UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Proxy Statement Pursuant to Section 14(a) of the Securities
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[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
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, Pennsylvania 17257
April 5, 2005
Notice of Annual Meeting of Shareholders
The Annual Meeting of Shareholders of Orrstown Financial Services, Inc.
will be held on Tuesday, May 3, 2005, at 9:00 a.m., at the Shippensburg
University Conference Center located at 500 Newburg Road, Shippensburg,
Pennsylvania, to consider and take action on the following matters:
1. Elect three directors to Class A for three year terms expiring
in 2008; and
2. Transact such other business as may properly come before the
meeting.
Your Board of Directors recommends a vote "FOR" the election as directors
to Class A of the three nominees listed in the enclosed Proxy Statement.
This Notice of Annual Meeting of Shareholders, the Proxy Statement and the
enclosed Proxy card are being sent to shareholders of record at the close of
business on March 18, 2005.
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 on the
proposals? 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 3
Section 16(a) Beneficial Ownership Reporting Compliance 4
Election of Directors 4
Nomination of Directors 5
Biographical Summaries of Nominees and Directors 6
Executive Officers 7
Board Committees and Meeting Attendance 8
Audit Committee Report 10
Compensation of Directors 10
Report on Executive Compensation 11
Company Performance 14
Executive Compensation 15
Summary of Compensation 15
Option Grants in 2004 16
Aggregated Option Exercises in 2004 and Year-end
Option Values 16
Retirement Benefits 17
Change in Control Agreement 18
Transactions with Management 18
Independent Certified Public Accountants 19
Shareholder Communications with the Board of Directors 20
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, May 3,
2005, beginning at 9:00 a.m., at the Shippensburg University Conference Center
located at 500 Newburg Road, 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 April 5,
2005.
Who is entitled to vote?
Shareholders owning Company common stock on March 18, 2005 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, 2005 there were 5,137,373 shares of Common Stock outstanding.
On what am I voting?
You will be asked to elect 3 directors to Class A for three year terms
expiring in 2008. 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 on the proposals?
The Board of Directors recommends a vote FOR the election of each of
the three nominees as directors to Class A.
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 A.
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 A 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 December 6, 2005. 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.
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, 2005, except as shown in the following
table:
Name and address of Common Stock Percent of
Beneficial Owner Beneficially Owned Class
Orrstown Bank 832,238(1) 16.20%
77 East King Street
Shippensburg, PA
17257
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(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 445,068 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 148,062 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 239,108
shares and disclaims beneficial ownership of such shares.
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 15, and by all
of the incumbent directors, nominees and executive officers of the Company as a
group, as of March 1, 2005. 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 4,794
Jeffrey W. Coy 28,888
Jeffrey W. Embly 21,994
Bradley S. Everly 21,387
Philip E. Fague 26,726
Stephen C. Oldt 21,257
Andrea Pugh 19,497
Gregory Rosenberry 33,946
Kenneth R. Shoemaker 59,497
Glenn W. Snoke 11,857
Common Stock
Name Beneficially
Owned(1)(2)
Denver L. Tuckey 10,193
John S. Ward 5,253
Joel R. Zullinger 27,585
Directors, nominees and
executive
officers as a group (16
persons including those named 320,295
above)
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(1) On March 1, 2005, none of the individuals named in the above table
beneficially owned more than 1% of the outstanding shares of Company Common
Stock, except Mr. Shoemaker who may be deemed to beneficially own 1.2% of
the outstanding shares. On that date, all of the incumbent directors,
nominees, and executive officers as a group beneficially owned approxi-
mately 6.23% 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, 2005 through the exercise of stock options granted pursuant to the
Company's stock option plans: Mr. Ceddia, 2,467; Mr. Coy, 3,007; Mr. Embly,
16,610; Mr. Everly, 16,238; Mr. Fague, 19,544; Mr. Oldt, 7,000; Ms. Pugh,
3,007; Mr. Rosenberry, 3,007; Mr. Shoemaker, 37,198; Mr. Snoke, 3,007; Mr.
