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Orrstown backs out of lender Yorktown's reorganization

By , - Last modified: July 15, 2011 at 12:28 PM

Although it still intends to get the money back, Orrstown Bank is writing off its entire $8.6 million loan to bankrupt construction loan firm Yorktown Funding Inc., according to a regulatory filing this week by parent company Orrstown Financial Services Inc.

In addition, Orrstown will not underwrite a planned successor to Yorktown, and is planning to increase its provision for loan losses by $21 million, the filing said.

Yorktown filed for bankruptcy in February 2010, owing millions of dollars to half a dozen local banks. In May, Yorktown filed a reorganization plan calling for Orrstown and other banks to provide exit financing. Orrstown's share was $9 million, according to a May 12 regulatory filing.

In addition, Yorktown's plan called for forming a successor construction loan company for which Orrstown was to provide $7.8 million of a planned $16 million credit facility.

However, Orrstown Bank on Monday "notified Yorktown and the newly formed entity that the Bank would not be able to extend its commitments which expired June 30."

Yorktown and Orrstown have disputed whether Orrstown's claim is secured and Yorktown has not paid debt service during the bankruptcy case, the filing said. Orrstown plans to "aggressively pursue a recovery of the amounts owed to it" by all available means, the filing said.

Orrstown said it plans to raise its provision for loan losses by $21 million, including $5.6 million due to the Yorktown case. It allocated $3 million of its reserve to the Yorktown loan in March 2010. Its provision for loan losses was $18.4 million at the end of the first quarter, according to the Federal Deposit Insurance Corp.

Orrstown President and CEO Thomas Quinn Jr. deferred questions regarding the regulatory filing until after the bank announces its quarterly results later this month.

"We're a well-capitalized bank," he said, adding that Orrstown made the filing to give investors "an early view of where our quarter may be headed."

Orrstown, based in Shippensburg, operates more than 20 branches in Cumberland, Franklin and Perry counties and Washington County, Md. Its shares are traded on the Nasdaq under the ticker symbol ORRF.

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