UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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ORRSTOWN FINANCIAL SERVICES, INC.
______________________________________________________________________________
(Name of Registrant as Specified In Its Charter)
______________________________________________________________________________
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[Orrstown Financial Services, Inc. Logo]
Orrstown Financial Services, Inc.
77 East King Street
Shippensburg, PA 17257
March 28, 2003
Dear Shareholder,
You are invited to attend the 2003 Annual Meeting of Shareholders of
Orrstown Financial Services, Inc. to be held on Tuesday, April 29, 2003
beginning at 9:00 a.m. The meeting will be held in the King Street Conference
Room of the Orrstown Bank Administrative Center located at 77 East King Street,
Shippensburg, Pennsylvania.
A Notice of the Annual Meeting, Proxy Statement and Proxy are enclosed
with this mailing. You are encouraged to review this material and complete,
sign, date, and return the Proxy in the postage-paid envelope provided. It is
important for you to return the Proxy regardless of whether you plan to attend
the Annual Meeting. I also invite you to review the enclosed Annual Report,
which includes details of the success achieved by your company during 2002.
Sincerely,
Kenneth R. Shoemaker
President and Chief Executive Officer
[Orrstown Financial Services, Inc. Logo]
Orrstown Financial Services, Inc.
77 East King Street
Shippensburg, Pennsylvania 17257
March 28, 2003
Notice of Annual Meeting of Shareholders
The Annual Meeting of Shareholders of Orrstown Financial Services, Inc.
will be held on Tuesday, April 29, 2003, at 9:00 a.m., in the King Street
Conference Room of the Orrstown Bank Administrative Center located at 77 East
King Street, Shippensburg, Pennsylvania, to consider and take action on the
following matters:
1. Elect three directors to Class C for three year terms expiring in
2006; and
2. Transact such other business as may properly come before the
meeting.
Your Board of Directors recommends a vote "in favor of" the election as
directors to Class C of the three nominees listed in the enclosed Proxy
Statement.
Denver L. Tuckey
Secretary
TABLE OF CONTENTS Page
----------------- ----
Annual Meeting Information 1
Who is entitled to vote? 1
On what am I voting? 1
How does the Board of Directors recommend I vote in the election of directors? 1
How do I vote? 1
What is a quorum? 2
What vote is required to elect directors? 2
Who will count the vote? 2
What is the deadline for shareholder proposals for next year's Annual Meeting? 2
How are proxies being solicited? 2
Share Ownership of Certain Beneficial Owners 3
Share Ownership of Management 4
Section 16(a) Beneficial Ownership Reporting Compliance 5
Election of Directors 5
Biographical Summaries of Nominees and Directors 6
Board Committees and Meeting Attendance 7
Audit Committee Report 8
Compensation of Directors 9
Report on Executive Compensation 10
Company Performance 12
Executive Compensation 14
Summary of Compensation 14
Option Grants in 2002 15
Aggregated Option Exercises in 2002 and Year-end Option Values 16
Retirement Benefits 16
Change in Control Agreement 17
Transactions with Management 17
Independent Certified Public Accountants 18
ORRSTOWN FINANCIAL SERVICES, INC.
77 East King Street
Shippensburg, Pennsylvania 17257
PROXY STATEMENT
Annual Meeting Information
This proxy statement contains information about the Annual Meeting of
Shareholders of Orrstown Financial Services, Inc. to be held Tuesday, April 29,
2003, beginning at 9:00 a.m., in the King Street Conference Room of the Orrstown
Bank Administrative Center located at 77 East King Street, Shippensburg,
Pennsylvania, and at any adjournments or postponements of the meeting. The proxy
statement was prepared at the direction of the Company's Board of Directors to
solicit your proxy for use at the Annual Meeting. It will be mailed to
shareholders on or about March 28, 2003.
Who is entitled to vote?
Shareholders owning Company Common Stock on March 31, 2003 are entitled
to vote at the Annual Meeting or any adjournment or postponement of the meeting.
Each shareholder has one vote per share on all matters to be voted on. On March
1, 2003 there were 2,401,970 shares of Common Stock outstanding.
On what am I voting?
You will be asked to elect 3 directors to Class C for three-year terms
expiring in 2006.
The Board of Directors is not aware of any other matters to be
presented for action at the meeting. If any other matter requiring a vote of the
shareholders would be presented at the meeting, the proxies will vote according
to the directions of Company management.
How does the Board of Directors recommend I vote in the election of directors?
The Board of Directors recommends a vote FOR the election of each of
the three nominees as directors to Class C.
How do I vote?
Sign and date each proxy form you receive and return it in the
postage-paid envelope provided. If you sign your proxy form but do not mark your
choices, your proxies will vote for the three persons nominated for election as
directors to Class C.
You may revoke your proxy at any time before it is exercised. To do so,
you must give written notice of revocation to the Secretary, Orrstown Financial
Services, Inc., 77 East King Street, Shippensburg, Pennsylvania 17257, submit
another properly signed proxy with a more recent date, or vote in person at the
meeting.
