- --------------------------------------------------------------------------------
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 September 30, 1998
------------------
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
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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.)
675 OLD HARRISBURG ROAD, GETTYSBURG, PA 17325
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(717) 334-3161
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
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 ____
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ____ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class - Common Stock ($2.50 par value)
Outstanding at November 5, 1998 - 5,253,278
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<PAGE>
PART I ITEM I FINANCIAL INFORMATION
ACNB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
30-Sep 30-Sep 31-Dec
1998 1997 1997
-------- -------- --------
(000 omitted)
<S> <C> <C> <C>
ASSETS
Cash and Due from Banks $ 15,944 $ 21,223 $ 28,734
Investment Securities
Securities Held to Maturity 30,908 49,788 32,988
Securities Available for Sale 101,488 47,499 55,935
-------- -------- --------
Total Investment Securities 132,396 97,287 88,923
Federal Funds Sold 0 100 100
Loans 340,095 343,181 341,808
Less: Reserve for Loan Losses (3,334) (3,176) (3,174)
-------- -------- --------
Net Loans 336,761 340,005 338,634
Premises and Equipment 4,560 5,079 4,949
Other Real Estate 365 210 401
Other Assets 5,775 6,046 5,096
-------- -------- --------
TOTAL ASSETS $495,801 $469,950 $466,837
======== ======== ========
LIABILITIES
Deposits
Noninterest Bearing 48,945 43,250 46,839
Interest Bearing 359,954 348,184 348,734
-------- -------- --------
Total Deposits 408,899 391,434 395,573
Securities Sold Under
Agreement To Repurchase 25,812 22,290 15,021
Borrowing Federal Home Loan Bank 0 0 0
Demand Notes U.S. Treasury 286 450 450
Other Liabilities 4,615 3,835 3,175
-------- -------- --------
TOTAL LIABILITIES 439,612 418,009 414,219
SHAREHOLDERS EQUITY
Common Stock ($2.50 par value)
20,000,000 shares authorized:
5,253,278 shares issued and
outstanding at 9/30/98 13,133 13,133 13,133
Surplus 3,647 3,647 3,647
Retained Earnings 37,444 34,454 34,968
Net unrealized gains on securities available
for sale 1,965 707 870
-------- -------- --------
TOTAL SHAREHOLDERS EQUITY 56,189 51,941 52,618
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $495,801 $469,950 $466,837
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
PAGE 2
<PAGE>
ACNB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sep-98 Sep-98
------------------- --------------------
1998 1997 1998 1997
------ ------ ------- -------
(000 omitted) (000 omitted)
<S> <C> <C> <C> <C>
INTEREST INCOME
Loan Interest and Fees $6,939 $6,994 $20,902 $20,596
Interest and Dividends on
Investment Securities 1,980 1,776 5,299 5,493
Interest on Federal Funds Sold 0 1 1 4
Interest on Balances with
Depository Institutions 112 88 451 169
------ ------ ------- -------
TOTAL INTEREST INCOME 9,031 8,859 26,653 26,262
INTEREST EXPENSE
Deposits 3,621 3,590 10,755 10,597
Other Borrowed Funds 227 184 573 519
------ ------ ------- -------
TOTAL INTEREST EXPENSE 3,848 3,774 11,328 11,116
NET INTEREST INCOME 5,183 5,085 15,325 15,146
Provision for Loan Losses 90 60 270 150
------ ------ ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 5,093 5,025 15,055 14,996
OTHER INCOME
Trust Department 129 112 413 349
Service Charges on Deposit Accounts 217 195 588 569
Other Operating Income 202 105 653 414
Securities Gains 0 0 0 0
------ ------ ------- -------
TOTAL OTHER INCOME 548 412 1,654 1,332
OTHER EXPENSES
Salaries and Employee Benefits 1,664 1,608 4,955 4,897
Premises and Fixed Assets 489 477 1,408 1,342
Other Expenses 727 614 2,093 1,941
------ ------ ------- -------
TOTAL OTHER EXPENSE 2,880 2,699 8,456 8,180
INCOME BEFORE INCOME TAX 2,761 2,738 8,253 8,148
Applicable Income Tax 913 906 2,731 2,693
------ ------ ------- -------
NET INCOME $1,848 $1,832 $ 5,522 $ 5,455
====== ====== ======= =======
EARNINGS PER SHARE* $ 0.35 $ 0.35 $ 1.05 $ 1.04
DIVIDENDS PER SHARE* 0.20 0.19 0.58 0.55
</TABLE>
- ----------
*Based on 5,253,278 shares outstanding in 1998 and 5,255,021 in 1997
See accompanying notes to financial statements.
