10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (Mark one) __XX__ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (Fee Required) For the fiscal year ended December 31, 1994 or ______ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (No Fee Required) For the Transition Period from______to______ 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, 1995, ACNB Corporation had outstanding 5,316,122 shares of Common Stock. The aggregate market value of such Common Stock held by nonaffiliates as of February 28, 1995 was approximately $74,397,000. 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 Annual Report for the year ended 12/31/94 are incorporated by reference into Parts II and IV. Portions of the Proxy Statement for the annual shareholders meeting to be held May 9, 1995 are incorporated by reference into Part III. 1 of 19 ACNB CORPORATION FORM 10-K INDEX PAGE Part I Item 1. Business 3 Item 2. Properties 12 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 Part II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters 12 Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 8. Financial Statements and Supplementary Data 12 Item 9. Disagreements on Accounting and Financial Disclosure 13 Part III Item 10. Directors and Executive Officers of the Registrant 13 Item 11. Management Remuneration 13 Item 12. Security Ownership of Certain Beneficial Owners and Management 13 Item 13. Certain Relationships and Related Transactions 13 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 14 Signatures 18 2 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, Pa., the Bank provides services to its customers through its branch network of 12 full service offices located throughout Adams County, Pa. and 1 in York County, Pa. The Bank's services include accepting time, demand, and savings deposits including NOW, supernow, money market, and regular savings accounts, a diversified array of certificates of deposit, IRA's, and club accounts. Its services also include making secured and unsecured commercial and consumer loans, financing commercial transactions, making construction and mortgage loans, and the renting of safe deposit facilities. Additional services include making residential mortgage loans, small business loans, and student loans. 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, registrar of stock and 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 Annual Report. The Bank has not experienced any significant seasonal fluctuations in the amount of its deposits. As of December 31, 1994, the Registrant had a total of 139 full-time and 58 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 activ-ities, whether conducted directly or through subsidiary corporations, to specified activities functionally related to banking. Permissible activities under that 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. 3 COMPETITION All phases of the Bank's business are highly competitive. The Bank's market area is the primary trade area of Adams County, Pa., a western portion of York County, Pa. and the northernmost portions of those counties in Maryland which are immediately adjacent to the southern border of Adams County, with concentration in the Gettysburg, Pa. area. The Bank competes with local commercial banks as well as other commercial banks with branches in the Bank's market area. The Bank considers its major competition to be PNC Corporation, Farmers Bank and Trust Company, a subsidiary of Dauphin Deposit Corporation, and Bank of Hanover and Trust Co.. GOVERNMENT MONETARY POLICIES AND ECONOMIC CONTROLS The earnings and growth of the Bank are affected by the policies of the regulatory authorities including the 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 effect of such policies and regulations upon the future business and earnings of the Bank cannot be accurately predicted. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION ---- --- -------- Ronald L. Hankey 54 Director and President of the Corporation and the Bank John W. Krichten 48 Secretary/Treasurer of the Corporation and Senior Vice President, Cashier, and Chief Financial Officer of the Bank Lynda L. Glass 34 Assistant Secretary of the Corporation and Senior Vice President of the Bank
CONSOLIDATED FINANCIAL AND STATISTICAL PROFILE The following tables set forth statistical information relating to the Registrant and the Bank. The tables should be read in conjunction with the consolidated financial statements of the Registrant which are incorporated by reference hereinafter. 4 INVESTMENT PORTFOLIO The following tables show the year-end composition of the investment security portfolio for the three years ended December 31, 1994; the maturity distribution of the portfolio at December 31, 1994; and the weighted average yield of the portfolio at December 31, 1994.
Book Value December 31, --------------------------- HELD TO MATURITY 1994 1993 1992 --------------------------------------------------------------------- (in thousands) U.S. Government and Federal Agency Obligations $141,140 $142,769 $112,693 State and Political Subdivision Obligations 1,509 1,296 1,632 Other Securities 2,256 3,737 7,484 -------- -------- -------- TOTAL $144,905 $147,802 $121,809 Maturity Distribution Book Value --------------------------------------- 1 year 1 to 5 5 to 10 Over or less years Years 10 years -------- ------ ------- -------- (in thousands) U.S. Government and Federal Agency Obligations $54,267 $86,873 $0 $0 State and Political Subdivision Obligations 547 230 378 354 Other Securities 0 0 0 2,256 ------- ------- ----- ------ TOTAL $54,814 $87,103 $ 378 $2,610
*Federal Reserve Bank stock and Federal Home Loan Bank stock, having no stated maturity, have been included in "Over 10 years" in the above table.
Weighted Average Yield ---------------------------------------------------- 1 year 1 to 5 5 to 10 Over 10 or less years years years Total -------- ------ ------- ------- ----- (in thousands) U.S. Government and Federal Agency Obligations 5.25% 5.47% 5.38% State and Political Subdivision Obligations 4.85% 8.50% 8.33% 8.33% 7.10% Other Securities 6.00% 6.00%
The weighted average yield of tax exempt obligations has been calculated on a tax equivalent basis. The amounts of the taxable equivalent adjustments are based on an effective tax rate of 34%. 5 LOAN PORTFOLIO The following summary shows the composition of the loan portfolio for the five years ended December 31, 1994:
1994 1993 1992 1991 1990 ------ ------ ------ ------ ------ (in thousands) Domestic Loans: Commercial, Financial, and Agricultural $ 10,785 $ 14,100 $ 16,104 $ 17,038 $ 19,478 Real Estate Loans 268,944 250,242 250,359 261,145 272,919 R/E Construction 12,632 4,791 4,732 4,938 3,298 Consumer 17,444 17,950 20,867 23,387 24,749 -------- -------- -------- -------- -------- Total Loans 309,805 287,083 292,062 306,508 320,444 Unearned Discount 3,883 3,785 4,239 4,708 5,247 -------- -------- -------- -------- -------- Total $305,922 $283,298 $287,823 $301,800 $315,197
The following table shows the repricing opportunities for all loans outstanding as of December 31, 1994. Those loans with immediately adjustable rates (such as loans tied to prime) will be totaled in the one day column. Those loans with rates that are adjustable at some time over the life of the loan will be totaled under the time heading when they become adjustable. All fixed rate loans will be totaled under the heading which they mature. REPRICING
One Within 1 to 5 After Day 1 year Years 5 Years Total ------- ------- -------- -------- ------- (in thousands) Commercial, Financial, and Agricultural $60,364 $ 7,430 $23,766 $1,157 $92,717 Consumer 4,688 13,147 20,773 38,608 Real Estate 0 144,076 33,875 529 178,480 ------- -------- ------- ------- -------- Total $65,052 $164,653 $78,414 $1,686 $309,805
Included in the Real Estate total due within one year are $144,000,000 of Adjustable Rate Mortgages (ARM). The Bank's ARM has a 2% per year interest rate cap with a lifetime cap of 5%. The index used is the Federal Housing Finance Board's National Average Mortgage Contract Rate for Mortgage Lenders on the Purchase of Previously Occupied Homes. 6 The following table presents information concerning the aggregate amount of nonperforming assets. Nonperforming assets comprise (a) loans accounted for on a nonaccrual basis; (b) loans contractually past due ninety days or more but still accruing; (c) loans with deferral of interest or principal because of deterioration in the financial position of the borrower (exclusive of loans in (a) or (b)); (d) loans now current where there are serious doubts as to the ability of the borrower to comply with present loan repayment terms; and (e) other real estate owned.
