Edgar Filing: ACNB CORP

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2013

Commission file number 0-11783

ACNB CORPORATION

(Exact name of Registrant as specified in its charter)

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

16 Lincoln Square, Gettysburg, Pennsylvania		17325
(Address of principal executive offices)		(Zip Code)

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

Title of each class		Name of each exchange on which registered
Common Stock, $2.50 par value per share		The NASDAQ Stock Market, LLC

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 x 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 x No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer x

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 Exchange Act). Yes o No x

The number of shares of the Registrant’s Common Stock outstanding on July 26, 2013, was 6,043,616.

PART I - FINANCIAL INFORMATION

ACNB CORPORATION

ITEM 1 - FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)

Dollars in thousands, except per share data	June 30, 2013			June 30, 2012			December 31, 2012

ASSETS

Cash and due from banks	$	15,398		$	13,620		$	19,078
Interest bearing deposits with banks	22,820			53,605			32,307

Total Cash and Cash Equivalents	38,218			67,225			51,385

Securities available for sale	141,536			188,711			165,790
Securities held to maturity, fair value $88,351; $29,011; $50,980	90,314			28,388			50,159
Loans held for sale	2,427			1,540			6,687
Loans, net of allowance for loan losses $17,239; $15,322; $16,825	683,357			676,984			691,311
Premises and equipment	15,147			14,723			15,131
Restricted investment in bank stocks	4,603			6,478			5,318
Investment in bank-owned life insurance	31,757			30,832			31,122
Investments in low-income housing partnerships	5,180			3,566			5,440
Goodwill	6,308			6,308			6,308
Intangible assets	2,089			2,730			2,409
Foreclosed assets held for resale	2,485			5,247			4,247
Other assets	15,435			14,587			14,688

Total Assets	$	1,038,856		$	1,047,319		$	1,049,995

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES
Deposits:
Non-interest bearing	$	132,776		$	115,616		$	119,297
Interest bearing	693,609			702,346			714,879

Total Deposits	826,385			817,962			834,176

Short-term borrowings	51,250			42,601			47,303
Long-term borrowings	52,830			80,074			59,954
Other liabilities	6,595			6,772			7,298

Total Liabilities	937,060			947,409			948,731

STOCKHOLDERS’ EQUITY
Preferred Stock, $2.50 par value; 20,000,000 shares authorized; no shares outstanding	—			—			—
Common stock, $2.50 par value; 20,000,000 shares authorized; 6,043,616, 6,018,135 and 6,027,968 shares issued; 5,981,016, 5,955,535 and 5,965,368 shares outstanding	15,109			15,045			15,070
Treasury stock, at cost (62,600 shares)	(728		)	(728		)	(728		)
Additional paid-in capital	9,475			9,117			9,246
Retained earnings	80,360			75,630			77,888
Accumulated other comprehensive (loss) income	(2,420		)	846			(212		)

Total Stockholders’ Equity	101,796			99,910			101,264

Total Liabilities and Stockholders’ Equity	$	1,038,856		$	1,047,319		$	1,049,995

The accompanying notes are an integral part of the consolidated financial statements.

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended June 30,					Six Months Ended June 30,
Dollars in thousands, except per share data	2013			2012		2013			2012

INTEREST INCOME
Loans, including fees	$	7,980		$	8,504	$	16,234		$	17,067
Securities:
Taxable	1,048			1,265		2,088			2,600
Tax-exempt	294			371		642			737
Dividends	6			4		10			7
Other	28			19		48			23

Total Interest Income	9,356			10,163		19,022			20,434

INTEREST EXPENSE
Deposits	560			872		1,221			1,788
Short-term borrowings	15			21		27			41
Long-term borrowings	443			702		902			1,397

Total Interest Expense	1,018			1,595		2,150			3,226

Net Interest Income	8,338			8,568		16,872			17,208

PROVISION FOR LOAN LOSSES	500			1,125		1,150			2,250

Net Interest Income after Provision for Loan Losses	7,838			7,443		15,722			14,958

OTHER INCOME
Service charges on deposit accounts	548			603		1,086			1,155
Income from fiduciary activities	312			356		643			644
Earnings on investment in bank-owned life insurance	254			242		495			480
Net gains on sales or calls of securities	—			3		—			7
Service charges on ATM and debit card transactions	356			323		675			632
Commissions from insurance sales	1,399			1,295		2,530			2,500
Other	271			243		656			463

Total Other Income	3,140			3,065		6,085			5,881

OTHER EXPENSES
Salaries and employee benefits	4,864			4,672		9,612			9,245
Net occupancy	493			497		1,008			990
Equipment	792			671		1,450			1,282
Other tax	232			170		470			393
Professional services	191			251		435			442
Supplies and postage	185			152		316			327
Marketing and corporate relations	113			90		212			190
FDIC and regulatory	192			218		401			451
Intangible assets amortization	161			161		321			321
Foreclosed real estate (income) expenses	(72		)	165		(93		)	230
Other operating	866			793		1,641			1,508

Total Other Expenses	8,017			7,840		15,773			15,379

Income before Income Taxes	2,961			2,668		6,034			5,460

PROVISION FOR INCOME TAXES	639			540		1,294			1,096

Net Income	$	2,322		$	2,128	$	4,740		$	4,364

PER SHARE DATA
Basic earnings	$	0.38		$	0.35	$	0.79		$	0.73
Cash dividends declared	$	0.19		$	0.19	$	0.38		$	0.38

The accompanying notes are an integral part of the consolidated financial statements.

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
Dollars in thousands	2013			2012			2013			2012

NET INCOME	$	2,322		$	2,128		$	4,740		$	4,364

OTHER COMPREHENSIVE (LOSS) INCOME

SECURITIES

Unrealized (losses) gains arising during the period, net of income taxes of $(1,023), $81, $(1,254) and $(10), respectively	(1,987		)	156			(2,436		)	(21		)

Reclassification adjustment for net gains included in net income, net of income taxes of $0, $(1), $0 and $(2), respectively (A) (C)	—			(2		)	—			(5		)

PENSION

Change in plan assets and benefit obligations, net of income taxes of $59, $56, $118 and $113, respectively (B) (C)	114			109			228			217

TOTAL OTHER COMPREHENSIVE (LOSS) INCOME	(1,873		)	263			(2,208		)	191

TOTAL COMPREHENSIVE INCOME	$	449		$	2,391		$	2,532		$	4,555

The accompanying notes are an integral part of the consolidated financial statements.

(A) Amounts are included in net gains on sales or calls of securities on the Consolidated Statements of Income in total other income.

(B) Amounts are included in the computation of net periodic benefit cost and are included in salaries and employee benefits on the Consolidated Statements of Income in other expenses.

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

Six Months Ended June 30, 2013 and 2012

Dollars in thousands	Common Stock		Treasury Stock			Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity

BALANCE — JANUARY 1, 2012	$	15,021	$	(728	)	$	9,000	$	73,526		$	655		$	97,474

Net income	—		—			—		4,364			—			4,364

Other comprehensive income, net of taxes	—		—			—		—			191			191

Common stock shares issued (9,726 shares)	24		—			117		—			—			141

Cash dividends declared	—		—			—		(2,260		)	—			(2,260		)

BALANCE — JUNE 30, 2012	$	15,045	$	(728	)	$	9,117	$	75,630		$	846		$	99,910

BALANCE — JANUARY 1, 2013	$	15,070	$	(728	)	$	9,246	$	77,888		$	(212	)	$	101,264

Net income	—		—			—		4,740			—			4,740

Other comprehensive loss, net of taxes	—		—			—		—			(2,208		)	(2,208		)

Common stock shares issued (15,648 shares)	39		—			229		—			—			268

Cash dividends declared	—		—			—		(2,268		)	—			(2,268		)

BALANCE — JUNE 30, 2013	$	15,109	$	(728	)	$	9,475	$	80,360		$	(2,420	)	$	101,796

The accompanying notes are an integral part of the consolidated financial statements.

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six Months Ended June 30,
Dollars in thousands	2013			2012

CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	4,740		$	4,364
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sales of loans	(353		)	(90		)
(Gain) loss on sales of assets held for resale, including writedowns	(185		)	58
Earnings on investment in bank-owned life insurance	(495		)	(480		)
Gain on sales or calls of securities	—			(7		)
Depreciation and amortization	1,002			1,023
Provision for loan losses	1,150			2,250
Net amortization of investment securities premiums	483			426
Decrease in accrued interest receivable	160			228
Decrease in accrued interest payable	(378		)	(224		)
Mortgage loans originated for sale	(16,699		)	(8,940		)
Proceeds from sales of loans originated for sale	21,312			7,827
Decrease in other assets	490			1,303
Increase (decrease) in other liabilities	21			(75		)

Net Cash Provided by Operating Activities	11,248			7,663

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities held to maturity	5,319			1,056
Proceeds from maturities of investment securities available for sale	27,177			38,417
Purchase of investment securities held to maturity	(45,695		)	(19,429		)
Purchase of investment securities available for sale	(6,875		)	(18,342		)
Net decrease (increase) in loans	6,366			(2,060		)
Redemption of restricted investment in bank stocks	715			668
Purchase of bank-owned life insurance	(140		)	(1,941		)
Capital expenditures	(699		)	(944		)
Proceeds from sale of foreclosed real estate	2,385			944

Net Cash Used in Investing Activities	(11,447		)	(1,631		)

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits	13,479			3,369
Net (decrease) increase in time certificates of deposits and interest bearing deposits	(21,270		)	31,798
Net increase (decrease) in short-term borrowings	3,947			(3,361		)
Dividends paid	(2,268		)	(2,260		)
Common stock issued	268			141
Proceeds from long-term borrowings	—			10,000
Repayments on long-term borrowings	(7,124		)	(1,117		)

Net Cash (Used in) Provided by Financing Activities	(12,968		)	38,570

Net (Decrease) Increase in Cash and Cash Equivalents	(13,167		)	44,602

CASH AND CASH EQUIVALENTS — BEGINNING	51,385			22,623

CASH AND CASH EQUIVALENTS — ENDING	$	38,218		$	67,225

Interest paid	$	2,528		$	3,450
Incomes taxes paid	$	2,225		$	—
Loans transferred to foreclosed assets held for resale	$	438		$	1,812

The accompanying notes are an integral part of the consolidated financial statements.

ACNB CORPORATION

ITEM 1 — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

ACNB Corporation, headquartered in Gettysburg, Pennsylvania, provides banking, insurance, and financial services to businesses and consumers through its wholly-owned subsidiaries, ACNB Bank and Russell Insurance Group, Inc. (RIG). The Bank engages in full-service commercial and consumer banking and trust services through its nineteen retail banking office locations in Adams, Cumberland and York Counties, Pennsylvania. There are also two loan production offices situated in York and Franklin Counties, Pennsylvania.

RIG is a full-service insurance agency based in Westminster, Maryland. The agency offers a broad range of property and casualty, life, and health insurance to both commercial and individual clients. In 2008, due to an agency acquisition, a second location of RIG was established in Germantown, Maryland.

The Corporation, along with seven other banks, entered into a joint venture to form BankersRe Insurance Group, SPC (formerly Pennbanks Insurance Co., SPC), an offshore reinsurance company. Each participating entity owned an insurance cell through which its premiums and losses from credit life, disability, and accident insurance are funded. Each entity was responsible for the activity in its respective cell. The financial activity for the Corporation’s insurance cell has been included in the consolidated financial statements and is not material to the consolidated financial statements. The segregated portfolio was novated to a third party during 2012.

The Corporation’s primary source of revenue is interest income on loans and investment securities and fee income on its products and services. Expenses consist of interest expense on deposits and borrowed funds, provisions for loan losses, and other operating expenses.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly ACNB Corporation’s financial position and the results of operations, comprehensive income, changes in stockholders’ equity, and cash flows. All such adjustments are of a normal recurring nature.

The accounting policies followed by the Corporation are set forth in Note A to the Corporation’s consolidated financial statements in the 2012 ACNB Corporation Annual Report on Form 10-K, filed with the SEC on March 15, 2013. It is suggested that the consolidated financial statements contained herein be read in conjunction with the consolidated financial statements and notes included in the Corporation’s Annual Report on Form 10-K. The results of operations for the three and six month periods ended June 30, 2013, are not necessarily indicative of the results to be expected for the full year.

The Corporation has evaluated events and transactions occurring subsequent to the statement of condition date of June 30, 2013, for items that should potentially be recognized or disclosed in the consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

2. Earnings Per Share

The Corporation has a simple capital structure. Basic earnings per share of common stock is computed based on 5,969,089 and 5,948,433 weighted average shares of common stock outstanding for the six months ended June 30, 2013 and 2012, respectively, and 5,971,929 and 5,950,424 for the three months ended June 30, 2013 and 2012, respectively. The Corporation does not have dilutive securities outstanding.