Page 3
<PAGE>
ACNB CORPORATION AND SUBSIDIARY
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
Sept 30
-----------------------
1998 1997
-------- --------
(000 omitted)
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash Flows from Operating Activities:
Interest and Dividends Received $ 26,472 $ 25,473
Fees and Commissions Received 2,014 1,742
Interest Paid (10,630) (10,467)
Cash Paid to Suppliers and Employees (8,136) (7,467)
Income Taxes Paid (2,790) (2,682)
Net Cash Provided by Operating Activities 6,930 6,599
Cash Flows from Investing Activities:
Proceeds from Maturities of Investment Securities
and Interest Bearing Balances with Other Banks 15,996 33,299
Purchase of Investment Securities and Interest
Bearing Balances with Other Banks (58,281) (13,560)
Principal Collected on Loans 61,626 51,301
Loans Made to Customers (59,987) (68,907)
Capital Expenditures (80) (149)
Net Cash Used in Investing Activities (40,726) 1,984
Cash Flow from Financing Activities:
Net Increase in Demand Deposits, NOW Accounts, and
Savings Accounts 14,144 2,026
Proceeds from Sale of Certificates of Deposit 34,811 30,471
Payments for Maturing Certificates of Deposit (24,838) (38,636)
Dividends Paid (3,047) (2,889)
Increase (Decrease) in Borrowings (164) 0
Repurchase of Common Stock 0 (410)
Net Cash Provided by Financing Activities 20,906 (9,438)
Net Increase in Cash and Cash Equivalents (12,890) (855)
Cash and Cash Equivalents: Beginning of Period 28,834 22,178
End of Period $ 15,944 $ 21,323
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net Income $ 5,522 $ 5,455
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 469 485
Provision for Possible Credit Losses 270 150
Provision for Deferred Taxes 0 73
Amortization of Investment Securities Premiums (92) (68)
Increase (Decrease) in Taxes Payable (59) (62)
(Increase) Decrease in Interest Receivable (460) (221)
Increase (Decrease) in Interest Payable 698 649
Increase (Decrease) in Accrued Expenses 70 381
(Increase) Decrease in Other Assets (219) (153)
Increase (Decrease) in Other Liabilities 731 (90)
Net Cash Provided by Operating Activities $ 6,930 $ 6,599
DISCLOSURE OF ACCOUNTING POLICY
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, and federal funds sold. Generally,
federal funds are purchased and sold for one-day periods.
</TABLE>
Page 4
<PAGE>
ACNB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
ACNB Corporation's financial position as of September 30, 1998 and 1996 and
December 31, 1997 and the results of its operations for the nine months
ended September 30, 1998 and 1997 and changes in financial position for the
nine months then ended. 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 financial statements in the 1997 ACNB Corporation
Annual Report and Form 10-K filed with the Securities and Exchange
Commission under file no. 0-11783.
2. The book and approximate market values of securities owned at September 30,
1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
9/30/98 12/31/97
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- -------
(000 omitted)
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government
Agencies (held to maturity) $ 30,119 $ 31,725 $32,156 $32,286
State and Municipal (held to maturity) 789 789 832 832
U.S. Government Agencies
(available for sale) 95,536 98,513 51,756 53,074
Other Investments (available for sale) 2,975 2,975 2,861 2,861
------- -------- ------- -------
TOTAL $129,419 $134,002 $87,605 $89,053
</TABLE>
Income earned on investment securities was as follows:
Nine Months Ended September 30
------------------------------
1998 1997
------ ------
(000 omitted)
U.S. Treasury $ 684 $1,132
U.S. Government Agencies 4,434 4,189
State and Municipal 38 41
Other Investments 143 131
------ ------
$5,299 $5,493
Page 5
<PAGE>
3. Gross loans are summarized as follows:
September 30 December 31
------------ -----------
(000 omitted)
Real Estate $298,966 $303,270
Real Estate Construction 14,897 13,674
Commercial and Industrial 11,816 9,758
Consumer 14,416 15,106
-------- --------
Total Loans $340,095 $341,808
4. Earnings per share are based on the weighted average number of shares of
stock outstanding during each period. Weighted average shares outstanding
for the nine month periods ended September 30, 1998 and 1997 were 5,253,278
and 5,255,021 respectively.
