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, 1998.
Commission file no. 0-11783.
ACNB CORPORATION
------------------------------------
(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, 1999, 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, 1999, was approximately $109,643,995. 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 4, 1999, are incorporated by reference into Part III.
<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 1998 Annual Report. The Bank has not experienced any
significant seasonal fluctuations in the amount of its deposits.
As of December 31, 1998, the Registrant had a total of 156 full-time
and 73 part-time employees.
Supervision and Regulation
The Registrant and the Bank are considered "affiliates" for purposes of
Section 23A of the Federal Reserve Act and, as such, are subject to certain
limitations specified therein on the making of loans on, extensions of credit
to, or investments in each other. The Federal Bank Holding Company Act of 1956
restricts the Registrant's activities, whether conducted directly or through
subsidiary corporations, to specified activities functionally related to
banking. Permissible activities under 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, 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.
<PAGE>
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 53 of the Registrant's
1998 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 46
of the Registrant's 1998 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 1998 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 1998 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
45 of the Registrant's 1998 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 in sections "Principal Beneficial
Owners of the Corporation's Stock", "Information as to Nominees, Directors and
Executive Officers" and "Principal Officers of the Corporation" of the
Registrant's definitive Proxy Statement to be used in connection with the 1999
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, 1998, through December 31, 1998, its officers and directors were in
compliance with all filing requirements applicable to them.
<PAGE>
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 29, 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 Reporton
Form 8-K, filed with the Commission on March 25, 1998.
Exhibit 11 Statement Regarding the Computation of Earnings Per Share
Exhibit 12 Statements Regarding the Computation of Ratios
The information required by this Exhibit is set forth on page 46 of the
Registrant's 1998 Annual Report and incorporated herein by reference.
Exhibit 21 Subsidiary of the Registrant
Exhibit 27 Financial Data Schedule
<PAGE>
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 16, 1999
--------------
Date
BY: /s/ Ronald L. Hankey BY: /s/ John W. Krichten
---------------------- ----------------------
Ronald L. Hankey John W. Krichten
Chairman, Secretary & Treasurer
President & CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on March 16, 1999, by the following persons in the
capacities indicated.
/s/ Philip P. Asper
- -------------------------
Philip P. Asper
Director
/s/ Guy F. Donaldson
- -------------------------
Guy F. Donaldson
Director
/s/ Frank Elsner, Jr.
- -------------------------
Frank Elsner, Jr.
Director
/s/ Richard L. Galusha
- -------------------------
Richard L. Galusha
Director
/s/ D. Richard Guise
- -------------------------
D. Richard Guise
Director & Vice Chairman of the Board
/s/ Ronald L. Hankey
- -------------------------
Ronald L. Hankey
Director, Chairman, President & CEO
/s/ Philip M. Jones
- -------------------------
Philip M. Jones
Director
/s/ Wayne E. Lau
- -------------------------
Wayne E. Lau
Director
/s/ William B. Lower
- -------------------------
William B. Lower
Director
/s/ Paul G. Pitzer
- -------------------------
Paul G. Pitzer
Director
/s/ Thomas A. Ritter
- -------------------------
Thomas A. Ritter
Director
/s/ Ralph S. Sandoe
- -------------------------
Ralph S. Sandoe
Director
/s/ Marian B. Schultz
- -------------------------
Marian B. Schultz
Director
/s/ L. Robert Snyder
- -------------------------
L. Robert Snyder
Director
/s/ Jennifer L. Weaver
- -------------------------
Jennifer L. Weaver
Director
<TABLE>
<CAPTION>
For the Fiscal Year
ended December 31
------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average shares outstanding 5,253,278 5,254,618 5,300,569
Common stock
Common stock equivalents
Stock options -- -- --
Stock awards -- -- --
ESOP shares -- -- --
---------- ---------- ----------
Total common stock equivalents -- -- --
---------- ---------- ----------
Total Weighted Average Shares Outstanding 5,253,278 5,254,618 5,300,569
========== ========== ==========
Net Income $7,221,000 $7,229,000 $7,109,000
Net Income Per Share $ 1.37 $ 1.38 $ 1.34
</TABLE>
ACNB CORPORATION ANNUAL REPORT o INDEPENDENCE
nineteen
98
INDEPENDENCE
[GRAPHIC OMITTED]
Antique Bank Photo
<PAGE>
Independence.
At ACNB Corporation and its wholly-owned subsidiary,
Adams County National Bank, the past, present and future
are predicated on independence. The strategic choice of
independence is the foundation of our strength and stability
in the marketplace as a community banking organization.
The 1998 Annual Report illustrates the significance of
independence as a keystone for ACNB Corporation.
Financial Highlights 1
Business Profile 1
Report to Stockholders 2
Independence 5
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 46
Five-Year Financial Summary 46
Form 10-K Cross-Reference Index 47
Form 10-K 48
Common Stock Information 53
Board of Directors 54
Officers 55
Office Locations 56
<PAGE>
ACNB CORPORATION & SUBSIDIARY
1998 ANNUAL REPORT
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE YEAR 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income $20,390,000 $20,151,000 $18,770,000
Net income 7,221,000 7,229,000 7,109,000
Cash dividends 4,360,000 4,150,000 9,018,000
- ---------------------------------------------------------------------------------------------------
PER SHARE STATISTICS
- ---------------------------------------------------------------------------------------------------
Basic earnings $ 1.37 $ 1.38 $ 1.34
Cash dividends .83 .79 1.70
Book value (year-end) 10.65 10.02 9.37
- ---------------------------------------------------------------------------------------------------
AT YEAR-END
- ---------------------------------------------------------------------------------------------------
Total assets $498,814,000 $466,837,000 $472,445,000
Total loans 335,127,000 341,808,000 324,927,000
Total deposits 416,560,000 395,573,000 403,127,000
Total stockholders' equity 55,937,000 52,618,000 49,436,000
- ---------------------------------------------------------------------------------------------------
KEY RATIOS
- ---------------------------------------------------------------------------------------------------
Return on average stockholders' equity 13.15% 14.14% 14.77%
Return on average assets 1.49% 1.55% 1.53%
Dividend payout 60% 57% 127%
Stockholders' equity to assets 11.21% 11.27% 10.46%
</TABLE>
BUSINESS PROFILE
At December 31, 1998, 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 $499 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. 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 229
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.
<PAGE>
Independence. This word is not commonplace in today's banking industry. Nor
is it a term arising from the popular business philosophy of the year. At ACNB
Corporation, independence is simply fundamental to our strategy as a community
banking organization.
This approach to the business of banking results in profitability to ACNB
Corporation and its wholly-owned subsidiary, Adams County National Bank. The
Corporation completed 1998 with solid earnings of $7.2 million, or $1.37 per
share. These figures do reflect a slight decline of $8,000, or 0.11%, in
comparison to year-end 1997. The lack of significant 1998 earnings growth was
impacted by the trend of downward pressure on the interest rate spread between
the interest earned on loans and the interest paid on deposits by the Bank.
Total assets of ACNB Corporation grew by 6.85% -- primarily funded by an
increase in total deposits of more than $20.9 million, or 5.31%, from December
31, 1997, to December 31, 1998. Total loans decreased by $6.7 million, or 1.96%,
during this same period. However, a rising percentage of mortgage loans are
being sold by the Corporation in the secondary mortgage market and, therefore,
do not appear on the Consolidated Statements of Condition.
The Corporation's capital position continued to expand during 1998. A 6.31%
rise in total stockholders' equity resulted in a stockholders' equity to assets
ratio of 11.21%.
ACNB Corporation earnings generated a return on average assets of 1.49% for
1998. The return on average stockholders' equity was 13.15% for the same annual
period.
Our Board of Directors approved aggregate cash dividends of $.83 per share
in 1998 -- an increase of 5.06% as compared to 1997. With total cash dividends
in the amount of $4.4 million, ACNB Corporation realized a dividend payout ratio
of 60%.
1998 was a year of refining and monitoring prior business initiatives.
These initiatives include efforts such as the introduction of the Visa(R) Check
Card program, expansion of the Bank's offering of fiduciary trust services, and
restructuring of the loan products and functions along the three major business
lines of commercial, retail mortgage and consumer lending.
More importantly, however, ACNB Corporation focused its resources on Year
2000 endeavors during 1998. The Year 2000 Task Force, which is composed
primarily of senior managers representing diverse functional areas, was
2
<PAGE>
actually established in July of 1996. This task force is responsible for the
development and implementation of the overall action plan and strategy for
addressing the potential challenges arising from the change of the millennium.
The Year 2000 Project is based upon the five project phases as outlined in
regulatory guidance -- awareness, assessment, renovation, validation and
implementation. In addition, the project scope encompasses five other major
components including contingency planning, stakeholder communications,
commercial loan customer assessments, fiduciary risk control, and ongoing
reporting to banking regulators and the Board of Directors. The services of
third-party technology consultants and attorneys have also been retained to
assist with the implementation of the action plan for Year 2000.
On July 28, 1998, ACNB Corporation entered into an Agreement and Plan of
Reorganization with Farmers National Bancorp, Inc. whereby Farmers National
Bancorp, Inc. and its wholly-owned subsidiary, Farmers National Bank of
Newville, would affiliate with ACNB Corporation. The shareholders of Farmers
National Bancorp, Inc. approved the agreement on December 15, 1998. The
effective date for the consummation of the affiliation is March 1, 1999.
Shareholders of Farmers National Bancorp, Inc. have a right to receive 2.266
shares of ACNB Corporation common stock for each share of Farmers National
Bancorp, Inc. common stock held on this date. ACNB Corporation will issue
approximately 561,968 shares of common stock in the transaction. Thus, as of
March 1, 1999, ACNB Corporation becomes a multi-bank holding company with two
bank subsidiaries -- Adams County National Bank and Farmers National Bank of
Newville -- and total assets of approximately $545 million. This partnership is
an opportunity for ACNB Corporation to further support the ideals of community
banking in another local marketplace of Newville, Cumberland County, where
Farmers National Bank of Newville serves its customers via three banking
locations.
On a personal note, in the past year, I was elected to the Board of
Directors of the American Bankers Association and was appointed to the Federal
Advisory Council as a representative of the Third Federal Reserve District. The
American Bankers Association is the largest banking trade association in the
country, whose membership includes community, regional and money center banks
and holding companies, as well as savings associations, trust companies, and
savings banks. The Federal Advisory Council was created by the Federal Reserve
Act of 1913 to be the principal conduit of information and views between the
Federal Reserve Board of Governors and the banking system. In both roles, I
represent the interests of the independent community bank in the financial
services marketplace of
3
<PAGE>
today while, simultaneously, being sensitive to the needs and issues for the
entire industry. I am truly honored to serve in these capacities at a national
level, and sincerely appreciate the support of ACNB Corporation's Board of
Directors in allowing me the opportunity to reinforce the virtues of independent
community banking organizations in the industry.
In remembrance, Ralph W. Tyson, Director Emeritus of ACNB Corporation and
Adams County National Bank, died on April 30, 1998. Mr. Tyson had originally
joined the Board of Directors of The Bendersville National Bank in 1964. Upon
the merger of The Bendersville National Bank into Adams County National Bank,
effective March 1987, he became a member of the Board of Directors for both ACNB
Corporation and Adams County National Bank. Mr. Tyson was faithful and diligent
in his service to the local banking community for 34 years.
