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SEPTA makes new allegations against Orrstown Bank

By - Last modified: March 5, 2013 at 4:59 PM

The Southeastern Pennsylvania Transportation Authority has amended its class action complaint against Orrstown Financial Services Inc. and its board members, significantly expanding on its earlier allegations.

The complaint says Orrstown repeatedly violated its internal risk management controls, approving questionable loans against the advice of its credit analysts.

"For example, loans were extended to such borrowers just because Orrstown's then-Chief Credit Officer had told the Loan Committee that 'Bob' (the Chief Credit Officer's next-door neighbor) 'needs this,'" the complaint says.

Orrstown's loan review officer "had no formal training or experience" for his position, the suit says.

The bank incurred bad loans in the Hagerstown, Md., area but avoided having to disclose them by "aggressively" restructuring them and extending new loans to the borrowers, "essentially throwing good money after bad," the complaint says.

These practices contradict the bank's statements, made in filings connected with a 2010 stock offering, that it followed strict and prudent underwriting standards, the complaint says. Once Orrstown was forced to disclose the losses, its stock price dropped sharply, defrauding investors who relied on the bank's assurances, the suit says.

Orrstown did not immediately have a comment on the amended complaint. CEO Thomas Quinn previously told the Business Journal the bank denies SEPTA's allegations and will fight them vigorously.

SEPTA first filed the suit in May. Another suit, filed by activist shareholders the PL Capital Group, was settled early this year. Orrstown had added criteria for board candidates that PL Capital alleged were unfairly restrictive; Orrstown agreed to repeal them as part of a settlement.

Orrstown, which is operating under federal and state enforcement orders, worked to rein in loan losses through most of 2012. It overhauled its management team and sold several packages of bad loans en route to returning to profitability in the fourth quarter.

Orrstown is the holding company of Orrstown Bank, based in Shippensburg. Its shares trade on the Nasdaq under the ticker symbol ORRF.

Write to the Editorial Department at editorial@cpbj.com

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