5. Dividends per share were $.58 and $.55 for the nine month periods ended
September 30, 1998 and 1997 respectively. This represented a 55% payout of
net income in 1998 and a 53% payout in 1997.
6. The results of operations for the nine month periods ended September 30,
1997 and 1997 are not necessarily indicative of the results to be expected
for the full year.
Page 6
<PAGE>
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The following is management's discussion and analysis of the significant changes
in the results of operations, capital resources and liquidity presented in the
accompanying consolidated financial statements for ACNB Corporation, a
Pennsylvania corporation and registered bank holding company (the Corporation),
and its wholly-owned subsidiary, Adams County National Bank (the Bank). The
Corporation's consolidated financial condition and results of operations consist
almost entirely of the Bank's financial condition and results of operations.
This discussion should be read in conjunction with the Corporation's 1997 Annual
Report and Form 10-K. Current performance does not guarantee, assure, or is
necessarily indicative of similar performance in the future.
In addition to historical information, this Form 10-Q may contain
forward-looking statements. From time to time, the Corporation may publish
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new products,
research and development activities and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the
Corporation notes that a variety of factors could cause the Corporation's actual
results and experience to differ materially from the anticipated results or
other expectations expressed in the Corporation's forward-looking statements.
The risks and uncertainties that may affect the operations, performance,
development and results of the Corporation's business include the following:
general economic conditions, including their impact on capital expenditures;
business conditions in the banking industry; the regulatory environment; rapidly
changing technology and evolving banking industry standards; competitive
factors, including increased competition with community, regional and national
financial institutions; new service and product offerings by competitors and
price pressures; and similar items.
Three months ended September 30, 1998 compared to three months ended
September 30, 1997
Net Income for the three month period ending September 30, 1998 was $1,848,000,
up $16,000 from the third quarter of 1997. The increase in net income was due
primarily to increased net interest income. Net income per share, for the third
quarter, was $.35, comparable to the $.35 earned in the same period in 1997.
An explanation of the factors and trends that caused changes between the two
periods, by major earnings category, follows.
Total interest income for the third three month period of 1998 was $9,031,000,
up $172,000 or 2% above the $8,859,000 earned in the same period of 1997. The
$172,000 increase in interest income was due to a greater volume of securities
and due from banks. The average yield on earning assets has decreased 7 basis
points over the same quarter in 1997. In an effort to manage interest rate risk,
the Bank continues to invest in mortgage-backed securities classified as
available-for-sale and now holds a total volume of over $91 million. Income from
securities and due from banks during the current period increased due to growth
of approximately $30 million.
Page 7
<PAGE>
Total interest expense for the third three month period of 1998 was $3,848,000,
up $74,000 or 2% above the $3,774,000 incurred for the same period in 1997. The
$74,000 increase in interest expense was due primarily to a increase in the
average volume of interest bearing liabilities, which was $16.6 million greater
in the current quarter compared to the same quarter in 1997.
Net interest income after provision for loan losses for the third three month
period of 1998 was $5,093,000, compared to the $5,025,000 earned in the same
period of 1997. Income before provision for loan losses was even greater in
1998, but a $30,000 greater provision reduced it to $68,000 greater than 1997.
Total non-interest income for the third three month period of 1998 at $548,000,
was $136,000 or 33% greater than the same quarter in 1997. This was primarily
due to ATM surcharges, which the Corporation did not levy in 1997, Visa debit
card fees, another service instituted in late 1997, and a good quarter for the
Bank's Trust Department which settled a large estate.
