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FORM 10-K
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997.
Commission file no. 0-11783.
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ACNB CORPORATION
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2233457
- ------------------------ ------------------------------------
(State of Incorporation) (IRS Employer Identification Number)
675 OLD HARRISBURG ROAD
GETTYSBURG, PA 17325
- ---------------------------------------- ----------
(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 CAPITAL STOCK, PAR VALUE $2.50 A 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 by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past ninety (90) days. YES X NO
----- -----
As of February 28, 1998, ACNB Corporation had outstanding 5,253,278 shares
of Common Stock. The aggregate market value of such Common Stock held by
nonaffiliates as of February 28, 1998, was approximately $125,183,250. Shares of
Common Stock held by each officer and director and by each person who owns 5% or
more of the outstanding Common Stock have been excluded because they may be
deemed to be affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to
be held May 5, 1998, are incorporated by reference into Part III.
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<PAGE>
FORM 10-K
PART I
ITEM 1. BUSINESS
The Registrant owns all the outstanding shares of Adams County National
Bank (hereinafter the "Bank"). The Registrant and the Bank have the same Board
of Directors. The Registrant, organized in 1983, presently has no significant
operations other than serving as a holding company. The Bank engages in a
full-service commercial and consumer banking and trust business. With its main
office at 675 Old Harrisburg Road, Gettysburg, Pennsylvania, the Bank provides
financial services to its customers through its community banking network of
fourteen full-service offices located throughout Adams County, Pennsylvania, and
in Hanover, York County, Pennsylvania.
The Bank's services include accepting demand, savings and time deposits
including NOW, SuperNOW, money market, passbook savings, a diversified array of
certificates of deposit, IRAs, and club accounts. Its services also include
making secured and unsecured commercial and consumer loans; financing commercial
transactions; making construction and mortgage loans; making residential
mortgage loans and home equity lines of credit; making small business loans;
making student loans; and, the renting of safe deposit box facilities. Further,
the Bank's business loans include seasonal credit, collateral loans and term
loans.
Trust services provided by the Bank include services as executor and
trustee under wills and deeds, estate planning services, and custodian and agent
for various investment companies. Trust services also include transfer agent and
registrar of bond issues and escrow agent.
The Bank has a relatively stable deposit base, and no material amount of
deposits is obtained from a single depositor or group of depositors (including
federal, state and local governments). See Management's Discussion and Analysis
in the 1997 Annual Report. The Bank has not experienced any significant seasonal
fluctuations in the amount of its deposits.
As of December 31, 1997, the Registrant had a total of 157 full-time and 60
part-time employees.
SUPERVISION AND REGULATION
The Registrant and the Bank are considered "affiliates" for purposes of
Section 23A of the Federal Reserve Act and, as such, are subject to certain
limitations specified therein on the making of loans on, extensions of credit
to, or investments in each other. The Federal Bank Holding Company Act of 1956
restricts the Registrant's activities, whether conducted directly or through
subsidiary corporations, to specified activities functionally related to
banking. Permissible activities under the Act include lending, certain leasing
activities, fiduciary and investment advisory services, acting as insurance
agent or broker in connection with loans by subsidiary or affiliated companies,
and certain bookkeeping or data processing services.
COMPETITION
All phases of the Bank's business are highly competitive. The Bank's market
area is the primary trading area of Adams County, Pennsylvania; a western
portion of York County, Pennsylvania; and, the northernmost portions of those
counties in Maryland which are immediately adjacent to the southern border of
Adams County. The market concentration is in the area of Gettysburg,
Pennsylvania. The Bank competes with local commercial banks, other commercial
banks with branches in the Bank's market area, savings associations, and other
financial service providers. The Bank considers its major competition to be PNC
Corporation; Farmers Bank and Trust Company, a subsidiary of Dauphin Deposit
Corporation; and, Bank of Hanover and Trust Co.
GOVERNMENT MONETARY POLICIES AND ECONOMIC CONTROLS
The earnings and growth of the Bank are affected by the policies of the
regulatory authorities including the Office of the Comptroller of the Currency,
the Board of Governors of the Federal Reserve System, and the Federal Deposit
Insurance Corporation. An important function of the Federal Reserve System is to
regulate the money supply and interest rates. Among the instruments used to
implement these objectives are open market operations in U.S. Government
securities and changes in reserve requirements against member bank deposits.
These instruments are used in varying combinations to influence overall growth
and distribution of bank loans, investments and deposits. Their use may also
affect interest rates charged on loans or paid for deposits. The policies and
regulations of the Federal Reserve Board have had, and will probably continue to
have, a significant effect on the Bank's deposits, loans and investment growth,
as well as the rate of interest earned and paid. The impact of such policies and
regulations upon the future business and earnings of the Bank cannot be
accurately predicted.
ITEM 2. PROPERTIES
The principal properties of the Registrant and its subsidiary are those
held by the Bank. The Bank's main office and executive offices are located at
675 Old Harrisburg Road, Gettysburg, Adams County, Pennsylvania. Additionally,
the Bank owns thirteen other properties located at 2 Chambersburg Street, 18-20
Chambersburg Street and 22-22 1/2 Chambersburg Street, Gettysburg, Pennsylvania;
17 South Queen Street and 444 West King Street, Littlestown, Pennsylvania; 369
Main Street, McSherrystown, Pennsylvania; 1677 Abbottstown Pike, East Berlin,
Pennsylvania; 202 Main Street, York Springs, Pennsylvania; 101 Main Street,
Arendtsville, Pennsylvania; 10 High Street, Cashtown, Pennsylvania; 101 North
Main Street, Bendersville, Pennsylvania; 104 Sanders Road, Carroll Valley,
Pennsylvania; and, 1127 Eichelberger Street, Hanover, Pennsylvania. The Bank
also leases a full-service office location at 3459 Biglerville Road,
Biglerville, Pennsylvania, and an in-store office location at the Super Kmart(R)
Center, 400 Eisenhower Drive, Hanover, Pennsylvania.
2
<PAGE>
FORM 10-K
ITEM 3. LEGAL PROCEEDINGS
In the opinion of the management of the Corporation, there are no
proceedings pending to which the Corporation and the Bank are a party or to
which its property is subject, which, if determined adversely to the Corporation
and the Bank, would be material in relation to the Corporation's and Bank's
financial condition. There are no proceedings pending other than ordinary
routine litigation incident to the business of the Corporation and the Bank. In
addition, no material proceedings are pending or are known to be threatened or
contemplated against the Corporation and the Bank by government authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The information required by this Item, regarding market value, dividend
payment, and number of shareholders, is set forth on page 49 of the Registrant's
1997 Annual Report and incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth on pages 15 and 42 of
the Registrant's 1997 Annual Report and incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is set forth on pages 16 through 24
of the Registrant's 1997 Annual Report and incorporated herein by reference.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item is set forth on pages 20 and 21 of
the Registrant's 1997 Annual Report and incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth on pages 26 through 41
of the Registrant's 1997 Annual Report and incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item, relating to directors, executive
officers, and control persons, is set forth on pages 3 through 7 and pages 14
and 15 of the Registrant's definitive Proxy Statement to be used in connection
with the 1998 Annual Meeting of Shareholders, which pages are incorporated
herein by reference.
Section 16(a) Beneficial Ownership Compliance. Section 16(a) of the
Securities Exchange Act of 1934, as amended, requires the Registrant's officers
and directors, and persons who own more than 10 percent of a registered class of
the Registrant's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission, or SEC. Officers,
directors and greater than 10 percent shareholders are required by SEC
regulation to furnish the Registrant with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of such forms received by it or
written representations from certain reporting persons that no Forms 5 were
required for those persons, the Registrant believes that during the period of
January 1, 1997, through December 31, 1997, its officers and directors were in
compliance with all filing requirements applicable to them.
3
<PAGE>
FORM 10-K
PART IV
ITEM 14b. EXHIBITS
Exhibit 3(i) Articles of Incorporation of Registrant
A copy of the Articles of Incorporation, as amended, of ACNB
Corporation is incorporated by reference to Exhibit 3(a) of the
Registrant's Annual Report on Form 10-K, filed with the Commission on
March 25, 1995.
Exhibit 3(ii) Bylaws of Registrant
A copy of the Bylaws, as amended, of ACNB Corporation is incorporated
by reference to Exhibit 3(ii) of the Registrant's Current Report on
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
A copy of the Executive Employment Agreement dated as of January 1,
1998, Between Adams County National Bank, ACNB Corporation and Ronald
L. Hankey, is incorporated by reference to Exhibit 99 of the
Registrant's Current Report on Form 8-K, filed with the Commission on
March 25, 1998.
Exhibit 11 Statement Regarding the Computation of Earnings Per Share
For the Fiscal Year
ended December 31
------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
Weighted average shares outstanding ..... $5,254,618 $5,300,569 $5,314,521
Common stock
Common stock equivalents
Stock options ........................ -- -- --
Stock awards ......................... -- -- --
ESOP shares .......................... -- -- --
---------- ---------- ----------
Total common stock equivalents .......... -- -- --
---------- ---------- ----------
Total Weighted Average Shares
Outstanding............................ $5,254,618 $5,300,569 $5,314,521
========== ========== ==========
Net Income .............................. $7,229,000 $7,109,000 $6,459,000
Net Income Per Share .................... $ 1.38 $ 1.34 $ 1.22
Exhibit 12 Statement Regarding the Computation of Ratios
The information required by this Exhibit is set forth on page 42 of the
Registrant's Annual Report and incorporated herein by reference.
Exhibit 21 Subsidiary of the Registrant
The Registrant has one subsidiary, Adams County National Bank, a national
bank, which is wholly-owned by the Registrant.
Exhibit 27 Financial Data Schedule
4
<PAGE>
FORM 10-K
ITEM 15. SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ACNB CORPORATION (Registrant) ---------------------------
March 19, 1998
Date
- ------------------------------------ ---------------------------
BY: /s/ Ronald L. Hankey BY: /s/ John W. Krichten
Ronald L. Hankey John W. Krichten
President & CEO Secretary & Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on March 19, 1998, by the following persons in the
capacities indicated.
/s/ Philip P. Asper /s/ William B. Lower
- -------------------------- --------------------------
Philip P. Asper William B. Lower
Director Director
/s/ Guy F. Donaldson /s/ Paul G. Pitzer
- -------------------------- --------------------------
Guy F. Donaldson Paul G. Pitzer
Director Director
/s/ Frank Elsner, Jr. /s/ Thomas A. Ritter
- -------------------------- --------------------------
Frank Elsner, Jr. Thomas A. Ritter
Director Director
/s/ Richard L. Galusha /s/ Ralph S. Sandoe
- -------------------------- --------------------------
Richard L. Galusha Ralph S. Sandoe
Director Director
/s/ D. Richard Guise /s/ Marian B. Schultz
- -------------------------- --------------------------
D. Richard Guise Marian B. Schultz
Director & Vice Chairman of the Board Director
/s/ Ronald L. Hankey /s/ L. Robert Snyder
- -------------------------- --------------------------
Ronald L. Hankey L. Robert Snyder
Director, President & CEO Director
/s/ Philip M. Jones /s/ Jennifer L. Weaver
- -------------------------- --------------------------
Philip M. Jones Jennifer L. Weaver
Director Director
/s/ Wayne E. Lau
- --------------------------
Wayne E. Lau
Director
5
EXHIBIT 13
CONTENTS
Financial Highlights 1
Business Profile 1
Report to Stockholders 2
Community Focus 4
Index to Financial Information 14
Five-Year Financial Overview 15
Management's Discussion and Analysis 16
Independent Auditors' Report 25
Consolidated Financial Statements 26
Notes to Consolidated Financial Statements 30
Quarterly Results of Operations 42
Five-Year Financial Summary 42
Form 10-K Cross-Reference Index 43
Form 10-K 44
Common Stock Information 49
Board of Directors 50
Officers 51
Office Locations 52
At ACNB Corporation and its wholly-owned subsidiary, Adams County
National Bank, the community is the focus. Providing financial services
to local customers, job opportunities to employees, and support to the
community...all contribute to the return on the investment of the
Corporation's stockholders. The 1997 Annual Report highlights this
community focus through the words of Ronald L. Hankey,
President and CEO of the Corporation and the Bank.
<PAGE>
ACNB CORPORATION & SUBSIDIARY
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1997 ANNUAL REPORT
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
FOR THE YEAR 1997 1996 1995
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<S> <C> <C> <C>
Net interest income $20,151,000 $18,740,000 $17,776,000
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Net income 7,229,000 7,109,000 6,459,000
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Cash dividends 4,150,000 9,018,000 3,507,000
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PER SHARE STATISTICS
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Basic earnings $ 1.38 $ 1.34 $ 1.22
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Cash dividends .79 1.70 .66
Book value (year-end) 10.02 9.37 9.70
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AT YEAR-END
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Total assets $466,723,000 $472,445,000 $459,353,000
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Total loans 341,808,000 324,927,000 323,128,000
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Total deposits 395,573,000 403,127,000 392,243,000
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Total stockholders' equity 52,618,000 49,436,000 51,463,000
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KEY RATIOS
- ---------------------------------------------------------------------------------------------------
Return on average stockholders' equity 14.14% 14.77% 12.84%
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Return on average assets 1.55% 1.53% 1.41%
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Dividend payout 57% 127% 54%
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Stockholders' equity to assets 11.27% 10.46% 11.20%
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</TABLE>
BUSINESS PROFILE
ACNB Corporation is a single-bank holding company with Adams County
National Bank as its sole and wholly-owned subsidiary. Adams County National
Bank, a full-service community bank in existence since 1857, provides a wide
array of consumer, commercial and fiduciary banking services to the individuals,
businesses, public entities and community organizations in its trading area.
With assets of $466 million, it is the largest community bank headquartered in
Adams County.
ACNB Corporation and its subsidiary, Adams County National Bank, possess a
history abundant in the traditions of community banking. Indeed, the
organizational focus remains constant -- providing the basic banking services
essential to fulfilling the savings and borrowing needs of all community
members. Integral to this steadfast strategy is the reinvestment of customers'
deposits in loans to others in our local marketplace -- primarily via mortgage
loans. A business philosophy predicated upon traditional, customer-oriented
values is the common thread running through Adams County National Bank's history
- -- and its future -- as a responsible, committed and sound community banking
organization.
