ITEM 1. BUSINESS The Registrant owns all the outstanding shares of Adams County National Bank (hereinafter the "Bank"). The Registrant and the Bank have the same Board of Directors. The Registrant, organized in 1983, presently has no significant operations other than serving as a holding company. The Bank engages in a full service commercial and consumer banking and trust business. With its main office at 675 Old Harrisburg Road, Gettysburg, Pa., the Bank provides services to its customers through its branch network of 12 full service offices located throughout Adams County, Pa. and 2 in York County, Pa.
The Bank's services include accepting time, demand, and savings deposits including NOW, supernow, money market, and regular savings accounts, a diversified array of certificates of deposit, IRA's, and club accounts. Its services also include making secured and unsecured commercial and consumer loans, financing commercial transactions, making construction and mortgage loans, and the renting of safe deposit facilities. Additional services include making residential mortgage loans, small business loans, and student loans. The Bank's business loans include seasonal credit, collateral loans and term loans.
Trust services provided by the Bank include services as executor and trustee under wills and deeds, estate planning services, and custodian and agent for various investment companies. Trust services also include transfer agent, registrar of stock and bond issues, and escrow agent. The Bank has a relatively stable deposit base and no material amount of deposits is obtained from a single depositor or group of depositors (including federal, state, and local governments). See Management's Discussion and Analysis in the Annual Report. The Bank has not experienced any significant seasonal fluctuations in the amount of its deposits.
As of December 31, 1995, the Registrant had a total of 152 full-time and 73 part-time employees.
SUPERVISION AND REGULATION
The Registrant and the Bank are considered "affiliates" for purposes of Section 23A of the Federal Reserve Act and as such are subject to certain limitations specified therein on the making of loans on, extensions of credit to, or investments in each other. The Federal Bank Holding Company Act of 1956 restricts the Registrant's activities, whether conducted directly or through subsidiary corporations, to specified activities functionally related to banking. Permissible activities under that Act include lending, certain leasing activities, fiduciary and investment advisory services, acting as insurance agent or broker in connection with loans by subsidiary or affiliated companies, and certain bookkeeping or data processing services.
COMPETITION
All phases of the Bank's business are highly competitive. The Bank's market area is the primary trade area of Adams County, Pa., a western portion of York County, Pa. and the northernmost portions of those counties in Maryland which are immediately adjacent to the southern border of Adams County, with concentration in the Gettysburg, Pa. area. The Bank competes with local commercial banks as well as other commercial banks with branches in the Bank's market area. The Bank considers its major competition to be PNC Corporation, Farmers Bank and Trust Company, a subsidiary of Dauphin Deposit Corporation, and Bank of Hanover and Trust Co.
GOVERNMENT MONETARY POLICIES AND ECONOMIC CONTROLS
The earnings and growth of the Bank are affected by the policies of the regulatory authorities including the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation. An important function of the Federal Reserve System is to
regulate the money supply and interest rates. Among the instruments used to implement these objectives are open market operations in U.S. Government Securities and changes in reserve requirements against member bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of Bank loans, investments, and deposits. Their use may also affect interest rates charged on loans or paid for deposits. The policies and regulations of the Federal Reserve Board have had and will probably continue to have a significant effect on the Bank's deposits, loans, and investment growth, as well as the rate of interest earned and paid. The effect of such policies and regulations upon the future business and earnings of the Bank cannot be accurately predicted.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
Ronald L. Hankey 55 Director and President of the Corporation and the Bank
John W. Krichten 49 Secretary/Treasurer of the Corporation and Senior Vice President, Cashier, and Chief Financial Officer of the Bank
Lynda L. Glass 35 Assistant Secretary of the Corporation and Senior Vice President of the Bank
CONSOLIDATED FINANCIAL AND STATISTICAL PROFILE
The following tables set forth statistical information relating to the Registrant and the Bank. The tables should be read in conjunction with the consolidated financial statements of the Registrant which are incorporated by reference hereinafter.
INVESTMENT PORTFOLIO
The following tables show the year-end composition of the investment security portfolio for the three years ended December 31, 1995; the maturity distribution of the portfolio at December 31,1995; and the weighted average yield of the portfolio at December 31, 1995.
