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Table of Contents
ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

(Mark One)    

ý

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year-ended December 31, 2015

OR

o

 

TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                             to                            

Commission file number 0-11783

ACNB CORPORATION
(Exact name of registrant as specified in its charter)

Pennsylvania
(State or other jurisdiction of
incorporation or organization)
  23-2233457
(I.R.S. Employer
Identification No.)

16 Lincoln Square, Gettysburg, Pennsylvania
(Address of principal executive offices)

 

17325
(Zip Code)

Registrant's telephone number, including area code: (717) 334-3161

Securities registered pursuant to Section 12(b) of the Act:

Title of each class   Name of each exchange on which registered

Common Stock, $2.50 par value per share

  The NASDAQ Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act: None

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

         Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check One)

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o   Smaller reporting company o

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No ý

         The aggregate market value of the voting stock held by nonaffiliates of the registrant at June 30, 2015, was approximately $122,345,128.

         The number of shares of the registrant's common stock outstanding on March 4, 2016, was 6,039,724.

         Documents Incorporated by Reference

         Portions of the registrant's 2016 definitive Proxy Statement are incorporated by reference into Part III of this report.

   


Table of Contents


ACNB CORPORATION

Table of Contents

 
   
  Page  

Part I

 

 

       

Item 1.

 

Business

    3  

           

Item 1A.

 

Risk Factors

    14  

           

Item 1B.

 

Unresolved Staff Comments

    26  

           

Item 2.

 

Properties

    26  

           

Item 3.

 

Legal Proceedings

    26  

           

Item 4.

 

Mine Safety Disclosures

    26  

           

Part II

 

 

       

           

Item 5.

 

Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    27  

           

Item 6.

 

Selected Financial Data

    30  

           

Item 7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

    31  

           

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

    55  

           

Item 8.

 

Financial Statements and Supplementary Data

    57  

           

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    108  

           

Item 9A.

 

Controls and Procedures

    108  

           

Item 9B.

 

Other Information

    110  

           

Part III

 

 

       

           

Item 10.

 

Directors, Executive Officers and Corporate Governance

    111  

           

Item 11.

 

Executive Compensation

    111  

           

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    111  

           

Item 13.

 

Certain Relationships and Related Transactions and Director Independence

    112  

           

Item 14.

 

Principal Accountant Fees and Services

    112  

           

Part IV

 

 

       

           

Item 15.

 

Exhibits and Financial Statement Schedules

    112  

           

 

Signatures

    116  

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PART I

FORWARD-LOOKING STATEMENTS

        In addition to historical information, this Form 10-K contains forward-looking statements. Examples of forward-looking statements include, but are not limited to, (a) projections or statements regarding future earnings, expenses, net interest income, other income, earnings or loss per share, asset mix and quality, growth prospects, capital structure, and other financial terms, (b) statements of plans and objectives of management or the Board of Directors, and (c) statements of assumptions, such as economic conditions in the Corporation's market areas. Such forward-looking statements can be identified by the use of forward-looking terminology such as "believes", "expects", "may", "intends", "will", "should", "anticipates", or the negative of any of the foregoing or other variations thereon or comparable terminology, or by discussion of strategy. Forward-looking statements are subject to certain risks and uncertainties such as local economic conditions, competitive factors, and regulatory limitations. Actual results may differ materially from those projected in the forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the following: the effects of economic deterioration and the prolonged economic malaise on current customers, specifically the effect of the economy on loan customers' ability to repay loans; the effects of governmental and fiscal policies, as well as legislative and regulatory changes; the effects of new laws and regulations, specifically the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act; impacts of the new capital and liquidity requirements of the Basel III standards; the effects of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Financial Accounting Standards Board and other accounting standard setters; ineffectiveness of the business strategy due to changes in current or future market conditions; future actions or inactions of the United States government, including the effects of short- and long-term federal budget and tax negotiations and a failure to increase the government debt limit or a prolonged shutdown of the federal government; the effects of competition, and of changes in laws and regulations on competition, including industry consolidation and development of competing financial products and services; the risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities, and interest rate protection agreements, as well as interest rate risks; difficulties in acquisitions and integrating and operating acquired business operations, including information technology difficulties; challenges in establishing and maintaining operations in new markets; the effects of technology changes; volatilities in the securities markets; slow economic conditions; the failure of assumptions underlying the establishment of reserves for loan losses and estimations of values of collateral and various financial assets and liabilities; acts of war or terrorism; disruption of credit and equity markets; the ability to manage current levels of impaired assets; the loss of certain key officers; the ability to maintain the value and image of ACNB's brand and protect ACNB's intellectual property rights; continued relationships with major customers; and, potential impacts to ACNB from continually evolving cybersecurity and other technological risks and attacks, including additional costs, reputational damage, regulatory penalties, and financial losses. We caution readers not to place undue reliance on these forward-looking statements. They only reflect management's analysis as of this date. The Corporation does not revise or update these forward-looking statements to reflect events or changed circumstances. Please carefully review the risk factors described in other documents the Corporation files from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

ITEM 1—BUSINESS

ACNB CORPORATION

        ACNB Corporation (the Corporation or ACNB) is a $1.1 billion financial holding company headquartered in Gettysburg, Pennsylvania. Through its banking and nonbanking subsidiaries, ACNB

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provides a full range of banking and financial services to individuals and businesses, including commercial and retail banking, trust and investment management, and insurance. ACNB's banking operations are conducted through its primary operating subsidiary, ACNB Bank, with twenty-one retail banking offices in Adams, Cumberland, Franklin and York Counties, Pennsylvania, as well as one loan production office in York County, Pennsylvania, as of December 31, 2015. The Corporation was formed in 1982, then became the holding company for Adams County National Bank (now ACNB Bank) in 1983.

        ACNB's major source of operating funds is dividends that it receives from its subsidiaries. ACNB's expenses consist principally of losses from low-income housing investments and interest paid on a term loan used to purchase RIG. Dividends that ACNB pays to stockholders consist of dividends declared and paid to ACNB by the subsidiary bank.

        ACNB and its subsidiaries are not dependent upon a single customer or a small number of customers, the loss of which would have a material adverse effect on the Corporation. ACNB does not depend on foreign sources of funds, nor does it make foreign loans.

        The common stock of ACNB is listed on The NASDAQ Capital Market under the symbol ACNB.

BANKING SUBSIDIARY

ACNB Bank

        ACNB Bank is a full-service commercial bank operating under charter from the Pennsylvania Department of Banking and Securities. The Bank's principal market area is Adams County, Pennsylvania, which is located in southcentral Pennsylvania. Adams County depends on agriculture, industry and tourism to provide employment for its residents. No single sector dominates the county's economy. At December 31, 2015, ACNB Bank had total assets of $1,135,000,000, total gross loans of $853,000,000, total deposits of $918,000,000, and total equity capital of $96,000,000. In October 2010, the Bank converted from a national banking association to a Pennsylvania state-chartered bank and trust company.

        The main office of the Bank is located at 16 Lincoln Square, Gettysburg, Pennsylvania. In addition to its main office, as of December 31, 2015, the Bank had thirteen branches in Adams County, four branches in York County, one branch in Cumberland County, and two branches in Franklin County, as well as a loan production office in York County, Pennsylvania. ACNB Bank's service delivery channels for its customers also include the ATM network, Customer Contact Center, and Online, Telephone and Mobile Banking. The Bank is subject to regulation and periodic examination by the Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation (FDIC). The FDIC, as provided by law, insures the Bank's deposits.

        Commercial lending includes commercial mortgages, real estate development and construction loans, accounts receivable and inventory financing, and agricultural and governmental loans. Consumer lending programs include home equity loans and lines of credit, automobile and recreational vehicle loans, manufactured housing loans, and personal lines of credit. Mortgage lending programs include personal residential mortgages, residential construction loans, and investment mortgage loans.

        A trust is a legal fiduciary agreement whereby the ACNB Bank Trust Department is named as trustee of financial assets. As trustee, the Trust Department invests, protects, manages and distributes financial assets as defined in the agreement. Estate settlement governed by the last will and testament of an individual constitutes another part of the Trust Department business. One purpose of having a will is to name an executor to settle the estate. ACNB Bank has the knowledge and expertise to act as executor. Other services include, but are not limited to, those related to testamentary trusts, life insurance trusts, charitable remainder trusts, guardianships, powers of attorney, custodial accounts, and

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investment management and advisory accounts. Total trust assets under management were $178,000,000 at December 31, 2015.

NONBANKING SUBSIDIARIES

Russell Insurance Group, Inc.

        ACNB Corporation's wholly-owned subsidiary, Russell Insurance Group, Inc. (RIG), is a full-service insurance agency that offers a broad range of property and casualty, life, and health insurance to both commercial and individual clients. Based in Westminster, Maryland, RIG has served the needs of its clients since its founding as an independent insurance agency by Frank C. Russell, Jr. in 1978. RIG operates a second office location in Germantown, Maryland. Total assets of RIG as of December 31, 2015, were $9,819,000.

        RIG is managed separately from the banking and related financial services that the Corporation offers and is reported as a separate segment. Financial information on this segment is included in the Notes to Consolidated Financial Statements, Note S—"Segment and Related Information".

BankersRe Insurance Group, SPC

        BankersRe Insurance Group, SPC (formerly Pennbanks Insurance Co., SPC) was organized in 2000 and held an unrestricted Class "B" Insurer's License under Cayman Islands Insurance Law. The segregated portfolio was novated to a third party during 2012. This entity was not material to ACNB's financial condition or results of operations.

MARKET AREA ECONOMIC FEATURES AND CONDITIONS

        ACNB Corporation, headquartered in Gettysburg, Pennsylvania, is the financial holding company for the wholly-owned subsidiaries of ACNB Bank, Gettysburg, Pennsylvania, and Russell Insurance Group, Inc., Westminster, Maryland. ACNB Bank serves its marketplace via a network of twenty-one retail banking offices located throughout Adams County, Pennsylvania, as well as in Dillsburg, Hanover and Spring Grove, York County, Pennsylvania, in Newville, Cumberland County, Pennsylvania, and in Chambersburg, Franklin County, Pennsylvania. In addition, the Bank operates a loan office in York, York County, Pennsylvania. Russell Insurance Group, Inc. offers a broad range of commercial and personal insurance lines with licenses in 42 states, including Pennsylvania and Maryland, through offices in Westminster, Carroll County, and Germantown, Montgomery County, Maryland. Accordingly, ACNB Corporation's major operations are in the more rural areas of the Harrisburg-Carlisle MSA and the York-Hanover MSA, along with all of Adams County, Pennsylvania, and parts of Franklin County, Pennsylvania. Approximately 60% of the population resides in areas designated rural. Major types of employers include those focused on manufacturing, education, healthcare, agriculture, tourism, and transportation/warehousing, as well as local governments. A material amount of land surrounding Gettysburg is under the control of the National Park Service, limiting certain types of development. Unemployment figures in the bank's market recently, and historically, have been better than those for Pennsylvania and the United States. Per capita and household incomes are generally under Pennsylvania averages.

COMPETITION

        The financial services industry in ACNB's market area is highly competitive, including competition for similar products and services from commercial banks, credit unions, finance and mortgage companies, and other nonbank providers of financial services. Several of ACNB's competitors have legal lending limits that exceed those of ACNB's subsidiary bank, as well as funding sources in the capital markets that exceed ACNB's availability. The high level of competition has resulted from changes in the legal and regulatory environment, as well as from the economic climate, customer

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expectations, and service alternatives via the Internet. There are 80 publicly-traded banks in Pennsylvania, 18 have higher market share than ACNB. In addition, there are 18 thrift institutions and numerous credit unions in Pennsylvania, some with higher market share. Banks, thrifts, credit unions, and other financial service providers in northern Maryland are also competition.

SUPERVISION AND REGULATION

Regulation of Bank Holding Company and Subsidiaries

        BANK HOLDING COMPANY ACT OF 1956—ACNB is a financial holding company and is subject to the regulations of the Board of Governors of the Federal Reserve System under the Bank Holding Company Act of 1956. Bank holding companies are required to file periodic reports with and are subject to examination by the Federal Reserve. The Federal Reserve has issued regulations under the Bank Holding Company Act that require a financial holding company to serve as a source of financial and managerial strength to its subsidiary bank. As a result, the Federal Reserve may require ACNB to stand ready to use its resources to provide adequate capital funds to the Bank during periods of financial stress or adversity.

        In addition, the Federal Reserve may require a financial holding company to end a nonbanking business if the nonbanking business constitutes a serious risk to the financial soundness and stability of any banking subsidiary of the financial holding company.

        The Bank Holding Company Act prohibits ACNB from acquiring direct or indirect control of more than 5% of the outstanding voting stock of any bank, or substantially all of the assets of any bank, or merging with another bank holding company, without the prior approval of the Federal Reserve. The Bank Holding Company Act allows interstate bank acquisitions and interstate branching by acquisition and consolidation in those states that had not elected to opt out by the required deadline. The Pennsylvania Department of Banking and Securities also must approve any similar consolidation. Pennsylvania law permits Pennsylvania financial holding companies to control an unlimited number of banks.

        Further, the Bank Holding Company Act restricts ACNB's nonbanking activities to those that are determined by the Federal Reserve Board to be financial in nature, incidental to such financial activity, or complementary to a financial activity. The Bank Holding Company Act does not place territorial restrictions on the activities of nonbanking subsidiaries of financial holding companies.

        GRAMM-LEACH-BLILEY ACT OF 1999 (GLBA)—The Gramm-Leach-Bliley Act of 1999 eliminated many of the restrictions placed on the activities of bank holding companies that become financial holding companies. Among other things, the Gramm-Leach-Bliley Act repealed certain Glass-Steagall Act restrictions on affiliations between banks and securities firms, and amended the Bank Holding Company Act to permit bank holding companies that are financial holding companies to engage in activities, and acquire companies engaged in activities, that are: financial in nature (including insurance underwriting, insurance company portfolio investment, financial advisory, securities underwriting, dealing and market-making, and merchant banking activities); incidental to financial activities; or, complementary to financial activities if the Federal Reserve determines that they pose no substantial risk to the safety or soundness of depository institutions or the financial system in general.

        REGULATION W—Transactions between a bank and its "affiliates" are quantitatively and qualitatively restricted under the Federal Reserve Act. The Federal Deposit Insurance Act applies Sections 23A and 23B to insured nonmember banks in the same manner and to the same extent as if they were members of the Federal Reserve System. The Federal Reserve has also issued Regulation W, which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act, and interpretative guidance with respect to affiliate transactions. Regulation W incorporates the exemption from the affiliate transaction rules, but expands the exemption to cover the purchase of any type of

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loan or extension of credit from an affiliate. Affiliates of a bank include, among other entities, the bank's holding company and companies that are under common control with the bank. ACNB Corporation and Russell Insurance Group, Inc. are considered to be affiliates of ACNB Bank.

        USA PATRIOT ACT OF 2001—In October 2001, the USA Patriot Act of 2001 was enacted in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C., which occurred on September 11, 2001. The Patriot Act is intended to strengthen U.S. law enforcement's and the intelligence communities' abilities to work cohesively to combat terrorism on a variety of fronts. The impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

        SARBANES-OXLEY ACT OF 2002 (SOA)—In 2002, the Sarbanes-Oxley Act of 2002 became law. The stated goals of the SOA are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly-traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities law.

        The SOA is the most far-reaching U.S. securities legislation enacted in some time. The SOA generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, or the Exchange Act.

        The SOA includes very specific additional disclosure requirements and corporate governance rules, as well as requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance, and other related rules. The SOA represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.

        The SOA addresses, among other matters:

    Audit committees for all reporting companies;

    Certification of financial statements by the chief executive officer and the chief financial officer;

    The forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer's securities by directors and senior officers in the twelve-month period following initial publication of any financial statements that later require restatement;

    A prohibition on insider trading during pension plan blackout periods;

    Disclosure of off-balance sheet transactions;

    A prohibition on personal loans to directors and officers;

    Expedited filing requirements for SEC Forms 4;

    Disclosure of a code of ethics and filing an SEC Form 8-K for a change or waiver of such code;

    "Real time" filing of periodic reports;

    Formation of a public accounting oversight board;

    Auditor independence; and,

    Increased criminal penalties for violations of securities laws.

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        The SEC has been delegated the task of enacting rules to implement various provisions of the SOA with respect to, among other matters, disclosure in periodic filings pursuant to the Exchange Act.

        AMERICAN JOBS CREATION ACT OF 2004—In 2004, the American Jobs Creation Act was enacted as the first major corporate tax act in years. The act addresses a number of areas of corporate taxation including executive deferred compensation restrictions. The impact of the act on ACNB is not material.

        BANK SECRECY ACT (BSA)—Under the Bank Secrecy Act, banks and other financial institutions are required to report to the Internal Revenue Service currency transactions of more than $10,000 or multiple transactions of which a bank is aware in any one day that aggregate in excess of $10,000 and to report suspicious transactions under specified criteria. Civil and criminal penalties are provided under the BSA for failure to file a required report, for failure to supply information required by the BSA, or for filing a false or fraudulent report.

        DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT (DODD-FRANK)—In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law. Dodd-Frank was intended to effect a fundamental restructuring of federal banking regulation. Among other things, Dodd-Frank created the Financial Stability Oversight Council to identify systemic risks in the financial system and gives federal regulators new authority to take control of and liquidate financial firms. Dodd-Frank additionally created a new independent federal regulator to administer federal consumer protection laws. Dodd-Frank has had and will continue to have a significant impact on ACNB's business operations as its provisions take effect. It is expected that, as various implementing rules and regulations are released, they will increase ACNB's operating and compliance costs and could increase the Bank's interest expense. Among the provisions that are likely to affect ACNB are the following:

Holding Company Capital Requirements

        Dodd-Frank requires the Federal Reserve to apply consolidated capital requirements to bank holding companies that are no less stringent than those currently applied to depository institutions. Under these standards, trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010, by a bank holding company with less than $15 billion in assets as of December 31, 2009. Dodd-Frank additionally requires that bank regulators issue countercyclical capital requirements so that the required amount of capital increases in times of economic expansion, consistent with safety and soundness. For further information, please refer to Regulatory Capital Changes in Management's Discussion and Analysis.

Deposit Insurance

        Dodd-Frank permanently increased the maximum deposit insurance amount for banks, savings institutions and credit unions to $250,000 per depositor. Dodd-Frank also broadens the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. Dodd-Frank requires the FDIC to increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by 2020 and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds. Dodd-Frank also eliminated the federal statutory prohibition against the payment of interest on business checking accounts.

Corporate Governance

        Dodd-Frank requires publicly-traded companies to give stockholders a non-binding vote on executive compensation at least every three years, a non-binding vote regarding the frequency of the vote on executive compensation at least every six years, and a non-binding vote on "golden parachute"

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payments in connection with approvals of mergers and acquisitions unless previously voted on by stockholders. The SEC has finalized the rules implementing these requirements which took effect on January 21, 2011. Additionally, Dodd-Frank directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion, regardless of whether the company is publicly traded. Dodd-Frank also gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.

Prohibition Against Charter Conversions of Troubled Institutions

        Dodd-Frank prohibits a depository institution from converting from a state to a federal charter, or vice versa, while it is the subject of a cease and desist order or other formal enforcement action or a memorandum of understanding with respect to a significant supervisory matter unless the appropriate federal banking agency gives notice of the conversion to the federal or state authority that issued the enforcement action and that agency does not object within 30 days. The notice must include a plan to address the significant supervisory matter. The converting institution must also file a copy of the conversion application with its current federal regulator, which must notify the resulting federal regulator of any ongoing supervisory or investigative proceedings that are likely to result in an enforcement action and provide access to all supervisory and investigative information relating thereto.

Interstate Branching

        Dodd-Frank authorizes national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted. Previously, banks could only establish branches in other states if the host state expressly permitted out-of-state banks to establish branches in that state. Accordingly, banks are able to enter new markets more freely.

Limits on Interstate Acquisitions and Mergers

        Dodd-Frank precludes a bank holding company from engaging in an interstate acquisition—the acquisition of a bank outside its home state—unless the bank holding company is both well capitalized and well managed. Furthermore, a bank may not engage in an interstate merger with another bank headquartered in another state unless the surviving institution will be well capitalized and well managed. The previous standard in both cases was adequately capitalized and adequately managed.

Limits on Interchange Fees

        Dodd-Frank amended the Electronic Fund Transfer Act to, among other things, give the Federal Reserve the authority to establish rules regarding interchange fees charged for electronic debit transactions by payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost of a transaction to the issuer.

Consumer Financial Protection Bureau

        Dodd-Frank created the independent federal agency called the Consumer Financial Protection Bureau (CFPB), which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act, Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act, and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the CFPB, but continue to be examined and supervised by federal banking regulators for consumer compliance

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purposes. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. Dodd-Frank authorizes the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower's ability to repay. In addition, Dodd-Frank allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a "qualified mortgage" as defined by the CFPB. Dodd-Frank permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

        ABILITY-TO-REPAY AND QUALIFIED MORTGAGE RULE—Pursuant to Dodd-Frank as highlighted above, the CFPB issued a final rule on January 10, 2013 (effective on January 10, 2014), amending Regulation Z as implemented by the Truth in Lending Act, requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. Mortgage lenders are required to determine the consumers' ability to repay in one of two ways. The first alternative requires the mortgage lender to consider the following eight underwriting factors when making the credit decision: (1) current or reasonably expected income or assets; (2) current employment status; (3) the monthly payment on the covered transaction; (4) the monthly payment on any simultaneous loan; (5) the monthly payment for mortgage-related obligations; (6) current debt obligations, alimony, and child support; (7) the monthly debt-to-income ratio or residual income; and, (8) credit history. Alternatively, the mortgage lender can originate "qualified mortgages", which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In general, a "qualified mortgage" is a mortgage loan without negative amortization, interest-only payments, balloon payments, or terms exceeding 30 years. In addition, to be a qualified mortgage, the points and fees paid by a consumer cannot exceed 3% of the total loan amount. Loans which meet these criteria will be considered qualified mortgages and, as a result, generally protect lenders from fines or litigation in the event of foreclosure. Qualified mortgages that are "higher-priced" (e.g., subprime loans) garner a rebuttable presumption of compliance with the ability-to-repay rules, while qualified mortgages that are not "higher-priced" (e.g., prime loans) are given a safe harbor of compliance. The impact of the final rule, and the subsequent amendments thereto, on the Corporation's lending activities and the Corporation's statements of income or condition has had little or no impact; however, management will continue to monitor the implementation of the rule for any potential effects on the Corporation's business.

        FEDERAL DEPOSIT INSURANCE CORPORATION ACT OF 1991—Under the Federal Deposit Insurance Corporation Act of 1991, any depository institution, including the subsidiary bank, is prohibited from paying any dividends, making other distributions or paying any management fees if, after such payment, it would fail to satisfy the minimum capital requirement.

        FEDERAL RESERVE ACT—A subsidiary bank of a bank holding company is subject to certain restrictions and reporting requirements imposed by the Federal Reserve Act, including:

    Extensions of credit to the bank holding company, its subsidiaries, or principal shareholders;

    Investments in the stock or other securities of the bank holding company or its subsidiaries; and,

    Taking such stock or securities as collateral for loans.

        COMMUNITY REINVESTMENT ACT OF 1977 (CRA)—Under the Community Reinvestment Act of 1977, the FDIC is required to assess the record of all financial institutions regulated by it to determine if these institutions are meeting the credit needs of the community, including low- and moderate-income neighborhoods, which they serve and to take this record into account in its evaluation of any application made by any of such institutions for, among other things, approval of a branch or other deposit facility, office relocation, merger, or acquisition of bank shares. The Financial Institutions

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Reform, Recovery and Enforcement Act of 1989 amended the CRA to require, among other things, that the FDIC make publicly available the evaluation of a bank's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods. This evaluation includes a descriptive rating like "outstanding", "satisfactory", "needs to improve" or "substantial noncompliance" and a statement describing the basis for the rating. These ratings are publicly disclosed.

        FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 (FDICIA)—The Federal Deposit Insurance Corporation Improvement Act requires that institutions be classified, based on their risk-based capital ratios into one of five defined categories, as follows and as illustrated below: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, or critically undercapitalized.

 
  Total
Risk-Based
Ratio
  Tier 1
Risk-Based
Ratio
  Tier 1
Leverage
Ratio
  Under a
Capital
Order or
Directive

Capital Category

                     

Well capitalized

    ³10.0 %   ³6.0 %   ³5.0 % NO

Adequately capitalized

    ³8.0 %   ³4.0 %   ³4.0 %*  

Undercapitalized

    <8.0 %   <4.0 %   <4.0 %*  

Significantly undercapitalized

    <6.0 %   <3.0 %   <3.0 %  

Critically undercapitalized

                <2.0 %  

*
3.0% for those banks having the highest available regulatory rating.

        In the event an institution's capital deteriorates to the undercapitalized category or below, FDICIA prescribes an increasing amount of regulatory intervention, including the institution of a capital restoration plan and a guarantee of the plan by a parent institution and the placement of a hold on increases in assets, number of branches, or lines of business. If capital reaches the significantly or critically undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management, and, in critically undercapitalized situations, appointment of a receiver. For well capitalized institutions, FDICIA provides authority for regulatory intervention when the institution is deemed to be engaging in unsafe or unsound practices or receives a less than satisfactory examination report rating for asset quality, management, earnings or liquidity. All but well capitalized institutions are prohibited from accepting brokered deposits without prior regulatory approval. Under FDICIA, financial institutions are subject to increased regulatory scrutiny and must comply with certain operational, managerial and compensation standards established by Federal Reserve Board regulations.

        In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by Dodd-Frank. The phase-in period for community banking organizations began January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) began compliance on January 1, 2014. The final rules call for the following capital requirements:

    A minimum ratio of common tier 1 capital to risk-weighted assets of 4.5%.

    A minimum ratio of tier 1 capital to risk-weighted assets of 6%.

    A minimum ratio of total capital to risk-weighted assets of 8%.

    A minimum leverage ratio of 4%.

        In addition, the final rules establish a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. If a banking organization fails to hold capital above the minimum capital ratios and the capital conservation buffer, it will be subject to

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certain restrictions on capital distributions and discretionary bonus payments. The phase-in period for the capital conservation and countercyclical capital buffers for all banking organizations will begin on January 1, 2016.

        A more in-depth discussion of how these new capital rules will affect ACNB Corporation appears under Item 7 (Management's Discussion and Analysis of Financial Condition and results of Operations).

        JUMPSTART OUR BUSINESS STARTUPS (JOBS) ACT—In 2012, the JOBS Act became law. The JOBS Act is aimed at facilitating capital raising by smaller companies and banks and bank holding companies by implementing the following changes:

    Raising the threshold requiring registration under the Securities Exchange Act of 1934 (Exchange Act) for banks and bank holding companies from 500 to 2,000 holders of record;

    Raising the threshold for triggering deregistration under the Exchange Act for banks and bank holding companies from 300 to 1,200 holders of record;

    Raising the limit for Regulation A offerings from $5 million to $50 million per year and exempting some Regulation A offerings from state blue sky laws;

    Permitting advertising and general solicitation in Rule 506 and Rule 144A offerings;

    Allowing private companies to use "crowd funding" to raise up to $1 million in any 12-month period, subject to certain conditions; and,

    Creating a new category of issuer, called an "Emerging Growth Company", for companies with less than $1 billion in annual gross revenue, which will benefit from certain changes that reduce the cost and burden of carrying out an equity initial public offering (IPO) and complying with public company reporting obligations for up to five years.

While the JOBS Act was not expected to have any immediate application to the Corporation, and since 2012 has had no material impact, management will continue to monitor the implementation rules for potential effects which might benefit the Corporation.

Dividends

        ACNB is a legal entity separate and distinct from its subsidiary bank. ACNB's revenues, on a parent company only basis, result primarily from dividends paid to the Corporation by its subsidiaries. Federal and state laws regulate the payment of dividends by ACNB's subsidiary bank. For further information, please refer to Regulation of Bank below.

Regulation of Bank

        The operations of the subsidiary bank are subject to statutes applicable to banks chartered under the banking laws of Pennsylvania, to state nonmember banks of the Federal Reserve, and to banks whose deposits are insured by the FDIC. The subsidiary bank's operations are also subject to regulations of the Pennsylvania Department of Banking and Securities, Federal Reserve, and FDIC.

        The Pennsylvania Department of Banking and Securities, which has primary supervisory authority over banks chartered in Pennsylvania, regularly examines banks in such areas as reserves, loans, investments, management practices, and other aspects of operations. The subsidiary bank is also subject to examination by the FDIC for safety and soundness, as well as consumer compliance. These examinations are designed for the protection of the subsidiary bank's depositors rather than ACNB's stockholders. The subsidiary bank must file quarterly and annual reports to the Federal Financial Institutions Examination Council, or FFIEC.

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Monetary and Fiscal Policy

        ACNB and its subsidiary bank are affected by the monetary and fiscal policies of government agencies, including the Federal Reserve and FDIC. Through open market securities transactions and changes in its discount rate and reserve requirements, the Board of Governors of the Federal Reserve exerts considerable influence over the cost and availability of funds for lending and investment. The nature and impact of monetary and fiscal policies on future business and earnings of ACNB cannot be predicted at this time. From time to time, various federal and state legislation is proposed that could result in additional regulation of, and restrictions on, the business of ACNB and the subsidiary bank, or otherwise change the business environment. Management cannot predict whether any of this legislation will have a material effect on the business of ACNB.

ACCOUNTING POLICY DISCLOSURE

        Disclosure of the Corporation's significant accounting policies is included in Note A—"Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements. Some of these policies are particularly sensitive requiring significant judgments, estimates and assumptions to be made by management. Additional information is contained in Management's Discussion and Analysis for the most sensitive of these issues, including the provision and allowance for loan losses which is located in Note D—"Loans" in the Notes to Consolidated Financial Statements.

        Management, in determining the allowance for loan losses, makes significant judgments. Consideration is given to a variety of factors in establishing this estimate. In estimating the allowance for loan losses, management considers current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan review, financial and managerial strengths of borrowers, adequacy of collateral if collateral dependent or present value of future cash flows, and other relevant factors.

STATISTICAL DISCLOSURES

        The following statistical disclosures are included in Management's Discussion and Analysis, Item 7 hereof, and are incorporated by reference in this Item 1:

    Interest Rate Sensitivity Analysis

    Interest Income and Expense, Volume and Rate Analysis

    Investment Portfolio

    Loan Maturity and Interest Rate Sensitivity

    Loan Portfolio

    Allocation of Allowance for Loan Losses

    Deposits

    Short-Term Borrowings

AVAILABLE INFORMATION

        The Corporation's reports, proxy statements, and other information are available for inspection and copying at the SEC Office of Investor Education and Advocacy at 100 F Street, N.E., Washington, DC 20549, at prescribed rates. The public may obtain information from the Office of Investor Education and Advocacy by calling the Commission at 1-800-SEC-0330. The Corporation is an electronic filer with the Commission. The Commission maintains a website that contains reports, proxy

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and information statements, and other information regarding registrants that file electronically with the Commission. The address of the Commission's website is http://www.sec.gov.

        Upon a shareholder's written request, a copy of the Corporation's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, as required to be filed with the SEC pursuant to Securities Exchange Act Rule 13a-1, may be obtained, without charge, from Lynda L. Glass, Executive Vice President, Secretary & Chief Governance Officer, ACNB Corporation, 16 Lincoln Square, P.O. Box 3129, Gettysburg, PA 17325, or visit our website at http://www.acnb.com and click on "ACNB Corporation".

EMPLOYEES

        As of December 31, 2015, ACNB had 296 full-time equivalent employees. None of these employees are represented by a collective bargaining agreement, and ACNB believes it enjoys good relations with its personnel.

ITEM 1A—RISK FACTORS

ACNB IS SUBJECT TO INTEREST RATE RISK.

        ACNB's earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets, such as loans and securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond ACNB's control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, could influence not only the amount of interest ACNB receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) ACNB's ability to originate loans and obtain deposits, (ii) the fair value of ACNB's financial assets and liabilities, and (iii) the average duration of ACNB's mortgage-backed securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, ACNB's net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.

        Although management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on ACNB's results of operations, any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on ACNB's financial condition and results of operations.

ACNB IS SUBJECT TO CREDIT RISK.

        As of December 31, 2015, approximately 49% of ACNB's loan portfolio consisted of commercial and industrial, construction, and commercial real estate loans. These types of loans are generally viewed as having more risk of default than residential real estate loans or consumer loans. These types of loans are also typically larger than residential real estate loans and consumer loans. Because ACNB's loan portfolio contains a significant number of commercial and industrial, construction, and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in non-performing loans. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for loan losses, and an increase in loan charge-offs, all of which could have a material adverse effect on ACNB's financial condition and results of operations.

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ACNB'S ALLOWANCE FOR LOAN LOSSES MAY BE INSUFFICIENT.

        ACNB maintains an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, that represents management's best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management's continuing evaluation of the following: industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions; and, unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires ACNB to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of ACNB's control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review ACNB's allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. Further, if charge-offs in future periods exceed the allowance for loan losses, ACNB will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income, and possibly capital, and may have a material adverse effect on ACNB's financial condition and results of operations.

COMPETITION FROM OTHER FINANCIAL INSTITUTIONS MAY ADVERSELY AFFECT ACNB'S PROFITABILITY.