Adams County National Bank's marketplace encompasses Adams County,
Pennsylvania, and its environs -- western York County, eastern Franklin County,
southern Cumberland County, and the northern sections of those counties in
Maryland that are adjacent to Adams County. Fourteen banking offices and 217
employees serve the customers in this marketplace. Each office and each person
is pivotal to ensuring the strength of Adams County National Bank's community
banking network.
1
<PAGE>
REPORT TO STOCKHOLDERS
[PICTURE OF Community Focus is the title for ACNB Corporation's 1997 Annual
RONALD Report. Specifically, the message in this report is to reinforce
L. HANKEY the commitment of the Corporation's sole and wholly-owned
PRESIDENT subsidiary, Adams County National Bank, to its community. As a
AND CEO] life-long member of this same community in which the Bank does
business, I have a vested and common interest in this focus
as well.
The importance of community has been integral to the business philosophy of
the Bank since its origins in 1857. Truly, this community focus is not a passing
fad. Nor is it just the most recent theme for one of the Bank's marketing
campaigns. Our sights, at Adams County National Bank, are on the future. A
shared future in which the ties of mutual interdependency between the Bank and
its community are continually strengthened and expanded.
With a 46% share of the deposits in its primary marketplace of Adams
County, the Bank is the dominant financial institution in this community.
Nonetheless, Adams County National Bank -- like other community banks across the
nation -- is being challenged to examine its business strategies for continued
success in the years ahead. Numerous factors influence our decision-making on a
daily basis including changing consumer demographics and expectations; pressure
from both traditional and nontraditional competitive forces; evolutionary
developments in the banking industry; rapid enhancements in the arena of
technology; and, of utmost importance as the new millennium approaches, the
critical need to ensure Year 2000 compliance and compatibility of the Bank's
systems and operations.
In response to the demands of the times in our business, consumer lending
training began in the third quarter of 1997 for the Bank's office
administrators. These individuals are now responsible for customer contact in
the taking of personal loan applications and the closing of these loans at the
Bank's community banking offices. Otherwise, the loan approval and operational
processes have been centralized and streamlined for efficiency purposes. This
was the last step in the Bank's restructuring, both in terms of operations and
human resources, for the implementation of specialized loan officers in the
three major business lines of commercial, retail mortgage and consumer lending.
Adams County National Bank introduced the Visa(R) Check Card in the fourth
quarter of 1997. This new debit card product replaces the Bank's MAC(R) 24-Hour
Account Access Card when linked to an Adams County National Bank checking
account. It can still be used to obtain cash and conduct other transactions at
the ATM, but it is also characterized by one significant difference -- worldwide
acceptance at over 14 million Visa merchant locations to pay for purchases. With
the added buying power of the Visa symbol, the Visa Check Card is the quick,
convenient and secure way for Bank cardholders to access accounts, as well as to
pay for goods and services.
Additionally, in anticipation of the expansion of the Bank's offering of
trust services, Gary R. Bennett joined the staff as Senior Vice President and
Senior Trust Officer effective December 1, 1997. The long-term goal in this
functional area of the Bank is to further develop the opportunities for client
investment management services.
Due to these initiatives and others in recent years, ACNB Corporation
continues to profitably pursue its steadfast strategy as an independent
community bank. The year of 1997 ended with earnings of $7,229,000 -- an
increase of $120,000, or 1.7%,
2
<PAGE>
over the comparative figure for 1996. A 6.4% rise in net interest income after
provision for possible loan losses, which was primarily a result of increased
commercial loan volume and higher yields on securities, contributed to enhanced
profitability for 1997. It is the Corporation's intention to look towards
non-interest income sources for future earnings growth, as is evidenced by the
introduction of the Visa Check Card and the new emphasis in trust services.
As of year-end 1997, the Corporation's return on average assets and return
on average stockholders' equity were 1.55% and 14.14%, respectively. The
stockholders' equity to assets ratio advanced to 11.27%, as stockholders' equity
grew by 6.4% and the Corporation's capital base expanded to $52.6 million.
Despite an increase of 9.2% in non-interest expense, the Corporation's
financial performance still exhibited a strong efficiency ratio. This ratio,
which is calculated by dividing non-interest expense by the sum of net interest
income and non-interest income, is a measure of the organization's efficiency in
utilizing its resources, generally through expense control, to maximize income.
The efficiency ratio for ACNB Corporation was 50% at year-end 1997, compared to
49% and 51% at the end of 1996 and 1995, respectively.
A key objective of the Corporation is to maximize the investment value for
its stockholders. Again, in 1997, ACNB Corporation was able to accomplish this
goal. Annual cash dividends for the Corporation's stockholders totaled $.79 per
share as of December 15, 1997, which included an extra dividend of $.05 per
share in the fourth quarter of the year. Quarterly dividends for 1997 improved
by 13% over those paid in 1996 -- excluding the Special Dividend of $1.00 per
share paid in January 1996 -- and the Corporation's dividend payout ratio was
57% for the year ending December 31, 1997.
On May 3, 1997, ACNB Corporation and Adams County National Bank lost a
long-time friend and advocate with the passing of J. Glenn Guise. Mr. Guise
served as Director Emeritus at the time of his death, and had been associated
with the Board of Directors of the Bank or a predecessor institution since 1952.
As a local businessman and a respected individual, Mr. Guise will certainly be
missed as he made valuable contributions to our organization, as well as to the
Gettysburg community.
Also, at the board level, the Corporation and the Bank accepted the
retirement of Robert G. Bigham effective December 31, 1997. Mr. Bigham retired
from the Board of Directors after more than 25 years of service due to his
election to the newly-created third judgeship in Adams County. Thomas A. Ritter,
an insurance agent with Northwestern Mutual Life in Gettysburg, was appointed to
fill this vacancy.
In ending this year's report to you, our stockholders, I reaffirm that at
ACNB Corporation and its wholly-owned subsidiary, Adams County National Bank,
the community is the focus. We, as an integral member of the community, provide
financial services to local customers, job opportunities to employees, and
overall support to the marketplace in which we do business. All of these
endeavors positively impact the return on your investment as our stockholders.
In looking to the years ahead, ACNB Corporation's vision is focused on its role
as an independent community banking organization. Your role, as a stockholder,
ensures our ability to uphold this vision.
Commitment: The philosophy upon which Adams County National Bank is founded
and upon which we are planning for your future financial needs today.
Sincerely, Ronald L. Hankey President and CEO
3
<PAGE>
INDEX TO FINANCIAL INFORMATION
Five-Year Financial Overview ........................................... 15
Management's Discussion and Analysis of
Financial Condition and Results of Operations .......................... 16-24
Independent Auditors' Report ........................................... 25
Consolidated Financial Statements
Consolidated Statements of Condition
at December 31, 1997 and 1996 ....................................... 26
Consolidated Statements of Income
for the years ended December 31, 1997, 1996 and 1995 ................ 27
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995 ................ 28
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995 ................ 29
Notes to Consolidated Financial Statements ............................. 30-41
Quarterly Results of Operations ........................................ 42
Five-Year Summary of Selected Financial Data ........................... 42
Form 10-K Cross-Reference Index ........................................ 43
Form 10-K .............................................................. 44-48
Common Stock Market Prices and Dividends ............................... 49
4
<PAGE>
FIVE-YEAR FINANCIAL OVERVIEW
TOTAL DEPOSITS
In millions of dollars
1997 395.6
1996 403.1
1995 392.2
1994 388.8
1993 412.7
BASIC EARNINGS PER SHARE
In dollars
1997 1.38
1996 1.34
1995 1.22
1994 1.27
1993 1.30
TOTAL LOANS
In millions of dollars
1997 341.8
1996 324.9
1995 323.1
1994 305.9
1993 283.3
DIVIDENDS PER SHARE
In dollars
1997 .79
1996 1.70
1995 .66
1994 .64
1993 .58
RETURN ON AVERAGE ASSETS
Percent
1997 1.55
1996 1.53
1995 1.41
1994 1.43
1993 1.51
BOOK VALUE PER SHARE
In dollars
1997 10.02
1996 9.37
1995 9.70
1994 9.15
1993 8.58
5
<PAGE>
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
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 1997 Annual Report. Current performance does not guarantee,
assure, or indicate similar performance in the future.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this 1997 Annual Report contains
forward-looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
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". Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The Corporation
undertakes no obligation to publicly revise or update these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
Readers should 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, to be filed by the
Corporation in 1998, and any Current Reports on Form 8-K filed by the
Corporation.
<TABLE>
<CAPTION>
Comparative Average Balance Sheet and Net Interest Analysis
- ------------------------------------------------------------------------------------------------------------------
December 31
------------------------------------------
1997
------------------------------------------
ASSETS In thousands Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans $337,465 $27,597 8.18%
Taxable investment securities 101,033 6,950 6.88%
Non-taxable investment securities 841 54 6.42%
Federal funds sold 100 6 6.00%
Interest bearing deposits with banks 8,256 456 5.52%
-------- ------- ----
Total interest earning assets 447,695 $35,063 7.83%
Cash and due from banks 11,807
Premises and equipment 5,196
Other assets 5,710
Allowance for loan losses (3,188)
--------
TOTAL ASSETS $467,220
========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------
Interest bearing demand deposits $ 52,419 $ 1,323 2.52%
Savings deposits 106,051 2,917 2.75%
Time deposits (excluding time certificates of
deposit of $100,000 or more) 176,840 9,044 5.11%
Time certificates of deposit of $100,000 or more 15,969 891 5.58%
Short-term borrowings 16,805 737 4.39%
-------- ------- ----
Total interest bearing liabilities 368,084 $14,912 4.05%
- ------------------------------------------------------------------------------------------------------------------
INTEREST RATE SPREAD 3.78%
- ------------------------------------------------------------------------------------------------------------------
Demand deposits 44,611
Other liabilities 3,388
Stockholders' equity 51,137
--------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $467,220
========
- ------------------------------------------------------------------------------------------------------------------
INTEREST INCOME/EARNING ASSETS $447,695 $35,063 7.83%
INTEREST EXPENSE/EARNING ASSETS $447,695 $14,912 3.33%
NET YIELD ON EARNING ASSETS $20,151 4.50%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Loan fees of $531,000, $569,000 and $396,000 for 1997, 1996 and 1995,
respectively, are included for rate calculation purposes. Average nonaccrual
loans for 1997, 1996 and 1995 were $1,441,000, $1,043,000 and $973,000,
respectively.
6
<PAGE>
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
EARNINGS PERFORMANCE
ACNB Corporation recorded a 1.7% increase in profitability with net income
of $7.2 million for the year ended December 31, 1997, compared to the $7.1
million of net income in 1996. Basic earnings per share of $1.38 in 1997
compares to 1996 basic earnings per share of $1.34.
The net income increase of $120,000 in 1997 can be attributed to an
increase of $1.2 million, or 6.4%, in the Corporation's net interest income
after provision for possible loan losses offset by an increase of $935,000, or
9.2%, in non-interest expense. These items were accompanied by non-interest
income in 1997, which was $66,000, or 3.3%, lower than the previous fiscal
period, and a higher income tax expense of $80,000, or 2.3%.
The Corporation recorded net income of $7.1 million for the year ended
December 31, 1996, compared to net income of $6.5 million in 1995. Basic
earnings per share of $1.34 in 1996 compares to $1.22 per share in 1995.
Increased net income by $650,000 in 1996 was primarily due to a $964,000,
or 5.4%, rise in net interest income after provision for possible loan losses
and an increase of $359,000, or 22.1%, in non-interest income. This was
partially offset by an increase in income tax expense of $353,000, or 11.3%, and
a $320,000, or 3.3%, increase in non-interest expense.
The balance of this discussion and analysis is intended to provide details
of the operating results, on a comparative basis, for each of the periods ended
December 31, 1997, 1996 and 1995.
NET INTEREST INCOME
Net interest income is the difference between the interest and dividends
earned on loans and investment securities, or interest earning assets, and the
interest paid on deposits and borrowings, or interest bearing liabilities. Net
interest income is affected principally by the spread between the yield on
interest earning assets and the cost of interest bearing liabilities, as well as
by the relative dollar amounts of such assets and liabilities.
Net interest income was $20.2 million in 1997. This result is up from $18.8
million and $17.8 million in 1996 and 1995, respectively. The increase was the
result of continued slow growth in average earning assets, which were up by $1.3
million, or 0.3%, and a shift to higher yields on securities. The rise in 1996
reflected higher growth than 1997, as average earning assets increased by $5.9
million, or 1.3%, in 1996. The increase of net yield on earning assets is the
result of improved yields on securities and an increased level of interest
earning assets.
Interest from loans accounted for 79% of the Corporation's interest income
in 1997, as compared to 78% and 80% in 1996 and 1995, respectively. Interest and
dividends on investments amounted to $7.0 million in 1997, as compared to $6.9
million in 1996 and $6.1 million in 1995. The average yield on the taxable
investment portfolio rose to 6.9% at year-end 1997 from 6.0% at the prior
year-end. This increase resulted largely from a shift from U.S. Treasuries to
mortgage-backed securities, as the Corporation narrowed its positive gap and
lengthened maturities.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
December 31 December 31
- ----------------------------------------- -----------------------------------------
1996 1995
- ----------------------------------------- -----------------------------------------
Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$321,979 $26,463 8.22% $319,712 $25,918 8.11%
113,818 6,846 6.01% 116,672 6,048 5.18%
1,013 62 6.12% 1,407 72 5.12%
100 5 5.00% 100 6 6.00%
9,843 518 5.26% 2,947 169 5.73%
-------- ------- -------- -------
446,753 $33,894 7.59% 440,838 $32,213 7.31%
11,227 10,996
5,586 5,922
5,666 4,703
(3,248) (3,323)
-------- --------
$465,984 $459,136
======== ========
- ------------------------------------------------------------------------------------------------------------------
$ 49,288 $ 1,207 2.45% $ 48,805 $ 1,189 2.44%
110,740 3,048 2.75% 116,660 3,202 2.74%
178,687 9,254 5.18% 169,276 8,479 5.01%
14,903 792 5.31% 11,720 589 5.03%
18,248 823 4.51% 19,953 978 4.90%
-------- ------- -------- -------
371,866 $15,124 4.07% 366,414 $14,437 3.94%
- ------------------------------------------------------------------------------------------------------------------
3.52% 3.37%
- ------------------------------------------------------------------------------------------------------------------
43,073 40,027
2,929 2,378
48,116 50,317
-------- ---------
$465,984 $459,136
======== ========
- ------------------------------------------------------------------------------------------------------------------
$446,753 $33,894 7.59% $440,838 $32,213 7.31%
$446,753 $15,124 3.39% $440,838 $14,437 3.28%
$18,770 4.20% $17,776 4.03%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
The Comparative Average Balance Sheet and Net Interest Analysis, a table
found on pages 16 and 17, presents for the periods indicated the total dollar
amount of interest income from average interest earning assets and resultant
yields, as well as the interest expense on average interest bearing liabilities
and the resultant costs, expressed both in dollars and rates. Nonaccrual loans
are included in the average interest earning assets balance. Interest from
nonaccrual loans is included in interest income only to the extent that payments
were received and to the extent that the Corporation believes it will recover
the remaining principal balance of the loan. Average balances are computed using
a daily average balance during the period. The net yield on earning assets,
which reflects the Corporation's relative level of interest earning assets to
interest bearing liabilities, equals the difference between interest income on
interest earning assets and interest expense on interest bearing liabilities,
divided by average interest earning assets for the period. This table also sets
forth the net interest income and the interest rate spread.