Tuckey, 3,007; Mr. Ward, 3,007; Mr. Zullinger, 3,007; and all directors,
nominees and executive officers as a group, 149,244 shares.
Section 16(a) Beneficial Ownership Reporting Compliance. Based on our
records, we believe that during 2004 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 A to serve until the annual meeting
of shareholders in 2008 or until their successor is elected.
The Board of Directors has nominated the following persons for election as
directors to Class A:
Jeffrey W. Coy
John S. Ward
Joel R. Zullinger
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 three 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 three
nominees as directors to Class A.
Nomination of Directors
The Executive Committee of the Bank's Board of Directors reviews the
qualifications of and makes recommendations regarding potential candidates to be
nominated by the Board of Directors for election to the Board. Those candidates
recommended by the Executive Committee are then submitted to the Board of
Directors for approval as nominees. In making its recommendations, the
Executive Committee determines the appropriate qualifications, skills and
characteristics desirable for the Board of Directors in the context of the
strategic direction of the Company and the Bank. Although there are no stated
minimum criteria for nominees, the Executive Committee considers a variety of
factors including a candidate's integrity, independence, qualifications, skills,
experience, including experience in finance and banking, compatibility with
other members of the Board of Directors, and such other factors as it may deem
to be in the best interest of the Bank, the Company and its shareholders, which
factors may change from time to time. The Executive Committee will consider
candidates recommended to it by shareholders, other directors and other sources
including the community and the Bank's regional advisory boards.
In addition to recommending potential candidates to the Executive
Committee, shareholders may nominate candidates for election to the Board of
Directors of the Company in accordance with procedures set forth in the
Company's By-laws. Shareholder nominations must be submitted not less than 30
days and not more than 50 days before the Annual Meeting of shareholders is
scheduled to be held, and include a statement setting forth the background,
education and business experiences of the nominee.
Biographical Summaries of Nominees and Directors
Information about the nominees for election as directors to Class A at the
Annual Meeting and information about the directors in Class B and Class C is set
forth below.
CLASS A DIRECTORS - TERM EXPIRES 2008
Principal occupation
for last 5 years and Director
Name Age position with the Since
Company
Jeffrey W. Coy 53 Commissioner, 1984(1)
(2) Pennsylvania Gaming
Control Board; former
State Representative -
89th District; Vice
Chairman of the
Company and the Bank
John S. Ward 67 President, Modern 1999
(3) Transit Partnership, a
non-profit
organization created
to support bringing
commuter rail to
Central Pennsylvania;
retired Chief Clerk,
Cumberland County,
Pennsylvania
Joel R. 56 Attorney-at-Law; 1981(1)
Zullinger Chairman of the Board
(2) of the Company and the
Bank
CLASS B DIRECTORS - TERM EXPIRES 2007
Principal Occupation
for last 5 years and Director
Name Age position with the Since
Company
Gregory A. 50 President, Tri-Valley 1997
Rosenberry Forestry, Inc., a
timber harvesting and
wholesale business
Glenn W. Snoke 56 President, Snokes 1999
Excavating & Paving,
Inc.
Denver L. Tuckey 71 Retired businessman; 1995
(2) , (3) Secretary of the
Company and the Bank
CLASS C DIRECTOR NOMINEES - TERM EXPIRES 2006
Principal occupation
for last 5 years and Director
Name Age position with the Since
Company
Anthony F. 61 President, 1996
Ceddia Shippensburg
(3) University
Andrea Pugh 52 Owner, PharmCare 1996
(3) Consultants, a
pharmacy consulting
business
Kenneth R. 57 President and Chief 1986(1)
Shoemaker (2) Executive Officer of
the Company and the
Bank
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(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.
Executive Officers
In addition to Kenneth R. Shoemaker, President and Chief Executive
Officer of the Company and the Bank, who also serves on the Board of Directors
and whose biographical information is set forth above, the Executive Officers
of the Company and/or the Bank are:
Philip E. Fague - age 45; Executive Vice President and Assistant
Treasurer of the Company; and Executive Vice President and Chief Sales and
Service Officer of the Bank.