Total non-interest expense for the third three month period of 1998 was
$2,880,000, up $181,000 or 7% more than the $2,699,000 incurred for the third
quarter of 1997. Most of the increase was in supplies, teller long and short,
and miscellaneous expenses.
The provision for income taxes in the third quarter increased $7,000 due to a
higher level of pretax earnings.
Nine months ended September 30, 1998 compared to nine months ended
September 30, 1997
Net income for the first nine months of 1998 was $5,522,000, up $67,000 or 1%
above the $5,455,000 earned for the same period of 1997. The increase in net
income was due primarily to a greater volume of loans. For the nine month period
(annualized) of 1998, the return on average assets (ROA) and return on average
equity (ROE) were 1.54% and 13.85%, respectively, compared to 1.57% and 14.50%,
respectively, for 1997.
At September 30, 1998, total assets were approximately $496 million, reflecting
a $29 million or 6% increase above September 30, 1997. As explained more fully
under Capital Management section, book value per share was $10.32 on September
30, 1998, compared to $9.75 on September 30, 1997. The Corporation's capital
remained sound as evidenced by a Tier I Risked-Based Capital Ratio of 18.6% and
a Total Risk-Based Capital Ratio of 19.8% on September 30, 1998.
Total interest income for the current nine month period was $26,653,000, up
$391,000 or 1% above the $26,262,000 earned in the same period of 1997. The
$391,000 increase in total interest income was due primarily to a larger volume
of securities and due from banks. Securities totaled $132,396 at September 30,
1998 compared to $97,287,000 at September 30,1997.
Total interest expense for the current nine month period was $11,328,000, up
$212,000 or 2% above the $11,116,000 incurred for the same period in 1997. The
$212,000 increase in total interest expense was due to an increase in average
interest bearing liabilities, principally time deposits. The year to date
average volume of interest bearing liabilities increased approximately $7.7
million or 2% above the same period of 1997.
Page 8
<PAGE>
Net interest income was $15,325,000 for the current period, up $179,000 above
the first nine months of 1997. Income from a larger volume of investment
securities out paced funding costs. Nevertheless, the net yield on average
earning assets was 4.50% for the current nine month period compared to 4.54% for
the same period in 1997. The additional income was not sufficient to offset a
decline in margins.
Total non-interest income for the current nine month period was $1,654,000, up
$322,000 or 24% above the same period in 1997. Improvement was in major
categories but centered mainly in the Bank's Trust Department, which was up
$64,000, caused by greater activity in estate settlements, and other operating
income due to ATM surcharges and debit card fees.
Total non-interest expense for the current nine month period was $8,456,000, up
$276,000 or 3% above the $8,180,000 incurred for the same period in 1997. The
increase in total non-interest expense was primarily the result of increases in
ATM costs and building repair and maintenance.
The provision for income taxes was $2,731,000 for the current period, $38,000
above the same period in 1997 due to a higher level of pretax earnings.
INTEREST RATE SPREAD AND NET YIELD ON EARNING ASSETS
Nine Months Ended
------------------------
9/30/98 9/30/97
------- -------
Rate Rate
---- ----
Earning Assets 7.80% 7.87%
Interest Bearing Liabilities 4.04% 4.04%
Interest Rate Spread 3.76% 3.83%
Net Yield on Earning Assets 4.50% 4.54%
Net Yield on Earning Assets is the difference, stated in percentages, between
the interest earned on loans and other investments and the interest paid on
deposits and other sources of funds. The Net Yield on Earning Assets is one of
the best analytical tools available to demonstrate the effect of interest rate
changes on the Corporation's earning capacity.
The Net Yield on Earning Assets, for the first nine months of 1998, was down 4
basis points compared to the same period in 1997. This is a result of lower
market yields on loans and securities without relief on the deposit side.