December 31 ------------------------------------------------ 1994 1993 1992 1991 1990 ------- ------- ------- ------- ------- (in thousands) Loans accounted for on a nonaccrual basis $ 854 $ 977 $ 905 $1,093 $1,462 Loans contractually past due 90 days or more as to inte- rest or principal payments 2,219 2,614 3,900 3,800 2,294 Loans whose terms have been renegotiated to provide a reduction or deferral of inte- rest or principal because of a deterioration in the financial position of the borrower 0 377 0 0 0 Loans now current where there are serious doubts as to the ability of the borrower to comply with present loan repayment terms 0 0 0 0 0 Other real estate owned 1,037 850 1,110 0 0
The Bank 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. 7 SUMMARY OF LOAN LOSS EXPERIENCES A detailed analysis of the Bank's Reserve for Loan Losses for the past five years is shown below:
Year ended December 31 ------------------------------------- 1994 1993 1992 1991 1990 ------ ------ ------ ------ ------ Balance of reserve for loan losses at beginning of period $3,581 $3,417 $2,815 $2,366 $2,061 Loans charged off: Commercial, financial, and agricultural 8 37 90 77 67 Real estate-mortgage 178 35 75 102 67 Real estate-construction 0 0 0 34 52 Consumer 70 120 125 148 135 ------ ------ ------ ------ ------ Total loans charged off 256 192 290 361 321 Recovery of charged off loans: Commercial, financial, and agricultural 5 8 22 3 7 Real estate-mortgage 13 1 1 22 25 Real estate-construction 0 0 0 17 0 Consumer 27 32 14 23 17 ------ ------ ------ ------ ------ Total recoveries 45 41 37 65 49 Net loans charged off 211 151 253 296 272 Additions to reserve 0 315 855 745 577 Balance at end of period $3,370 $3,581 $3,417 $2,815 $2,366
The amounts of additional provision to the reserve were based on management's judgment after considering an analysis of larger loans, all loans known to management to have unusual risk characteristics, non-performing 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 Bank's local service area. Loans secured by real estate comprise 92% of the Bank's total loan portfolio at December 31, 1994. 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 Bank over the last five years. This policy did not change during the year ending 1994. 1995 losses for all loan categories are expected to approximate $200,000. 8 The following table reflects certain historical statistics of the Bank relative to the relationship among loans (net of unearned discount), net charge-offs, and the reserve:
Year ended December 31 ----------------------------------------------- 1994 1993 1992 1991 1990 -------- -------- -------- -------- ------- (in thousands) Balances Average total loans $289,350 $288,790 $293,075 $307,489 $316,222 Total loans at yearend 305,922 283,298 287,823 301,800 315,197 Net charge-offs 211 151 253 296 272 Reserve for loan losses at yearend 3,370 3,581 3,417 2,815 2,366 Ratios Net charge-offs to: Average total loans .07% .05% .09% .10% .09% Total loans at yearend .07 .05 .09 .10 .09 Reserve for loan losses 6.26 4.22 7.40 10.52 11.50 Reserve for loan losses to: Average total loans 1.16 1.24 1.17 .92 .75 Total loans at yearend 1.10 1.26 1.19 .93 .75
DEPOSITS The average daily amounts of deposits are summarized below:
Year ended December 31 ------------------------------ 1994 1993 1992 -------- -------- -------- (in thousands) Demand deposits $ 38,772 $ 33,906 $ 30,826 Interest-bearing demand deposits 56,420 50,563 46,302 Savings 137,910 127,785 102,406 Time deposits (excluding time cer- tificates of deposit of $100,000 or more) 162,366 173,880 190,772 Time certificates of $100,000 or more 13,856 18,255 24,260 -------- -------- -------- Total $409,324 $404,389 $394,566
9 Maturities of time deposits of $100,000 or more outstanding at December 31, 1994 are summarized as follows (in thousands):
3 months or less $ 3,938 Over 3 through 6 months 3,115 Over 6 through 12 months 3,035 Over 12 months 1,854 ------- Total $11,942
FINANCIAL RATIOS The following ratios are among those commonly used in analyzing bank holding company statements.
