ACNB CORP - 10-K Annual Report

Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002
---------------------------

OR

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to
------------- ------------

Commission file number 0-11783

ACNB CORPORATION
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

PENNSYLVANIA 23-2233457
---------------------------- --------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

16 LINCOLN SQUARE, GETTYSBURG, PENNSYLVANIA 17325-3129
- ------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

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

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

COMMON STOCK, PAR VALUE $2.50 PER SHARE
---------------------------------------
(TITLE OF CLASS)

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

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 |_|

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_|

The aggregate market value of the voting stock held by nonaffiliates of the
Registrant at June 28, 2002 was approximately $116,348,000.

The number of shares of Registrant's Common Stock outstanding on March 1, 2003
was 5,436,101.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 2003 Proxy Statement for the Registrant are incorporated by
reference into Part III of this report.

ACNB CORPORATION

TABLE OF CONTENTS

PART I PAGE

Item 1. Business ....................................................3

Item 2. Properties ..................................................8

Item 3. Legal Proceedings ...........................................8

Item 4. Submission of Matters to a Vote of Stockholders .............8

PART II

Item 5. Market for the Registrant's Common Stock Equity
and Related Stockholder Matters .............................9

Item 6. Selected Financial Data ....................................10

Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations ..............11

Item 8. Financial Statements and Supplementary Data.................27

Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure......................48

PART III

Item 10. Directors and Executive Officers of the Registrant..........48

Item 11. Executive Compensation......................................48

Item 12. Security Ownership of Certain Beneficial Owners
and Management..............................................48

Item 13. Certain Relationships and Related Transactions..............49

Item 14. Controls and Procedures.....................................49

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.................................................50

Signatures..................................................51

2

PART I

The management of ACNB Corporation has made forward-looking statements in this
Annual Report on Form 10-K. These forward-looking statements may be subject to
risks and uncertainties. Forward-looking statements include the information
concerning possible or assumed future results of operations of ACNB Corporation
and its wholly-owned subsidiaries, Adams County National Bank and Pennbanks
Insurance Company. When words such as "believes", "expects", "anticipates",
"may", "could", "should", "estimates", or similar expressions occur in this
annual report, management is making forward-looking statements.

Shareholders should note that many factors, some of which are discussed
elsewhere in this report, could affect the future financial results of ACNB
Corporation and its subsidiaries, both individually and collectively, and could
cause those results to differ materially from those expressed in this report.
These risk factors include the following:

o Operating, legal and regulatory risks;

o Economic, political and competitive forces impacting our various lines of
business;

o The risk that our analysis of these risks and forces could be incorrect
and/or that the strategies developed to address them could be
unsuccessful;

o The possibility that increased demand or prices for ACNB's financial
services and products may not occur;

o Volatility in interest rates; and/or

o Other risks and uncertainties.

ACNB undertakes no obligation to publicly revise or update these forward-looking
statements to reflect events or circumstances that arise after the date of this
report. Readers should carefully review the risk factors described in other
documents ACNB files periodically with the Securities and Exchange Commission,
including Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

ITEM I - BUSINESS

ACNB CORPORATION

ACNB Corporation is a $734.6 million financial holding company headquartered in
Gettysburg, Pennsylvania. Through its banking and nonbanking subsidiaries, ACNB
provides a full range of banking and financial services to individuals and
businesses, including commercial and retail banking, trust, accounting and
insurance. ACNB's operations are conducted through its primary operating
subsidiary, Adams County National Bank with nineteen offices in Adams,
Cumberland and York counties.

ACNB's major source of operating funds is dividends that it receives from its
subsidiary bank. ACNB's expenses consist principally of losses from low-income
housing investments. Dividends that ACNB pays to shareholders consist of
dividends declared and paid to ACNB by the subsidiary bank.

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

The common stock of ACNB is listed on the Over The Counter Bulletin Board under
the symbol ACNB.

The corporation has four operating segments, Commercial, Consumer, Mortgage
Lending and Investment Securities, as described in Note R of the Notes to
Consolidated Financial Statements included in this Report. The segment reporting
information in Note R is incorporated by reference into this Item I.

BANKING SUBSIDIARY

ADAMS COUNTY NATIONAL BANK

Adams County National Bank is a full-service commercial bank operating under
charter from the Office of the Comptroller of the Currency. The bank's principal
market area is Adams County, Pennsylvania, which is located in south central
Pennsylvania. Adams County depends on agriculture, industry and tourism to
provide employment for its residents. No single sector dominates the county's
economy. At December 31, 2002, Adams County National Bank had total assets of
$731.7 million, total loans of $375 million and total deposits of $512 million.

The main office of the bank is located at 16 Lincoln Square, Gettysburg,
Pennsylvania. In addition to its main office, the bank has thirteen branches in
Adams County, two branches in York County, and three branches in Cumberland
County. Adams County National Bank's service delivery channels for its customers

3

also include the ATM network, Customer Contact Center, Internet and telephone
banking. The bank is subject to regulation and periodic examination by the
Office of the Comptroller of the Currency. The Federal Deposit Insurance
Corporation, as provided by law, insures the bank's deposits.

NONBANKING SUBSIDIARY

PENNBANKS INSURANCE CO.

Pennbanks Insurance Co. holds an unrestricted Class "B" Insurer's License under
Cayman Islands Insurance Law. The segregated portfolio is engaged in the
business of reinsuring credit life and credit accident and disability risks.
Total assets of the segregated portfolio as of December 31, 2002, totaled
$686,000.

COMPETITION

The financial services industry in ACNB's market area is highly competitive,
including competition from commercial banks, savings banks, credit unions,
finance companies and nonbank providers of financial services. Several of ACNB's
competitors have legal lending limits that exceed those of ACNB's subsidiary, as
well as funding sources on the capital markets that exceed ACNB's availability.
The increased competition has resulted from a changing legal and regulatory
climate, as well as from the economic climate.

In addition, savings banks, savings and loan associations, credit unions, money
market and other mutual funds, mortgage companies, leasing companies, finance
companies, and other financial services companies offer competitive products and
services similar in terms to those offered by ACNB.

Many bank holding companies have elected to become financial holding companies
under the Gramm-Leach-Bliley Act, which gives them a broader range of products
with which the bank must compete. Although the long-range effects of this
development cannot be predicted, most probably it will further narrow the
differences and intensify competition among commercial banks, investment banks,
insurance firms and other financial services companies.