In the coming year of 1999, Frank Elsner, Jr. will retire from his role as
a member of the Board of Directors of ACNB Corporation and Adams County National
Bank. As of the Corporation's Annual Meeting of Shareholders on May 4, 1999, Mr.
Elsner will continue his association with the Corporation and the Bank as
Director Emeritus. Since 1974, he has served on the Board of Directors of Adams
County National Bank and, later, ACNB Corporation. His involvement in recent
years included chairing the Board Loan Committee and participating as a member
of the Board Executive Committee. Mr. Elsner has truly been a friend, as well as
an advocate, of this organization for nearly 25 years.
We, at ACNB Corporation, look forward to a year of promise and challenges.
There is promise in realizing the value of independence as a community banking
organization for the future. The challenges of business are sometimes daunting
as they lie ahead. But, frankly, they are really opportunities to assure our
independence into the next millennium.
Your commitment, as a stockholder, to the independence of ACNB Corporation
is gratifying. As always, we endeavor to ensure that ACNB Corporation is worthy
of your investment.
Sincerely,
/s/ Ronald L. Hankey
----------------------
Ronald L. Hankey
President
4
<PAGE>
[GRAPHIC OMITTED]
Cropped Image of Antique Bank Photo
INDEPENDENCE
5
<PAGE>
The history of independence.
ACNB Corporation's history is one woven with the threads of independence. In
1962, The First National Bank of Gettysburg and Littlestown State Bank and Trust
Company merged to form Adams County National Bank. The mission was simple and
forthright -- to establish an independent community bank serving all of Adams
County. ACNB Corporation was then established as a single-bank holding company
in 1982. The vision endured as local people and businesses depended upon Adams
County National Bank for the fulfillment of their savings and borrowing needs.
Today, Adams County National Bank's marketplace extends beyond the eastern
border of Adams County with community banking offices in Hanover, York County.
The history of independence for ACNB Corporation serves as an emblem of the
steadfast commitment to the community in which we do business.
6
<PAGE>
[GRAPHIC OMITTED]
American flag and wood sculpture of ACNB logo photo
7
<PAGE>
The choice of independence.
At ACNB Corporation, independence is a choice. This choice is a strategic
decision, especially given the dynamic, as well as sometimes tumultuous,
environment of bank mergers and acquisitions during the last two decades. It is
fundamental to the vitality of ACNB Corporation and Adams County National Bank.
Peering into 1999, independence continues to be a focus. With the affiliation of
Farmers National Bancorp, Inc. and its wholly-owned subsidiary, Farmers National
Bank of Newville, as of March 1, 1999, ACNB Corporation becomes a multi-bank
holding company with the two banking subsidiaries of Adams County National Bank
and Farmers National Bank of Newville. Each bank stands firm in its unique
community...committed to the choice of independence for ACNB Corporation.
8
<PAGE>
[GRAPHIC OMITTED]
Antique Banks Photo
9
<PAGE>
The Value of independence.
Value to stakeholders is intrinsic to the ideals of ACNB Corporation's
independence. Corporation stockholders receive value in the form of a fair
return on their investment. Value is delivered each business day to thousands of
Adams County National Bank customers via personal, responsive service. Bank
employees are both the providers and the recipients of this value. In response
to their integral and multifaceted roles in fulfilling customer expectations,
employees receive value in terms of competitive salaries and benefits. Value to
the community is not always perceived as tangible, but clearly there is the
impact of real dollars and cents flowing through Adams County National Bank into
the local economy. It is the synergy of interaction between all groups of
stakeholders that maximizes the value of ACNB Corporation's independence to each
stakeholder.
10
<PAGE>
[GRAPHIC OMITTED]
Antique Silver Dollars Photo
11
<PAGE>
The Future of independence.
To remain independent, ACNB Corporation must enter the future with a balance
between technology and human resources. Technology enhances both customer
convenience and operational efficiency through new products and alternative
channels of service delivery. Technology is also fundamental to the continuous
flow of payments and information within Adams County National Bank, as well as
throughout the financial services industry. However, it is the human element
that differentiates one financial institution from the other in the minds of the
customer and the community. The proper equilibrium of the personal touch versus
technological advances in the offering of financial services is one of today's
organizational challenges. Furthermore, it is the key to ACNB Corporation's
future of independence as a community banking organization.
12
<PAGE>
[GRAPHIC OMITTED]
Computer Keyboard Photo
13
<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, 1998 and 1997 26
Consolidated Statements of Income for the
years ended December 31, 1998, 1997 and 1996 27
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996 28
Consolidated Statements of Cash Flows for the
years ended December 31, 1998, 1997 and 1996 29
Notes to Consolidated Financial Statements 30-45
Quarterly Results of Operations 46
Five-Year Summary of Selected Financial Data 46
Form 10-K Cross-Reference Index 47
Form 10-K 48-52
Common Stock Market Prices and Dividends 53
14
<PAGE>
FIVE-YEAR FINANCIAL OVERVIEW
[GRAPHIC OMITTED]
TOTAL DEPOSITS
BASIC EARNINGS PER SHARE
TOTAL LOANS
DIVIDENDS PER SHARE
RETURN ON AVERAGE ASSETS
BOOK VALUE PER SHARE
15
<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, and its wholly-owned subsidiary, Adams
County National Bank. The corporation's consolidated financial condition and
results of operations consist almost entirely of the bank's financial condition
and results of operations. Please read this discussion in conjunction with the
1998 Annual Report to ACNB Corporation stockholders. Current performance does
not guarantee, assure, or indicate similar performance in the future.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this 1998 Annual Report contains
forward-looking statements. Forward-looking statements are subject to certain
risks and uncertainties. Actual results may differ materially from those
projected in the forward-looking statements. Important factors that might cause
such a difference include, but are not limited to, those discussed in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations". We caution readers not to place undue reliance on
these forward-looking statements. They only reflect management's analysis as of
this date. The corporation does not revise or update these forward-looking
statements to reflect events or changed circumstances. Please carefully review
the risk factors described in other documents the corporation files from time to
time with the Securities and Exchange Commission, including the Quarterly
Reports on Form 10-Q, to be filed by the corporation in 1999, and any Current
Reports on Form 8-K filed by the corporation.
- -------------------------------------------------------------------------------
Comparative Average Balance Sheet and Net Interest Analysis
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31
1998
ASSETS In thousands Balance Interest Rate
- ------------------- ------- -------- ----
<S> <C> <C> <C>
Loans $ 339,447 $ 27,602 8.13%
Taxable investment securities 115,446 7,488 6.49%
Non-taxable investment securities 794 50 6.30%
Federal funds sold 16 1 6.25%
Interest bearing deposits with banks 8,908 487 5.47%
--------- ---------
Total interest earning assets 464,611 $ 35,628 7.67%
Cash and due from banks 12,845
Premises and equipment 5,029
Other assets 5,218
Allowance for loan losses (3,275)
---------
TOTAL ASSETS $ 484,428
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing demand deposits $ 57,841 $ 1,464 2.53%
Savings deposits 104,503 2,736 2.62%
Time deposits (excluding time certificates
of deposit of $100,000 or more) 178,281 9,199 5.16%
Time certificates of deposit of
$100,000 or more 18,507 981 5.30%
Short-term borrowings 19,380 858 4.43%
--------- ---------
Total interest bearing liabilities 378,512 $ 15,238 4.03%
INTEREST RATE SPREAD 3.64%
Demand deposits 47,483
Other liabilities 3,525
Stockholders' equity 54,908
---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 484,428
=========
INTEREST INCOME/EARNING ASSETS $ 464,611 $ 35,628 7.67%
INTEREST EXPENSE/EARNING ASSETS $ 464,611 $ 15,238 3.28%
NET YIELD ON EARNING ASSETS $ 20,390 4.39%
</TABLE>
Loan fees of $459,000, $531,000 and $569,000 for 1998, 1997 and 1996,
respectively, are included for rate calculation purposes.
Average nonaccrual loans for 1998, 1997 and 1996 were $1,453,000, $1,441,000 and
$1,043,000, respectively.
16
<PAGE>
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
EARNINGS PERFORMANCE
Net income for years ended December 31, 1998 and 1997 were $7.2
million. Basic earnings per share were $1.37 in 1998 and $1.38 in 1997.
We attribute the net income decrease of $8,000 in 1998 to an increase
of $538,000, or 7.7%, in the corporation's interest income from taxable
securities offset by a shrinkage of 0.11% in net interest margin, and a
$448,000, or 4.0%, increase in non-interest expense. These items were
accompanied by a higher provision of $150,000 in the allowance for possible loan
losses.
The corporation recorded net income of $7.2 million for the year ended
December 31, 1997, compared to net income of $7.1 million in 1996. Basic
earnings per share of $1.38 in 1997 compared to $1.34 per share in 1996.
The $120,000 increase in net income in 1997 was primarily due to a $1.2
million, or 6.4%, rise in net interest income after provision for possible loan
losses. This was partially offset by an increase in income tax expense of
$80,000, or 2.3%, and a $935,000, or 9.2%, increase in non-interest expense.
We intend, in the balance of this discussion and analysis, to provide
details of the operating results, on a comparative basis, for each of the
periods ended December 31, 1998, 1997 and 1996.
NET INTEREST INCOME
Net interest income is the difference between the interest and
dividends earned on loans and investment securities (interest earning assets)
and the interest paid on deposits and borrowings (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 $20.4 million in 1998. This is an increase over
net interest income of $20.2 million in 1997, and $18.8 million in 1996. The
increase was the result of growth in average earning assets, which were up by
$16.9 million, or 3.8%. The rise in 1997 reflected slower growth than 1998.
Average earning assets increased by $900,000, or 0.2%, in 1997, which caused a
marked widening in net yield on earning assets from 4.2% to 4.5%. Improved
yields on securities resulted in the increase of net yield on earning assets.
Interest from loans accounted for 77% of the corporation's interest
income in 1998, as compared to 79% in 1997 and 78% in 1996. Interest and
dividends on investments were $7.5 million in 1998, as compared to $7.0 million
in 1997 and $6.9 million in 1996. The average yield on the taxable investment
portfolio decreased to 6.49% for 1998, from 6.88% for the prior year. The yield
decrease 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
- --------------------------------------- ---------------------------------------
1997 1996
- --------------------------------------- ---------------------------------------
Balance Interest Rate Balance Interest Rate
- --------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C>
$337,465 $ 27,597 8.18% $321,979 $26,463 8.22%
101,033 6,950 6.88% 113,818 6,846 6.01%
841 54 6.42% 1,013 62 6.12%
100 6 6.00% 100 5 5.00%
8,256 456 5.52% 9,843 518 5.26%
-------- -------- -------- -------
447,695 $ 35,063 7.83% 446,753 $33,894 7.59%
11,807 11,227
5,196 5,586
5,710 5,666
(3,188) (3,248)
-------- --------
$467,220 $465,984
======== ========
- ------------------------------------------------------------------------------------------------
$ 52,419 $ 1,323 2.52% $ 49,288 $ 1,207 2.45%
106,051 2,917 2.75% 110,740 3,048 2.75%
176,840 9,044 5.11% 178,687 9,254 5.18%
15,969 891 5.58% 14,903 792 5.31%
16,805 737 4.39% 18,248 823 4.51%
-------- -------- -------- -------
368,084 $ 14,912 4.05% 371,866 $15,124 4.07%
- ------------------------------------------------------------------------------------------------
3.78% 3.52%
44,611 43,073
3,388 2,929
51,137 48,116
-------- --------
$467,220 $465,984
======== ========
$447,695 $ 35,063 7.83% $446,753 $33,894 7.59%
$447,695 $ 14,912 3.33% $446,753 $15,124 3.39%
$ 20,151 4.50% $18,770 4.20%
- ------------------------------------------------------------------------------------------------
</TABLE>
17
<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. The
average interest earning assets balance includes nonaccrual loans. Interest
income includes interest from nonaccrual loans 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, is 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 shows
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, shows changes in interest
income and expense for ACNB Corporation for the years indicated. For each
category of interest earning assets and interest bearing liabilities, we provide
data 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. We compute the interest earning asset and interest
bearing liability balances using daily average balances.