Stephen C. Oldt - age 62; Executive Vice President and Assistant
Secretary of the Company; and Executive Vice President and Chief Operations
Officer of the Bank.
Bradley S. Everly - age 53; Senior Vice President and Treasurer of the
Company; and Senior Vice President and Chief Financial Officer of the Bank.
Barbara E. Brobst - age 46; Vice President and Senior Trust Officer of the
Bank.
Stephen C. Caldwell - age 56; Vice President and Director of Human
Resources of the Bank.
Jeffrey W. Embly - age 34; Vice President of the Company; and Vice
President and Senior Loan Officer of the Bank.
Benjamin S. Stoops - age 53; Vice President and Chief Technology
Officer of the Bank.
Board Committees and Meeting Attendance
During 2004 the Board of Directors of the Company met 13 times and the
Board of Directors of Orrstown Bank met 12 times. The Board of Directors of the
Company has an Executive Committee that did not hold any meetings in 2004, and
an Audit Committee. The Board of Directors of the Bank has an Executive
Committee. During 2004 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. In addition, although the Company does not have a formal
policy regarding the attendance by Directors at the Annual Meeting of
Shareholders, it is generally expected that each Director will attend. All of
the Company's Directors attended the Annual Meeting of Shareholders in 2004.
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, as described above under the heading "Nomination of
Directors," reviews the qualifications of and makes recommendations to the Board
of Directors regarding potential candidates to be nominated for election to the
Board of Directors. The Executive Committee met 13 times during 2004. 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.
Although they hold offices of the Company and the Bank, the Board of Directors
has determined that Messrs. Coy, Tuckey and Zullinger are independent as defined
in the listing standards of the National Association of Securities Dealers, Inc.
(NASD) because they hold such offices in their capacities as Directors and
because they do not, except as Directors, perform a policy making function, and
are not otherwise in charge of a principal business unit, division or function
of the Company or the Bank. As President and Chief Executive Officer of the
Company and the Bank, Mr. Shoemaker is not independent.
Audit Committee. The Audit Committee is responsible for providing
independent oversight and review of the Company's accounting functions and
financial reporting and internal control systems. The Audit Committee monitors
the preparation of quarterly and annual financial reports by Company management,
including reviewing with management and the Company's independent auditors the
scope and results of the annual audit and recommendations made by the
independent auditors and related management responses, and reviews prior to
filing all annual and quarterly reports and proxy statements filed with the
Securities and Exchange Commission (SEC). The Audit Committee also is
responsible for matters concerning the relationship between the Company and its
independent auditors including their appointment, compensation and retention;
approval of their audit and permissible non-audit services prior to engagement;
and determining whether the independent auditors are "independent." In
addition, the Audit Committee oversees management's implementation and reviews
the effectiveness of the Company's 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 Board of Directors revised the Audit Committee Charter in 2003 in order
to bring it into conformity with requirements specified in the Sarbanes-Oxley
Act of 2002 and related SEC regulations. A copy of the Audit Committee Charter,
as revised, was included as Appendix A to the Company's Proxy Statement in
connection with the 2004 Annual Meeting of shareholders and, unless sooner
amended, will again be included as an Appendix to the Proxy Statement for the
Annual Meeting of shareholders in 2007, in accordance with SEC Rules.
The members of the Audit Committee are Andrea Pugh, Chair, Anthony F.
Ceddia, Denver L. Tuckey and John S. Ward, each of whom the Board of Directors
has determined to be independent as defined in NASD listing standards. The
Audit Committee Charter provides that the Audit Committee shall consist of at
least 3 directors, each of whom is to be "independent" as defined by applicable
law and regulation, and who also is free of any relationship that, in the
opinion of the Board, could interfere with the exercise of their independent
judgment.