SUPERVISION AND REGULATION

BANK HOLDING COMPANY REGULATION

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

Under the Bank Holding Company Act, the Federal Reserve may require a financial
holding company to end a nonbanking business if the nonbanking business
constitutes a serious risk to the financial soundness and stability of any bank
subsidiary of the financial holding company.

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

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

The Federal Deposit Insurance Corporation Improvement Act requires a bank
holding company to guarantee the compliance of any insured depository
institution subsidiary that may become "undercapitalized", as defined by
regulations, with the terms of any capital restoration plan filed by such
subsidiary with its appropriate federal banking agency, up to specified limits.

RECENT LEGISLATION

USA PATRIOT ACT OF 2001 - In October 2001, the USA Patriot Act of 2001 was
enacted in response to the terrorist attacks in New York, Pennsylvania and
Washington, D.C., which occurred on September 11, 2001. The Patriot Act is
intended to strengthen U.S. law enforcement's and the intelligence communities'
abilities to work cohesively to combat terrorism on a variety of fronts. The
potential impact of the Patriot Act on financial institutions of all kinds is
significant and wide ranging. The Patriot Act contains sweeping anti-money
laundering and financial transparency laws and imposes various regulations,

4

including standards for verifying client identification at account opening, and
rules to promote cooperation among financial institutions, regulators and law
enforcement entities in identifying parties that may be involved in terrorism or
money laundering.

FINANCIAL SERVICES MODERNIZATION LEGISLATION - In November 1999, the
Gramm-Leach-Bliley Act of 1999, or the GLB, was enacted. The GLB repeals
provisions of the Glass-Steagall Act which restricted the affiliation of Federal
Reserve member banks with firms "engaged principally" in specified securities
activities, and which restricted officer, director or employee interlocks
between a member bank and any company or person "primarily engaged" in specified
securities activities.

In addition, the GLB also contains provisions that expressly preempt any state
law restricting the establishment of financial affiliations, primarily related
to insurance. The general effect of the law is to establish a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms and other financial service providers by revising and expanding
the Bank Holding Company Act framework to permit a holding company to engage in
a full range of financial activities through a new entity known as a "financial
holding company". "Financial activities" is broadly defined to include not only
banking, insurance and securities activities, but also merchant banking and
additional activities that the Federal Reserve Board, in consultation with the
Secretary of the Treasury, determines to be financial in nature, incidental to
such financial activities or complementary activities that do not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally.

The GLB also permits national banks to engage in expanded activities through the
formation of financial subsidiaries. A national bank may have a subsidiary
engaged in any activity authorized for national banks directly or any financial
activity, except for insurance underwriting, insurance investments, real estate
investment or development, or merchant banking, which may only be conducted
through a subsidiary of a financial holding company. Financial activities
include all activities permitted under new sections of the Bank Holding Company
Act or permitted by regulation.

To the extent that the GLB permits banks, securities firms and insurance
companies to affiliate, the financial services industry may experience further
consolidation. The GLB is intended to grant to community banks certain powers as
a matter of right that larger institutions have accumulated on an ad hoc basis
and which unitary savings and loan holding companies already possess.
Nevertheless, the GLB may have the result of increasing the amount of
competition that ACNB faces from larger institutions and other types of
companies offering financial products, many of which may have substantially more
financial resources than ACNB has.

SARBANES-OXLEY ACT OF 2002 - On July 30, 2002, President Bush signed into law
the Sarbanes-Oxley Act of 2002, or the SOA. The stated goals of the SOA are to
increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies, and to
protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities law.

The SOA is the most far-reaching U.S. securities legislation enacted in some
time. The SOA generally applies to all companies, both U.S. and non-U.S., that
file or are required to file periodic reports with the Securities and Exchange
Commission (the "SEC") under the Securities Exchange Act of 1934, or the
Exchange Act. Given the extensive SEC role in implementing rules relating to
many of the SOA's new requirements, the final scope of these requirements
remains to be determined.

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

The SOA addresses, among other matters:

o Audit committees for all reporting companies;

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

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

o A prohibition on insider trading during pension plan black out periods;

o Disclosure of off-balance sheet transactions;

o A prohibition on personal loans to directors and officers;

o Expedited filing requirements for Forms 4s;

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

5

o "Real time" filing of periodic reports;

o Formation of a public accounting oversight board;

o Auditor independence; and,

o Increased criminal penalties for violations of securities laws.

The SOA contains provisions that became effective upon enactment on July 30,
2002 and provisions that will become effective from within 30 days to one year
from enactment. The SEC has been delegated the task of enacting rules to
implement various provisions with respect to, among other matters, disclosure in
periodic filings pursuant to the Exchange Act.

REGULATION W - Transactions between a bank and its "affiliates" are
quantitatively and qualitatively restricted under the Federal Reserve Act. The
Federal Deposit Insurance Act applies Sections 23A and 23B to insured nonmember
banks in the same manner and to the same extent as if they were members of the
Federal Reserve System. The Federal Reserve Board has also recently issued
Regulation W, which codifies prior regulations under Sections 23A and 23B of the
Federal Reserve Act, and interpretative guidance with respect to affiliate
transactions. Regulation W incorporates the exemption from the affiliate
transaction rules, but expands the exemption to cover the purchase of any type
of loan or extension of credit from an affiliate. Affiliates of a bank include,
among other entities, the bank's holding company and companies that are under
common control with the bank. ACNB Corporation is considered to be an affiliate
of Adams County National Bank. In general, subject to certain specified
exemptions, a bank or its subsidiaries are limited in their ability to engage in
"covered transactions" with affiliates:

o To an amount equal to 10% of the bank's capital and surplus, in the
case of covered transactions with any one affiliate; and,

o To an amount equal to 20% of the bank's capital and surplus, in the
case of covered transactions with all affiliates.

In addition, a bank and its subsidiaries may engage in covered transactions and
other specified transactions only on terms and under circumstances that are
substantially the same, or at least as favorable to the bank or its subsidiary,
as those prevailing at the time for comparable transactions with nonaffiliated
companies. A "covered transaction" includes:

o Loan or extension of credit to an affiliate;

o Purchase of, or an investment in, securities issued by an affiliate;

o Purchase of assets from an affiliate, with some exceptions;

o Acceptance of securities issued by an affiliate as collateral for a
loan or extension of credit to any party; and

o Issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.

In addition, under Regulation W:

o A bank and its subsidiaries may not purchase a low-quality asset from
an affiliate;

o Covered transactions and other specified transactions between a bank or
its subsidiaries and an affiliate must be on terms and conditions that
are consistent with safe and sound banking practices; and,

o With some exceptions, each loan or extension of credit by a bank to an
affiliate must be secured by collateral with a market value ranging
from 100% to 130%, depending on the type of collateral, of the amount
of the loan or extension of credit.

