in actual transactions or include retail markups and markdowns or any commission to the broker/dealer.as published by various financial sources.

The Corporation expects to continue its policy of paying regular cash dividends declared from time to time by the Board of Directors, although there is no assurance as to future dividends because they depend on future earnings, capital requirements, financial condition and other factors deemed relevant by the Board of Directors. See Note 1615 in the “Notes to Consolidated Financial Statements” for the year ended December 31, 20062007 for restrictions on the payment of dividends.

Issuer Purchases of Equity Securities

On April 27, 2006, Orrstown Financial Services, Inc. announced a Stock Repurchase Plan approvingThe table below summarizes the purchaseCorporation’s repurchase of up to 150,000 shares as conditions allow. The plan may be suspended at any time without prior notice and has no prescribed time limit in which to fill the authorized repurchase amount. As of December 31, 2006, 14,749 shares have been purchased under the program. Orrstown did not sell any unregistered securities. The Company has not repurchased any common equity securities during the fourth quarter ended December 31, 2006.2007. The maximum number of shares that may yet be purchased under the plan is 135,251107,287 shares at December 31, 2006.2007.

PERFORMANCE GRAPH

The following graph shows a five-year comparison of the cumulative total return on the Corporation’s common stock as compared to other indexes: the SNL index of banks with assets between $500 million and $1 billion, the S&P 500 Index, and the NASDAQ Composite index. Shareholder returns on the Corporation’s common stock are based upon trades reported by the National Association of Securities Dealers’ Inc.’s OTC Bulletin Board service. The Corporation is not aware of all prices at which shares traded during such periods. The shareholder returns shown in the graph are not necessarily indicative of future performance. The performance illustrated assumes that $100 was invested in the Corporation’s common stock and each index on December 31, 2002 and that all dividends were reinvested.

Orrstown Financial Services, Inc.

Item 6.6 - Selected Financial Data.Data

The selected five-year financial data on page 41 of the AnnualSelected Financial Report to shareholdersData at or for the year ended December 31, 2006 is incorporated herein by reference.Year

The First National Bank of Newport was acquired on May 1, 2006. Results above reflect First National’s operations after May 1, 2006.

Item 7.7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation.Operation

The following is a discussion of our consolidated financial condition and results of operations for each of the three years ended December 31, 2007, 2006 and 2005. Some statements and information contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are not historical facts but are forward-looking statements. For a discussion of these forward-looking statements and important factors that could cause results to differ materially from the forward-looking statements contained in this Annual Report, see “Important Factors Relating to Forward Looking Statements”. The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and Notes to Consolidated Financial Statements presented in this report. Certain prior period amounts, presented in this discussion and analysis, have been reclassified to conform to current period classifications.

Overview

Orrstown Financial Services, Inc. (the Corporation) is a financial holding company with a wholly-owned bank subsidiary, Orrstown Bank. On May 1, 2006, the Corporation acquired The First National Bank of Newport, located in Perry County. Results of their operations were included for the last eight months of 2006. During January 2007, both bank boards executed documents allowing combination of the two banks into one company. The consolidation of the companies took place as of the close of business on June 15, 2007. The four branches and the employees of First National became part of Orrstown Bank. This consolidation of the Banks centralized operations, eliminated separate financial reporting, and created additional banking opportunities and products for all of our customers.

While our market area expanded in 2006 with the addition of First National plus two other offices, no additional branch offices were opened in 2007. This pause allowed time for our operations staff to expand so that they are better staffed to support our branches and business development officers. This backroom support, in turn, helped our front line employees to provide the best possible service to each of our customers. On October, 29, 2007, Orrstown Bank purchased a facility to utilize as its Operations Center with some space available for lease to other business entities. The building is located at 2605 – 2695 Philadelphia Avenue, Chambersburg, Pennsylvania, in the North Pointe Business Center. Our operations departments, information technology, human resources and other support staff will be moving into the renovated facility to give them much needed space and to prepare for future growth. The target date for the move is May 2008. Our largest branch project in 2008 will be the opening of a flagship branch of Orrstown Bank, in the Hagerstown, Maryland area. Construction will begin during the first quarter of 2008, and the new office should be completed by the middle of the year. This is an expansion of our Hagerstown operation and supplements our first branch, which was opened in March 2006. The original office has experienced tremendous loan growth and we look forward to the opportunities this market will afford the Bank with the addition of the new branch.

