Orrstown Financial Services and Orrstown Bank

UNITED STATES OF AMERICA

BEFORE THE

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

WASHINGTON, D.C.

Written Agreement by and among

ORRSTOWN FINANCIAL SERVICES, INC.

Shippensburg, Pennsylvania

ORRSTOWN BANK

Shippensburg, Pennsylvania

and

FEDERAL RESERVE BANK

OF PHILADELPHIA

Philadelphia, Pennsylvania

Docket No. 12-021-WA/RB-HC

12-021-WA/RB-SMB

WHEREAS, in recognition of their common goal to maintain the financial soundness of

Orrstown Financial Services, Inc, Shippensburg, Pennsylvania ("Orrstown"), a registered bank

holding company, and its subsidiary bank, Orrstown Bank, Shippensburg, Pennsylvania (the

"Bank"), a state-chartered bank that is a member of the Federal Reserve System, Orrstown, the

Bank, and the Federal Reserve Bank of Philadelphia (the "Reserve Bank") have mutually agreed

to enter into this Written Agreement (the "Agreement"); and

WHEREAS, on March 22, 2012, Orrstown's and the Bank's boards of directors, at duly

constituted meetings, adopted resolutions authorizing and directing Thomas Quinn to consent to

this Agreement on behalf of Orrstown and the Bank, and consenting to compliance with each and

every applicable provision of this Agreement by Orrstown, the Bank, and their institution-

affiliated parties, as defined in sections 3(u) and 8(b)(3) of the Federal Deposit Insurance Act, as

amended (the "FDI Act") (12 U.S.C. §§ 1813(u) and 1818(b)(3)). [page break]

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NOW, THEREFORE, Orrstown, the Bank, and the Reserve Bank agree as follows:

Source of Strength

1. The board of directors of Orrstown shall take appropriate steps to fully utilize

Orrstown's financial and managerial resources, pursuant to section 38A of the FDI Act

(12 U.S.C. § 1831o-1) and section 225.4(a) of Regulation Y of the Board of Governors of the

Federal Reserve System (the "Board of Governors") (12 C.F.R. § 225.4(a)), to serve as a source

of strength to the Bank, including, but not limited to, taking steps to ensure that the Bank

complies with this Agreement and any other supervisory action taken by the Bank's federal or

state regulators.

Board Oversight

2. Within 60 days of this Agreement, the board of directors of the Bank shall submit

to the Reserve Bank a written plan to strengthen board oversight of the management and

operations of the Bank. The plan shall, at a minimum, address, consider, and include:

(a) The actions that the board of directors will take to improve the Bank's

condition and maintain effective control over, and supervision of, the Bank's major operations

and activities, including but not limited to, credit risk management, lending and credit

administration, asset quality, liquidity, audit, capital, and earnings;

(b) the responsibility of the board of directors to monitor management's

adherence to approved policies and procedures, and applicable laws and regulations and to

monitor exceptions to approved policies and procedures;

reviewed by the board of directors and its committees in their oversight of the operations and

management of the Bank, including information on the Bank's credit risk management, lending [page break]

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and credit administration, adversely classified assets, interest only loans, allowance for loan and

lease losses ("ALLL"), capital, liquidity, audit, and earnings; and

(d) the maintenance of adequate and complete minutes of all board and

committee meetings.

Management Review

3. (a) Within 30 days of this Agreement, the board of directors of the Bank shall

retain an independent consultant acceptable to the Reserve Bank to conduct a review of all

management and staffing needs of the Bank and the qualifications and performance of all senior

Bank management (the "Management Review"), and to prepare a written report of findings and

recommendations (the "Report"). The primary purpose of the Management Review shall be to

aid in the development of a suitable management structure that is adequately staffed by qualified

and trained personnel.

(b) Within 10 days of the Reserve Bank's approval of the Bank's independent

consultant selection, the Bank shall submit an engagement letter to the Reserve Bank for

approval. The engagement letter shall require the independent consultant to submit the Report

within 90 days of regulatory approval of the engagement letter and to provide a copy of the

Report to the Reserve Bank at the same time that it is provided to the Bank's board of directors.