NON-INTEREST INCOME
Growth in non-interest income is one of the corporation's long-term
strategies. Non-interest income for 1998 increased by $349,000, or 18.2%,
compared to 1997, and decreased by $66,000, or 3.3%, when 1997 is compared to
1996. In 1998, ACNB Corporation adjusted service fees on deposit accounts to
reflect the marketplace more closely and miscellaneous service fees, including
earnings on cash surrender value and Visa debit card fee income, increased
$152,000, or 224%.
Trust service income rose by 2.0% in 1998 and 0.6% in 1997. The
corporation participated in an ongoing study with a consulting firm to improve
operations and revenues in the Trust Department. In December 1997, the
corporation hired a new trust officer to head the department.
Year-to-date service fees improved over the last two years, even though
the corporation continued to experience marginal deposit growth. A reassessment
of service charges, which took affect in September 1998, was the main reason for
the 11.4% improvement in service fees on deposit accounts in 1998. The small
improvement experienced in 1997 was due to growth in the demand deposit totals.
While average interest bearing liabilities were up 2.8% in 1998 and down 1.0% in
1997, average non-interest bearing demand deposits were up 6.4% in 1998 and 3.6%
in 1997.
NON-INTEREST EXPENSE
Non-interest expense was $11.5 million in 1998, an increase of 4.0%
compared to 1997. In 1997, non-interest expense was $11.1 million, reflecting an
increase of 9.2% compared to 1996. The primary causes of the increases in
non-interest expense are salaries and employee benefits and equipment expense.
Personnel expense increased by $295,000, or 4.5%, in 1998, compared to
1997, and by $648,000, or 11.0%, in 1997, compared to 1996. The rise in 1998 was
due to normal merit raises and an increase in loan personnel. Management has
studied the impact of the eventual retirement of certain loan officers. In
anticipation of these retirements, the bank has decided not to add additional
loan officers at this time, but to evaluate the effect of the loss of these
personnel and determine if the bank can offset the loss through internal
promotion.
In addition to salary and employee benefit increases, there was a
significant rise in equipment expense. Costs were up by $93,000, or 9.3%, in
1998, compared to 1997, and by $67,000, or 7.2%, in 1997, compared to 1996. The
increase in 1998 is attributable to a full year's operation 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.
FDIC insurance cost remained consistent with 1997. This was due to the
final recapitalization of the Federal
Analysis of Changes in Interest Income and Expense Due to Volume and Rate
Changes
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------------------------------------------
1998 versus 1997 1997 versus 1996 1996 versus 1995
Changes Due To Changes Due To Changes Due To
In thousands Volume Rate Net Volume Rate Net Volume Rate Net
- ------------ ------ ---- --- ------ ---- --- ------ ---- ---
Interest earned on:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans $ 168 $(163) $ 5 $1,262 $(128) $1,134 $ 185 $ 360 $ 545
Taxable investment securities 953 (415) 538 (386) 490 104 (144) 942 798
Non-taxable investment securities (3) (1) (4) (11) 3 (8) (33) 23 (10)
Federal funds sold (5) -- (5) -- 1 1 -- (1) (1)
Time deposits with banks 35 (4) 31 (89) 27 (62) 362 (13) 349
- --------------------------------------------------------------------------------------------------------------------------------
Total Interest Earning Assets $1,148 $(583) $ 565 $ 776 $ 393 $1,169 $ 370 $1,311 $1,681
- --------------------------------------------------------------------------------------------------------------------------------
Interest paid on:
Interest bearing demand deposits $ 136 $ 5 $ 141 $ 80 $ 36 $ 116 $ 12 $ 6 $ 18
Savings deposits (43) (138) (181) (131) -- (131) (164) 10 (154)
Time deposits 206 39 245 (38) (73) (111) 646 332 978
Short-term borrowings 114 7 121 (65) (21) (86) (80) (75) (155)
- --------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities $ 413 $ (87) $ 326 $ (154) $ (58) $ (212) $ 414 $ 273 $ 687
- --------------------------------------------------------------------------------------------------------------------------------
NET INTEREST EARNINGS $ 735 $(496) $ 239 $ 930 $ 451 $1,381 $ (44) $1,038 $ 994
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
Deposit Insurance Corporation's Bank Insurance Fund in May 1995, and the
dramatic reduction in deposit insurance fees for the second half of that year.
The costs in 1996 were due to the final recapitalization of the insurance in May
of 1995 and a full year at reduced rates. The cost for deposit insurance was
$48,000 in 1998 and $49,000 in 1997. The cost should be approximately the same
in 1999.
OVERVIEW OF THE BALANCE SHEET
During 1998, ACNB Corporation's total assets increased by $32.0
million, or 6.8%. This is a turnaround from 1997 when total assets shrank by
$5.6 million, or 1.2%. Deposits were up $21.0 million, or 5.3%. Loans were down
$6.7 million, or 2.0%, with most of the runoff in residential mortgages. The
bank continues to compete with its traditional rivals, including several local
and nonlocal commercial banks, as well as nontraditional rivals, such as
mortgage brokers and brokerage houses for deposits and for loans.
The mix of assets and liabilities continues to change. Investment
securities rose $50.4 million, or 56.7%, as loans fell $6.7 million, or 2.0%, in
1998 after increasing by $16.3 million, or 5.0%, in 1997. Premises and equipment
decreased by $458,000 in 1998 and by $466,000 in 1997, as fixed assets were
depreciated faster than the value of new equipment placed in service. In
addition, other real estate decreased by $249,000, or 62.0%, in 1998.
On the liability side, non-interest bearing deposits were up by $5.6
million, or 12.0%, in 1998, and down by $5.8 million, or 11.1%, in 1997. Core
deposits strengthened in 1998, with a total increase of $21.0 million in 1998.
Fiscal year 1997 showed a decrease of $7.6 million, or 1.9%.
Capital continued to be strong, as it increased by $3.3 million, or
6.3%, in 1998. It increased by $3.2 million, or 6.4%, in 1997 due to internal
earnings retention.
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 1998 and 1997, 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.
This is the most stable source of liquidity for a bank because of the long-term
relationship with depositors and the deposit insurance provided by the FDIC. In
1998, 84% of total assets were funded by core deposits and 5% were funded with
short-term purchased funds, compared to 85% and 3%, respectively, in 1997. ACNB
Corporation belongs to the Federal Home Loan Bank of Pittsburgh. This membership
serves the dual purposes of emergency and long-term liquidity. The corporation's
borrowing capacity with the Federal Home Loan Bank stood at $237.0 million at
year-end 1998.
Parent company liquidity is maintained by the cash flow from dividends
received from the bank. Dividends from the bank are the corporation's primary
source of funds to pay dividends to the corporation's shareholders. The amount
of dividends paid by the bank is subject to certain regulatory restrictions,
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. The corporation's off-balance sheet items consist
solely of loan commitments and letters of credit.
19
<PAGE>
LOAN REVIEW AND ALLOWANCE
FOR LOAN LOSS ANALYSIS
- ------------------------------------------------------------------------------
GENERAL
ACNB Corporation's lending activities are carried on through the bank.
As of December 31, 1998, the corporation's total loan portfolio, carried at
historical cost, of $335.1 million included:
o $207.4 million in mortgage loans secured by liens on one-to-four
family residential properties;
o $88.5 million in mortgage loans secured by commercial properties, such
as apartment buildings, office buildings, warehouses, and medical
office buildings;
o $14.0 million in construction loans;
o $13.5 million in consumer loans; and,
o $11.7 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. 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 have a direct impact on residential lending volumes.
RESIDENTIAL REAL ESTATE LOANS
The corporation makes a full range of residential loans, including
conventional fixed-rate loans for terms of 5, 15 or 30 years and adjustable-rate
mortgage loans, available to borrowers in its primary consumer market area.
Adjustable-rate mortgages are advantageous to the corporation because
adjustable-rate loans are a closer match to 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, 1997 and 1998, 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 and Federal Home Loan Mortgage Corporation 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 bank, 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 bank receives fees for
originating loans and for providing loan commitments. The bank 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
The bank 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. This type of construction loan involves somewhat more risk
than custom construction loans and the bank uses 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, which are properties other than
single-family detached houses, are subject to more stringent approval
requirements.
<TABLE>
<CAPTION>
Quantitative Disclosures of Market Risk
- ------------------------------------------------------------------------------
Principal Amount Maturing In
---------------------------------------------
RATE SENSITIVE ASSETS In thousands 1999 2000 2001
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed interest rate loans $ 13,066 $ 8,018 $ 5,759
Average interest rate 9.11% 9.30% 8.88%
Variable interest rate loans $ 33,709 $ 21,826 $ 20,326
Average interest rate 7.75% 7.58% 7.53%
Fixed interest rate securities $ 3,642 $ 8,882 $ 19,245
Average interest rate 6.55% 6.28% 6.17%
Variable interest rate securities $ 57 $ 60 $ 66
Average interest rate 5.45% 5.45% 5.45%
Other interest bearing assets $ 3,450 $ -- $ --
Average interest rate 4.50% 0.00% 0.00%
RATE SENSITIVE LIABILITIES
- -------------------------------------------------------------------------------------------
Non-interest bearing checking $ 13,120 $ 11,806 $ 11,806
Average interest rate 0.00% 0.00% 0.00%
Savings and interest bearing checking $ 7,701 $ 48,233 $ 48,233
Average interest rate 2.50% 2.45% 2.45%
Time deposits $ 148,542 $ 21,955 $ 15,326
Average interest rate 4.97% 5.45% 5.85%
Variable interest rate borrowings $ 11,328 $ 3,399 $ 3,399
Average interest rate 4.33% 4.33% 4.33%
<CAPTION>
Principal Amount Maturing In Fair Value
------------------------------------------------------------ December 31,
2002 2003 Thereafter TOTAL 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed interest rate loans $ 3,913 $ 3,484 $ 18,268 $ 52,508 $ 52,834
Average interest rate 8.28% 7.08% 7.28% 8.28%
Variable interest rate loans $17,235 $16,367 $169,732 $279,195 $279,948
Average interest rate 7.43% 7.40% 7.60% 7.59%
Fixed interest rate securities $14,410 $ 4,701 $ 85,672 $136,552 $140,570
Average interest rate 6.24% 6.56% 6.42% 6.36%
Variable interest rate securities $ 75 $ 84 $ 447 $ 789 $ 789
Average interest rate 5.45% 5.45% 5.45% 5.45%
Other interest bearing assets $ -- $ -- $ -- $ 3,450 $ 3,450
Average interest rate 0.00% 0.00% 0.00% 4.50%
- ---------------------------------------------------------------------------------------------------------------------------
Non-interest bearing checking $ 5,247 $ 5,247 $ 5,247 $ 52,473 $ 52,473
Average interest rate 0.00% 0.00% 0.00% 0.00%
Savings and interest bearing checking $14,794 $14,794 $ 29,585 $163,340 $163,340
Average interest rate 2.45% 2.45% 2.45% 2.45%
Time deposits $13,924 $ -- $ 1,000 $200,747 $204,302
Average interest rate 5.73% 0.00% 5.26% 5.13%
Variable interest rate borrowings $2,266 $2,266 $ -- $22,658 $ 22,658
Average interest rate 4.33% 4.33% 0.00% 4.33%
</TABLE>
20
<PAGE>
COMMERCIAL REAL ESTATE LOANS
In all commercial real estate lending, the bank 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 bank
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 bank 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 bank'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 bank classifies
loans that fall below underwriting standards into various risk or watch
categories.