Orrstown Bank’s deposit services include a variety of checking, savings, time and money market deposits along with related debit card and merchant services. Lending services include commercial loans, residential loans, commercial mortgages and various forms of consumer lending. The Orrstown Financial Advisors division has continued to increase the assets under management throughout 2007 with approximately $415 million of assets under management at December 31, 2007. The Orrstown Financial Advisors division offers a diverse line of financial services to our customers, including, but not limited to, brokerage, mutual funds, trusts, estate planning, investments and insurance products.

The Corporation has had another year of strong operating performance and outstanding loan growth. The funding of the loan growth was made more difficult as deposit growth was not as robust as in past years. Deposit growth will be a major focus of the Bank in 2008 to better position Orrstown for sustainable growth. New Deposit Services Officer positions have been created to assist in the push for deposit growth. The purpose of these positions is to generate new business and personal contacts for deposit customers and retain current customer relationships and deposits. Another tool, in the form of the Reward Checking product, was started in May of 2007. This product has had success in bringing in new deposits in the second half of 2007 and should continue to do well throughout 2008 by offering a very competitive interest rate and free ATM usage nation wide, if certain conditions are met. The results of our financial performance have exceeded our peer group averages by a significant margin and continue to rank Orrstown Financial Services among the top performing banking companies in the country. The Corporation is committed to providing both shareholder value and continually improving our customer’s relationships and experience with us.

For the year ended December 31, 2007, the Corporation recorded net income of $12,558,000, an increase of 8.0% over 2006 earnings of $11,632,000, which was a 16.5% increase over net income of $9,987,000 realized in 2005. The acquisition of First National contributed $1,150,000 of net income during the last eight months of 2006 resulting in a higher than normal growth percentage from 2005 to 2006. Basic earnings per share have increased over the last three years from $1.76 in 2005 to $1.87 in 2006 and $1.95 in 2007. The per share amounts have been restated to reflect the 5% stock dividend paid to shareholders on June 29, 2005 and the 5% stock dividend paid to shareholders on June 15, 2007.

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 2007, 1.61% in 2006, and 1.81% in 2005. The average publicly traded banking company and the average Mid-Atlantic Region banking company generated an ROA of approximately 0.83% per SNL Financial, a provider of financial information for the banking industry. The return on average equity for the Corporation was 18.69% in 2005, 15.10% in 2006, and 13.64% in 2007. SNL Financial indicates that approximately 8.56% is the median for our industry while Mid-Atlantic banks return less than 8.50% on average. In order to compare past years’ performance ratios more effectively with the addition of goodwill and intangibles from the First National acquisition in 2006 and other goodwill and intangibles, we have included the return on average tangible assets (ROTA) and return on average tangible equity (ROTE) ratios which excludes intangibles from equity and assets and amortization of intangibles and related tax expense from net income. The return on average tangible assets was 1.56% in 2007, 1.66% in 2006, and 1.81% in 2005. The return on average tangible equity was 18.02% in 2007, 18.98% in 2006 and 19.28% in 2005.

Economic Climate

The U.S. Economy grew at an uneven pace during 2007, and especially during the second half of the year. After very strong growth in the 3^rd quarter of 4.9%, the economy slowed sharply to a meager pace of 0.6% for the 4^th quarter. As the credit and mortgage strain continued to worsen, the Federal Reserve began to take actions to inject much needed liquidity and confidence into the financial system and the markets. Beginning in August of 2007, the federal funds rate was cut by a total of 100 basis points, and the discount rate by a total of 150 basis points. The central bank also auctioned off billions of dollars to cash-strapped financial institutions at below market rates. This was the largest such infusion since the terrorist attacks of 2001. The U.S. Economy for the year grew at a rate of 2.2% which was the slowest rate in the past 5 years. At the same time core inflation rose to an annual rate of 2.7% which is well above the typical comfort level for the Federal Reserve. Oil, food, and other commodity prices continued to rise to unprecedented levels and consumers began to pull back on their spending. The U.S. stock market also experienced a high level of volatility throughout 2007, pulling back after reaching new all-time highs. For the year as a whole, the S&P 500 rose by a total of 5.49%, while bonds rose by 7% in light of changes in interest rates and the yield curve becoming steeper.