What is a quorum?
A "quorum" is the presence at the meeting, in person or by proxy, of
the holders of a majority of the outstanding shares. There must be a quorum for
the meeting to be held. Abstentions are counted for purposes of determining the
presence or absence of a quorum, but are not considered a vote cast under
Pennsylvania law. Brokers holding shares in street name for their customers
generally are not entitled to vote on certain matters unless they receive voting
instructions from their customers. Such shares for which brokers have not
received voting instructions from their customers are called "broker non-votes."
Under Pennsylvania law broker non-votes will be counted to determine if a quorum
is present with respect to any matter to be voted upon by shareholders at the
meeting only if such shares have been voted at the meeting on another matter
other than a procedural motion.
What vote is required to elect directors?
The three nominees for election as directors to Class C receiving the
highest number of votes will be elected to the Board of Directors.
Who will count the vote?
The Judges of Election appointed by the Board of Directors will count
the votes cast in person or by proxy at the Annual Meeting.
What is the deadline for shareholder proposals for next year's Annual Meeting?
Shareholders may submit proposals on matters appropriate for
shareholder action at future annual meetings by following the rules of the
Securities and Exchange Commission and the Company's By-laws. Proposals intended
for inclusion in next year's proxy statement and proxy card must be received by
the Company not later than November 28, 2003. All proposals should be addressed
to the Secretary of the Company.
How are proxies being solicited?
In addition to solicitation by mail, the officers, directors and
employees of the Company may, without additional compensation, solicit proxies
by telephone or personal interview. Brokers and other custodians, nominees and
fiduciaries will be requested to forward soliciting material to the beneficial
owners of Common Stock held by such persons and will be reimbursed by the
Company for their expenses. The cost of soliciting proxies for the Annual
Meeting will be born by the Company.
2
Share Ownership of Certain Beneficial Owners
The Company does not know of any person who beneficially owned more
than 5% of the Company's Common Stock on March 1, 2003, except as shown in the
following table:
Name and address of Common Stock Percent of
Beneficial Owner Beneficially Owned Class
---------------- ------------------ -----
Orrstown Bank 365,800(1) 15.2%
77 East King Street
Shippensburg, PA 17257
(1) Shares held directly by the Bank, or by way of its nominees, in its trust
department as fiduciary for certain trusts, estates and agency accounts
that beneficially own the shares. The Bank shares voting power as to
205,208 of these shares but, as a matter of policy, votes such shares
solely in accordance with the directions, if any, of the persons with whom
it shares voting power. The Bank has sole voting power as to 36,245 of
these shares and, subject to the provisions of governing instruments and/or
in accordance with applicable provisions of fiduciary law, may vote such
shares in what it reasonably believes to be the best interest of the
respective trust, estate or agency account for which it holds such shares.
As a matter of policy, however, the Bank does not vote shares for which it
has sole voting power. The Bank does not have the right to vote the
remaining 124,347 shares and disclaims beneficial ownership of such shares.
3
Share Ownership of Management
The following table shows the number of shares of Company Common Stock
beneficially owned by each incumbent director, each nominee and each executive
officer named in the Summary Compensation Table appearing on page 14, and by all
of the incumbent directors, nominees and executive officers of the Company as a
group, as of March 1, 2003. Except as otherwise indicated, sole voting power and
sole investment power with respect to the shares shown in the table are held
either by the individual alone or by the individual together with his or her
spouse.
Common Stock
Name Beneficially Owned(1)(2)
---- ------------------------
Anthony F. Ceddia 1,846
Jeffrey W. Coy 13,887
Bradley S. Everly 6,483
Philip E. Fague 8,263
Stephen C. Oldt 8,670
Andrea Pugh 5,054
Gregory Rosenberry 15,610
Kenneth R. Shoemaker 19,833
Glenn W. Snoke 5,140
Denver L. Tuckey 4,757
John S. Ward 2,049
Joel R. Zullinger 12,510
Directors, nominees and
executive
officers as a group (17
persons including those named 118,785
above)
- --------------------------------------------------------------------------------
(1) On March 1, 2003, none of the individuals named in the above table
beneficially owned more than 1% of the outstanding shares of Company
Common Stock. On that date, all of the incumbent directors, nominees, and
executive officers as a group beneficially owned approximately 4.85% of
the outstanding shares of Company Common Stock. Fractional shares
beneficially owned by such individuals have been rounded down to the
number of whole shares beneficially owned.
(2) The amounts shown include the following amounts of Common Stock that the
indicated individuals and group have the right to acquire within 60 days
of March 1, 2003 through the exercise of stock options granted pursuant to
the Company's stock option plans: Mr. Ceddia, 763; Mr. Coy, 1,020; Mr.