Year ended December 31 -------------------------------- 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- Profitability ratios: Rate of return on average: Earning assets 1.49% 1.57% 1.66% 1.51% 1.57% Total assets 1.43 1.51 1.59 1.45 1.52 Total stockholders equity 14.15 15.61 17.63 16.85 18.48 Liquidity and capital ratios: Average primary (1) capital to average total assets 10.85 10.48 9.74 9.21 8.78 Average total stockholders eq- uity to average earning assets 10.54 10.07 9.40 8.95 8.52 Average total stockholders eq- uity to average total assets 10.12 9.70 9.04 8.62 8.22 Common dividend payout ratio (2) 50.45 44.73 40.68 42.74 40.97
---------------- (1) includes total shareholders equity and reserve for loan losses. (2) Cash dividends paid on common stock as a percentage of net income. 10 The following table sets forth for the periods indicated a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rate. 1994 compared to 1993 1993 compared to 1992 (in thousands)
Increase (decrease) due to ---------------------------------------------------- Volume Rate Net Volume Rate Net ------ ----- ------ ------ ------ ------- Interest earned on: Loans $ 48 $(1,721) $(1,673) $(399) $(2,606) $(3,005) Taxable investment securities 976 (615) 361 1,330 (1,296) 34 Non-taxable invest- ment securities 56 (30) 26 (15) (6) (21) Federal funds sold (261) 104 (157) (64) (84) (148) Time deposits with banks (77) 37 (40) (79) (39) (118) ------ ----- ------ ------ ------ ------ Total interest earning assets 742 (2,225) (1,483) 773 (4,031) (3,258) Interest paid on: Interest bearing Demand deposits 153 (165) (12) 135 (379) (244) Savings deposits 307 (698) (391) 920 (831) 89 Time deposits (639) (605) (1,244) (1,149) (2,458) (3,607) Short term borrowings 209 (37) 172 90 (16) 74 ------ ---- ------ ------ ------ ------ Total interest bearing liabilities 30 (1,505) (1,475) (4) (3,684) (3,688) Net interest earnings $ 712 $ (720) $ (8) $ 777 $ (347) $ 430
The change in interest rates due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. Nonaccruing loans, being a small portion of total loans, have not been excluded for these calculations. 11 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, Pa. Additionally, the Bank owns 13 other properties located at 2 Chambersburg St., 18-20 Chambersburg St., 22-22 1/2 Chambersburg St., Gettysburg, Pa.; 17 S. Queen St., W. King St., Littlestown, Pa.; 369 Main St., McSherrystown; 1677 Abbottstown Pike, East Berlin, Pa.; 202 Main St., York Springs, Pa.; 101 Main St., Arendtsville, Pa.; U.S. Rte. 30, Cashtown, Pa.; 101 N. Main St., Bendersville, Pa.; Rte. 116 and Sanders Road, Fairfield, Pa.; and Eichelberger St. and Kennedy Ct., Hanover, Pa. The Bank also leases a full service office at South Main St., Biglerville, Pa. ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings pending against the Registrant or the Bank. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Page 37, entitled "Common Stock Market Prices and Dividends" and Note G on page 31 of the Annual Report to Shareholders for the year ended December 31, 1994, are herein incorporated by reference. ITEM 6. SELECTED FINANCIAL DATA Selected Financial Data on page 36 of the Annual Report to Share-holders for the year ended December 31, 1994, is herein incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 15 through 21 of the Annual Report to Shareholders for the year ended December 31, 1994, is hereby incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPLEMENTARY DATA The consolidated financial statements of the Registrant and the Bank, included in the Annual Report to Shareholders, on pages 22 through 34 for the year ended December 31, 1994, are incorporated herein by reference. 12 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT That portion of the Registrant's Proxy Statement dated April 15, 1995, entitled "Election of Directors", appearing on pages 5 through 9 thereof, is hereby incorporated by reference. Information regarding executive officers of the Registrant is included in PART I, ITEM I, BUSINESS. ITEM 11. MANAGEMENT REMUNERATION Those portions of the Registrant's Proxy Statement dated April 15, 1995, entitled "Executive Compensation" and "Compensation of Directors", appearing on page 9 through 14 thereof, are hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of February 28,1995, there were no persons known to the Registrant to be beneficial owners of more than 5% of the Registrant's common capital stock. Those portions of the Registrant's Proxy Statement dated April 15, 1995, entitled "Beneficial Ownership by Officers, Directors and Nominees ", appearing on pages 3 through 5 are hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information on page 15 through 16 of the Registrant's Proxy Statement dated April 15, 1995, is hereby incorporated by reference. Footnote M--Loans to Related Parties included in the Annual Report to Shareholders, on page 34, for the year ended December 31, 1994, is herein incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The Report of Independent Certified Public Accountants is on page 15. Item 14(a)(1) Financial Statements: The following consolidated financial statements of the Registrant and its wholly-owned subsidiary included in the Annual Report to Shareholders, page 22 through 34, for the year ended December 31, 1994, are incorporated by reference in Item 8: 13 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) By /s/ Ronald L. Hankey ---------------------------- President /s/ John W. Krichten ---------------------------- Secretary/Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated. /s/ R.W. Tyson ------------------------ Director 3/14/95 R.W. Tyson /s/ Frank Elsner, Jr. ------------------------ Director 3/14/95 Frank Elsner, Jr. /s/ William B. Lower ------------------------ Director 3/14/95 William B. Lower /s/ Philip Asper ------------------------ Director 3/14/95 Philip Asper /s/ Glenn Guise ------------------------ Director 3/14/95 Glenn Guise /s/ Robert G. Bigham ------------------------ Director 3/14/95 Robert G. Bigham /s/ C.F. Ditzler ------------------------ Director 3/14/95 C.F. Ditzler /s/ Wayne Lau ------------------------ Director 3/14/95 Wayne Lau /s/ Richard Galusha ------------------------ Director 3/14/95 Richard Galusha /s/ Ralph S. Sandoe ------------------------ Director 3/14/95 Ralph S. Sandoe /s/ Jennifer W. Hartman ------------------------ Director 3/14/95 Jennifer W. Hartman /s/ Marian B. Schultz ------------------------ Director 3/14/95 Marian B. Schultz /s/ Guy F. Donaldson ------------------------ Director 3/14/95 Guy F. Donaldson /s/ Paul G. Pitzer ------------------------ Director 3/14/95 Paul G. Pitzer /s/ D. Richard Guise ------------------------ Director 3/14/95 D. Richard Guise /s/ Charles E. Ritter ------------------------ Director 3/14/95 Charles E. Ritter /s/ S.M. Raffensperger ------------------------ Director 3/14/95 S.M. Raffensperger /s/ Ronald L. Hankey ------------------------ Director 3/14/95 Ronald L. Hankey /s/ [signature] ------------------------ [title] [date] [name] /s/ [signature] ------------------------ [title] [date] [name] /s/ [signature] ------------------------ [title] [date] [name] 19 Consolidated Balance Sheets - December 31, 1994 and 1993 Consolidated Statements of Income - Years ended December 31, 1994, 1993, and 1992 Consolidated Statements of Cash Flows - December 31, 1994, 1993, and 1992 Consolidated Statements of Changes in Equity Capital - years ended December 31, 1994, 1993, and 1992 Condensed Financial Information of Registrant - year ended December 31, 1994 and 1993 Notes to Consolidated Financial Statements - December 31, 1994 and 1993 Schedules not listed above are omitted since the required information is either not applicable, not deemed material, or is shown in the respective financial statements or in the notes thereto. ITEM 14(a)(3) EXHIBITS Exhibit 3(a) Copy of Articles of Incorporation of ACNB Corporation is incorporated by reference to Exhibit 3(a), page 15. Exhibit 3(b) Copy of By-laws of ACNB Corporation is incorporated by reference to Exhibit 3(b) of the Annual Report on Form 10-K for the year ended December 31, 1992. Exhibit 13 Annual Report to Shareholders, page 16. Exhibit 21 Subsidiary of the Registrant, page 17. Exhibit 23 Consent of Experts and Counsel, page 18. Exhibit 27 Financial Data Schedule ITEM 14(b) Reports on Form 8-K: No reports on Form 8-K were filed during the fourth quarter of 1994. 