3. Retirement Benefits

The components of net periodic benefit cost related to the non-contributory, defined benefit pension plan for the three and six month periods ended June 30 were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
In thousands	2013			2012			2013			2012
Service cost	$	194		$	163		$	388		$	326
Interest cost	223			231			446			462
Expected return on plan assets	(489		)	(443		)	(978		)	(886		)
Amortization of net loss	163			153			326			306
Amortization of transition obligation	—			2			—			4
Amortization of prior service cost	10			10			20			20

Net Periodic Benefit Cost	$	101		$	116		$	202		$	232

The Corporation previously disclosed in its consolidated financial statements for the year ended December 31, 2012, that it had not yet determined the amount the Bank planned on contributing to the Plan in 2013. As of June 30, 2013, this contribution amount has still not been determined. Effective April 1, 2012, no inactive or former participant in the Plan will be eligible to again participate in the Plan, and no employee hired after March 31, 2012, will be eligible to participate in the Plan. As of the last annual census, ACNB Bank had a combined 368 active, vested terminated, and retired persons in the Plan.

4. Guarantees

The Corporation does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are written conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Corporation generally holds collateral and/or personal guarantees supporting these commitments. The Corporation had $4,301,000 in standby letters of credit as of June 30, 2013. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The current amount of the liability, as of June 30, 2013, for guarantees under standby letters of credit issued is not material.

5. Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss), net of taxes, are as follows:

In thousands	Unrealized Gains on Securities		Pension Liability			Accumulated Other Comprehensive Income (Loss)
BALANCE — JUNE 30, 2013	$	3,178	$	(5,598	)	$	(2,420	)
BALANCE — DECEMBER 31, 2012	$	5,614	$	(5,826	)	$	(212	)
BALANCE — JUNE 30, 2012	$	5,970	$	(5,124	)	$	846

6. Segment Reporting

Russell Insurance Group, Inc. (RIG) is managed separately from the banking segment, which includes the Bank and related financial services that the Corporation offers through its banking subsidiary. RIG offers a broad range of property and casualty, life, and health insurance to both commercial and individual clients.

Segment information for the six month periods ended June 30, 2013 and 2012, is as follows:

In thousands	Banking		Insurance		Total
2013
Net interest income and other income from external customers	$	20,443	$	2,514	$	22,957
Income before income taxes	5,657		377		6,034
Total assets	1,029,276		9,580		1,038,856
Capital expenditures	692		7		699

2012
Net interest income and other income from external customers	$	20,605	$	2,484	$	23,089
Income before income taxes	5,049		411		5,460
Total assets	1,036,693		10,626		1,047,319
Capital expenditures	872		72		944

Segment information for the three month periods ended June 30, 2013 and 2012, is as follows:

In thousands	Banking		Insurance		Total
2013
Net interest income and other income from external customers	$	10,084	$	1,394	$	11,478
Income before income taxes	2,682		279		2,961
Total assets	1,029,276		9,580		1,038,856
Capital expenditures	466		—		466

2012
Net interest income and other income from external customers	$	10,342	$	1,291	$	11,633
Income before income taxes	2,447		221		2,668
Total assets	1,036,693		10,626		1,047,319
Capital expenditures	370		—		370

Intangible assets, representing customer lists, are amortized over 10 years on a straight line basis. Goodwill is not amortized, but rather is analyzed annually for impairment. If certain events occur which might indicate goodwill has been impaired, the goodwill is tested for impairment when such events occur. Amortization of goodwill and the intangible assets is deductible for tax purposes.

7. Securities

Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported, net of tax, in other comprehensive income (loss).

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses on debt securities, management considers (1) whether management intends to sell the security, or (2) if it is more likely than not that management will be required to sell the security before recovery, or (3) if management does not expect to recover the entire amortized cost basis. In assessing potential other-than-temporary impairment for equity securities, consideration is given to management’s intention and ability to hold the securities until recovery of unrealized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Amortized cost and fair value of securities at June 30, 2013, and December 31, 2012, were as follows:

In thousands	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

SECURITIES AVAILABLE FOR SALE

JUNE 30, 2013
U.S. Government and agencies	$	21,159	$	659	$	—	$	21,818
Mortgage-backed securities, residential	61,068		2,752		55		63,765
State and municipal	41,821		1,325		276		42,870
Corporate bonds	11,005		211		47		11,169
CRA mutual fund	1,044		9		—		1,053
Stock in other banks	627		234		—		861
	$	136,724	$	5,190	$	378	$	141,536

DECEMBER 31, 2012
U.S. Government and agencies	$	23,225	$	1,016	$	—	$	24,241
Mortgage-backed securities, residential	75,816		4,767		—		80,583
State and municipal	49,568		2,246		10		51,804
Corporate bonds	7,008		286		8		7,286
CRA mutual fund	1,044		52		—		1,096
Stock in other banks	627		153		—		780
	$	157,288	$	8,520	$	18	$	165,790

SECURITIES HELD TO MATURITY

JUNE 30, 2013
U.S. Government and agencies	$	37,551	$	295	$	614	$	37,232
Mortgage-backed securities, residential	52,763		—		1,644		51,119
	$	90,314	$	295	$	2,258	$	88,351
DECEMBER 31, 2012
U.S. Government and agencies	$	30,115	$	536	$	6	$	30,645
Mortgage-backed securities, residential	20,044		298		7		20,335
	$	50,159	$	834	$	13	$	50,980

The following table shows the Corporation’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2013, and December 31, 2012:

	Less than 12 Months				12 Months or More				Total
In thousands	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

SECURITIES AVAILABLE FOR SALE

JUNE 30, 2013
Mortgage-backed securities, residential	$	6,659	$	55	$	—	$	—	$	6,659	$	55
State and municipal	$	11,262	$	276	$	—	$	—	$	11,262	$	276
Corporate bonds	$	4,953	$	47	$	—	$	—	$	4,953	$	47
	$	22,874	$	378	$	—	$	—	$	22,874	$	378

DECEMBER 31, 2012
State and municipal	$	1,975	$	10	$	—	$	—	$	1,975	$	10
Corporate bond	992		8		—		—		992		8
	$	2,967	$	18	$	—	$	—	$	2,967	$	18

SECURITIES HELD TO MATURITY

JUNE 30, 2013
U.S. Government and agencies	$	26,925	$	614	$	—	$	—	$	26,925	$	614
Mortgage-backed securities, residential	51,119		1,644		—		—		51,119		1,644
	$	78,044	$	2,258	$	—	$	—	$	78,044	$	2,258

DECEMBER 31, 2012
U.S. Government and agencies	$	2,994	$	6	$	—	$	—	$	2,994	$	6
Mortgage-backed security, residential	2,046		7		—		—		2,046		7
	$	5,040	$	13	$	—	$	—	$	5,040	$	13

All mortgage-backed security investments are government sponsored enterprise (GSE) pass-through instruments issued by the Federal National Mortgage Association (FNMA), Government National Mortgage Association (GNMA) or Federal Home Loan Mortgage Corporation (FHLMC), which guarantee the timely payment of principal on these investments.

At June 30, 2013, five available for sale mortgage-backed securities, residential, had unrealized losses that individually did not exceed 2% of amortized cost. These securities have not been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

At June 30, 2013, twenty-five available for sale state and municipal bonds had unrealized losses that individually did not exceed 6% of amortized cost. These securities have not been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

At June 30, 2013, one available for sale corporate bond had an unrealized loss that individually did not exceed 1% of amortized cost. This security has not been in a continuous loss position for 12 months or more. This unrealized loss relates principally to changes in interest rates subsequent to the acquisition of the specific securities.

At June 30, 2013, eighteen held to maturity U.S. Government and agency securities had unrealized losses that individually did not exceed 5% of amortized cost. These securities have not been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

At June 30, 2013, thirty held to maturity mortgage-backed securities, residential, had unrealized losses that individually did not exceed 8% of amortized cost. These securities have not been in a continuous loss position for 12 months or more. These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.

In analyzing the issuer’s financial condition, management considers industry analysts’ reports, financial performance, and projected target prices of investment analysts within a one-year time frame. Based on the above information, management has determined that none of these investments are other-than-temporarily impaired.

The fair values of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or 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 securities but rather by relying on the security’s relationship to other benchmark quoted prices. The Corporation uses independent service providers to provide matrix pricing.

Management routinely sells securities from its available for sale portfolio in an effort to manage and allocate the portfolio. At June 30, 2013, management had not identified any securities with an unrealized loss that it intends or will be required to sell. In estimating other-than-temporary impairment losses on debt securities, management considers (1) whether management intends to sell the security, or (2) if it is more likely than not that management will be required to sell the security before recovery, or (3) if management does not expect to recover the entire amortized cost basis. In assessing potential other-than-temporary impairment for equity securities, consideration is given to management’s intention and ability to hold the securities until recovery of unrealized losses.

Amortized cost and fair value at June 30, 2013, by contractual maturity, where applicable, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay with or without penalties.

Available for Sale

Held to Maturity

In thousands

Amortized
Cost

Fair
Value

Amortized
Cost

Fair
Value

1 year or less

4,134

4,214

10,012

10,308

Over 1 year through 5 years

32,316

33,666

9,074

8,939

Over 5 years through 10 years

33,875

34,194

18,465

17,985

Over 10 years

3,660

3,783

—

Mortgage-backed securities, residential

61,068

63,765

52,763

51,119

CRA mutual fund

1,044

1,053

—

Stock in other banks

627

861

—

136,724

141,536

90,314

88,351

The Corporation did not realize any gross gains or losses on sales or calls of securities available for sale during the second quarter of 2013. The Corporation realized gross gains of $3,000 and $0 in gross losses on sales or calls of securities available for sale during the second quarter of 2012. For the six month period ended June 30, 2013, the Corporation did not realized any gross gains or losses on sales or calls of securities available for sale. For the six month period ended June 30, 2012, the Corporation realized gross gains of $7,000 and $0 in gross losses on sales or calls of securities available for sale.

At June 30, 2013, and December 31, 2012, securities with a carrying value of $134,594,000 and $147,923,000, respectively, were pledged as collateral as required by law on public and trust deposits, repurchase agreements, and for other purposes.

8. Loans

The Corporation grants commercial, residential, and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans throughout southcentral Pennsylvania and northern Maryland. The ability of the Corporation’s debtors to honor their contracts is dependent upon the real estate values and general economic conditions in this area.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

The loans receivable portfolio is segmented into commercial, residential mortgage, home equity lines of credit, and consumer loans. Commercial loans consist of the following classes: commercial and industrial, commercial real estate, and commercial real estate construction.

The accrual of interest on residential mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Consumer loans (consisting of home equity lines of credit and consumer loan classes) are typically charged off no later than 120 days past due. Past due status is based on the 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.

All interest accrued, but not collected, for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Credit Losses

The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses (the “allowance”) is established as losses are estimated to occur through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated statement of condition. The amount of the reserve for unfunded lending commitments is not material to the consolidated financial statements.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity, and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for the previous twelve quarters for each of these categories of loans, adjusted for qualitative risk factors. These qualitative risk factors include:

· 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;

· the nature and volume of the portfolio and terms of loans;

· the experience, ability and depth of lending management and staff;

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

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

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.

The unallocated component of the allowance is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. It covers risks that are inherently difficult to quantify including, but not limited to, collateral risk, information risk, and historical charge-off risk.

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

A specific allocation within the allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of the Corporation’s impaired loans are measured based on the estimated fair value of the loan’s collateral or the discounted cash flows method.

For commercial loans secured by real estate, estimated fair values of collateral are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal, and the condition of the property. Appraised values are discounted based on the age of the appraisal, special use nature of the property, or condition of the property to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value.

For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging reports, equipment appraisals, or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a troubled debt restructure.

Loans whose terms are modified are classified as troubled debt restructured loans if the Corporation grants such borrowers concessions that it would not otherwise consider and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate, a below market interest rate given the risk associated with the loan, or an extension of a loan’s stated maturity date. Nonaccrual troubled debt restructurings may be restored to accrual status if principal and interest payments, under the modified terms, are current for a sustained period of time and, based on a well-documented credit evaluation of the borrower’s financial condition, there is reasonable assurance of repayment. Loans classified as troubled debt restructurings are generally designated as impaired.

The allowance calculation methodology includes further segregation of loan classes into credit quality rating categories. The borrower’s overall financial condition, repayment sources, guarantors, and value of collateral, if appropriate, are generally evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments.

Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful, and loss. Loans classified special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.

In addition, 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.

Commercial and Industrial Lending — The Corporation originates commercial and industrial loans primarily to businesses located in its primary market area and surrounding areas. These loans are used for various business purposes which include short-term loans and lines of credit to finance machinery and equipment purchases, inventory, and accounts receivable. Generally, the maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment. Most business lines of credit are written on demand and may be renewed annually.