Regulation W generally excludes all nonbank and nonsavings association
subsidiaries of banks from treatment as affiliates, except to the extent that
the Federal Reserve Board decides to treat these subsidiaries as affiliates.

Concurrently with the adoption of Regulation W, the Federal Reserve Board has
proposed a regulation that would further limit the amount of loans that could be
purchased by a bank from an affiliate to not more than 100% of the bank's
capital and surplus.

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. Federal and state laws regulate the
payment of dividends by ACNB's subsidiary. See "Regulation of Bank" below.

6

REGULATION OF BANK

The operations of the subsidiary bank are subject to federal and state statutes
applicable to banks chartered under the banking laws of the United States, to
members of the Federal Reserve System, and to banks whose deposits are insured
by the FDIC. The bank's operations are also subject to regulations of the Office
of the Comptroller of the Currency, Federal Reserve, FDIC, and Pennsylvania
Department of Banking.

The Office of the Comptroller of the Currency, which has primary supervisory
authority over national banks, 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 bank's
depositors rather than ACNB's shareholders. The subsidiary bank must file
quarterly and annual reports to the Federal Financial Institutions Examinations
Council or FFIEC.

The National Bank Act requires the subsidiary national bank to obtain the prior
approval of the Office of the Comptroller of the Currency for the payment of
dividends if the total of all dividends declared by the bank in one year would
exceed the bank's net profits, as defined and interpreted by regulation, for the
two preceding years, less any required transfers to surplus. In addition, the
bank may only pay dividends to the extent that the retained net profits,
including the portion transferred to surplus, exceed statutory bad debts, as
defined by regulation. These restrictions have not had, nor are they expected to
have, any impact on the corporation's dividend policy. Under the Federal Deposit
Insurance Corporation Insurance Act of 1991, any depository institution,
including the bank, is prohibited from paying any dividends, making other
distributions or paying any management fees if, after such payment, it would
fail to satisfy the minimum capital requirement.

A subsidiary bank of a bank holding company is subject to certain restrictions
imposed by the Federal Reserve Act, including:

o Extensions of credit to the bank holding company or its subsidiaries;

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

o Taking such stock or securities as collateral for loans.

The Federal Reserve Act and Federal Reserve regulations also place certain
limitations and reporting requirements on extensions of credit by a bank to the
principal shareholders of its parent holding company, among others, and to
related interests of principal shareholders. In addition, such legislation and
regulations may affect the terms upon which any person becoming a principal
shareholder of a holding company may obtain credit from banks with which the
subsidiary bank maintains a correspondent relationship.

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.

OTHER

From time to time, various federal and state legislation is proposed that could
result in additional regulation of, and restrictions on, the business of ACNB
and the subsidiary bank, or otherwise change the business environment.
Management cannot predict whether any of this legislation will have a material
effect on the business of ACNB.

ACCOUNTING POLICY DISCLOSURE

Disclosure of the corporation's significant accounting policies is included in
Note A to the consolidated financial statements. Some of these policies are
particularly sensitive requiring significant judgments, estimates and
assumptions to be made by management. Additional information is contained in
Management's Discussion and Analysis for the most sensitive of these issues,
including the provision and allowance for loan losses which are located in Note
D to the consolidated financial statements.

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

7

STATISTICAL DISCLOSURES

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

o Interest Rate Sensitivity Analysis

o Interest Income and Expense, Volume and Rate Analysis

o Investment Portfolio

o Loan Maturity and Interest Rate Sensitivity

o Loan Portfolio

o Allocation of Allowance for Loan Losses

o Deposits

o Short-Term Borrowings

AVAILABLE INFORMATION

Upon a shareholder's written request, a copy of the corporation's
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports
on Form 8-K, as required to be filed with the SEC pursuant to Securities
Exchange Act Rule 13a-1, may be obtained, without charge, from John W. Krichten,
Secretary/Treasurer, 16 Lincoln Square, P.O. Box 3129, Gettysburg, PA 17325.

EMPLOYEES

As of December 31, 2002, ACNB had 197 full-time equivalent employees.
None of these employees are represented by a collective bargaining agreement,
and ACNB believes it enjoys good relations with its personnel.

ITEM 2 - PROPERTIES

ACNB Corporation owns no real estate.

Adams County National Bank, in addition to its main office, had an office
network of eighteen offices at December 31, 2002. All offices are located in
Adams County with the exception of three offices located in Cumberland County
and two offices located in York County. Offices at fifteen locations are owned,
while four are leased. All real estate owned by the subsidiary bank is free and
clear of encumbrances.

ITEM 3 - LEGAL PROCEEDINGS

As of December 31, 2002, 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.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS

There were no matters submitted to a vote of stockholders during the fourth
quarter of 2002.

8

PART II

ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK EQUITY AND RELATED STOCKHOLDER
MATTERS

ACNB Corporation's common stock trades on the Over The Counter Bulletin Board
under the symbol ACNB. There were 20,000,000 shares of common stock authorized
at December 31, 2002, and 5,436,101 shares outstanding. As of March 3, 2003,
ACNB had approximately 2,926 stockholders of record. There is no other class of
stock authorized or outstanding. ACNB is restricted as to the amount of
dividends that it can pay to stockholders by virtue of the restrictions on the
subsidiary's ability to pay dividends to ACNB. ACNB Corporation has no equity
compensation plans.

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

PRICE RANGE PER SHARE PER SHARE
2002 HIGH LOW DIVIDEND
---- ---- --- --------
First Quarter $18.50 $17.10 $ .40
Second Quarter $22.40 $17.80 $ .20
Third Quarter $21.50 $19.65 $ .20
Fourth Quarter $21.60 $20.75 $ .28

PRICE RANGE PER SHARE PER SHARE
2001 HIGH LOW DIVIDEND
---- ---- --- --------
First Quarter $16.38 $15.88 $ .20
Second Quarter $17.25 $15.50 $ .20
Third Quarter $19.00 $17.00 $ .20
Fourth Quarter $18.40 $18.05 $ .28

9

ITEM 6 - SELECTED FINANCIAL DATA

10

ITEM 7 - 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 results of operations, capital resources and liquidity presented in its
accompanying consolidated financial statements for ACNB Corporation, 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 2002 Annual Report contains
forward-looking statements. Forward-looking statements are subject to certain
risks and uncertainties. Actual results may differ materially from those
projected in the forward-looking statements. Important factors that might cause
such a difference include, but are not limited to, those discussed in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations". We caution readers not to place undue reliance on
these forward-looking statements. They only reflect management's analysis as of
this date. The corporation does not revise or update these forward-looking
statements to reflect events or changed circumstances. Please carefully review
the risk factors described in other documents the corporation files from time to
time with the Securities and Exchange Commission, including the Quarterly
Reports on Form 10-Q, filed by the corporation in 2003 and any Current Reports
on Form 8-K filed by the corporation.