14 EX-3.A 2 ARTICLES OF INCORPORATION ARTICLES OF INCORPORATION [x] Domestic Business Corporation COMMONWEALTH OF PENNSYLVANIA DEPARTMENT OF STATE CORPORATION BUREAU ----------------------------------------------------------------- 1. Name of Corporation (must contain a corporate indictor unless exempt under 15 P.S. 2908 B): ACNB Corporation 2. Address of Registered Office in Pennsylvania (P. O. Box Number not acceptable): 675 Old Harrisburg Road Gettysburg, PA 17325 (Adams County) 3. Explain the Purpose or Purposes of the Corporation: To have unlimited power to engage in and do any lawful act concerning any or all lawful business for which corporations may be incorporated under the provisions of the Business Corporation Law of the Commonwealth of Pennsylvania. The Corporation is incorporated under the provisions of the Business Corporation Law of the Commonwealth of Pennsylvania (Act of May 5, 1993, P. L. 364 as amended). 4. The Aggregate Number of Shares, Class of Shares and Par Value of Shares which the corporation shall have authority to issue: Number and Class of Shares: 2 million shares, common stock Stated Par Value per Share, if any: $5.00 Total Authorized Capital: 10,000,000 5. Term of Existence: Perpetual 6. The Name and Address of Each Incorporator, and the Number and Class of Shares Subscribed to by each Incorporator: Ronald L. Hankey 1 share common stock 306 Oak Lane Gettysburg, PA 17325 Franklin R. Bigham 1 share common stock 210 West Broadway Gettysburg, PA 17325 1 Robert G. Bigham 1 share common stock 43 West Broadway Gettysburg, PA 17325 7. Cumulative voting rights shall not exist with respect to the election of directors. 8.A. The Board of Directors may, if it deems it advisable, oppose a tender, or other offer for the corporation's securities, whether the offer is in cash or in securities of a corporation or otherwise. When considering whether to oppose an offer, the Board of Directors may, but it is not legally obligated to, consider any pertinent issues; by way of illustration, but not of limitation, the Board of Directors may, but shall not be legally obligated to, consider any and all of the following: (1) Whether the offer price is acceptable based on the historical and present operating results or financial condition of the corporation. (2) Whether a more favorable price could be obtained for the corporation's securities in the future. (3) The impact which an acquisition of the corporation would have on its employees, depositors and customers of the corporation and its subsidiaries in the community which they serve. (4) The reputation and business practices of the offeror and its management and affiliates as they would affect the employees, depositors and customers of the corporation and its subsidiaries and the future value of the corporation's stock. (5) The value of the securities, if any, which the offeror is offering in exchange for the corporation's securities, based on an analysis of the worth of the corporation as compared to the corporation or other entity whose securities are being offered. (6) Any antitrust or other legal and regulatory issues that are raised by the offer. B. If the Board of Directors determines that an offer should be rejected, it may take any lawful action to accomplish its purpose including, but not limited to, any and all of the following: advising shareholders not to accept the offer; litigation against the offeror; filing complaints with all governmental and regulatory authorities; acquiring the corporation's securities; selling or otherwise issuing authorized but unissued securities or treasury stock or granting options with respect thereto; acquiring a company to create an anti-trust or other regulatory problem for the offeror; and 2 obtaining a more favorable offer from another individual or entity. 9. No merger, consolidation, liquidation or dissolution of the Corporation, or any action that would result in the sale or other disposition of all or substantially all of the assets of the Corporation shall be valid unless first approved by the affirmative vote of the holders of at least seventy- five percent (75%) of the outstanding shares of Common Stock. This Article 9 may not be amended unless first approved by the affirmative vote of the holders of at least seventy-five percent (75%) of the outstanding shares of Common Stock. 10. Classification of Directors. The Directors shall be divided into three (3) classes, as nearly equal in number as possible, known as Class 1, consisting of not more than eight (8) Directors; Class 2, consisting of not more than eight (8) Directors; and Class 3, consisting of not more than nine (9) Directors. The initial Directors of Class 1 shall serve until the third (3rd) annual meeting of shareholders. At the third (3rd) annual meeting of the shareholders, the Directors of Class 1 shall be elected for a term of three (3) years, and after expiration of such term, shall thereafter be elected every three (3) years for three (3) year terms. The initial Directors of Class 2 shall serve until the second (2nd) annual meeting of shareholders. At the second (2nd) annual meeting of the shareholders, the Directors of Class 2 shall be elected for a term of three (3) years and, after the expiration of such term, shall thereafter be elected every three (3) years for three (3) year terms. The initial Directors of Class 3 shall serve until the first (1st) annual meeting of shareholders. At the first (1st) annual meeting of the shareholders the Directors of Class 3 shall be elected for a term of three (3) years and, after the expiration of such term, shall thereafter be elected every three (3) years for three (3) year terms. Each Director shall serve until his/her successor shall have been elected and shall qualify, even though his/her term of office as herein provided has otherwise expired, except in the event of his/her earlier resignation, removal or disqualification. 11. The Board of Director shall consist of not less than five (5) nor more than twenty-five (25) shareholders, the exact number to be fixed and determined from time to time by resolution of a majority of the shareholders at any annual or special meeting thereof. 