Commercial and industrial loans are generally secured with short-term assets; however, in many cases, additional collateral such as real estate is provided as additional security for the loan. Loan-to-value maximum values have been established by the Corporation and are specific to the type of collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, collateral appraisals, etc.

In underwriting commercial and industrial loans, an analysis is performed to evaluate the borrower’s character and capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as the conditions affecting the borrower. Evaluation of the borrower’s past, present and future cash flows is also an important aspect of the Corporation’s analysis.

Commercial loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions.

Commercial Real Estate Lending — The Corporation engages in commercial real estate lending in its primary market area and surrounding areas. The Corporation’s commercial loan portfolio is secured primarily by commercial retail space, office buildings, and hotels. Generally, commercial real estate loans have terms that do not exceed 20 years, have loan-to-value ratios of up to 80% of the appraised value of the property, and are typically secured by personal guarantees of the borrowers.

In underwriting these loans, the Corporation performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. Appraisals on properties securing commercial real estate loans originated by the Corporation are performed by independent appraisers.

Commercial real estate loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions and the complexities involved in valuing the underlying collateral.

Commercial Real Estate Construction Lending — The Corporation engages in commercial real estate construction lending in its primary market area and surrounding areas. The Corporation’s commercial real estate construction lending consists of commercial and residential site development loans, as well as commercial building construction and residential housing construction loans.

The Corporation’s commercial real estate construction loans are generally secured with the subject property. Terms of construction loans depend on the specifics of the project, such as estimated absorption rates, estimated time to complete, etc.

In underwriting commercial real estate construction loans, the Corporation performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the project using feasibility studies, market data, etc. Appraisals on properties securing commercial real estate construction loans originated by the Corporation are performed by independent appraisers.

Commercial real estate construction loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions and the uncertainties surrounding total construction costs.

Residential Mortgage Lending — One-to-four family residential mortgage loan originations, including home equity closed-end loans, are generated by the Corporation’s marketing efforts, its present customers, walk-in customers, and referrals. These loans originate primarily within the Corporation’s market area or with customers primarily from the market area.

The Corporation offers fixed-rate and adjustable-rate mortgage loans with terms up to a maximum of 30 years for both permanent structures and those under construction. The Corporation’s one-to-four family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas. The majority of the Corporation’s residential mortgage loans originate with a loan-to-value of 80% or less. Loans in excess of 80% are required to have private mortgage insurance.

In underwriting one-to-four family residential real estate loans, the Corporation evaluates both the borrower’s ability to make monthly payments and the value of the property securing the loan. Properties securing real estate loans made by the Corporation are appraised by independent appraisers. The Corporation generally requires borrowers to obtain an attorney’s title opinion or title insurance, as well as fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. The Corporation has not engaged in subprime residential mortgage originations.

Residential mortgage loans present a moderate level of risk due primarily to general economic conditions, as well as a currently weakened housing market.

Home Equity Lines of Credit Lending — The Corporation originates home equity lines of credit primarily within the Corporation’s market area or with customers primarily from the market area. Home equity lines of credit are generated by the Corporation’s marketing efforts, its present customers, walk-in customers, and referrals.

Home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of 90% and a maximum term of 20 years. In underwriting home equity lines of credit, a thorough analysis of the borrower’s financial ability to repay the loan as agreed is performed. The ability to repay is determined by the borrower’s employment history, current financial condition, and credit background.

Home equity lines of credit generally present a moderate level of risk due primarily to general economic conditions, as well as a weakened housing market.

Junior liens inherently have more credit risk by virtue of the fact that another financial institution may have a higher 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 continues to be weak and property values deteriorate.

Consumer Lending — The Corporation offers a variety of unsecured and secured consumer loans, including those for vehicles and mobile homes and those secured by savings deposits. These loans originate primarily within the Corporation’s market area or with customers primarily from the market area.

Consumer loan terms vary according to the type and value of collateral and the creditworthiness of the borrower. In underwriting consumer loans, a thorough analysis of the borrower’s financial ability to repay the loan as agreed is performed. The ability to repay is determined by the borrower’s employment history, current financial condition, and credit background.

Consumer loans may entail greater credit risk than residential mortgage loans or home equity lines of credit, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets such as automobiles or recreational equipment. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard, and doubtful within the Corporation’s internal risk rating system as of June 30, 2013, and December 31, 2012:

In thousands	Pass		Special Mention		Substandard		Doubtful		Total
JUNE 30, 2013
Commercial and industrial	$	40,707	$	2,600	$	3,265	$	—	$	46,572
Commercial real estate	199,289		20,507		17,677		—		237,473
Commercial real estate construction	4,668		3,488		6,367		—		14,523
Residential mortgage	326,755		4,452		3,592		—		334,799
Home equity lines of credit	50,694		1,849		354		—		52,897
Consumer	14,332		—		—		—		14,332
	$	636,445	$	32,896	$	31,255	$	—	$	700,596

DECEMBER 31, 2012
Commercial and industrial	$	44,072	$	2,491	$	2,441	$	—	$	49,004
Commercial real estate	205,449		20,379		17,191		—		243,019
Commercial real estate construction	7,354		9,820		1,980		—		19,154
Residential mortgage	321,986		4,502		2,348		—		328,836
Home equity lines of credit	51,096		1,776		258		—		53,130
Consumer	14,993		—		—		—		14,993
	$	644,950	$	38,968	$	24,218	$	—	$	708,136

The following table summarizes information relative to impaired loans by loan portfolio class as of June 30, 2013, and December 31, 2012:

	Impaired Loans with Allowance						Impaired Loans with No Allowance
In thousands	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance
JUNE 30, 2013
Commercial and industrial	$	—	$	—	$	—	$	187	$	1,302
Commercial real estate	—		—		—		12,587		13,030
Commercial real estate construction	4,526		4,526		1,306		788		1,062
Residential mortgage	1,290		1,290		370		834		1,159
	$	5,816	$	5,816	$	1,676	$	14,396	$	16,553

DECEMBER 31, 2012
Commercial and industrial	$	146	$	146	$	29	$	195	$	1,310
Commercial real estate	237		276		7		8,772		9,216
Commercial real estate construction	—		—		—		854		1,128
Residential mortgage	—		—		—		938		1,263
	$	383	$	422	$	36	$	10,759	$	12,917

The following table summarizes information in regards to average of impaired loans and related interest income by loan portfolio class for the three months ended June 30, 2013 and 2012:

	Impaired Loans with Allowance				Impaired Loans with No Allowance
In thousands	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
JUNE 30, 2013
Commercial and industrial	$	73	$	—	$	191	$	—
Commercial real estate	119		—		12,176		93
Commercial real estate construction	4,955		60		821		—
Residential mortgage	1,344		—		883		3
	$	6,491	$	60	$	14,071	$	96

JUNE 30, 2012
Commercial and industrial	$	22	$	—	$	229	$	—
Commercial real estate	1,046		—		8,568		—
Commercial real estate construction	839		—		933		—
Residential mortgage	—		—		1,605		—
	$	1,907	$	—	$	11,335	$	—

The following table summarizes information in regards to average of impaired loans and related interest income by loan portfolio class for the six months ended June 30, 2013 and 2012:

	Impaired Loans with Allowance				Impaired Loans with No Allowance
In thousands	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
June 30, 2013
Commercial and industrial	$	97	$	—	$	193	$	—
Commercial real estate	158		—		11,041		359
Commercial real estate construction	3,303		135		832		—
Residential mortgage	896		—		902		6
	$	4,454	$	135	$	12,968	$	365

June 30, 2012
Commercial and industrial	$	671	$	—	$	236	$	—
Commercial real estate	788		—		7,825		—
Commercial real estate construction	560		—		1,493		—
Residential mortgage	29		—		1,508		—
	$	2,048	$	—	$	11,062	$	—

No additional funds are committed to be advanced in connection with impaired loans.

The following table presents nonaccrual loans by classes of the loan portfolio as of June 30, 2013, and December 31, 2012:

In thousands	June 30, 2013		December 31, 2012

Commercial and industrial	$	187	$	341
Commercial real estate	5,573		4,472
Commercial real estate construction	788		854
Residential mortgage	1,810		660
	$	8,358	$	6,327

The following table summarizes information relative to troubled debt restructurings by loan portfolio class as of June 30, 2013, and December 31, 2012:

In thousands	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Recorded Investment at Period End
JUNE 30, 2013
Nonaccruing troubled debt restructurings:
Commercial and industrial	$	490	$	485	$	178
Commercial real estate	1,021		1,021		677
Commercial real estate construction	1,548		1,541		694
Total nonaccruing troubled debt restructurings	3,059		3,047		1,549
Accruing troubled debt restructurings:
Commercial real estate	7,118		7,170		7,014
Residential mortgage	336		336		314
Total accruing troubled debt restructurings	7,454		7,506		7,328
Total troubled debt restructurings	$	10,513	$	10,553	$	8,877
DECEMBER 31, 2012
Nonaccruing troubled debt restructurings:
Commercial and industrial	$	490	$	485	$	187
Commercial real estate	1,304		1,304		953
Commercial real estate construction	1,548		1,541		760
Total nonaccruing troubled debt restructurings	3,342		3,330		1,900
Accruing troubled debt restructurings:
Commercial real estate	4,577		4,577		4,494
Residential mortgage	336		336		321
Total accruing troubled debt restructurings	4,913		4,913		4,815
Total troubled debt restructurings	$	8,255	$	8,243	$	6,715

All of the Corporation’s troubled debt restructured loans are also impaired loans, which resulted in a specific allocation and, subsequently, a charge-off as appropriate. During the three and six months ended June 30, 2013, one troubled debt restructured loan defaulted in the amount of $237,000 and all other troubled debt restructured loans were current with respect to their associated forbearance agreement. One forbearance agreement was negotiated during 2009 and modified during 2011, two were negotiated during 2010, three were negotiated during 2012, and one was negotiated during 2013.

There are forbearance agreements on all loans currently classified as troubled debt restructurings, and all of these agreements have resulted in additional principal repayment. The terms of these forbearance agreements vary whereby principal payments have been decreased, interest rates have been reduced, and/or the loan will be repaid as collateral is sold.

The following table summarizes loans whose terms have been modified resulting in troubled debt restructurings during the three and six months ended June 30, 2013:

Dollars in thousands	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Recorded Investment
THREE MONTHS ENDED JUNE 30, 2013
Troubled debt restructurings:	—	$	—	$	—	$	—

SIX MONTHS ENDED JUNE 30, 2013
Troubled debt restructurings:
Commercial real estate	1	$	2,541	$	2,593	$	2,593

There were no loans modified resulting in troubled debt restructurings during the three and six months ended June 30, 2012.

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due.

The following table presents the classes of the loan portfolio summarized by the past due status as of June 30, 2013, and December 31, 2012:

In thousands	30-59 Days Past Due		60-89 Days Past Due		Nonaccrual or >90 Days Past Due		Total Past Due		Current		Total Loans Receivable		Loans Receivable >90 Days and Accruing
JUNE 30, 2013
Commercial and industrial	$	24	$	1	$	205	$	230	$	46,342	$	46,572	$	18
Commercial real estate	531		—		5,573		6,104		231,369		237,473		—
Commercial real estate construction	—		—		788		788		13,735		14,523		—
Residential mortgage	184		1,694		3,821		5,699		329,100		334,799		2,011
Home equity lines of credit	144		—		95		239		52,658		52,897		95
Consumer	21		7		4		32		14,300		14,332		4
	$	904	$	1,702	$	10,486	$	13,092	$	687,504	$	700,596	$	2,128

DECEMBER 31, 2012
Commercial and industrial	$	128	$	—	$	342	$	470	$	48,534	$	49,004	$	1
Commercial real estate	598		—		4,478		5,076		237,943		243,019		6
Commercial real estate construction	—		—		854		854		18,300		19,154		—
Residential mortgage	4,197		2,425		1,381		8,003		320,833		328,836		721
Home equity lines of credit	353		10		43		406		52,724		53,130		43
Consumer	8		4		—		12		14,981		14,993		—
	$	5,284	$	2,439	$	7,098	$	14,821	$	693,315	$	708,136	$	771

The following tables summarize the allowance for loan losses and recorded investment in loans receivable:

In thousands	Commercial and Industrial			Commercial Real Estate			Commercial Real Estate Construction			Residential Mortgage			Home Equity Lines of Credit			Consumer			Unallocated			Total
AS OF AND FOR THE PERIODS ENDED JUNE 30, 2013
Allowance for Loan Losses
Beginning balance - April 1, 2013	$	1,562		$	6,244		$	2,101		$	4,083		$	516		$	665		$	2,315		$	17,486
Charge-offs	(56		)	(109		)	—			(482		)	—			(106		)	—			(753		)
Recoveries	5			—			—			—			—			1			—			6
Provisions	(41		)	(283		)	(559		)	548			15			266			554			500
Ending balance - June 30, 2013	$	1,470		$	5,852		$	1,542		$	4,149		$	531		$	826		$	2,869		$	17,239