Everly, 4,400; Mr. Fague, 6,450; Mr. Oldt, 3,350; Ms. Pugh, 1,020; Mr.
Rosenberry, 1,020; Mr. Shoemaker, 12,190; Mr. Snoke, 1,020; Mr. Tuckey,
1,020; Mr. Ward, 1,020; Mr. Zullinger, 1,020; and all directors, nominees
and executive officers as a group, 47,943 shares.
4
Section 16(a) Beneficial Ownership Reporting Compliance. Based on our
records, we believe that during 2002 our directors and executive officers
complied with all SEC filing requirements applicable to them.
ELECTION OF DIRECTORS
The By-laws of the Company provide that the directors will serve in
three classes, as nearly equal in number as possible, with each class of
directors serving a staggered, three year term of office. At each annual meeting
of shareholders, a class consisting of approximately one third of all of the
Company's directors is elected to hold office for a term expiring at the annual
meeting held in the third year following the year of their election and until
their successors have been elected. At the Annual Meeting the shareholders will
be asked to elect three directors to Class C to serve until the annual meeting
of shareholders in 2006 or until their successor is elected.
The Board of Directors has nominated the following persons for election
as directors to Class C:
Anthony F. Ceddia
Andrea Pugh
Kenneth R. Shoemaker
All of the nominees are presently serving as directors of the Company and of
Orrstown Bank, the wholly owned bank subsidiary of the Company.
Your shares of Company Common Stock represented by your proxy will be
voted FOR the election of the 3 named nominees unless you mark the proxy form to
withhold authority to vote for one or more of the nominees. If one or more of
the nominees is unable or unwilling to serve as a director, the persons named in
the proxy will vote for the election of such substitute nominee, if any, as will
be named by the Board of Directors. The Company has no reason to believe that
any of the nominees will be unable or unwilling to serve as a director. Each
nominee has expressed a willingness to serve if elected.
The Board of Directors recommends a vote FOR the election of all 3
nominees as directors to Class C.
5
Biographical Summaries of Nominees and Directors
Information about the nominees for election as directors to Class C at
the Annual Meeting and information about the directors in Class A and Class B is
set forth below.
CLASS A DIRECTORS - TERM EXPIRES 2005
Principal occupation
for last 5 years and Director
Name Age position with the Company Since
---- --- ------------------------- -----
Jeffrey W. Coy (2) 51 State Legislator; Vice Chairman 1984(1)
of the Company and the Bank
John S. Ward (3) 65 President, Modern Transit 1999
Partnership, a non-profit
organization created to support
bringing commuter rail to
Central Pennsylvania; retired
Chief Clerk, Cumberland County,
Pennsylvania
Joel R. Zullinger (2) 54 Attorney-at-Law; Chairman of the 1981(1)
Board of the Company and the Bank
CLASS B DIRECTORS - TERM EXPIRES 2004
Principal Occupation
for last 5 years and Director
Name Age position with the Company Since
---- --- ------------------------- -----
Gregory A. Rosenberry 48 President, Tri-Valley Forestry, 1997
Inc., a timber harvesting and
wholesale business
Glenn W. Snoke (3) 54 President, Snokes Excavating & 1999
Paving, Inc.
Denver L. Tuckey (2) 69 Retired businessman; Secretary 1995
of the Company and the Bank
6
CLASS C DIRECTOR NOMINEES - TERM EXPIRES 2006
Principal occupation
for last 5 years and Director
Name Age position with the Company Since
---- --- ------------------------- -----
Anthony F. Ceddia 59 President, 1996
Shippensburg University
Andrea Pugh (3) 50 Owner, PharmCare Consultants, a 1996
pharmacy consulting business
Kenneth R. Shoemaker (2) 55 President and Chief Executive 1986(1)
Officer of the
Company and the Bank
- --------------------------------------------------------------------------------
(1) Includes service as director of Orrstown Bank during period prior to 1988,
when Orrstown Bank became a wholly-owned subsidiary of the Company.
(2) Member of the Executive Committee of the Bank.
(3) Member of the Audit Committee.
Board Committees and Meeting Attendance
During 2002 the Board of Directors of the Company met 13 times and the
Board of Directors of Orrstown Bank met 13 times. The Board of Directors of the
Company has an Executive Committee that did not hold any meetings in 2002, and
an Audit Committee. The Board of Directors of the Bank has an Executive
Committee. During 2002 all of the Directors of the Company and the Bank attended
at least 75% of all meetings of the respective Boards and Committees on which
they served.
Executive Committee. The Executive Committee of the Bank's Board of
Directors acts on matters between regular meetings of the Board of Directors.
The Executive Committee also makes recommendations regarding compensation to the
Board of Directors and reviews the qualifications of and makes recommendations
to the Board of Directors regarding persons eligible to stand for election as
directors. The Executive Committee met 14 times during 2002. The members of the
Executive Committee are Jeffrey W. Coy, Chairman, Kenneth R. Shoemaker, Denver
L. Tuckey and Joel R. Zullinger. The same individuals also constitute the
Executive Committee of the Board of Directors of the Company.