The Audit Committee Charter also provides that at least one member of the
Audit Committee must have accounting or related financial management expertise
as the Board of Directors interprets such qualifications in its business
judgment. Although the Board of Directors believes that it is appropriate for
the Audit Committee to have at least one member with accounting or related
financial management expertise, it also believes that there are a number of
other important factors, discussed above with respect to the factors considered
by the Executive Committee in connection with candidates for nomination for
election to the Board of Directors, that affect Board composition. In
accommodating each of these factors and composing a Board of Directors that is,
as a whole, strong in its collective knowledge of and diversity of skills and
experience with respect to the business of banking and the communities and
markets in which the Bank competes, together with demonstrated qualities
exhibiting leadership, vision and business judgment, it is possible that from
time to time no member of the Board of Directors will fully satisfy all
conditions of the definition of "audit committee financial expert" in SEC
Regulation S-K.
The Board of Directors believes that John S. Ward has the requisite
financial management expertise required by the Audit Committee Charter as a
result of his experience as Chief Clerk of Cumberland County, Pennsylvania, from
which he is retired, and as President of Modern Transit Partnership. In each of
these positions Mr. Ward has had ultimate responsibility for overseeing and
assessing the performance of the County and the Partnership in the preparation
of their respective financial statements, providing him with an understanding of
and familiararity with generally accepted accounting principles and internal
controls over financial reporting. The Board of Directors, however, has
determined that Mr. Ward is not an "audit committee financial expert" as defined
in SEC Regulation S-K principally because his experience in these positions has
not presented to him the breadth and level of complexity of accounting issues
that are generally comparable to the breadth and complexity of issues raised by
the Company's financial statements.
The Audit Committee Charter provides that the Audit Committee is to meet at
least 4 times each year. The Audit Committee met 5 times during 2004.
Audit Committee Report
The Audit Committee has reviewed and discussed with management the
Company's audited financial statements for the year ended December 31, 2004.
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 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 permissible
non-audit 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, 2004 filed
with the Securities and Exchange Commission.
Audit Committee:
Andrea Pugh, Chair
Anthony F. Ceddia
Denver L. Tuckey
John S. Ward
Compensation of Directors
Directors' Fees. During 2004, each director of the Company received
$600.00 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 $9,500.00 and a fee of $600.00 for each meeting attended.
Non-employee directors also receive $250.00 for each committee meeting attended.
In addition, in 2004 the Chairman of the Board of the Bank received an annual
fee of $11,500, the Vice Chairman received an annual fee of $9,500 and the
Secretary received an annual fee of $8,500.
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 Operating 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 $121,009 at December 31, 2004. Annual expense of $11,520 was
charged to operations for 2004.
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 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 NASD'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 2004, each director, except Mr. Shoemaker, was granted an
option covering 301 shares of Company Common Stock at an exercise price of
$43.13 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 2004. 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.
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 2004 pursuant to the Executive Incentive Plan
include 50% of the bonus amount earned in 2004, 25% of the bonus amount earned
in 2003 and 25% of the bonus amount earned in 2002. The bonus amounts as to
which payment is deferred to subsequent years are not vested and may be
forfeited by an employee whose employment with the Bank is terminated prior to
payment of the deferred amounts. In addition, in 2002, 2003 and 2004, 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. All options awarded under the Stock Option Plan are exercisable at an
option price equal to the "fair market value" of the Company's common stock at
the date of 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 NASD's OTC
Bulletin Board service, "fair market value" shall mean 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 relevant date. 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. 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.
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
2004 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 between $500 million and $1 billion.
For 2001, 2002, 2003 and 2004, 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.
Orrstown Financial Services, Inc.
Period Ending
Index 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03 12/31/04
Orrstown Financial 100.00 106.81 111.08 136.07 206.59 279.98
Services, Inc.
S&P 500* 100.00 91.20 80.42 62.64 80.62 89.47
SNL $500M-$1B Bank 100.00 95.72 124.18 158.54 228.61 259.07
Index
The performance illustrated assumes that $100 was invested in Company Common
Stock and each index on December 31, 1999 and that all dividends were
reinvested.
Executive Compensation
Summary of Compensation. The following table shows cash and other
compensation paid or accrued during the last three fiscal years to the Bank's
Chief Executive Officer and other executive officers who received total annual
salary and bonus exceeding $100,000 in 2004.