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 policy is deemed to be a critical
accounting policy by management:

ALLOWANCE FOR LOAN LOSSES

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 the following
Management's Discussion and Analysis of Financial Condition and Results of
Operations.

RESULTS OF OPERATIONS

OVERVIEW

ACNB's 2002 net income was $8,904,000, or $1.64 per share, compared to
$8,337,000, or $1.53 per share in 2001, and $8,095,000, or $1.44 per share in
2000.

Returns on average equity were 13.45% in 2002, 13.34% in 2001, and 13.50% in
2000. Returns on average assets were 1.35% in 2002, 1.45% in 2001, and 1.46% in
2000.

NET INTEREST INCOME

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

Net interest income is affected by changes in interest rates, volume of interest
bearing assets and liabilities, and the composition of those assets and
liabilities. The "interest rate spread" and "net interest margin" are two common
statistics related to changes in net interest income. The interest rate spread
represents the difference between the yields earned on interest earning assets
and the rates paid for interest bearing liabilities. The net interest margin is
defined as the percentage of net interest income to average earning assets. Due
to demand deposits and stockholders' equity, the net interest margin exceeds the
interest rate spread, as these funding sources are non-interest bearing.

Table 1 presents net interest income, interest rate spread, and net interest
margin for the years ending December 31, 2002, 2001 and 2000. Table 2 analyzes
the changes in net interest income for the periods broken down by their rate and
volume components.

11

Net interest income in 2002 was $24,341,000, compared to $23,105,000 in 2001 and
$22,908,000 in 2000. ACNB has been able to increase its net interest income over
the last two years primarily through increases in average earning assets.

The interest rate spread and net interest margin have compressed over the last
year. The interest rate spread was 3.47% in 2002, down from 3.60% in 2001 and
3.53% in 2000. The net yield on earning assets experienced similar results,
totaling 3.91% in 2002, down from 4.27% in 2001 and 4.33% in 2000. Several
factors impacted the net interest margin for 2002. First, ACNB was in an asset
sensitive interest rate risk position in 2002, and interest earning assets
repriced more quickly than interest bearing liabilities. Longer-term funding
sources, including certificates of deposit, have to reach their maturity date to
reprice. Second, ACNB had a less profitable interest earning asset mix, as
deposits and borrowings were used to fund securities because loan growth
remained weak. Finally, the market area served by ACNB is highly competitive,
resulting in financial institutions pricing quality credits competitively in
order to increase volume.

Average earning assets were $622,890,000 in 2002, an increase of 15.1% over the
2001 balance of $541,117,000. Average earning assets for 2000 were $529,262,000.
Securities growth was the primary contributor to the increase in average earning
assets during these periods.

Average securities were $253,060,000 for the year ended December 31, 2002,
compared to $162,021,000 in 2001 and $169,796,000 in 2000. Weak loan growth,
coupled with strong growth in transaction accounts, required increased emphasis
on the securities portfolio which resulted in growth of 56.2% in 2002. Because
the bank has traditionally been a mortgage lender and mortgage-backed securities
carry higher interest rates than other agency securities, most of the securities
growth was in mortgage-backed securities. Mortgage backed securities grew from
$101,416,000 at December 31, 2001, to $180,696,000 at December 31, 2002. In
addition, corporate securities increased from $1,957,000 to $63,782,000 during
the same time period. The significant increase of corporate securities was
caused by extremely low U.S. Treasury and agency rates. The rate spread between
corporate and government securities indicated the need for a strong preference
for corporate securities. Many of the securities have a relatively short
duration that should provide sufficient liquidity to assist in the funding of
loan demand during 2003. Overall loan income is down due to lower rates, but
slow loan growth prevented the increase in volume from making up for the
decrease.

Average loans were $367,494,000 in 2002, versus $359,404,000 in 2001 and
$352,666,000 in 2000. The small increase in loans, in part, reflects the strong
competition from other financial institutions and changeover in loan personnel.

Average interest bearing liabilities were $516,897,000 in 2002, up from
$441,112,000 in 2001 and $423,494,000 in 2000. Funding to support loan and
securities growth came from an increase in interest bearing liabilities in 2002
and 2001, with a continued shift in mix from time deposits and borrowed money to
lower-cost demand and savings deposits.

12

TABLE 1 - COMPARATIVE AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS

The rate-volume variance analysis set forth in the table below compares changes
in net interest income for the periods indicated by their rate and volume
components. The change in interest income/expense due to both volume and rate
has been factored in proportionally.

TABLE 2 - ANALYSIS OF CHANGES IN NET INTEREST INCOME

13

PROVISION FOR LOAN LOSSES

The provision for loan losses charged against earnings was $370,000 in 2002,
compared to $240,000 in 2001 and $240,000 in 2000. ACNB adjusts the provision
for loan losses periodically as necessary to maintain the allowance at a level
deemed to meet the risk characteristics of the loan portfolio. The $130,000, or
54.0%, increase in the provision for loan losses during 2002, compared to 2001,
reflects increases in net charge-offs and some growth in the loan portfolio.

See further discussion in the asset quality discussion of this annual report.

NON-INTEREST INCOME

Non-interest income was $5,028,000 for the year ended December 31, 2002, a 42.3%
increase over 2001. For the year ended December 31, 2001, non-interest income
totaled $3,533,000, an increase of 26.3% over 2000 totals.

Income from fiduciary activities, which includes both institutional and personal
trust management services and brokerage service fees, grew to $683,000 for the
year ended December 31, 2002, up from $569,000 in 2001 and $623,000 in 2000. At
December 31, 2002, ACNB had total assets under administration of approximately
$59,000,000 compared to $69,000,000 at the end of 2001 and $56,000,000 at the
end of 2000. The 2001 numbers include assets of approximately $11,000,000 in a
non-profit organization bond fund. These funds inflated 2001 totals, but were
paid out by the end of 2002. The increase in income for 2002 came from estate
management and brokerage fees, while the shortfall in 2001 resulted from lower
estate and agency revenue.