MANUFACTURED HOUSING, SECOND MORTGAGE AND OTHER CONSUMER LOANS
The bank offers consumer loan programs that include the following:
o manufactured housing loans;
o second mortgage loans for a variety of purposes, including purchase,
renovation, or remodeling of property, and for uses unrelated to the
security;
o loans for the purchase of automobiles, pleasure boats and recreational
vehicles;
o student loans; and,
o loans for general household purposes, including home equity lines of
credit.
Consumer loans, in addition to being an important part of the bank'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 bank, 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 certain 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. The bank 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:
o nonaccrual loans;
o loans under foreclosure;
o other real estate owned, or OREO; and,
o performing loans and securities that exhibit credit quality
weaknesses.
The principal measures of asset problems are:
o the levels of nonaccruing loans;
o loans under foreclosure;
o other real estate owned;
o the size of the provision for loan losses;
o loan charge-offs; and,
o the size of the write-downs in the value of other real estate owned.
Management ceases to accrue interest income on any loan that becomes 90
days or more delinquent and is
21
<PAGE>
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 1998 and 1997.
Real estate that served as security for a defaulted loan and that then
became other real estate owned, 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 $152,000 as of December
31, 1998, down by $249,000 from $401,000 at December 31, 1997. 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 in excess of book
value.
PROVISION FOR LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is based upon management's continuing
analysis of certain factors underlying the quality of the loan portfolio. These
factors include:
o changes in the size and composition of the portfolio;
o historical loan loss trends;
o the industry's loss experience; and,
o current and anticipated economic conditions.
To determine adequacy of the allowance for loan losses, the bank 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 the bank confirms that specific loans or portions of loans are
uncollectible, these amounts are charged against the allowance for loan losses.
The existence of some or all of the following criteria generally confirms that a
loss has been incurred:
o the loan is significantly delinquent and the borrower has not
evidenced the ability or intent to bring the loan current;
o the corporation has no recourse to the borrower or, if it does, the
borrower has insufficient assets to pay the debt; or,
o 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, found on page
23, shows a breakdown of the allowance as it applies to different types of loans
in the portfolio.
CAPITAL MANAGEMENT
- ------------------------------------------------------------------------------
During 1998, ACNB Corporation's fiscal capital increased by $3.3
million, or 6.3%. During 1997, the capital base increased by $3.2 million, or
6.4%. At year-end 1998, the risk-based capital ratios of Tier 1 capital and
Total capital were 18.93% and 20.15%, which exceed the minimum ratios required
by the Federal Reserve Board. Capital ratios are highlighted in a table, Capital
Ratios at Year-end, on page 24.
Capital management is an ongoing process, which consists of providing
equity and long-term debt for current and future financial positioning. ACNB
Corporation manages its capital as set forth in its strategic business plan and
to support its growth and investments.
ACNB Corporation and the bank 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, 1998,
the corporation and the bank were in compliance with the capital requirements of
these regulatory agencies. Management expects them to remain in compliance with
these capital requirements in the future. 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, 1998, the
capital ratios of the corporation exceeded these levels. Management expects the
corporation's ratios to remain in excess of the minimum ratios required of a
well-capitalized institution.
The corporation's board of directors increased the quarterly common
stock cash dividend to $.19 per share during the third quarter of 1997, and
further increased the quarterly dividend to $.20 per share during the third
quarter of 1998. Annual dividends per share during 1998 were $.83, which
included a $.05 special dividend. The corporation paid dividends of $.79 per
share in 1997, which included a $.05 special dividend paid in the fourth quarter
of 1997.
The corporation's total stockholders' equity at December 31, 1998, was
$55.9 million, or 11.21%, of total assets, compared with $52.6 million, or
11.27%, of total assets at December 31, 1997. The growth in capital is the
direct result of continued strong retained earnings.
<TABLE>
<CAPTION>
Nonperforming Assets Analysis
- ----------------------------------------------------------------------------------------------------------------------
Year ended December 31
------------------------------------------------------------------------
1998 1997
------------------------------- --------------------------------
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) $1,535 $ (12) $1,531 $ 33
Real estate loans (other) 1,773 4 1,089 --
Commercial and industrial 83 20 95 49
Consumer 120 98 122 137
------ ------- ------ -------
TOTAL $3,511 $ 110 $2,837 $ 219
====== ======= ====== =======
</TABLE>
22
<PAGE>
CORPORATION IS IN THE PROCESS OF BECOMING
YEAR 2000 COMPLIANT - EXPENSES NOT MATERIAL
- -------------------------------------------------------------------------------
YEAR 2000 ISSUE
The following section contains forward-looking statements which involve
risks and uncertainties. The actual impact on the corporation of the Year 2000
issue could materially differ from that which is anticipated in the
forward-looking statements as a result of certain factors identified below.
Corporation's State of Readiness
The Year 2000 (Y2K) Problem is the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Such computer
systems may be unable to interpret dates beyond the year 1999, which could cause
a system failure or other computer errors, leading to disruptions in operations.
If not corrected, many computer applications could fail or create erroneous
results by or at the Year 2000. This could cause entire system failures,
miscalculations, and disruptions of normal business operations including, among
other things, a temporary inability to process transactions, send statements, or
engage in similar day-to-day business activities. The extent of the potential
impact of the Year 2000 Problem is not yet known, and if not timely corrected,
it could affect the global economy.
The corporation has developed a five-phase program for Y2K information and
non-information systems compliance which includes the following:
1. Awareness Phase
o Establish Year 2000 Task Force.
o Define Year 2000 Problem.
o Develop Year 2000 Plan and Strategy.
This phase was completed as of December 31, 1997.
2. Assessment Phase
o Identify and inventory all information systems, technology items,
computer programs, business partners, environmental systems, and data
communication links.
o Prioritize mission critical systems.
o Obtain vendor certifications for software, hardware, and outsourced
service providers.
o Assess impact of Year 2000.
This phase was completed as of December 31, 1998.
3. Renovation Phase
o Implement hardware and software upgrades.
o Replace systems and technology items.
o Monitor vendor and service provider progress.
This phase was substantially completed as of December 31, 1998.
4. Validation Phase
o Develop testing plan and strategy.
o Establish test environment(s).
o Test all internal information systems, technology items, computer
programs, environmental systems, and data communication links.
o Test with and/or monitor testing of vendors and service providers.
This phase began in May 1998 and will continue through June 30, 1999.
5. Implementation Phase
o Implement Y2K compliant systems and technology items.
This phase began in December 1997 and will continue through October 29,
1999.
Based on an ongoing assessment, the corporation has determined that it
will be required to modify or replace portions of its hardware and software so
that its computer systems will properly use dates beyond December 31, 1999. The
corporation presently believes that as a result of modifications to existing
software and hardware and conversions to new software, the Year 2000 Problem can
be mitigated. However, if such modifications and conversions are not made, or
are not completed on a timely basis, the Year 2000 Problem could have a material
adverse impact on the operations of the corporation.
The major part of the corporation's software is designed and maintained
by companies well known throughout the banking industry. This portion of the
software has been or is in the process of being renovated for compliance with
the Year 2000. The cost of renovation will be primarily borne by the third-party
providers. Even though the corporation does not have direct control over the
software renovation process, it is monitoring the progress of its third-party
vendors to assess the status of their Y2K readiness efforts. However, because
most computer systems are, by their very nature, interdependent, it is possible
that noncompliant third-party computers could impact the corporation's computer
systems. The corporation could be adversely affected by the Year 2000 Problem if
it or unrelated parties fail to successfully and timely address the problem. The
corporation has taken steps to communicate with the unrelated parties with whom
it deals to coordinate Year 2000 compliance. Additionally, the corporation is
dependent on external suppliers, such as wire transfer systems, telephone
systems, electric companies, and other utility companies, for continuation of
service. The corporation is also assessing the impact, if any, the century date
change may have on its credit risk and fiduciary risk.
Costs of Year 2000
The total cost to implement the five-phase program ranges from
approximately $400,000 to $450,000. Internal costs should approximate $235,000,
while outside consultants for legal work, contingency planning, and verification
of testing will approximate $190,000. Costs in 1998 were $169,000 with $119,000
being internal costs with very little cash outlay and were absorbed by current
operations.
$50,000 was spent on consultant and legal work in 1998. Fiscal year
1999 expenses have been budgeted at $108,000 for internal costs and $140,000 for
consultant and legal work. There has been a shift in personnel which will
require that more work will have to be outsourced at higher costs in 1999.
<TABLE>
<CAPTION>
Allocation of the Allowance for Loan Losses
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------- ---------------- ------------- --------------- --------------
% of % of % of % of % of
Gross Gross Gross Gross Gross
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
In thousands
- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 798 0.24% $ 696 0.20% $ 92 0.03% $ 95 0.03% $ 98 0.03%
Real estate - construction 102 0.03% 68 0.02% 47 0.01% 48 0.01% 51 0.02%
Real estate - mortgage 1,098 0.33% 1,518 0.45% 1,672 0.52% 1,719 0.53% 1,769 0.58%
Consumer 227 0.07% 200 0.06% 156 0.05% 160 0.05% 165 0.05%
Unallocated 1,199 0.35% 692 0.20% 1,216 0.37% 1,252 0.39% 1,287 0.42%
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total $3,424 1.02% $3,174 0.93% $3,183 0.98% $3,274 1.01% $3,370 1.10%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
23
<PAGE>
With actual costs of $169,000 in 1998 and estimated costs of $248,000
for 1999, the financial impact to the corporation of Year 2000 compliance has
not been and is not anticipated to be material to the corporation's financial
position or results of operations in any given year. However, if compliance is
not achieved in a timely manner by the corporation or any of its significant
related third parties, be it a supplier of services or customer, the Y2K issue
could possibly have a material effect on the corporation's operations and
financial position.
The cost of the Year 2000 project and the dates when the corporation
plans to complete both Year 2000 modifications and systems conversions are based
on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, the failure of a related third party to achieve Y2K
compliance, and similar uncertainties.
RISKS OF YEAR 2000
At present, management believes its progress in remedying the
corporation's systems, programs and applications and installing Y2K compliant
upgrades is on target. The Year 2000 computer problem creates risk for the
corporation from unforeseen problems in its own computer systems and from
third-party vendors who provide the majority of mainframe and PC-based computer
applications. Failure of third-party systems relative to the Y2K issue could
have a material impact on the corporation's ability to conduct business.
CONTINGENCY PLANS
In compliance with Y2K regulatory guidance, the corporation has
completed remediation contingency planning for mission critical systems and will
finalize its business resumption contingency planning by June 30, 1999.