7
Audit Committee. The Audit Committee is responsible for providing
independent oversight of the Company's accounting functions and internal
controls. The Audit Committee monitors the preparation of quarterly and annual
financial reports by Company management, including discussions with management
and the Company's independent auditors about key accounting and reporting
matters. The Audit Committee also is responsible for matters concerning the
relationship between the Company and its independent auditors including,
recommending, their appointment or removal; reviewing the scope of their audit
services and related fees as well as other services they provide to the Company;
and determining whether the independent auditors are "independent." In addition,
the Audit Committee oversees management's implementation of internal control
systems including, reviewing policies relating to legal and regulatory
compliance, ethics and conflicts of interest; and reviewing the activities and
recommendations of the Company's internal auditing program. The members of the
Audit Committee are Andrea Pugh, Chair, Gregory A. Rosenberry, Denver L. Tuckey
and John S. Ward, each of whom is independent as defined in the listing
standards of the National Association of Securities Dealers (NASD). Glenn W.
Snoke served on the Audit Committee through April, 2002 when Messrs. Rosenberry
and Tuckey were appointed to the Committee. The Audit Committee met 5 times
during 2002.
Audit Committee Report
The Audit Committee has reviewed and discussed with management the
Company's audited financial statements for the year ended December 31, 2002. The
Audit Committee also has discussed with Smith Elliott Kearns & Company, LLC, the
matters required to be discussed by Statement on Auditing Standards No. 61
(Communications with Audit Committees), received from Smith Elliott Kearns &
Company, LLC, the written disclosures and letter required by Independence
Standards Board Standard No. 1 (Independence Standards Board Standard No. 1,
Independence Discussions with Audit Committees) and has discussed with Smith
Elliott Kearns & Company, LLC, that firm's independence. In that regard, the
Audit Committee has considered whether the provision by Smith Elliott Kearns &
Company, LLC, of certain limited services in addition to its audit services is
compatible with maintaining that firm's independence and has determined that it
is. Based on the review and discussions referred to above, the Audit Committee
recommended to the Board of Directors that the audited financial statements be
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2002 filed with the Securities and Exchange Commission.
Audit Committee:
Andrea Pugh, Chair
Gregory A. Rosenberry
Denver L. Tuckey
John S. Ward
8
Compensation of Directors
Directors' Fees. During 2002, each director of the Company received
$400.00 for each meeting of the Company Board of Directors attended and $250.00
for each committee meeting attended. Each director of Orrstown Bank was paid an
annual retainer fee of $7,500.00 and a fee of $400.00 for each meeting attended.
Non-employee directors of the Bank also receive $250.00 for each committee
meeting attended. In addition, in 2002 the Chairman of the Board of the Bank
received an annual fee of $8,500, the Vice Chairman received an annual fee of
$6,500 and the Secretary received an annual fee of $5,500.
Deferred Compensation Plan. In 1995, the Company and Orrstown Bank
established a non-qualified deferred compensation plan for directors.
Participation in the plan is voluntary. Kenneth R. Shoemaker, President and
Chief Executive Officer of the Company and the Bank, and Stephen C. Oldt,
Executive Vice President and Chief Operations Officer of the Bank, also
participate in the Plan. Each participant may elect each year to defer all or a
portion of his or her directors' fees or, in the case of Messrs. Shoemaker and
Oldt, base salary. Those deferring compensation must begin withdrawals from the
plan by age 75. The amounts deferred are invested in a rabbi trust with the
trust department of Orrstown Bank as trustee. The participants direct the
investment of their own accounts and there is no guarantee as to investment
performance. Growth of each participant's account is a result of investment
performance and not as a result of an interest factor or interest formula
established by the participant.
In addition, Orrstown Bank has a separate deferred compensation
arrangement with seven of its directors or former members of its Board of
Directors whereby a director or his or her beneficiaries will receive a monthly
benefit beginning at age 65. The arrangement is funded by an amount of life
insurance on each participating director calculated to meet the Bank's
obligations under the compensation agreement. The cash value of future benefits
to be paid, which are included in other liabilities on the Company's
consolidated balance sheet, amounted to $124,057 at December 31, 2002. Annual
expense of $12,456 was charged to operations for 2002.
Directors Retirement Plan. In 1998 Orrstown Bank established a
director's retirement plan which provides participating directors a $12,000 per
year benefit (indexed for inflation by 4.00% per year until payments commence)
for the lesser of ten years or the number of years served. This program
encourages current directors to continue to serve as directors and enables the
Bank to reward its long-serving directors for their valuable services.