Book Value December 31, HELD TO MATURITY 1995 1994 1993 (in thousands) U.S. Government and Federal Agency Obligations $101,400 $141,140 $142,769 State and Political Subdivision Obligations 962 1,509 1,296 Other Securities 2,480 2,256 3,737 -------- -------- -------- TOTAL $104,842 $144,905 $147,802
Maturity Distribution Book Value After After 1 year 1 to 5 5 to 10 Over or less years years 10 years (in thousands) U.S. Government and Federal Agency Obligations $39,326 $62,074 $ 0 $ 0 State and Political Subdivision Obligations 37 253 423 249 Other Securities 0 0 0 2,480 ------- ------- ------- ------- TOTAL $39,363 $62,327 $ 423 $ 2,729
* Federal Reserve Bank stock and Federal Home Loan Bank stock, having no stated maturity, have been included in "Over 10 years" in the above table.
Weighted Average Yield After After 1 year 1 to 5 5 to 10 Over 10 or less years years years Total (in thousands) U.S. Government and Federal Agency Obligations 4.63% 6.12% 5.54% State and Political Subdivision Obligations 9.09% 9.09% 9.09% 9.09% 9.09% Other Securities 6.00% 6.00%
The weighted average yield of tax exempt obligations has been calculated on a tax equivalent basis. The amounts of the taxable equivalent adjustments are based on an effective tax rate of 34%.
LOAN PORTFOLIO
The following summary shows the composition of the loan portfolio for the five years ended December 31, 1995:
1995 1994 1993 1992 1991 Domestic Loans: Commercial, Financial, and Agricultural $ 9,268 $ 10,785 $ 14,100 $ 16,104 $ 17,038 Real Estate Loans 284,943 268,944 250,242 250,359 261,145 R/E Construction 12,951 12,632 4,791 4,732 4,938 Consumer 18,150 17,444 17,950 20,867 23,387 -------- -------- -------- -------- -------- Total Loans $325,312 309,805 287,083 292,062 306,508 Unearned Discount 2.184 3,883 3,785 4,239 4,708 -------- -------- -------- -------- -------- Total $323,128 $305,922 $283,298 $287,823 $301,800
The following table shows the repricing opportunities for all loans outstanding as of December 31, 1995. Those loans with immediately adjustable rates (such as loans tied to prime) will be totaled in the thirty day column. Those loans with
rates that are adjustable at some time over the life of the loan will be totaled under the time heading when they become adjustable. All fixed rate loans will be totaled under the heading which they mature.
REPRICING From 30 After Thirty Days To 1 to 5 After Days 1 year Years 5 Years Total (in thousands) Commercial, Financial, and Agricultural $56,915 $ 14,103 $27,486 $2,866 $101,370 Consumer 5,565 14,519 18,512 38,596 Real Estate 7,922 145,961 30,288 1,175 185,346 ------- -------- ------- ------ -------- Total $70,402 $174,583 $76,286 $4,041 $325,312
Included in the Real Estate total due within one year are $151,000,000 of Adjustable Rate Mortgages (ARM). The Bank's ARM has a 2% per year interest rate cap with a lifetime cap of 5%. The index used is the Federal Housing Finance Board's National Average Mortgage Contract Rate for Mortgage Lenders on the Purchase of Previously Occupied Homes.
The following table presents information concerning the aggregate amount of nonperforming assets. Nonperforming assets comprise (a) loans accounted for on a nonaccrual basis; (b) loans contractually past due ninety days or more but still accruing; (c) loans with deferral of interest or principal because of deterioration in the financial position of the borrower (exclusive of loans in (a) or (b)); (d) loans now current where there are serious doubts as to the ability of the borrower to comply with present loan repayment terms; and (e) other real estate owned.
December 31 1995 1994 1993 1992 1991 (in thousands) Loans accounted for on a nonaccrual basis $1,093 $ 854 $ 977 $ 905 $1,093
Loans contractually past due 90 days or more as to inte- rest or principal payments 2.780 2,219 2,614 3,900 3,800
Loans whose terms have been renegotiated to provide a reduction or deferral of inte- rest or principal because of a deterioration in the financial position of the borrower 0 0 377 0 0
Loans now current where there are serious doubts as to the ability of the borrower to comply with present loan repayment terms 0 0 0 0 0
Other real estate owned 689 1,037 850 1,110 0
The Bank does not accrue interest on any loan when principal or interest are in default for 90 days or more unless the loan is well secured and in the process of collection. Consumer loans and residential real estate loans secured by 1 to 4 family dwellings shall ordinarily not be subject to these guidelines.
When a loan is placed in a nonaccrual status all previously accrued but uncollected interest is charged against the interest income account. Previously accrued interest is not charged off if principal and interest are protected by sound collateral values.