The Review shall, at a minimum, address, consider, and include:

(i) the identification of the type and number of senior officers needed

to manage and supervise properly the affairs of the Bank

(ii) an evaluation of each senior officer to determine whether the

individual possesses the ability, experience, and other qualifications to competently perform

present and anticipated duties, including their ability to: adhere to applicable laws and [page break]

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regulations and the Bank's established policies and procedures; restore and maintain the Bank to

a safe and sound condition; and comply with the requirements of this Agreement;

(iii) an evaluation of reporting lines within the management structure;

(iv) a management succession plan for key senior officers; and

(v) the identification of present and future management and staffing

needs for each area of the Bank, particularly in the areas of credit risk management, lending and

credit administration, loan review, and problem asset resolution.

4. Within 30 days of receipt of the Report, the Bank's board of directors shall submit

a written management plan to the Reserve Bank that fully addresses the findings and

recommendations in the Report and describes the specific actions that the board of directors

proposes to take in order to strengthen the Bank's management, including, but not limited to

plans to hire or appoint additional or replacement personnel

Credit Risk Management

5. Within 90 days of this Agreement, the Bank shall submit to the Reserve Bank an

acceptable written plan to strengthen credit risk management practices. The plan shall, at a

minimum, address, consider, and include:

(a) Procedures to identify, limit and manage concentrations of credit that are

consistent with the Interagency Guidance on Concentrations in Commercial Real Estate Lending,

Sound Risk Management Practices, dated December 12, 2006 (SR 07-1);

(b) procedures for the timely and accurate identification of problem loans;

accurate risk ratings;

(d) enhanced stress testing of loan and portfolio segments; and [page break]

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(e) improvements to the Bank's management information systems to ensure

that the board of directors and senior management obtain timely and accurate information

regarding the condition of the Bank's loan portfolio.

Lending and Credit Administration

6. Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank an

acceptable written lending and credit administration program that shall, at a minimum, address,

consider, and include:

(a) Loan underwriting and credit administration procedures that include and

provide for, at a minimum, documented analysis of: (i) the borrower's repayment sources, global

cash flow, and overall debt service ability; and (ii) the value of any collateral;

(b) procedures to ensure that appraisals conform to accepted appraisal

standards, as defined in the Uniform Standards of Professional Appraisal Practice, and comply

with the requirements of Subpart G of Regulation Y of the Board of Governors

(12 C.F.R. Part 225, Subpart G) made applicable to state member banks by section 208.50 of

Regulation H of the Board of Governors (12 C.F.R. § 208.50), and the Interagency Appraisal and

Evaluation Guidelines, dated October 27, 1994 (SR 94-55);

(d) the appropriate use of interest reserves;

(e) policies and procedures to minimize and monitor underwriting and

document exceptions;

(f) enhancements to the loan workout process to ensure that workout plans for

problem loans are consistent with the Interagency Guidance on Prudent Commercial Real Estate

Loan Workouts, dated October 30, 2009 (SR 09-7); [page break]

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(g) standards for renewing, extending or modifying existing loans;

(h) standards for the timely movement of loans to non-accrual status;

(i) compensation standards for loan origination officers that include an

assessment of loan performance; and

(j) the appropriate accounting treatment of costs incurred in connection with

the maintenance and sale of collateral.

Asset Improvement

7. The Bank shall not, directly or indirectly, extend, renew, or restructure any credit

to or for the benefit of any borrower, including any related interest of the borrower, whose loans

or other extensions of credit are criticized in the report of the joint examination conducted by the

Reserve Bank and the Pennsylvania Department of Banking that commenced on May 16, 2011

(the "Report of Examination") or in any subsequent report of examination, without the prior

approval of a majority of the full board of directors or a designated committee thereof. The

board of directors or its committee shall document in writing the reasons for the extension of

credit, renewal, or restructuring, specifically certifying that: (i) the Bank's risk management

policies and practices for loan workout activity are acceptable; (ii) the extension of credit is

necessary to improve and protect the Bank's interest in the ultimate collection of the credit

already granted and maximize its potential for collection; (iii) the extension of credit reflects

prudent underwriting based on reasonable repayment terms and is adequately secured; and all

necessary loan documentation has been properly and accurately prepared and filed; (iv) the Bank

has performed a comprehensive credit analysis indicating that the borrower has the willingness

and ability to repay the debt as supported by an adequate workout plan, as necessary; and (v) the

board of directors or its designated committee reasonably believes that the extension of credit [page break]