Beginning balance - January 1, 2013	$	1,507		$	6,576		$	518		$	3,721		$	517		$	633		$	3,353		$	16,825
Charge-offs	(92		)	(144		)	—			(596		)	—			(129		)	—			(961		)
Recoveries	221			—			—			1			—			3			—			225
Provisions	(166		)	(580		)	1,024			1,023			14			319			(484		)	1,150
Ending balance - June 30, 2013	$	1,470		$	5,852		$	1,542		$	4,149		$	531		$	826		$	2,869		$	17,239
Ending balance: individually evaluated for impairment	$	—		$	—		$	1,306		$	370		$	—		$	—		$	—		$	1,676
Ending balance: collectively evaluated for impairment	$	1,470		$	5,852		$	236		$	3,779		$	531		$	826		$	2,869		$	15,563

Loans Receivable
Ending balance	$	46,572		$	237,473		$	14,523		$	334,799		$	52,897		$	14,332		$	—		$	700,596
Ending balance: individually evaluated for impairment	$	187		$	12,587		$	5,314		$	2,124		$	—		$	—		$	—		$	20,212
Ending balance: collectively evaluated for impairment	$	46,385		$	224,886		$	9,209		$	332,675		$	52,897		$	14,332		$	—		$	680,384

AS OF AND FOR THE PERIODS ENDED JUNE 30, 2012
Allowance for Loan Losses
Beginning Balance - April 1, 2012	$	1,759		$	6,419		$	541		$	3,667		$	546		$	464		$	1,142		$	14,538
Charge-offs	(93		)	—			(380		)	(9		)	—			(13		)	—			(495		)
Recoveries	6			—			148			—			—			—			—			154
Provisions	(157		)	(50		)	228			(25		)	(24		)	54			1,099			1,125
Ending balance - June 30, 2012	$	1,515		$	6,369		$	537		$	3,633		$	522		$	505		$	2,241		$	15,322

Beginning Balance - January 1, 2012	$	2,582		$	6,007		$	548		$	3,624		$	507		$	419		$	1,795		$	15,482
Charge-offs	(2,087		)	(39		)	(380		)	(209		)	(51		)	(51		)	—			(2,817		)
Recoveries	8			250			148			—			—			1			—			407
Provisions	1,012			151			221			218			66			136			446			2,250
Ending balance - June 30, 2012	$	1,515		$	6,369		$	537		$	3,633		$	522		$	505		$	2,241		$	15,322
Ending balance: individually evaluated for impairment	$	—		$	274		$	—		$	—		$	—		$	—		$	—		$	274
Ending balance: collectively evaluated for impairment	$	1,515		$	6,095		$	537		$	3,633		$	522		$	505		$	2,241		$	15,048

Loans Receivable
Ending balance	$	51,010		$	234,974		$	19,055		$	319,395		$	52,173		$	15,699		$	—		$	692,306
Ending balance: individually evaluated for impairment	$	222		$	9,964		$	922		$	1,498		$	—		$	—		$	—		$	12,606
Ending balance: collectively evaluated for impairment	$	50,788		$	225,010		$	18,133		$	317,897		$	52,173		$	15,699		$	—		$	679,700

In thousands	Commercial and Industrial		Commercial Real Estate		Commercial Real Estate Construction		Residential Mortgage		Home Equity Lines of Credit		Consumer		Unallocated		Total
AS OF DECEMBER 31, 2012
Allowance for Loan Losses
Ending balance	$	1,507	$	6,576	$	518	$	3,721	$	517	$	633	$	3,353	$	16,825
Ending balance: individually evaluated for impairment	$	29	$	7	$	—	$	—	$	—	$	—	$	—	$	36
Ending balance: collectively evaluated for impairment	$	1,478	$	6,569	$	518	$	3,721	$	517	$	633	$	3,353	$	16,789

Loans Receivable
Ending balance	$	49,004	$	243,019	$	19,154	$	328,836	$	53,130	$	14,993	$	—	$	708,136
Ending balance: individually evaluated for impairment	$	341	$	9,009	$	854	$	938	$	—	$	—	$	—	$	11,142
Ending balance: collectively evaluated for impairment	$	48,663	$	234,010	$	18,300	$	327,898	$	53,130	$	14,993	$	—	$	696,994

9. Fair Value Measurements

Management uses its best judgment in estimating the fair value of the Corporation’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective reporting dates and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period end.

Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.

Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with fair value measurement and disclosure guidance.

This guidance further clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

Fair value measurement and disclosure guidance establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

For assets measured at fair value, the fair value measurements by level within the fair value hierarchy, and the basis on measurement used at June 30, 2013, and December 31, 2012, are as follows:

Fair Value Measurements at June 30, 2013

In thousands

Basis

Total

Level 1

Level 2

Level 3

U.S. Government and agencies

21,818

—

21,818

—

Mortgage-backed securities, residential

63,765

—

63,765

—

State and municipal

42,870

—

42,870

—

Corporate bonds

11,169

—

11,169

—

CRA mutual fund

1,053

—

Stock in other banks

861

—

Total securities available for sale

Recurring

141,536

1,914

139,622

—

Impaired loans

Nonrecurring

6,118

—

6,118

Foreclosed assets held for resale

Nonrecurring

590

—

590

Fair Value Measurements at December 31, 2012

In thousands	Basis	Total		Level 1		Level 2		Level 3
U.S. Government and agencies		$	24,241	$	—	$	24,241	$	—
Mortgage-backed securities, residential		80,583		—		80,583		—
State and municipal		51,804		—		51,804		—
Corporate bonds		7,286		—		7,286		—
CRA mutual fund		1,096		1,096		—		—
Stock in other banks		780		780		—		—
Total securities available for sale	Recurring	$	165,790	$	1,876	$	163,914	$	—
Impaired loans	Nonrecurring	$	2,415	$	—	$	—	$	2,415
Foreclosed assets held for resale	Nonrecurring	$	2,338	$	—	$	—	$	2,338

The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Corporation’s financial instruments at June 30, 2013, and December 31, 2012:

Cash and Cash Equivalents (Carried at Cost)

The carrying amounts reported in the consolidated statement of condition for cash and short-term instruments approximate those assets’ fair value. U.S. currency is Level 1 and cash equivalents are Level 2.

Securities

The fair values of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) 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 an independent service provider to provide matrix pricing and uses the valuation of another provider to compare for reasonableness.

Loans Held for Sale (Carried at Lower of Cost or Fair Value)

The fair values of mortgage loans held for sale are determined based on amounts to be received at settlement by establishing the respective buyer requirement or market interest rates.

Loans (Carried at Cost)

The fair values of loans are estimated using discounted cash flow analyses, as well as using market rates at the balance sheet date that reflect the credit and interest rate risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments, and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Impaired Loans (Generally Carried at Fair Value)

Loans for which the Corporation has measured impairment are generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances less the valuation allowance and/or charge-offs.

Foreclosed Assets Held for Resale

Fair value of real estate acquired through foreclosure is based on independent third-party appraisals of the properties. These assets are included as Level 3 fair values, based upon appraisals that consider the sales prices of similar properties in the proximate vicinity.

Restricted Investment in Bank Stock (Carried at Cost)

The carrying amount of required and restricted investment in correspondent bank stock approximates fair value, and considers the limited marketability of such securities.

Accrued Interest Receivable and Payable (Carried at Cost)

The carrying amounts of accrued interest receivable and accrued interest payable approximate their fair value.

Deposits (Carried at Cost)

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (e.g., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-Term Borrowings (Carried at Cost)

The carrying amounts of short-term borrowings approximate their fair values.

Long-Term Borrowings (Carried at Cost)

Fair values of Federal Home Loan Bank (FHLB) advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms, and remaining maturity. The prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

Off-Balance Sheet Credit-Related Instruments

Fair values for the Corporation’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Corporation’s financial instruments as of June 30, 2013, and December 31, 2012:

June 30, 2013

In thousands

Carrying
Amount

Fair Value

Level 1

Level 2

Level 3

Financial assets:

Cash and due from banks

15,398

7,928

7,470

—

Interest-bearing deposits in banks

22,820

—

Investment securities available for sale

141,536

1,914

139,622

—

Investment securities held to maturity

90,314

88,351

—

88,351

—

Loans held for sale

2,427

—

2,427

—

Loans, less allowance for loan losses

683,357

704,447

—

704,447

Accrued interest receivable

3,200

—

3,200

—

Restricted investment in bank stocks

4,603

—

4,603

—

Financial liabilities:

Deposits

826,385

826,943

—

826,943

—

Short-term borrowings

51,250

—

51,250

—

Long-term borrowings

52,830

54,614

—

54,614

—

Accrued interest payable

736

—

736

—

Off-balance sheet financial instruments

—

	December 31, 2012
In thousands	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	19,078	$	19,078	$	5,832	$	13,246	$	—
Interest-bearing deposits in banks	32,307		32,307		32,307		—		—
Investment securities available for sale	165,790		165,790		1,876		163,914		—
Investment securities held to maturity	50,159		50,980		—		50,980		—
Loans held for sale	6,687		6,687		—		6,687		—
Loans, less allowance for loan losses	691,311		724,982		—		—		724,982
Accrued interest receivable	3,360		3,360		—		3,360		—
Restricted investment in bank stocks	5,318		5,318		—		5,318		—

Financial liabilities:
Deposits	834,176		835,640		—		835,640		—
Short-term borrowings	47,303		47,303		—		47,303		—
Long-term borrowings	59,954		62,296		—		62,296		—
Accrued interest payable	1,114		1,114		—		1,114		—

Off-balance sheet financial instruments	—		—		—		—		—

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis for which the Corporation has utilized Level 3 inputs to determine fair value:

Quantitative Information about Level 3 Fair Value Measurements

Dollars in thousands

Fair Value
Estimate

Valuation
Technique

Unobservable
Input

Range

Weighted
Average

June 30, 2013

Impaired loans

6,118

Appraisal of collateral

(1)

Appraisal adjustments

(2)

(10) - (50)%

(24

Foreclosed assets held for resale

590

Appraisal of collateral

(1) (3)

Appraisal adjustments

(2)

(10) - (50)%

(34

December 31, 2012

Impaired loans

2,415

Appraisal of collateral

(1)

Appraisal adjustments

(2)

(10) - (50)%

(16

Foreclosed assets held for resale

2,338

Appraisal of collateral

(1) (3)

Appraisal adjustments

(2)

(10) - (50)%

(40

(1) Fair value is generally determined through independent third-party appraisals of the underlying collateral, which generally includes various Level 3 inputs which are not observable.

(2) Appraisals may be adjusted downwards by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percentage of the appraisal. Higher downward adjustments are caused by negative changes to the collateral or conditions in the real estate market, actual offers or sales contracts received, or age of the appraisal.

(3) Includes qualitative adjustments by management and estimated liquidation expenses.

10. Securities Sold Under Agreements to Repurchase (“Repurchase Agreements”)

The Corporation enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Corporation may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Corporation to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing agreements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability in the Corporation’s consolidated statements of condition, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Corporation does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.

The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Corporation be in default (e.g., fails to make an interest payment to the counterparty). For private institution repurchase agreements, if the private institution counterparty were to default (e.g., declare bankruptcy), the Corporation could cancel the repurchase agreement (i.e., cease payment of principal and interest), and attempt collection on the amount of collateral value in excess of the repurchase agreement fair value. The collateral is held by a third party financial institution in the counterparty’s custodial account. The counterparty has the right to sell or repledge the investment securities. For government entity repurchase agreements, the collateral is held by the Corporation in a segregated custodial account under a tri-party agreement.

The following table presents the liabilities subject to an enforceable master netting arrangement or repurchase agreements as of June 30, 2013 and December 31, 2012:

				Gross Amounts		Net Amounts of Liabilities		Gross Amounts Not offset in the Statements of Condition
Dollars in thousands		Gross Amounts of Recognized Liabilities		offset in the Statements of Condition		Presented in the Statements of Condition		Financial Instruments			Cash Collateral Pledged		Net Amount
June 30, 2013
Repurchase agreements
Commercial Customers and Government Entities	(a)	$	51,250	$	—	$	51,250	$	(51,250	)	$	—	$	—

December 31, 2012
Repurchase agreements
Commercial Customers and Government Entities	(a)	$	47,303	$	—	$	47,303	$	(47,303	)	$	—	$	—

(a) As of June 30, 2013 and December 31, 2012, the fair value of securities pledged in connection with repurchase agreements was $57,389 and $56,392, respectively.