The outlook for 2008 remains uncertain, with many economists predicting that we will experience a recession during the year. Some economists feel we have already entered a recessionary period. The yield curve has become much steeper, with the Federal Reserve cutting short term rates and inflation pushing longer rates higher. The financial crisis and the housing correction look as if they will continue for many more months, and could actually worsen before any recovery is seen. The Corporation’s balance sheet contains practically no exposure to sub-prime lending issues.

With the recent rate cuts during January 2008 and the possibility of future rate declines, the Corporation’s net interest margin for 2008 will likely compress to levels below that of 2007. A rising rate environment, with a normal yield curve, would be the optimum positive scenario for Orrstown and many other community banks. The Corporation is positioned adequately to avoid material earnings damage under any interest rate scenario.

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 volumes and the mix of earning assets and interest bearing liabilities. Net interest income is still the primary source of commercial bank profits despite a continued focus on noninterest income sources. Throughout this discussion, the yield on earning assets is stated on a fully taxable-equivalent basis (FTE) and balances represent average daily balance unless otherwise stated.

For the year ended December 31, 2007, non FTE net interest income totaled $30,120,000, an increase of $2,703,000, or 9.9%, over 2006, the 2006 net interest total was $27,417,000, or 19.8%, over 2005 results. First National contributed $3,021,000 of non FTE net interest income during their eight months of inclusion for 2006, boosting the 2006 growth rate. On a FTE basis, net interest income increased by 9.2% in 2007 and 20.9% in 2006. Marginal tax rates used in the taxable equivalent equation were 34% for 2005 and 35% for 2006 and 2007. The Corporation’s net interest spread was 4.16% in 2005, 3.85% in 2006, and 3.58% in 2007. The net interest margin, which factors in noninterest bearing funds sources, has moved from 4.55% to 4.32% to 4.08% in 2005, 2006 and 2007, respectively.

Average earning assets as a percent of average assets has declined, primarily due to the intangible assets that arose with the acquisition, resulting in ratios of 90.9% for 2007, 91.3% for 2006, and 93.8% for 2005. During 2007, the prime lending rate remained steady at 8.25 basis points throughout the first 8 months of the year; in September, prime started to drop and ended at 7.25 basis points at December 31, 2007. In 2006, there were four 25 basis point increases in the prime lending rate during the first half of the year. As shown in the tables below, during 2006, despite market rate increases, volume factors were more significant for interest earning assets due to the acquisition of First National and robust organic growth. 2007 volume factors for interest earning assets were much more significant than rate factors due to loan demand and a flat interest rate environment for three quarters of 2007.

Interest earning assets for 2007, grew 15.6%, or $102,708,000 on an average daily basis, and interest income increased $8,249,000 or 18.0%, during the same period. The loan portfolio grew by $105,553,000 during 2007 with most of the growth channeled into commercial loans. Commercial loan balances were up $76,506,000, or 20.9%, over 2006 levels.

Interest bearing liabilities grew 16.8%, or $93,926,000, during 2007. Much of the funding growth was in demand deposit accounts and time deposit balances which increased by $44,683,000 and $39,414,000, respectively. Saving account deposits decreased $13,947,000, while long term borrowings added $13,764,000. Short term borrowings, in the form of customer repurchase agreements, grew by $10,012,000 during 2007. Customers continue to shop for higher rate deposit products, like our new Reward Checking account product and time deposits. Our deposit mix, which has significant balances in discretionarily priced transaction accounts, enables us some flexibility in pricing.

The movement of deposit dollars to higher yielding categories, the inverted yield curve during most of the year and the competitive environment for loans, served to reduce our margins during 2007 as net interest spread tightened by 27 basis points to 3.58%. Free funds, the difference between total interest earning assets and total interest bearing liabilities, has increased by $8,782,000 during 2007. The Corporation’s margin of 4.08%, produced during 2007, remained comfortably ahead of industry averages of approximately 3.85% overall and 3.52% within the Mid-Atlantic region per SNL Financial. Our balance sheet is currently in a balanced position which will enable management to react to movements of rates in either direction.