Service fees on deposit accounts were $1,913,000 in 2002, a 41.9% increase over
2001's total of $1,348,000. 2001 experienced a similar increase over 2000's
results, which were $989,000. The increase in both 2002 and 2001 is the result
of a new service called Overdraft Privilege. The new service allows checking
account overdrafts, up to a preset dollar amount, with a fee for every check
paid.

Other non-interest income totaled $2,432,000 for the year ended December 31,
2002, an increase of $816,000 or 50.5%, over 2001's amount of $1,616,000. The
2002 increase was spread across the entire spectrum, but several categories
showed notable increases. Gain on sale of other real estate was up $113,000,
earnings on bank-owned life insurance (BOLI) was up $151,000, loan fees were up
$84,000, and the bank gained a $60,000 litigation fee. Non-interest income for
2001 was up 26.3% over $2,797,000 in 2000. Income was enhanced during 2001 by an
increase in BOLI of $320,000, a rise in safe deposit box fees of $40,000, and
the introduction of a new public accounting service resulting in $37,000 in its
first year. BOLI is used to fund various employee benefit plans, and all
employees affected are aware of their insured status.

NON-INTEREST EXPENSE

The largest component of non-interest expense is salaries and employee benefits,
which increased $1,512,000, or 19.0%, to $9,454,000 in 2002, after increasing by
$351,000, or 4.6%, in 2001. The increase in salaries and employee benefits
during 2002 is attributable to the following factors:

o Normal merit increases to employees;

o The growth that ACNB has experienced, including two branches purchased
or leased in 2001, which were fully operational for the entire year,
and a new branch opened in the third quarter of 2002;

o Increases in administrative personnel expense as the bank's strategic
direction changes to a focus on greater growth; and,

o Increases in employee benefit costs, particularly health and welfare
benefit plans, consistent with the rising health care cost trend noted
nationwide and increased net periodic pension costs due to the
underperformance of investments in the pension plan.

Net occupancy expense was $829,000 in 2002, $701,000 in 2001, and $649,000 in
2000. The 18.3% increase experienced in 2002 was primarily the result of three
new branches, two of which opened in late 2001 and were fully operational for
the entire 2002 year. Another branch was opened in the third quarter of 2002.

Similarly, the 29.7%, or $323,000, increase in furniture and equipment expense
during 2002 versus 2001 was the result of an increase in number of locations, as
well as the increased maintenance costs associated with more sophisticated
delivery channels offered to the bank's customer base.

Professional service expense totaled $452,000 for the year ended December 31,
2002, a 16.3% decrease from 2001 results. This followed a 154.7% increase in
professional service expense experienced in 2001 as compared to 2000. The
increase in professional services can be attributed to the following factors:

o Payments for the rights to and implementation of Overdraft Privilege, a
new service described above. The payments were made in both 2001 and
2002.

14

o Payments made to a computer and operations consulting firm that also
extended over the last two years.

Other non-interest expense totaled $3,967,000 during 2002, versus $3,220,000 in
2001 and $2,900,000 in 2000. Significant expense components in this category
include marketing and advertising, postage, supplies, amortization of core
deposit intangibles, and Pennsylvania Shares Tax. The increase in expense noted
during 2002 and 2001 was the direct result of ACNB's overall growth, which
requires many of these types of expenses to increase as well.

INCOME TAXES

ACNB recognized income taxes of $3,107,000, or 25.9% of pre-tax income, in 2002.
Income tax expense was $3,734,000, or 30.9% of pre-tax income, in 2001 and
$4,158,000, or 33.9% of pre-tax income, in 2000. The variances from the federal
statutory rate of 35% are generally due to tax-exempt income and investments in
low-income housing partnerships (which qualify for federal tax credits).

The decline in the effective tax rate during 2002 is a result of a significant
historical tax credit associated with a just completed low-income housing
project. The downward trend in the effective tax rate from 2000 to 2002 is
consistent with the increase in tax-free investment securities during this
period.

FINANCIAL CONDITION

Average earning assets increased in 2002 to $622,890,000 from $541,117,000 in
2001 and $529,262,000 in 2000. ACNB's investment portfolio has increased over
the last three years, as a result of planned growth using borrowed funds. To a
lesser degree, the slow growth in commercial and consumer loans contributed to
the increase in average earning assets. Average funding sources, or interest
bearing liabilities, increased in 2002 to $516,897,000 from $441,112,000 in 2001
and $423,494,000 in 2000.

INVESTMENT SECURITIES

ACNB uses investment securities to generate interest and dividend income, to
manage interest rate risk, and to provide liquidity. The growth in the security
portfolio, in part, reflects the trends in loans, deposits, and borrowed funds
during 2002. As deposit and borrowing growth outpaced loan growth during 2002,
excess funding was invested in the securities portfolio. Much of the investment
activity focused on U.S. Government agencies, tax-free municipal, and corporate
securities. These securities provide the appropriate characteristics with
respect to yield and maturity relative to the management of the overall balance
sheet.

At December 31, 2002, the securities balance included a net unrealized gain on
available-for-sale securities of $4,089,000, net of taxes, versus a net
unrealized gain of $774,000, net of taxes at December 31, 2001. The reduction in
interest rates during 2002 versus 2001 led to the appreciation in the fair value
of securities during 2002.

15

TABLE 3 - INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities at December
31, 2002 and 2001, were as follows:

The amortized cost and estimated fair value of debt securities at December 31,
2002, by contractual maturity are shown below. Expected maturities may differ
from contractual maturities because some issuers have the right to call or
prepay obligations with or without call or prepayment penalties.

16

TABLE 4 - INVESTMENT SECURITIES (YIELDS)

The weighted average yield of tax-exempt obligations has been calculated on a
taxable equivalent basis. The taxable equivalent adjustments are based on an
effective tax rate of 35%. The yield information does not give effect to changes
in fair value that are reflected as a component of stockholders' equity.

At December 31, 2002 and 2001, assets with a carrying value of $92,123,000 and
$77,744,000, respectively, were pledged as required or permitted by law to
secure certain public and trust deposits, repurchase agreements, or for other
purposes.

LOANS

Loans outstanding increased $10,767,000, or 3.0% in 2002, compared to 0.3%
growth experienced in 2001. The growth in loans is consistent with a stable
local economy and lending to support existing customers. The commercial loan
portfolio experienced solid growth during the period, increasing by
approximately $19,000,000. The improved growth experienced in 2002 is the result
of actively marketing commercial loans to local businesses. Additionally, ACNB
has been able to participate with other institutions on larger loans.