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will not impair the Bank's interest in obtaining repayment of the already outstanding credit and

that the extension of credit or renewal will be repaid according to its terms. The written

certification shall be made a part of the minutes of the meetings of the board of directors or its

committee, as appropriate, and a copy of the signed certification, together with the credit analysis

and related information that was used in the determination, shall be retained by the Bank in the

borrower's credit file for subsequent supervisory review.

8. (a) Within 60 days of this Agreement, the Bank shall submit to the Reserve

Bank an acceptable written plan designed to improve the Bank's position through repayment,

amortization, liquidation, additional collateral, or other means on each loan, relationship, or other

asset in excess of $750,000, including other real estate owned ("OREO"), that (i) is past due as to

principal or interest more than 90 days as of the date of this Agreement; (ii) is on the Bank's

problem loan list; or (iii) was adversely classified in the Report of Examination.

(b) Within 30 days of the date that any additional loan, relationship, or other

asset in excess of $750,000, including OREO, becomes past due as to principal or interest for

more than 90 days, is on the Bank's problem loan list, or is adversely classified in any

subsequent report of examination of the Bank, the Bank shall submit to the Reserve Bank an

acceptable written plan to improve the Bank's position on such loan or asset.

shall submit a written progress report to the Reserve Bank to update each asset improvement

plan, which shall include, at a minimum, the carrying value of the loan or other asset and

changes in the nature and value of supporting collateral, along with a copy of the Bank's current

problem loan list, a list of all loan renewals and extensions without full collection of interest in

the last quarter, and past due/non-accrual report. [page break]

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Allowance for Loan and Lease Losses

9. (a) The Bank shall, within 30 days from the receipt of any federal or state

report of examination, charge off all assets classified "loss" unless otherwise approved in writing

by the Reserve Bank.

(b) Within 60 days of this Agreement, the Bank shall review and revise its

ALLL methodology consistent with relevant supervisory guidance, including the Interagency

Policy Statements on the Allowance for Loan and Lease Losses, dated July 2, 2001 (SR 01-17

(Sup)) and December 13, 2006 (SR 06-17), and the findings and recommendations regarding the

ALLL set forth in the Report of Examination, and submit a description of the revised

methodology to the Reserve Bank. The revised ALLL methodology shall be designed to

maintain an adequate ALLL and shall address, consider, and include, at a minimum, the

reliability of the Bank's loan grading system, the volume of criticized loans, concentrations of

credit, the current level of past due and nonperforming loans, past loan loss experience,

evaluation of probable losses in the Bank's loan portfolio, including adversely classified loans,

and the impact of market conditions on loan and collateral valuations and collectibility.

Bank an acceptable written program for the maintenance of an adequate ALLL. The program

shall include policies and procedures to ensure adherence to the revised ALLL methodology and

provide for periodic reviews and updates to the ALLL methodology, as appropriate. The

program shall also provide for a review of the ALLL by the board of directors on at least a

quarterly calendar basis. Any deficiency found in the ALLL shall be remedied in the quarter it is

discovered, prior to the filing of the Consolidated Reports of Condition and Income, by

additional provisions. The board of directors shall maintain written documentation of its review, [page break]

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including the factors considered and conclusions reached by the Bank in determining the

adequacy of the ALLL. During the term of this Agreement, the Bank shall submit to the Reserve

Bank, within 30 days after the end of each calendar quarter, a written report regarding the board

of directors' quarterly review of the ALLL and a description of any changes to the methodology

used in determining the amount of ALLL for that quarter.