Remediation contingency planning for mission critical systems encompassed the
identification of alternative means of achieving Y2K readiness in the event the
mission critical system service provider or software vendor cannot complete
critical efforts by predetermined trigger dates. The corporation's development
of the business resumption contingency plan includes organizational planning
guidelines, a business impact analysis, a written disaster recovery/contingency
plan, and validation of the plan. Both forms of contingency planning are the
corporation's efforts to minimize any potential disruptions to business
operations due to a Y2K-related issue.
OTHER YEAR 2000 ENDEAVORS
ACNB Corporation has also undertaken other endeavors to address the
challenges of the Year 2000 Problem. These include:
1. Stakeholder Communications
o Customer awareness program
o Bank employee communications and training
o Corporation stockholder communications
2. Commercial Customer Credit Risk Control Process
o Due diligence process for current and future material customers
o Assessment of customer Year 2000 readiness
3. Fiduciary Client Risk Control Process
o Due diligence process for fiduciary account and asset administration
servicers including investment providers, third parties,
counterparties and transfer agents
o Assessment of servicer Year 2000 readiness
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 Office of the Comptroller of the Currency has issued
guidelines for national banks to sell insurance. The corporation is evaluating
its options regarding the sale of 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.
Consequently, equity underwriting activities of banks may increase in the near
future. 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. Management cannot predict
whether such legislation will be enacted or, if enacted, how the 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
corporation's 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.
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.
<TABLE>
<CAPTION>
Capital Ratios at Year-end
- --------------------------------------------------------------------------------------------------------------------
1998 1997
----- -----
<S> <C> <C>
Common stockholders' equity to assets 11.21% 11.27%
Tier 1 leverage ratio 11.55% 11.26%
Tier 1 risk-based capital ratio 18.93% 18.14%
Total risk-based capital ratio 20.15% 19.28%
</TABLE>
24
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stambaugh o Ness
----------------------------
Certified Public Accountants
To The Stockholders and Board of Directors
ACNB Corporation
Gettysburg, Pennsylvania
We have audited the accompanying consolidated statements of condition of
ACNB Corporation and subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Stambaugh o Ness, P.C.
York, Pennsylvania
January 15, 1999
25
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Condition
December 31
----------------------------
<S> <C> <C>
ASSETS In thousands 1998 1997
- ------------------- --------- ---------
Cash and due from banks $ 14,354 $ 14,674
Interest bearing deposits with banks 3,450 14,060
Investment securities
(fair value $140,570 and $89,053, respectively) 139,353 88,923
Federal funds sold -- 100
Mortgage loans held for sale 504 570
Loans
(net of unearned discount of $22 and $166, respectively) 334,623 341,238
Allowance for possible loan losses (3,424) (3,174)
--------- ---------
Net loans 331,199 338,064
Premises and equipment 4,491 4,949
Other real estate 152 401
Other assets 5,311 5,096
--------- ---------
TOTAL ASSETS $ 498,814 $ 466,837
========= =========
LIABILITIES
- --------------------------------------------------------------------------------------------------------------
Non-interest bearing deposits $ 52,473 $ 46,839
Interest bearing deposits 364,087 348,734
--------- ---------
TOTAL DEPOSITS 416,560 395,573
Securities sold under agreement to repurchase 22,658 15,021
Demand notes, U.S. Treasury 100 450
Other liabilities 3,559 3,175
--------- ---------
TOTAL LIABILITIES 442,877 414,219
STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------
Common stock (par value $2.50; 20,000,000 shares authorized; 5,253,278 issued
and outstanding shares
on 12/31/98 and 12/31/97) 13,133 13,133
Additional paid-in capital 3,647 3,647
Retained earnings 37,829 34,968
Accumulated other comprehensive income 1,328 870
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 55,937 52,618
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 498,814 $466,837
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
26
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------
INTEREST INCOME In thousands, except per share data 1998 1997 1996
- --------------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Loans (including fees) $27,602 $27,597 $26,463
Time deposits with banks 487 456 518
Federal funds sold 1 6 5
Taxable securities 7,488 6,950 6,846
Non-taxable securities 50 54 62
------- ------- -------
TOTAL INTEREST INCOME 35,628 35,063 33,894
INTEREST EXPENSE
- ------------------------------------------------------------------------------------------------------------------
Interest bearing deposits 14,380 14,175 14,301
Other borrowed funds 858 737 823
------- ------- -------
TOTAL INTEREST EXPENSE 15,238 14,912 15,124
NET INTEREST INCOME 20,390 20,151 18,770
Provision for possible loan losses 360 210 30
------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN LOSSES 20,030 19,941 18,740
NON-INTEREST INCOME
- ------------------------------------------------------------------------------------------------------------------
Trust income 530 520 517
Service fees on deposit accounts 851 764 756
Other income 888 636 713
------- ------- -------
TOTAL NON-INTEREST INCOME 2,269 1,920 1,986
NON-INTEREST EXPENSE
- ------------------------------------------------------------------------------------------------------------------
Salaries and employee benefits 6,824 6,529 5,881
Net occupancy expense 775 802 770
Equipment expense 1,097 1,004 937
Other taxes 458 441 424
Other expense 2,358 2,288 2,117
------- ------- -------
TOTAL NON-INTEREST EXPENSE 11,512 11,064 10,129
INCOME BEFORE INCOME TAXES 10,787 10,797 10,597
Applicable income taxes 3,566 3,568 3,488
------- ------- -------
NETINCOME $ 7,221 $ 7,229 $ 7,109
======= ======= =======
PER COMMON SHARE DATA*
- ------------------------------------------------------------------------------------------------------------------
Basic earnings $1.37 $1.38 $1.34
Cash dividends $ .83 $ .79 $1.70
</TABLE>
*Based on a weighted average of 5,253,278 shares in 1998, 5,254,618 shares
in 1997, and 5,300,569 shares in 1996.
The accompanying notes are an integral part of the consolidated
financial statements.
27
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income Total
-------- ---------- -------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
In thousands
BALANCE AT JANUARY 1, 1996 $ 13,269 $ 4,396 $ 33,798 $ -- $ 51,463
Comprehensive income:
Net income -- -- 7,109 -- 7,109
Net change in unrealized gains on securities available-for-sale -- -- -- 357 357
--------
Total comprehensive income 7,466
--------
Cash dividends -- -- (9,018) -- (9,018)
Retirement of 29,284 shares (73) (402) -- -- (475)
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1996 13,196 3,994 31,889 357 49,436
Comprehensive income:
Net income -- -- 7,229 -- 7,229
Net change in unrealized gains on securities available-for-sale -- -- -- 513 513
--------
Total comprehensive income 7,742
--------
Cash dividends -- -- (4,150) -- (4,150)
Retirement of 25,194 shares (63) (347) -- -- (410)
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1997 13,133 3,647 34,968 870 52,618
Comprehensive income:
Net income -- -- 7,221 -- 7,221
Net change in unrealized gains on securities available-for-sale -- -- -- 458 458
--------
Total comprehensive income 7,679
--------
Cash dividends -- -- (4,360) -- (4,360)
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1998 $ 13,133 $ 3,647 $ 37,829 $ 1,328 $ 55,937
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
28
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
INCREASE (DECREASE) IN CASH ----------------------------------
AND CASH EQUIVALENTS In thousands 1998 1997 1996
- --------------------------------- -------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and dividends received $ 35,293 $ 35,015 $ 33,563
Fees and commissions received 2,728 2,451 2,555
Interest paid (14,997) (14,768) (14,940)
Cash paid to suppliers and employees (11,017) (10,257) (10,481)
Income taxes paid (3,770) (3,629) (3,438)
Loans originated for sale (21,294) (6,368) (10,538)
Proceeds of mortgage loans sold 21,360 5,798 11,412
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,303 8,242 8,133
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities held-to-maturity 7,000 67,622 59,124
Proceeds from maturities of investment securities available-for-sale 12,267 4,485 804
Purchase of investment securities held-to-maturity (5,000) (20,197) (37,236)
Purchase of investment securities available-for-sale (64,101) (23,560) (34,334)
Net decrease (increase) in loans 6,505 (16,530) (1,927)
Capital expenditures (167) (191) (235)
Proceeds from sale of other real estate owned 249 614 (326)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (43,247) 12,243 (14,130)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 10,357 2,440 (3,186)
Net increase (decrease) in certificates of deposit 10,630 (9,994) 14,070
Net increase (decrease) in securities
sold under agreement to repurchase 7,637 (1,715) 3,533
Dividends paid (4,360) (4,150) (9,018)
Net increase (decrease) in borrowed funds (350) -- 251
Retirement of common stock -- (410) (475)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 23,914 (13,829) 5,175
-------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (11,030) 6,656 (822)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 28,834 22,178 23,000
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 17,804 $ 28,834 $ 22,178
======== ======== ========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------
Net income $ 7,221 $ 7,229 $ 7,109
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 625 657 633
Provision for possible loan losses 360 210 30
Provision for deferred taxes (291) 73 91
Amortization (Accretion) of investment securities premiums (discounts) (148) (39) 356
Increase (Decrease) in taxes payable 87 (134) (41)
Decrease (Increase) in interest receivable (111) 442 (30)
Increase in interest payable 241 144 184
Increase (Decrease) in accrued expenses (39) 209 301
Decrease (Increase) in mortgage loans held for sale 66 (570) 874
Increase in other assets (91) (59) (1,233)
Increase (Decrease) in other liabilities 383 80 (141)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 8,303 $ 8,242 $ 8,133
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
29
<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, as accumulated other comprehensive income, 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.
ALLOWANCEFOR 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, 1998 and 1997, all
of the corporation's impaired loans were on nonaccrual status for all reported
periods.
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.
30
<PAGE>
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- -------------------------------------------------------------------------------
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.
COMPREHENSIVE INCOME
The corporation adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income", as of January 1, 1998. Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in income. Although certain changes in assets and liabilities, such
as unrealized gains and losses on available-for-sale securities, are reported as
a separate component of the equity section of the statement of condition, such
items, along with net income, are components of comprehensive income. The
adoption of Statement of Financial Accounting Standards No. 130 had no effect on
the corporation's net income or stockholders' equity other than expanded
disclosure.
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, 1998 and 1997, were approximately $6,465,000 and $5,554,000,
respectively.
31
<PAGE>
NOTE C
INVESTMENT SECURITIES
- -------------------------------------------------------------------------------
The amortized cost and estimated fair value of investment securities at December
31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1998 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 $ 30,107 $ 1,217 $ -- $ 31,324
Obligations of states and political subdivisions 789 -- -- 789
--------- --------- ------------ ---------
Total debt securities 30,896 1,217 -- 32,113
Restricted equity securities 2,975 -- -- 2,975
--------- --------- ------------ ---------
Total Held-to-Maturity Securities $ 33,871 $ 1,217 $ -- $ 35,088
========= ========= ============ =========
Available-for-Sale Securities
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 103,470 $ 2,012 $ -- $ 105,482
========= ========= ============ =========
1997 In thousands
- -----------------
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
========= ========= ============ =========
Held-to-Maturity Available-for-Sale
------------------------- --------------------------
Amortized Fair Amortized Fair
In thousands Cost Value Cost Value
- ------------ --------- --------- ------------ ---------
Within one year $ 57 $ 57 $ -- $ --
After one year through five years 20,392 20,966 10,000 10,098
After five years through ten years 10,447 11,090 -- --
After ten years -- -- 93,470 95,384
--------- --------- ------------ ---------
Total Debt Securities $ 30,896 $ 32,113 $ 103,470 $ 105,482
========= ========= ============ =========
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1998, 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.