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation
Compensation(1)
Securities
Name and principal Fiscal underlying All other
position Year Salary Bonus options compensatio
(2) (3) n (4)
Kenneth R. Shoemaker, 2004 $207,692 $45,000 9,000 $83,570
President and Chief 2003 185,000 30,000 8,400 78,683
Executive Officer 2002 175,000 30,000 8,400 68,526
Philip E. Fague, 2004 $135,000 $22,000 4,500 $29,944
Executive Vice President 2003 120,000 15,000 4,500 26,880
and 2002 110,000 15,000 4,724 23,344
Chief Sales and Service
Officer
Stephen C. Oldt, 2004 $135,000 $15,000 4,000 $54,014
Executive Vice President 2003 120,000 15,000 3,000 50,987
and 2002 110,000 10,000 2,624 44,518
Chief Operations Officer
Bradley S. Everly, 2004 $122,538 $18,000 4,000 $36,191
Senior Vice President and 2003 113,000 10,000 3,000 34,352
Chief Financial Officer 2002 110,000 10,000 2,624 29,486
Jeffrey W. Embly, 2004 $114,231 $15,000 4,000 $20,456
Vice President and Senior 2003 93,000 10,000 4,000 16,275
Loan Officer 2002 88,000 10,000 4,200 15,400
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(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 2004 under the Executive Incentive Plan.
(4) Includes for 2004 for Messrs. Shoemaker, Fague, Oldt, Everly and Embly,
respectively, the following compensation amounts: (i) profit sharing
contributions, $31,296, $20,463, $20,277, $18,381 and $17,135; (ii)
matching contributions to the 401(k) plans, $6,027, $4,093, $4,055, $3,676
and $3,321; (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 plan for
Messrs. Shoemaker, Fague, Oldt and Everly, respectively, $44,715, $3,780,
$28,932 and $13,820; (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 for Messrs. Shoemaker, Fague, Oldt and Everly,
respectively, $766, $179, $750 and $314; and (v) cash payments in lieu of
benefits under the Company's cafeteria plan not selected by Mr. Shoemaker,
$766, or by Mr. Fague, $1,429.
Option Grants in 2004. The following table shows all grants of stock
options in 2004 to the executive officers named in the Summary Compensation
Table under the Company's Employee Stock Option Plan of 2000.
Individual Grants
% of
No. of total
securities options
underlying granted Exercise
options to price Expiratio Grant Date
Name granted employees ($/share) n Date Present Value
in fiscal (1)
year
Kenneth R. 9,000 20.69% $40.70 6/24/14 $113,400.00
Shoemaker
Philip E. 4,500 10.34% $40.70 6/24/14 $ 56,700.00
Fague
Stephen C. 4,000 9.20% $40.70 6/24/14 $ 50,400.00
Oldt
Bradley S. 4,000 9.20% $40.70 6/24/14 $ 50,400.00
Everly
Jeffrey W. 4,000 9.20% $40.70 6/24/14 $ 50,400.00
Embly
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(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 (32.18%); (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 (1.18%); (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 (3.85%); and, (iv) an expected
time of exercise of five (5) years.
Aggregated Option Exercises in 2004 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 2004
and the number and value of unexercised options held by them at December 31,
2004.
Number of Value of unexercised
securities in-
underlying the-money options at
unexercised year end($)(2)
options at year end
Shares
acquired on Value Exercisable Exercisable
Name exercise Realized Unexercisable Unexercisable
(1)
Kenneth R. 5,800 $117,755 37,198 - - $698,946 - -
Shoemaker
Philip E. 3,000 $84,735 19,544 - - $370,524 - -
Fague
Stephen C. 4,828 $86,535 - - $ 70,435 - -
Oldt 7,000
Bradley S. - - - - 16,238 - - $316,084 - -
Everly
Jeffrey W. 4,410 $89,534 16,610 - - $307,430 - -
Embly
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(1) The "Value Realized" is equal to the difference between the option exercise
price and the "fair market value" of Company's Common Stock on the date of
exercise, determined under the terms of the Company's Employee Stock Option
Plan of 2000 to be 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 preceding the date of
exercise.