Changes in the Corporation's net interest income are a function of both
changes in rates and changes in volumes of interest earning assets and interest
bearing liabilities. The Analysis of Changes in Interest Income and Expense Due
to Volume and Rate Changes, a table found on page 18, sets forth information
regarding changes in interest income and expense for ACNB Corporation for the
years indicated. For each category of interest earning assets and interest
bearing liabilities, data is provided on the changes attributed to changes in
rate (changes in rate multiplied by old volume) and changes in volume (changes
in volume multiplied by old rate), with changes in rate volume (change in rate
multiplied by change in volume) factored in proportionally. Interest earning
asset and interest bearing liability balances in the calculations are computed
using daily average balances.
NON-INTEREST INCOME
The Corporation stresses the importance of growth in non-interest income as
one of its key long-term strategies. Non-interest income for 1997 decreased by
$66,000, or 3.3%, when compared to 1996, and increased by $359,000, or 22.1%,
when comparing 1996 to 1995. In 1995, ACNB Corporation began to sell fixed-rate
mortgages on the secondary market to increase non-interest income, as well as
adjusted service fees on deposit accounts to reflect the marketplace more
closely.
Trust service income rose by 0.6% in 1997 and 45.2% in 1996. The
Corporation participated in an ongoing study with a consulting firm to improve
operations and revenues in the Trust Department. These recommendations showed
positive results in 1997, and the Corporation was able to duplicate the results
experienced in 1996 even though that year showed a very substantial increase
from 1995. In December 1997, a new trust officer was hired to head the
department.
Year-to-date service fees have improved over the last two years, even
though the Corporation continued to experience marginal deposit growth. The
reasons for the 1.1% improvement in service fees on deposit accounts in 1997
over 1996, and the 12.5% improvement in 1996 over 1995, include growth in the
demand deposit area and service fee adjustments as mentioned above. While
average interest bearing liabilities were down 1.0% in 1997 and up 1.5% in 1996,
average non-interest bearing demand deposits were up 3.6% and 7.6%,
respectively.
NON-INTEREST EXPENSE
Non-interest expense was $11.1 million in 1997, an increase of 9.2%
compared to 1996. In 1996, non-interest expense was $10.1 million, reflecting an
increase of 3.3% compared to 1995. The primary causes of the increases in
non-interest expense are salaries and employee benefits and equipment expense.
Personnel expense increased by $648,000, or 11.0%, in 1997, compared to
1996, and by $271,000, or 4.8%, in 1996, compared to 1995. The rise in 1997 was
due to normal merit raises and an increase in loan personnel. Management has
evaluated the impact of the eventual retirement of certain loan officers. In
anticipation of that fact, the Bank has added two lending officers to its staff
with the hope that these individuals will be fully integrated into lending
operations well before any retirements.
In addition to the salary and employee benefit increases, there was a
significant rise in equipment expense. Costs were up by $67,000, or 7.2%, in
1997, compared to 1996, and by $114,000, or 13.9%, in 1996, compared to 1995.
The increase in 1997 is attributable to the initiation of telephone banking and
debit cards. While satisfying current technological needs, management realizes
that this will be an ongoing area of concern because of the rapid technological
changes taking place in the financial services industry. Management also
<TABLE>
<CAPTION>
Analysis of Changes in Interest Income and Expense Due to Volume and Rate Changes
- --------------------------------------------------------------------------------------------------------------------
Year ended December 31
-------------------------------------------------------------------------------------
1997 versus 1996 1996 versus 1995 1995 versus 1994
Changes Due To Changes Due To Changes Due To
-------------------------------------------------------------------------------------
In thousands Volume Rate Net Volume Rate Net Volume Rate Net
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans $1,262 $ (128) $1,134 $ 185 $ 360 $ 545 $2,450 $ 470 $2,920
Taxable investment securities (386) 490 104 (144) 942 798 (1,902) 929 (973)
Non-taxable investment securities (11) 3 (8) (33) 23 (10) (75) 40 (35)
Federal funds sold -- 1 1 -- (1) (1) (1,035) 640 (395)
Time deposits with banks (89) 27 (62) 362 (13) 349 76 (19) 57
- --------------------------------------------------------------------------------------------------------------------
Total Interest Earning Assets $ 776 $ 393 $1,169 $ 370 $1,311 $1,681 $ (486) $2,060 $1,574
- --------------------------------------------------------------------------------------------------------------------
Interest paid on:
Interest bearing demand
deposits $ 80 $ 36 $ 116 $12 $ 6 $ 18 $ (187) $(7) $194)
Savings deposits (131) -- (131) (164) 10 (154) (581) (41) (622)
Time deposits (38) (73) (111) 646 332 978 190 2,060 2,250
Short-term borrowings (65) (21) (86) (80) (75) (155) 203 381 584
- --------------------------------------------------------------------------------------------------------------------
Total Interest Bearing
Liabilities $ 154) $ (58) $ (212) $ 414 $ 273 $ 687 $ (375) $2,393 $2,018
- --------------------------------------------------------------------------------------------------------------------
NET INTEREST EARNINGS $ 930 $ 451 $1,381 $ (44) $1,038 $ 994 $ (111) $ (333) $ (444)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
shortened the estimated depreciation life of certain equipment in 1996. This
change increased expenses for 1997 and 1996, but will better reflect the useful
life of electronic data processing equipment.
FDIC insurance increased significantly in 1997, but from a very low base.
After falling by $467,000, or 50.3%, in 1995, the annual expense for deposit
insurance decreased by $459,000, or 99.6%, in 1996. This was due to the final
recapitalization of the Federal Deposit Insurance Corporation's Bank Insurance
Fund in May of 1995, and the dramatic reduction in deposit insurance fees for
the second half of that year. The savings in 1996 were every bit as impressive,
since the Bank paid $2,000 for the entire year. The cost for deposit insurance
was $49,000 in 1997, and will approximate that same amount in 1998.
OVERVIEW OF THE BALANCE SHEET
During 1997, ACNB Corporation's total assets decreased by $5.6 million, or
1.2%. The result was a turnaround from 1996 when total assets grew by $13.1
million, or 2.9%. Loans and deposits continue to be difficult to acquire, though
the Bank did achieve significant growth in commercial loans. The Bank continues
to be confronted by its traditional competitors, including several local and
nonlocal commercial banks, as well as nontraditional competitors, such as
mortgage brokers and brokerage houses.
The mix of assets and liabilities continues to change. Investment
securities fell by $27.6 million, or 23.7%, as loans rose by $16.3 million, or
5.0%, in 1997 after increasing by $925,000, or 0.3%, in 1996. Premises and
equipment decreased by $466,000 in 1997 and by $352,000 in 1996, as fixed assets
were depreciated faster than the value of new equipment placed in service. In
addition, other real estate decreased by $614,000, or 60.5%, in 1997.
On the liability side, non-interest bearing deposits were down by $5.8
million, or 11.1%, in 1997, and up by $8.3 million, or 18.8%, in 1996. The
decrease in 1997 was the result of runoff of one large deposit in January of
that year. It had been deposited in the Bank for a short period over year-end.
Core deposits have been weak for several years, with a total decline of $7.6
million in 1997. Fiscal year 1996 showed an increase of $10.9 million, but
approximately 75% of that amount was the large deposit mentioned above.
Capital continued to be strong, as it increased by $3.2 million, or 6.4%,
in 1997. It decreased by $2.0 million, or 3.9%, in 1996 due to a Special
Dividend of $1.00 per share paid in January of that year.
ASSET/LIABILITY AND MARKET RISK MANAGEMENT
- --------------------------------------------------------------------------------
INTEREST RATE RISK
Managing interest rate risk is fundamental to banking. Banking institutions
manage the inherently different maturity and repricing characteristics of the
lending and deposit-taking lines of business to achieve a desired interest rate
sensitivity position and to limit their exposure to interest rate risk. ACNB
Corporation manages its balance sheet to achieve maximum stockholder value
within the constraints of interest rate risk discipline, the maintenance of high
credit quality, and sound leverage and liquidity positions. The primary
objective of interest rate sensitivity management is to manage net interest
income growth, while reducing exposure to the risks inherent in interest rate
movements.
MARKET RISK
The Quantitative Disclosures of Market Risk, a table found on pages 20 and
21, provides information about the Corporation's financial instruments used for
purposes other than trading that are sensitive to changes in interest rates. For
loans, securities and liabilities with contractual maturities, this table
presents principal cash flows and related weighted-average interest rates by
contractual maturities, as well as the Corporation's historical experience
relative to the impact of interest rate fluctuations on the prepayment of
residential and home equity loans and mortgage-backed securities. For core
deposits -- such as demand deposit, interest checking, savings and money market
deposit accounts -- that have no contractual maturity, the table presents
principal cash flows and, as applicable, related weighted-average interest rates
based on the Corporation's historical experience, management's judgment, and
statistical analysis, as applicable, concerning their most likely withdrawal
behaviors. Different assumptions would result in a change in cash flows and a
change in results.
Also, ACNB Corporation uses a simulation model as another method of
measuring interest rate risk. The simulation model, because of its dynamic
nature, forecasts the effects of future balance sheet trends, changing slopes of
the yield curve, different patterns of rate movements, and changing
relationships between rates. The results of the simulation analysis are used by
management to evaluate possible corrective actions to reduce any negative impact
to the net interest margin.
Traditionally, the investment portfolio is used to alter the interest rate
sensitivity of the Corporation. This is accomplished by holding fixed-rate debt
instruments in the securities portfolio. During 1997 and 1996, ACNB Corporation
lengthened the maturity of prime rate loans, added fixed-rate mortgages with a
maturity of 15 years or less to the loan portfolio, and continued to purchase
mortgage-backed securities; thus, restructuring the asset sensitive position
resulting from a short maturity investment portfolio.
LIQUIDITY MANAGEMENT
Liquidity management involves planning to meet anticipated funding needs at
a reasonable cost, as well as contingency plans to meet unanticipated funding
needs or a loss of funding sources. Liquidity management is governed by policies
formulated and monitored by senior management, which take into account the
marketability of assets, the sources and stability of funding, and the level of
unfunded commitments.
Long-term liquidity needs are provided by a large core deposit base, which
is the most stable source of liquidity a bank can have due to the long-term
relationship with depositors and the deposit insurance provided by the FDIC. In
1997, 85% of total assets were funded by core deposits and 3% were funded with
short-term purchased funds, compared to 85% and 4%, respectively, in 1996. ACNB
Corporation belongs to the Federal Home Loan Bank of Pittsburgh to serve the
dual purpose of emergency and long-term liquidity. The Corporation's borrowing
capacity stood at $206.0 million at year-end 1997.
Parent company liquidity is maintained by cash flows stemming from
dividends collected from the Bank, which represents the primary source of funds
to pay dividends to stockholders. The amount of dividends from the bank
subsidiary is subject to certain regulatory restrictions, as detailed in Note L
of the Notes to Consolidated Financial Statements, "Restrictions on Subsidiary
Dividends, Loans and Advances". The parent company financial statements are
presented in Note Q of the Notes to Consolidated Financial Statements, "ACNB
Corporation (Parent Company Only) Financial Information".
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the normal course of business, ACNB Corporation does not use off-balance
sheet financial instruments to hedge potential fluctuations in income or market
values. Off-balance sheet items consist solely of commitments to lend and
letters of credit.
9
<PAGE>
LOAN REVIEW AND ALLOWANCE
FOR LOAN LOSS ANALYSIS
- --------------------------------------------------------------------------------
GENERAL
ACNB Corporation's lending activities are carried on through its bank
subsidiary. As of December 31, 1997, the Corporation's total loan portfolio,
carried at historical cost, of $341.8 million included $208.8 million in
mortgage loans secured by liens on one-to-four family residential properties;
$94.5 million in mortgage loans secured by commercial properties such as
apartment buildings, office buildings, warehouses, and medical office buildings;
$13.7 million in construction loans; $15.2 million in consumer loans; and, $9.8
million in commercial and agricultural credits.
In originating loans, the Corporation must compete with savings banks,
savings and loan associations, other commercial banks, mortgage companies, and
credit unions. Additionally, the Corporation's lending activities are heavily
influenced by economic trends affecting the availability of funds and by general
interest rate levels. More specifically, the condition of the construction
industry and the demand for housing directly impact residential lending volumes.
RESIDENTIAL REAL ESTATE LOANS
The Corporation makes available to borrowers in its primary consumer market
area a full range of residential loans, including conventional fixed-rate loans
for terms of 5, 15 or 30 years and adjustable-rate mortgage loans, or ARMs.
Adjustable-rate mortgages are advantageous to the Corporation because
adjustable-rate loans better match the repricing of the Corporation's core
deposits. However, the Corporation's ability to originate ARMs, in lieu of
fixed-rate loans, has varied in response to changes in market interest rates.
Between 1990 and 1993, ARMs were refinanced to fixed-rate loans, reflecting
continuing lower market interest rates and leading to runoff in the
Corporation's loan portfolio. With the rise in interest rates in 1994 and 1995,
ARMs comprised a larger share of total originations and the Corporation's
portfolio resumed its long-term growth. In 1996 and 1997, the situation reversed
itself and ACNB Corporation again suffered runoff in its residential
adjustable-rate mortgage portfolio. Currently, ARMs are indexed to the Federal
Housing Finance Board's Contract Rate for Major Lenders and One-Year U.S.