11. New Accounting Pronouncements

ASU 2013-08

In June 2013, the Financial Accounting Standards Boards (FASB) issued Accounting Standard Update (ASU) 2013-08, Financial Services — Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements. The amendments in this Update modify the guidance for determining whether an entity is an investment company, update the measurement requirements for noncontrolling interests in other investment companies and require additional disclosures for investment companies under US GAAP. The amendments in the Update develop a two-tiered approach for the assessment of whether an entity is an investment company which requires an entity to possess certain fundamental characteristics while allowing judgment in assessing other typical characteristics. The amendments in this Update also revise the measurement guidance in Topic 946 such that investment companies must measure noncontrolling ownership interests in other investment companies at fair value, rather than applying the equity method of accounting to such interests.

The amendments in this Update are effective for an entity’s interim and annual reporting periods in fiscal years that begin after December 15, 2013. Earlier application is prohibited.

The Corporation does not expect that this standard will have a significant impact on its consolidated financial condition or results of operations.

ACNB CORPORATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION AND FORWARD-LOOKING STATEMENTS

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.

Forward-Looking Statements

In addition to historical information, this Form 10-Q 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 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 and other regulatory pronouncements, regulations, and rules; ineffectiveness of the business strategy due to changes in current or future market conditions; 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 competition, and of changes in laws and regulations on competition, including industry consolidation and development of competing financial products and services; interest rate movements; difficulties in integrating distinct business operations, including information technology difficulties; challenges in establishing and maintaining operations in new markets; volatilities in the securities markets; and, slow economic conditions. 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 Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and any Current Reports on Form 8-K.

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 Standard 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, 2012. If certain events occur which might indicate goodwill has been impaired, the goodwill is tested for impairment when such events occur. The Corporation has not identified any such events and, accordingly, has not tested goodwill for impairment during the six months ended June 30, 2013. During the quarter ended June 30, 2012, the Corporation changed its method of applying ASC Topic 350 such that the annual goodwill impairment testing date was changed from December 31 to October 1. This new testing date is preferable under the circumstances, because it allows the Corporation more time to accurately complete its impairment testing process in order to incorporate the results in the annual consolidated financial statements. 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.

The Corporation recognizes deferred tax assets and liabilities for the future effects of temporary differences and tax credits. Enacted tax rates are applied to cumulative temporary differences based on expected taxable income in the periods in which the deferred tax asset or liability is anticipated to be realized. Future tax rate changes could occur that would require the recognition of income or expense in the consolidated statements of income in the period in which they are enacted. Deferred tax assets must be reduced by a valuation allowance if in management’s judgment it is “more likely than not” that some portion of the asset will not be realized. Management may need to modify their judgments in this regard from one period to another should a material change occur in the business environment, tax legislation, or in any other business factor that could impair the Corporation’s ability to benefit from the asset in the future.

RESULTS OF OPERATIONS

Quarter ended June 30, 2013, compared to quarter ended June 30, 2012

Executive Summary

Net income for the three months ended June 30, 2013, was $2,322,000, compared to $2,128,000 for the same quarter in 2012, an increase of $194,000 or 9%. Earnings per share was $0.38 in 2013 and $0.35 in 2012. Net interest income decreased $230,000, or 3%, as decreases in interest income were not totally matched by decreases in interest expense. Provision for loan losses decreased $625,000, or 56%, based on adequacy analysis of the allowance for loan losses at the end of each period. Other income increased $75,000, or 2%, due to additional revenue from the insurance subsidiary and higher fees from mortgage sales. Other expenses increased $177,000, or 2%, due to a variety of higher expenditures.

Net Interest Income

Net interest income totaled $8,338,000 for the quarter ended June 30, 2013, compared to $8,568,000 for the same period in 2012, a decrease of $230,000 or 3%. Net interest income decreased due to a decrease in interest income to a greater degree than the decrease in interest expense, both resulting from reductions in market rates associated with the continued low interest rates maintained by the Federal Reserve Bank and the general interest rate environment. Interest income decreased $807,000, or 8%, due to declines in the Federal Funds Target Rate and other market driver rates. These driver rates affect new loan originations and are indexed to a portion of the loan portfolio in that a decrease in the driver rates decreases the yield on new loans and on existing loans at subsequent interest rate reset dates. In this manner, interest income will continue to decrease as new loans replace paydowns on existing loans and variable rate loans reset to new lower rates. In addition, interest income was lower as a result of investment securities paydowns that were reinvested at much lower market rates that were prevailing at the time of reinvestment due to uneven domestic and international economic conditions, compounded by Federal Reserve Bank buying activities referred to as Quantitative Easing. A portion of earning assets was left in short-term money market type accounts during the 2013 second quarter because of the interest rate risk and liquidity tolerances set for the current mix of deposit funding sources. As to funding costs, interest rates on alternative funding sources, such as the Federal Home Loan Bank (FHLB), and other market driver rates are factors in rates the Corporation and the local market pay for deposits. However, during the second quarter of 2013, several of the core deposit rates continued at practical floors after the Federal Open Market Committee decreased the Federal Funds Target Rate by 400 basis points during 2008 and has maintained it at 0% to 0.25% since that time. Interest expense decreased $577,000, or 36%. For more information about interest rate risk, please refer to Item 7A - Quantitative and Qualitative Disclosures about Market Risk in the Annual Report on Form 10-K for the fiscal year ended December 31, 2012, and filed with the SEC on March 15, 2013. Over the longer term, the Corporation continues its strategic direction to increase asset yield and interest income by means of loan growth and rebalancing the composition of earning assets.

The net interest spread for the second quarter of 2013 was 3.38% compared to 3.49% during the same period in 2012. Also comparing the second quarter of 2013 to 2012, the yield on interest earning assets decreased by 0.39% and the cost of interest bearing liabilities decreased by 0.28%. The net interest margin was 3.47% for the second quarter of 2013 and 3.62% for the second quarter of 2012. The net interest margin decline was mainly a result of the rate of decline in the yield on assets decreasing to a greater degree than the decline in funding rates due to funding rates approaching practical floors on deposits as described above.

Average earning assets were $966,082,000 during the second quarter of 2013, an increase of $13,050,000 from the average for the second quarter of 2012. Average interest bearing liabilities were $799,276,000 in the second quarter of 2013, a decrease of $4,526,000 from the same quarter in 2012.

Provision for Loan Losses

The provision for loan losses was $500,000 in the second quarter of 2013 compared to $1,125,000 in the second quarter of 2012, a decrease of $625,000 or 56%. The decrease was a result of analysis of the adequacy of the allowance for loan losses. More specifically, even though substandard increased, provision expense was down because the increase in substandard was largely in credits that had low or no specific allocations because of appraised values in excess of the loan balance. Each quarter, the Corporation measures risk in the loan portfolio compared with the balance in the allowance for loan losses and the current evaluation factors. For more information, please refer to Allowance for Loan Losses in the following Financial Condition section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations. ACNB charges confirmed loan losses to the allowance and credits the allowance for recoveries of previous loan charge-offs. For the second quarter of 2013, the Corporation had net charge-offs of $747,000, as compared to net charge-offs of $341,000 for the second quarter of 2012.

Other Income

Total other income was $3,140,000 for the three months ended June 30, 2013, up $75,000, or 2%, from the second quarter of 2012. Fees from deposit accounts decreased by $55,000, or 9%, due to varying volume. Various specific government regulations effectively limit fee assessments related to deposit accounts, making future revenue levels uncertain. Revenue from ATM and debit card transactions increased 10% to $356,000 due to higher volume. The current increase 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. Income from fiduciary activities, which include both institutional and personal trust management services, totaled $312,000 for the three months ended June 30, 2013, as compared to $356,000 during the second quarter of 2012, a 12% decrease as a result of less estate fee income in the second quarter of 2013. Estate fee income is inherently sporadic in nature. Earnings on bank-owned life insurance increased by $12,000, or 5%, as a result more insurance in force. At the Corporation’s wholly-owned subsidiary, Russell Insurance Group, Inc. (RIG), revenue was up by $104,000, or 8%, to $1,399,000, due to timing on receipt of “contingent” commissions. The contingent or extra commission payments from insurance carriers are mostly received 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. Other income in the quarter ended June 30, 2013, was up by $28,000, or 12%, to $271,000 due to increased fees related to sales of residential mortgages.

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. Recent changes to 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 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 a 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. At the last test, commissions from insurance sales were up, although RIG’s stand alone net income decreased because of startup costs of a new business line and earned incentive payments. The testing for potential impairment involves methods that include both current and projected income amounts, and the fair value remained above the carrying value as of the annual impairment test date.

The results of the annual evaluations determined that there was no impairment of goodwill, including the testing at October 1, 2012. However, future 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.

Other Expenses

The largest component of other expenses is salaries and employee benefits, which increased by $192,000, or 4%, when comparing the second quarter of 2013 to the same quarter a year ago. Overall, the net increase in salaries and employee benefits was the result of:

· increases from normal promotion and production-based incentive/bonus compensation to employees;

· increased payroll taxes including higher unemployment tax assessments;

· increased costs associated with benefit plans other than the qualified pension plan; partially offset by,

· decreased defined benefit pension expense, which was down by $15,000, or 13%, when comparing the three months ended June 30, 2013, to June 30, 2012, resulting from higher 2012 investment performance offsetting a significant decrease in the discount rate from market rates at historically low levels.

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 low discount rates and fair value volatility. 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. In addition, a pension 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. The ACNB Plan has maintained a well-funded status.

Net occupancy expense decreased by $4,000, or 1%, in part due to preventative maintenance programs. Equipment expense increased by $121,000, or 18%, as a result of higher outsourced processing costs and small ticket technology upgrades in 2013.

Professional services expense totaled $191,000 during the second quarter of 2013, as compared to $251,000 for the same period in 2012, a decrease of $60,000 or 24%. The decrease was due to lower corporate governance and problem loan legal expenses.

Marketing and corporate relations expenses were $23,000 or 26% higher in the second quarter of 2013 compared to the same period of 2012. Marketing expense will vary with the timing of advertising production and media expenditures to promote certain in-market consumer loans.

FDIC and regulatory expense for the second quarter of 2013 was $192,000, a decrease of $26,000, or 12%, from the second quarter of 2012. The decrease was primarily due to improved risk ratings . Over the last several years, much higher expense was required of all FDIC-insured banks to restore the deposit insurance fund due to the cost of protecting depositors’ accounts at failed banks during the recession.

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 (income) expenses were ($72,000) and $165,000 for the quarters ended June 30, 2013 and 2012, respectively. The higher cost in 2012 was due to the number and varying mix of commercial and residential real estate collateral, unpaid property taxes, and deferred maintenance required upon acquisition. In addition, some properties suffered decreases in value after acquisition, requiring write-downs to fair value during the prolonged marketing cycles for these distressed properties. The second quarter of 2013 saw a net recovery from the benefit of a final sale on a property that had been written down and incurred significant carrying costs in previous periods. Foreclosed assets held for resale expenses or recoveries will vary in the remainder of 2013 depending on the successful closing of sales agreements on some existing properties and the unknown expenses related to new properties acquired. It is not expected that a similar recovery booked in the second quarter will recur.

Other tax expenses increased by $62,000, or 36%, due to a state shareholders’ equity-based tax that has increased annually regardless of income and a 2012 recovery from a sales tax challenge. Supplies and postage increased by 23% in part due to periodic large envelope reorders. Other operating expenses increased by $73,000, or 9%, in the second quarter of 2013, as compared to the second quarter of 2012. The increases were centered in technology and corporate governance expenditures.

Provision for Income Taxes

The Corporation recognized income taxes of $639,000, or 22% of pretax income, during the second quarter of 2013, as compared to $540,000, or 20% of pretax income, during the same period in 2012. The variances from the federal statutory rate of 34% in both periods 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) and investments in low-income housing partnerships (which qualify for federal tax credits). Tax exempt investments have been allowed to run off due to concerns of interest rate risk of these investments. The income tax provision during the second quarters ended June 30, 2013 and 2012, included low-income housing tax credits of $170,000 and $139,000, respectively.

Six months ended June 30, 2013, compared to six months ended June 30, 2012

Executive Summary

Net income for the six months ended June 30, 2013, was $4,740,000, compared to $4,364,000 for the same six months in 2012, an increase of $376,000 or 9%. Earnings per share was $0.79 in 2013 and $0.73 in 2012. Net interest income decreased $336,000, or 2%, as decreases in interest income were not totally matched by decreases in interest expense. Provision for loan losses decreased $1,100,000, or 49%, based on adequacy analysis of the allowance for loan losses at the end of each period. Other income increased $204,000, or 3%, due to additional revenue from higher fees from mortgage sales. Other expenses increased $394,000, or 3%, due to a variety of higher expenditures.