Non-Employee Director Stock Option Plan of 2000. On January 27, 2000,
the Board of Directors of the Company approved the Orrstown Financial Services,
Inc. Non-Employee Director Stock Option Plan of 2000. The Directors' Option Plan
is a formula plan under which options to purchase shares of Company Common Stock
are granted each year to directors in office on April 1. The number of options
granted each year is based on the Company's return on average equity for the
most recent fiscal year. All options have a term of 10 years from the regular
grant date, are fully exercisable from the regular grant date and have an
exercise price
9
equal to the "fair market value" of Company Common Stock as of the date of the
grant of the option. As long as shares of Company Common Stock are traded
over-the-counter and quotations for the shares appear on the National
Association of Securities Dealers, Inc.'s OTC Bulletin Board service, "fair
market value" will mean the average of the average of the daily high bid and low
offer quotations for shares of Company Common Stock reported through the OTC
Bulletin Board service for the 10 trading days immediately preceding the date of
the grant of the option. If no bid or no offer quotations are available during
the 10 day pricing period, then "fair market value" will mean the price of the
last trade reported for the shares through the OTC Bulletin Board service. If a
director "retires," whether as a result of reaching mandatory retirement age, or
under any other circumstances the Board of Directors, in its discretion, may
determine to constitute retirement, the options previously granted to the
director will expire at their scheduled expiration date. If a director's service
as a director terminates for any other reason, the options previously granted to
the director will expire six months after the date of termination of service
unless scheduled to expire sooner. In April 2002, each director, except Mr.
Shoemaker, was granted an option covering 331 shares of Company Common Stock at
an exercise price of $39.25 per share.
Report on Executive Compensation
The Company does not have a compensation committee and no compensation
was paid to executive officers of the Company by the Company in 2002. All
compensation was paid by the Bank.
The Executive Committee of the Bank, composed of three non-employee
Directors of the Bank and Kenneth R. Shoemaker, President and Chief Executive
Officer of the Company and the Bank, conducts a full review each year of the
Bank's executive compensation programs and is responsible for making
recommendations to the full Board of Directors. Mr. Shoemaker does not
participate in the Committee's evaluation of his performance for purposes of his
compensation. With respect to other executive officers, the Committee considers
the recommendations of Mr. Shoemaker before making final recommendations to the
Board of Directors.
The Bank's executive compensation program has four main components:
Base Salary. The Executive Committee determines base salaries for
executive officers based upon competitive pay practices of other banks of
similar size on a regional basis for similar positions and responsibilities. The
Executive Committee obtains comparisons of base salaries paid by other banks
from various sources, including L. R. Webber Associates, a Holidaysburg,
Pennsylvania consulting firm. Annually, the Executive Committee recommends
changes in base salaries of executive officers based on its evaluation of past
performance, job duties, scope and responsibilities and expected future
contributions. In determining the level of base salary, an individual's personal
performance in achieving previously established goals is the most important
factor.
10
Executive Incentive Plan. The Executive Committee also oversees the
Bank's Executive Incentive Plan established in 1998. The purpose of the Plan is
to support and promote the pursuit of the Bank's organizational objectives and
financial goals through the payment of annual cash bonuses to executive officers
and other key employees. Under the Plan, the percentage increase in earnings for
the year is given a 75% weighting and the percentage increase in funds (deposits
and short-term purchased funds) for the year is given a 25% weighting. The
resulting percentage factors are then added together, resulting in a bonus
percentage factor to be applied to an executive's salary to determine the amount
of his or her bonus. For example, a 10% increase in earnings and a 20% increase
in funds would result in a 12.5% bonus percentage factor (10% x .75 = 7.5%, 20%
x .25 = 5%; 7.5% + 5% = 12.5%). Assuming a base salary of $100,000, the amount
of the bonus would be $12,500. Under the Plan, the Bank will pay out 50% of the
bonus amount in the year to which the bonus relates, 25% in the next year and
25% in the second year. Thus, the amounts reported below in the Summary
Compensation Table as paid in 2002 pursuant to the Executive Incentive Plan
include 50% of the bonus amount earned in 2002, 25% of the bonus amount earned
in 2001 and 25% of the bonus amount earned in 2000. The bonus amounts as to
which payment is deferred to subsequent years are not vested and will be
forfeited by an employee whose employment with the Bank is terminated prior to
payment of the deferred amounts. In addition, in 2000, 2001 and 2002, the Board
of Directors determined, within its discretion under the Plan, to actually fund
bonuses under the Plan at the rate of 50% of the bonus amount calculated
pursuant to the principles described above. The Executive Committee and the
Board of Directors have complete discretion as to whom bonuses will be awarded
under the Plan and have the further discretion to award bonuses in excess of the
amounts calculated pursuant to the Plan.
Stock Options. On January 27, 2000, the Board of Directors of the
Company unanimously approved and adopted the Employee Stock Option Plan of 2000.
The Stock Option Plan was ratified by the shareholders at the 2000 Annual
Meeting. The purpose of the Stock Option Plan is to promote the long term
success of the Company and the creation of shareholder value by providing
additional incentives to those officers and key employees who are in a position
to contribute to the long term growth and profitability of the Company; assist
the Company to attract, retain and motivate key personnel with experience and
ability; and link employees receiving stock options directly to shareholder
interests through increased stock ownership.