Treasury Bills with constant maturity, and have limits on annual increases of 2%
over the prior year's rate.
All of the Corporation's residential mortgage lending is subject to
nondiscriminatory underwriting standards, and most is subject to loan
origination and documentation procedures acceptable to the secondary market.
Residential mortgage loans are originated using standard Federal National
Mortgage Association, or FNMA, and Federal Home Loan Mortgage Corporation, or
FHLMC, applications and appraisal forms. All loans are subject to underwriting
review and approval by various levels of Bank personnel, depending upon the size
of the loan. Residential loan applications come in through various channels,
primarily via a network of 14 community banking offices. However, all
residential loans are currently originated by the Corporation's bank subsidiary,
and mortgage insurance is required on all residential loans originated at a
loan-to-value ratio over 85%.
In addition to interest earned on loans, the Corporation receives fees for
originating loans and for providing loan commitments. The Corporation also
assesses fees for loan modifications, late payments, changes of property
ownership, and other miscellaneous services -- as well as receives fees for the
servicing of loans for others, which were sold prior to 1996.
RESIDENTIAL CONSTRUCTION LOANS
ACNB Corporation provides financing for two different categories of
residential construction loans. A custom construction loan is made to the
intended occupant of a house to finance its construction. Speculative
construction loans are made to borrowers who are in the business of building
homes for resale. Speculative construction loans are made on a house-by-house
basis, and not as lines of credit to builders. Nevertheless, this type of
construction loan involves somewhat more risk than custom construction loans and
different underwriting considerations. All construction loans require approval
by various levels of Bank personnel, depending upon the size of the loan.
Construction loans for nonconforming residential properties,
<TABLE>
<CAPTION>
Quantitative Disclosures of Market Risk
- -----------------------------------------------------------------------------------------------------------------
Principal Amount Maturing In,
-------------------------------------------------------------
RATE SENSITIVE ASSETS In thousands 1998 1999 2000
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed interest rate loans $ 14,182 $ 8,320 $ 5,524
Average interest rate 9.36% 9.52% 9.43%
Variable interest rate loans $ 26,387 $ 21,325 $ 23,025
Average interest rate 8.32% 8.07% 8.27%
Fixed interest rate securities $ 14,223 $ 8,995 $ 5,780
Average interest rate 7.17% 6.38% 6.69%
Variable interest rate securities $ 47 $ 53 $ 60
Average interest rate 6.30% 6.30% 6.30%
Other interest bearing assets $ 14,160 $ -- $ --
Average interest rate 6.34% 0.00% 0.00%
RATE SENSITIVE LIABILITIES
- -----------------------------------------------------------------------------------------------------------------
Non-interest bearing checking $ 11,720 $ 10,550 $ 10,550
Average interest rate 0.00% 0.00% 0.00%
Savings and interest bearing checking $ 7,866 $ 46,481 $ 46,481
Average interest rate 2.75% 2.71% 2.71%
Time deposits $ 145,632 $ 8,451 $ 25,111
Average interest rate 5.01% 5.79% 5.68%
Variable interest rate borrowings $ 7,511 $ 2,253 $ 2,253
Average interest rate 2.84% 4.26% 4.26%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
which are properties other than single-family detached houses, are subject to
more stringent approval requirements.
COMMERCIAL REAL ESTATE LOANS
In all commercial real estate lending, the Corporation considers the
location, marketability and overall attractiveness of the project. ACNB
Corporation underwriting guidelines on commercial real estate loans currently
require an economic analysis of each property, with regard to the annual revenue
and expenses, debt service coverage and fair market value, to determine the
maximum loan amount. Commercial real estate loans require approval at various
levels of Bank personnel, depending upon the size of the loan.
Commercial real estate lending generally entails greater risks than
residential mortgage lending. This form of lending typically involves large loan
balances concentrated with single borrowers or groups of related borrowers. In
addition, the payment experience on loans secured by income-producing properties
usually depends on the successful operation of the related real estate project
and, thus, may be subject, to a greater extent, to adverse conditions in the
real estate market or in the general economy.
In order to monitor its commercial real estate loan portfolio, the
Corporation periodically inspects real estate collateral based on the loan risk
classification, the loan size, and the location of the collateral; analyzes the
economic condition of markets in which the Corporation has a geographic
concentration; and, reviews operating statements and rent rolls, updated
financial and tax statements of borrowers, evidence of insurance coverage, and
evidence that real estate taxes have been paid. These procedures are designed to
analyze the economic viability of the property, as well as to determine whether
or not the debt service coverage and loan-to-value ratios remain consistent with
the Corporation's underwriting policies. It is the intention of management to
perform a continual review of the commercial real estate loan portfolio in light
of the condition of the real estate market. Based upon the above procedures, the
Corporation classifies loans that fall below underwriting standards into various
risk or watch categories.
MANUFACTURED HOUSING, SECOND MORTGAGE AND OTHER CONSUMER LOANS
The Corporation offers consumer loan programs that include the following:
manufactured housing loans; second mortgage loans for a variety of purposes,
including purchase, renovation, or remodeling of property, and for uses
unrelated to the security; loans for the purchase of automobiles, pleasure boats
and recreational vehicles; student loans; and, loans for general household
purposes, including home equity lines of credit. Consumer loans, in addition to
being an important part of the Corporation's orientation toward consumer
financial services, promote greater net interest income stability because of
their somewhat shorter maturities and faster prepayment characteristics. Lending
in this area may involve special risks, including decreases in the value of
collateral and transaction costs associated with foreclosure and repossession.
Consumer loans are generally secured loans and are made based on an
evaluation of the collateral and the borrower's creditworthiness, including such
factors as income, other indebtedness and credit history. Secured consumer loan
amounts typically do not exceed 85% of the value of the collateral, less the
outstanding balance of any first mortgage loan. Lines of credit are subject to
periodic review, revision and, when deemed appropriate by the Corporation,
cancellation as a result of changes in the borrower's financial circumstances.
ASSET QUALITY
Banks are required to review their assets on a regular basis, and to
classify them if any weaknesses are noted. Adequate allowances must be
maintained for assets classified as substandard or doubtful. Any assets
classified as a loss must be written off immediately. ACNB Corporation has a
comprehensive process for classifying assets, and asset reviews are performed on
a quarterly basis. The objective of the review process is to identify any trends
and to determine the levels of loss exposure to evaluate the need for an
adjustment to the allowance account. Classified assets consist of nonaccrual
loans; loans under foreclosure; other real estate owned, or OREO; and,
performing loans and securities that exhibit credit quality weaknesses. The
principal measures of asset problems are the levels of nonaccruing loans, loans
under foreclosure, and other real estate owned; the size of the provision for
loan losses; loan charge-offs; and, the size of the write-downs in the value of
other real estate owned.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Principal Amount Maturing In Fair Value
- ------------------------------------------------------------------------------------------ December 31,
2001 2002 Thereafter TOTAL 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 3,186 $ 1,476 $ 6,576 $ 39,264 $ 39,121
9.09% 8.67% 7.93% 9.11%
$ 16,333 $ 19,873 $ 195,601 $ 302,544 $ 303,017
8.11% 8.22% 7.93% 8.03%
$ 18,734 $ 13,387 $ 23,076 $ 84,195 $ 85,643
6.54% 7.04% 7.03% 6.85%
$ 66 $ 75 $ 3,109 $ 3,410 $ 3,410
6.30% 6.30% 6.13% 6.15%
$ -- $ -- $ -- $ 14,160 14,160
0.00% 0.00% 0.00% 6.34%
- -----------------------------------------------------------------------------------------------------------------
$ 4,673 $ 4,673 $ 4,673 $ 46,839 $ 46,839
0.00% 0.00% 0.00% 0.00%
$ 14,183 $ 14,183 $ 28,365 $ 157,559 $ 157,559
2.71% 2.71% 2.71% 2.71%
$ 10,981 $ -- $ 1,000 $ 191,175 $ 191,741
5.99% 0.00% 5.50% 5.19%
$ 1,502 $ 1,502 $ 450 $ 15,471 $ 15,471
4.26% 4.26% 5.50% 3.61%
</TABLE>
11
<PAGE>
Management ceases to accrue interest income on any loan that becomes 90
days or more delinquent and is not in the process of collection. Thereafter,
interest income is accrued only if and when, in management's opinion, projected
cash proceeds are deemed sufficient to repay both principal and interest. All
loans on which interest is not being accrued are referred to as loans on
nonaccrual status. Nonperforming loans include loans on which payment is 90 days
or more delinquent, whether or not interest is still being accrued. The
Nonperforming Assets Analysis, a table found on page 22, presents figures
relative to nonperforming assets and net charge-offs for 1997 and 1996.
Real estate that served as security for a defaulted loan and that then
became other real estate owned, or OREO, is recorded on the Corporation's books
at the lower of the outstanding loan balance or fair market value, the
determination of which takes into account the effect of sales and financing
concessions that may be required to market the property. If management's
estimate of fair market value at the time a property becomes OREO is less than
the loan balance, the loan is written down at that time by a charge to the
allowance for loan losses. OREO currently consists of three properties valued at
$401,000 as of December 31, 1997, down by $614,000 from $1.0 million at December
31, 1996. One of these properties has been sold, but must be reported as OREO
until the terms, under which it was disposed of, meet current regulatory
standards. The remaining properties are single-family dwellings with an
appraised value well in excess of book value.
PROVISION FOR LOAN LOSSES AND
ALLOWANCE FOR LOAN LOSSES
Allowances are based upon management's continuing analysis of pertinent
factors underlying the quality of the loan portfolio. These factors include
changes in the size and composition of the portfolio, historical loan loss
trends, the industry's loss experience, and current and anticipated economic
conditions.
As part of the process of determining the adequacy of the allowance for
loan losses, the Corporation reviews its loan portfolio for specific weaknesses.
A portion of the allowance is then allocated to reflect the potential loss
exposure of those specific weaknesses. When available information confirms that
specific loans or portions thereof are uncollectible, these amounts are
charged-off against the allowance for loan losses. The existence of some or all
of the following criteria generally confirms that a loss has been incurred: the
loan is significantly delinquent and the borrower has not evidenced the ability
or intent to bring the loan current; the Corporation has no recourse to the
borrower or, if it does, the borrower has insufficient assets to pay the debt;
or, the fair market value of the loan collateral is significantly below the
current loan balance, and there is little or no near-term prospect for
improvement. Residential real estate and consumer loans are not individually
analyzed for loss exposure because of the significant number of loans, their
relatively small balances, and historically low level of losses.
The table, Allocation of the Allowance for Loan Losses, as found on page
23, details the breakdown of the allowance as it applies to different types of
loans contained within the portfolio.
CAPITAL MANAGEMENT
- --------------------------------------------------------------------------------
During 1997, ACNB Corporation's equity capital increased by $3.2 million,
or 6.4%, compared to 1996 during which the capital base decreased by $2.0
million, or 3.9%. This decrease was due to a Special Dividend of $1.00 per share
paid in the first quarter of 1996. At year-end 1997, the risk-based capital
ratios of Tier 1 capital and Total capital were 18.14% and 19.28%, respectively,
exceeding the minimum ratios specified by the Federal Reserve Board. Capital
ratios are highlighted in a table, Capital Ratios at Year-end, as found on page
24.
Capital management is an ongoing process that consists of providing equity
and long-term debt for both current and future financial positioning. ACNB
Corporation manages its capital to execute its strategic business plans and to
support its growth and investments.
ACNB Corporation and its bank subsidiary are subject to the capital
adequacy guidelines of various federal banking agencies, such as the Federal
Reserve Board and the Office of the Comptroller of the Currency. At December 31,
1997, the Corporation and its bank subsidiary were in compliance with the
capital requirements of their respective regulatory agencies and are expected to
remain in compliance in the future. Furthermore, pursuant to the Federal Deposit
Insurance Corporation Improvement Act of 1991, or FDICIA, the federal banking
regulators have set the minimum capital ratios for a well-capitalized banking
institution at 6% Tier 1 capital, 10% Total capital, and 5% Tier 1 leverage. At
December 31, 1997, the capital ratios of the Corporation exceeded these levels
and are expected to be in excess of the minimum ratios required of a
well-capitalized institution in the future. The risk-based capital guidelines
are designed to measure Tier 1 and Total capital, which is comprised of Tier 1
and Tier 2, in relation to the credit risk of both on- and off-balance sheet
items.
The Corporation's Board of Directors increased the quarterly common stock
cash dividend to $.18 per share during the third quarter of 1996, and further
increased the quarterly dividend to $.19 per share during the third quarter of
1997. The annual dividend per share during 1997 was $.79, which included a $.05
extra dividend, versus $1.70 per share for 1996, which included a $1.00 Special
Dividend paid in January 1996.
The Corporation's total stockholders' equity at December 31, 1997, was
$52.6 million, or 11.27% of total assets, compared with $49.4 million, or 10.46%
of total assets, at December 31, 1996. The growth in capital is the direct
result of continued strong retained earnings.
<TABLE>
<CAPTION>
Nonperforming Assets Analysis
- ---------------------------------------------------------------------------------------------------------------------------
Year ended December 31
-----------------------------------------------------------------------------
1997 1996
------------------------------- -------------------------------------
Nonperforming Net Nonperforming Net
In thousands Assets Charge-offs Assets Charge-offs
------------------------------- -------------------------------------
<S> <C> <C> <C> <C>
Real estate loans (1-to-4 family dwellings) $1,531 $ 33 $1,918 $ 2
Real estate loans (other) 1,089 -- 953 (12)
Commercial and industrial 95 49 175 28
Consumer 122 137 123 103
------ ------- ------ -------
TOTAL $2,837 $ 219 $3,169 $ 121
====== ======= ====== =======
</TABLE>
12
<PAGE>
CORPORATION IS IN THE PROCESS OF BECOMING
YEAR 200 COMPLIANT--EXPENSES NOT MATERIAL
- --------------------------------------------------------------------------------
The Corporation is in the process of assessing the cost and extent of
vulnerability of the Corporation's computer systems to the "Year 2000 Problem".