        ACNB's banking subsidiary faces substantial competition in originating both commercial and consumer loans. This competition comes principally from other banks, credit unions, mortgage banking companies, and other lenders. Many of its competitors enjoy advantages, including greater financial resources with higher lending limits, wider geographic presence, more branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, and lower origination and operating costs. This competition could reduce the Corporation's net income by decreasing the number and size of loans that its banking subsidiary originates and the interest rates it may charge on these loans.

        In attracting business and consumer deposits, its banking subsidiary faces substantial competition from other insured depository institutions such as banks, savings institutions, and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of ACNB's competitors enjoy advantages, including greater financial resources, wider geographic presence, more aggressive marketing campaigns, better brand recognition, more branch office locations, the ability to offer a wider array of services or more favorable pricing alternatives, and lower origination and operating costs. These competitors may offer higher interest rates than ACNB, which could decrease the deposits that it attracts or require it to increase its rates to retain existing deposits or attract new deposits. Increased deposit competition could adversely affect the subsidiary's ability to generate the funds necessary for lending operations. As a result, it may need to seek other sources of funds that may be more expensive to obtain and could increase its cost of funds.

        ACNB's banking subsidiary also competes with nonbank providers of financial services, such as brokerage firms, consumer finance companies, credit unions, insurance agencies, and governmental organizations which may offer more favorable terms. Some of its nonbank competitors are not subject to the same extensive regulations that govern ACNB's banking operations. As a result, such nonbank competitors may have advantages over ACNB's banking subsidiary in providing certain products and services. This competition may reduce or limit ACNB's margins on banking services, reduce its market share, and adversely affect its earnings and financial condition.

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THE BASEL III CAPITAL REQUIREMENTS MAY REQUIRE ACNB TO MAINTAIN HIGHER LEVELS OF CAPITAL, WHICH COULD REDUCE ACNB'S PROFITABILITY.

        Basel III targets higher levels of base capital, certain capital buffers, and a migration toward common equity as the key source of regulatory capital. Although the new capital requirements are phased in over the next decade and may change substantially before final implementation, Basel III signals a growing effort by domestic and international bank regulatory agencies to require financial institutions, including depository institutions, to maintain higher levels of capital. The direction of the Basel III implementation activities or other regulatory viewpoints could require additional capital to support our business risk profile prior to final implementation of the Basel III standards. If ACNB and the subsidiary bank are required to maintain higher levels of capital, ACNB and the subsidiary bank may have fewer opportunities to invest capital into interest-earning assets, which could limit the profitable business operations available to ACNB and the subsidiary bank and adversely impact ACNB's financial condition and results of operations.

THE CORPORATION'S OPERATIONS OF ITS BUSINESS, INCLUDING ITS TRANSACTIONS WITH CUSTOMERS, ARE INCREASINGLY DONE VIA ELECTRONIC MEANS, AND THIS HAS INCREASED ITS RISKS RELATED TO CYBERSECURITY.

        The Corporation is exposed to the risk of cyber-attacks in the normal course of business. In addition, the Corporation is exposed to cyber-attacks on vendors and merchants that affect the Corporation and its customers. In general, cyber incidents can result from deliberate attacks or unintentional events. The Corporation has observed an increased level of attention in the industry focused on cyber-attacks that include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. To combat against these attacks, policies and procedures are in place to prevent or limit the effect of the possible security breach of its information systems. While ACNB maintains insurance coverage that may, subject to policy terms and conditions including significant self-insured deductibles, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses. While the Corporation has not incurred any material losses related to cyber-attacks, nor is it aware of any specific or threatened cyber incidents as of the date of this report, it may incur substantial costs and suffer other negative consequences if it falls victim to successful cyber-attacks. Such negative consequences could include remediation costs that may include liability for stolen assets or information and repairing system damage that may have been caused; deploying additional personnel and protection technologies, training employees, and engaging third-party experts and consultants; lost revenues resulting from unauthorized use of proprietary information or the failure to retain or attract customers following an attack; disruption or failures of physical infrastructure, operating systems or networks that support ACNB's business and customers resulting in the loss of customers and business opportunities; additional regulatory scrutiny and possible regulatory penalties; litigation; and, reputational damage adversely affecting customer or investor confidence.

ACNB'S CONTROLS AND PROCEDURES MAY FAIL OR BE CIRCUMVENTED.

        Management regularly reviews and updates ACNB's internal controls, disclosure controls and procedures, as well as corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of ACNB's controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on ACNB's business, financial condition, and results of operations.

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ACNB'S ABILITY TO PAY DIVIDENDS DEPENDS PRIMARILY ON DIVIDENDS FROM ITS BANKING SUBSIDIARY, WHICH ARE SUBJECT TO REGULATORY LIMITS AND THE BANKING SUBSIDIARY PERFORMANCE.

        ACNB is a financial holding company and its operations are conducted by its subsidiaries. Its ability to pay dividends depends on its receipt of dividends from its subsidiaries. Dividend payments from its banking subsidiary are subject to legal and regulatory limitations, generally based on net profits and retained earnings, imposed by the various banking regulatory agencies. The ability of its subsidiaries to pay dividends is also subject to their profitability, financial condition, capital expenditures, and other cash flow requirements. There is no assurance that its subsidiaries will be able to pay dividends in the future or that ACNB will generate adequate cash flow to pay dividends in the future. ACNB's failure to pay dividends on its common stock could have a material adverse effect on the market price of its common stock.

ACNB'S PROFITABILITY DEPENDS SIGNIFICANTLY ON ECONOMIC CONDITIONS IN THE COMMONWEALTH OF PENNSYLVANIA AND THE STATE OF MARYLAND.

        ACNB's success depends primarily on the general economic conditions of the Commonwealth of Pennsylvania, the State of Maryland, and the specific local markets in which ACNB operates. Unlike larger national or other regional banks that are more geographically diversified, ACNB provides banking and financial services to customers primarily in the southcentral Pennsylvania and northern Maryland region of the country. The local economic conditions in these areas have a significant impact on the demand for ACNB's products and services, as well as the ability of ACNB's customers to repay loans, the value of the collateral securing the loans, and the stability of ACNB's deposit funding sources. A significant decline in general economic conditions caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets, or other factors could impact these local economic conditions and, in turn, have a material adverse effect on ACNB's financial condition and results of operations.

THE EARNINGS OF FINANCIAL SERVICES COMPANIES ARE SIGNIFICANTLY AFFECTED BY GENERAL BUSINESS AND ECONOMIC CONDITIONS.

        ACNB's operations and profitability are impacted by general business and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, and the strength of the U.S. economy and the local economies in which ACNB operates, all of which are beyond ACNB's control. Deterioration in economic conditions could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values, and a decrease in demand for ACNB's products and services, among other things, any of which could have a material adverse impact on ACNB's financial condition and results of operations.

        The regulatory environment for the financial services industry is being significantly impacted by financial regulatory reform initiatives in the United States and elsewhere, including Dodd-Frank and regulations promulgated to implement it.

        Dodd-Frank, which was signed into law on July 21, 2010, comprehensively reforms the regulation of financial institutions, products and services. Dodd-Frank requires various federal regulatory agencies to implement numerous rules and regulations. Because the federal agencies are granted broad discretion in drafting these rules and regulations, many of the details and the impact of Dodd-Frank may not be known for many months or years.

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        While much of how the Dodd-Frank and other financial industry reforms will change ACNB's current business operations depends on the specific regulatory reforms and interpretations, many of which have yet to be released or finalized, it is clear that the reforms, both under Dodd-Frank and otherwise, will have a significant effect on the entire industry. Although Dodd-Frank and other reforms will affect a number of the areas in which ACNB does business, it is not clear at this time the full extent of the adjustments that will be required and the extent to which ACNB will be able to adjust its businesses in response to the requirements. Although it is difficult to predict the magnitude and extent of these effects at this stage, ACNB believes compliance with Dodd-Frank and implementing its regulations and initiatives will negatively impact revenue and increase the cost of doing business, both in terms of transition expenses and on an ongoing basis, and it may also limit ACNB's ability to pursue certain business opportunities.

NEW LINES OF BUSINESS OR NEW PRODUCTS AND SERVICES MAY SUBJECT ACNB TO ADDITIONAL RISKS.

        From time to time, ACNB may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, ACNB may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business and/or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of ACNB's system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business and new products or services could have a material adverse effect on ACNB's business, financial condition, and results of operations.

ACNB MAY NOT BE ABLE TO ATTRACT AND RETAIN SKILLED PEOPLE.

        ACNB's success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities engaged in by ACNB can be intense, and ACNB may not be able to hire people or to retain them. The unexpected loss of services of one or more of ACNB's key personnel could have a material adverse impact on ACNB's business because the Corporation would no longer have the benefit of their skills, knowledge of ACNB's market, as well as years of industry experience, and it would be difficult to promptly find qualified replacement personnel. ACNB currently has employment agreements, including covenants not to compete, with the following named executive officers: its President & Chief Executive Officer; Executive Vice President, Secretary & Chief Governance Officer; Executive Vice President, Treasurer & Chief Financial Officer; the President of ACNB Bank; and, the President & Chief Executive Officer of Russell Insurance Group, Inc.

ACNB IS SUBJECT TO CLAIMS AND LITIGATION PERTAINING TO FIDUCIARY RESPONSIBILITY.

        From time to time, customers make claims and take legal action pertaining to ACNB's performance of its fiduciary responsibilities. Whether customer claims and legal action related to ACNB's performance of its fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to ACNB, they may result in significant financial liability and/or adversely affect the market perception of ACNB and its products and services, as well as impact customer demand for those products and services. Any financial liability or reputation damage could

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have a material adverse effect on ACNB's business, which, in turn, could have a material adverse effect on ACNB's financial condition and results of operations.

THE TRADING VOLUME IN ACNB'S COMMON STOCK IS LESS THAN THAT OF OTHER LARGER FINANCIAL SERVICES COMPANIES.

        ACNB's common stock trades on NASDAQ, and the trading volume in its common stock is less than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of ACNB's common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which ACNB has no control. Given the lower trading volume of ACNB's common stock, significant sales of ACNB's common stock, and the expectation of these sales, could cause ACNB's stock price to fall.

ACNB OPERATES IN A HIGHLY REGULATED ENVIRONMENT AND MAY BE ADVERSELY AFFECTED BY CHANGES IN FEDERAL, STATE AND LOCAL LAWS AND REGULATIONS.

        ACNB, primarily through its banking subsidiary, is subject to extensive regulation, supervision and/or examination by federal and state banking authorities. Any change in applicable regulations or federal, state or local legislation could have a substantial impact on ACNB and its operations. Additional legislation and regulations that could significantly affect ACNB's powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on its financial condition and results of operations. Further, regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank and financial holding companies in the performance of their supervisory and enforcement duties. The exercise of regulatory authority may have a negative impact on ACNB's financial condition and results of operations.

        Like other financial holding companies and financial institutions, ACNB must comply with significant anti-money laundering and anti-terrorism laws. Under these laws, ACNB is required, among other things, to enforce a customer identification program and file currency transaction and suspicious activity reports with the federal government. Government agencies have substantial discretion to impose significant monetary penalties on institutions which fail to comply with these laws or make required reports. While ACNB has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.

THE SOUNDNESS OF OTHER FINANCIAL INSTITUTIONS MAY ADVERSELY AFFECT ACNB.

        Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. ACNB has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and institutional clients. Many of these transactions expose ACNB to credit risk in the event of a default by a counterparty or client. In addition, ACNB's credit risk may be exacerbated when the collateral held by ACNB cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit exposure due to ACNB. Any such losses could have a material adverse effect on ACNB's financial condition and results of operations.

MARKET VOLATILITY MAY HAVE MATERIALLY ADVERSE EFFECTS ON ACNB'S LIQUIDITY AND FINANCIAL CONDITION.

        The capital and credit markets have experienced extreme volatility and disruption. Over the last several years, in some cases, the markets have exerted downward pressure on stock prices, security prices, and credit capacity for certain issuers without regard to those issuers' underlying financial

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strength. If the market disruption and volatility returns, there can be no assurance that ACNB will not experience adverse effects, which may be material, on its liquidity, financial condition, and profitability.

ACNB MAY NEED OR BE COMPELLED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE WHICH COULD DILUTE SHAREHOLDERS OR BE UNAVAILABLE WHEN NEEDED OR AT UNFAVORABLE TERMS.

        ACNB's regulators or market conditions may require it to increase its capital levels. If ACNB raises capital through the issuance of additional shares of its common stock or other securities, it would likely dilute the ownership interests of current investors and would likely dilute the per share book value and earnings per share of its common stock. Furthermore, it may have an adverse impact on ACNB's stock price. New investors may also have rights, preferences and privileges senior to ACNB's current shareholders, which may adversely impact its current shareholders. ACNB's ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside its control, and on its financial performance. Accordingly, ACNB cannot be assured of its ability to raise additional capital on terms and time frames acceptable to it or to raise additional capital at all. If ACNB cannot raise additional capital in sufficient amounts when needed, its ability to comply with regulatory capital requirements could be materially impaired. Additionally, the inability to raise capital in sufficient amounts may adversely affect ACNB's operations, financial condition, and results of operations.

ACNB'S FUTURE ACQUISITIONS COULD DILUTE SHAREHOLDER OWNERSHIP AND MAY CAUSE IT TO BECOME MORE SUSCEPTIBLE TO ADVERSE ECONOMIC EVENTS.

        ACNB may use its common stock to acquire other companies or make investments in banks and other complementary businesses in the future. ACNB may issue additional shares of common stock to pay for future acquisitions, which would dilute current investors' ownership interest in ACNB. Future business acquisitions could be material to ACNB, and the degree of success achieved in acquiring and integrating these businesses into ACNB could have a material effect on the value of ACNB's common stock. In addition, any acquisition could require it to use substantial cash or other liquid assets or to incur debt. In those events, ACNB could become more susceptible to economic downturns and competitive pressures.

PENNSYLVANIA BUSINESS CORPORATION LAW AND VARIOUS ANTI-TAKEOVER PROVISIONS UNDER ACNB'S ARTICLES AND BYLAWS COULD IMPEDE THE TAKEOVER OF ACNB.

        Various Pennsylvania laws affecting business corporations may have the effect of discouraging offers to acquire ACNB, even if the acquisition would be advantageous to shareholders. In addition, ACNB has various anti-takeover measures in place under its articles of incorporation and bylaws, including a supermajority vote requirement for mergers, a staggered Board of Directors, and the absence of cumulative voting. Any one or more of these measures may impede the takeover of ACNB without the approval of the Board of Directors and may prevent shareholders from taking part in a transaction in which they could realize a premium over the current market price of ACNB common stock.

IF ACNB CONCLUDES THAT THE DECLINE IN VALUE OF ANY OF ITS INVESTMENT SECURITIES IS AN OTHER-THAN-TEMPORARY IMPAIRMENT, ACNB IS REQUIRED TO WRITE DOWN THE VALUE OF THAT SECURITY THROUGH A CHARGE TO EARNINGS.

        ACNB reviews its investment securities portfolio at each quarter-end to determine whether the fair value is below the current carrying value. When the fair value of any of its investment securities has declined below its carrying value, ACNB is required to assess whether the decline is an other-than-temporary impairment. If ACNB determines that the decline is an other-than-temporary

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impairment, it is required to write down the value of that security through a charge to earnings for credit related impairment. Non-credit related reductions in the value of a security do not require a write down of the value through earnings unless ACNB intends to, or is required to, sell the security. Changes in the expected cash flows related to the credit related piece of the investment of a security in ACNB's investment portfolio or a prolonged price decline may result in ACNB's conclusion in future periods that an impairment is other than temporary, which would require a charge to earnings to write down the security to fair value. Due to the complexity of the calculations and assumptions used in determining whether an asset has an impairment that is other than temporary, the impairment disclosed may not accurately reflect the actual impairment in the future.

ACNB IS SUBJECT TO POTENTIAL IMPAIRMENT OF GOODWILL AND INTANGIBLES.

        RIG has certain long-lived assets including purchased intangible assets subject to amortization, such as insurance books of business, and associated goodwill assets which are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the statement of condition and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.

        Goodwill, which has an indefinite useful life, is evaluated pursuant to ASC Topic 350, Intangibles—Goodwill and Other, for impairment annually and is evaluated for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. The goodwill impairment analysis currently used by the Corporation is a two-step test. The first step, used to identify potential impairment, involves comparing the reporting unit's estimated fair value to its carrying value, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment. If required, the second step involves calculating an implied fair value of goodwill for the reporting unit for which the first step indicated potential impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit to a group of likely buyers whose cash flow estimates could differ from those of the reporting entity, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to the reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. Subsequent reversal of goodwill impairment losses is not permitted. ACNB performs an annual evaluation to determine if there is goodwill impairment.

ACNB IS SUBJECT TO ENVIRONMENTAL LIABILITY RISK ASSOCIATED WITH LENDING ACTIVITIES.