Page 9
<PAGE>
PROVISION AND RESERVE FOR POSSIBLE LOAN LOSSES
Reserve for Possible Loan Losses
(In Thousands Except Ratios)
Nine Months Ended
---------------------
9/30/98 9/30/97
------- -------
Balance at Beginning of Period $3,174 $3,183
Provision Charged to Expense 270 150
Loans Charged Off 183 173
Recoveries 73 16
------ ------
Balance at End of Period $3,334 $3,176
Ratios:
Net Charge-offs to:
Net Income 1.99% 2.88%
Total Loans .03% .05%
Reserve for Possible Loan Losses 3.30% 4.94%
Reserve for Possible Loan Losses to:
Total Loans .98% .93%
The Reserve for Possible Loan Losses at September 30, 1998 was $3,334,000 (.98%
of Total Loans), an increase of $158,000 from $3,176,000 (.93% of Total Loans)
at the end of the first nine months of 1997. Loans past due 90 days and still
accruing amounted to $1,837,000 and non-accrual loans totaled $1,382,000 as of
September 30, 1998. The ratio of non-performing assets plus other real estate
owned to total assets was .76% at September 30, 1998. All properties are carried
at the lower of market or book value and are not considered to represent
significant threat of loss to the bank.
Loans past due 90 days and still accruing were $1,197,000 at year end 1997 while
non-accruals stood at $1,640,000. The bulk of the Corporation's real estate
loans are in owner occupied dwellings. Management believes that internal loan
review procedures will be effective in recognizing and correcting any real
estate lending problems that may occur due to current economic conditions.
Interest not accrued, due to an average of $1,613,000 in non-accrual loans, was
approximately $145,000 for the first nine months of 1998.
A loan is considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect all amounts due. Impaired
loans are measured based on the present value of expected future cash flows,
discounted at the loan's effective interest rate, or as a practical expedient,
at the loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. If the measure of the impaired loan is less than
its recorded investment a creditor must recognize an impairment by creating, or
adjusting, a valuation allowance with a corresponding charge to loan loss
expense. The Corporation uses the cash basis method to recognize interest income
on loans that are impaired. All of the Corporation's impaired loans were on
non-accrual status for all reported periods.
CAPITAL MANAGEMENT
Total Shareholders' Equity amounted to $56,189,000 at September 30, 1998
compared to $51,941,000 at September 30, 1997, an increase of $4,248,000 or 8%
over that period. The ratio of Total Shareholders' Equity to Total Assets was
11.33% at September 30, 1997, 11.27% at December 31, 1997, and 11.05% at
September 30, 1998. The total risk-based capital ratio was 19.78% at September
30, 1998. The leverage ratio was 10.78% at September 30, 1998 and 10.61% during
the same period in 1997. Capital at the Corporation remains strong even with a
55% dividend payout ratio.
Page 10
<PAGE>
LIQUIDITY AND INTEREST RATE SENSITIVITY
Management believes that the Corporation's liquidity is adequate. Liquid assets
(cash and due from banks, federal funds sold, money market instruments,
available for sale securities and held to maturity investment securities
maturing within one year) were 24% of total assets at September 30, 1998. This
mix of assets is readily available for funding any cash requirements. In
addition, the Bank has an approved line of credit of $221,582,000 at the Federal
Home Loan Bank of Pittsburgh with $-0- outstanding at September 30, 1998.
As of September 30, 1998, the cumulative asset sensitive gap was 6.5% of total
assets at one month, 2.8% at nine months, and 11.2% at one year. Adjustable rate
mortgages, which have an annual interest rate cap of 2%, are considered rate
sensitive. Passbook savings and NOW accounts are carried in the one to five year
category while half of money market deposit accounts are spread over the four to
twelve month category and the other half are shown to mature in the one to three
year category.
There are no known trends or demands, commitments, events or uncertainties that
will result in, or that are reasonably likely to result in, liquidity increasing
or decreasing in any material way. Aside from those matters described above,
management does not currently believe that there are any known trends or
uncertainties which would have a material impact on future operating results,
liquidity or capital resources nor is it aware of any current recommendations by
the regulatory authorities which if they were to be implemented would have such
an effect, although the general cost of compliance with numerous and multiple
federal and state laws and regulation does have and in the future may have a
negative impact on the corporation's results of operations.
COMPANY IS IN THE PROCESS OF BECOMING YEAR 2000 COMPLIANT - EXPENSES NOT
MATERIAL
YEAR 2000 ISSUE
The following section contains forward-looking statements which involve risks
and uncertainties. The actual impact on the Corporation of the Year 2000 issue
could materially differ from that which is anticipated in the forward-looking
statements as a result of certain factors identified below.
