Orrstown Financial Services (ORRF) in Shippensburg, Pa., has been hit with a lawsuit alleging that it misled investors about its financial strength during its March 2010 stock offering.
Investors accuse the $1.4 billion-asset Orrstown of failing to disclose information about the quality of its loan portfolio and other relevant information about its underwriting policies, according to the plaintiffs' lawyers. The lawsuit names 10 Orrstown directors as defendants, including president and chief executive Thomas Quinn Jr., and chairman Joel Zullinger.
The Southeastern Pennsylvania Transportation Authority, which operates Philadephia's mass-transit system, is the lead plaintiff for the lawsuit, which seeks class-action status.
Attorneys accuse Orrstown of seeking rapid growth in its mortgage business at the expense of risk control. Specifically, Orrstown added new mortgage products and a new software platform that let customers submit mortgage applications online and allowed the bank to approve them quicker. Orrstown failed to implement stricter risk controls, in spite of the shorter time period for approving applications, the lawsuit says.
In a statement filed Thursday with the Securities and Exchange Commission, Orrstown said, "the company believes that the allegations in the complaint are without merit and intends to vigorously defend against these claims."
The plaintiffs' law firm, Chimicles & Tikellis of Haverford, Pa., filed the lawsuit on Friday in U.S. District Court for the Middle District of Pennsylvania. Orrstown said it received a copy of the lawsuit on Wednesday.
Orrstown's shares have lost more than 70% of their value in the last year as the company's problem loans have mounted. Its stock closed at $7.58 Thursday.
Orrstown's chief financial officer, Brad Everly, resigned earlier this month after 14 years in the position. Everly's departure came amid ongoing struggles at the company. It reported a first-quarter $8.2 million loss and earlier this year was placed under an enforcement order requiring it to reduce problem loans. Separately, two proxy advisory firms had recommended that shareholders reject the company's executive pay plan, in a say-on-pay vote, during this year's annual meeting. Orrstown did, however, receive approval from shareholders in the non-binding vote.
At the time of his resignation, Orrstown said Everly's decision "was not due to any disagreement" with the company or to accounting-related matters.