        A significant portion of ACNB's banking subsidiary loan portfolio is secured by real property. During the ordinary course of business, ACNB may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, ACNB may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require ACNB to incur substantial expense and may materially reduce the affected property's value or limit ACNB's ability to

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use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase ACNB's exposure to environmental liability. Although ACNB has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on ACNB's financial condition and results of operations.

THE SEVERITY AND DURATION OF A FUTURE ECONOMIC DOWNTURN AND THE COMPOSITION OF THE BANKING SUBSIDIARY'S LOAN PORTFOLIO COULD IMPACT THE LEVEL OF LOAN CHARGE-OFFS AND THE PROVISION FOR LOAN LOSSES AND MAY AFFECT ACNB'S NET INCOME OR LOSS.

        Lending money is a substantial part of ACNB's business through its banking subsidiary. However, every loan that ACNB makes carries a certain risk of non-payment. ACNB cannot assure that its allowance for loan losses will be sufficient to absorb actual loan losses. ACNB also cannot assure that it will not experience significant losses in its loan portfolio that may require significant increases to the allowance for loan losses in the future.

        Although ACNB evaluates every loan that it makes against its underwriting criteria, ACNB may experience losses by reasons of factors beyond its control. Some of these factors include changes in market conditions affecting the value of real estate and unexpected problems affecting the creditworthiness of ACNB's borrowers.

        ACNB determines the adequacy of its allowance for loan losses by considering various factors, including:

    An analysis of the risk characteristics of various classifications of loans;

    Previous loan loss experience;

    Specific loans that would have loan loss potential;

    Delinquency trends;

    Estimated fair value of the underlying collateral;

    Current economic conditions;

    The views of ACNB's regulators;

    Reports of internal auditors;

    Reports of external auditors;

    Reports of loan reviews conducted by independent organizations; and,

    Geographic and industry loan concentrations.

        Local economic conditions could impact the loan portfolio of ACNB. For example, an increase in unemployment, a decrease in real estate values, or increases in interest rates, as well as other factors, could weaken the economies of the communities ACNB serves. Weakness in the market areas served by ACNB could depress the Corporation's earnings and, consequently, its financial condition because:

    Borrowers may not be able to repay their loans;

    The value of the collateral securing ACNB's loans to borrowers may decline; and/or,

    The quality of ACNB's loan portfolio may decline.

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        Although, based on the aforementioned procedures implemented by ACNB, management believes the current allowance for loan losses is adequate, ACNB may have to increase its provision for loan losses should local economic conditions deteriorate which could negatively impact its financial condition and results of operations.

CHANGES IN REAL ESTATE VALUES MAY ADVERSELY IMPACT ACNB'S BANKING SUBSIDIARY LOANS THAT ARE SECURED BY REAL ESTATE.

        A significant portion of ACNB's banking subsidiary loan portfolio consists of residential and commercial mortgages, as well as consumer loans, secured by real estate. These properties are concentrated in Adams County, Pennsylvania. Real estate values and real estate markets generally are affected by, among other things, changes in national, regional or local economic conditions, fluctuations in interest rates, the availability of loans to potential purchasers, changes in the tax laws and other government statutes, regulations and policies, and acts of nature. If real estate prices decline, particularly in ACNB's market area, the value of the real estate collateral securing ACNB's loans could be reduced. This reduction in the value of the collateral could increase the number of non-performing loans and could have a material adverse impact on ACNB's financial condition and results of operations.

ACNB'S INFORMATION SYSTEMS MAY EXPERIENCE AN INTERRUPTION OR BREACH IN SECURITY.

        ACNB relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in ACNB's customer relationship management, general ledger, deposit, loan and other systems. While ACNB has policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. Although ACNB maintains insurance coverage that may, subject to policy terms and conditions including significant self-insured deductibles, cover certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses. The occurrence of any failures, interruptions or security breaches of ACNB's information systems could damage ACNB's reputation, adversely affecting customer or investor confidence, result in a loss of customer business, subject ACNB to additional regulatory scrutiny and possible regulatory penalties, or expose ACNB to civil litigation and possible financial liability, any of which could have a material adverse effect on ACNB's financial condition and results of operations.

ACNB CONTINUALLY ENCOUNTERS TECHNOLOGICAL CHANGE.

        The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. ACNB's future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in ACNB's operations. Many of ACNB's competitors have substantially greater resources to invest in technological improvements. ACNB may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on ACNB's business and, in turn, ACNB's financial condition and results of operations.

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FINANCIAL SERVICES COMPANIES DEPEND ON THE ACCURACY AND COMPLETENESS OF INFORMATION ABOUT CUSTOMERS AND COUNTERPARTIES.

        In deciding whether to extend credit or enter into other transactions, ACNB may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports, and other financial information. ACNB may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports, or other financial information could have a material adverse impact on ACNB's business and, in turn, ACNB's financial condition and results of operations.

CONSUMERS MAY DECIDE NOT TO USE BANKS TO COMPLETE THEIR FINANCIAL TRANSACTIONS.

        Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods. For example, consumers can now maintain funds in brokerage accounts or mutual funds that would have historically been held as bank deposits. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as "disintermediation", could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on ACNB's financial condition and results of operations.

FUTURE ECONOMIC CONDITIONS MAY ADVERSELY AFFECT SECONDARY SOURCES OF LIQUIDITY.

        In addition to primary sources of liquidity in the form of deposits and principal and interest payments on outstanding loans and investments, ACNB maintains secondary sources that provide it with additional liquidity. These secondary sources include secured and unsecured borrowings from sources such as the Federal Reserve Bank, Federal Home Loan Bank of Pittsburgh, and third-party commercial banks. However, market liquidity conditions have been negatively impacted by past disruptions in the capital markets and could, in the future, have a negative impact on ACNB's secondary sources of liquidity.

SEVERE WEATHER, NATURAL DISASTERS, ACTS OF WAR OR TERRORISM, AND OTHER EXTERNAL EVENTS COULD SIGNIFICANTLY IMPACT ACNB'S BUSINESS.

        The unpredictable nature of events such as severe weather, natural disasters, acts of war or terrorism, and other adverse external events could have a significant impact on ACNB's ability to conduct business. If any of its financial, accounting, network or other information processing systems fail or have other significant shortcomings due to external events, ACNB could be materially adversely affected. Third parties with which ACNB does business could also be sources of operational risk to ACNB, including the risk that the third parties' own network and information processing systems could fail. Any of these occurrences could materially diminish ACNB's ability to operate one or more of the Corporation's businesses, or result in potential liability to clients, reputational damage, and regulatory intervention, any of which could materially adversely affect ACNB. Such events could affect the stability of ACNB's deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, impair ACNB's liquidity, cause significant property damage, result in loss of revenue, and/or cause ACNB to incur additional expenses.

        ACNB may be subject to disruptions or failures of the financial, accounting, network and other information processing systems arising from events that are wholly or partially beyond ACNB's control,

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which may include, for example, computer viruses, electrical or telecommunications outages, natural disasters, disease pandemics, damage to property or physical assets, or terrorist acts. ACNB has developed a comprehensive business continuity plan which includes plans to maintain or resume operations in the event of an emergency, such as a power outage or disease pandemic, and contingency plans in the event that operations or systems cannot be resumed or restored. The business continuity plan is updated as needed, periodically reviewed, and components are regularly tested. ACNB also reviews and evaluates the business continuity plans of critical third-party service providers. While ACNB believes its business continuity plan and efforts to evaluate the business continuity plans of critical third-party service providers help mitigate risks, disruptions or failures affecting any of these systems may cause interruptions in service to customers, damage to ACNB's reputation, and loss or liability to the Corporation.

FUTURE CREDIT DOWNGRADES OF THE UNITED STATES GOVERNMENT DUE TO ISSUES RELATING TO DEBT AND THE DEFICIT MAY ADVERSELY AFFECT ACNB.

        As a result of past difficulties of the federal government to reach agreement over federal debt and issues connected with the debt ceiling, certain rating agencies placed the United States government's long-term sovereign debt rating on their equivalent of negative watch and announced the possibility of a rating downgrade. The rating agencies, due to constraints related to the rating of the United States, also placed government-sponsored enterprises in which ACNB invests and receives lines of credit on negative watch and a downgrade of the United States government's credit rating would trigger a similar downgrade in the credit rating of these government-sponsored enterprises. Furthermore, the credit rating of other entities, such as state and local governments, may also be downgraded should the United States government's credit rating be downgraded. The impact that a credit rating downgrade may have on the national and local economy could have an adverse effect on ACNB's financial condition and results of operations.

ACNB'S BANKING SUBSIDIARY MAY BE REQUIRED TO PAY HIGHER FDIC INSURANCE PREMIUMS OR SPECIAL ASSESSMENTS WHICH MAY ADVERSELY AFFECT ITS EARNINGS.

        Poor economic conditions and the resulting bank failures have increased the costs of the FDIC and adversely impacted its Deposit Insurance Fund. Additional bank failures may prompt the FDIC to increase its premiums or to issue special assessments. ACNB is generally unable to control the amount of premiums or special assessments that its banking subsidiary is required to pay for FDIC insurance. Any future changes in the calculation or assessment of FDIC insurance premiums may have a material adverse effect on ACNB's financial condition and results of operations.

INCOME TAXATION CHANGES COULD HAVE NEGATIVE EFFECTS ON RESULTS OF OPERATIONS AND ASSET VALUES.

        Discussions of proposed major overhauls of the federal corporate tax code could result in unknown and unpredictable effects on ACNB's results of operations and value of assets. Proposals that would lower the corporate tax rate and, at the same time, reduce certain deductions from taxable income are aimed to increase overall revenue from corporate taxation. For example, reducing the tax deductibility of state and local government investments and loans would increase income tax expense and could perhaps decrease the value of those assets. Lowering tax rates would decrease the value of certain deferred tax assets. In addition, changes to individual income tax laws could have the effect of lowering demand for important sources of lending and revenue to ACNB, such as residential mortgages.

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THE INCREASING USE OF SOCIAL MEDIA PLATFORMS PRESENTS NEW RISKS AND CHALLENGES AND THE INABILITY OR FAILURE TO RECOGNIZE, RESPOND TO, AND EFFECTIVELY MANAGE THE ACCELERATED IMPACT OF SOCIAL MEDIA COULD MATERIALLY ADVERSELY IMPACT ACNB'S BUSINESS.

        There has been a marked increase in the use of social media platforms, including weblogs (blogs), social media websites, and other forms of Internet-based communications which allow individuals access to a broad audience of consumers and other interested persons. Social media practices in the banking industry are evolving, which creates uncertainty and risk of noncompliance with regulations applicable to ACNB's business. Consumers value readily available information concerning businesses and their goods and services and often act on such information without further investigation and without regard to its accuracy. Many social media platforms immediately publish the content their subscribers and participants post, often without filters or checks on accuracy of the content posted. Information posted on such platforms at any time may be adverse to ACNB's interests and/or may be inaccurate. The dissemination of information online could harm ACNB's business, prospects, financial condition, and results of operations, regardless of the information's accuracy. The harm may be immediate without affording ACNB an opportunity for redress or correction.

        Other risks associated with the use of social media include improper disclosure of proprietary information, negative comments about ACNB's business, exposure of personally identifiable information, fraud, out-of-date information, and improper use by employees and customers. The inappropriate use of social media by ACNB's customers or employees could result in negative consequences such as remediation costs including training for employees, additional regulatory scrutiny and possible regulatory penalties, litigation, or negative publicity that could damage ACNB's reputation adversely affecting customer or investor confidence.

ITEM 1B—UNRESOLVED STAFF COMMENTS

        None.

ITEM 2—PROPERTIES

        ACNB Bank, in addition to its main office in Gettysburg, Adams County, Pennsylvania, had a retail banking office network of twenty offices at December 31, 2015. Thirteen retail banking offices are located in Adams County, one is located in Cumberland County, two are located in Franklin County, and four are located in York County, Pennsylvania. There is also a loan production office situated in York County, Pennsylvania. Bank offices at fifteen locations are owned, while six are leased. All real estate owned by the subsidiary bank is free and clear of encumbrances. RIG owns an office located in Carroll County, Maryland, and leases an office in Montgomery County, Maryland.

ITEM 3—LEGAL PROCEEDINGS

        As of December 31, 2015, there were no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which ACNB or its subsidiaries are a party or by which any of their property is the subject, which could have a material adverse effect on ACNB or its subsidiaries or their results of operations. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Corporation or its subsidiaries by governmental authorities.

ITEM 4—MINE SAFETY DISCLOSURES

        Not Applicable.

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PART II

ITEM 5—MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        ACNB Corporation's common stock trades on NASDAQ under the symbol ACNB. At December 31, 2015 and 2014, there were 20,000,000 shares of common stock authorized, 6,102,324 and 6,078,250 shares issued, respectively, and 6,039,724 and 6,015,650 shares outstanding, respectively. As of December 31, 2015, ACNB had approximately 2,227 stockholders of record. At December 31, 2015 and 2014, there were 62,600 shares of treasury stock purchased by the Corporation through the common stock repurchase program approved in October 2008. There have been no shares purchased during the most recent quarter and 57,400 shares can still be purchased under the program. ACNB is restricted as to the amount of dividends that it can pay to stockholders by virtue of the restrictions on the banking subsidiary's ability to pay dividends to ACNB under the Pennsylvania Banking Code, the Federal Deposit Insurance Corporation Act, and the regulations of the FDIC. For further information, please refer to Notes J—"Regulatory Restrictions on Dividends" and N—"Regulatory Matters" in the Notes to Consolidated Financial Statements.

        On May 5, 2009, stockholders approved and ratified the ACNB Corporation 2009 Restricted Stock Plan, effective as of February 24, 2009, in which awards shall not exceed, in the aggregate, 200,000 shares of common stock. As of December 31, 2015, there were 5,673 shares of common stock granted as restricted stock awards to either employees or directors. The Corporation's Registration Statement under the Securities Act of 1933 on Form S-8 for the ACNB Corporation 2009 Restricted Stock Plan was filed with the Securities and Exchange Commission on January 4, 2013.

        On May 5, 2009, stockholders approved and adopted the amendment to the Articles of Incorporation of ACNB Corporation to authorize up to 20,000,000 shares of preferred stock, par value $2.50 per share. As of December 31, 2015, there were no issued or outstanding shares of preferred stock.

        On January 24, 2011, the ACNB Corporation Dividend Reinvestment and Stock Purchase Plan was introduced for stockholders of record. This plan provides registered holders of ACNB Corporation common stock with a convenient way to purchase additional shares of common stock by permitting participants in the plan to automatically reinvest cash dividends on all or a portion of the shares owned and to make quarterly voluntary cash payments under the terms of the plan. Participation in the plan is voluntary, and there are eligibility requirements to participate in the plan. As of December 31, 2015, there were 105,708 shares of common stock issued through the ACNB Corporation Dividend Reinvestment and Stock Purchase Plan.

        There have been no unregistered sales of stock in 2015, 2014 or 2013.

        The following table reflects the quarterly high and low prices of ACNB's common stock and the cash dividends on the common stock for the periods indicated.

 
  Price Range
Per Share
   
 
 
  Per Share
Dividend
 
 
  High   Low  

2015:

                   

First Quarter

  $ 21.35   $ 19.80   $ 0.20  

Second Quarter

    20.89     20.04     0.20  

Third Quarter

    21.75     19.65     0.20  

Fourth Quarter

    22.14     20.63     0.20  

2014:

   
 
   
 
   
 
 

First Quarter

  $ 19.50   $ 18.00   $ 0.19  

Second Quarter

    19.99     18.37     0.19  

Third Quarter

    19.87     18.69     0.19  

Fourth Quarter

    21.83     19.08     0.20  

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        The Corporation used the Mid-Atlantic Custom Peer Group—Asset $700M-$2B performance graph below, which management believes better represents the Corporation's performance versus other financial institutions of similar size.

GRAPHIC

 
  Period Ending  
Index
  12/31/2010   12/31/2011   12/31/2012   12/31/2013   12/31/2014   12/31/2015  

ACNB Corporation

    100.00     92.79     114.14     133.13     166.78     169.77  

NASDAQ Composite

    100.00     99.21     116.82     163.75     188.03     201.40  

Mid-Atlantic Custom Peer Group—Asset $700M-$2B*

    100.00     95.27     116.21     149.25     160.56     168.65  

*
Mid-Atlantic Custom Peer Group—Asset $700M-$2B consists of Mid-Atlantic commercial banks with assets between $700M to $2B as of September 30, 2015, and indicated below. Source: SNL Financial LC, Charlottesville, VA

Company
  City   State   Company   City   State

1st Constitution Bancorp

  Cranbury   NJ  

FNB Bancorp, Inc.

  Newtown   PA

1st Summit Bancorp of Johnstown, Inc.

  Johnstown   PA  

Franklin Financial Services Corporation

  Chambersburg   PA

ACNB Corporation

  Gettysburg   PA  

Howard Bancorp, Inc.

  Ellicott City   MD

Adirondack Trust Company

  Saratoga Springs   NY  

Lyons Bancorp, Inc.

