SHARE-BASED COMPENSATION PLANS

The Company maintains share-based compensation plans, the purpose of which are to provide officers, employees, and non-employee members of the Board of Directors of the Company and the Bank, with additional incentive to further the success of the Company. In May 2011, the shareholders of the Company approved the 2011 Orrstown Financial Services, Inc. Incentive Stock Plan (the “Plan”). Under the Plan, 381,920 shares of the common stock of the Company were reserved to be issued. As of June 30, 2016, 141,945 shares were available to be issued under the Plan.

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

A roll forward of the Company’s nonvested restricted shares for the six months ended June 30, 2016 is presented below:



	Shares		Weighted Average Grant Date Fair Value

Nonvested shares, beginning of year	197,381		$	16.17
Granted	41,045		17.77
Forfeited	(3,583	)	16.91
Vested	(12,500	)	15.97
Nonvested shares, at period end	222,343		$	16.46

For the three months ended June 30, 2016 and 2015, $259,000 and $157,000 was recognized as expense on the restricted stock awards, with tax benefits recorded of $91,000 and $55,000 for the respective periods. For the six months ended June 30, 2016 and 2015, $496,000 and $288,000 was recognized as expense on the restricted stock awards, with tax benefits recorded of $174,000 and $101,000 for the respective periods. As of June 30, 2016 and December 31, 2015, the unrecognized compensation expense related to the stock awards were $2,409,000 and $2,293,000. The unrecognized compensation expense at June 30, 2016 is expected to be recognized over a weighted-average period of 2.7 years.

A roll forward of the Company’s outstanding stock options for the six months ended June 30, 2016 is presented below:



	Shares		Weighted Average Exercise Price

Outstanding at beginning of year	101,460		$	28.72
Forfeited	(2,525	)	26.15
Expired	(18,265	)	35.11
Options outstanding and exercisable, at period end	80,670		$	27.35

The exercise price of each option equals the market price of the Company’s stock on the date of grant and an option’s maximum term is ten years. All options are fully vested upon issuance. Information pertaining to options outstanding and exercisable at June 30, 2016 is as follows:



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

$21.14 - $24.99	35,299	3.90	$	21.47
$25.00 - $29.99	2,792	3.76	25.76
$30.00 - $34.99	35,231	1.43	31.34
$35.00 - $37.59	7,348	3.06	37.08
$21.14 - $37.59	80,670	2.74	$	27.35

The options outstanding and exercisable had no intrinsic value at June 30, 2016 and December 31, 2015 as each exercise price exceeded the market value.

The Company also maintains an employee stock purchase plan, in order to provide employees of the Company and its subsidiaries an opportunity to purchase stock of the Company. Under the employee stock purchase plan, eligible employees may purchase shares in an amount that does not exceed 10% of their annual salary, up to the IRS limit, at the lower of 95% of the fair market value of the shares on the semi-annual offering date, or related purchase date. The Company reserved 350,000 shares of its common stock, after making adjustments for stock dividends and a stock split, to be issued under the employee stock purchase plan. As of June 30, 2016, 189,877 shares were available to be issued under the employee stock purchase plan. Employees purchased 0 and 0 shares at a weighted average price of $0.00 and $0.00 for the three months ended June 30, 2016 and 2015. For the six months ended June 30, 2016 and 2015, employees purchased 2,461 and 2,964 shares at a weighted average price of $16.57 and $15.74. Compensation expense recognized on the employee stock purchase plan totaled $0 and $0 for the three months ended June 30, 2016 and 2015. For the six months ended June 30, 2016 and 2015, compensation expense recognized on the employee stock purchase plan totaled $3,000 and $3,000.

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