12. No holder of shares of any class or of any series of any class shall have any preemptive right to subscribe for, purpose or receive any shares of the corporation, whether now or hereafter authorized, or any obligations or other securities convertible into or carrying options to purchase any such shares of the corporation, or any options or rights to purchase any such shares or securities, issued or sold by the 3 corporation for cash or any other form of consideration, and any such shares, securities or rights may be issued or disposed of by the Board of Directors to such persons and on such terms as the Board in its discretion shall deem advisable. IN TESTIMONY WHEREOF, the Incorporators have signed and sealed the Articles of Incorporation this 4th day of November, 1982. /s/ Robert G. Bigham /s/ Franklin R. Bigham ------------------------- ---------------------------- /s/ Ronald L. Hankey ---------------------------- ------------------------------------------------------------- 030. FILED: 11/09/82 Code: AIB Reviewed by: TES /s/ William R. Davis Date Approved: 11/10/82 ---------------------------- Sequential Number: 13904 Secretary of the Commonwealth Amount: $75.00 Department of State Microfilm No. 82-60 882 Commonwealth of Pennsylvania Corporation Number: 760209 4 Microfilm Number 86301422 Filed with the Department of State on May 12, 1986 Entity Number: 760209 /s/ Robert A. Gleason, Jr. ------------------------- Secretary of the Commonwealth COMMONWEALTH OF PENNSYLVANIA DEPARTMENT OF STATE CORPORATION BUREAU ARTICLES OF AMENDMENT - DOMESTIC BUSINESS CORPORATION In compliance with the requirements of Section 806 of the Business Corporation Law, Act of May 5, 1933 (P. L. 364) (15 P. S. Section 1806), the undersigned corporation, desiring to amend its Articles, does hereby certify that: 1. The Name of the Corporation is: ACNB Corporation 2. The location of its registered office in this Commonwealth is: (The Department of State is hereby authorized to correct the following statement to conform to the records of the Department): 675 Old Harrisburg Road, Gettysburg, Adams County, Pennsylvania 17325 3. The Statute by or under which the Corporation was Incorporated is: Business Corporation Law, Act of May 5, 1933, as amended 4. The Date of its Incorporation is: November 9, 1982 5. [x] The meeting of the shareholders of the corporation at which the amendment was adopted was held at the time and place and pursuant to the kind and period of notice herein stated. Time: The 6th day of May, 1986 Place: Main Office, Adams County National Bank, 675 Old Harrisburg Road, Gettysburg, PA Kind and Period of Notice: Written notice given not less than ten days prior to May 6, 1986. 5 6. At the time of the action of shareholders: (a) The total number of shares outstanding was: 816,306 (b) The number of shares entitled to vote was: 816,306 7. In the action taken by the shareholders: (a) The number of shares voted in favor of the amendment was: 617,208 (b) The number or shares voted against the amendment was: 16,840 8. The amendment adopted by the shareholders, set forth in full, is as follows: RESOLVED, that the Articles of Incorporation of ACNB Corporation be amended so that the aggregate number of shares which the Corporation shall have authority to issue is ten million (10,000,000) shares of common stock, par value five dollars ($5.00) per share, and the total authorized capital of the corporation is fifty million dollars ($50,000,000). IN TESTIMONY WHEREOF, the undersigned Corporation has caused these Articles of Amendment to be signed by a duly authorized officer and its corporate seal, duly attested by another such officer, to be hereunto affixed this 7th day of May, 1986. Attest: ACNB CORPORATION /s/ John W. Krichten /s/ Ronald L. Hankey ------------------------- By: ------------------------------ John W. Krichten Ronald L. Hankey, President Secretary (CORPORATE SEAL) 6 Microfilm Number ---------------- Filed with the Department of State on 11-23-94 Entity Number: 760209 /s/ Robert M. Grant ------------------------- Secretary of the Commonwealth COMMONWEALTH OF PENNSYLVANIA DEPARTMENT OF STATE CORPORATION BUREAU ARTICLES OF AMENDMENT - DOMESTIC BUSINESS CORPORATION In compliance with the requirements of 15 Pa.C.S. (S)1915 (relating to Articles of Amendment), the undersigned business corporation, desiring to amend its Articles, does hereby certify and state that: 1. The Name of the Corporation is: ACNB Corporation 2. The Address, including street and number, of its Registered Office in this Commonwealth is: (The Department of State is hereby authorized to correct the following statement to conform to the records of the Department): 675 Old Harrisburg Road, Gettysburg, Adams County, Pennsylvania 17325 3. The Statute by or under which the Corporation was Incorporated is: Business Corporation Law of 1933 (Act of May 5, 1933, P. L. 364 as amended) 4. The Date of its Incorporation is: November 9, 1982 5. The Manner in which the Amendment was Adopted by the Corporation is: The amendment was duly adopted by the Board of Directors of the Corporation pursuant to Section 1914(c)(3)(ii) of the Business Corporation Law of 1988, as amended, at a meeting of the Board of Directors duly called, convened and conducted on Tuesday, November 22, 1994. 7 6. The Amendment Adopted by the Corporation, set forth in full, is as follows: 4. The aggregate number of shares which the Corporation shall have authority to issue is Twenty Million (20,000,000) shares of Common Stock of the par value of $2.50 per share (the "Common Stock"). 7. The Amendment shall be Effective at 12:01 a.m., prevailing time, on December 31, 1994. IN TESTIMONY WHEREOF, the undersigned Corporation has caused these Articles of Amendment to be signed by a duly authorized officer thereof and its corporate seal, duly attested by another such officer, to be hereunto affixed this 22nd day of November, 1994. Attest: ACNB CORPORATION /s/ John W. Krichten /s/ Ronald L. Hankey ------------------------- By: ------------------------------ John W. Krichten Ronald L. Hankey, President Secretary (CORPORATE SEAL) 8 EX-13 3 ACNB 1994 ANNUAL REPORT ACNB Corporation & Subsidiary ---------- ACNB CORPORATION & SUBSIDIARY 1994 ANNUAL REPORT FINANCIAL HIGHLIGHTS
FOR THE YEAR 1994 1993 1992 --------------------------------------------------------------------------------------- Net interest income $18,220,000 $18,228,000 $17,798,000 --------------------------------------------------------------------------------------- Net income* 6,773,000 6,933,000 7,038,000 --------------------------------------------------------------------------------------- Cash dividends 3,417,000 3,101,000 2,861,000 --------------------------------------------------------------------------------------- PER SHARE STATISTICS** --------------------------------------------------------------------------------------- Net income* $1.27 $1.30 $1.32 --------------------------------------------------------------------------------------- Cash dividends .64 .58 .54 --------------------------------------------------------------------------------------- Book value (year-end) 9.15 8.58 7.86 --------------------------------------------------------------------------------------- AT YEAR-END --------------------------------------------------------------------------------------- Total assets $472,032,000 $471,415,000 $451,154,000 --------------------------------------------------------------------------------------- Total loans 305,922,000 283,298,000 287,823,000 --------------------------------------------------------------------------------------- Total deposits 388,798,000 412,686,000 402,376,000 --------------------------------------------------------------------------------------- Total stockholders' equity 48,647,000 45,862,000 42,030,000 --------------------------------------------------------------------------------------- KEY RATIOS --------------------------------------------------------------------------------------- Return on average stockholders' equity 14.15% 15.61% 17.63% --------------------------------------------------------------------------------------- Return on average assets 1.43% 1.51% 1.59% --------------------------------------------------------------------------------------- Dividend payout 50% 45% 41% --------------------------------------------------------------------------------------- Stockholders' equity to assets 10.31% 9.73% 9.32% ---------------------------------------------------------------------------------------