  Lyons   NY

AmeriServ Financial, Inc.

  Johnstown   PA  

Marlin Business Services Corp.

  Mount Laurel   NJ

Bancorp of New Jersey, Inc.

  Fort Lee   NJ  

Mid Penn Bancorp, Inc.

  Millersburg   PA

Bank of Utica

  Utica   NY  

Norwood Financial Corp.

  Honesdale   PA

BCB Bancorp, Inc.

  Bayonne   NJ  

Old Line Bancshares, Inc.

  Bowie   MD

CB Financial Services, Inc.

  Carmichaels   PA  

Orange County Bancorp, Inc.

  Middletown   NY

Chemung Financial Corporation

  Elmira   NY  

Orrstown Financial Services, Inc.

  Shippensburg   PA

Citizens & Northern Corporation

  Wellsboro   PA  

Parke Bancorp, Inc.

  Sewell   NJ

Citizens Financial Services, Inc.

  Mansfield   PA  

Penns Woods Bancorp, Inc.

  Williamsport   PA

Codorus Valley Bancorp, Inc.

  York   PA  

Peoples Financial Services Corp.

  Scranton   PA

Community Financial Corporation

  Waldorf   MD  

QNB Corp.

  Quakertown   PA

DNB Financial Corporation

  Downingtown   PA  

Republic First Bancorp, Inc.

  Philadelphia   PA

Embassy Bancorp, Inc.

  Bethlehem   PA  

Royal Bancshares of Pennsylvania, Inc.

  Bala Cynwyd   PA

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Company
  City   State   Company   City   State

ENB Financial Corp

  Ephrata   PA  

Shore Bancshares, Inc.

  Easton   MD

Evans Bancorp, Inc.

  Hamburg   NY  

Solvay Bank Corporation

  Solvay   NY

Fidelity D & D Bancorp, Inc

  Dunmore   PA  

Somerset Trust Holding Company

  Somerset   PA

First Bank

  Hamilton   NJ  

Stewardship Financial Corporation

  Midland Park   NJ

First Keystone Corporation

  Berwick   PA  

Two River Bancorp

  Tinton Falls   NJ

First National Community Bancorp, Inc.

  Dunmore   PA  

Unity Bancorp, Inc.

  Clinton   NJ

First United Corporation

  Oakland   MD            

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ITEM 6—SELECTED FINANCIAL DATA

 
  For the Year Ended December 31,  
Dollars in thousands, except per share data
  2015   2014   2013   2012   2011  

INCOME STATEMENT DATA

                               

Interest income

  $ 39,464   $ 37,526   $ 37,601   $ 40,439   $ 41,832  

Interest expense

    3,858     3,646     3,989     6,095     7,462  

Net interest income

    35,606     33,880     33,612     34,344     34,370  

Provision for loan losses

        150     1,450     4,675     5,435  

Net interest income after provision for loan losses

    35,606     33,730     32,162     29,669     28,935  

Other income

    12,406     11,904     11,703     11,867     11,737  

Other expenses

    33,234     32,264     32,015     30,331     30,016  

Income before income taxes

    14,778     13,370     11,850     11,205     10,656  

Provision for income taxes

    3,761     3,080     2,535     2,319     2,154  

Net income

  $ 11,017   $ 10,290   $ 9,315   $ 8,886   $ 8,502  

BALANCE SHEET DATA (AT YEAR-END)

                               

Assets

  $ 1,147,925   $ 1,089,808   $ 1,046,047   $ 1,049,995   $ 1,004,823  

Securities

  $ 197,235   $ 191,346   $ 224,356   $ 215,949   $ 219,259  

Loans, net

  $ 838,213   $ 784,100   $ 712,557   $ 691,311   $ 678,986  

Deposits

  $ 912,980   $ 844,876   $ 800,643   $ 834,176   $ 782,795  

Borrowings

  $ 111,702   $ 126,636   $ 131,755   $ 107,257   $ 117,153  

Stockholders' equity

  $ 114,715   $ 110,022   $ 106,802   $ 101,264   $ 97,474  

COMMON SHARE DATA

   
 
   
 
   
 
   
 
   
 
 

Earnings per share—basic

  $ 1.83   $ 1.71   $ 1.56   $ 1.49   $ 1.43  

Cash dividends declared

  $ 0.80   $ 0.77   $ 0.76   $ 0.76   $ 0.76  

Book value per share

  $ 18.99   $ 18.29   $ 17.83   $ 16.98   $ 16.39  

Weighted average number of common shares          

    6,026,224     6,002,240     5,976,960     5,953,723     5,936,030  

Dividend payout ratio

    43.75 %   44.92 %   48.76 %   50.91 %   53.15 %

PROFITABILITY RATIOS AND CONDITION

   
 
   
 
   
 
   
 
   
 
 

Return on average assets

    0.99 %   0.97 %   0.90 %   0.86 %   0.85 %

Return on average equity

    9.77 %   9.32 %   9.00 %   8.91 %   8.80 %

Average stockholders' equity to average assets          

    10.10 %   10.43 %   9.95 %   9.61 %   9.72 %

SELECTED ASSET QUALITY RATIOS

   
 
   
 
   
 
   
 
   
 
 

Non-performing loans to total loans

    0.68 %   1.04 %   1.44 %   1.00 %   2.02 %

Net charge-offs to average loans outstanding

    0.05 %   0.14 %   0.31 %   0.48 %   0.77 %

Allowance for loan losses to total loans

    1.73 %   1.90 %   2.21 %   2.38 %   2.23 %

Allowance for loan losses to non-performing loans

    252.91 %   183.15 %   153.26 %   237.04 %   110.29 %

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ITEM 7—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

        The following is management's discussion and analysis of the significant changes in the financial condition, results of operations, comprehensive income, capital resources, and liquidity presented in its accompanying consolidated financial statements for ACNB Corporation (the Corporation or ACNB), a financial holding company. Please read this discussion in conjunction with the consolidated financial statements and disclosures included herein. Current performance does not guarantee, assure or indicate similar performance in the future.

CRITICAL ACCOUNTING POLICIES

        The accounting policies that the Corporation's management deems to be most important to the portrayal of its financial condition and results of operations, and that require management's most difficult, subjective or complex judgment, often result in the need to make estimates about the effect of such matters which are inherently uncertain. The following policies are deemed to be critical accounting policies by management:

            The allowance for loan losses represents management's estimate of probable losses inherent in the loan portfolio. Management makes numerous assumptions, estimates and adjustments in determining an adequate allowance. The Corporation assesses the level of potential loss associated with its loan portfolio and provides for that exposure through an allowance for loan losses. The allowance is established through a provision for loan losses charged to earnings. The allowance is an estimate of the losses inherent in the loan portfolio as of the end of each reporting period. The Corporation assesses the adequacy of its allowance on a quarterly basis. The specific methodologies applied on a consistent basis are discussed in greater detail under the caption, Allowance for Loan Losses, in a subsequent section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

            The evaluation of securities for other-than-temporary impairment requires a significant amount of judgment. In estimating other-than-temporary impairment losses, management considers various factors including the length of time the fair value has been below cost, the financial condition of the issuer, and the Corporation's intent to sell, or requirement to sell, the security before recovery of its value. Declines in fair value that are determined to be other than temporary are charged against earnings.

            Accounting Standards Codification (ASC) Topic 350, Intangibles—Goodwill and Other, requires that goodwill is not amortized to expense, but rather that it be assessed or tested for impairment at least annually. Impairment write-downs are charged to results of operations in the period in which the impairment is determined. The Corporation did not identify any impairment on its outstanding goodwill from its most recent testing, which was performed as of October 1, 2015. If certain events occur which might indicate goodwill has been impaired, the goodwill is tested for impairment when such events occur. Other acquired intangible assets with finite lives, such as customer lists, are required to be amortized over the estimated lives. These intangibles are generally amortized using the straight line method over estimated useful lives of ten years.

EXECUTIVE OVERVIEW

        The primary source of the Corporation's revenues is net interest income derived from interest earned on loans and investments, less deposit and borrowing funding costs. Revenues are influenced by general economic factors, including market interest rates, the economy of the markets served, stock market conditions, as well as competitive forces within the markets.

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        The Corporation's overall strategy is to increase loan growth in local markets, while maintaining a reasonable funding base by offering competitive deposit products and services. The year 2015 continued to be challenging for financial institutions with new expensive compliance regulations, slowly recovering housing markets, lingering wage stagnation, and slow uneven growth. ACNB continued to be profitable and well capitalized despite the legacy effects of the United States economy's recent past. Higher net interest income and improved fee income offset increased expenses resulting in increased net income of $11,017,000, or $1.83 per share, in 2015, compared to $10,290,000, or $1.71 per share, in 2014 and $9,315,000, or $1.56 per share, in 2013. Returns on average equity were 9.77%, 9.32% and 9.00% in 2015, 2014 and 2013, respectively.

        Because funding costs were near practical floors, they could not be decreased at the same increments as earning asset decreases; therefore, the Corporation's net interest margin decreased to 3.45% in 2015, compared to 3.47% and 3.48% in 2014 and 2013, respectively. Net interest income was $35,606,000 in 2015, as compared to $33,880,000 in 2014 and $33,612,000 in 2013.

        Other income was $12,406,000, $11,904,000 and $11,703,000 in 2015, 2014 and 2013, respectively. The largest source of other income is commissions from insurance sales from Russell Insurance Group, Inc. (RIG), which decreased by 4.24% in 2015 to $4,634,000, hindered by lower contingent commissions and decreased commercial insurance volume, both partially a result of specific actions of insurance carriers. In 2015, a $261,000 gain was recognized on sold or merged investments, in 2014 a $62,000 gain was recognized on sold investments compared to net gains of $0 in 2013. Income from fiduciary activities totaled $1,589,000 for 2015, as compared to $1,418,000 for 2014 and $1,299,000 for 2013. Trust fiduciary income increased from new account relationships and increased market values in accounts. Service charges on deposit accounts increased 9.0% to $2,308,000 for 2015 due to concerted management of this fee source, while revenue from ATM and debit card transactions decreased 6.1% to $1,456,000 due to changes in customer behaviors resulting in lower volume.

        Other expenses increased to $33,234,000, or by 3.01%, in 2015, as compared to $32,264,000 in 2014. Other expenses totaled $32,015,000 in 2013. The largest component of other expenses is salaries and employee benefits, which increased 7.3% to $20,932,000 in 2015 compared to $19,516,000 in 2014, due to an increase in employees, merit increases, and the increased cost of benefits including higher pension expense. Compared to 2014, occupancy expense increased 5.9% in 2015 due to higher net lease expense and new locations, and equipment expense increased 8.6% from maintenance of technology assets. Professional services expense decreased 9.8% from lower problem loan-related legal expenses in 2015, along with varying compliance and corporate governance engagements. Marketing and corporate relations expense decreased by 23.1% due to specific campaigns and brand awareness activities. FDIC and regulatory expense decreased by 11.1% based on these agencies' formulas; however, it is still a significant expense as the result of a requirement of all FDIC-insured banks to restore and maintain the Deposit Insurance Fund to protect depositors' accounts. In 2015, foreclosed real estate expenses decreased $227,000 or 65.6% resulting from lower final sale losses in 2015. A more thorough discussion of the Corporation's results of operations is included in the following pages.

RESULTS OF OPERATIONS

Net Interest Income

        The primary source of ACNB's traditional banking revenue is net interest income, which represents the difference between interest income on earning assets and interest expense on liabilities used to fund those assets. Earning assets include loans, securities, and interest bearing deposits with banks. Interest bearing liabilities include deposits and borrowings.

        Net interest income is affected by changes in interest rates, volume of interest bearing assets and liabilities, and the composition of those assets and liabilities. The "interest rate spread" and "net interest margin" are two common statistics related to changes in net interest income. The interest rate

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spread represents the difference between the yields earned on interest earning assets and the rates paid for interest bearing liabilities. The net interest margin is defined as the percentage of net interest income to average earning assets, which also considers the Corporation's net non-interest bearing funding sources, the largest of which are non-interest bearing demand deposits and stockholders' equity.

        The following table includes average balances, rates, interest income and expense, interest rate spread, and net interest margin:

Table 1—Average Balances, Rates and Interest Income and Expense

 
  2015   2014   2013  
Dollars in thousands
  Average
Balance
  Interest   Yield/
Rate
  Average
Balance
  Interest   Yield/
Rate
  Average
Balance
  Interest   Yield/
Rate
 

INTEREST EARNING ASSETS

                                                       

Loans

  $ 819,866   $ 35,090     4.28 % $ 752,837   $ 32,573     4.33 % $ 711,841   $ 32,084     4.51 %

Taxable securities

    158,685     3,127     1.97 %   172,698     3,647     2.11 %   186,900     4,230     2.26 %

Tax-exempt securities

    31,045     859     2.77 %   38,380     1,042     2.71 %   41,597     1,197     2.88 %

Total Securities

    189,730     3,986     2.10 %   211,078     4,689     2.22 %   228,497     5,427     2.38 %

Other

    22,328     388     1.74 %   13,474     264     1.96 %   25,107     90     0.36 %

Total Interest Earning Assets

    1,031,924     39,464     3.82 %   977,389     37,526     3.84 %   965,445     37,601     3.89 %

Cash and due from banks

    13,283                 12,838                 13,663              

Premises and equipment

    17,427                 15,930                 14,603              

Other assets

    69,418                 67,189                 63,099              

Allowance for loan losses

    (14,942 )               (15,833 )               (17,072 )            

Total Assets

  $ 1,117,110               $ 1,057,513               $ 1,039,738              

LIABILITIES AND STOCKHOLDERS' EQUITY

                                                       

INTEREST BEARING LIABILITIES

                                                       

Interest bearing demand deposits

  $ 184,869   $ 120     0.06 % $ 179,903   $ 127     0.07 % $ 183,341   $ 140     0.08 %

Savings deposits

    288,369     227     0.08 %   264,467     194     0.07 %   260,093     197     0.08 %

Time deposits

    250,550     1,773     0.71 %   239,000     1,489     0.62 %   251,312     1,840     0.73 %

Total Interest Bearing Deposits

    723,788     2,120     0.29 %   683,370     1,810     0.26 %   694,746     2,177     0.31 %

Short-term borrowings

    40,217     47     0.12 %   44,399     63     0.14 %   53,184     61     0.11 %

Long-term borrowings

    78,453     1,691     2.16 %   81,042     1,773     2.19 %   55,311     1,751     3.17 %

Total Interest Bearing Liabilities

    842,458     3,858     0.46 %   808,811     3,646     0.45 %   803,241     3,989     0.50 %

Non-interest bearing demand deposits

    153,660                 134,355                 126,047              

Other liabilities

    8,227                 4,013                 6,969              

Stockholders' equity

    112,765                 110,334                 103,481              

Total Liabilities and Stockholders' Equity

  $ 1,117,110               $ 1,057,513               $ 1,039,738              

NET INTEREST INCOME

        $ 35,606               $ 33,880               $ 33,612        

INTEREST RATE SPREAD

                3.36 %               3.39 %               3.39 %

NET INTEREST MARGIN

                3.45 %               3.47 %               3.48 %

        For yield calculation purposes, nonaccruing loans are included in average loan balances. Loan fees (expense) of $(172,000), $23,000 and $154,000 as of December 31, 2015, 2014 and 2013, respectively, are included in interest income. Yields on tax-exempt securities and loans are not tax effected.

        Table 1 presents balance sheet items on a daily average basis, net interest income, interest rate spread, and net interest margin for the years ending December 31, 2015, 2014 and 2013. Table 2 analyzes the relative impact on net interest income for changes in the volume of interest earning assets

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and interest bearing liabilities and changes in rates earned and paid by the Corporation on such assets and liabilities.

        Net interest income totaled $35,606,000 in 2015, as compared to $33,880,000 in 2014 and $33,612,000 in 2013. During 2015, net interest income increased from loan volume in the earning asset mix offset by negative rate variances in earning assets and funding costs. The increase in net interest income in 2014 was due to increases in earning assets.

        The net interest margin during 2015 was 3.45% compared to 3.47% during 2014. The margin decreased due to continued decreasing earning asset yields along with increasing funding costs from new or renewed time deposits and stable market rates on savings products. The Federal Open Market Committee repeatedly decreased the federal funds rate from September 2007 to December 2008 and has maintained it at 0% to 0.25% until mid December 2015. In addition, the Federal Reserve Bank has embarked on various programs referred to as Quantitative Easing which, in effect, attempted to lower rates on longer term portions of the yield curve. These decreases allowed interest rate reductions on lower-cost transactional deposit products and higher-cost certificates of deposit (CD's) over the intervening years; however economic progress allowed the Federal Reserve to end new Quantitative Easing and to signal rates they control would eventually increase. ACNB took steps to ameliorate the effect of rising rates including promoting longer term CD's; the result was a 0.01% increase in funding costs in 2015. In addition to the slightly higher cost of funds in 2015, earning asset yields continued down, decreasing 0.02% from declines in the investment portfolio as new purchases were at lower rates, as well as declines in the loan portfolio from new originations at lower market rates and existing adjustable-rate loans resetting at lower rates based on declines in index rates. The decreased earning asset yields in 2014 were 0.05% compared to funding cost declines of 0.05%. Maintaining the net interest margin going forward will be challenged by the fact that substantial amounts of deposits are at practical rate floors, while loans and the investment securities portfolio will most likely continue to decrease in yields. The cost and availability of wholesale funding could also be affected by a variety of internal and external factors resulting from interest rate market factors and the creditworthiness of the Corporation and the credit providers.