The Executive Committee, on behalf of the Board of Directors,
administers the Stock Option Plan, and determines the number of shares to be
covered by each option, the term of the option, the period of time for options
to vest after grant, if any, and other terms and limitations applicable to the
exercise of the option. Grants to officers of the Company and other key
employees are based on criteria established by the Executive Committee
including, past performance, job duties, scope and responsibilities and
contributions to overall Company performance.
11
Deferred Compensation and Supplemental Benefit Programs. The Bank has
established certain deferred compensation and supplemental benefit programs
described elsewhere in this proxy statement for certain of its executive
officers. The purposes of these programs are to provide to those executive
officers an economic incentive for long term service to the Company and the
Bank. The Executive Committee believes that these programs are competitive with
those offered by other banks of similar size on a regional basis.
Chief Executive Officer Compensation. Mr. Shoemaker's compensation for
2002 was established based upon the same factors and policies used to establish
compensation for executive officers generally.
Executive Committee:
Jeffrey W. Coy, Chairman
Kenneth R. Shoemaker
Denver L. Tuckey
Joel R. Zullinger
Company Performance
The following graph shows a five-year comparison of the cumulative
total return on Company Common Stock as compared to two other indexes: the S&P
500 Index and an index of banks with assets of under $500 million in assets. For
2000, 2001 and 2002, shareholder returns on Company Common Stock are based upon
trades reported by the National Association of Securities Dealers' Inc.'s OTC
Bulletin Board service. For prior years, shareholder returns on Company Common
Stock are based upon reports to the Company by shareholders that bought or sold
shares during the indicated periods. The Company 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.
12
Orrstown Financial Services, Inc.
[GRAPH OMITTED]
- --------------------------------------------------------------------------------------------------------------------
Period Ending
- --------------------------------------------------------------------------------------------------------------------
Index 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02
- --------------------------------------------------------------------------------------------------------------------
Orrstown Financial Services, Inc. 100.00 147.57 222.74 237.92 247.41 303.06
- --------------------------------------------------------------------------------------------------------------------
S&P 500 100.00 128.55 155.60 141.42 124.63 96.95
- --------------------------------------------------------------------------------------------------------------------
SNL <$500M Bank Index 100.00 91.31 84.52 81.54 112.79 144.45
- --------------------------------------------------------------------------------------------------------------------
The performance illustrated assumes that $100 was invested in Company Common
Stock and each index on December 31, 1997 and that all dividends were
reinvested.
13
Executive Compensation
Summary of Compensation. The following table shows cash and other
compensation paid or accrued during the last three fiscal years to the Company's
Chief Executive Officer and other executive officers who received total annual
salary and bonus exceeding $100,000 in 2002.
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation (1) Compensation
-------------------------------- -------------------
Name and principal Fiscal Securities All other
position Year Salary (2) Bonus (3) underlying options compensation (4)
------------------ ---- ---------- --------- ------------------ ----------------
Kenneth R. Shoemaker, 2002 $175,000 $30,000 4,000 $68,526
President and Chief 2001 160,000 25,000 3,990 72,246
Executive Officer 2000 150,000 20,000 4,200 70,918
- ---------------------------------------------------------------------------------------------------------------------------------
Philip E. Fague, Executive Vice 2002 $110,000 $15,000 2,250 $23,344
President and Chief Sales and 2001 97,500 15,000 2,100 22,137
Service Officer 2000 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Stephen C. Oldt, Executive Vice 2002 $110,000 $10,000 1,250 $44,518
President and Chief Operations 2001 100,000 15,000 1,050 46,404
Officer 2000 95,000 7,364 1,050 45,586
- ---------------------------------------------------------------------------------------------------------------------------------
Bradley S. Everly, Senior Vice 2002 $110,000 $ 10,000 1,250 $29,486
President and Chief Financial Officer 2001 110,000 10,032 1,050 33,874
2000 108,000 8,394 2,100 33,561
- ----------------------------------------------------------------------------------------------------------------------------------
(1) None of the named executive officers received perquisites and other
personal benefits in excess of 10% of total annual salary and bonuses.
(2) Amounts shown include compensation earned and received as well as amounts
earned but deferred at the election of the executive officer.
(3) Includes bonuses earned in 2002 under the Executive Incentive Plan.
(4) Includes for 2002 for Messrs. Shoemaker, Fague, Everly and Oldt,
respectively, the following compensation amounts: (i) profit sharing
contributions, $26,255, $16,654, $16,500 and $16,500; (ii) matching
contributions to the 401(k) plan; $5,159, $3,331, $3,300 and $3,300; (iii)
the present value of the economic benefit to the executive from premiums
paid by the Company to purchase split dollar life insurance contracts under
the Company's salary continuation plans, $36,513, $2,221, $9,438 and
$24,177; (iv) the amount of premiums paid by the Company for death benefit
in excess of $50,000 under the Company's group term life replacement plan,
$563, $130, $248 and $541; and (v) cash payments in lieu of benefits under
the Company's cafeteria plan not selected by Mr. Shoemaker, $36, or by Mr.