*1992 includes $446,000, or $.09 per share, related to the cumulative effect of the change in accounting for income taxes. See Notes to Consolidated Financial Statements. **Data restated to reflect two-for-one stock split in the form of a 100% stock dividend issued in 1994. BUSINESS PROFILE ACNB Corporation is a single-bank holding company with Adams County National Bank as its sole and wholly-owned subsidiary. Adams County National Bank, a full-service community bank in existence since 1857, provides a wide array of consumer, commercial and fiduciary banking services to the individuals, businesses, public entities and community organizations in its trading area. With assets of $472 million, it is the largest community bank headquartered in Adams County. ACNB Corporation and its subsidiary, Adams County National Bank, possess a history abundant in the traditions of community banking. Indeed, the organizational focus remains constant -- providing the basic banking services essential to fulfilling the savings and borrowing needs of all community members. Integral to this steadfast strategy is the reinvestment of customers' deposits in loans to others in our local marketplace -- primarily via mortgage loans. A business philosophy predicated upon traditional, customer-oriented values is the common thread running through Adams County National Bank's history -- and its future -- as a responsible, committed and sound community banking organization. Adams County National Bank's marketplace encompasses Adams County, Pennsylvania, and its environs -- western York County, eastern Franklin County, southern Cumberland County, and the northern sections of those counties in Maryland that are adjacent to Adams County. Thirteen banking offices and 200 employees serve the customers in this marketplace. Each office and each person is pivotal to ensuring the strength of Adams County National Bank's community banking network. 1 16 REPORT TO STOCKHOLDERS To recap 1994, only two words are necessary--change and progress. Change repeatedly manifested itself throughout ACNB Corporation's sole and wholly-owned subsidiary, Adams County National Bank, during the year. Progress, however, was the end result of change. From a technological perspective, change was indeed pervasive. The Bank converted to new computer system hardware and software at the end of July 1994. The check and item processing functions were upgraded as well. Technology is a significant factor driving the success of a bank in today's operating environment. It also requires a substantial commitment of monetary and human resources. At ACNB Corporation and Adams County National Bank, this challenge was met due to the dedication of many individuals--those who researched and implemented the new system, those who trained and communicated the workings of the system and, of course, those who were trained both at the point of customer contact and in operational areas. The aim of technology is to increase productivity; but, more importantly, it is the means by which the Bank can better meet the financial needs of current and potential customers. Change impacted the Bank's portfolio of products and services. In the second quarter of 1994, a new Home Equity Line of Credit was introduced to the marketplace. The interest rate for this open-end loan product, which is accessed by check, is tied to Prime Rate. The product was designed to complement the organization's desire to concentrate on variable-rate lending instruments in its strategy for managing interest rate sensitivity. To date, the Home Equity Line of Credit has been a contributing factor in the emergence of stronger loan growth after declines in recent years. Change was also evident in the arena of human resource management. From the community banking office network to operational functions to the senior management level, the organizational structure evolved in 1994 to better position the Bank for the future in terms of customer service and profitability. In illustration, peak-time tellers are now commonplace in many of the Bank's offices for more efficient operations and enhanced levels of service during those times of peak customer demand and activity. 2 Change will not cease at ACNB Corporation and Adams County National Bank. In fact, two major projects are under way for the first quarter of 1995. First, the Bank is planning the opening of its first in-store office location inside the new Super Kmart/(R)/ Center at 400 Eisenhower Drive, Hanover, for late March. Second, the Retail Mortgage Division is in its formative stages. This new functional area will seek additional opportunities for the Bank to realize profitability in the one-to-four family residential mortgage market. The fundamental objective of both of these endeavors is to expand the product delivery system through improved customer options and accessibility. Change is not undertaken haphazardly; nor, simply for the sake of experimentation. Our commitment in embracing change is to ensure progress for the mutual benefit of those living in our service community, our internal staff members, and our stockholders. Amidst change internally, as well as in the financial services industry, ACNB Corporation continued to profitably pursue its steadfast strategy as an independent community bank. The year of 1994 ended with earnings of $6,773,000 -- a decrease of $160,000, or 2%, over the comparative figure of $6,933,000 for year-end 1993. The slight fall in earnings can be attributed to a decline in net interest income and a rise in expenses relative to technology enhancements and human resources. These expense items, however, are investments in the continued strength of the organization. As of year-end 1994, the Corporation's return on average assets and return on average stockholders' equity were 1.43% and 14.15%, respectively. The stockholders' equity to assets ratio advanced to 10.31%, as stockholders' equity grew by 6% and the Corporation's capital base expanded. A key goal of the Corporation is to maximize the investment value for its stockholders. Again, in 1994, ACNB Corporation was able to accomplish this goal. The annual cash dividend for the Corporation's stockholders was $1.28 per share as of December 15, 1994, which included an extra dividend of $.10 per share in the fourth quarter. Dividends for 1994 improved by 10% over those paid in 1993. 