        Average earning assets were $1,032,000,000 in 2015, an increase of 5.6% from the balance of $977,389,000 in 2014, which was an increase from $965,445,000 in 2013. Loan growth represented the largest increase in average assets in 2015, 2014 and 2013, in conjunction with changes in the investment portfolio in those years to balance liquidity needs and to fund the loans. Average interest bearing liabilities were $842,458,000 in 2015, up from $808,811,000 in 2014 and up from $803,241,000 in 2013. Average non-interest bearing demand deposits increased 14.4% in 2015, continuing the upward trend from 2014 and 2013. This increase was attributed to new relationships and the value placed on stability and FDIC insurance by depositors. On average, deposits (including non-interest bearing) were up 7.3%, while borrowings decreased by 5.4% due to funding loan growth with increased deposits even though Federal Home Loan Bank (FHLB) advances continued to be used in 2015. Lower-cost transaction, savings deposits and time deposits all increased in 2015, a trend started in 2008 in part due to FDIC insurance but also the lack of higher paying alternatives. A trend of lower time deposit in prior years was attributed to depositors dissatisfied by the Federal Reserve induced low rate environment and perhaps investing in equity markets.

        The rate/volume analysis detailed in Table 2 shows that the increase in net interest income in 2015 was due to loan volume increases exceeding earning asset rate decreases and funding cost rate and volume increases. Earning asset yields declined due to new purchases at lower rates in the investment portfolio and declines in the loan portfolio from existing adjustable-rate loans resetting at lower rates and new lower-rate originations replacing loan amortizations at higher rates. Interest expense increased due to higher deposit volumes.

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        The following table shows changes in net interest income attributed to changes in rates and changes in average balances of interest earning assets and interest bearing liabilities:

Table 2—Rate/Volume Analysis

 
  2015 versus 2014   2014 versus 2013  
 
  Due to Changes in    
  Due to Changes in    
 
In thousands
  Volume   Rate   Total   Volume   Rate   Total  

INTEREST EARNING ASSETS

                                     

Loans

  $ 2,872   $ (355 ) $ 2,517   $ 1,804   $ (1,315 ) $ 489  

Taxable securities

    (285 )   (235 )   (520 )   (310 )   (273 )   (583 )

Tax-exempt securities

    (203 )   20     (183 )   (90 )   (65 )   (155 )

Total Securities

    (488 )   (215 )   (703 )   (400 )   (338 )   (738 )

Other

    157     (33 )   124     (59 )   233     174  

Total

  $ 2,541   $ (603 ) $ 1,938   $ 1,345   $ (1,420 ) $ (75 )

INTEREST BEARING LIABILITIES

                                     

Interest bearing demand deposits

  $ 3   $ (10 ) $ (7 ) $ (3 ) $ (10 ) $ (13 )

Savings deposits

    18     15     33     3     (6 )   (3 )

Time deposits

    75     209     284     (87 )   (264 )   (351 )

Short-term borrowings

    (6 )   (10 )   (16 )   (11 )   13     2  

Long-term borrowings

    (56 )   (26 )   (82 )   663     (641 )   22  

Total

    34     178     212     565     (908 )   (343 )

Change in Net Interest Income

  $ 2,507   $ (781 ) $ 1,726   $ 780   $ (512 ) $ 268  

        The net change attributable to the combination of rate and volume has been allocated on a consistent basis between volume and rate based on the absolute value of each. For yield calculation purposes, nonaccruing loans are included in average balances.

Provision for Loan Losses

        The provision for loan losses charged against earnings was $0 in 2015, as compared to $150,000 in 2014 and $1,450,000 in 2013. The decrease was a result of the analysis of the adequacy of the allowance for loan losses calculation, as well as improvement in asset quality, including nonaccrual loans decreasing by 44% and all substandard loans decreasing by 24%. Each quarter, the Corporation assesses risk in the loan portfolio compared with the balance in the allowance for loan losses and the current evaluation factors.

        For additional discussion of the provision and the loans associated therewith, please refer to the Asset Quality section of this Management's Discussion and Analysis. ACNB charges confirmed loan losses to the allowance and credits the allowance for recoveries of previous loan charge-offs. For 2015, the Corporation had net charge-offs of $425,000 as compared to net charge-offs of $1,069,000 for 2014.

Other Income

        Other income was $12,406,000 for the year ended December 31, 2015, a $502,000, or 4.2%, increase from 2014. Other income was $11,904,000 for the year ended December 31, 2014, a $201,000, or 1.7%, increase from 2013. The largest source of other income is commissions from insurance sales from RIG, which decreased 4.2% to $4,634,000 in 2015, and increased 3.6% to $4,839,000 in 2014. The decrease in 2015 was due to lower contingent commission payments and a decrease in commercial lines commission income; the 2014 increase was due to higher contingent commission payments and a stabilization of customer commission income. The contingent, or extra, commissions are mostly received

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in March and April of each year, and the amount is at the discretion of various insurance carriers in accordance with applicable insurance regulations. Heightened pressure on commissions is expected to continue in this business line, and contingent commissions are not predictable.

        In 2015, a gain of $261,000 was recognized on sold or merged securities compared to a gain of $62,000 in 2014, and no gains in 2013. Securities were sold in all periods to balance state and local geographic mix, in addition an equity position recognized a $158,000 gain from a merger transaction in 2015. Income from fiduciary activities, which includes fees from both institutional and personal trust and investment management services and estate settlement services, totaled $1,589,000 for the year ended December 31, 2015, as compared to $1,418,000 for 2014 and $1,299,000 for 2013. At December 31, 2015, ACNB had total assets under administration of approximately $178,000,000, compared to $165,000,000 at the end of 2014 and $151,000,000 at the end of 2013. The variations in income were in part due to more assets under management net of lower estate settlement income in 2015 which varies with specific activity.

        Service charges on deposit accounts increased 9.0% to $2,308,000, after decreasing 5.7% in 2014, based upon varying customer actions that affect the volume of fees and due to concerted management of this fee source. Further, certain government regulations and policies effective since 2010 limited service charge increases and make future revenue levels uncertain. Revenue from ATM and debit card transactions decreased 6.1% to $1,456,000 due to lower volume. The longer term trend of increased fees resulted from consumer desire to use more electronic delivery channels; however, regulations or legal challenges for large financial institutions may impact industry pricing for such transactions and fees in connection therewith in future periods, the effect of which cannot be currently quantified. Another more recent threat to this revenue source is the security breaches in the merchant base that are negatively affecting consumer confidence in the debit card channel. Income from sold mortgages, included in other income, increased by $278,000, or 130.8%, to $491,000 in 2015 as new originations markedly increased in mortgage types that are sold (for interest rate risk reasons) rather than retained in portfolio. This revenue source is subject to wide divergence due to national and local economic trends.

Impairment Testing

        RIG has certain long-lived assets, including purchased intangible assets subject to amortization such as insurance books of business, and associated goodwill assets, which are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the statement of condition and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.

        Goodwill, which has an indefinite useful life, is evaluated for impairment annually and is evaluated for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. Accounting rules permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The goodwill impairment analysis currently used by the Corporation is a two-step test. The first step, used to identify potential impairment, involves comparing the reporting unit's estimated fair value to its carrying value, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds the estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment. If required, the second step involves calculating an implied fair value of goodwill for the

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reporting unit for which the first step indicated potential impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit to a group of likely buyers whose cash flow estimates could differ from those of the reporting entity, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to the reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. Subsequent reversal of goodwill impairment losses is not permitted.

        As noted above, commissions from insurance sales were down 4.2% in 2015, however RIG's stand alone net income was the same in 2015 compared to 2014 because of expense reductions. The testing for potential impairment involves methods that include both current and projected income amounts, and RIG's fair value remained above the carrying value as of the most recent annual impairment test date. Thus, the results of the annual evaluations determined that there was no impairment of goodwill, including the testing at October 1, 2015. However, declines in RIG's net income or changes in external market factors, including likely buyers that are assumed in impairment testing, may require an impairment charge to goodwill. Should it be determined in a future period that the goodwill has been impaired, then a charge to earnings will be recorded in the period that such a determination is made.

Other Expenses

        Other expenses increased 3.0% to $33,234,000 for the year ended December 31, 2015. The largest component of other expenses is salaries and employee benefits, which increased 7.3% in 2015 to $20,932,000 compared to $19,516,000 in 2014, and increased $566,000, or 3.0%, from 2013 to 2014. The reasons for the increase in salaries and employee benefits expenses include the following:

    increased staff in support functions and higher skilled mix of employees necessitated by regulations and growth;

    normal merit increases to employees and associated payroll taxes;

    higher performance-based commissions and incentives;

    higher employee benefit plan costs, including health insurance;

    increases related to 401(k) plan and non-qualified retirement plan benefits; and,

    increased defined benefit pension expense due to plan investment performance and continued low discount rates (increasing the liabilities for future obligations).

        The Corporation reduced the benefit formula for the defined benefit pension plan effective January 1, 2010, in order to manage total benefit costs. Subsequently, the Corporation amended the defined benefit pension plan effective April 1, 2012, in that no employee hired after March 31, 2012, shall be eligible to participate in the Plan and no inactive or former plan participant shall be eligible to again participate in the Plan. The Corporation's overall pension plan investment strategy is to achieve a mix of investments to meet the long-term rate of return assumption and near-term pension obligations with a diversification of asset types, fund strategies, and fund managers. The mix of investments is adjusted periodically by retaining an advisory firm to recommend appropriate allocations after reviewing the Corporation's risk tolerance on contribution levels, funded status, plan expense, as well as any applicable regulatory requirements. However, the determination of future benefit expense is also dependent on the fair value of assets and the discount rate on the year-end measurement date, which in recent years has experienced fair value volatility and low discount rates. The expense will be higher in 2016 due to the lower plan return in 2015, and change in mortality tables utilized. A pension

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provision in a public law known as MAP-21, enacted in July 2012, had no effect on reducing the GAAP expense associated with the plan. In addition, the ACNB plan has maintained a well-funded status.

        Net occupancy expense was up 5.9% at $2,170,000 in 2015, $2,050,000 in 2014, and $1,957,000 in 2013. Equipment expense totaled $3,007,000 during 2015, as compared to $2,768,000 during 2014 and $2,826,000 during 2013. Occupancy expense was up in 2015 due to more revenue generating locations; and equipment expense increased in 2015 due to ongoing support and maintenance of financial systems applications and security technology. Equipment expense is subject to ever increasing technology demands and the need for system upgrades for security and reliability purposes; the decrease in expense in 2014 was outside the normal increased expense trend.

        Professional services expense totaled $844,000 for 2015, as compared to $936,000 for 2014 and $895,000 for 2013. The variation in expense from year to year included varying legal costs associated with problem loans and corporate governance, as well as the expense of heightened compliance monitoring on existing regulations and the expense of implementing new regulations including the Dodd-Frank Act. Other tax expense increased $42,000 or 5.7% in 2015 compared to 2014. 2014 decreased from 2013 due to a lower rate. Various budget proposals under consideration could again increase the rate on the stockholders' equity-based state tax. Supplies and postage expense increased in 2015 compared to the prior year due to outsourcing that reduced other expense categories, 2014 decreased from the prior year due to customers' increased use of electronic channels.

        Marketing and corporate relations expense decreased 23.1% during 2015 which included normal product promotions and image expenditures, while in addition to normal expenses in 2014, a new office campaign increased this expense category 48.2% higher than the 2013 product promotions and image expenditures.

        FDIC and regulatory expense for 2015 was $665,000, a decrease of $83,000 from $748,000 in 2014. FDIC and regulatory expense in 2013 was $768,000. FDIC expense varies with changes in net asset size, risk ratings, and FDIC derived assessment rates.

        Foreclosed assets held for resale consist of the fair value of real estate acquired through foreclosure on real estate loan collateral or the acceptance of ownership of real estate in lieu of the foreclosure process. Fair values are based on appraisals that consider the sales prices of similar properties in the proximate vicinity less estimated selling costs. Foreclosed real estate expenses were $119,000, $346,000 and $576,000 for the years ended December 31, 2015, 2014 and 2013, respectively. The higher expense in 2013 and to a lesser extent in 2014 was a result of properties that suffered decreases in value after acquisition (requiring write-downs to fair value) during prolonged marketing cycles for these distressed properties and, in some cases, during which the debtor remained in physical possession while eviction actions were contested and finally executed. Values are written down based upon updated appraisals less selling costs (which in the often extended marketing periods can create multiple year expenses) and other fair value adjustments, or in some cases properties are written down based on sales agreements that do not subsequently close. In all, the historically high costs of all years consisted of these write-downs and other costs to carry and was due to the increased number and varying mix of commercial and residential collateral for which such carrying costs include insurance, property maintenance, unpaid and ongoing property taxes, and deferred maintenance required upon acquisition. Foreclosed real estate expenses will vary in 2016 depending on the successful sales on some existing properties and the unknown expenses related to new properties acquired.

        Intangible assets related to the initial purchase of the insurance agency subsidiary were completely amortized at the end of 2014 which decreased this expense by 48.2% in 2015. Other operating expense decreased $34,000 or 1.0% in 2015 as a result of a variety of mostly offsetting variances including various data channels, corporate governance and risk management (including training) expenditures. Other operating expense decreased 5.6% in 2014 from 2013 mainly as a result of costs associated with corporate governance and communications. All periods include higher cost of the Bank's legal

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responsibility to reimburse customers in electronic transactions disputes even when another party is at fault.

Provision for Income Taxes

        ACNB recognized income taxes of $3,761,000, or 25.5% of pretax income, during 2015, as compared to $3,080,000, or 23.0%, during 2014 and $2,535,000, or 21.4%, during 2013. The variances from the federal statutory rate are generally due to tax-exempt income from investments in and loans to state and local units of government at below-market rates (an indirect form of taxation), investment in bank-owned life insurance, and investments in low-income housing partnerships (which qualify for federal tax credits).

        The increasing effective tax rate during 2015, 2014, and 2013 was a result of increasing pretax income in relationship to expiration of tax credits. Pretax income increased in each year due to revenue and expense elements described above.

        At December 31, 2015, net deferred tax assets amounted to $2,151,000. Deferred tax assets are realizable primarily through future reversal of existing taxable temporary differences and future earnings. Management currently anticipates future earnings and capital gains will be adequate to utilize deferred tax assets. Accordingly, no valuation allowance has been established for deferred tax assets at December 31, 2015.

FINANCIAL CONDITION

        Average earning assets increased in 2015 to $1,031,924,000, or by 5.6%, from $977,389,000 in 2014 following $965,445,000 in 2013. ACNB's overnight interest bearing deposits increased in 2015 on average, as more funds were allocated into liquid short-term investment due to temporary increases in funding. On average, investments decreased in 2015 and 2014 as repayments and maturities were used to fund loan demand. Average loans increased 8.9% and 5.8% on average in 2015 and 2014, respectively. Growth in loans was funded by increased deposits, investment cash flow and term FHLB borrowings. Average deposits increased 7.3% in 2015 to $877,448,000 from $817,725,000 in 2014 and $820,793,000 in 2013. Average borrowings decreased in 2015 to $118,670,000 from $125,441,000 in 2014 and $108,495,000 in 2013. Fluctuations in borrowings are term borrowing to fund loan demand and variations in local customer repurchase accounts, which are akin to deposits.

Investment Securities

        ACNB uses investment securities to generate interest and dividend income, manage interest rate risk, provide collateral for certain funding products, and provide liquidity. The changes in the securities portfolio in 2015 were mainly to deploy available funds into the appropriate mix of earning assets. Investing into investment security portfolio assets over the last several years was made more challenging due to the Federal Reserve's program commonly called Quantitative Easing in which, by the Federal Reserve's open market purchases, the yields were maintained at a lower level than would otherwise be the case. The mix in the securities portfolio during 2014 was changed to deploy available funds into the appropriate mix of earning assets. The investment portfolio is comprised of U.S. Government agency, municipal, and corporate securities. These securities provide the appropriate characteristics with respect to credit quality, yield and maturity relative to the management of the overall balance sheet.