ANALYSIS OF NET INTEREST INCOME

Average Balances and Interest Rates, Taxable Equivalent Basis

ANALYSIS OF NET INTEREST INCOME (CONTINUED)

Average Balances and Interest Rates, Taxable Equivalent Basis

CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME

TAX-EQUIVALENT NET INTEREST INCOME

Noninterest Income

Other noninterest income, excluding securities gains, increased $2,206,000, or 20.0%, in 2007. The majority of the increase was due to service charges on deposit accounts which increased $1,211,000.

Included in service charges on deposits was an increase in fees of $852,000 in the popular overdraft protection program. The convenience of debit card usage continues to grow with consumers and that usage has contributed to a $267,000 increase in debit card fees. This trend should continue to increase as businesses and society move toward the electronic method of purchasing consumer goods and rely less on cash and checks. This is also shown in the increase of our merchant accounts which grew revenue by $90,000.

Loan service charges and fees increased 17.8%, or $242,000, over 2006. Loan income, not including secondary market income, grew $106,000 due to the loan demand mainly concentrated in the commercial loan area. A pickup of new loans running through the secondary mortgage market program contributed fees of $136,000, or a 16.2% increase over last year. The outstanding balances of assets serviced for others at December 31, 2007, stood at $92,876,000 and $71,242,000 at December 31, 2006, a 30.4% increase in serviced mortgage loans.

ATM fees rose by $76,000, a normalization from the large increase shown in 2006 over 2005. Last year’s increase was caused largely by the addition of five ATM machines through the First National acquisition. In May 2007, Orrstown Bank sold its interest in CBIA, a property and casualty insurance business. Due to the sale, no insurance income from CBIA was recorded for 2007, resulting in a decrease of revenue of $75,000 over 2006; this amount is included in other service charges, commissions and fees in the table below. Although insurance revenue was down, the sale on the investment provided a nonrecurring pretax gain of $219,000. Orrstown Financial Advisors contributed to other income as trust department income increased by $257,000 and brokerage income increased by $176,000 over 2006. The Corporation had net securities gains in 2007 of $58,000 and net securities gains in 2006 of $41,000. The table that follows provides additional information regarding noninterest income changes over the past three years:

ANALYSES OF NONINTEREST INCOME

Noninterest Expenses

Total operating expenses increased by $3,293,000 to $24,921,000, or a 15.2% increase over 2006; this is down from the 24.3% increase between 2006 and 2005. The acquisition of First National in 2006 added $2,296,000 to operating expenses for that year, creating the large dollar and percentage increases versus 2005.

Salary expense, including incentive compensation, grew by $1,146,000, or 12.6% and employee benefits increased 15.0% or $583,000 over 2006. These percentage increases, although lower than the previous year’s increase, were still higher than normal due to having the employee expense from First National, four more months in 2007 than in 2006. Included in employee benefits was a $275,000 increase in profit sharing expense, a $224,000 increase in health care costs, and a $126,000 increase in employment taxes. Salary continuation expense and employee stock option expense were both down compared to the prior year.

Occupancy and equipment costs rose only 8.2%, or $276,000, versus 2006. Increases in depreciation expense amounted to $117,000. Some of this was due to a lack of a full year’s expense in 2006 for the four offices in Perry County, the Hagerstown, Maryland office opened in March 2006, and the Mechanicsburg office purchased in October 2006. The Bank also completed major renovations on two of its branches during 2007. In August 2007, renovations to the original Orrstown office, located in Orrstown, Pennsylvania, were complete. The Orrstown branch office transferred an adjacent room into a museum room, dedicated to the preservation of a fully restored carriage that was manufactured by the S.B. Wise Factory. The falling top carriage is depicted in the Company’s logo. The lobby and teller area were given a spacious new layout, a new customer service office was added, the old office was converted into a much needed conference room, a new drive-up teller lane was added, along with a walk up ATM machine, and an overall face lift to the outside of the building. In the Carlisle area, the Bank also purchased and expanded into one of the adjacent units in the Stonehedge complex. The expansion at the Stonehedge office is now housing additional space for the Financial Advisors unit, including offices, a conference room, and a file room. The expansion also included converted space for the growing Commercial Business unit, and added a large meeting room able to host Advisory council meetings as well as other community meetings and events in the building, and a refreshed lobby and teller area. Occupancy expense will continue to see an increase throughout 2008 as the Bank occupies a new operations facility in Chambersburg, Pennsylvania and builds a new office in Hagerstown, Maryland. Maintenance agreements and equipment repairs are becoming a larger expense for the Corporation, as we continue to grow, increasing by 8.8% to $989,000 during 2007.