3 The Board of Directors also adopted an Amendment to the Corporation's Articles of Incorporation on November 22, 1994. The Amendment changed the par value per share of Common Stock from $5.00 per share to $2.50 per share and increased the number of authorized shares of the Corporation's Common Stock from 10,000,000 shares to 20,000,000 shares, thereby effecting a two-for-one stock split of the Corporation's Common Stock. The two-for-one Common Stock split and the increase in the number of authorized shares of the Corporation's Common Stock are significant in effectively planning for the long-term growth of the Corporation and the Bank. These actions will afford the Corporation and the Bank more financial flexibility, as well as will allow the organization to better serve the communities in which it does business. The Corporation and the Bank will, therefore, be more strategically positioned for the opportunities and challenges that may arise in the future. Sadly, in 1994, the Corporation lost two individuals who were integral to the formation and development of Adams County National Bank and, then, ACNB Corporation. At the time of their respective deaths, Wilbur A. Bankert and Franklin R. Bigham were both members of the Board of Directors. These gentlemen demonstrated a commitment and foresight unparalleled in the history of the Bank. In looking forward, ACNB Corporation's vision is focused on its role as an independent community banking organization. As always, your ongoing investment in our future sustains this vision. Sincerely, Ronald L. Hankey President 4 ACNB Corporation & Subsidiary --------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ACNB Corporation reported net income of $6,773,000, or $1.27 per share, for the year 1994. This produced a return on average assets of 1.43% and a return on average stockholders' equity of 14.15%. The following is a discussion of those results and the factors that helped cause them. All per share figures have been restated to reflect the two-for-one common stock split in the form of a 100% stock dividend dated December 31, 1994. FINANCIAL CONDITION -------------------------------------------------------------------------------- The Corporation continued to grow in 1994 with average assets increasing by $15,494,000, or 3.4%, to $473,186,000 -- though total assets rose by only $617,000 from December 31, 1993, to December 31, 1994. This percentage increase was lower than the 3.6% growth in average assets experienced in 1993, and can be attributed to the pressure on deposits as consumers searched elsewhere for higher yields. Deposits and securities sold under agreement to repurchase that were generated in the Corporation's local market area declined by $20,077,000, or 4.7%, during 1994. The Corporation's growth during 1994 exhibited contradictory characteristics. Average loans, for example, showed positive growth of $560,000 in 1994 versus a decline of $4,285,000 in 1993, but total loans increased by $22,624,000 from year-end 1993 to year-end 1994. Lending activity rose significantly in the second half of 1994, after a continued decline during the first four months of the year. The growth was evident in all loan categories, including the Corporation's new open-end home equity lines of credit which were introduced in the second quarter. Average investment securities showed positive growth with 1994 totals being 16.3% higher than 1993 totals -- which were 21.7% higher than 1992. However, the Corporation's management is committed to lending in its local service area and, thus, reversed this trend as total investments fell by $2,897,000, or 2.0%, during 1994. The Corporation continues to follow a policy of acquiring debt securities with the intention that they remain in the portfolio until maturity. Short-term investments, which include federal funds sold and securities maturing within 90 days, declined by $15,915,000, or 40.7%, during 1994. The Corporation owns $20,034,000 in investments that could be converted for liquidity purposes, without compromising its hold-to-maturity portfolio designation. The federal funds component of this category was the cause of most of the decrease. Any additional liquidity needs caused by this shift could be met by the U.S. Treasury portfolio, which is structured to meet the Corporation's requirements. Average balances for premises and equipment were up 13.8% in 1993, due to the relocation of the Bank's East Berlin Office and the expansion of the main office in Gettysburg. These balances rose again in 1994, by 21.0%, due to the purchase of a new computer system and accompanying software. Other real estate increased 22.0% to $1,037,000 during 1994. As indicated above, deposits and securities sold under agreement to repurchase declined 4.7% during 1994. This was caused by slack loan demand, which hampered the Corporation's ability to compete effectively for consumer deposits. To counter this trend, the Corporation raised interest rates substantially and joined the Federal Home Loan Bank of Pittsburgh during the fourth quarter of 1994. Federal Home Loan Bank borrowings were $14,613,000 at year-end 1994. Lower interest rates in 1993 not only slowed deposit growth, but also caused a dramatic change in the mix. Time deposits declined, while interest bearing demand deposits and savings grew significantly as consumers waited for an upward trend in rates. Average interest bearing demand deposits grew 9.2% in 1993. Average savings deposits, which include passbook savings and money market accounts, were up 24.8% in that same year. Average time deposits were down 10.6% in 1993, and demand deposits increased 10.0%. These averages continued their upward trend for 1994 as a whole, but actually reversed direction during the year as low cost deposits began to shift toward time deposits. This was particularly evident in the monthly average savings category, which peaked at $142,839,000 in May and then fell to $129,744,000 by December of 1994. Stockholders' equity continued to be an important funding source in 1994. Average stockholders' equity grew by $3,482,000, or 7.8%, in 1994 and $4,481,000, or 11.2%, in 1993. This internal growth was achieved in conjunction with regularly increased dividends, and depends on sustained strong earnings performance. 5 ACNB Corporation & Subsidiary --------- RESULTS OF OPERATIONS -------------------------------------------------------------------------------- Corporate net earnings of $6,773,000 for 1994 were down 2.3% from last year. This was a decrease of $160,000 from the $6,933,000 earned in 1993, and was the result of declining net interest income due to several years of reduced loan demand. Return on average assets and return on average stockholders' equity declined compared to last year. Return on average assets was 1.43% in 1994, 1.51% in 1993, and 1.59% in 1992. Return on average stockholders' equity was 14.15% in 1994, 15.61% in 1993, and 17.63% in 1992. The declines from 1993 and 1992 are due to shrinking net interest margin, the cumulative effect of the change in accounting for income taxes, and the Corporation's growing capital base. These ratios are closely-watched indicators of performance in the banking industry, and the Corporation's results are better than average. Since the Corporation is in the business of borrowing and lending money, net interest income is the major component of net income. The net yield on earning assets continued under pressure for the second straight year. Net interest income was down by $8,000 in 1994, compared to an increase of $430,000, or 2.4%, in 1993. These results translated into a net yield on average earning assets of 4.01%, 4.13% and 4.19% in 1994, 1993 and 1992, respectively. Lack of significant loan demand in 1992, 1993 and through the first quarter of 1994 caused a marked shift to lower yielding government securities. This, in turn, caused the interest rate spread to narrow, and is the primary factor contributing to the earnings decline in 1994. Loan demand picked up significantly in the second half of the year, but interest