Fague, $1,008.
14
Option Grants in 2002. The following table shows all grants of stock
options to the executive officers named in the Summary Compensation Table under
the Company's Employee Stock Option Plan of 2000.
Individual Grants
-------------------------------------------------------------
% of total
No. of options
securities granted to
underlying employees Exercise Grant Date
options in fiscal price Expiration Present Value
Name granted year ($/share) Date (1)
- -------------------------------------------------------------------------------------------------------------------
Kenneth R. Shoemaker 4,000 19.05% $44.00 6/27/12 $53,240
Philip E. Fague 2,250 10.71% $44.00 6/27/12 $29,948
Bradley S. Everly 1,250 5.95% $44.00 6/27/12 $16,638
Stephen C. Oldt 1,250 5.95% $44.00 6/27/12 $16,638
- -------------------------------------------------------------------------------------------------------------------
(1) Based on the Black-Scholes model adapted for use in valuing executive stock
options. There is no assurance the value realized by an executive will be
at or near the value estimated by the Black-Scholes model. The actual
value, if any, an executive may realize will depend on the excess of the
stock price over the exercise price on the date the option is exercised. In
determining the Black-Scholes value, the following underlying assumptions
were used: (i) stock price volatility represents the standard deviation in
stock prices for Company Common Stock during the 12 month period prior to
grant of the option (30.04%); (ii) dividend yield represents the cumulative
dividends per share for the 12 month period prior to grant of the option,
divided by the average monthly price of Company Common Stock over the same
period (1.48%); (iii) the risk-free rate of return represents the average
monthly yield on US Treasury Notes maturing within 9 to 10 years after the
date of grant (3.5%); and, (iv) option term represents the period from the
date of grant of the option to the expiration of the term of the option.
15
Aggregated Option Exercises in 2002 and Year-end Option Values. The
following table shows information for the executive officers named in the
Summary Compensation Table regarding exercises of options by them during 2002
and the number and value of unexercised options held by them at December 31,
2002.
Number of securities
underlying unexercised Value of unexercised in-the-
Shares options at year end money options at year end($)(2)
acquired on Value --------------------------- -------------------------------
Name exercise (1) Realized (1) Exercisable Unexercisable Exercisable Unexercisable
- ---- ------------ ------------ ----------- ------------- ----------- -------------
Kenneth R. Shoemaker -- -- 12,190 -- $94,570 --
Philip E. Fague -- -- 6,450 -- $48,960 --
Bradley S. Everly -- -- 4,400 -- $36,710 --
Stephen C. Oldt -- -- 3,350 -- $24,855 --
- --------------------------------------------------------------------------------
(1) No options were exercised by the named executive officers during 2002.
(2) Represents the difference between the option exercise price and the "fair
market value" of Company Common Stock on December 31, 2002, determined by
the Board of Directors in the exercise of discretion under the terms of the
Company's Employee Stock Option Plan of 2000 to be the price of the last
trade reported through the OTC Bulletin Board service ($47.00 per share).
Retirement Benefits. In 1988 Orrstown Bank established a profit sharing
plan covering all employees who have attained age 21, completed one year of
service and have worked for 1,000 hours or more during the plan year. Upon
becoming eligible to participate in the plan, an employee is fully vested.
Contributions to the plan are based on bank performance and are at the
discretion of the Bank's Board of Director's. Substantially all of the Bank's
employees are covered by the plan. The total amount allocated in 2002 to the
executive officers identified in the Summary Compensation Table was $75,909.
In 1992 the Bank established a 401(k) plan for its employees. The Bank
makes annual matching contributions of up to 50% of employee contributions to
the plan. The total amount allocated in 2002 to the executive officers
identified in the Summary Compensation Table was $15,090.
16
In 1998, the Bank's Board of Directors established salary continuation
plans for Kenneth R. Shoemaker, Bradley S. Everly, Stephen C. Oldt and Philip E.
Fague, in order to provide them with supplemental retirement income so that when
combined with Social Security and amounts available under the Bank's profit
sharing and 401(k) plan, they will be provided a total retirement income equal
in amount to 70% of final annual salary. In projecting the amount of an
employee's final annual salary, annual salary was assumed to increase at the
rate of 5% per year. Vesting in the benefits of the salary continuation plans is
determined within the discretion of the Board of Directors. As a result, an
intended purpose of the plans is to provide an incentive to such persons to
continue in the employ of the Bank.