The approximately $18,000,000 decrease in real estate mortgage loans is due to
the inability to hold 30-year fixed-rate mortgage loans for the portfolio.
30-year fixed-rate mortgages are not compatible with the bank's asset-liability
operations. Given the low interest rates on newly-originated loans, management
continues to sell a high percentage of mortgage loans in the secondary market
than in the past in order to manage its interest rate risk position.

17

TABLE 5 - LOAN PORTFOLIO

Loans at December 31 are summarized as follows:

TABLE 6 - LOAN MATURITY AND INTEREST SENSITIVITY

The following table outlines the repricing opportunities for all loans
outstanding as of December 31, 2002. Loans with immediately adjustable rates,
such as loans tied to prime rate, are included in the within one year column.
Loans with rates that are adjustable at some time over the life of the loan are
included under the time heading when they become adjustable. All fixed-rate
loans are included under the heading in which they mature.

ASSET QUALITY

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

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

The unemployment rate in ACNB's market area remained below the national average
during 2002. Additionally, reasonably low interest rates, a stable local economy
and minimal inflation continued to support favorable economic conditions in the
area.

Nonperforming assets include nonaccrual and restructured loans, accruing loans
past due 90 days or more and other foreclosed assets. ACNB's general policy has
been to cease accruing interest on loans when management determines that a
reasonable doubt exists as to the collectibility to additional interest. When
management places a loan on non-accrual status, it reverses unpaid interest
credited to income in the current year. ACNB recognizes income on these loans
only to the extent that it receives cash payments. ACNB occasionally returns
nonaccrual loans to performing status when the borrower brings the loan current
and performs in accordance with contractual terms for a reasonable period of
time. ACNB categorizes a loan as restructured if it changes the terms of the
loan such as interest rate, repayment schedule or both, to terms that it
otherwise would not have granted originally.

18

TABLE 7 - NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS

The following table presents information concerning the aggregate amount of
nonperforming assets as of December 31:

If interest due on all nonaccrual loans had been accrued at original contract
rates, it is estimated that income before income taxes would have been greater
by $55,000 in 2002, $99,000 in 2001, and $84,000 in 2000.

The corporation does not accrue interest on any loan when principal or interest
is in default for 90 days or more, unless the loan is well secured and in the
process of collection. Consumer loans and residential real estate loans secured
by 1-to-4 family dwellings shall ordinarily not be subject to these guidelines.

When a loan is placed in a nonaccrual status, all previously accrued, but
uncollected, interest is charged against the interest income account.

As of December 31, 2002, total nonperforming loans totaled $2,416,000, an
increase of $576,000 or 31.3% from December 31, 2001. The increase in
nonperforming loans is primarily the result of a large credit that moved into
still accruing, past due 90 days or more status during 2002. The loan is fully
secured by real estate. Although nonperforming loans increased, these levels are
within acceptable limits and are generally secured by real estate which
facilitates collection activity and keeps ultimate losses within reasonable
totals.

Potential problem loans are defined as performing loans that have
characteristics that cause management to have serious doubts as to the ability
of the borrower to perform under present loan repayment terms and which may
result in the reporting of these loans as nonperforming loans in the future.
Total potential problem loans approximated $2.4 million at December 31, 2002.
The majority of these loans are secured by real estate with acceptable
loan-to-value ratios.

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 is established
through a provision for loan losses charged to earnings. Quarterly, the
corporation utilizes a defined methodology in determining the adequacy of the
allowance for loan losses, which considers specific credit reviews, past loan
loss historical experience, and qualitative factors. This methodology, which has
remained consistent for the past several years, results in an allowance
consisting of two components, "allocated" and "unallocated".

Management assigns internal risk ratings for each significant commercial lending
relationship. Utilizing migration analysis for the previous eight quarters,
management develops a loss factor test, which it then uses to estimate losses
for non-rated and non-classified loans. When management finds loans with
uncertain collectibility of principal and interest, it places those loans on the
"problem list", and evaluates a specific reserve on a quarterly basis in order
to estimate potential losses. Management's analysis considers:

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

o estimated value of underlying collateral; and,

o prevailing market conditions.

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

19

o trends in delinquency levels;

o trends in non-performing and potential problem loans;

o trends in composition, volume and terms of loans;

o effects in changes in lending policies or underwriting procedures;

o experience, ability and depth of management;

o national and local economic conditions;

o concentrations in lending activities; and,

o other factors that management may deem appropriate.

Management determines the unallocated portion of the allowance for loan losses
based on the following criteria:

o risk of error in the specific and general reserve allocations;

o other potential exposure in the loan portfolio;

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

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

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 discussed above, which
reduces the difference between actual losses and estimated losses.

Management bases the provision for loan losses, or lack of provision, on the
overall analysis taking into account the methodology discussed above.

20

TABLE 8 - SUMMARY OF LOAN LOSS EXPERIENCE

The allowance for loan losses increased $114,000 from $3,723,000 at December 31,
2001, to $3,837,000 at December 31, 2002. The allowance represents 1.02% of
loans outstanding at December 31, 2002, versus 1.03% as of the prior year-end.

Net charge-offs were $256,000 for the year ended December 31, 2002, versus
$212,000 in 2001, an increase of 20.7%. A primary reason for the increase in
charge-offs was a charge-off of approximately $160,000 in two loans due to
bankruptcy and deterioration of collateral. Charge-offs for 2003 will most
likely total between $200,000 and $300,000.

As a result of the increased net loan charge-offs and growth in commercial
loans, ACNB increased its provision for loan losses by $130,000 or 54.2%.

21

TABLE 9 - ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

The allocation of the allowance for loan losses between the various loan
portfolios has changed over the past few years, consistent with the historical
net loss experience in each of the portfolios.

The largest reserve allocation is to the commercial, financial and agricultural
loan portfolio, which represents approximately 68% of the reserve balance. This
is because of specific allocations to the reserve for troubled credits and
continued loan growth in that category.

Nonperforming loans have increased during the year, this was primarily the
result of two large credits. Absent these two credits, the overall credit rating
of the portfolio is basically the same as 2001. This nonhomogeneous loan
portfolio continues to represent the greatest risk exposure to ACNB, as the
credits generally are significantly larger than the remainder of the portfolio
and the related collateral is not as marketable. Additionally, other external
factors such as quality of loan personnel have also been considered in
allocating this reserve balance.