SUMMARY OF LOAN LOSS EXPERIENCES
A detailed analysis of the Bank's Reserve for Loan Losses for the past five years is shown below:
Year ended December 31 1995 1994 1993 1992 1991 Balance of reserve for loan losses at beginning of period $3,370 $3,581 $3,417 $2,815 $2,366 Loans charged off: Commercial, financial, and agricultural 0 8 37 90 77 Real estate-mortgage 44 178 35 75 102 Real estate-construction 0 0 0 0 34 Consumer 90 70 120 125 148 ------ ------ ------ ------ ------ Total loans charged off 134 256 192 290 361
Recovery of charged off loans: Commercial, financial, and agricultural 12 5 8 22 3 Real estate-mortgage 1 13 1 1 22 Real estate-construction 0 0 0 0 17 Consumer 25 27 32 14 23 ------ ------ ------ ------ ------ Total recoveries 38 45 41 37 65
Net loans charged off 96 211 151 253 296 Additions to reserve 0 0 315 855 745
Balance at end of period $3,274 $3,370 $3,581 $3,417 $2,815
The amounts of additional provision to the reserve were based on management's judgment after considering an analysis of larger loans, all loans known to management to have unusual risk characteristics, non-performing or problem loans, historical patterns of charge-offs and recoveries, and actual net charge-offs. Further consideration was given to current economic and employment conditions both nationally and in the Bank's local service area. Loans secured by real estate comprise 92% of the Bank's total loan portfolio at December 31, 1995. The majority of loans in both the commercial,
financial, and agricultural category and the consumer category are also secured by personal property, negotiable assets, or business assets. This conservative policy explains the low ratio of losses to loans experienced by the Bank over the last five years. This policy did not change during the year ending 1995. 1996 net losses for all loan categories are expected to approximate $150,000.
The following table reflects certain historical statistics of the Bank relative to the relationship among loans (net of unearned discount), net charge-offs, and the reserve:
Year ended December 31 1995 1994 1993 1992 1991 (in thousands) Balances Average total loans $319,712 $289,350 $288,790 $293,075 $307,489 Total loans at yearend 323,128 305,922 283,298 287,823 301,800 Net charge-offs 96 211 151 253 296 Reserve for loan losses at yearend 3,274 3,370 3,581 3,417 2,815
Ratios
Net charge-offs to: Average total loans .03% .07% .05% .09% .10% Total loans at yearend .03 .07 .05 .09 .10 Reserve for loan losses 2.93 6.26 4.22 7.40 10.52
Reserve for loan losses to: Average total loans 1.02 1.16 1.24 1.17 .92 Total loans at yearend 1.01 1.10 1.26 1.19 .93
DEPOSITS The average daily amounts of deposits are summarized below:
Year ended December 31 1995 1994 1993 (in thousands) Demand deposits $40,027 $ 38,772 $ 33,906 Interest-bearing demand deposits 48,805 56,420 50,563 Savings 116,660 137,910 127,785 Time deposits (excluding time cer- tificates of deposit of $100,000 or more) 169,276 162,366 173,880 Time certificates of $100,000 or more 11.720 13,856 18,255 -------- -------- -------- Total $386,488 $409,324 $404,389
Maturities of time deposits of $100,000 or more outstanding at December 31, 1995 are summarized as follows (in thousands):
3 months or less $ 4,324 Over 3 through 6 months 3,785 Over 6 through 12 months 5,276 Over 12 months 3,064 ------- Total $16,449
FINANCIAL RATIOS
The following ratios are among those commonly used in analyzing bank holding company statements.
Year ended December 31
1995 1994 1993 1992 1991 Profitability ratios:
Rate of return on average: Earning assets 1.47% 1.49% 1.57% 1.66% 1.51% Total assets 1.41 1.43 1.51 1.59 1.45 Total stockholders equity 12.84 14.15 15.61 17.63 16.85
Liquidity and capital ratios: Average primary (1) capital to average total assets 11.68 10.85 10.48 9.74 9.21 Average total stockholders eq- uity to average earning assets 11.41 10.54 10.07 9.40 8.95 Average total stockholders eq- uity to average total assets 10.96 10.12 9.70 9.04 8.62 Common dividend payout ratio (2) 54.30 50.45 44.73 40.68 42.74
(1) includes total stockholders equity and reserve for loan losses. (2) Cash dividends paid on common stock as a percentage of net income.
ITEM 2.