32
<PAGE>
NOTE C
INVESTMENT SECURITIES (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S.
Government Taxable
and Federal State and Other Equivalent
December 31, 1998 In thousands Agency Municipal Securities Total Yield
- ------------------------------ ----------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Amortized Cost
Within one year $ -- $ 57 $ -- $ 57 9.55%
After one year through five years 30,107 285 -- 30,392 6.11%
After five years through ten years 10,000 447 -- 10,447 6.31%
After ten years 93,470 -- -- 93,470 6.48%
No set maturity -- -- 2,975 2,975 6.48%
-------- -------- -------- --------
Total $133,577 $ 789 $ 2,975 $137,341
======== ======== ======== ========
Fair Value $136,806 $ 789 $ 2,975 $140,570
Taxable Equivalent Yield 6.36% 9.55% 6.45%
December 31, 1997 In thousands
- -------------------------------------------------------------------------------------------------------------------------
Amortized Cost $ 83,912 $ 832 $ 2,861 $ 87,605
======== ======== ======== ========
December 31, 1996 In thousands
- -------------------------------------------------------------------------------------------------------------------------
Amortized Cost $112,460 $ 925 $ 2,570 $115,955
======== ======== ======== ========
</TABLE>
The weighted average yield of tax-exempt obligations has been calculated on
a taxable equivalent basis. The taxable equivalent adjustments are based on an
effective tax rate of 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, 1998 and 1997, assets with a carrying value of $57,788,000
and $47,971,000, 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
- -------------------------------------------------------------------------------
Loans at December 31 are summarized as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996 1995 1994
- ------------ --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 11,698 $ 9,758 $ 9,866 $ 9,268 $ 10,785
Real estate - construction 14,018 13,674 11,207 12,951 12,632
Real estate - mortgage 295,902 303,270 288,588 284,943 268,944
Consumer 13,531 15,272 15,994 18,150 17,444
--------- --------- --------- --------- ---------
335,149 341,974 325,655 325,312 309,805
Less: Unearned discount on loans 22 166 728 2,184 3,883
--------- --------- --------- --------- ---------
Total Loans $ 335,127 $ 341,808 $ 324,927 $ 323,128 $ 305,922
========= ========= ========= ========= =========
</TABLE>
The following table outlines the repricing opportunities for all loans
outstanding as of December 31, 1998. 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 $ 5,986 $ 5,712 $ 11,698
Real estate - construction 5,910 8,108 14,018
-------- -------- --------
Total $ 11,896 $ 13,820 $ 25,716
======== ======== ========
Loans with predetermined interest rates $ 2,163 $ 3,356 $ 5,519
Loans with variable interest rates 9,733 10,464 20,197
-------- -------- --------
Total $ 11,896 $ 13,820 $ 25,716
======== ======== ========
</TABLE>
33
<PAGE>
NOTED
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,
1998 and 1997, was $3,279,064 and $3,570,156, respectively. The terms for these
loans were substantially the same as those for unrelated parties.
<TABLE>
<CAPTION>
Balance at Balance at Number
January 1, Amounts December 31, of
1998 Additions Collected 1998 Debtors
- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
$3,570,156 $1,352,000 $1,643,092 $3,279,064 5
</TABLE>
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:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996 1995 1994
- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance of allowance for loan losses at beginning of period $ 3,174 $ 3,183 $ 3,274 $ 3,370 $ 3,581
Loans charged-off:
Commercial, financial and agricultural 20 49 34 -- 8
Real estate - construction -- -- -- -- --
Real estate - mortgage 4 34 31 44 178
Consumer 185 160 131 90 70
-------- -------- -------- -------- --------
Total loans charged-off 209 243 196 134 256
Recovery of charged-off loans:
Commercial, financial and agricultural -- 1 6 12 5
Real estate - construction -- -- -- -- --
Real estate - mortgage 12 -- 41 1 13
Consumer 87 23 28 25 27
-------- -------- -------- -------- --------
Total recoveries 99 24 75 38 45
Net loans charged-off 110 219 121 96 211
Provision for possible loan losses 360 210 30 -- --
-------- -------- -------- -------- --------
Balance at end of period $ 3,424 $ 3,174 $ 3,183 $ 3,274 $ 3,370
======== ======== ======== ======== ========
TOTAL LOAN BALANCES In thousands
- ---------------------------------
Average total loans $339,448 $337,465 $321,979 $319,712 $289,350
Total loans at year-end 335,127 341,808 324,927 324,002 305,922
RATIOS
- ----------------------------------------------------------------------------------------------------------------------
Net charge-offs to:
Average total loans 0.03% 0.06% 0.04% 0.03% 0.07%
Total loans at year-end 0.03% 0.06% 0.04% 0.03% 0.07%
Allowance for loan losses 3.21% 6.90% 3.80% 2.93% 6.26%
Allowance for loan losses to:
Average total loans 1.01% 0.94% 0.99% 1.02% 1.16%
Total loans at year-end 1.02% 0.93% 0.98% 1.01% 1.10%
</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 92% of the corporation's total loan portfolio
at December 31, 1998. 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 1998.
Management anticipates that charge-off amounts will approximate $200,000 in
1999.
34
<PAGE>
NOTE E
ALLOWANCE FOR LOAN LOSSES (continued)
- --------------------------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------------- -------------- ------------------- -------------- --------------
% of % of % of % of % of
Gross Gross Gross Gross Gross
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 $ 798 0.24% $ 696 0.20% $ 92 0.03% $ 95 0.03% $ 98 0.03%
Real estate - construction 102 0.03% 68 0.02% 47 0.01% 48 0.01% 51 0.02%
Real estate - mortgage 1,098 0.33% 1,518 0.45% 1,672 0.52% 1,719 0.53% 1,768 0.58%
Consumer 227 0.07% 200 0.06% 156 0.05% 160 0.05% 165 0.05%
Unallocated 1,199 0.35% 692 0.20% 1,216 0.37% 1,252 0.39% 1,287 0.42%
------- ---- ------ ---- ------ ---- ------ ---- ------ ----
Total $ 3,424 1.02% $3,174 0.93% $3,183 0.98% $3,274 1.01% $3,370 1.10%
======= ==== ====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
NOTE F
PREMISES AND EQUIPMENT
- -------------------------------------------------------------------------------
The composition of corporation premises and equipment at December 31 was as
follows:
<TABLE>
<CAPTION>
In thousands 1998 1997
- ------------ ------- --------
<S> <C> <C>
Land $ 857 $ 857
Bank premises 5,907 5,835
Furniture and equipment 4,616 4,556
Less: Accumulated depreciation and amortization (6,889) (6,299)
------- -------
Total $ 4,491 $ 4,949
======= =======
</TABLE>
<TABLE>
A summary of depreciation and amortization expenses is as follows:
<S> <C> <C> <C>
In thousands 1998 1997 1996
- ------------ ----- ----- -----
Bank premises $ 182 $ 185 $ 200
Furniture and equipment 443 472 433
----- ----- -----
Total $ 625 $ 657 $ 633
===== ===== =====
</TABLE>
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, 1998 and 1997, the carrying value of this investment
was approximately $276,019 and $319,219, respectively.
35
<PAGE>
NOTE H
NONPERFORMING ASSETS
- --------------------------------------------------------------------------------
The following table presents information concerning the aggregate amount of
nonperforming assets at December 31:
In thousands 1998 1997 1996 1995 1994
- ------------ ------ ------ ------- ------ -------
Nonaccrual loans $1,281 $1,640 $ 994 $1,092 $ 854
90 days past due still accruing 2,230 1,197 2,175 2,780 2,219
Restructured loans -- -- -- -- --
Other real estate owned 152 401 1,015 689 1,037
------ ------ ------ ------ ------
Total Nonperforming Assets $3,663 $3,238 $4,184 $4,561 $4,110
====== ====== ====== ====== ======
The gross interest income that would have been recorded on nonaccrual loans
at December 31, 1998, under original terms was approximately $124,000. The
amount of interest income on these loans that was included in net income for the
year ended December 31, 1998, 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, 1998 and
1997, are summarized in the following table:
In thousands 1998 1997
------------ ------- -------
Time certificates of deposit $19,982 $17,247
Other time deposits 1,000 1,000
Maturities of time deposits of $100,000 or more outstanding at December 31,
1998, are summarized as follows:
In thousands
------------
Three months or less $ 5,894
Over three through six months 4,106
Over six through twelve months 5,606
Over twelve months 5,376
-------
Total $20,982
=======
The interest expense related to time certificates of deposit in
denominations of $100,000 or more totaled $981,000 in 1998, $891,000 in 1997 and
$792,000 in 1996.
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 $104,508, $91,887 and
$96,473 for the years ended December 31, 1998, 1997 and 1996, 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:
1999 $ 59,400
2000 47,500
2001 48,000
2002 48,000
2003 48,000
Later years 311,000
--------
Total Minimum Payments $561,900
========
36
<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, 1998, 1997 and 1996, respectively:
In thousands 1998 1997 1996
- ------------ ------- ------- -------
Amount outstanding at year-end $22,758 $15,471 $17,186
Average interest rate at year-end 4.33% 4.42% 4.36%
Maximum amount outstanding at any month-end $25,812 $22,740 $38,057
Average amount outstanding $19,001 $16,805 $18,248
Weighted average interest rate 4.41% 4.39% 4.51%
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, 1998, $5,272,000 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, 1998, the maximum amount
available for transfer from the bank to the corporation in the form of loans was
approximately $5,937,000.
NOTE M
INCOME TAXES
- --------------------------------------------------------------------------------
The composition of applicable income taxes for the years ended December 31
was allocated as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
- ------------ ------ ------ ------
<S> <C> <C> <C>
Income from continuing operations $3,566 $3,568 $3,488
Stockholders' equity for other comprehensive income 236 264 184
------ ------ ------
Total $3,802 $3,832 $3,672
====== ====== ======
</TABLE>
Income tax expense attributable to other comprehensive income consists of the
following at December 31:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
- ------------ ------ ------ ------
<S> <C> <C> <C>
Unrealized gains (losses) on securities arising during the period $ 236 $ 264 $ 184
Reclassification adjustment for gains (losses) included in net income -- -- --
------ ------ ------
Income Tax Expense (Benefits) Related to Other Comprehensive Income $ 236 $ 264 $ 184
====== ====== ======
</TABLE>
Income tax expense attributable to income from continuing operations consists of
the following at December 31:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
- ------------ ------ ------ ------
<S> <C> <C> <C>
Currently payable $3,564 $3,665 $3,453
Deferred taxes payable (benefit) 2 (97) 35
------ ------ ------
Applicable Income Taxes $3,566 $3,568 $3,488
====== ====== ======
</TABLE>
37
<PAGE>
NOTE M
INCOME TAXES (continued)
- --------------------------------------------------------------------------------
For the years ended December 31, the applicable income tax expense
attributable to income from continuing operations differed from the tax expense
computed by applying the federal statutory rate to pretax earnings. The
components of the differences are as follows:
In thousands 1998 1997 1996
- ------------ ------ ------ ------
Income taxes at statutory rates $3,775 $3,779 $3,709
Increases (Decreases) resulting from:
Tax-exempt income (32) (34) (45)
Tax preference interest expense 3 4 5
Rehabilitation and low-income housing credits (73) (73) (75)
Other (107) (108) (106)
------ ------ ------
Applicable Income Taxes $3,566 $3,568 $3,488
====== ====== ======
The significant components of deferred tax assets and deferred tax
liabilities at December 31, 1998 and 1997, are as follows:
In thousands 1998 1997
- ------------ ---- -----
Deferred tax assets:
Allowance for possible loan losses $623 $ 538
Pension -- 18
Deferred compensation 128 --
Total gross deferred tax assets 751 556
---- -----
Deferred tax liabilities:
Depreciation 60 219
Net unrealized gains on available-for-sale securities 684 448
Pension 50 --
Total gross deferred tax liabilities 794 667
---- -----
Net Deferred Tax Assets (Liabilities) $(43) $(111)
==== =====
Since the corporation has historically had strong earnings, management
believes the deferred tax assets are realizable.