Over the past several years, the allowance for loan losses as a percent of
outstanding loan balance has remained steady at approximately 1.02%. The
unallocated portion of the allowance reflects estimated inherent losses within
the portfolio that have not been detected. The unallocated portion of the
reserve exists due to risk of error in the specific and general reserve
allocations, other potential exposure in the loan portfolio, variances in
management's assessment of national and local economic conditions, and other
internal and external factors that management believes appropriate at the time.
The unallocated portion of the reserve has increased due to variances in
management's assessment of national and local economic conditions as may be
affected by the current political environment and other external factors.

While management believes ACNB's allowance for loan losses is adequate based on
information currently available, future adjustments to the reserve may be
necessary due to changes in economic conditions, and management's assumptions as
to future delinquencies or loss rates.

DEPOSITS

ACNB continues to rely on deposit growth as the primary source of funds for
lending activities. Average deposits increased 15.1% or $61 million in 2002.
This increase is greater than the 4.0% growth achieved in 2001. This growth has
been accomplished through the marketing of a special money market rate account
to compete with money market mutual funds. Additionally, due to consumers'
confidence slipping in the stock and mutual fund markets, deposits have grown as
these consumers migrate towards deposit products, which are generally regarded
as safer, more liquid investments. ACNB will continue to explore new products
for its customers, to attract and retain other funds seeking safe havens.

22

TABLE 10 - TIME DEPOSITS

Time deposits in denominations of $100,000 or more at December 31, 2002 and
2001, are summarized in the following table. The interest expense related to
time certificates of deposit in denominations of $100,000 or more totaled
$1,275,000 in 2002, $1,583,000 in 2001, and $943,000 in 2000.

IN THOUSANDS 2002 2001
---- ----
Time certificates of deposit $ 33,657 $ 33,746
Other time deposits 1,000 1,000

Maturities of time deposits of $100,000 or more outstanding at December 31, 2002
and 2001, are summarized as follows:

IN THOUSANDS 2002 2001
---- ----
Three months or less $ 7,432 $12,049
Over three through six months 6,560 9,898
Over six through twelve months 5,007 5,974

Over twelve months 15,658 6,825
-------- -------
Total $ 34,657 $34,746
======== =======

BORROWINGS

Short-term borrowings are comprised primarily of securities sold under
agreements to repurchase, and overnight borrowings at the Federal Home Loan Bank
in Pittsburgh. As of December 31, 2002, short-term borrowings were $56,445,000,
an increase of $4,944,000, or 9.6%, from the December 31, 2001 balance of
$51,501,000.

Long-term debt consists of advances from the Federal Home Loan Bank to fund
ACNB's growth in its securities portfolio. Long-term debt totaled $20,000,000 at
December 31, 2002, versus none outstanding at December 31, 2001. ACNB increased
its reliance on long-term debt during 2002 to match maturities with long-term
tax-free securities at positive spreads. The increase in long-term debt was a
direct result of management's intention to capitalize on the 30 year lows in
interest rates.

CAPITAL

The management of capital in a regulated financial services industry must
properly balance return on equity to stockholders while maintaining sufficient
capital levels and related risk-based capital ratios to satisfy regulatory
requirements. Capital management must also consider growth opportunities that
may exist, and the resulting need for additional capital. ACNB's capital
management strategies have been developed to provide attractive rates of returns
to stockholders, while maintaining its "well-capitalized" position.

The primary source of additional capital to ACNB is earnings retention, which
represents net income less dividends declared. During 2002, ACNB retained
$4,120,000, or 46%, of its net income. Stockholders' equity also increased as a
result of $3,287,000 net of taxes in other comprehensive income, which relates
primarily to unrealized gains on securities available-for-sale.

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 their 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
requires ACNB to maintain minimum amounts and ratios of total and Tier 1 capital
to average assets. Management believes, as of December 31, 2002 and 2001, that
ACNB met all minimum capital adequacy requirements to which they are subject and
are categorized as "well-capitalized". There are no conditions or events since
the notification that management believes have changed the subsidiary bank's
category.

23

TABLE 11 - RISKED-BASED CAPITAL

ACNB's capital ratios are as follows:

2002 2001
---- ----
Common stockholders' equity to assets 9.54% 9.95%
Tier 1 leverage ratio 9.00% 10.33%
Tier 1 risk-based capital ratio 15.13% 18.46%
Total risk-based capital ratio 16.03% 19.36%

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 to cash (federal funds sold, short-term investments),
securities portfolio, scheduled repayments of loans receivable, core deposit
base, and the FHLB. As of December 31, 2002, capacity to borrow from the FHLB
totaled approximately $335,000,000 with $40,000,000 being drawn down.

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 shareholders 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 restrictions on dividends
paid to the parent company from the subsidiary banks. The total amount of
dividends that may be paid from the subsidiary bank to ACNB total $1,317,000 at
December 31, 2002.

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. Management
expects to incur approximately $7,000,000 in capital expenditures during
2003-2004, a significant portion for a proposed operations center.

24

TABLE 12 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Financial institutions can be exposed to several market risks that may impact
the value or future earnings capacity of an 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 borrowings) at various terms and rates. These funds are then
invested into earning assets (loans, leases, investments, etc.) at various terms
and rates. This risk is further discussed below.

ACNB does not have any exposure to foreign currency exchange risk, commodity
price risk or equity market risk.

INTEREST RATE RISK

Interest rate risk is the exposure to fluctuations in the corporation's future
earnings (earnings at risk) and value (value at risk) resulting from changes in
interest rates. This exposure results from differences between the amounts of
interest earning assets and interest bearing liabilities that reprice within a
specified time period as a result of scheduled maturities and repayment and
contractual interest rate changes.

The primary objective of the corporation's asset/liability management process is
to maximize current and future net interest income within acceptable levels of
interest rate risk while satisfying liquidity and capital requirements.
Management recognizes that a certain amount of interest rate risk is inherent,
appropriate, and necessary to ensure the corporation's profitability. Thus the
goal of interest rate risk management is to maintain a balance between risk and
reward such that net interest income is maximized while risk is maintained at a
tolerable level.

Management endeavors to control the exposure to changes in interest rates by
understanding, reviewing and making decisions based on its risk position. The
bank subsidiary asset/liability committee is responsible for these decisions.
The corporation primarily uses the securities portfolios and FHLB advances to
manage its interest rate risk position. Additionally, pricing, promotion and
product development activities are directed in an effort to emphasize the loan
and deposit term or repricing characteristics that best meet current interest
rate risk objectives. At present, there is no use of off-balance sheet
instruments.