Capital Plan

10. Within 90 days of this Agreement, Orrstown shall submit to the Reserve Bank an

acceptable written plan to maintain sufficient capital at Orrstown on a consolidated basis, and

Orrstown and the Bank shall submit an acceptable joint written plan to maintain sufficient capital

at the Bank as a separate legal entity on a stand-alone basis. The plans shall, at a minimum,

address, consider, and include:

(a) Orrstown's current and future capital requirements, including compliance

with the Capital Adequacy Guidelines for Bank Holding Companies: Risk-Based Measure and

Tier 1 Leverage Measure, Appendices A and D of Regulation Y of the Board of Governors

(12 C.F.R. Part 225, App. A and D);

(b) the Bank's current and future capital requirements, including compliance

with the Capital Adequacy Guidelines for State Member Banks: Risk-Based Measure and Tier 1

Leverage Measure, Appendices A and B of Regulation H of the Board of Governors (12 C.F.R.

Part 208, App. A and B);

classified assets, concentrations of credit, the adequacy of the ALLL, current and projected asset

growth, projected retained earnings, and anticipated and contingency funding needs; [page break]

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(d) the source and timing of additional funds to fulfill Orrstown's and the

Bank's future capital requirements; and

(e) the requirements of section 225.4(a) of Regulation Y of the Board of

Governors that Orrstown serve as a source of strength to the Bank.

11. Orrstown and the Bank shall notify the Reserve Bank, in writing, no more than 30

days after the end of any calendar quarter in which any of Orrstown's consolidated capital ratios

or the Bank's capital ratios (total risk-based, Tier 1 risk-based, or leverage) fall below the

approved capital plan's minimum ratios. No more than 60 days after the end of any such

calendar quarter, Orrstown and the Bank shall submit an acceptable written plan that details the

steps Orrstown or the Bank, as appropriate, will take to increase Orrstown's or the Bank's capital

ratios to or above the approved capital plan's minimums.

Internal Audit

12. Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank an

acceptable enhanced written internal audit program that shall, at a minimum, provide for:

(a) Improved oversight of all aspects of the audit program by the board of

directors' audit committee;

(b) timely resolution of audit findings and follow-up reviews to ensure

completion of corrective measures; and

and examination findings to the audit committee.

Strategic Plan and Budget [page break]

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13. (a) Within 90 days of this Agreement, the Bank shall submit to the Reserve

Bank a strategic plan to improve the Bank's earnings and a budget for 2012. The written plan

and budget shall include, but not be limited to:

(i) Identification of the major areas where, and means by which, the

board of directors will seek to improve the Bank's operating performance;

(ii) a realistic and comprehensive budget for the remainder of calendar

year 2012, including income statement and balance sheet projections; and

(iii) a description of the operating assumptions that form the basis for,

and adequately support, major projected income, expense, and balance sheet components.

(b) A strategic plan and budget for each calendar year subsequent to 2012

shall be submitted to the Reserve Bank at least 30 days prior to the beginning of that calendar

year.

Liquidity and Funds Management

14. Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank an

acceptable revised written contingency funding plan that, at a minimum, identifies available

sources of liquidity and includes adverse scenario planning.

Interest Rate Risk Management

15. Within 60 days of this Agreement, the Bank shall submit to the Reserve Bank

an acceptable written plan to improve interest rate risk management practices that are

appropriate for the size and complexity of the Bank. The plan shall, at a minimum, include

procedures and controls to ensure that the inputs and assumptions used to model and control

the vulnerability of the Bank's net interest income due to changes in interest rates are accurate

and reflect the Bank's current balance sheet structure and market conditions. [page break]

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Dividends and Payments

16. (a) Orrstown and the Bank shall not declare or pay any dividends without the

prior written approval of the Reserve Bank and the Director of the Division of Banking

Supervision and Regulation of the Board of Governors.

(b) Orrstown shall not take any other form of payment representing a

reduction in capital from the Bank without the prior written approval of the Reserve Bank.

the proposed dividend declaration date. All requests shall contain, at a minimum, current and

projected information, as appropriate, on the parent's capital, earnings, and cash flow; the Bank's

capital, asset quality, earnings and ALLL needs; and identification of the sources of

funds

for the

proposed payment or distribution. For requests to declare or pay dividends, Orrstown and the

Bank, as appropriate, must also demonstrate that the requested declaration or payment of

dividends is consistent with the Board of Governors' Policy Statement on the Payment of Cash

Dividends by State Member Banks and Bank Holding Companies, dated November 14, 1985

(Federal Reserve Regulatory Service, 4-877 at page 4-323).