Modifications or replacements of computer systems to attain Year 2000 compliance
have begun, and the Corporation expects to attain Year 2000 compliance and
institute appropriate testing of its modifications and replacements before the
Year 2000 date change. The Corporation believes that, with modifications to
existing software and conversions to new software, the Year 2000 problem will
not pose a significant operational problem for the Corporation. However, because
most computer systems are, by their very nature, interdependent, it is possible
that noncompliant third-party computers could "reinfect" the Corporation's
computer systems. The Corporation could be adversely affected by the Year 2000
problem if it or unrelated parties fail to successfully address this problem.
The Corporation has taken steps to communicate with the unrelated parties with
whom it deals to coordinate Year 2000 compliance. All of the costs incurred in
addressing the Year 2000 problem are expected to be expensed as incurred, in
compliance with generally accepted accounting principles.
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. The total cost of preparing
for Year 2000 compliance has been estimated to range between $201,000 and
$296,000 spread over the years of 1997, 1998 and 1999.
<TABLE>
<CAPTION>
Allocation of the Allowance for Loan Losses
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- -------------- --------------- --------------
% of % of % of % of % of
Gross Gross Gross Gross Gross
In thousands Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 696 0.20% $ 92 0.03% $ 95 0.03% $ 98 0.03% $ 104 0.04%
Real estate - construction 68 0.02% 47 0.01% 48 0.01% 51 0.02% 54 0.02%
Real estate - mortgage 1,518 0.45% 1,672 0.52% 1,719 0.53% 1,769 0.58% 1,880 0.66%
Consumer 200 0.06% 156 0.05% 160 0.05% 165 0.05% 175 0.06%
Unallocated 692 0.20% 1,216 0.37% 1,252 0.39% 1,287 0.42% 1,368 0.48%
------ ---- ------ ---- ------ ---- ------- ---- ------ ----
TOTAL $3,174 0.93% $3,183 0.98% $3,274 1.01% $ 3,370 1.10% $3,581 1.26%
====== ==== ====== ==== ====== ==== ======= ==== ====== ====
</TABLE>
13
<PAGE>
REGULATORY ACTIVITY
- --------------------------------------------------------------------------------
Recently, Pennsylvania enacted a law that permits state-chartered banking
institutions to sell insurance. This follows the U.S. Supreme Court decision in
favor of nationwide insurance sales by banks, which also bars states from
blocking insurance sales by national banks in towns with populations of no more
than 5,000. The Corporation is currently evaluating its options regarding the
sale of insurance. Further, the Office of the Comptroller of the Currency has
issued guidelines for national banks to sell insurance.
Congress is currently considering legislative reforms to modernize the
financial services industry, including the repeal of the Glass-Steagall Act
which prohibits commercial banks from engaging in the securities industry. Thus,
equity underwriting activities of banks may increase in the near future.
However, the Corporation does not currently anticipate entering into these
activities.
From time to time, various types of federal and state legislation have been
proposed that could result in additional regulation of, and restrictions on, the
business of the Corporation and the Bank. It cannot be predicted whether such
legislation will be enacted or, if enacted, how such legislation would affect
the business of the Corporation and the Bank. As a consequence of the extensive
regulation of commercial banking activities in the United States, the
Corporation's and the Bank's business is particularly susceptible to being
affected by federal legislation and regulations that may increase the cost of
doing business. Except as specifically described above, management believes that
the impact of the provisions of the aforementioned legislation on the liquidity,
capital resources, and results of operations of the Corporation will be
immaterial. Management is not aware of any other current specific
recommendations by regulatory authorities or proposed legislation, which if they
were implemented, would have a material adverse effect upon the liquidity,
capital resources, or results of operations, although the general cost of
compliance with numerous and multiple federal and state laws and regulations
does have, and in the future may have, a negative impact on the Corporation's
results of operations.
Further, the business of the Corporation is also affected by the state of
the financial services industry in general. As a result of legal and industry
changes, management predicts that the industry will continue to experience an
increase in consolidations and mergers as the financial services industry
strives for greater cost efficiencies and market share. Management also expects
increased diversification of financial products and services offered by the Bank
and its competitors. Management believes that such consolidations and mergers,
as well as the expanded diversification of products and services, may enhance
its competitive position as a community bank.
Capital Ratios at Year-end
- --------------------------------------------------------------------------------
1997 1996
------ ------
Common stockholders' equity to assets 11.27% 10.46%
Tier I leverage ratio 11.26% 10.61%
Tier I risk-based capital ratio 18.14% 18.81%
Total risk-based capital ratio 19.28% 20.01%
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board of Directors [StambaughoNess Graphic]
ACNB Corporation ----------------------------
Gettysburg, Pennsylvania CERTIFIED PUBLIC ACCOUNTANTS
We have audited the accompanying consolidated statements of condition of
ACNB Corporation and subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a 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 subsidiary as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
[Stambaugh o Ness, P.C. Graphic]
York, Pennsylvania
January 12, 1998
15
<PAGE>
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31
-----------------------
ASSETS In thousands 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 14,674 $ 13,039
Interest bearing deposits with banks 14,060 9,039
Investment securities
(market value $89,053 and $116,587, respectively) 88,923 116,496
Federal funds sold 100 100
Mortgage loans held for sale 570 --
Loans
(net of unearned discount of $166 and $728, respectively) 341,238 324,927
Allowance for possible loan losses (3,174) (3,183)
--------- ---------
Net loans 338,064 321,744
Premises and equipment 4,949 5,415
Other real estate 401 1,015
Other assets 5,096 5,597
--------- ---------
TOTAL ASSETS $ 466,837 $ 472,445
========= =========
LIABILITIES
- ----------------------------------------------------------------------------------------------
Non-interest bearing deposits $ 46,839 $ 52,666
Interest bearing deposits 348,734 350,461
--------- ---------
TOTAL DEPOSITS 395,573 403,127
Securities sold under agreement to repurchase 15,021 16,736
Demand notes, U.S. Treasury 450 450
Other liabilities 3,175 2,696
--------- ---------
TOTAL LIABILITIES 414,219 423,009
STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------
Common stock (par value $2.50; 20,000,000 shares authorized;
5,253,278 issued and outstanding shares on 12/31/97 and
5,278,472 on 12/31/96) 13,133 13,196
Additional paid-in capital 3,647 3,994
Retained earnings 34,968 31,889
Net unrealized gains on securities available-for-sale 870 357
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 52,618 49,436
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 466,837 $ 472,445
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
16
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------
INTEREST INCOME In thousands, except per share data 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans (including fees) $27,597 $26,463 $25,918
Time deposits with banks 456 518 169
Federal funds sold 6 5 6
Taxable securities 6,950 6,846 6,048
Non-taxable securities 54 62 72
------- ------- -------
TOTAL INTEREST INCOME 35,063 33,894 32,213
INTEREST EXPENSE
- -----------------------------------------------------------------------------------------------
Interest bearing deposits 14,175 14,301 13,459
Other borrowed funds 737 823 978
------- ------- -------
TOTAL INTEREST EXPENSE 14,912 15,124 14,437
NET INTEREST INCOME 20,151 18,770 17,776
Provision for possible loan losses 210 30 --
------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN LOSSES 19,941 18,740 17,776
NON-INTEREST INCOME
- -----------------------------------------------------------------------------------------------
Trust income 520 517 356
Service fees on deposit accounts 764 756 672
Other income 636 713 599
------- ------- -------
TOTAL NON-INTEREST INCOME 1,920 1,986 1,627
NON-INTEREST EXPENSE
- -----------------------------------------------------------------------------------------------
Salaries and employee benefits 6,529 5,881 5,610
Net occupancy expense 802 770 695
Equipment expense 1,004 937 823
FDIC insurance 49 2 461
Other taxes 441 424 401
Other expense 2,239 2,115 1,819
------- ------- -------
TOTAL NON-INTEREST EXPENSE 11,064 10,129 9,809
INCOME BEFORE INCOME TAXES 10,797 10,597 9,594
Applicable income taxes 3,568 3,488 3,135
------- ------- -------
NET INCOME $ 7,229 $ 7,109 $ 6,459
======= ======= =======
PER COMMON SHARE DATA*
- -----------------------------------------------------------------------------------------------
Basic earnings $1.38 $1.34 $1.22
Cash dividends $ .79 $1.70 $ .66
</TABLE>
*Based on a weighted average of 5,254,618 shares in 1997, 5,300,569 shares in
1996, and 5,314,521 shares in 1995.
The accompanying notes are an integral part of the
consolidated financial statements.
17
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Net
Common Paid-in Retained Unrealized
Stock Capital Earnings Gains Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
In thousands
BALANCE AT JANUARY 1, 1995 $13,290 $4,511 $30,846 $ -- $48,647
Net income -- -- 6,459 -- 6,459
Cash dividends -- -- (3,507) -- (3,507)
Retirement of 8,366 shares (21) (115) -- -- (136)
------- ------ ------- ---- -------
BALANCE AT DECEMBER 31, 1995 13,269 4,396 33,798 -- 51,463
Net income -- -- 7,109 -- 7,109
Cash dividends -- -- (9,018) -- (9,018)
Retirement of 29,284 shares (73) (402) -- -- (475)
Net change in unrealized gains on securities available-for-sale -- -- -- 357 357
------- ------ ------- ---- -------
BALANCE AT DECEMBER 31, 1996 13,196 3,994 31,889 357 49,436
Net income -- -- 7,229 -- 7,229
Cash dividends -- -- (4,150) -- (4,150)
Retirement of 25,194 shares (63) (347) -- -- (410)
Net change in unrealized gains on securities available-for-sale -- -- -- 513 513
------- ------ ------- ---- -------
BALANCE AT DECEMBER 31, 1997 $13,133 $3,647 $34,968 $870 $52,618
======= ====== ======= ==== =======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31
INCREASE (DECREASE) IN CASH ----------------------------------
AND CASH EQUIVALENTS In thousands 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and dividends received $ 35,015 $ 33,563 $ 32,634
Fees and commissions received 2,451 2,555 2,023
Interest paid (14,768) (14,940) (13,875)
Cash paid to suppliers and employees (10,257) (10,481) (9,759)
Income taxes paid (3,629) (3,438) (3,478)
Loans originated for sale (6,368) (10,538) (5,138)
Proceeds of mortgage loans sold 5,798 11,412 4,264
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,242 8,133 6,671
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities held-to-maturity 67,622 59,124 68,885
Proceeds from maturities of investment securities available-for-sale 4,485 804 --
Purchase of investment securities held-to-maturity (20,197) (37,236) (29,481)
Purchase of investment securities available-for-sale (23,560) (34,334) --
Net increase in loans (16,530) (1,927) (17,309)
Capital expenditures (191) (235) (474)
Proceeds from sale of other real estate owned 614 (326) 348
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 12,243 (14,130) 21,969
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW accounts
and savings accounts 2,440 (3,186) (11,331)
Net increase (decrease) in certificates of deposit (9,994) 14,070 14,776
Net increase (decrease) in securities
sold under agreement to repurchase (1,715) 3,533 (1,410)
Dividends paid (4,150) (9,018) (3,507)
Net increase (decrease) in borrowed funds -- 251 (17,051)
Retirement of common stock (410) (475) (136)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (13,829) 5,175 (18,659)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 6,656 (822) 9,981
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 22,178 23,000 13,019
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 28,834 $ 22,178 $ 23,000
======== ======== ========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------
Net income $ 7,229 $ 7,109 $ 6,459
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 657 640 588
Provision for possible loan losses 210 30 --
Provision for deferred taxes 73 91 88
Amortization (Accretion) of investment securities premiums (discounts) (39) 356 760
Decrease in taxes payable (134) (41) (431)
Decrease (Increase) in interest receivable 442 (30) 414
Increase in interest payable 144 184 562
Increase (Decrease) in accrued expenses 209 301 (351)
Decrease (Increase) in mortgage loans held for sale (570) 874 (874)
Increase in other assets (59) (1,240) (180)
Increase (Decrease) in other liabilities 80 (141) (364)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 8,242 $ 8,133 $ 6,671
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
The accounting and reporting policies followed by ACNB Corporation and its
principal subsidiary, Adams County National Bank, conform with generally
accepted accounting principles and with general practice within the banking
industry.
BASIS OF FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiary, Adams County National Bank. All
significant intercompany transactions have been eliminated.
Financial statements prepared in accordance with generally accepted
accounting principles require management to make estimates and assumptions that
affect the reported amounts and disclosure of contingencies. Actual results
could differ from these estimates.
Income and expenses are recorded on the accrual basis of accounting, except
for trust department income and certain other fees which are recorded primarily
on the cash basis. Recognition of such income on an accrual basis is impractical
and would not materially affect net income.
For comparative purposes, prior years' financial statements have been
reclassified to conform with report classifications of the current year.
CASH EQUIVALENTS
For the purpose of presentation in the consolidated statements of 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.
INVESTMENT SECURITIES
Under Statement of Financial Accounting Standards No. 115, securities are
required to be classified into one of three categories: held-to-maturity,
available-for-sale, or trading. Investments in securities which the Corporation
has the positive intent and ability to hold to maturity are classified as
held-to-maturity. These securities are accounted for at amortized cost. Other
securities are classified as available-for-sale. The difference between
amortized cost and fair value is an unrealized holding gain or loss included,
net of taxes, in stockholders' equity. Management will reassess the
appropriateness of the classifications each quarter.
Amortization of premium and accretion of discount for investment securities
is computed by the straight-line method to the maturity date or call date. There
is not a material difference between the straight-line method and the interest
method. Gains and losses are determined using the specific identification
method. Income is accrued the month it is earned.
MORTGAGE LOANS HELD FOR SALE
The mortgages held for sale are carried at the lower of aggregate cost or
estimated market value.
LOANS
Loans are stated net of unearned interest on consumer installment loans.
Beginning in 1995, interest on new installment loans is recognized on the simple
interest method. Interest on installment loans opened prior to 1995 is
recognized using the sum-of-the-month-digits method, which is not materially
different from the interest method. Interest on commercial and real estate loans
is recognized based upon the principal amount outstanding. Loan fees are
recorded on the cash basis, since there is not a material difference to the
amount of income that would be recognized under Statement of Financial
Accounting Standards No. 91.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses charged to income is based upon
management's evaluation of outstanding loans, the historical loan loss
experience of the subsidiary, and the adequacy of the allowance for possible
loan losses. A significant change in this estimate could result in a material
change to net income.