Data processing fees and advertising expense remained almost level with 2006 while ATM expense and directors fees dropped slightly showing some economies of scale from the combination of the two Banks.

Telephone costs increased by $148,000, or 42.3%, over 2006 due to the additional costs of long distance calling to the Perry County area and the rise in costs for cellular/ Blackberry phones and usage. The move to a new phone network and the reduction in needed circuits during 2008 should improve theses costs. Printing and supplies increased 27.5%, or $134,000. The non-recurring pretax expenses related to the combination of the two bank charters amounted to $78,000. This was expensed in the second quarter of 2007 and was made up of severance payments of $44,000 and additional costs from printing, postage and legal fee expense. Other operating expenses increased over 2006 by $657,000, including increases of $149,000 in demand deposit charge offs, $92,000 in debit card expense and $78,000 in contributions.

The Corporation was able to maintain an enviable efficiency ratio for 2007 of 55.6%. Efficiency ratios of 54.0% and 52.9% had been generated during 2006 and 2005, respectively. SNL Financial reports average efficiency ratios of approximately 67.30% for the industry and 65.39% for banks in our peer size.

The table that follows provides additional information regarding noninterest expense changes over the past three years:

ANALYSES OF NONINTEREST EXPENSES

Federal Income Taxes

The Corporation’s effective federal income tax rate for the year ended December 31, 2007 was 29.3% as compared to 29.4% in 2006 and 30.6% in 2005. Increased low income housing credits that arose from investment in community projects helped to minimally lower the effective rate in 2006 and 2007. Corporate income tax rates for 2008 are forecast to be similar to 2007 levels. Although tax free debt securities will continue to mature, additional low income housing tax credits will be available in 2008. The Corporation was pushed into the 35% tax bracket during 2006, an increase from the 34% bracket used in 2005, and remained in the 35% tax bracket through 2007. During 2008, taxable income for the Corporation will be at the 35% rate on average but marginally at the 38% rate.

Financial Condition

The quality of the Corporation’s asset structure continues to be strong. A substantial amount of time is devoted by management to overseeing the investment of funds in loans and securities and the formulation of policies directed toward the profitability and minimization of risk associated with such investments.

Investment Securities

Orrstown has established investment policies and an asset management policy to assist in administering its investment portfolio. Decisions to purchase or sell these securities are based on economic conditions and management’s strategy to respond to changes in interest rates, liquidity, securitization of deposits and repurchase agreements and other factors while obtaining the maximum return on the investments. Under generally accepting accounting principles, the Corporation may segregate their investment portfolio into three categories: “securities held to maturity”, “trading securities” and “securities available for sale”. Management has classified the full securities portfolio as available for sale. Securities 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.

The following table shows the maturities of investment securities at book value as of December 31, 2007, and weighted average yields of such securities. Yields are shown on a tax equivalent basis, assuming a 35% federal income tax rate.

INVESTMENT MATURITY SCHEDULE

Loan Portfolio

The Bank follows conservative lending practices and continues to carry a high quality loan portfolio with no unusual or undue concentrations of credit. No loans are extended to non domestic borrowers or governments, consistent with past practice and policy.

