SHARE-BASED COMPENSATION PLANS

The Company maintains share-based compensation plans, the purpose of which are to provide officers, employees, and non-employee members of the Board of Directors of the Company and the Bank, with additional incentive to further the success of the Company. In May 2011, the shareholders of the Company approved the 2011 Orrstown Financial Services, Inc. Incentive Stock Plan (the “Plan”). Under the Plan, 381,920 shares of the common stock of the Company were reserved to be issued. As of September 30, 2014, 223,788 shares were available to be issued under the Plan.

Incentive awards under the Plan may consist of grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, deferred stock units and performance shares. All employees of the Company and its present or future subsidiaries, and members of the Board of Directors of the Company or any subsidiary of the Company, are eligible to participate in the Plan. The Plan allows for the Compensation Committee of the Board of Directors to determine the type of incentive to be awarded, its term, manner of exercise, vesting of awards and restrictions on shares. Generally, awards are nonqualified under the IRS code, unless the awards are deemed to be incentive awards to employees, at the Compensation Committee’s discretion.

A roll forward of the Company’s nonvested restricted shares for the nine months ended September 30, 2014 is presented below:



	Shares	Weighted Average Exercise Price

Nonvested shares, beginning of year	5,000	$	10.43
Granted	150,500	15.69
Nonvested shares, at period end	155,500	$	15.52

For the three and nine months ended September 30, 2014, $57,933 and $66,625 was recognized as expense on the restricted stock awards. For the three and nine months ended September 30, 2013, $4,346 and $13,037 was recognized as expense on the restricted stock awards. As of September 30, 2014, the unrecognized compensation expense related to the stock award was $2,093,779.

A roll forward of the Company’s outstanding stock options for the nine months ended September 30, 2014 is presented below:



	Shares	Weighted Average Exercise Price

Outstanding at beginning of year	206,063	$	32.20
Forfeited	20,319	31.81
Expired	35,164	37.00
Options outstanding and exercisable, at year end	150,580	$	31.14

The exercise price of each option equals the market price of the Company’s stock on the date of grant and an option’s maximum term is ten years. All options are fully vested upon issuance. Information pertaining to options outstanding and exercisable at September 30, 2014 is as follows:



Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price

$21.14 - $24.99	42,985	5.55	$	21.41
$25.00 - $29.99	2,792	5.51	25.76
$30.00 - $34.99	45,470	3.02	31.25
$35.00 - $39.99	29,567	2.56	36.54
$40.00 - $40.14	29,766	0.72	40.14
$21.14 - $40.14	150,580	3.24	$	31.14

The options outstanding and exercisable had no intrinsic value at September 30, 2014 and December 31, 2013 as each exercise price exceeded the market value.

The Company also maintains an employee stock purchase plan, in order to provide employees of the Company and its subsidiaries an opportunity to purchase stock of the Company. Under the employee stock purchase plan, eligible employees may purchase shares in an amount that does not exceed 10% of their annual salary, up to the IRS limit, at the lower of 95% (85% prior to August 31, 2014) of the fair market value of the shares on the semi-annual offering date, or related purchase date. The Company reserved 167,674 shares of its common stock, after making adjustments for stock dividends and a stock split, to be issued under the employee stock purchase plan. As of September 30, 2014, 164,306 shares were available to be issued under the employee stock purchase plan. Employees purchased 3,668 and 6,707 shares at a weighted average price of $15.56 and $14.88 for the three and nine months ended September 30, 2014. For the three and nine months ended September 30, 2013, employees purchased 15,434 and 21,609 shares at a weighted average price of $12.47 and $11.52. Compensation expense recognized on the employee stock purchase plan totaled $4,000 and $12,000 for the three and nine months ended September 30, 2014, and $77,000 and $112,000 for the three and nine months ended September 30, 2013.

The Company uses a combination of issuing new shares or treasury shares to meet stock compensation exercises depending on market conditions.