The committee operates under management policies defining guidelines and limits
on the level of risk. These policies are approved by the Board of Directors.

The corporation uses simulation analysis to assess earnings at risk and net
present value analysis to assess value at risk. These methods allow management
to regularly monitor both the direction and magnitude of the corporation's
interest rate risk exposure. These modeling techniques involve assumptions and

25

estimates that inherently cannot be measured with complete precision. Key
assumptions in the analyses include maturity and repricing characteristics of
both assets and liabilities, prepayments on amortizing assets, non-maturity
deposit sensitivity and loan deposit pricing. These assumptions

are inherently uncertain due to the timing, magnitude and frequency of rate
changes and changes in market conditions and management strategies, among other
factors. However, the analyses are useful in quantifying risk and provide a
relative gauge of the corporation's interest rate risk position over time.

EARNINGS AT RISK

Simulation analysis evaluates the effect of upward and downward changes in
market interest rates on future net interest income. The analysis involves
changing the interest rates used in determining net interest income over the
next twelve months. The resulting percentage change in net interest income in
various rate scenarios is an indication of the corporation's shorter-term
interest rate risk. The analysis utilizes a "static" balance sheet approach. The
measurement date balance sheet composition (or mix) is maintained over the
simulation time period, with maturing and repayment dollars being rolled back
into like instruments for new terms at current market rates. Additional
assumptions are applied to modify volumes and pricing under the various rate
scenarios. These include prepayment assumptions on mortgage assets, the
sensitivity of non-maturity deposit rates, and other factors deemed significant.

The simulation analysis results are presented in Table 13a. These results as of
December 31, 2002, indicate that the corporation would expect net interest
income to decrease over the next twelve months by 0.4% assuming an immediate
upward shift in market interest rates of 3.00% and to decrease by 8.9% if rates
shifted downward in the same manner. This profile reflects an asset sensitive
short-term rate risk position and exceeds guidelines set by policy.

Net interest income declines with both up and down directions of interest rates
because of a large amount of transaction accounts positioned to change rates
overnight. Since they are theoretically positioned to change rates immediately
they cause a negative change in net interest income regardless of direction of
interest rates. In actual practice, management would change these rates much
more gradually than the model predicts. Since interest rates are at 40-year
lows, an asset sensitive position will enable the corporation to capitalize on
rising rates.

VALUE AT RISK

The net present value analysis provides information on the risk inherent in the
balance sheet that might not be taken into account in the simulation analysis
due to the shorter time horizon used in that analysis. The net present value of
the balance sheet is defined as the discounted present value of expected asset
cash flows minus the discounted present value of the expected liability cash
flows. The analysis involves changing the interest rates used in determining the
expected cash flows and in discounting the cash flows. The resulting percentage
change in net present value in various rate scenarios is an indication of the
longer term repricing risk and options embedded in the balance sheet.

The net present value analysis results are presented in Table 13b. These results
as of December 31, 2002 indicate that the net present value would decrease 4.6%
assuming an immediate upward shift in market interest rates of 3.00% and to
increase 2.0% if rates shifted downward in the same manner. The risk position of
ACNB is within the guidelines set by policy.

The corporation's current strategy is to extend liability maturities and keep
asset maturities relatively short to protect against both greater earnings at
risk and value at risk.

TABLE 13A TABLE 13B
NET INTEREST INCOME PROJECTIONS PRESENT VALUE EQUITY
- -------------------------------------------------------------------------
Changes in Changes in
Basis Points % Change Basis Points % Change
- -------------------------------------------------------------------------
(300) (8.9)% (300) 2.0%
(100) (2.1)% (100) 1.0%
-- 0.0% -- 0.0%
100 (0.7)% 100 (1.3)%
300 (0.4)% 300 (4.6)%

26

ITEM 8 - FINANCIAL STATEMENTS

(a) The following audited consolidated financial statements and related
documents are set forth in this Annual Report on Form 10-K on the
following pages:

PAGE

Independent Auditor's Report .............................................28

Consolidated Statements of Condition .....................................29

Consolidated Statements of Income ........................................30

Consolidated Statements of Changes in Stockholders' Equity ...............31

Consolidated Statements of Cash Flows ....................................32

Notes to Consolidated Financial Statements ...............................33

27

INDEPENDENT AUDITOR'S REPORT

To The Stockholders and Board of Directors
ACNB Corporation
Gettysburg, Pennsylvania

We have audited the accompanying consolidated statements of condition of ACNB
Corporation and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2002. These
consolidated financial statements are the responsibility of the corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based upon our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ACNB Corporation and
subsidiaries as of December 31, 2002 and 2001, and the results of operations and
their cash flows for each of the three years in the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States of America.

/s/ Stambaugh Ness, PC

Stambaugh Ness, PC
York, Pennsylvania
January 17, 2003

28

CONSOLIDATED STATEMENTS OF CONDITION

DECEMBER 31
----------------------
2002 2001
ASSETS IN THOUSANDS

Cash and Due from Banks $ 18,089 $ 21,185

Interest bearing deposits with banks 1,009 740

Investment securities

Securities held to maturity 31,658 48,480
Securities available for sale
(fair value $316,874 and $225,161, respectively) 282,389 175,017
--------- ---------
TOTAL INVESTMENT SECURITIES 314,047 223,497

Mortgage loans held for sale 2,544 1,040

Loans 372,306 361,539

Less: provision for possible loan losses (3,837) (3,723)

Net loans 368,469 357,816

Premises and equipment 7,182 5,704

Other real estate 559 1,646

Other assets 22,745 18,606
--------- ---------
TOTAL ASSETS $ 734,644 $ 630,234
========= =========

LIABILITIES

Non-interest bearing deposits $ 70,728 $ 70,907

Interest bearing deposits 511,887 438,328
--------- ---------
TOTAL DEPOSITS 582,615 509,235

Securities sold under agreement to repurchase 35,945 33,239

Borrowings, Federal Home Loan Bank 40,050 17,850

Demand notes, U.S. Treasury 450 412

Other liabilities 5,484 6,805
--------- ---------
TOTAL LIABILITIES 664,544 567,541

STOCKHOLDERS' EQUITY
Common stock ($2.50 par value; 20,000,000 shares
authorized; 5,436,101 shares issued and
outstanding at 12/31/02 and 12/31/01, respectively) 13,590 13,590

Retained earnings 52,781 48,661

Accumulated other comprehensive income 3,729 442
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 70,100 62,693

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 734,644 $ 630,234
========= =========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.

29

CONSOLIDATED STATEMENTS OF INCOME