Loans are deemed impaired when it is probable that the Corporation will be
unable to collect all amounts due in accordance with the loan agreement. The
Corporation evaluates collectively for impairment large groups of smaller
balance homogeneous loans. At December 31, 1997 and 1996, the Corporation did
not have any loans that would be classified as impaired loans.
PREMISES AND EQUIPMENT
Land is carried at cost. Bank premises and furniture and equipment are
carried at cost, less accumulated depreciation computed principally by the
straight-line method.
NONPERFORMING ASSETS
Nonperforming assets are comprised of loans for which the accrual of
interest has been discontinued due to a serious weakening of the borrower's
financial condition.
Loans are generally placed on a nonaccrual basis when principal or interest
is past due 90 days or more and when, in the opinion of management, full
collection of principal or interest is unlikely. At the time a loan is placed on
nonaccrual status, the accrual of interest is discontinued. Income on such loans
is then recognized only to the extent of cash received.
The basis in foreclosed real estate is carried at the lower of fair market
value, less costs to sell, or the carrying value of the related loan at the time
of acquisition.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently-enacted
income tax rates applicable to the period in which deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
NET INCOME PER SHARE
Basic earnings per share of common stock is computed on the basis of the
weighted average number of shares of common stock outstanding. The Corporation
does not have diluted earnings per share.
ADVERTISING COSTS
Costs of advertising are expensed when incurred.
20
<PAGE>
NOTE B
RESTRICTIONS ON CASH
AND DUE FROM BANK ACCOUNTS
- --------------------------------------------------------------------------------
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. The average amount of these reserve balances for the years ended
December 31, 1997 and 1996, were approximately $5,554,000 and $4,881,000,
respectively.
NOTE C
INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
The amortized cost and estimated fair value of investment securities at
December 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1997 In thousands Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-Maturity Securities
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $32,156 $ 245 $ 115 $32,286
Obligations of states and political subdivisions 832 -- -- 832
------- ------- ------- -------
Total debt securities 32,988 245 115 33,118
Restricted equity securities 2,861 -- -- 2,861
------- ------- ------- -------
Total Held-to-Maturity Securities $35,849 $ 245 $ 115 $35,979
======= ======= ======= =======
Available-for-Sale Securities
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $51,756 $ 1,318 $ -- $53,074
======= ======= ======= =======
<CAPTION>
1996 In thousands
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-Maturity Securities
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $78,930 $ 275 $ 185 $79,020
Obligations of states and political subdivisions 925 1 -- 926
------- ------- ------- -------
Total debt securities 79,855 276 185 79,946
Restricted equity securities 2,570 -- -- 2,570
------- ------- ------- -------
Total Held-to-Maturity Securities $82,425 $ 276 $ 185 $82,516
======= ======= ======= =======
Available-for-Sale Securities
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $33,530 $ 541 $ -- $34,071
======= ======= ======= =======
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1997, 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.
<TABLE>
<CAPTION>
Held-to-Maturity Available-for-Sale
------------------------ -----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- -------
<S> <C> <C> <C> <C>
In thousands
Within one year $ 47 $ 47 $ -- $ --
After one year through five years 22,410 22,455 10,000 10,064
After five years through ten years 10,531 10,616 -- --
After ten years -- -- 41,756 43,010
------- ------- ------- -------
Total Debt Securities $32,988 $33,118 $51,756 $53,074
======= ======= ======= =======
</TABLE>
21
<PAGE>
NOTE C
INVESTMENT SECURITIES (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
U.S.
Government Taxable
and Federal State and Other Equivalent
December 31, 1997 In thousands Agency Municipal Securities Total Yield
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amortized Cost
Within one year $ -- $ 47 $ -- $ 47 9.55%
After one year through five years 32,156 254 -- 32,410 6.06%
After five years through ten years 10,000 531 -- 10,531 6.34%
After ten years 41,756 -- -- 41,756 7.06%
No set maturity -- -- 2,861 2,861 6.31%
-------- ---- ------ -------- ----
Total $ 83,912 $832 2,861 $ 87,605
======== ==== ====== ========
Fair Value $ 85,360 $832 $2,861 $ 89,053
======== ==== ====== ========
Taxable Equivalent Yield 6.56% 9.55% 6.31%
December 31, 1996 In thousands
- --------------------------------------------------------------------------------------------------------------------
Amortized Cost $112,460 $925 $2,570 $115,955
======== ==== ====== ========
December 31, 1995 In thousands
- --------------------------------------------------------------------------------------------------------------------
Amortized Cost $101,400 $962 $2,480 $104,842
======== ==== ====== ========
</TABLE>
The weighted average yield of tax-exempt obligations has been calculated on
a taxable equivalent basis. The amounts of the taxable equivalent adjustments
are based on an effective tax rate of 34%. The yield information does not give
effect to changes in fair value that are reflected as a component of
stockholders' equity.
At December 31, 1997 and 1996, assets with a carrying value of $47,971,000
and $47,351,000, respectively, were pledged as required or permitted by law to
secure certain public and trust deposits, repurchase agreements, or for other
purposes.
The Corporation did not sell any securities over the past three years.
NOTE D
LOANS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Loans at December 31 are summarized as follows:
In thousands 1997 1996 1995 1994 1993
- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 9,758 $ 9,866 $ 9,268 $ 10,785 $ 14,100
Real estate - construction 13,674 11,207 12,951 12,632 4,791
Real estate - mortgage 303,270 288,588 284,943 268,944 250,242
Consumer 15,272 15,994 18,150 17,444 17,950
-------- -------- -------- -------- --------
341,974 325,655 325,312 309,805 287,083
Less: Unearned discount on loans 166 728 2,184 3,883 3,785
-------- -------- -------- -------- --------
Total Loans $341,808 $324,927 $323,128 $305,922 $283,298
======== ======== ======== ======== ========
</TABLE>
The following table outlines the repricing opportunities for all loans
outstanding as of December 31, 1997. 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.
<TABLE>
<CAPTION>
Repricing Period
---------------------------------------
Within After One Year
One Through
In thousands Year Five Years Total
- ------------ ------- -------------- -------
<S> <C> <C> <C>
Commercial, financial and agricultural $ 7,067 $ 2,691 $ 9,758
Real estate - construction 6,120 7,554 13,674
------- ------- -------
Total $13,187 $10,245 $23,432
======= ======= =======
Loans with predetermined interest rates $ 1,917 $ 2,429 $ 4,346
Loans with variable interest rates 11,270 7,816 19,086
------- ------- -------
Total $13,187 $10,245 $23,432
======= ======= =======
</TABLE>
22
<PAGE>
NOTE D
LOANS (continued)
- --------------------------------------------------------------------------------
The aggregate balance of loans (in excess of $60,000) made to directors and
executive officers in the normal course of business as of December 31, 1997 and
1996, was $3,570,156 and $3,527,423, respectively. The terms for these loans
were substantially the same as those for unrelated parties.
Balance at Balance at Number
January 1, Amounts December 31, of
1997 Additions Collected 1997 Debtors
- --------------------------------------------------------------------------------
$3,527,423 $982,777 $940,044 $3,570,156 6
<TABLE>
<CAPTION>
NOTE E
ALLOWANCE FOR LOAN LOSSES
- -------------------------------------------------------------------------------------------------------------------------------
Transactions in the valuation portion of the allowance for loan
losses for the past five years at December 31, are shown below:
In thousands 1997 1996 1995 1994 1993
- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance of allowance for loan losses at beginning of period $ 3,183 $ 3,274 $ 3,370 $ 3,581 $ 3,417
Loans charged-off:
Commercial, financial and agricultural 49 34 -- 8 37
Real estate - construction -- -- -- -- --
Real estate - mortgage 34 31 44 178 35
Consumer 160 131 90 70 120
-------- -------- -------- -------- --------
Total loans charged-off 243 196 134 256 192
Recovery of charged-off loans:
Commercial, financial and agricultural 1 6 12 5 8
Real estate - construction -- -- -- -- --
Real estate - mortgage -- 41 1 13 1
Consumer 23 28 25 27 32
-------- -------- -------- -------- --------
Total recoveries 24 75 38 45 41
Net loans charged-off 219 121 96 211 151
Provision for possible loan losses 210 30 -- -- 315
-------- -------- -------- -------- --------
Balance at end of period $ 3,174 $ 3,183 $ 3,274 $ 3,370 $ 3,581
======== ======== ======== ======== ========
<CAPTION>
TOTAL LOAN BALANCES In thousands
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average total loans $337,465 $321,979 $319,712 $289,350 $288,790
Total loans at year-end 341,808 324,927 324,002 305,922 283,298
<CAPTION>
RATIOS
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net charge-offs to:
Average total loans 0.06% 0.04% 0.03% 0.07% 0.05%
Total loans at year-end 0.06% 0.04% 0.03% 0.07% 0.05%
Allowance for loan losses 6.90% 3.80% 2.93% 6.26% 4.22%
Allowance for loan losses to:
Average total loans 0.94% 0.99% 1.02% 1.16% 1.24%
Total loans at year-end 0.93% 0.98% 1.01% 1.10% 1.26%
</TABLE>
The amounts of additional provision to the allowance were based on
management's judgement after considering an analysis of larger loans, all loans
known to management to have unusual risk characteristics, nonperforming or
problem loans, historical patterns of charge-offs and recoveries, and actual net
charge-offs. Further consideration was given to current economic and employment
conditions both nationally and in the Corporation's local service area. Loans
secured by real estate comprised 93% of the Corporation's total loan portfolio
at December 31, 1997. The majority of loans in both the commercial, financial
and agricultural category and the consumer category are also secured by personal
property, negotiable assets, or business assets. This conservative policy
explains the low ratio of losses to loans experienced by the Corporation over
the last five years. This policy did not change during the year ending 1997.
Management anticipates that charge-off amounts will approximate $200,000 in
1998.
23
<PAGE>
<TABLE>
<CAPTION>
NOTE E
ALLOWANCE FOR LOAN LOSSES (continued)
- ------------------------------------------------------------------------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- ------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- -------------- -------------- -------------- ---------------
% of % of % of % of % of
Gross Gross Gross Gross Gross
In thousands Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
- ------------ ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 696 0.20% $ 92 0.03% $ 95 0.03% $ 98 0.03% $ 104 0.04%
Real estate - construction 68 0.02% 47 0.01% 48 0.01% 51 0.02% 54 0.02%
Real estate - mortgage 1,518 0.45% 1,672 0.52% 1,719 0.53% 1,769 0.58% 1,880 0.66%
Consumer 200 0.06% 156 0.05% 160 0.05% 165 0.05% 175 0.06%
Unallocated 692 0.20% 1,216 0.37% 1,252 0.39% 1,287 0.42% 1,368 0.48%
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total $3,174 0.93% $3,183 0.98% $3,274 1.01% $3,370 1.10 $3,581 1.26%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
NOTE F
PREMISES AND EQUIPMENT
- --------------------------------------------------------------------------------
The composition of Corporation premises and
equipment at December 31 was as follows:
In thousands 1997 1996
- ------------ ------ ------
Land $ 857 $ 857
Bank premises 5,835 5,770
Furniture and equipment 4,556 4,984
Less: Accumulated depreciation and amortization (6,299) (6,196)
------ ------
Total $4,949 $5,415
====== ======
A summary of depreciation and amortization
expenses is as follows:
In thousands 1997 1996 1995
- ------------ ---- ---- ----
Bank premises $185 $200 $193
Furniture and equipment 472 433 388
---- ---- ----
Total $657 $633 $581
==== ==== ====
NOTE G
INVESTMENT IN REAL ESTATE PARTNERSHIP
- --------------------------------------------------------------------------------
ACNB Corporation is the sole limited partner in a partnership named
Gettysburg Scattered Site Associates, whose purpose is to develop, manage and
operate a residential low-income development comprised of sixteen dwelling
units. ACNB Corporation owns a 99% limited partner's interest in the
partnership. The investment is accounted for under the equity method of
accounting. At December 31, 1997 and 1996, the carrying value of this investment
was approximately $319,219 and $363,319, respectively.
24
<PAGE>
<TABLE>
<CAPTION>
NOTE H
NONPERFORMING ASSETS
- -------------------------------------------------------------------------------------------
The following table presents information
concerning the aggregate amount of
nonperforming assets at December 31:
In thousands 1997 1996 1995 1994 1993
- ------------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $1,640 $ 994 $1,092 $ 854 $ 977
90 days past due still accruing 1,197 2,175 2,780 2,219 2,614
Restructured loans -- -- -- -- 377
Other real estate owned 401 1,015 689 1,037 850
------ ------ ------ ------ ------
Total Nonperforming Assets $3,238 $4,184 $4,561 $4,110 $4,818
====== ====== ====== ====== ======
</TABLE>
The gross interest income that would have been recorded on nonaccrual loans
at December 31, 1997, under original terms was approximately $119,000. The
amount of interest income on these loans that was included in net income for the
year ended December 31, 1997, was $0.
The Corporation does not accrue interest on any loan when principal or
interest are in default for 90 days or more, unless the loan is well secured and
in the process of collection. Consumer loans and residential real estate loans
secured by 1-to-4 family dwellings shall ordinarily not be subject to these
guidelines.
When a loan is placed in a nonaccrual status, all previously accrued, but
uncollected, interest is charged against the interest income account. Previously
accrued interest is not charged-off if principal and interest are protected by
sound collateral values.
NOTE I
TIME DEPOSITS
- --------------------------------------------------------------------------------
Time deposits in denominations of $100,000 or more at December 31, 1997 and
1996, are summarized in the following table:
In thousands 1997 1996
- ------------ ------- -------
Time certificates of deposit $17,247 $16,417
Other time deposits 1,000 1,000
Maturities of time deposits of $100,000 or more outstanding at December 31,
1997, are summarized as follows:
In thousands
- ------------
Three months or less $ 7,162
Over three through six months 2,809
Over six through twelve months 4,426
Over twelve months 3,850
-------
Total $18,247
=======
The interest expense related to time certificates of deposit in
denominations of $100,000 or more totaled $891,000 in 1997, $792,000 in 1996 and
$589,000 in 1995.
NOTE J
LEASE COMMITMENTS
- --------------------------------------------------------------------------------
Certain branch offices and equipment are leased under agreements which
expire at varying dates through 2010. Most leases contain renewal provisions at
the Corporation's option.
The total rental expense for all operating leases was $91,887, $96,473 and
$72,816 for the years ended December 31, 1997, 1996 and 1995, respectively.