Corporation's State of Readiness
The Year 2000 ("Y2K") issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Such computer systems
will be unable to interpret dates beyond the year 1999, which could cause a
system failure or other computer errors, leading to disruptions in operations.
If not corrected, many computer applications could fail or create erroneous
results by or at the year 2000. This could cause entire system failures,
miscalculations, and disruptions of normal business operations including, among
other things, a temporary inability to process transactions, send statements, or
engage in similar day to day business activities. The extent of the potential
impact of the Year 2000 Problem is not yet known, and if not timely corrected,
it could affect the global economy.
Page 11
<PAGE>
The Corporation has developed a five phase program for Y2K information systems
compliance which include the following:
1. Awareness Phase
o Establish Year 2000 Task Force
o Define Year 2000 Problem
o Develop Year 2000 Plan and Strategy
This phase has been completed as of December 31, 1997.
2. Assessment Phase
o Identify and inventory all information systems, technology
items, computer programs, business partners, environmental
systems, and data communication links
o Prioritize Mission Critical Systems
Obtain vendor certifications for all software, hardware, and
outsourced service providers
o Assess impact of Year 2000
This phase will be completed December 31, 1998
3. Renovation Phase
o Implement hardware and software upgrades
o Replace systems and technology items
o Monitor vendor and service provider progress
This phase will be in effect from January 1, 1998 through December 31, 1998
4. Validation Phase
o Develop testing plan and strategy
o Establish test environment(s)
o Test all internal information systems, technology items,
computer programs, environmental systems, and data
communication links
o Test with and/or monitor testing of vendors and service
providers
This phase began August 31, 1998 and will continue through June 30, 1999
5. Implementation Phase
o Implement Y2K compliant systems and technology items
This phase began December 31, 1997 and will continue through
October 29, 1999
Based on an ongoing assessment, the Corporation has determined that it will be
required to modify or replace portions of its software so that its computer
systems will properly use dates beyond December 31, 1999. The Corporation
presently believes that as a result of modifications to existing software and
hardware and conversions to new software, the Year 2000 Problem can be
mitigated. However, if such modifications and conversions are not made, or are
not completed on a timely basis, the Year 2000 Problem could have a material
adverse impact on the operations of the Corporation.
The major part of the Corporation's software is designed and maintained by
companies well known throughout the banking industry. This portion of the
software has been or is in the
Page 12
<PAGE>
process of being renovated for compliance with the year 2000. The cost of
renovation will be borne by the third party providers. Thus, even though the
Corporation does not have direct control over the renovation process, it is
monitoring the progress of its third-party vendors to assess the status of their
Y2K readiness efforts. However, because most computer systems are, by their very
nature, interdependent, it is possible that noncompliant third-party computers
could impact the Corporation's computer systems. The Corporation could be
adversely affected by the Y2K problem if it or unrelated parties fail to
successfully address the problem. The Corporation has taken steps to communicate
with the unrelated parties with whom it deals to coordinate Year 2000
compliance. Additionally, the Corporation is dependent on external suppliers,
such as, wire transfer systems, telephone systems, electric companies, and other
utility companies for continuation of service. The Corporation is also assessing
the impact, if any, the century date change may have on its credit risk.
Costs of Year 2000
The cost to implement the aforementioned five phase program will range from
approximately $300,000 to $350,000. Internal costs should approximate $229,390,
while outside consultants for both legal work and contingency planning will
approximate $93,125. $42,000 of the consultant fees have already been expended
with another $41,000 scheduled to be spent by year end 1998. The majority of the
remainder of the approximated costs are internal costs, which will not be actual
cash outlays but will be absorbed by current operations.
The financial impact to the Corporation of Year 2000 compliance has not been and
is not anticipated to be material to the Corporation's financial position or
results of operations in any given year. However, if compliance is not achieved
in a timely manner by the Corporation or any of its significant related
third-parties, be it a supplier of services or customer, the Y2K issue could
possibly have a material effect on the Corporation's operations and financial
position.