Net Interest Income

Net interest income totaled $16,872,000 for the six months ended June 30, 2013, compared to $17,208,000 for the same period in 2012, a decrease of $336,000 or 2%. Net interest income decreased due to a decrease in interest income to a greater degree than the decrease in interest expense, both resulting from reductions in market rates associated with the continued low interest rates maintained by the Federal Reserve Bank and the general interest rate environment. The sharp spike in market rates at the end of June 2013 had little effect on the second quarter results, except to lower fair values on the security portfolio. Interest income decreased $1,412,000, or 7%, due to declines in the Federal Funds Target Rate and other market driver rates. These driver rates affect new originations and are indexed to a portion of the loan portfolio in that a decrease in the driver rates decreases the yield on new loans and on existing loans at subsequent interest rate reset dates. In this manner, interest income will continue to decrease as new loans replace paydowns on existing loans and variable rate loans reset to new lower rates. In addition, interest income was lower as a result of investment securities paydowns that were reinvested at much lower market rates that were prevailing at the time of reinvestment due to uneven domestic and international economic conditions, compounded by Federal Reserve Bank buying activities referred to as Quantitative Easing. A portion of earning assets was left in short-term money market type accounts because of the interest rate risk and liquidity tolerances set for the current mix of deposit funding sources. As to funding costs, interest rates on alternative funding sources, such as the Federal Home Loan Bank (FHLB), and other market driver rates are factors in rates the Corporation and the local market pay for deposits. However, during the second quarter of 2013, several of the core deposit rates continued at practical floors after the Federal Open Market Committee decreased the Federal Funds Target Rate by 400 basis points during 2008 and has maintained it at 0% to 0.25% since that time. Interest expense decreased $1,076,000, or 33%. For more information about interest rate risk, please refer to Item 7A - Quantitative and Qualitative Disclosures about Market Risk in the Annual Report on Form 10-K for the fiscal year ended December 31, 2012, and filed with the SEC on March 15, 2013. Over the longer term, the Corporation continues its strategic direction to increase asset yield and interest income by means of loan growth and rebalancing the composition of earning assets.

The net interest spread for the first six months of 2013 was 3.45% compared to 3.54% during the same period in 2012. Also comparing the first six months of 2013 to 2012, the yield on interest earning assets decreased by 0.37% and the cost of interest bearing liabilities decreased by 0.27%. The net interest margin was 3.53% for the first six months of 2013 and 3.67% for the same period in 2012. The net interest margin decline was mainly a result of the rate of decline in the yield on assets decreasing to a greater degree than the decline in funding rates due to funding rates approaching practical floors on deposits as described above.

Average earning assets were $964,644,000 during the first six months of 2013, an increase of $21,556,000 from the average for the first six months of 2012. Average interest bearing liabilities were $803,741,000 in the first six months of 2013, an increase of $6,225,000 from the same six months in 2012.

Provision for Loan Losses

The provision for loan losses was $1,150,000 in the first six months of 2013 compared to $2,250,000 in the first six months of 2012, a decrease of $1,100,000 or 49%. The decrease was a result of analysis of the adequacy of the allowance for loan losses. More specifically, even though substandard increased, provision expense was down because the increase in substandard was largely in credits that had low or no specific allocations because of appraised values in excess of the loan balance. Each quarter, the Corporation measures risk in the loan portfolio compared with the balance in the allowance for loan losses and the current evaluation factors. For more information, please refer to Allowance for Loan Losses in the following Financial Condition section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations. ACNB charges confirmed loan losses to the allowance and credits the allowance for recoveries of previous loan charge-offs. For the first six months of 2013, the Corporation had net charge-offs of $736,000, as compared to net charge-offs of $2,410,000 for the first six months of 2012.

Other Income

Total other income was $6,085,000 for the six months ended June 30, 2013, up $204,000, or 3%, from the first six months of 2012. Fees from deposit accounts decreased by $69,000, or 6%, due to varying volume. Various specific government regulations effectively limit fee assessments related to deposit accounts, making future revenue levels uncertain. Revenue from ATM and debit card transactions increased 7% to $675,000 due to higher volume. The current increase 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. Income from fiduciary activities, which include both institutional and personal trust management services, totaled $643,000 for the six months ended June 30, 2013, as compared to $644,000 during the first six months of 2012, a less than 1% decrease as a result of higher average asset market values under management mostly offsetting lower estate fee income in the second quarter of 2013. Estate fee income is inherently sporadic in nature. Earnings on bank-owned life insurance increased by $15,000, or 3%, as a result of lower crediting rates being offset by more insurance in force. At the Corporation’s wholly-owned subsidiary, Russell Insurance Group, Inc. (RIG), revenue was up by $30,000, or 1%, to $2,530,000, with improved recurring revenue offsetting lower “contingent” commissions. The contingent or extra commission payments from insurance carriers are mostly received in March and April of each year, and the amount is at the discretion of various insurance carriers in accordance with applicable insurance regulations. Pressure on RIG net income is expected to continue in this business line, and contingent commissions are not predictable. Other income in the six months ended June 30, 2013, was up by $193,000, or 42%, to $656,000 due to increased, but slowing, fees related to sales of residential mortgages.

Other Expenses

The largest component of other expenses is salaries and employee benefits, which increased by $367,000, or 4%, when comparing the first six months of 2013 to the same period a year ago. Overall, the net increase in salaries and employee benefits was the result of:

· increases from normal promotion and production-based incentive/bonus compensation to employees;

· increased payroll taxes including higher unemployment tax assessments;

· health insurance, covering a substantial portion of employees, although stable is projected to increase;

· increased costs associated with benefit plans other than the qualified pension plan; partially offset by,

· decreased defined benefit pension expense, which was down by $31,000, or 13%, when comparing the six months ended June 30, 2013, to June 30, 2012, resulting from higher 2012 investment performance offsetting a significant decrease in the discount rate from market rates at historically low levels.

Net occupancy expense increased by $18,000, or 2%, in part due to higher winter season expenses in first quarter 2013. Equipment (technology) expense increased by $168,000, or 13%, as a result of higher outsourced processing and small ticket electronic products costs in 2013.

Professional services expense totaled $435,000 during the first six months of 2013, as compared to $442,000 for the same period in 2012, a decrease of $7,000 or 2%. The decrease was due to lower corporate governance legal expenses.

Marketing and corporate relations expenses were up $22,000 or 12% in the first six months of 2013 compared to the same period of 2012. Marketing expense will vary with the timing of advertising production and media expenditures to promote certain in-market consumer loans. In addition, 2013 saw production costs involved in a future redesigned bank website.

FDIC and regulatory expense for the first six months of 2013 was $401,000, a decrease of $50,000, or 11%, from the same period in 2012. The decrease was primarily due to improved risk ratings. Over the last several years, much higher expense was required of all FDIC-insured banks to restore the deposit insurance fund due to the cost of protecting depositors’ accounts at failed banks during the recession.

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 (income) expenses were ($93,000) and $230,000 for the six months ended June 30, 2013 and 2012, respectively. The higher cost in 2012 was due to the number and varying mix of commercial and residential real estate collateral, unpaid property taxes, and deferred maintenance required upon acquisition. In addition, some properties suffered decreases in value after acquisition, requiring write-downs to fair value during the prolonged marketing cycles for these distressed properties. Year to date through the second quarter of 2013 saw a net recovery from the benefit of a sale and expense recovery. This was a one time event not expected to recur. Foreclosed assets held for resale expenses or recoveries will vary in the remainder of 2013, depending on the successful closing of sales agreements on some existing properties and the unknown expenses related to new properties acquired.

Other tax expenses increased by $77,000, or 20%, due to a state shareholders’ equity-based tax had increased annually regardless of income and a 2012 $54,000 recovery from a sales tax challenge. Supplies and postage declined by 3% in part due to more electronic information delivery. Other operating expenses increased by $133,000, or 9%, in the first six months of 2013, as compared to the first six months of 2012. The increases were centered in technology and corporate governance expenditures.

Provision for Income Taxes

The Corporation recognized income taxes of $1,294,000, or 21% of pretax income, during the first six months of 2013, as compared to $1,096,000, or 20% of pretax income, during the same period in 2012. The variances from the federal statutory rate of 34% in both periods 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) and investments in low-income housing partnerships (which qualify for federal tax credits). The income tax provision during the six months ended June 30, 2013 and 2012, included low-income housing tax credits of $339,000 and $278,000, respectively.

FINANCIAL CONDITION

Assets totaled $1,039,000,000 at June 30, 2013, compared to $1,050,000,000 at December 31, 2012, and $1,047,000,000 at June 30, 2012. Average earning assets during the six months ended June 30, 2013, increased to $965,000,000 from $943,000,000 during the same period in 2012. Average interest bearing liabilities increased in 2013 to $804,000,000 from $798,000,000 in 2012, while average non-interest bearing deposits increased by $15,000,000.

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 increase in the securities portfolio in 2013 was mainly to deploy available funds into a more suitable allocation than Federal Reserve balances. Investing into investment security portfolio assets was made more challenging due to the Federal Reserve Bank’s program called Quantitative Easing in which, by its open market purchases, the yields are maintained at a lower level than would otherwise be the case. 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 June 30, 2013, the securities balance included a net unrealized gain of $3,178,000, net of taxes, on available for sale securities on $136,724,000 amortized cost versus a net unrealized gain of $5,614,000, net of taxes, on $157,288,000 amortized cost at December 31, 2012, and a net unrealized gain of $5,970,000, net of taxes, on available for sale securities on $198,102,000 amortized cost at June 30, 2012. The decrease in fair value of securities during 2013 was a result of a lower amount of investments in the available for sale portfolio and changes in the U.S. Treasury yield curve and the spread from this yield curve required by investors on the types of investment securities that ACNB owns. More specifically, an increase in market rates after comments by Federal Reserve Chairman Bernanke in late June caused a sharp spike in market rates which in turn lowers the value of most securities already owned. Previously, actions by the Federal Reserve to lower rates on the yield curve most conducive to stimulating the housing market and separate concerns about European sovereign debt offset the bond markets’ concern about the level of U.S. debt and inflation, leading to generally lower rates in the yield curve despite fair values being volatile on any given day in all periods presented.

At June 30, 2013, the securities balance included held to maturity securities with an amortized cost of $90,314,000 and with a fair value of $88,351,000, compared to an amortized cost of $50,159,000 and a fair value of $50,980,000 at December 31, 2012, compared to an amortized cost of $28,388,000 and a fair value of $29,011,000 at June 30, 2012. 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 because of prevailing low interest rates at purchase are projected not to be practicable to sale 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 liquidity for Bank needs for the FHLB 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 7 - Securities in the Notes to Consolidated Financial Statements for more information on the security portfolio and Note 9 - Fair Value Measurements in the Notes to Consolidated Financial Statements for more information about fair value.

Loans

Loans outstanding increased by $8,290,000, or 1%, from June 30, 2012, to June 30, 2013, and decreased by $7,540,000, or 1%, from December 31, 2012, to June 30, 2013. The year-over-year increase in loan volume was the result of determined efforts to lend to creditworthy borrowers subject to our disciplined standards, despite the continued uncertain economic conditions. The decrease in the first six months of 2013 was caused by a number of large commercial loans paying off by refinancing elsewhere for better rates or more lenient terms. More payoffs are anticipated in the remainder of 2013 from the customers’ cash reserves or from refinancing at competing banks. During the first six months of 2013, commercial purpose loans (both real estate secured and non-real estate secured) decreased, while local market portfolio residential mortgages increased despite customer preference for a 30-year fixed product, which is generally sold because of inherent interest rate risk. Commercial purpose segments decreased $12,609,000, or 4%, as compared to December 31, 2012. These loans are spread among diverse categories that include commercial real estate, commercial real estate construction, and commercial and industrial. Residential real estate mortgage lending, which includes smaller commercial purpose loans secured by the owner’s home, increased by $5,730,000, or 2%, as compared to December 31, 2012. These loans are to local borrowers who preferred loan types that would not be sold into the secondary mortgage market. Of the $387,700,000 total, $84,950,000 were 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 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 further and property values further deteriorate. Real estate construction loans included in commercial purpose segments exhibited no growth, as a result of the weak demand in the residential real estate market and because of stricter underwriting on this loan type due to the category’s credit attributes.

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 dwellings that total $104,910,000, or 26% of total loans, at June 30, 2013. 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 do not present any greater risk than commercial loans in general. ACNB does not originate or hold Alt-A or subprime mortgages in its loan portfolio.

Allowance for Loan Losses

ACNB maintains the allowance for loan losses at a level believed adequate by management to absorb potential 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 collectability 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 twelve quarters 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;

· the nature and volume of the portfolio and terms of loans;

· the experience, ability and depth of lending management and staff;

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

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

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:

· the 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, as well as a Corporation specific and industry-wide hesitancy to prematurely release reserves at this time given that additional losses are probable. The Corporation has determined that the amount of provision in 2013 and the resulting allowance at June 30, 2013, are appropriate given the continuing level of risk in the loan portfolio. Management also believes the unallocated allowance is appropriate as the total amount of impaired loans is still elevated; low risk government loans were paid off in 2012. In addition, there are certain loans that, although they did not meet the criteria for impairment, management believed there was a strong possibility that these loans represented probable losses at June 30, 2013.