The following is a schedule by years of future minimum rental payments
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of December 31:
1998 $64,200
1999 59,400
2000 47,500
2001 48,000
2002 48,000
Later years 359,000
--------
Total Minimum Payments $626,100
========
25
<PAGE>
NOTE K
SHORT-TERM BORROWINGS
- --------------------------------------------------------------------------------
Federal funds purchased, securities sold under agreements to repurchase,
and other short-term borrowings generally mature within one to 90 days from the
date originated.
The following is a summary of aggregate short-term borrowings for the years
ended December 31, 1997, 1996 and 1995, respectively:
In thousands 1997 1996 1995
- ------------ ------- ------- -------
Amount outstanding at year-end $15,471 $17,186 $13,402
Average interest rate at year-end 4.42% 4.36% 4.20%
Maximum amount outstanding at any month-end $22,740 $38,057 $28,665
Average amount outstanding $16,805 $18,248 $19,953
Weighted average interest rate 4.39% 4.51% 4.90%
NOTE L
RESTRICTIONS ON SUBSIDIARY
DIVIDENDS, LOANS AND ADVANCES
- --------------------------------------------------------------------------------
Certain restrictions exist regarding the ability of the Bank to transfer
funds to the Corporation in the form of cash dividends, loans or advances. The
approval of the Office of the Comptroller of the Currency is required to pay
dividends in excess of earnings retained in the current year plus retained net
profits for the preceding two years. As of December 31, 1997, $3,199,000 of
undistributed earnings of the Bank, included in consolidated retained earnings,
was available for distribution to the Corporation as dividends without prior
regulatory approval.
Under national banking laws, the Bank is also limited as to the amount it
may loan to its affiliates, including the Corporation, unless such loans are
collateralized by specific obligations. At December 31, 1997, the maximum amount
available for transfer from the Bank to the Corporation in the form of loans was
approximately $5,579,000.
NOTE M
INCOME TAXES
- --------------------------------------------------------------------------------
The composition of applicable income taxes for the years 1997, 1996 and 1995 was
as follows:
In thousands 1997 1996 1995
- ------------ ------ ------ ------
Current $3,665 $3,453 $3,049
Deferred (97) 35 86
------ ------ ------
$3,568 $3,488 $3,135
====== ====== ======
Income taxes paid during 1997, 1996 and 1995 were $3,640,000, $3,440,000
and $2,931,000, respectively. Differences between applicable income taxes
included in net income and the maximum federal income tax rates were comprised
as follows:
In thousands 1997 1996 1995
- ------------ ------ ------ ------
Income taxes at statutory rates $3,671 $3,603 $3,262
Increases (Decreases) resulting from:
Tax-free income (34) (45) (60)
Tax preference interest expense 4 5 6
Rehabilitation and low-income housing credits (73) (75) (73)
------ ------ ------
Applicable Income Tax $3,568 $3,488 $3,135
====== ====== ======
The significant components of deferred tax assets and deferred tax
liabilities at December 31, 1997 and 1996, are as follows:
In thousands 1997 1996
- ------------ --------- --------
Deferred tax assets:
Allowance for loan losses $ 538,000 $541,000
Pension 18,000 --
--------- --------
Total gross deferred tax assets 556,000 541,000
--------- --------
Deferred tax liabilities:
Depreciation 219,000 185,000
Net unrealized gains on securities 448,000 184,000
Pension -- 127,000
--------- --------
Total gross deferred tax liabilities 667,000 496,000
--------- --------
Net Deferred Tax Assets (Liabilities) $(111,000) $ 45,000
========= ========
Federal income taxes on securities gains were $0 in 1997, 1996 and 1995.
Since the Corporation has historically had strong earnings, management believes
the deferred tax assets are realizable.
26
<PAGE>
NOTE N
RETIREMENT PLANS
- --------------------------------------------------------------------------------
The Corporation's subsidiary has a non-contributory pension plan covering
all eligible employees. The plan provides retirement benefits which are a
function of both the years of service and the highest level of compensation
during any consecutive five-year period. It is the subsidiary's funding policy
to contribute annually the amount that is sufficient to meet the minimum funding
requirements set forth in the Employee Retirement Income Security Act. The total
pension expense for the years ended December 31, 1997, 1996 and 1995 was
$418,000, $374,000 and $277,000, respectively.
The following table sets forth the plan's funded status as of October 31,
1997 and 1996, and amounts recognized in the Corporation's consolidated
financial statements at December 31:
<TABLE>
<CAPTION>
In thousands 1997 1996
- ------------ ------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$5,296 for 1997 and $4,308 for 1996 $(5,339) $(4,369)
======= =======
In thousands
- ------------
Projected benefit obligation for service rendered to date $(7,494) $(6,341)
Plan assets at fair value 6,052 4,931
------- -------
Projected benefit obligation in excess of plan assets (1,442) (1,410)
Unrecognized transition asset (65) (78)
Unrecognized loss 1,224 1,220
Unrecognized prior service cost 231 269
------- -------
Prepaid (Accrued) pension cost included in Statements of Condition $ (52) $ 1
======= =======
In thousands
- ------------
Net pension cost for 1997 and 1996 included the following components:
Service cost $ 287 $ 250
Interest cost 443 406
Actual return on plan assets (770) (267)
Amortization and deferral 459 (15)
------- -------
Net periodic pension cost $ 419 $ 374
======= =======
</TABLE>
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 6.50% and 7.00%,
respectively, for 1997 and 1996, and the rate of increase in future compensation
levels was 5.62% for 1997 and 1996. The weighted average expected long-term rate
of return on plan assets was 7.50% for 1997 and 1996.
Plan assets consist of a deposit administration contract, various pooled
separate accounts, and an investment of 37,560 shares of common stock with ACNB
Corporation at December 31, 1997 and 1996.
The Corporation has a 401(k) Salary Deferral Plan, which covers all
eligible employees who elect to contribute to the plan. An eligible employee is
anyone over the age of 20-1/2, who has completed six months of service. The
Corporation's contribution equals 100% of the employee's contribution, up to a
maximum of 4% of annual salary, for 1997 and 1996. The annual expense included
in salaries and benefits amounted to $159,000, $159,000 and $76,000 for 1997,
1996 and 1995, respectively.
The Corporation has non-qualified salary continuation plans for certain
senior management. The future commitments under these arrangements have been
funded through Corporate-owned variable life insurance policies. At December 31,
1997 and 1996, the present value of the future obligations was $199,000 and
$91,000, respectively. The insurance policies included in other assets had total
cash value of $1,841,000 and $1,747,000, respectively, at December 31, 1997 and
1996.
27
<PAGE>
NOTE O
COMMITMENTS, CONTINGENCIES
AND CONCENTRATIONS OF CREDIT
- --------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit and financial guarantees which involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
consolidated statements of condition. The Corporation uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments. A summary of significant commitments and
contingent liabilities at December 31, 1997 and 1996, is presented below:
In thousands 1997 1996
- ------------ ------- -------
Commitments to extend credit $32,022 $32,456
Standby letters of credit 3,007 2,068
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses,
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the creditor. The type of collateral may vary;
however, a significant portion of these financial instruments is secured through
real estate.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Corporation to guarantee the performance of a customer
to a third party. These guarantees are primarily issued to support borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to customers.
CONCENTRATIONS OF CREDIT RISK
The Corporation has a diversified loan portfolio and grants agribusiness,
commercial and residential loans to customers, substantially all of whom are
local residents to the Corporation's fourteen offices.
CONTINGENT LIABILITIES
The Corporation is party to litigation and claims arising in the normal
course of business. Management, after consultation with legal counsel, believes
that the liabilities, if any, arising from such litigation and claims will not
be material to the consolidated financial position.
NOTE P
DISCLOSURES ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", requires all entities to disclose the
estimated fair value of its financial instrument assets and liabilities. For
1997 and 1996, approximately 98% and 97%, respectively, of the Corporation's
assets and 88% and 89%, respectively, of its liabilities are considered
financial instruments as defined in Statement of Financial Accounting Standards
No. 107. Many of the Corporation's financial instruments, however, lack an
available trading market as characterized by a willing buyer and a willing
seller engaging in an exchange transaction. Therefore, significant estimations
and present value calculations were used by the Corporation for the purposes of
this disclosure.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
the value.
Financial instruments actively traded in a secondary market have been
valued using quoted available market prices.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------ ------------------------
Estimated Carrying Estimated Carrying
In thousands Fair Value Amount Fair Value Amount
- ------------ ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Cash and due from banks $14,674 $14,674 $13,039 $ 13,039
Interest bearing deposits with banks 14,060 14,060 9,039 9,039
Federal funds sold 100 100 100 100
Investment securities 89,053 88,923 116,587 116,496
Interest receivable 2,510 2,510 2,719 2,719
</TABLE>
28
<PAGE>
NOTE P
DISCLOSURES ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS (continued)
- --------------------------------------------------------------------------------
Fair values for net loans are estimated for portfolios with similar
financial characteristics. Loans are segregated into commercial, residential
real estate, and consumer. The loan categories are further segmented into fixed
and adjustable types. Fair value for adjustable-rate commercial loans is
considered to be the same as the carrying value because these loans were made at
the Corporation's prime lending rate, which is the same rate these loans would
be written as of the date of this financial statement. Fixed-rate commercial
loans have been revalued at a rate the Corporation would use if the loans were
written as of December 31, 1997 and 1996. Mortgages and consumer loans have been
revalued using discounted cash flows. The mortgages were estimated using market
rates at December 31, 1997 and 1996, and consumer loans were revalued using
rates being charged by the Corporation at year-end 1997 and 1996. Fair value for
nonperforming loans is based on current valuations of underlying collateral.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------ ------------------------
Estimated Carrying Estimated Carrying
In thousands Fair Value Amount Fair Value Amount
- ------------ ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Net loans $338,394 $338,064 $321,546 $321,744
Mortgage loans held for sale 570 570 -- --
</TABLE>
Under Statement of Financial Accounting Standards No. 107, the fair value
of deposits with no stated maturity, such as non-interest bearing demand
deposits, savings, NOW accounts, and money market checking accounts, is equal to
the amount payable on demand as of December 31, 1997 and 1996. The fair value of
certificates of deposit is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities. The fair value estimates do not
include the benefit that results from the low-cost funding provided by the
deposit liabilities, compared to the cost of borrowing funds in the market.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------ ------------------------
Estimated Carrying Estimated Carrying
In thousands Fair Value Amount Fair Value Amount
- ------------ ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Deposits with no stated maturities $204,398 $204,398 $210,228 $210,228
Deposits with stated maturities 191,741 191,175 193,421 192,899
Repurchase agreements 15,021 15,021 16,736 16,736
Federal funds purchased and demand notes 450 450 450 450
Interest payable 2,472 2,472 2,329 2,329
</TABLE>
The fair value of commitments to extend credit is estimated taking into
account the remaining terms of the agreements and the creditworthiness of the
counterparties. For loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair value
of letters of credit is based on fees currently charged for similar agreements,
or on the estimated cost to terminate them or otherwise settle the obligations
with the counterparties. The contract amount and the estimated fair value for
commitments to extend credit and standby credits are charted.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------ ------------------------
Estimated Carrying Estimated Carrying
In thousands Fair Value Amount Fair Value Amount
- ------------ ---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Commitments to extend credit $32,022 $32,022 $32,456 $32,456
Standby letters of credit 3,007 3,007 2,068 2,068
</TABLE>
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include deferred tax assets and
liabilities, and property and equipment. In addition, the tax ramifications
related to the realization of unrealized gains and losses can have a significant
effect on the fair value estimates.
29
<PAGE>
<TABLE>
<CAPTION>
NOTE Q
ACNB CORPORATION (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
- ----------------------------------------------------------------------------------------------------
December 31
-----------------------
STATEMENTS OF CONDITION In thousands 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 202 $ 202
Securities and other assets 319 363
Investment in common stock of subsidiary 50,227 47,192
Receivable from subsidiary 1,000 1,322
------- --------
TOTAL ASSETS $51,748 $49,079
======= =======
STOCKHOLDERS' EQUITY
Common stock (par value $2.50; 20,000,000 shares
authorized; 5,253,278 issued and outstanding shares
on 12/31/97 and 5,278,472 on 12/31/96) $13,133 $13,196
Additional paid-in capital 3,647 3,994
Retained earnings 34,968 31,889
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $51,748 $49,079
======= =======
<CAPTION>
Year ended December 31
---------------------------------
STATEMENTS OF INCOME In thousands 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
INCOME
Dividend from subsidiary $4,150 $9,018 $5,257
EXPENSE 44 (7) 61
INCOME BEFORE TAXES AND EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARY 4,106 9,025 5,196
Applicable tax benefit (88) (72) (93)
------ ------ ------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARY 4,194 9,097 5,289
Equity in undistributed net income of subsidiary 3,035 (1,988) 1,170
------ ------ ------
NET INCOME $7,229 $7,109 $6,459
====== ====== ======
<CAPTION>
Year ended December 31
---------------------------------
STATEMENTS OF CASH FLOWS In thousands 1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Dividends received $4,560 $9,493 $3,643
------ ------ ------
Net Cash Provided by Operating Activities 4,560 9,493 3,643
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (4,150) (9,018) (3,507)
Retirement of common stock (410) (475) (136)
------ ------ ------
Net Cash Used in Financing Activities (4,560) (9,493) (3,643)
------ ------ ------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 202 202 202
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 202 $ 202 $ 202
====== ====== ======
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income $7,229 $7,109 $6,459
Decrease (Increase) in investment in common stock of subsidiary (3,035) 1,988 (1,170)
Decrease (Increase) in receivable from subsidiary 322 403 (1,707)
Loss (Gain) on equity investment 44 (7) 61
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES $4,560 $9,493 $3,643
====== ====== ======
</TABLE>
30
<PAGE>
NOTE R
FUTURE EFFECT OF RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", which was
effective for 1997. SFAS No. 127 amended SFAS No. 125 by deferring for one year
the effective date for certain provisions of SFAS No. 125. The Statements
establish new criteria to determine whether a transfer of assets should be
accounted for as a sale or as a pledge of collateral in a secured borrowing.
Additionally, SFASNo. 127 establishes new accounting requirements for pledged
collateral. The adoption of this Statement is not expected to have a material
impact on the Corporation's financial condition.