Income taxes paid during 1998, 1997 and 1996 were $3,770,000, $3,629,000
and $3,438,000, respectively. Federal income taxes on securities gains were $0
in 1998, 1997 and 1996.
38
<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, 1998, 1997 and 1996 was
$413,000, $419,000 and $374,000, respectively.
The following tables provide a reconciliation of the changes in the plan
benefit obligation and fair value of assets for the two plan years ending
December 31, 1998 and 1997, and a statement of the funded status as of December
31, 1998 and 1997:
In thousands 1998 1997
- ------------ ------- -------
Reconciliation of benefit obligation:
Benefit obligation - beginning of year $ 7,494 $ 6,342
Service costs 328 287
Interest costs 485 443
Actuarial (gains)/losses 881 438
Benefit payments (61) (16)
------- -------
Benefit obligation - end of year $ 9,127 $ 7,494
======= =======
Reconciliation of fair value of plan assets:
Fair value of plan assets - beginning of year $ 6,052 $ 4,932
Actual return on plan assets 491 770
Employer contributions 611 366
Benefits paid (61) (16)
------- -------
Fair value - end of year $ 7,093 $ 6,052
======= =======
Reconciliation of funded assets:
Funded status at December 31(under funded) over funded $(2,034) $(1,442)
Unrecognized net actuarial loss 2,038 1,224
Unrecognized transition asset (52) (65)
Unrecognized prior service cost 193 231
------- -------
Net amount recognized $ 145 $ (52)
======= =======
39
<PAGE>
NOTE N
RETIREMENT PLANS (continued)
- --------------------------------------------------------------------------------
The following table provides the amounts recognized in the statements of
condition as of December 31 of both years:
In thousands 1998 1997
- ------------ ----- -----
Prepaid (Accrued) benefit cost $ 145 $ (52)
===== =====
The following table provides the components of net periodic benefit cost for the
years ending December 31, 1998 and 1997:
In thousands
- ------------
Components of net periodic benefit cost:
Service cost $ 328 $ 287
Interest cost 485 443
Expected return on assets (459) (378)
Recognized net actuarial loss 34 42
Amortization of transition asset (13) (13)
Amortization of prior service costs 38 38
----- -----
Net periodic benefit cost $ 413 $ 419
===== =====
The prior service costs and gains/losses are amortized on a straight-line
basis over the average service period of members expected to receive benefits.
The assumptions used in the measurement of the benefit obligation are shown
in the following table:
Weighted average assumption as of December 31:
Discount rate 5.50% 6.50%
Expected return on plan assets 8.25% 7.50%
Rate of compensation increase 4.62% 5.62%
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, 1998 and 1997.
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 1998 and 1997. The annual expense included
in salaries and benefits amounted to $180,000, $159,000 and $159,000 for 1998,
1997 and 1996, respectively.
ACNB 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,
1998 and 1997, the present value of the future obligations was $338,000 and
$199,000, respectively. The insurance policies included in other assets had
total cash value of $1,932,000 and $1,841,000, respectively, at December 31,
1998 and 1997.
40
<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, 1998 and 1997, is presented below:
In thousands 1998 1997
- ------------ ------- -------
Commitments to extend credit $29,237 $32,022
Standby letters of credit 2,039 3,007
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
1998 and 1997, approximately 98% of the corporation's assets and 88% 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, 1998 December 31, 1997
------------------------ --------------------------
Estimated Fair Carrying Estimated Fair Carrying
In thousands Value Amount Value Amount
- ------------ ------------------------ --------------------------
<S> <C> <C> <C> <C>
Cash and due from banks $ 14,354 $ 14,354 $14,674 $14,674
Interest bearing deposits with banks 3,450 3,450 14,060 14,060
Federal funds sold -- -- 100 100
Investment securities 140,570 139,353 89,053 88,923
Interest receivable 2,614 2,614 2,510 2,510
</TABLE>
41
<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, 1998 and 1997. Mortgages and consumer loans have been
revalued using discounted cash flows. The mortgages were estimated using market
rates at December 31, 1998 and 1997, and consumer loans were revalued using
rates being charged by the corporation at year-end 1998 and 1997. Fair value for
nonperforming loans is based on current valuations of underlying collateral.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-------------------------- --------------------------
Estimated Fair Carrying Estimated Fair Carrying
In thousands Value Amount Value Amount
- ------------ -------------------------- --------------------------
<S> <C> <C> <C> <C>
Net loans $332,278 $331,199 $338,394 $338,064
Mortgage loans held for sale 504 504 570 570
</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, 1998 and 1997. 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, 1998 December 31, 1997
-------------------------- --------------------------
Estimated Fair Carrying Estimated Fair Carrying
In thousands Value Amount Value Amount
- ------------ -------------------------- --------------------------
<S> <C> <C> <C> <C>
Deposits with no stated maturities $215,813 $215,813 $204,398 $204,398
Deposits with stated maturities 204,302 200,747 191,741 191,175
Repurchase agreements 22,658 22,658 15,021 15,021
Federal funds purchased and demand notes 100 100 450 450
Interest payable 2,713 2,713 2,472 2,472
</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, 1998 December 31, 1997
-------------------------- --------------------------
Estimated Fair Carrying Estimated Fair Carrying
In thousands Value Amount Value Amount
- ------------ -------------------------- --------------------------
<S> <C> <C> <C> <C>
Commitments to extend credit $ 29,237 $ 29,237 $ 32,022 $ 32,022
Standby letters of credit 2,039 2,039 3,007 3,007
</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.
42
<PAGE>
NOTE Q
ACNB CORPORATION (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31
-------------------
STATEMENTS OF CONDITION In thousands 1998 1997
- ------------------------------------ ------- -------
<S> <C> <C>
ASSETS
Cash $ 202 $ 202
Securities and other assets 276 319
Investment in common stock of subsidiary 53,124 50,227
Receivable from subsidiary 1,007 1,000
------- -------
TOTAL ASSETS $54,609 $51,748
======= =======
STOCKHOLDERS' EQUITY
Common stock (par value $2.50; 20,000,000 shares
authorized; 5,253,278 issued and outstanding shares
on 12/31/98 and 12/31/97) $13,133 $13,133
Additional paid-in capital 3,647 3,647
Retained earnings 37,829 34,968
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $54,609 $51,748
======= =======
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31
----------------------------
STATEMENTS OF INCOME In thousands 1998 1997 1996
- --------------------------------- ------ ------ ------
<S> <C> <C> <C>
INCOME
Dividend from subsidiary $4,360 $4,150 $9,018
EXPENSE 166 44 (7)
------ ------ ------
INCOME BEFORE TAXES AND EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARY 4,194 4,106 9,025
Applicable tax benefit (130) (88) (72)
------ ------ ------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARY 4,324 4,194 9,097
Equity in undistributed net income of subsidiary 2,897 3,035 (1,988)
------ ------ ------
NET INCOME $7,221 $7,229 $7,109
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31
----------------------------
STATEMENTS OF CASH FLOWS In thousands 1998 1997 1996
- ------------------------------------- ------ ------ ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Dividends received $4,360 $4,560 $9,493
------ ------ ------
Net Cash Provided by Operating Activities 4,360 4,560 9,493
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (4,360) (4,150) (9,018)
Retirement of common stock -- (410) (475)
------ ------ ------
Net Cash Used in Financing Activities (4,360) (4,560) (9,493)
------ ------ ------
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 $7,221 $7,229 $7,109
Decrease (Increase) in investment in common stock of subsidiary (2,897) (3,035) 1,988
Decrease (Increase) in receivable from subsidiary (7) 322 403
Loss (Gain) on equity investment 43 44 (7)
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES $4,360 $4,560 $9,493
====== ====== ======
</TABLE>
43
<PAGE>
NOTE R
FINANCIAL INFORMATION RELATING
TO OPERATING SEGMENTS
- --------------------------------------------------------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131 establishes
standards and disclosure requirements for the manner entities report information
about operating segments. Operating segments are defined based upon the way
management organizes segments for making operating decisions and evaluating
performance.
Management of the corporation monitors and evaluates four segments of its
operations, which include commercial, consumer and mortgage lending and
investment securities. The corporation's marketplace is south central
Pennsylvania which encompasses Adams County and adjoining contiguous counties of
York, Franklin and Cumberland, and sections of northern Maryland. Management
views its market as a single geographic area.
Commercial lending includes commercial mortgages, real estate development,
accounts receivable financing, and agricultural loans. Consumer lending programs
include home equity loans, automobile and recreational vehicles loans, and
manufactured housing loans. Mortgage lending programs include personal
residential mortgages, residential construction loans, and speculative
construction loans.
Management measures the net interest income of each segment based upon the
earnings and fees for each segment recognized less the charge for the funds
used. The charge for funds used is based on the average cost of funds used by
the respective segment. Other non-interest expense, which includes salaries and
employee benefits, occupancy and equipment expense, and other expenses, is
allocated to each segment and is netted against net interest income after
provision for possible loan losses to arrive at income before income taxes for
each respective segment.
Management initiated segment reporting in 1998; accordingly, segment
information for 1997 and 1996 is not presented herein. The following is for year
ending December 31, 1998, by the four operating segments:
<TABLE>
<CAPTION>
Commercial Consumer Mortgage Investment
In thousands Lending Lending Lending Securities Other Total
- ------------ ---------- -------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Total interest income $ 11,093 $ 3,345 $ 13,164 $ 8,026 $ -- $ 35,628
Charge for funds used (4,393) (1,151) (5,756) (3,847) (91) (15,238)
-------- ------- -------- -------- ------- --------
Net Interest Income 6,700 2,194 7,406 4,179 (91) 20,390
Provision for possible
loan losses (155) (115) (90) -- -- (360)
-------- ------- -------- -------- ------- --------
Net Interest Income After Provision
for Possible Loan Losses 6,545 2,079 7,318 4,179 (91) 20,030
Non-interest income 52 89 126 -- 2,002 2,269
Non-interest expense (1,087) (509) (571) (55) (9,290) (11,512)
-------- ------- -------- -------- ------- --------
Income Before Income Taxes $ 5,510 $ 1,659 $ 6,873 $ 4,124 $(7,379) $ 10,787
======== ======= ======== ======== ======= ========
Average Funds Used $130,315 $34,207 $171,648 $125,164 $23,094 $484,428
======== ======= ======== ======== ======= ========
</TABLE>
44
<PAGE>
NOTE S
EFFECT OF RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging purposes. The
statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of condition and measure those instruments at fair
value. The accounting for changes in fair value of a derivative depends on the
intended use of the derivative and the resulting designation. If conditions are
met, a derivative may be specifically designated as a hedge of the exposure to
changes in fair value of a recognized asset or liability or unrecognized
commitment, a hedge of the exposure to variable cash flows of a forecasted
transaction, or a hedge of certain foreign currency exposures. SFAS No. 133
includes a provision for the potential reclassification of investments from
held-to-maturity to available-for-sale. This statement became effective for the
fiscal year beginning after December 15, 1998. Management anticipates that the
adoption of this statement will not have a material effect on operating results
or financial condition.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained After Securitization of Mortgage Loans Held
for Sale by a Mortgage Banking Enterprise". This statement requires that, after
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify any retained mortgage-backed securities based on the
ability and intent to sell or hold those investments, except that an entity
engaged in mortgage banking must classify as "trading securities" any retained
mortgage-backed securities that it commits to sell before or during the
securitization process. This statement is effective for the first fiscal quarter
beginning after January 30, 1999. The statement provides a one-time opportunity
for an enterprise to reclassify, based on the ability and intent on the adoption
of this statement, mortgage-backed securities and other beneficial interests
retained after securitization of mortgage loans held for sale from the trading
category, except those with commitments in place. The corporation has not
determined the impact, if any, of this statement on the statement of condition
or results of operations.