The cost of the projects and the date on which the Corporation plans to complete
both Year 2000 modifications and systems conversions are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
Risks of Year 2000
At present, management believes it's progress in remedying the Corporation's
systems, programs and applications and installing Y2K compliant upgrades is on
target. The Y2K computer problem creates risk for the Corporation from
unforeseen problems in its own computer systems and from third-party vendors who
provide the majority of mainframe and PC based computer applications. Failure of
third-party systems relative to the Y2K issue could have a material impact on
the Corporation's ability to conduct business.
Page 13
<PAGE>
Contingency Plans
In conjunction with the Y2K Compliance, three major components have been
established as part of this project.
1. Contingency Planning
o Business Resumption Contingency Planning including
Organizational Planning Guidelines, Business Impact
Analysis, Written Plan, and Validation
2. Stakeholder Communications
o Customer Awareness Program
o Bank Employee Communications
o Corporation Stockholder Communications
3. Commercial Customer Credit Risk Control Process
o Due Diligence Process for Current and Future Material
Customers
o Assessment of Customer Year 2000 Readiness
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE 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. For further
discussion of year end information, refer to the annual report.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - Nothing to report.
Item 2. Changes in Securities and Use of Proceeds - Nothing to report.
Item 3. Defaults Upon Senior Securities - Nothing to report.
Item 4. Submission of Matters to a Vote of Security Holders -
Nothing to report.
Item 5. Other Information - Nothing to report.
Item 6. Exhibits and Reports of Form 8-K
An 8-K concerning the acquisition of Farmers National Bancorp was
filed on July 30, 1998.
The following Exhibits are included in this Report:
Exhibit 3(i) Articles of Incorporation of Registrant (Incorporated by
Reference to Exhibit 3 in Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994, filed with the Commission on
March 25, 1995).
Page 14
<PAGE>
Exhibit 3(ii) Bylaws of Registrant as amended and restated (Incorporated by
Reference to Exhibit 3(ii) in Registrant's Report of Form 8-K,
filed with the Commission on March 25, 1998).
Exhibit 10.1 Executive Employment Agreement dated as of January 1, 1998 between
Adams County National Bank, ACNB Corporation and Ronald L. Hankey
(Incorporated by Reference to Exhibit 99 in Registrant's Current
Report on Form 8-K filed with the Commission on March 25, 1998).
Exhibit 11 Statement Regarding Computation of Earnings Per Share.
Exhibit 27 Financial Data Schedule.
Pursuant to the requirements 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
-------------------------------------
Ronald L. Hankey, President
November 5, 1998
(Date)
-------------------------------------
John W. Krichten, Secretary/Treasurer
Page 15
<PAGE>
EXHIBIT INDEX
Exhibit Number
- --------------
Exhibit 3(i) Articles of Incorporation of Registrant (Incorporated by Reference
to Exhibit 3 in Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994, filed with the Commission on March
25, 1995).
Exhibit 3(ii) Bylaws of Registrant as amended and restated (Incorporated by
Reference to Exhibit 3(ii) in Registrant's Report of Form 8-K,
filed with the Commission on March 25, 1998).
Exhibit 10.1 Executive Employment Agreement dated as of January 1, 1998 between
Adams County National Bank, ACNB Corporation and Ronald L. Hankey
(Incorporated by Reference to Exhibit 99 in Registrant's Current
Report on Form 8-K filed with the Commission on March 25, 1998).
Exhibit 11 Statement Regarding Computation of Earnings Per Share.
Exhibit 27 Financial Data Schedule.
Page 16
<PAGE>
EXHIBIT 11
Statement Regarding the Computation of Earnings Per Share
For the nine month period
ending September 30
----------------------------
1998 1997
--------- ---------
Weighted average shares outstanding: 5,253,278 5,255,021
Common Stock
Common Stock Equivalents
Stock Options 0 0
Stock Awards 0 0
ESOP shares 0 0
Total Common Stock Equivalents 0 0
Total weighted average shares outstanding 5,253,278 5,255,021
Net Income $5,522,000 $5,455,000
Net Income Per Share $1.05 $1.04
Fully Diluted Income Per Share $1.05 $1.04
Page 17
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