        At December 31, 2015, the securities balance included a net unrealized gain on available for sale securities of $1,164,000, net of taxes, on amortized cost of $123,929,000 versus a net unrealized gain of $2,570,000, net of taxes, on amortized cost of $114,106,000 at December 31, 2014. The change in fair value of available for sale securities during 2015 was a result of a higher amount of investments in the available for sale portfolio, offset by a increase in the U.S. Treasury yield curve rates and the spread from this yield curve required by investors on the types of investment securities that ACNB owns. The

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Federal Reserve ceased their rate-decreasing Quantitative Easing program in 2014 and increased the the fed funds rate in mid-December 2015 causing the U. S. Treasury yield curve to increase in the time terms relevant to the investment securities in the Corporation's portfolio. Previously, after a prolonged period of inaction by the Federal Reserve after a lowering rates on the yield curve most conducive to stimulating the housing market and to boost employment and consumption was augmented by a combination of weak domestic and international economic conditions, leading to generally lower rates on the yield curve at the end of 2014. However, fair values were volatile on any given day in 2015 and such volatility will continue.

        At December 31, 2015, the securities balance included held to maturity securities with an amortized cost of $71,542,000 and a fair value of $71,363,000, as compared to an amortized cost of $73,346,000 and a fair value of $73,057,000 at December 31, 2014. The held to maturity securities are U.S. government agency debentures and pass-through mortgage-backed securities in which the full payment of principal and interest is guaranteed; however, they are not classified as available for sale because of prevailing low interest rates at purchase, therefore these securities are projected not to be practicable to sell for liquidity needs in future periods. These securities are generally used as required collateral for certain eligible government accounts or repurchase agreements. They are also held for possible pledging to access additional liquidity for banking subsidiary needs in the form of Federal Home Loan Bank borrowings.

        The Corporation does not own investments consisting of pools of Alt-A or subprime mortgages, private label mortgage-backed securities, or trust preferred investments.

        The fair values of securities available for sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1) or by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific security but rather by relying on the security's relationship to other benchmark quoted prices. The Corporation uses independent service providers to provide matrix pricing. Please refer to Note C—"Securities" in the Notes to Consolidated Financial Statements for more information on the security portfolio and Note L—"Fair Value Measurements" in the Notes to Consolidated Financial Statements for more information about fair value.

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        The following tables set forth the composition of the securities portfolio and the securities maturity schedule, including weighted average yield, as of the end of the years indicated:

Table 3—Investment Securities

In thousands
  2015   2014   2013  

AVAILABLE FOR SALE SECURITIES AT FAIR VALUE

                   

U.S. Government and agencies

  $ 46,029   $ 17,317   $ 21,651  

Mortgage-backed securities

    42,839     53,262     53,740  

State and municipal

    28,078     35,445     41,522  

Corporate bonds

    6,955     10,083     11,165  

CRA mutual fund

    1,053     1,058     1,033  

Stock in other banks

    739     835     872  

    125,693     118,000     129,983  

HELD TO MATURITY SECURITIES AT AMORTIZED COST

                   

U.S. Government and agencies

    31,044     24,497     37,528  

Mortgage-backed securities

    40,498     48,849     56,845  

    71,542     73,346     94,373  

TOTAL

  $ 197,235   $ 191,346   $ 224,356  

        Table 4 discloses investment securities at the scheduled maturity date at December 31, 2015. Many securities have call features that make their redemption possible before the stated maturity date.

Table 4—Securities Maturity Schedule

 
  1 Year or Less   Over 1-5 Years   Over 5-10 Years   Over 10 Years
or No Maturity
  Total  
Dollars in thousands
  Amount   Yield   Amount   Yield   Amount   Yield   Amount   Yield   Amount   Yield  

U.S. Government and agencies

  $ 9,889     2.20 % $ 58,239     1.64 % $ 9,134     2.61 % $     % $ 77,262     1.82 %

Mortgage-backed securities

            6,482     4.66     28,654     2.96     46,890     2.45     82,026     2.80  

State and municipal

    496     3.75     14,683     3.15     12,093     3.46     165     4.63     27,437     3.30  

Corporate bonds

    2,000     2.70             5,000     1.23             7,000     1.65  

CRA mutual fund

                            1,044         1,044      

Stock in other banks

                            702         702      

  $ 12,385     2.34 % $ 79,404     2.16 % $ 54,881     2.85 % $ 48,801     2.37 % $ 195,471     2.42 %

        Securities are at amortized cost. Mortgage-backed securities are allocated based upon scheduled maturities.

Loans

        Year over year, loans outstanding increased by $53,688,000, or 6.7%, in 2015, as compared to 9.7% growth experienced in 2014, both years demonstrating the determined efforts to lend to creditworthy borrowers subject to the Corporation's disciplined underwriting standards despite the continued slow economic conditions and intense competition. The lower increase in 2015 was caused by concerted efforts to produce new loans however several large local loans paid off early. Within the portfolio, higher growth was centered in increased commercial purpose loans/commercial construction loans, while lower growth was in local market residential mortgages. The commercial purpose segments increased $52,373,000, or 14.2%, during 2015, spread among diverse categories that include farmland secured, loans to local government units, and other types of commercial lending. Residential real estate

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mortgage lending, which includes smaller commercial purpose loans secured by the owner's home, increased by $2,004,000, or 0.5%, to local borrowers who preferred loan types that would not be sold into the secondary mortgage market. Included in the mortgage increase were $4,361,000 in residential mortgage loans secured by junior liens or home equity loans, which are also in many cases junior liens. Junior liens inherently have more credit risk by virtue of the fact that another financial institution may have a senior security position in the case of foreclosure liquidation of collateral to extinguish the debt. Generally, foreclosure actions could become more prevalent if the real estate market weakens, property values deteriorate, or rates increase sharply. Included in commercial purpose were real estate construction loans up $1,219,000, or 10.0% in 2015, as a result of some stabilization in the residential real estate market despite stricter underwriting on this loan type due to the category's credit attributes.

        A similar higher mix of commercial purpose loans was $70,624,000 or 9.7% increase in 2014 compared to 2013 as the result of both lower residential mortgage activity and the reluctance to leave longer terms residential loans in the portfolio. In 2013, commercial lending staff concentrated in maintaining business lending outstandings despite reduced business activity in the market area that hindered new originations, as well as management's decision to not renew certain commercial loans, primarily participation credits in conjunction with other financial institutions, due to perceived potential credit risk.

Table 5—Loan Portfolio

        Loans at December 31 were as follows:

In thousands
  2015   2014   2013   2012   2011  

Commercial, financial and agricultural

  $ 117,692   $ 74,855   $ 59,217   $ 49,004   $ 56,145  

Real estate:

                               

Commercial

    289,899     281,582     239,186     243,019     236,017  

Construction

    13,429     12,210     11,196     19,154     22,757  

Residential

    417,352     415,348     404,861     381,966     363,798  

Consumer

    14,588     15,277     14,188     14,993     15,751  

Total Loans

  $ 852,960   $ 799,272   $ 728,648   $ 708,136   $ 694,468  

        The repricing range of the loan portfolio at December 31, 2015, and the amounts of loans with predetermined and fixed rates are presented in the tables below:

Table 6—Loan Sensitivities

LOANS MATURING

In thousands
  Less than
1 Year
  1-5 Years   Over
5 Years
  Total  

Commercial, financial and agricultural

  $ 12,667   $ 41,538   $ 63,487   $ 117,692  

Real estate:

                         

Commercial

    10,812     104,789     174,298     289,899  

Construction

    3,273     3,283     6,873     13,429  

Residential

    51,562     83,091     282,699     417,352  

Total

  $ 78,314   $ 232,701   $ 527,357   $ 838,372  

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LOANS BY REPRICING OPPORTUNITY

In thousands
  Less than
1 Year
  1-5 Years   Over
5 Years
  Total  

Commercial, financial and agricultural

  $ 28,611   $ 41,551   $ 47,530   $ 117,692  

Real estate:

                         

Commercial

    66,763     152,041     71,095     289,899  

Construction

    4,201     28     9,200     13,429  

Residential

    79,636     68,893     268,823     417,352  

Total

  $ 179,211   $ 262,513   $ 396,648   $ 838,372  

Loans with a fixed interest rate

  $ 16,948   $ 58,157   $ 357,798   $ 432,903  

Loans with a variable interest rate

    162,263     204,356     38,850     405,469  

Total

  $ 179,211   $ 262,513   $ 396,648   $ 838,372  

        Most of the Corporation's lending activities are with customers located within southcentral Pennsylvania and in the northern Maryland area that is contiguous to its Pennsylvania retail banking offices. This region currently and historically has lower unemployment than the U.S. as a whole. Included in commercial real estate loans are loans made to lessors of non-residential properties that total $130,539,000, or 15.3% of total loans, at December 31, 2015. These borrowers are geographically dispersed throughout ACNB's marketplace and are leasing commercial properties to a varied group of tenants including medical offices, retail space, and other commercial purpose facilities. Because of the varied nature of the tenants, in aggregate, management believes that these loans present an acceptable risk when compared to commercial loans in general. ACNB does not originate or hold Alt-A or subprime mortgages in its loan portfolio.

Asset Quality

        The ACNB loan portfolio is subject to varying degrees of credit risk. Credit risk is mitigated through prudent underwriting standards, ongoing credit review, and monitoring and reporting asset quality measures. Additionally, loan portfolio diversification, limiting exposure to a single industry or borrower, and requiring collateral also reduces ACNB's credit risk.

        ACNB's commercial, consumer and residential mortgage loans are principally to borrowers in southcentral Pennsylvania and northern Maryland. As the majority of ACNB's loans are located in this area, a substantial portion of the debtor's ability to honor the obligation may be affected by the level of economic activity in the market area.

        The unemployment rate in ACNB's market area remained below the state and national average during 2015. Additionally, low interest rates, a less volatile local economy, and minimal inflation continued to provide some support to the economic conditions in the area. During 2015, continued contraction in new residential real estate development/construction and general lower economic activity lingered from the 2007 to 2009 major recession, challenging the Corporation's marketplace commercial activity. Slower growth areas such as ACNB's marketplace generally do not retract in economic recessions as quickly and as low as other areas of the country, however the recovery from low economic cycles are also generally slower.

        Non-performing assets include nonaccrual loans and restructured loans (troubled debt restructures or TDRs), accruing loans past due 90 days or more, and other foreclosed assets. The accrual of interest on residential mortgage and commercial loans (consisting of commercial and industrial, commercial real estate, and commercial real estate construction loan categories) is discontinued at the time the loan is 90 days past due unless the credit is well secured and in the process of collection. Consumer loans (consisting of home equity lines of credit and consumer loan categories) are typically charged off no

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later than 120 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful. ACNB occasionally returns nonaccrual loans to performing status when the borrower brings the loan current and performs in accordance with contractual terms for a reasonable period of time. ACNB categorizes a loan as a TDR if it changes the terms of the loan, such as interest rate, repayment schedule or both, to terms that it otherwise would not have granted to a borrower, for economic or legal reasons related to the borrower's financial difficulties.

        The following table sets forth the Corporation's non-performing assets as of the end of the years indicated:

Table 7—Non-Performing Assets

Dollars in thousands
  2015   2014   2013   2012   2011  

Nonaccrual loans, including TDRs

  $ 3,699   $ 6,648   $ 8,573   $ 6,327   $ 12,846  

Accruing loans 90 days past due

    2,132     1,636     1,926     771     1,191  

Total Non-Performing Loans

    5,831     8,284     10,499     7,098     14,037  

Foreclosed assets

    580     1,617     1,762     4,247     4,437  

Total Non-Performing Assets

  $ 6,411   $ 9,901   $ 12,261   $ 11,345   $ 18,474  

Total Accruing Troubled Debt Restructurings

  $ 6,792   $ 6,968   $ 7,139   $ 4,815   $  

Ratios:

                               

Non-performing loans to total loans

    0.68 %   1.04 %   1.44 %   1.00 %   2.02 %

Non-performing assets to total assets          

    0.56 %   0.91 %   1.17 %   1.08 %   1.84 %

Allowance for loan losses to non-performing loans

    252.91 %   183.15 %   153.26 %   237.04 %   110.29 %

        If interest due on all nonaccrual loans had been accrued at original contract rates, it is estimated that income before income taxes would have been greater by $456,000 in 2015, $570,000 in 2014, and $704,000 in 2013. The decrease in nonaccrual loans from 2014 to 2015 is discussed further below.

        Impaired loans at December 31, 2015 and 2014, totaled $10,491,000 and $13,616,000, respectively. At December 31, 2015 and 2014, $534,000 and $866,000, respectively, of the impaired loans were troubled debt restructured loans, which were also classified as nonaccrual. $6,792,000 and $6,968,000 of the impaired loans were accruing troubled debt restructured loans at December 31, 2015 and 2014, respectively. Loans whose terms are modified are classified as troubled debt restructurings if the borrowers have been granted concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve interest rates being granted below current market rates for the credit risk of the loan or an extension of a loan's stated maturity date. Nonaccrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired. The related allowance for loan losses on impaired loans totaled $0 and $302,000 at December 31, 2015 and 2014, respectively. The decrease in accruing troubled debt restructurings was due to payments made. The decrease in nonaccrual loans was related to customer payments made and complete payoffs exceeding new non-accrual loans added in 2015 (with adequate real estate collateral), net of other loan amounts that were charged-off. Further discussion on nonaccrual loans is included below in a separate discussion on nonaccrual loans. Potential problem loans are defined as performing loans that have characteristics that cause management to have doubts as to the ability of the borrower to perform under present loan repayment terms and which may result in the reporting of these loans as non-performing loans in the future. Total additional potential problem loans approximated $6,908,000 at December 31, 2015, compared to $9,896,000 at December 31, 2014.

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        Foreclosed assets held for resale consists of the fair value of real estate acquired through foreclosure on real estate loan collateral or the acceptance of ownership of such real estate in lieu of the foreclosure process. Fair values are based on appraisals that consider the sale prices of similar properties in the proximate vicinity less estimated selling costs. Foreclosed assets held for resale totaled $580,000 at December 31, 2015. Three unrelated commercial use or construction real estate properties were brought into foreclosed real estate in 2015, 2014, or 2012 with an aggregate fair value of $90,000. In addition, the fair value of $490,000 for foreclosed real estate at December 31, 2015, represented four residential real estate single family homes, which were taken into foreclosed real estate in 2014 or 2015. All properties are being actively marketed to targeted buyers by external and internal resources. The total of $1,617,000 in foreclosed real estate at December 31, 2014, represented seven unrelated commercial use or construction real estate properties, and five single family homes.

Allowance for Loan Losses

        ACNB maintains the allowance for loan losses at a level believed to be adequate by management to absorb probable losses in the loan portfolio, and it is funded through a provision for loan losses charged to earnings. On a quarterly basis, ACNB utilizes a defined methodology in determining the adequacy of the allowance for loan losses, which considers specific credit reviews, past loan losses, historical experience, and qualitative factors. This methodology results in an allowance that is considered appropriate in light of the high degree of judgment required and that is prudent and conservative, but not excessive.

        Management assigns internal risk ratings for each commercial lending relationship. Utilizing historical loss experience, adjusted for changes in trends, conditions and other relevant factors, management derives estimated losses for non-rated and non-classified loans. When management identifies impaired loans with uncertain collectibility of principal and interest, it evaluates a specific reserve on a quarterly basis in order to estimate potential losses. Management's analysis considers:

    adverse situations that may affect the borrower's ability to repay;

    the current estimated fair value of underlying collateral; and,

    prevailing market conditions.

        If management determines a loan is not impaired, a specific reserve allocation is not required. Management then places the loan in a pool of loans with similar risk factors and assigns the general loss factor to determine the reserve. For homogeneous loan types, such as consumer and residential mortgage loans, management bases specific allocations on the average loss ratio for the previous three years for each specific loan pool. Additionally, management adjusts projected loss ratios for other factors, including the following:

    lending policies and procedures, including underwriting standards and collection, charge-off, and recovery practices;

    national, regional, and local economic and business conditions, as well as the condition of various market segments, including the impact on the value of underlying collateral for collateral dependent loans;

    nature and volume of the portfolio and terms of loans;

    experience, ability and depth of lending management and staff;

    volume and severity of past due, classified and nonaccrual loans, as well as other loan modifications; and,

    existence and effect of any concentrations of credit and changes in the level of such concentrations.

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        Management determines the unallocated portion of the allowance for loan losses, which represents the difference between the reported allowance for loan losses and the calculated allowance for loan losses, based on the following criteria:

    risk of imprecision in the specific and general reserve allocations;

    the perceived level of consumer and small business loans with demonstrated weaknesses for which it is not practicable to develop specific allocations;

    other potential exposure in the loan portfolio;

    variances in management's assessment of national, regional, and local economic conditions; and,

    other internal or external factors that management believes appropriate at that time.