NOTE T
SUBSEQUENT EVENT
- --------------------------------------------------------------------------------
ACNB Corporation ("ACNB") signed a definitive agreement on July 28, 1998,
to acquire Farmers National Bancorp, Inc. ("FNB") of Newville, Pennsylvania.
Approximately 562,000 shares of common stock will be issued by ACNB Corporation
in conjunction with this transaction, based on an exchange ratio of 2.266 shares
of ACNB Corporation common stock for each share of Farmers National Bancorp,
Inc. common stock. The transaction will be accounted for under
"pooling-of-interests" method of accounting. The affiliation is planned to be
consummated during the first quarter of 1999, at which time the financial
statements of Farmers National Bancorp, Inc. will be consolidated into the
financial statements of ACNB Corporation.
A summary of unaudited proforma combined financial information for
ACNB Corporation and Farmers National Bancorp, Inc. is as follows:
<TABLE>
<CAPTION>
Earnings Data
- --------------------------------------------------------------------------------------------------------
1998 1997
-------------------------- -------------------------
ACNB ACNB/FNB ACNB ACNB/FNB
In thousands, except per share data As Reported Combined As Reported Combined
- ----------------------------------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Net interest income $20,390 $22,076 $20,151 $21,814
Provision for possible loan losses 360 360 210 210
Non-interest income 2,269 2,411 1,920 2,061
Non-interest expense 11,512 12,650 11,064 12,111
------- ------- ------- -------
Income before income taxes 10,787 11,477 10,797 11,554
Income taxes 3,566 3,753 3,568 3,784
------- ------- ------- -------
Net Income $ 7,221 $ 7,725 $ 7,229 $ 7,770
======= ======= ======= =======
Basic Net Income Per Share $1.37 $1.34 $1.38 $1.34
======= ======= ======= =======
<CAPTION>
Balance Sheet Data
- --------------------------------------------------------------------------------------------------------
In thousands
- ------------
<S> <C> <C> <C> <C>
Assets $498,814 $544,263 $466,837 $508,211
Net loans 331,199 348,257 338,064 354,375
Deposits 416,560 455,700 395,573 431,054
</TABLE>
45
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
Selected quarterly information for the years ended December 31, 1998 and 1997,
is as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
1998 In thousands, except per share data Quarter Quarter Quarter Quarter
- ---------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $8,710 $8,912 $9,031 $8,975
Interest expense 3,683 3,797 3,848 3,910
Net interest income 5,027 5,115 5,183 5,065
Provision for possible loan losses 90 90 90 90
Net income 1,766 1,908 1,848 1,699
Basic earnings per share .34 .36 .35 .32
Return on average assets 1.51% 1.59% 1.51% 1.36%
1997
- ----
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 possible 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%
</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 1998 1997 1996 1995 1994
- ----------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total interest income $ 35,628 $ 35,063 $ 33,894 $ 32,213 $ 30,639
Total interest expense 15,238 14,912 15,124 14,437 12,419
Net interest income 20,390 20,151 18,770 17,776 18,220
Provision for possible loan losses 360 210 30 -- --
Net income 7,221 7,229 7,109 6,459 6,773
PER SHARE DATA*
- ---------------
Basic earnings $1.37 $1.38 $1.34 $1.22 $ 1.27
Cash dividends .83 .79 1.70 .66 .64
BALANCE SHEET TOTALS
- --------------------
Average stockholders' equity $ 54,908 $ 51,137 $ 48,116 $ 50,317 $ 47,893
Average assets 484,428 467,220 465,984 459,136 473,186
RATIOS
- ------
Return on average assets 1.49% 1.55% 1.53% 1.41% 1.43%
Return on average stockholders' equity 13.15% 14.14% 14.77% 12.84% 14.15%
Dividend payout 60% 57% 127% 54% 50%
Stockholders' equity to assets 11.21% 11.27% 10.46% 11.20% 10.31%
</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.
46
<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, 1998. Only the sections
referenced in the index below are incorporated into this Form 10-K.
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
PART I
Item 1 - Business 49
Item 2 - Properties 49
Item 3 - Legal Proceedings 50
Item 4 - Submission of Matters to a Vote of Stockholders 50
PART II
Item 5 - Market for the Registrant's Common Stock and
Related Stockholder Matters 53
Item 6 - Selected Financial Data 15 & 46
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 16 - 24
a. Quantitative and Qualitative
b. Disclosures About Market Risk 20 & 21
Item 8 - Financial Statements and Supplementary Data 26 - 45
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 50
PART III
Item 10 - Directors and Executive Officers of the Registrant 50
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 51
c. Reports on Form 8-K(3)
Item 15 - Signatures 52
</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, 1998, 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,
1998.
47
<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, 1998, the approximate number of shareholders of the
corporation's common stock was 2,994.
As quoted on the OTCBulletin Board, high and low bid prices of common
shares and dividends for the last two years were:
1998 1997
---------------------------- ----------------------------
Bid Price Cash Bid Price Cash
Quarter ----------------- Dividend ----------------- Dividend
Ended High Low Paid High Low Paid
- ------------------------------------------------------------------------------
March 31 $25.63 $23.38 $.19 $17.50 $16.00 $.18
June 30 27.50 25.63 .19 18.25 16.63 .18
September 30 27.75 24.50 .20 22.75 18.25 .19
December 31 24.50 22.00 .25 24.25 22.75 .24
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 F.J. Morrissey & Co., Inc.
Frederick, MD Philadelphia, PA
(301)662-6488/(800)950-6488 (215) 563-8500/(800)842-8928
Hopper Soliday & Co., Inc. Smith Barney Inc.
Lancaster, PA Gettysburg, PA
(717) 560-3015/(800)456-9234 (717) 334-9101/(800)344-3828
Janney Montgomery Scott, Inc.
York, PA
(717) 845-5611/(800)999-0503
48
<PAGE>
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
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 Littlestown Hardware &
President President Foundry Co., Inc.
Adams County Motors Corp. Boyer Nurseries & Orchards, Inc.
Vice Chairman JENNIFER L. WEAVER
ACNB Corporation & PAUL G. PITZER Director
Adams County National Bank Fruit Grower Gettysburg Center of Harrisburg
Area Community College
</TABLE>
ACNB CORPORATION AND ADAMS COUNTY NATIONAL BANK
DIRECTORS EMERITI
- --------------------------------------------------------------------------------
C. F. DITZLER CHARLES E. RITTER
ADAMS COUNTY NATIONAL BANK HONORARY DIRECTOR
- --------------------------------------------------------------------------------
DALE G. CRUM
49
<PAGE>
OFFICERS
ACNB CORPORATION
- --------------------------------------------------------------------------------
RONALD L. HANKEY JOHN W. KRICHTEN LYNDA L. GLASS
Chairman, Secretary & Treasurer Assistant Secretary
President & CEO
ADAMS COUNTY NATIONAL BANK
- --------------------------------------------------------------------------------
RONALD L. HANKEY ASSISTANT
Chairman, VICE PRESIDENTS VICE PRESIDENTS
President & CEO --------------- ---------------
ELIZABETH H. BEALL ROBERT L. BREWER DEBRA B. BRENNAN
Senior Vice President
Human Resources WAYNE G. CRUM STEVEN E. EBERSOLE
GARY R. BENNETT DAVID W. DEANER GEORGE R. GUISE
Senior Vice President &
Senior Trust Officer ROBERT A. HAHN NANCY E. HELWIG
LYNDA L. GLASS L. JOHN HICKS DOROTHY K. PUHL
Senior Vice President &
Chief Operating Officer RONALD L. HOFFMAN SHELBY L. STONE
JOHN M. KIEHL RONALD E. LINDBECK
Senior Vice President ASSISTANT CASHIERS
Operations & Security STANLEY E. MUMMERT ------------------
JOHN W. KRICHTEN WAYNE A. STEINOUR BEVERLY S. KRESS
Senior Vice President, Cashier
& Chief Financial Officer WILLIAM H. YOHE, JR. DIANA K. KUNTZ
NANCY L. REICHART LINDA L. LEER
Senior Vice President &
Trust Officer
VICTOR L. REYNOLDS
Senior Vice President &
Senior Loan Officer
CARL L. RICKER
Senior Vice President &
Chief Lending Officer
JOHN E. SALISBURY
Senior Vice President
Audit
50
<PAGE>
ADAMS COUNTY NATIONAL BANK OFFICE LOCATIONS
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
ADAMS COUNTY NATIONAL BANK
Banking Convenience is Just a Phone Call Away!
Toll-Free: 1-888-338-ACNB (2262) Local: 338-ACNB (2262)
51
<PAGE>
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders for ACNB Corporation will be held on
Tuesday, May 4, 1999, 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
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.
<PAGE>
[ACNB LOGO]
675 OLD HARRISBURG ROAD P.O. Box 3129 Gettysburg, PA 17325
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
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 14,354
<INT-BEARING-DEPOSITS> 3,450
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 105,482
<INVESTMENTS-CARRYING> 33,871
<INVESTMENTS-MARKET> 35,088
<LOANS> 335,127
<ALLOWANCE> 3,424
<TOTAL-ASSETS> 498,814
<DEPOSITS> 416,560
<SHORT-TERM> 22,758
<LIABILITIES-OTHER> 3,559
<LONG-TERM> 0
13,133
0
<COMMON> 0
<OTHER-SE> 42,804
<TOTAL-LIABILITIES-AND-EQUITY> 498,814
<INTEREST-LOAN> 27,602
<INTEREST-INVEST> 7,538
<INTEREST-OTHER> 488
<INTEREST-TOTAL> 36,628
<INTEREST-DEPOSIT> 14,380
<INTEREST-EXPENSE> 16,238
<INTEREST-INCOME-NET> 20,390
<LOAN-LOSSES> 360
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11,512
<INCOME-PRETAX> 10,787
<INCOME-PRE-EXTRAORDINARY> 10,787
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,221
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.37
<YIELD-ACTUAL> 4.39
<LOANS-NON> 1,281
<LOANS-PAST> 2,230
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,511
<ALLOWANCE-OPEN> 3,174
<CHARGE-OFFS> 209
<RECOVERIES> 88
<ALLOWANCE-CLOSE> 3,424
<ALLOWANCE-DOMESTIC> 3,424
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