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 on the overall analysis taking into account the methodology discussed above. The provision for the quarter ended June 30, 2013, was $625,000 less than the provision for the quarter ended June 30, 2012. More specifically, even though substandard increased, provision expense was down because the increase in substandard was largely in credits that had low or no specific allocations because of appraised values in excess of the loan balance. Management believes that the decrease in the provision reflects that losses inherent in the portfolio were reflected in previous period provision expense and included in the unallocated portion of allowance.

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.

The allowance for loan losses at June 30, 2013, was $17,239,000, or 2.46% of loans, as compared to $15,322,000, or 2.21% of loans, at June 30, 2012, and $16,825,000, or 2.38% of loans, at December 31, 2012.

Changes in the allowance for loan losses were as follows:

In thousands	Six Months Ended June 30, 2013			Year Ended December 31, 2012			Six Months Ended June 30, 2012
Beginning balance - January 1	$	16,825		$	15,482		$	15,482
Provisions charged to operations	1,150			4,675			2,250
Recoveries on charged-off loans	225			425			407
Loans charged-off	(961		)	(3,757		)	(2,817		)

Ending balance	$	17,239		$	16,825		$	15,322

Loans past due 90 days and still accruing were $2,128,000 and nonaccrual loans were $8,358,000 as of June 30, 2013. $1,549,000 of the nonaccrual balance at June 30, 2013, was troubled debt restructured loans. $7,328,000 of the impaired loans were accruing troubled debt restructured loans. Loans past due 90 days and still accruing were $892,000 at June 30, 2012, while nonaccruals were $7,730,000. $2,024,000 of the nonaccrual balance at June 30, 2012, was troubled debt restructured loans. $4,876,000 of the impaired loans were accruing troubled debt restructured loans. Loans past due 90 days and still accruing were $771,000 at December 31, 2012, while nonaccruals were $6,327,000. $1,900,000 of the nonaccrual balance at December 31, 2012, was troubled debt restructured loans. $4,815,000 of the impaired loans were accruing troubled debt restructured loans. Total additional loans classified as substandard (potential problem loans) at June 30, 2013, June 30, 2012, and December 31, 2012, were approximately $11,043,000, $10,600,000 and $13,076,000, respectively.

A better understanding of the trends of the nonaccrual loans is obtained by a comparison back to previous periods. Information on nonaccrual loans at June 30, 2013, as compared to December 31, 2012 and 2011, is as follows:

Dollars in thousands	Number of Credit Relationships	Balance		Specific Loss Allocations		Current Year Charge-Offs		Location	Originated
June 30, 2013
Residential real estate developments	3	$	1,225	$	214	$	—	In market	2006 - 2010
Owner occupied commercial real estate	13	4,235		—		109		In market	1995 - 2012
Investment/rental commercial real estate	6	2,711		156		101		In market	2003 - 2010
Commercial and industrial	2	187		—		22		In market	2006 - 2007
Total	24	$	8,358	$	370	$	232

December 31, 2012
Residential real estate developments	2	$	854	$	—	$	389	In market	2006 - 2010
Owner occupied commercial real estate	12	3,137		7		83		In market	1995 - 2010
Investment/rental commercial real estate	6	1,995		—		606		In market	2003 - 2011
Commercial and industrial	3	341		29		1,954		In market	2006 - 2010
Total	23	$	6,327	$	36	$	3,032

December 31, 2011
Residential real estate developments	3	$	2,614	$	—	$	1,155	In market	2006 - 2010
Owner occupied commercial real estate	13	6,469		43		1,196		In market	1995 - 2010
Investment/rental commercial real estate	5	1,544		53		286		In market	2003 - 2010
Commercial and industrial	3	2,219		1,085		1,664		In market	2006 - 2008
Total	24	$	12,846	$	1,181	$	4,301

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 2012 for purposes listed in the classifications in the tables above.

Included in residential real estate developments at June 30, 2013, the Corporation had one impaired loan totaling $694,000 to finance a residential real estate development project in the Corporation’s primary trading area of southcentral Pennsylvania, which is in nonaccrual of interest status. The loan has standard terms and conditions, including repayment from the sales of the respective properties, and no interest reserves and was originated during the first half of 2006. Foreclosure has been held in abeyance while allowing the pursuit of a workout plan including providing additional collateral and more targeted marketing of the property. This loan was charged down by $274,000 in the first quarter of 2011 due to a decline in fair value, and subsequently additional paydowns were made by the borrower from sales of collateral in 2011. Because of the 2011 write-down and subsequent principal repayments, there was no specific valuation allowance at June 30, 2013. One smaller residential real estate development relationship, added in 2010, was reduced by collateral sales to $94,000, which is supported by the remaining collateral’s current fair value. Another smaller residential real estate development relationship, added in 2013 after the borrower filed Chapter 13 bankruptcy, is not fully supported by the collateral’s current fair value because of a dispute on a prior lien. These two relationships totaled $437,000 and resulted in a specific allocation of $214,000 based on new appraisals received in the second quarter 2013. Legal action has commenced on resolving the issues on this credit.

Owner occupied commercial real estate at June 30, 2013, includes 13 unrelated loan relationships totaling $4,235,000, 12 of which have balances of less than $700,000 each, in which real estate is collateral and is used in connection with a business enterprise that is suffering economic stress or is out of business. These loans were originated between 1995 and 2012. The loans in this category are business loans impacted by the general economic downturn. Collection efforts will continue until it is deemed in the best interest to initiate foreclosure procedures. One prior loan with a balance of $237,000 was moved to foreclosed assets held for sale after a charge off of $109,000 in the second quarter. Another relationship was added to nonaccrual in the second quarter of 2013 after the loan matured with no response from the borrowers. It had an outstanding balance of $925,000 on farm land that appears to be adequately secured by real estate collateral awaiting new appraisals. A smaller loan in the amount of $164,000 was added to nonaccrual and collection efforts continue on this loan.

Investment/rental commercial real estate at June 30, 2013, includes six unrelated loan relationships totaling $2,711,000 in which the real estate is collateral, and the purpose of which is for speculation, rental, or other non-owner occupied use. These loans were originated between 2003 and 2010. The loans in this category were each affected by the lack of borrower cash flow to continue to service the debt and, in some cases, by increased real estate taxes levied by local government units. The plan is to enter foreclosure proceedings and subsequently market the real estate if ongoing workout efforts are not successful. One loan with a balance of $853,000 added in the first quarter of 2013 had a specific allocation of $156,000 based on a current appraisal less estimated costs to sell.

Included in impaired commercial and industrial loans at June 30, 2013, is a fully-disbursed line of credit originated in the second quarter of 2007 for a start-up enterprise in the food industry in southcentral Pennsylvania, in the amount of $178,000, with no specific valuation allowance at June 30, 2013, which is net of a $1,000,000 charge-off taken in 2008 and an additional charge-off of $529,000 in 2011. Subsequently, in the third quarter of 2011, the borrower entered into an addendum to a prior delinquent forbearance agreement with all required principal forbearance payments made by the borrower. This loan, with standard terms and conditions including repayment from conversion of trade assets, continues in default and in nonaccrual status. The remaining smaller loans in this category are business loans impacted by the general economic downturn. Two loans were settled in the second quarter of 2013, one with no loss due to a guarantee and the other with a $22,000 charge-off which was less than the previous specific allocation.

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 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 2013 and 2012 was a result of the measurement of the adequacy of the allowance for loan losses at each period.

Foreclosed Assets Held for Resale

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 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. The carrying value of real estate acquired through foreclosure totaled $2,485,000 for 15 properties at June 30, 2013, compared to $4,247,000 for 15 properties at December 31, 2012. The decrease in the carrying value was due to five unrelated commercial purpose parcels sold while five different and unrelated smaller value residential and small commercial real estate were added in 2013. All remaining properties are actively being marketed. The Corporation expects to obtain and market additional foreclosed assets through the remainder of 2013; however, the total amount and timing is currently not certain. A realized final gain on a property sold in the second quarter of 2013 more than offset the other 2013 foreclosed real estate expense year to date as of June 30, 2013.

Deposits

ACNB continues to rely on its market area deposits as a primary source of funds for lending activities with total deposits of $826,385,000 as of June 30, 2013. Deposits increased by $8,423,000, or 1%, from June 30, 2012, to June 30, 2013, and decreased by $7,791,000, or less than 1%, from December 31, 2012, to June 30, 2013. Deposits vary between quarters mostly reflecting different levels held by local government and school districts during different times of the year. 2012 had an additional increase due to the deposit of $20,000,000 in bond proceeds from a major customer. The drawdown of these deposits has commenced. In addition, deposits decreased in the first half of 2013 in part due to declines in retail certificates of deposits (CDs). CDs written in prior periods at higher interest rates are currently maturing, and some customers are unwilling to accept the current lower rates. 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 credit unions and larger regional banks. During the recession and subsequent slow recovery, deposit growth mix experienced 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. With persistent low market interest rates in a slow economy, ACNB’s ability to maintain and add to its deposit base may be further 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 improve, funds could leave the Corporation or be priced higher to maintain similar levels.

Borrowings

Short-term borrowings are comprised of securities sold under agreements to repurchase. As of June 30, 2013, short-term borrowings were $51,250,000, as compared to $47,303,000 at December 31, 2012, and $42,601,000 at June 30, 2012. Agreements to repurchase accounts are within the commercial customer base and have attributes similar to core deposits. Investment securities are pledged in sufficient amounts to collateralize these agreements. In comparison to year-end 2012, repurchase agreement balances were up due to changes in the cash flow position of ACNB’s commercial and local government customer base. There were no short-term Federal Home Loan Bank (FHLB) borrowings at the end of any of the periods presented; although, they were last used in the first quarter of 2012 to even out funding from seasonality in the deposit base and would be used again in such circumstances. Long-term borrowings consist primarily of longer-term advances from the FHLB that contribute to a more balanced net repricing position; in addition, they include a loan from a commercial bank to fund the purchase of RIG. Long-term borrowings totaled $52,830,000 at June 30, 2013, versus $59,954,000 at December 31, 2012, and $80,074,000 at June 30, 2012. The Corporation decreased long-term borrowings by paying off maturing FHLB advances from increased core deposits. An additional $7,000,000 mature in the third quarter 2013 which currently are projected to be paid off.

Capital

ACNB’s capital management strategies have been developed to provide an appropriate rate of return to stockholders, while maintaining its “well-capitalized” position. Total stockholders’ equity was $101,796,000 at June 30, 2013, compared to $101,264,000 at December 31, 2012, and $99,910,000 at June 30, 2012. Stockholders’ equity increased in the first six months of 2013 by $532,000 due to $2,472,000 in earnings retained in capital offsetting an increase in accumulated other comprehensive loss as a result of depreciation in the fair value of the investment portfolio, which offset an increase in pension plan assets and benefit obligations. Other comprehensive income or loss is mainly caused by fixed-rate investment securities gaining or losing value in different interest rate environments and changes in the net funded position of the defined benefit pension plan.

The primary source of additional capital to ACNB is earnings retention, which represents net income less dividends declared. During the first six months of 2013, ACNB earned $4,740,000 and paid dividends of $2,268,000 for a dividend payout ratio of 48%. During the first six months of 2012, ACNB earned $4,364,000 and paid dividends of $2,260,000 for a dividend payout ratio of 52%.

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. Year to date June 30, 2013, 15,648 shares were issued under this plan with proceeds in the amount of $268,000. Year to date June 30, 2012, 9,726 shares were issued under this plan with proceeds in the amount of $141,000. Proceeds will be 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.

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 June 30, 2013, and December 31, 2012, 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 begins January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) must begin 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 leverage ratio of 4%.

In addition, the final rules establishes 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 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.

Under the proposed rules, accumulated other comprehensive income (AOCI) would have been included in a banking organization’s common equity tier 1 capital. The final rules allow community banks to make a one-time election not to include these additional components of AOCI in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital. The opt-out election must be made in the first call report or FR Y-9 series report that is filed after the financial institution becomes subject to the final rule.

The final rules permanently grandfather non-qualifying capital instruments (such as trust preferred securities and cumulative perpetual preferred stock) issued before May 19, 2010 for inclusion in the tier 1 capital of banking organizations with total consolidated assets less than $15 billion as of December 31, 2009 and banking organizations that were mutual holding companies as of May 19, 2010.

The proposed rules would have modified the risk-weight framework applicable to residential mortgage exposures to require banking organizations to divide residential mortgage exposures into two categories in order to determine the applicable risk weight. In response to commenter concerns about the burden of calculating the risk weights and the potential negative effect on credit availability, the final rules do not adopt the proposed risk weights but retain the current risk weights for mortgage exposures under the general risk-based capital rules.

The Corporation is in the process of assessing the impact of these changes on the regulatory ratios of the Corporation and the bank on the capital, operations, liquidity and earnings of the Corporation and bank.