SFAS No. 130, "Reporting Comprehensive Income", will be effective in 1998.
The Statement establishes rules for reporting and displaying comprehensive
income. Comprehensive income is defined as essentially all changes in
stockholders' equity, exclusive of dividends. The Statement requires that
comprehensive income be presented in a financial statement display with the same
prominence as other financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". The Statement, which is effective for
periods beginning after December 15, 1997, requires reporting of operating
segments which management utilizes to evaluate and make operating decisions. The
impact to the financial statements will be expanded disclosures.
31
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
Selected quarterly information for the years ended December 31, 1997 and 1996,
is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
1997 In thousands, except per share data Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $8,612 $8,791 $8,859 $8,801
Interest expense 3,644 3,698 3,774 3,796
Net interest income 4,968 5,093 5,085 5,005
Provision for loan losses 30 60 60 60
Net income 1,706 1,917 1,832 1,774
Basic earnings per share .33 .36 .35 .34
Return on average assets 1.48% 1.65% 1.56% 1.51%
<CAPTION>
1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $8,122 $8,302 $8,655 $8,815
Interest expense 3,699 3,721 3,838 3,866
Net interest income 4,423 4,581 4,817 4,949
Provision for loan losses -- -- -- 30
Net income 1,581 1,655 1,883 1,990
Basic earnings per share .30 .31 .36 .37
Return on average assets 1.39% 1.43% 1.60% 1.68%
- -------------------------------------------------------------------------------------------------
</TABLE>
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
The following table sets forth financial data
for the last five years:
<TABLE>
<CAPTION>
In thousands, except per share data 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $ 35,063 $ 33,894 $ 32,213 $ 30,639 $ 32,122
Total interest expense 14,912 15,124 14,437 12,419 13,894
Net interest income 20,151 18,770 17,776 18,220 18,228
Provision for loan losses 210 30 -- -- 315
Net income 7,229 7,109 6,459 6,773 6,933
PER SHARE DATA*
- -----------------------------------------------------------------------------------------------------------
Basic earnings $1.38 $1.34 $1.22 $1.27 $1.30
Cash dividends .79 1.70 .66 .64 .58
BALANCE SHEET TOTALS
- -----------------------------------------------------------------------------------------------------------
Average stockholders' equity $ 51,137 $ 48,116 $ 50,317 $ 47,893 $ 44,411
Average assets 467,220 465,984 459,136 473,186 457,692
RATIOS
- -----------------------------------------------------------------------------------------------------------
Return on average assets 1.55% 1.53% 1.41% 1.43% 1.51%
Return on average stockholders' equity 14.14% 14.77% 12.84% 14.15% 15.61%
Dividend payout 57% 127% 54% 50% 45%
Stockholders' equity to assets 11.27% 10.46% 11.20% 10.31% 9.73%
</TABLE>
*Data restated to reflect two-for-one stock split in the form of a 100% stock
dividend issued in 1994.
See Notes to Consolidated Financial Statements.
32
<PAGE>
FORM 10-K CROSS-REFERENCE INDEX
Portions of this Annual Report are not required by Form 10-K, and are not
filed with the Securities and Exchange Commission as part of the Corporation's
Report on Form 10-K for the year ended December 31, 1997. Only the sections
referenced in the index below are incorporated into this Form 10-K.
<TABLE>
<CAPTION>
PART I Page(s)
-------
<S> <C> <C>
Item 1 - Business 45
Item 2 - Properties 45
Item 3 - Legal Proceedings 46
Item 4 - Submission of Matters to a Vote of Stockholders 46
PART II
Item 5 - Market for the Registrant's Common Stock
and Related Stockholder Matters 46
Item 6 - Selected Financial Data 15 & 42
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 16 - 24
a. Quantitative and Qualitative
Disclosures About Market Risk 20 & 21
Item 8 - Financial Statements and Supplementary Data 26 - 41
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 46
PART III
Item 10 - Directors and Executive Officers of the Registrant 46
Item 11 - Executive Compensation(1)
Item 12 - Security Ownership of Certain Beneficial Owners and Management(1)
Item 13 - Certain Relationships and Related Transactions(1)
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
a. Financial Statements and Financial Statement Schedules(2)
b. Exhibits 47
c. Reports on Form 8-K(3)
Item 15 - Signatures 48
</TABLE>
- ----------
(1) The information required by Item 11, Item 12 and Item 13 is incorporated
herein by reference to the Corporation's definitive Proxy Statement to be
filed with the Commission not later than 120 days after the close of the
year ended December 31, 1997, under the headings "Executive Compensation"
and "Compensation of Directors".
(2) Financial statement schedules have been omitted because either they are not
applicable or the required information is included in the financial
statements or the notes thereto.
(3) No reports on Form 8-K were filed during the quarter ended December 31,
1997.
33
<PAGE>
COMMON STOCK MARKET PRICES AND DIVIDENDS
The common stock of ACNB Corporation is traded in the over-the-counter
market. As of December 31, 1997, the approximate number of shareholders of the
Corporation's common stock was 3,029.
As quoted on the OTC Bulletin Board, high and low bid prices of common
shares and dividends for the last two years were:
<TABLE>
<CAPTION>
1997 1996
------------------------------- -------------------------------
Bid Price Cash Bid Price Cash
Quarter ------------------ Dividend ------------------ Dividend
Ended High Low Paid High Low Paid
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
March 31 $17.50 $16.00 $.18 $18.25 $16.00 $1.17
June 30 18.25 16.63 .18 16.25 16.00 .17
September 30 22.75 18.25 .19 17.00 16.25 .18
December 31 24.25 22.75 .24 16.25 16.00 .18
</TABLE>
The bid prices for ACNB Corporation common stock for the periods indicated
represent inter-dealer prices without adjustment for retail mark-up, mark-down
or commission, and do not necessarily represent actual transactions. Trades have
generally occurred in relatively small lots, and the prices quoted herein are
not necessarily indicative of the market value of a substantial block.
While the Corporation expects to continue its policy of regular quarterly
dividend payment, no assurance of future dividend payment can be given. Future
dividend payments will depend upon maintenance of a continued strong financial
condition, future earnings, and capital requirements. The Corporation has no
restrictions affecting the payment of dividends, except as indicated in Note L
of the Notes to Consolidated Financial Statements.
The following firms make a market in
ACNB Corporation common stock:
Ferris, Baker Watts, Incorporated
Frederick, MD
(301)662-6488/(800)950-6488
Hopper Soliday & Co., Inc.
Lancaster, PA
(717)560-3015/(800)456-9234
Janney Montgomery Scott, Inc.
York, PA
(717)845-5611/(800)999-0503
F.J. Morrissey & Co., Inc.
Philadelphia, PA
(215)496-8500/(800)842-8928
Smith Barney Inc.
Gettysburg, PA
(717)334-9101/(800)344-3828
34
<PAGE>
BOARD OF DIRECTORS
<TABLE>
<CAPTION>
ACNB CORPORATION AND ADAMS COUNTY NATIONAL BANK
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PHILIP P. ASPER RONALD L. HANKEY THOMAS A. RITTER
Owner Chairman, President & CEO Insurance Agent
Philip P. Asper, Builder ACNB Corporation & Northwestern Mutual Life
Adams County National Bank
GUY F. DONALDSON RALPH S. SANDOE
Fruit Grower PHILIP M. JONES Fruit Broker
CEO
FRANK ELSNER, JR. Times & News MARIAN B. SCHULTZ
Chairman Publishing Company Assistant Dean
Elsner Engineering Works, Inc. Division of Undeclared Majors
WAYNE E. LAU Shippensburg University
RICHARD L. GALUSHA Sales Representative
Realtor Destinations: A Travel Company L. ROBERT SNYDER
Chairman of the Board &
D. RICHARD GUISE WILLIAM B. LOWER President
President President Littlestown Hardware &
Adams County Motors Corp. Boyer Nurseries & Orchards, Inc. Foundry Co., Inc.
Vice Chairman
ACNB Corporation & PAUL G. PITZER JENNIFER L. WEAVER
Adams County National Bank Fruit Grower Director
Gettysburg Center of Harrisburg
Area Community College
</TABLE>
ACNB CORPORATION AND ADAMS COUNTY NATIONAL BANK
DIRECTORS EMERITI
- --------------------------------------------------------------------------------
C. F. DITZLER RALPH W. TYSON
CHARLES E. RITTER
ADAMS COUNTY NATIONAL BANK HONORARY DIRECTOR
- --------------------------------------------------------------------------------
DALE G. CRUM
35
<PAGE>
OFFICERS
ACNB CORPORATION
- --------------------------------------------------------------------------------
RONALD L. HANKEY JOHN W. KRICHTEN LYNDA L. GLASS
President & CEO Secretary & Treasurer Assistant Secretary
ADAMS COUNTY NATIONAL BANK
- --------------------------------------------------------------------------------
RONALD L. HANKEY ASSISTANT
President & CEO VICE PRESIDENTS VICE PRESIDENTS
-------------------- ------------------
ELIZABETH H. BEALL
Senior Vice President HELEN L. ALTLAND DEBRA B. BRENNAN
Human Resources
ROBERT L. BREWER STEVEN E. EBERSOLE
GARY R. BENNETT
Senior Vice President & JACK W. CHAMBERS GEORGE R. GUISE
Senior Trust Officer
WAYNE G. CRUM NANCY E. HELWIG
LYNDA L. GLASS
Senior Vice President & DAVID W. DEANER L. JOHN HICKS
Chief Operating Officer
ROBERT A. HAHN TERRY L. POTTORFF
JOHN M. KIEHL
Senior Vice President RONALD L. HOFFMAN DOROTHY K. PUHL
Operations & Security
RONALD E. LINDBECK SHELBY L. STONE
JOHN W. KRICHTEN
Senior Vice President, Cashier STANLEY E. MUMMERT
& Chief Financial Officer ASSISTANT CASHIERS
WILLIAM H. YOHE, JR. ------------------
NANCY L. REICHART
Senior Vice President & BEVERLY S. KRESS
Trust Officer
DIANA K. KUNTZ
VICTOR L. REYNOLDS
Senior Vice President & LINDA L. LEER
Senior Loan Officer
CARL L. RICKER TRUST OFFICER
Senior Vice President & ------------------
Chief Lending Officer
RONALD D. BAKER
JOHN E. SALISBURY
Senior Vice President
Audit
36
<PAGE>
ADAMS COUNTY NATIONAL BANK OFFICE LOCATIONS
<TABLE>
<S> <C> <C>
ARENDTSVILLE FRANKLIN TOWNSHIP NORTH GETTYSBURG
101 Main Street 10 High Street 675 Old Harrisburg Road
Arendtsville, PA 17303 Cashtown, PA 17310 Gettysburg, PA 17325
BENDERSVILLE HANOVER SUPER KMART(R) CENTER
101 North Main Street 1127 Eichelberger Street 400 Eisenhower Drive
Bendersville, PA 17306 Hanover, PA 17331 Hanover, PA 17331
BIGLERVILLE LINCOLN SQUARE WEST LITTLESTOWN
3459 Biglerville Road 2 Chambersburg Street 444 West King Street
Biglerville, PA 17307 Gettysburg, PA 17325 Littlestown, PA 17340
CARROLL VALLEY LITTLESTOWN YORK SPRINGS
104 Sanders Road 17 South Queen Street 202 Main Street
Carroll Valley, PA 17320 Littlestown, PA 17340 York Springs, PA 17372
EAST BERLIN McSHERRYSTOWN
1677 Abbottstown Pike 369 Main Street
East Berlin, PA 17316 McSherrystown, PA 17344
</TABLE>
ADAMS COUNTY NATIONAL BANK
[Telephone Banking Graphic]
Banking Convenience is Just a Phone Call Away!
Toll-Free: 1-888-338-ACNB (2262) Local: 338-ACNB (2262)
37
<PAGE>
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders for ACNB Corporation will be held on
Tuesday, May 5, 1998, at 1:00 p.m. at the Main Office of Adams County National
Bank, 675 Old Harrisburg Road, Gettysburg, PA.
FORM 10-K
A copy of ACNB Corporation's Form 10-K, as filed with the Securities and
Exchange Commission, may be obtained, without charge, by writing to:
Ronald L. Hankey
President & CEO
ACNB Corporation
P.O. Box 3129
Gettysburg, PA 17325
The Annual Report and other Corporation reports are also filed
electronically through the Electronic Data Gathering, Analysis, and Retrieval
System ("EDGAR"), which performs automated collection, validation, indexing,
acceptance, and forwarding of submissions to the Securities and Exchange
Commission, or SEC, and is accessible by the public using the Internet at
http://www.sec.gov./edgarhp.htm.
TRANSFER AGENT, REGISTRAR
AND DIVIDEND DISBURSING AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
For stockholder inquiries, call toll-free (800)368-5948.
38
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 14,674
<INT-BEARING-DEPOSITS> 14,060
<FED-FUNDS-SOLD> 100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 53,074
<INVESTMENTS-CARRYING> 35,849
<INVESTMENTS-MARKET> 35,979
<LOANS> 341,808
<ALLOWANCE> 3,174
<TOTAL-ASSETS> 466,837
<DEPOSITS> 395,573
<SHORT-TERM> 15,471
<LIABILITIES-OTHER> 3,175
<LONG-TERM> 0
13,133
0
<COMMON> 0
<OTHER-SE> 39,485
<TOTAL-LIABILITIES-AND-EQUITY> 466,837
<INTEREST-LOAN> 27,597
<INTEREST-INVEST> 7,004
<INTEREST-OTHER> 462
<INTEREST-TOTAL> 35,063
<INTEREST-DEPOSIT> 14,175
<INTEREST-EXPENSE> 14,912
<INTEREST-INCOME-NET> 20,151
<LOAN-LOSSES> 210
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11,064
<INCOME-PRETAX> 10,797
<INCOME-PRE-EXTRAORDINARY> 10,797
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,229
<EPS-PRIMARY> 1.38
<EPS-DILUTED> 1.38
<YIELD-ACTUAL> 4.50
<LOANS-NON> 1,640
<LOANS-PAST> 1,197
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,837
<ALLOWANCE-OPEN> 3,183
<CHARGE-OFFS> 243
<RECOVERIES> 24
<ALLOWANCE-CLOSE> 3,174
<ALLOWANCE-DOMESTIC> 3,174
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