        The unallocated portion of the allowance is deemed to be appropriate as it reflects an uncertainty that remains in the loan portfolio; specifically reserves where the Corporation believes that tertiary losses are probable above the loss amount derived using appraisal-based loss estimation, where such additional loss estimates are in accordance with regulatory and GAAP guidance. Appraisal-based loss derivation does not fully develop the loss present in certain unique, ultimately bank-owned collateral. The Corporation has determined that the amount of provision in 2015 and the resulting allowance at December 31, 2015, are appropriate given the continuing level of risk in the loan portfolio. Further, management believes the unallocated allowance is appropriate, because even though the impaired loans added in 2015 demonstrate generally low risk due to adequate real estate collateral, the value of such collateral can decrease; plus, the growth in the loan portfolio is centered around commercial real estate which continues to have little increase in value and low liquidity. In addition, there are certain loans that, although they did not meet the criteria for impairment, management believes there was a strong possibility that these loans represented probable losses at December 31, 2015.

        Management believes the above methodology accurately reflects losses inherent in the portfolio. Management charges actual loan losses to the allowance for loan losses. Management periodically updates the methodology and the assumptions discussed above.

        Management bases the provision for loan losses, or lack of provision, on the overall analysis taking into account the methodology discussed above. The provision for 2015 was $0, or $150,000 less than the provision for 2014. The provision for 2014 was $150,000, or $1,300,000 less than the provision for 2013. Management believes that the decrease in the provision reflects that potential losses inherent in the portfolio were reflected in previous period provision expense and is consistent with recent improving credit quality in the loan portfolio.

        Federal and state regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for loan losses and may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management's comprehensive analysis of the loan portfolio and economic conditions, management believes the current level of the allowance for loan losses is adequate.

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        The following tables set forth information on the analysis of the allowance for loan losses and the allocation of the allowance for loan losses as of the dates indicated:

Table 8—Analysis of Allowance for Loan Losses

 
  Years Ended December 31,  
Dollars in thousands
  2015   2014   2013   2012   2011  

Beginning balance

  $ 15,172   $ 16,091   $ 16,825   $ 15,482   $ 15,252  

Provision for loan losses

        150     1,450     4,675     5,435  

Loans charged-off:

                               

Commercial, financial and agricultural          

    150     132     178     2,180     1,861  

Real estate

    39     121     996     955     2,550  

Residential mortgage

    637     874     1,062     551     802  

Consumer

    111     64     191     71     30  

Total Loans Charged-Off

    937     1,191     2,427     3,757     5,243  

Recoveries:

                               

Commercial, financial and agricultural          

    369     15     235     22     34  

Real estate

                399      

Residential mortgage

    136     97     4     1     2  

Consumer

    7     10     4     3     2  

Total Recoveries

    512     122     243     425     38  

Net charge-offs

    425     1,069     2,184     3,332     5,205  

Ending balance

  $ 14,747   $ 15,172   $ 16,091   $ 16,825   $ 15,482  

Ratios:

                               

Net charge-offs to average loans

    0.05 %   0.14 %   0.31 %   0.48 %   0.77 %

Allowance for loan losses to total loans

    1.73 %   1.90 %   2.21 %   2.38 %   2.23 %

Table 9—Allocation of the Allowance for Loan Losses

 
  2015   2014   2013   2012   2011  
Dollars in thousands
  Amount   Percent
of Loan
Type to
Total
Loans
  Amount   Percent
of Loan
Type to
Total
Loans
  Amount   Percent
of Loan
Type to
Total
Loans
  Amount   Percent
of Loan
Type to
Total
Loans
  Amount   Percent
of Loan
Type to
Total
Loans
 

Commercial, financial and agricultural

  $ 2,508     13.8 % $ 2,048     9.4 % $ 1,915     8.1 % $ 1,507     6.9 % $ 2,582     8.1 %

Real estate:

                                                             

Commercial

    5,216     34.0     5,872     35.2     5,819     32.8     6,576     34.4     6,007     34.0  

Construction

    112     1.6     194     1.5     247     1.5     518     2.7     548     3.3  

Residential

    3,968     48.9     4,402     52.0     4,550     55.6     4,238     53.9     4,131     52.4  

Consumer

    1,083     1.7     1,050     1.9     947     2.0     633     2.1     419     2.3  

Unallocated

    1,860     N/A     1,606     N/A     2,613     N/A     3,353     N/A     1,795     N/A  

Total

  $ 14,747     100.0 % $ 15,172     100.0 % $ 16,091     100.0 % $ 16,825     100.0 % $ 15,482     100.0 %

        The allowance for loan losses at December 31, 2015, was $14,747,000, or 1.73% of loans, as compared to $15,172,000, or 1.90% of loans, at December 31, 2014. The ratio of non-performing loans plus foreclosed assets to total assets was 0.56% at December 31, 2015, as compared to 0.91% at December 31, 2014.

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        Loans past due 90 days and still accruing were $2,132,000 and nonaccrual loans were $3,699,000 as of December 31, 2015. Loans past due 90 days and still accruing were $1,636,000 at December 31, 2014, while nonaccruals were $6,648,000.

        Additional information on nonaccrual loans at December 31, 2015 and 2014, is as follows:

Dollars in thousands
  Number of
Credit
Relationships
  Balance   Current Specific
Loss Allocations
  Current Year
Charge-Offs
  Location   Originated

December 31, 2015

                               

Commercial real estate construction

    2   $ 374   $   $   In market   2006–2010

Owner occupied commercial real estate

    10     1,676           In market   1995–2012

Investment/rental residential real estate

    3     178           In market   2003–2011

Commercial and industrial

    2     1,471           In market   2006–2007

Total

    17   $ 3,699   $   $        

December 31, 2014

   
 
   
 
   
 
   
 
 

 

 

 

Commercial real estate construction

    2   $ 368   $   $   In market   2006–2010

Owner occupied commercial real estate

    12     3,325         111   In market   1995–2012

Investment/rental residential real estate

    3     1,226     302     543   In market   2003–2011

Commercial and industrial

    3     1,729           In market   2006–2007

Total

    20   $ 6,648   $ 302   $ 654        

        All nonaccrual impaired loans are to borrowers located within the market area served by the Corporation in southcentral Pennsylvania and nearby areas of northern Maryland. All nonaccrual impaired loans were originated by ACNB's banking subsidiary, except for one participation loan discussed below, between 1995 and 2014 for purposes listed in the classifications in the table above.

        Included in commercial real estate construction at December 31, 2015, the Corporation had two impaired and nonaccrual loan of $374,000 to finance unrelated projects in the Corporation's primary trading area of southcentral Pennsylvania. The loans had standard terms and conditions including repayment from the sales or permanent finance of the respective properties and no interest reserves, and were originated during the first half of 2006 and 2014. Foreclosure has been held in abeyance while allowing the pursuit of a workout plan. One workout plan resulted in payments of $420,000 in 2015. One smaller commercial real estate construction loan, added in 2010, was reduced by collateral sales to $94,000 and was moved to foreclosed assets in 2015 with a $39,000 charge off.

        Owner occupied commercial real estate and construction includes 10 unrelated loan relationships, all of which but a $472,000 loan relationship for a local restaurant have balances of less than $386,000 each, for which the real estate is collateral and is used in connection with a business enterprise that is suffering economic stress or is out of business. A restaurant-related loan with normal terms and conditions, was added to nonaccrual in the first quarter of 2012 is supported by a recent appraisal and the loan is current with restructured payments. A farmland relationship with an outstanding balance of $386,000, with normal terms and conditions, was added to nonaccrual in the second quarter of 2013 after the loan matured and the borrower commenced a bankruptcy filing. Based on recent appraisals, the loan appears to be adequately collateralized and some principal payments are being made. The other loans in this category were originated between 1995 and 2010 and are business loans impacted by the general economic downturn that has not recovered. Collection efforts will continue until it is deemed in the best interest of the Corporation to initiate foreclosure procedures. A $619,000 loan was paid in full by the borrower in the second quarter of 2015 and one other unrelated loan totaling $394,000 and was moved to foreclosed assets in 2015 and was subsequently sold.

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        Investment/rental residential real estate includes three unrelated loan relationships totaling $178,000 for which the real estate is collateral and the purpose of which is for speculation, rental, or other non-owner occupied uses. One unrelated loan for approximately $508,000, in this category at December 31, 2014, was moved to foreclosed assets upon receipt of legal title in the first quarter 2015 and was subsequently sold. One loan with a balance of $694,000 had a specific allocation of $302,000 based on appraisal less estimated costs to sell was moved to foreclosed assets in the second quarter 2015 with a $416,000 charge off based on more recent appraisals and remains unsold.

        Included in impaired commercial and industrial loans is a participation loan with standard terms and conditions including repayment from conversion of trade assets for a business in southcentral Pennsylvania in Chapter 11 bankruptcy that has a balance of $1,470,000. This loan was moved to nonaccrual in the third quarter of 2014 after becoming delinquent with no indication of when regular payments would resume. Besides trade assets, the loan is fully guaranteed by a government sponsored entity so no specific allocation was deemed to be necessary. The remaining unrelated smaller loan in this category, a business loan impacted by the general economic downturn, has a remaining balance of $1,000 at December 31, 2015

        The Corporation utilizes a systematic review of its loan portfolio on a quarterly basis in order to determine the adequacy of the allowance for loan losses. In addition, ACNB engages the services of an outside independent loan review function and sets the timing and coverage of loan reviews during the year. The results of this independent loan review are included in the systematic review of the loan portfolio. The allowance for loan losses consists of a component for individual loan impairment, primarily based on the loan's collateral fair value and expected cash flow. A watch list of loans is identified for evaluation based on internal and external loan grading and reviews. Loans other than those determined to be impaired are grouped into pools of loans with similar credit risk characteristics. These loans are evaluated as groups with allocations made to the allowance based on historical loss experience adjusted for current trends in delinquencies, trends in underwriting and oversight, concentrations of credit, and general economic conditions within the Corporation's trading area. The provision expense was based on the loans discussed above, as well as current trends in the watch list and the local economy as a whole. The charge-offs discussed elsewhere in this Management's Discussion and Analysis create the recent loss history experience and result in the qualitative adjustment which, in turn, affects the calculation of losses inherent in the portfolio. The provision for loan losses for 2015 compared to 2014 and 2013 was a result of the measurement of the adequacy of the allowance for loan losses at each period. The decrease in the provision was also a result of the analysis of the adequacy of the allowance for loan losses. More specifically, nonaccrual loans decreased and provision expense decreased due to the amount of the allowance necessary in proportion to substandard loans in accordance with management's belief that adequate collateralization generally exists for substandard loans in accordance with GAAP. Each quarter, the Corporation assesses risk in the loan portfolio compared with the balance in the allowance for loan losses and the current evaluation factors.

Foreclosed Assets Held for Resale

        The carrying value of real estate acquired through foreclosure was $580,000 at December 31, 2015, compared to $1,617,000 at December 31, 2014. The decrease was mainly due to 16 properties that were disposed of in 2015. Four additional commercial properties were added in 2012 through 2013 that remain unsold at December 31, 2015, with an aggregate fair value of $72,000. One unrelated commercial property for $63,000 and three residential properties totaling $445,000 were added in 2015 and remain unsold at December 31, 2015. All properties are actively being marketed. The Corporation expects to obtain and market additional foreclosed assets in 2016; however, the total amount and timing is currently not certain.

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Other Assets

        Other assets decreased $1,750,000, or 8.6%, in 2015 compared to 2014, in part due to a decrease in the Bank's pension plan, including the related deferred tax effect due to the change in discount rate, rate of return, and change in mortality assumptions in 2014.

Deposits

        ACNB relies on deposits as the primary source of funds for lending activities. Average deposits increased 7.3%, or $59,723,000, during 2015, as compared to a 0.4% decrease during 2014. ACNB's deposit pricing function employs a disciplined pricing approach based upon alternative funding rates, but also strives to price deposits to be competitive with relevant local competition, including a local government investment trust, credit unions and larger regional banks. The 2015 average deposit increase in part was due to a shift to transaction accounts as customers put more value in liquidity and FDIC insurance. Products, such as money market accounts and interest-bearing transaction accounts that had suffered declines in past years, continued with recovered balances while time deposits decreased. Year-end 2014 to year-end 2015 recorded an increase in deposits of $68,104,000, or 8.1%, most of which was in large local government non maturity and time deposits, as such funds typically are held for liquidity by those agencies or a no risk alternative to other currently low rate investments. With persistent low market interest rates in a slow economy, ACNB's ability to maintain and add to its deposit base may be impacted by the reluctance of consumers to accept low rates and by competition willing to pay above market rates to attract market share. Alternatively, if rates rise rapidly and the equity markets recover, funds could leave the Corporation or be priced higher to maintain deposits.

Table 10—Time Deposits

        Maturities of time deposits of $100,000 or more outstanding at December 31, 2015, are summarized as follows:

In thousands
   
 

Three months or less

  $ 15,566  

Over three through six months

    23,338  

Over six through twelve months

    30,372  

Over twelve months

    19,193  

Total

  $ 88,469  

Borrowings

        Short-term borrowings are comprised primarily of securities sold under agreements to repurchase and short-term borrowings from the Federal Home Loan Bank (FHLB). As of December 31, 2015, short-term borrowings were $35,202,000, a decrease of $10,497,000, or 23.0%, from the December 31, 2014, balance of $45,699,000. Agreements to repurchase accounts are within the commercial/local government customer base and have attributes similar to core deposits. Investment securities are pledged in sufficient amounts to collateralize these agreements. Compared to year-end 2014, repurchase agreement balances were down due to fluctuations in the business activities of ACNB's commercial/local government customer base. At December 31, 2015, there were $0 in short-term FHLB borrowings, due to daily fluctuation in deposits and loans. Long-term borrowings consist primarily of longer-term advances from the FHLB that provides term funding of loan assets and contribute to a more balanced net repricing position. In addition, such borrowings in prior periods included a loan from a commercial bank to fund the initial purchase of RIG, which was paid off from cash in 2015. Long-term borrowings totaled $76,500,000 at December 31, 2015, versus $80,937,000 at December 31, 2014. The Corporation decreased long-term borrowings 5.5% as funding for loan demand was available

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from other sources. Generally however, as term advances matured, new laddered FHLB fixed-rate term advances were taken in 2015 to reduce net liability sensitivity and to take advantage of lower rates. Further borrowings will be used when necessary for a variety of risk management and funding purposes. Please refer to the Liquidity discussion below for more information on the Corporation's ability to borrow.

        The following tables set forth information about the Corporation's short-term borrowings as of the dates indicated:

In thousands
  2015   2014   2013  

Short-term borrowings outstanding at end of year:

                   

FHLB overnight advance

  $   $   $ 6,800  

Securities sold under repurchase agreements

    35,202     45,699     42,252  

Total

  $ 35,202   $ 45,699   $ 49,052  

 

Dollars in thousands
  2015   2014   2013  

Average interest rate at year-end

    0.12 %   0.14 %   0.14 %

Maximum amount outstanding at any month-end

  $ 66,028   $ 74,846   $ 76,333  

Average amount outstanding

  $ 40,217   $ 44,399   $ 53,184  

Weighted average interest rate

    0.12 %   0.14 %   0.11 %

Capital

        ACNB's capital management strategies have been developed to provide an appropriate rate of return, in the opinion of management, to stockholders, while maintaining its "well capitalized" position in relationship to its risk exposure. Total stockholders' equity was $114,715,000 at December 31, 2015, compared to $110,022,000 at December 31, 2014. Stockholders' equity increased during 2015, a net result of earnings retained in capital during 2015, and a decrease in accumulated other comprehensive income resulting from amounts associated with the pension plan, and the change in fair value of the assets in the available for sale investment portfolio.

        The primary source of additional capital to ACNB is earnings retention, which represents net income less dividends declared. During 2015, ACNB retained $6,197,000, or 56.2%, of its net income, as compared to $5,668,000, or 55.1%, in 2014 and $4,773,000, or 51.2%, in 2013.

        ACNB Corporation has a Dividend Reinvestment and Stock Purchase Plan that provides registered holders of ACNB Corporation common stock with a convenient way to purchase additional shares of common stock by permitting participants in the plan to automatically reinvest cash dividends on all or a portion of the shares owned and to make quarterly voluntary cash payments under the terms of the plan. Participation in the plan is voluntary, and there are eligibility requirements to participate in the plan. Cumulative to December 31, 2015, 111,381 shares were issued under this plan with proceeds in the amount of $1,879,000. Proceeds are used for general corporate purposes.

        ACNB is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on ACNB. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, ACNB must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and reclassifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

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        Quantitative measures established by regulation to ensure capital adequacy require ACNB to maintain minimum amounts and ratios of total and Tier 1 capital to average assets. Management believes, as of December 31, 2015 and 2014, that ACNB's banking subsidiary met all minimum capital adequacy requirements to which it is subject and is categorized as "well capitalized". There are no subsequent conditions or events that management believes have changed the banking subsidiary's category.

Regulatory Capital Changes

        In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The phase-in period for community banking organizations began January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) began compliance effective January 1, 2014. The final rules call for the following capital requirements:

    a minimum ratio of common Tier 1 capital to risk-weighted assets of 4.5%;