(2) Represents the difference between the option exercise price and the "fair
market value" of Company Common Stock on December 31, 2004, determined
under the terms of the Company's Employee Stock Option Plan of 2000 to be
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 preceding December 31, 2004.
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 2004 to the
executive officers identified in the Summary Compensation Table was $107,552.
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 2004 to the executive officers
identified in the Summary Compensation Table was $21,172.
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 2004 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.
During 2004, Snokes Excavating & Paving, Inc., of which Glenn W. Snoke, a
Director of the Company and the Bank, is President, performed certain paving and
excavating services in the ordinary course of business on behalf of the Bank,
directly, and pursuant to subcontracts with the Bank's general contractors in
connection with the construction of new branch offices of the Bank. The total
amounts paid to Snokes Excavating & Paving, Inc. for such services in 2004,
whether directly or indirectly through the Bank's general contractors, were
$217,926.
Independent Certified Public Accountants
The Board of Directors again has selected Smith Elliott Kearns & Company,
LLC, as the Company's independent certified public accountants for 2005.
Representatives of the firm are expected to be present at the Annual Meeting,
will have the opportunity to make a statement if they desire to do so, and are
expected to be available to respond to appropriate questions.
Audit Fees and Non-Audit Fees. Aggregate fees billed for professional
services rendered for the Company and the Bank by Smith Elliott Kearns &
Company, LLC, as of and for the fiscal years ended December 31, 2004 and 2003
are set forth below:
2004 2003
Audit Fees $34,625 $23,175
Audit Related Fees 0 540
Tax Fees 0 560
All Other Fees 900 0
---------- ----------
TOTAL $35,525 $24,275
========== =========
Audit Fees for 2004 and 2003 were for professional services rendered for
the audits of the consolidated financial statements of the Company, quarterly
review of the financial statements included in the Company's Quarterly Reports
on Form 10-Q, consents and other assistance required to complete the year end-
audit of the consolidated financial statements, assessment of the Company's
internal controls, and in the preparation of the Company's Annual Report on Form
10-K.
Tax Fees for 2003 were for assistance in the preparation of a petition for
a refund of Pennsylvania sales taxes.
All Other Fees for 2004 were for assistance with the transfer of the Bank's
401(k) data to a new service provider.
All of the services for which Tax Fees were paid in 2003 and All Other Fees
were paid in 2004 were approved by the Audit Committee pursuant to the de
minimus exception provided by Rule 2-01(c)(7)(i)(C) of SEC Regulation S-X.
Smith Elliott Kearns & Company, LLC also performs certain administrative
and regulatory compliance related services on behalf of certain retirement plan
accounts for which the Bank acts as custodian. Discretion with respect to the
engagement of Smith Elliott Kearns & Company, LLC is vested in each plan
administrator and the fees paid to Smith Elliott Kearns & Company, LLC for such
services are expenses of and paid from the funds of each of the respective
retirement accounts. Such fees are not included among the fees reported above.
Shareholder Communications with the Board of Directors
The Company does not have a formal process by which shareholders may send
communications to the Board of Directors. As a matter of practice, shareholder
communications received by the Company are included under the topic
"Correspondence" with the Board meeting materials routinely furnished by
management to Directors in connection with meetings of the Board of Directors.
In addition, shareholder communications determined by the Chief Executive
Officer, in his discretion, to require immediate attention, also are promptly
furnished by him to the Chairman. When and as appropriate, the Company seeks to
provide a timely response to shareholder communications it receives.
[ ORRSTOWN FINANCIAL SERVICES, INC. LOGO ]
This Proxy is solicited on behalf of the Board of Directors.
The undersigned hereby appoints Barbara A. Brobst 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, May 3, 2005, at 9:00 A.M., at the Shippensburg University Conference
Center located at 500 Newburg Road, 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 A 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 A to serve for a three (3)
year term. Nominees: Jeffrey W. Coy, John S. Ward and Joel R. Zullinger.
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.)
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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: , 2005
-----------------------