Debt and Stock Redemption

17. (a) Orrstown shall not, directly or indirectly, incur, increase, or guarantee any

debt without the prior written approval of the Reserve Bank. All requests for prior written

approval shall contain, but not be limited to, a statement regarding the purpose of the debt, the

terms of the debt, and the planned source(s) for debt repayment, and an analysis of the cash flow

resources available to meet such debt repayment.

(b) Orrstown shall not, directly or indirectly, purchase or redeem any shares

of its stock without the prior written approval of the Reserve Bank. [page break]

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Compliance with Laws and Regulations

18. (a) In appointing any new director or senior executive officer, or changing the

responsibilities of any senior executive officer so that the officer would assume a different senior

executive officer position, the Bank shall comply with the notice provisions of section 32 of the

FDI Act (12 U.S.C. § 1831i) and Subpart H of Regulation Y of the Board of Governors

(12 C.F.R. §§ 225.71 et seq.).

(b) The Bank shall comply with the restrictions on indemnification and

severance payments of section 18(k) of the FDI Act (12 U.S.C. § 1828(k)) and Part 359 of the

Federal Deposit Insurance Corporation's regulations (12 C.F.R. Part 359).

Compliance with the Agreement

19. Within 30 days after the end of each calendar quarter following the date of this

Agreement, the boards of directors of Orrstown and the Bank shall jointly submit to the Reserve

Bank written progress reports detailing the form and manner of all actions taken to secure

compliance with this Agreement and the results thereof.

Approval and Implementation of Plans, Programs, and Engagement Letter

20. (a) The Bank, and as applicable, Orrstown, shall submit written plans,

programs, and engagement letter that are acceptable to the Reserve Bank within the applicable

time periods set forth in paragraphs 3(b), 5, 6, 8(a), 9(c), 10, 12, 14, and 15 of this Agreement.

(b) Within 30 days of approval by the Reserve Bank, the Bank, and as

applicable Orrstown, shall adopt the approved plans, programs, and engagement letter. Upon

adoption, the Bank, and as applicable Orrstown, shall promptly implement the approved plans

and programs and thereafter fully comply with them. [page break]

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engagement letter shall not be amended or rescinded without the prior written approval of the

Reserve Bank.

Communications

21. All communications regarding this Agreement shall be sent to:

(a) Mr. Christopher C. Henderson

Assistant Vice President

Federal Reserve Bank of Philadelphia

Ten Independence Mall

Philadelphia, Pennsylvania 19106

(b) Mr. Thomas R. Quinn, Jr.

President and Chief Executive Officer

Orrstown Financial Services, Inc. and Orrstown Bank

77 East King Street

Shippensburg, Pennsylvania 17244

Miscellaneous

22. Notwithstanding any provision of this Agreement, the Reserve Bank may, in its

sole discretion, grant written extensions of time to Orrstown and the Bank to comply with any

provision of this Agreement.

23. The provisions of this Agreement shall be binding upon Orrstown and the Bank

and their institution-affiliated parties, in their capacities as such, and their successors and assigns.

24. Each provision of this Agreement shall remain effective and enforceable until

stayed, modified, terminated, or suspended in writing by the Reserve Bank.

25. The provisions of this Agreement shall not bar, estop, or otherwise prevent the

Board of Governors, the Reserve Bank, or any other federal or state agency from taking any

other action affecting Orrstown and the Bank or any of their current or former institution-

affiliated parties and their successors and assigns. [page break]

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26. Pursuant to section 50 of the FDI Act (12 U.S.C. § 1831aa), this Agreement is

enforceable by the Board of Governors under section 8 of the FDI Act (12 U.S.C. § 1818).

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of

the

22nd

day of March, 2012.

ORRSTOWN FINANCIAL

SERVICES, INC.

Signed by: Thomas R. Quinn, Jr.

President and Chief Executive Officer

FEDERAL RESERVE BANK OF

PHILADELPHIA

Signed by: Christopher C. Henderson

Assistant Vice President

ORRSTOWN BANK

Signed by: Thomas R. Quinn, Jr.

President and Chief Executive Officer