The loan portfolio at December 31 has grown 13.4% year over year, from $618.8 million to $702.0 million. On an average daily balance, loans have grown 19.1%, from $553.6 million in 2006 to $659.1 million in 2007. This larger percentage increase compared to end of period loans, is due to the acquisition of a $72.0 million loan portfolio from First National in May of 2006. Their portfolio was made up of mainly mortgage and consumer loans and was included for the last eight months of 2006. Loans considered commercial in purpose have been the leading growth area for the Bank and have grown organically. On an average daily basis commercial loans have grown from $365.2 million in 2006 to $441.7 million in 2007, this is a 20.9%, or $76.5 million increase. Mortgage loans have grown by $12.5 million and consumer loans have increased by $16.6 million. The following table presents a breakdown how loans are secured at the end of each of the last five years:

LOANS SECURED BY:

Presented below are the approximate maturities of the loan portfolio (excluding real estate mortgages, installments, and credit cards) at December 31, 2007.

The following table presents the approximate amount of fixed rate loans and variable rate loans due as of December 31, 2007.

Deposit Products

Total deposits grew 13.3%, or $75.8 million, during 2007 on an average daily basis. From the year ended December 31, 2006 to 2007 deposits only increased by 1.2%. The larger average daily balance increase was due in part to the inclusion of First National’s deposits for the last eight months of 2006; whereas, First National’s deposits were included in total deposits at December 31, 2007 and 2006. Noninterest bearing deposits increased approximately 7.0% over 2006, for both year-end and average daily balances; while interest bearing transaction accounts, including savings, grew over 12% for each measure. Some balances migrated from savings products into checking products, but there was overall growth provided by the new reward checking program kicked off around May 2007. As we move into 2008 we expect this product to continue to bring in outside deposits to help the funding of our growing loan portfolio. Time deposit balances, which increased $39.4 million on average, were down year-end 2007 to year-end 2006 by $32.2 million. Growth occurred in time deposits with balances over $100,000, while all other categories declined in differing degrees. Regular time deposits took the biggest hit as Federal Home Loan Bank rates and Federal Funds rates declined as 2007 progressed. Consumers tended to keep new or renewed CDs short and shopped for competing rates. The average amounts of deposits are summarized below:

The following is a breakdown of maturities of time deposits of $100,000 or more as of December 31, 2007.

Credit Risk Management

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. The Bank’s policies, related to the allowance for loan losses, are considered to be critical accounting policies because the allowance for loan losses represents a particularly sensitive accounting estimate. The amount of the allowance is based on management’s evaluation of the collectibility of the loan portfolio, including the nature of the loan portfolio and loan growth, credit concentrations, trends in historical loss experience, specific impaired loans, and national and local economic conditions. The allowance for loan losses is established through a provision for loan losses charged to expense. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, charge-offs and recoveries in total, overall portfolio quality, review of specific problem loans, recent examinations, and current economic conditions that may affect the borrowers’ ability to pay.

Through this review and evaluation process, an amount deemed adequate to meet current growth and future loss expectations is charged to operations. The provision for loan losses amounted to $750,000, $390,000, and $144,000 for 2007, 2006 and 2005, respectively. These provisions compared to net charge-offs of $129,000, $18,000 and $34,000 for 2007, 2006 and 2005, respectively. The unallocated portion of the reserve was approximately 12.0% at December 31, 2007 and 20.3% at December 31, 2006. The reserve at December 31, 2007 represented 0.87% of loans outstanding, a ratio that has decreased in each of the past four years in recognition of the quality of the loan portfolio and in keeping with the guidelines established by the SEC.

The unallocated portion of the reserve ensures that any additional unforeseen losses that are not otherwise identifiable will be able to be absorbed. It is intended to provide for imprecise estimates in assessing projected losses, uncertainties in economic conditions and allocating pool reserves. Management deems the total of the allocated and unallocated portions of the allowance for loan losses to be adequate to absorb losses at this time.

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. The following is an allocation by loan categories of the allowance for loan losses for the last five years at December 31,

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

Net charge-offs for the Bank’s loan portfolio has historically been quite low, when compared to industry standards, and represented .02% of average outstanding loans during 2007, .00% in 2006, and .01% in 2005. Net charge-offs to average loans for the industry averaged approximately .10% of loans during 2007, .06% in 2006 and .07% in 2005, per SNL Financial.

SUMMARY OF LOAN LOSS EXPERIENCE