In 1998, the Bank's Board of Directors also established an officer
group term replacement plan for the benefit of Messrs. Shoemaker, Everly, Oldt
and Fague. This plan provides participating officers with a benefit equal to two
times current salary with no cap. Under the plan the officer receives the same
coverage as he currently receives under the Bank's group term plan at less cost
to the Bank while the officer is employed. The officer receives continued
coverage after retirement for a small annual charge. The post-retirement
coverage will approximate two times annual salary (not to exceed the net
coverage purchased).
Change in Control Agreement. The Company and the Bank have entered into
a change in control agreement with Mr. Shoemaker. The agreement generally
provides that in the event of termination of Mr. Shoemaker's employment (other
than for cause) with the Company or the Bank under certain circumstances
following a "change in control" of the Company or the Bank, Mr. Shoemaker will
be entitled to receive continued payment of his annual cash compensation for
three years. If Mr. Shoemaker would obtain other employment at any time during
the three year period, his compensation from his new employer would be offset
against the amounts to be paid to him under the agreement. The agreement also
provides that the Company will continue to provide Mr. Shoemaker with available
insurance coverages in effect at the time of his termination pursuant to a
change in control for a period of three years, offset by coverage for any
subsequent employment, or until he reaches age 65. For purposes of the agreement
a "change in control" is defined to include an acquisition of 20% or more of the
outstanding voting securities of the Company; a merger or consolidation of the
Company or the Bank if, as a result of the transaction, less than 50% of the
voting securities of the surviving corporation are owned by the former
shareholders of the Company; a sale of substantially all the assets of the
Company; or the occurrence of any other event designated by a majority of the
non-employee directors to constitute a change in control for purposes of the
Agreement.
Transactions with Management
During 2001 some of the directors and executive officers of the Company
and the Bank, members of their immediate families and some of the companies with
which they are associated, had banking transactions in the ordinary course of
business with the Bank and may be expected to have similar transactions in the
future. These transactions were made on substantially the same terms, including
interest rates, collateral requirements and repayment terms, as those prevailing
at the time for comparable transactions with non-affiliated persons and did not
involve more than the normal risk of collectability or present other unfavorable
features.
17
Independent Certified Public Accountants
The Board of Directors has selected Smith Elliott Kearns & Company,
LLC, as the Company's independent certified public accountants for 2003.
Representatives of the firm are expected to be present at the Annual Meeting,
will have opportunity to make a statement if they desire to do so, and are
expected to be available to respond to appropriate questions.
Audit Fees. Smith Elliott Kearns & Company, LLC, billed the Company
aggregate fees totaling $27,150 for professional services rendered for the audit
of the Company's financial statements for the year ending December 31, 2002 and
for reviewing the financial statements included in the Company's Forms 10-Q for
2002 filed with the Securities and Exchange Commission.
Financial Information Systems Design and Implementation Fees. Smith
Elliott Kearns & Company, LLC, did not perform any financial information systems
design or implementation services for the Company in 2002.
All other Fees. The aggregate fees billed by Smith Elliott Kearns &
Company, LLC, for all other services rendered by it to the Company in 2002,
other than those described in the two immediately preceding paragraphs, totaled
$300.
18
[ORRSTOWN FINANCIAL SERVICES, INC. LOGO]
This Proxy is solicited on behalf of the Board of Directors.
The undersigned hereby appoints Patricia A. Corwell and Robert B. Russell, or
either of them, each with full power of substitution as attorneys and proxies of
the undersigned to vote all Orrstown Financial Services, Inc. Common Stock of
the undersigned at the Annual Meeting of Shareholders of the Company to be held
on Tuesday, April 29, 2003, at 9:00 A.M., in the King Street Conference Room of
the Orrstown Bank Administrative Center located at 77 East King Street,
Shippensburg, Pennsylvania, and at any adjournment of such meeting, as fully and
effectually as the undersigned could do if personally present, and hereby
revokes all previous proxies for said meeting.
Where a vote is not specified, the proxies will vote shares represented by this
Proxy FOR the election of all three nominees for director to Class C and will
vote in accordance with the directions of Company management on such other
matters that may properly come before the meeting.
Please mark your votes as indicated in this example [X]
Proxy Item 1 - -
Election of three directors to Class C to serve for a three (3) year term.
Nominees: Anthony F. Ceddia, Andrea Pugh and Kenneth R. Shoemaker
FOR all nominees listed herein WITHHOLD AUTHORITY
(except as withheld) in space to vote for all nominees listed
provided herein
[ ] [ ]
(Instructions: To withhold authority to vote for any individual nominee, write
that nominee's name in the space provided below.)
________________________________________________________________________________
Please date and sign exactly as name appears hereon. When signing as attorney,
executor, administrator, trustee, guardian, etc., full title as such should be
shown. For joint accounts, each joint owner should sign. If more than one
trustee is listed, all trustees should sign, unless one trustee has power to
sign for all.
_____________________________(Signature of Shareholder)
_____________________________(Signature of Shareholder)
Dated: _______________________________________, 2003