Risk-Based Capital

The banking subsidiary’s capital ratios are as follows:

	June 30, 2013		December 31, 2012		To Be Well Capitalized Under Prompt Corrective Action Regulations
Tier 1 leverage ratio (to average assets)	8.55	%	8.14	%	5.00	%
Tier 1 risk-based capital ratio (to risk-weighted assets)	13.21	%	12.80	%	6.00	%
Total risk-based capital ratio	14.47	%	14.07	%	10.00	%

Liquidity

Effective liquidity management ensures the cash flow requirements of depositors and borrowers, as well as the operating cash needs of ACNB, are met.

ACNB’s funds are available from a variety of sources, including assets that are readily convertible such as interest bearing deposits with banks, maturities and repayments from the securities portfolio, scheduled repayments of loans receivable, the core deposit base, and the ability to borrow from the FHLB. At June 30, 2013, ACNB’s banking subsidiary had a borrowing capacity of approximately $384,598,000 from the FHLB, of which $333,598,000 was available. Because of various restrictions and requirements on utilizing the available balance, ACNB considers $250,000,000 to be the practicable additional borrowing capacity, which is considered to be sufficient for operational needs. The FHLB system is self-capitalizing, member-owned, and its member banks’ stock is not publicly traded. ACNB creates its borrowing capacity with the FHLB by granting a security interest in certain loan assets with requisite credit quality. ACNB has reviewed information on the FHLB system and the FHLB of Pittsburgh, and has concluded that they have the capacity and intent to continue to provide both operational and contingency liquidity. The FHLB of Pittsburgh instituted a requirement that a member’s investment securities must be moved into a safekeeping account under FHLB control to be considered in the calculation of maximum borrowing capacity. The Corporation currently has securities in safekeeping at the FHLB of Pittsburgh; however, the safekeeping account is under the Corporation’s control. As better contingent liquidity is maintained by keeping the securities under the Corporation’s control, the Corporation has not moved the securities which, in effect, lowered the Corporation’s maximum borrowing capacity. However, there is no practical reduction in borrowing capacity as the securities can be moved into the FHLB-controlled account promptly if they are needed for borrowing purposes.

Another source of liquidity is securities sold under repurchase agreements to customers of ACNB’s banking subsidiary totaling approximately $51,250,000 and $47,303,000 at June 30, 2013, and December 31, 2012, respectively. These agreements vary in balance according to the cash flow needs of customers and competing accounts at other financial organizations.

The liquidity of the parent company also represents an important aspect of liquidity management. The parent company’s cash outflows consist principally of dividends to stockholders and corporate expenses. The main source of funding for the parent company is the dividends it receives from its banking subsidiary. Federal and state banking regulations place certain legal restrictions and other practicable safety and soundness restrictions on dividends paid to the parent company from the subsidiary bank.

ACNB manages liquidity by monitoring projected cash inflows and outflows on a daily basis, and believes it has sufficient funding sources to maintain sufficient liquidity under varying degrees of business conditions.

Off-Balance Sheet Arrangements

The Corporation is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and, to a lesser extent, standby letters of credit. At June 30, 2013, the Corporation had unfunded outstanding commitments to extend credit of approximately $167,400 and outstanding standby letters of credit of approximately $4,301,000. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements.

Market Risks

Financial institutions can be exposed to several market risks that may impact the value or future earnings capacity of the organization. These risks involve interest rate risk, foreign currency exchange risk, commodity price risk, and equity market price risk. ACNB’s primary market risk is interest rate risk. Interest rate risk is inherent because, as a financial institution, ACNB derives a significant amount of its operating revenue from “purchasing” funds (customer deposits and wholesale borrowings) at various terms and rates. These funds are then invested into earning assets (primarily loans and investments) at various terms and rates.

RECENT DEVELOPMENTS

JUMPSTART OUR BUSINESS STARTUPS (JOBS) ACT - In April 2012, President Obama signed the JOBS Act into 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 holdings 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 is not expected to have any immediate application to the Corporation, and since April 2012 has had no material impact, management will continue to monitor the implementation rules for potential effects which might benefit the Corporation.

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 is intended to effect a fundamental restructuring of federal banking regulation. Among other things, Dodd-Frank created a new 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 and is expected 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 banking subsidiary’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. 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.

Deposit Insurance

Dodd-Frank permanently increases the maximum deposit insurance amount for banks, savings institutions, and credit unions to $250,000 per depositor, and extended unlimited deposit insurance to non-interest bearing transaction accounts through December 31, 2012. 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. Effective one year from the date of enactment, on July 21, 2011, Dodd-Frank 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” payments in connection with approvals of mergers and acquisitions unless previously voted on by the 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 gave the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.

Prohibition Against Charter Conversions of Troubled Institutions

Effective one year after enactment, 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 amends 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 creates a new, 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 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 consumer’s 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 final rule, as issued, is not expected to have a material impact on the Corporation’s lending activities or the Corporation’s statements of income or condition.

SUPERVISION AND REGULATION

Dividends

ACNB is a legal entity separate and distinct from its subsidiary bank. ACNB’s revenues, on a parent company only basis, result almost entirely from dividends paid to the Corporation by its subsidiary bank. 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, 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. 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.

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 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.

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Management monitors and evaluates changes in market conditions on a regular basis. Based upon the most recent review, management has determined that there have been no material changes in market risks since year-end 2012. For further discussion of year-end information, please refer to the Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

ITEM 4 - CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Corporation carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in periodic SEC filings.

Disclosure controls and procedures are Corporation controls and other procedures that are designed to ensure that information required to be disclosed by the Corporation in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There were no changes in the Corporation’s internal control over financial reporting during the quarterly period ended June 30, 2013, that have materially affected, or are reasonably likely to materially affect, the internal control over financial reporting.

PART II - OTHER INFORMATION

ACNB CORPORATION

ITEM 1 - LEGAL PROCEEDINGS

As of June 30, 2013, 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. 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 1A - RISK FACTORS

Management has reviewed the risk factors that were previously disclosed in the Annual Report on Form 10-K for the fiscal year-ended December 31, 2012. There are no material changes from the risk factors as previously disclosed in the Form 10-K.

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On November 3, 2008, the Corporation announced a plan to purchase up to 120,000 shares of its outstanding common stock. There were no treasury shares purchased under this plan during the quarter ended June 30, 2013. The maximum number of shares that may yet be purchased under this stock repurchase plan is 57,400.

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 June 30, 2013, there were no 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 June 30, 2013, there were no issued or outstanding shares of preferred stock.

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES - NOTHING TO REPORT.

ITEM 4 - MINE SAFETY DISCLOSURES - NOT APPLICABLE.

ITEM 5 - OTHER INFORMATION - NOTHING TO REPORT.

ITEM 6 - EXHIBITS

The following exhibits are included in this report:

Exhibit 3(i)		Articles of Incorporation of ACNB Corporation, as amended. (Incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K, filed with the Commission on June 2, 2009.)

Exhibit 3(ii)		Bylaws of ACNB Corporation, as amended. (Incorporated by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K, filed with the Commission on February 4, 2013.)

Exhibit 10.1		ACNB Corporation, ACNB Acquisition Subsidiary LLC, and Russell Insurance Group, Inc. Stock Purchase Agreement. (Incorporated by reference to Exhibit 10.2 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Commission on March 15, 2005.)

Exhibit 10.2		Salary Continuation Agreement — Applicable to Ronald L. Hankey. (Incorporated by reference to Exhibit 10.2 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Commission on March 13, 2009.)

Exhibit 10.3		Executive Supplemental Life Insurance Plan — Applicable to Ronald L. Hankey, Thomas A. Ritter, David W. Cathell and Lynda L. Glass. (Incorporated by reference to Exhibit 10.3 of the Registrant’s Quarterly Report on Form 10-Q for the period ended September 30, 2008, filed with the Commission on November 7, 2008.)

Exhibit 10.4		Director Supplemental Life Insurance Plan — Applicable to Frank Elsner III, Scott L. Kelley, James J. Lott, Robert W. Miller, Donna M. Newell, J. Emmett Patterson, Daniel W. Potts, Marian B. Schultz, David L. Sites, Alan J. Stock, Harry L. Wheeler and James E. Williams. (Incorporated by reference to Exhibit 10.5 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004, filed with the Commission on March 15, 2005.)

Exhibit 10.5		Amended and Restated Director Deferred Fee Plan — Applicable to Frank Elsner III, Scott L. Kelley, James J. Lott, Robert W. Miller, Donna M. Newell, J. Emmett Patterson, Marian B. Schultz, David L. Sites, Alan J. Stock, Harry L. Wheeler and James E. Williams. (Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K, filed with the Commission on January 6, 2012.)

Exhibit 10.6		ACNB Bank Salary Savings Plan. (Incorporated by reference to Exhibit 10.6 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the Commission on March 12, 2010.)

Exhibit 10.7		Group Pension Plan for Employees of ACNB Bank. (Incorporated by reference to Exhibit 10.7 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, filed with the Commission on May 4, 2012.)

Exhibit 10.8		Complete Settlement Agreement and General Release made among ACNB Corporation, Adams County National Bank and John W. Krichten effective June 13, 2006. (Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K, filed with the Commission on June 15, 2006.)

Exhibit 10.9		Employment Agreement between ACNB Corporation, Adams County National Bank and Thomas A. Ritter dated as of December 31, 2008. (Incorporated by reference to Exhibit 10.9 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Commission on March 13, 2009.)

Exhibit 10.10		Employment Agreement between ACNB Corporation, Adams County National Bank and Lynda L. Glass dated as of December 31, 2008. (Incorporated by reference to Exhibit 10.10 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Commission on March 13, 2009.)

Exhibit 10.11		Employment Agreement between ACNB Corporation, Russell Insurance Group, Inc. and Frank C. Russell, Jr. dated as of January 13, 2011. (Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K, filed with the Commission on January 19, 2011.)

Exhibit 10.12		Employment Agreement between ACNB Corporation, Adams County National Bank and David W. Cathell dated as of April 17, 2009. (Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K, filed with the Commission on April 23, 2009.)

Exhibit 10.13		2009 Restricted Stock Plan. (Incorporated by reference to Appendix C of the Registrant’s Proxy Statement on Schedule 14A, filed with the Commission on March 25, 2009.)

Exhibit 10.14		Salary Continuation Agreement by and between ACNB Bank and Thomas A. Ritter dated as of March 28, 2012. (Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K, filed with the Commission on April 3, 2012.)

Exhibit 10.15		Salary Continuation Agreement by and between ACNB Bank and Lynda L. Glass dated as of March 28, 2012. (Incorporated by reference to Exhibit 99.2 of the Registrant’s Current Report on Form 8-K, filed with the Commission on April 3, 2012.)

Exhibit 10.16		Salary Continuation Agreement by and between ACNB Bank and David W. Cathell dated as of March 28, 2012. (Incorporated by reference to Exhibit 99.3 of the Registrant’s Current Report on Form 8-K, filed with the Commission on April 3, 2012.)

Exhibit 10.17		Amended and Restated 2001 Salary Continuation Agreement by and between ACNB Bank and Thomas A. Ritter dated as of March 28, 2012. (Incorporated by reference to Exhibit 99.4 of the Registrant’s Current Report on Form 8-K, filed with the Commission on April 3, 2012.)

Exhibit 10.18		Amended and Restated 1996 Salary Continuation Agreement by and between ACNB Bank and Lynda L. Glass dated as of March 28, 2012. (Incorporated by reference to Exhibit 99.5 of the Registrant’s Current Report on Form 8-K, filed with the Commission on April 3, 2012.)

Exhibit 11		Statement re Computation of Earnings. (Incorporated by reference to page 7 of this Form 10-Q.)

Exhibit 14		Code of Ethics. (Incorporated by reference to Exhibit 14 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Commission on March 15, 2013.)

Exhibit 18		Preferability Letter from ParenteBeard LLC dated as of August 3, 2012. (Incorporated by reference to Exhibit 18 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed with the Commission on August 3, 2012.)

Exhibit 31.1		Chief Executive Officer Certification of Quarterly Report on Form 10-Q.

Exhibit 31.2		Chief Financial Officer Certification of Quarterly Report on Form 10-Q.

Exhibit 32.1		Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.2		Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibit 101.LAB		XBRL Taxonomy Extension Label Linkbase.

Exhibit 101.PRE		XBRL Taxonomy Extension Presentation Linkbase.

Exhibit 101.INS		XBRL Instance Document.

Exhibit 101.SCH		XBRL Taxonomy Extension Schema.

Exhibit 101.CAL		XBRL Taxonomy Extension Calculation Linkbase.

Exhibit 101.DEF		XBRL Taxonomy Extension Definition Linkbase.

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)

Date:	August 1, 2013	/s/ Thomas A. Ritter
		Thomas A. Ritter
		President & Chief Executive Officer


		/s/ David W. Cathell
		David W. Cathell
		Executive Vice President, Treasurer &
		Chief Financial Officer (Principal Financial Officer)