ITEM 2. PROPERTIES
The principal properties of the Registrant and its subsidiary are those held by the Bank. The Bank's main office and executive offices are located at 675 Old Harrisburg Road, Gettysburg, Adams County, Pa. Additionally, the Bank owns 13 other properties located at 2 Chambersburg St., 18-20 Chambersburg St., 22-22 1/2 Chambersburg St., Gettysburg, Pa.; 17 S. Queen St., W. King St., Littlestown, Pa.; 369 Main St., McSherrystown; 1677 Abbottstown Pike, East Berlin, Pa.; 202 Main St., York Springs, Pa.; 101 Main St., Arendtsville, Pa.; U.S. Rte. 30, Cashtown, Pa.; 101 N. Main St., Bendersville, Pa.; Rte. 116 and Sanders Road, Fairfield, Pa.; and Eichelberger St. and Kennedy Ct., Hanover, Pa. The Bank also leases a full service office at South Main St., Biglerville, Pa.; and a supermarket office at 400 Eisenhower Drive, Hanover, Pa.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Registrant or the Bank. Note K on page 33 of the Annual Report is herein incorporated by reference.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Page 37, entitled "Common Stock Market Prices and Dividends" and Note G on page 31 of the Annual Report to Shareholders for the year ended December 31, 1995, are herein incorporated by reference.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data on page 36 of the Annual Report to Shareholders for the year ended December 31, 1995, is herein incorporated by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 15 through 21 of the Annual Report to Shareholders for the year ended December 31, 1995, is hereby incorporated by reference.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPLEMENTARY DATA
The consolidated financial statements of the Registrant and the Bank, included in the Annual Report to Shareholders, on pages 22 through 34 for the year ended December 31, 1995, are incorporated herein by reference.
ITEM 9.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
That portion of the Registrant's Proxy Statement dated April 10, 1996, entitled "Election of Directors", appearing on pages 5 through 9 thereof, is hereby incorporated by reference. Information regarding executive officers of the Registrant is included in PART I, ITEM I, BUSINESS.
ITEM 11.

ITEM 11. MANAGEMENT REMUNERATION
Those portions of the Registrant's Proxy Statement dated April 10, 1996, entitled "Executive Compensation" and "Compensation of Directors", appearing on page 9 through 14 thereof, are hereby incorporated by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of February 29,1996, there were no persons known to the Registrant to be beneficial owners of more than 5% of the Registrant's common capital stock. Those portions of the Registrant's Proxy Statement dated April 10, 1996, entitled "Beneficial Ownership by Officers, Directors and Nominees", appearing on pages 3 through 5 are hereby incorporated by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information on page 15 through 16 of the Registrant's Proxy Statement dated April 10, 1996, is hereby incorporated by reference. Footnote M--Loans to Related Parties included in the Annual Report to Shareholders, on page 34, for the year ended December 31, 1995, is herein incorporated by reference.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The Report of Independent Certified Public Accountants is on page 14.
Item 14(a)(1) Financial Statements: The following consolidated financial statements of the Registrant and its wholly-owned subsidiary included in the Annual Report to Shareholders, page 22 through 34, for the year ended December 31, 1995, are incorporated by reference in Item 8:
Consolidated Balance Sheets - December 31, 1995 and 1994
Consolidated Statements of Income - Years ended December 31, 1995, 1994, and
Consolidated Statements of Cash Flows - December 31, 1995, 1994, and 1993
Consolidated Statements of Changes in Equity Capital - Years ended December 31, 1995, 1994, and 1993
Condensed Financial Information of Registrant - Years ended December 31, 1995 and 1994
Notes to Consolidated Financial Statements - December 31, 1995 and 1994
Schedules not listed above are omitted since the required information is either not applicable, not deemed material, or is shown in the respective financial statements or in the notes thereto.
ITEM 14(a)(3) EXHIBITS
Exhibit 3(a) Copy of Articles of Incorporation of ACNB Corporation is incorporated by reference to Exhibit 3(a), of the Annual Report on Form 10-K for the year ended December 31, 1992.
Exhibit 3(b) Copy of By-laws of ACNB Corporation is incorporated by
reference to Exhibit 3(b) of the Annual Report on Form 10-K for the year ended December 31, 1992.
Exhibit 13 Annual Report to Shareholders.
Exhibit 21 Subsidiary of the Registrant.
Exhibit 23 Consent of Experts and Counsel.
ITEM 14(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ACNB CORPORATION (Registrant)
By ----------------------------- Ronald L. Hankey, President
By -------------------------------------- John W. Krichten, Secretary/Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
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