rates on deposits also showed a sustained rise. This rise, along with what may be a major shift from savings deposits to certificates of deposit, will continue to make improvement in net interest income difficult to achieve. Other operating income decreased 5.9% in 1994, compared to a 14.4% increase in 1993. The major reasons for the increase in 1993 were improvements in service charges on deposit accounts and securities gains. A survey of competitive financial institutions in 1992 indicated that there was an opportunity for a realignment of deposit service charges. The increase in 1993 was the result of changes made due to the survey. The other significant item was securities gains. The Corporation's policy is to hold debt securities until maturity, but these gains resulted from equities held at the holding company level. The lack of capital gains is the reason for the decline in other operating income for 1994. Service charges on deposit accounts was up 77.9% in 1993 and 5.9% in 1994, while trust income fell 10.0% and then rose 5.0% in those same years. Trust services provided by the Corporation include estate planning services, executor and trustee under wills and deeds, and registrar of stock and bond issues. The trust department had total assets of $44,626,000 under management at year-end 1993 and $51,121,000 at year-end 1994. This was an increase of 14.6%. The trust department is not a major earnings center for the Corporation because of the large number of assets necessary to make such a department profitable. Nevertheless, the Corporation is committed to providing this service to the communities in which it operates. Other operating expense increased 6.2% in 1993 and 5.1% in 1994. The major factors driving the increase were salaries and employee benefits and net occupancy and equipment expense. Salaries and employee benefits is the largest single component of other operating expense, and it rose by $278,000, or 5.9%, in 1993 and $178,000, or 3.6%, in 1994. Net occupancy and equipment expense was up $74,000, or 6.5%, in 1993 and $146,000, or 12.0%, in 1994. These increases were due to the expansion of the Bank's main office, relocation of another community banking office, and a complete upgrading of the Corporation's computer system. Another major expense, FDIC insurance, was also up 2.3% in 1993 and 3.0% in 1994. If the Bank Insurance Fund reaches its federally-mandated level and the Federal Deposit Insurance Corporation reduces premiums, both of which are predicted to happen in the third quarter of 1995, FDIC insurance expense may decline as much as $300,000 in the coming year. The provision for income taxes was $3,288,000 in 1994, compared to $3,383,000 in 1993. The Corporation was subject to federal taxes at the 35% marginal rate in 1994 and 1993 and 34% in 1992. The overall effective rates were 32.7% in 1994, 32.8% in 1993, and 31.9% in 1992. The major differences between the statutory rates and the effective rates result from state and municipal loan and security income, rehabilitation and low-income housing credits, and the difference between the provision for loan losses and actual net losses. In 1992, the Corporation adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. The cumulative effect of this accounting change was $446,000, or $.09 per share, which was recognized in the first quarter of 1992. 6 ACNB Corporation & Subsidiary ---------- LOAN REVIEW AND PROVISION AND RESERVE FOR POSSIBLE LOAN LOSSES -------------------------------------------------------------------------------- Total loans of $305,922,000 at year-end 1994 were 8.0% higher than year-end 1993. Loans were down 1.6% in 1993. In fact, 1994 reversed the trend of the previous four years with a return to strong loan growth. This is attributable to a stronger economy and the end of the mortgage rewrite phenomenon which occurred during the early 1990s. The Corporation also responded with a new commercial loan product and home equity line of credit. The commercial product may have a fixed interest rate for a maximum of five years, while the interest rate on the home equity line of credit is tied to the national prime rate. For asset/liability management reasons, most of the Corporation's lending is done with variable-rate instruments. Residential real estate loans, of which 98% have variable rates adjusted annually, are a major part of the Corporation's loan portfolio at $176,495,000. Adjustable-rate mortgages continue to play a significant role in the management of the Corporation's interest rate sensitivity position. They also are less likely to cause significant loan portfolio weaknesses due to the nature of the borrower and the collateral. The loans are tied to the Federal Housing Finance Board's Contract Rate for Major Lenders, which is based on current mortgage rates. The reserve for possible loan losses totaled $3,370,000 at December 31, 1994, a decrease of 5.9% from 1993. This followed an increase of 4.8% in 1993. There were no additional provisions made to the reserve during 1994. The adequacy of the reserve is determined by a consideration of management's assessment of the quality of the loan portfolio, the trend of past due loans, the type of collateral, the history of loan losses, and the state of the economy. Net charge-offs increased $60,000 in 1994 to $211,000. As a percentage of average total loans, they were 0.07% for all of 1994. The reserve is not broken down by industry or type because management feels that such allocation is not meaningful. Considering the Corporation's charge-off history, the amount of nonaccrual loans, and the information provided by the loan review function, management feels the present reserve is adequate. At December 31, 1994, loans past due 90 days and still accruing amounted to $2,219,000 and nonaccrual loans totaled $854,000. Interest lost due to nonaccrual loans during 1994 was approximately $75,000. Total nonperforming assets were down 14.4% from year-end 1993, and were 0.65% of total assets. Loan loss coverage of nonperforming assets was 110% at year-end 1994, compared to 100% in 1993. The table below indicates the recent history of the Corporation's nonperforming assets and charge-offs. Other real estate owned went from five properties valued at $850,000 at year-end 1993 to eight properties valued at $1,037,000 at year-end 1994. One of the eight properties, a commercial building valued at $454,000, was actually sold in December of 1992, but has not performed as expected and continues to be considered as other real estate owned. Of the other seven properties, one was sold in the first quarter of 1995 and another is under option to a nonprofit agency for use as low-income housing.
Nonperforming Assets Analysis ------------------------------------------------------------------------------------------------------- Year ended December 31 --------------------------------------------------------- 1994 1993 -------------------------- --------------------------- Nonperforming Net Nonperforming Net In thousands Assets Charge-offs Assets Charge-offs -------------------------- --------------------------- Real estate loans (1-4 family dwellings)..... $2,080 $ 276 $1,633 $ 34 Real estate loans (other).................... 796 89 1,659 -- Commercial and industrial.................... 98 3 135 29 Consumer..................................... 99 43 164 88 ------ ------ ------ ------ TOTAL $3,073 $ 211 $3,591 $ 151 ====== ====== ====== ======
7 ACNB Corporation & Subsidiary ----------
Comparative Average Balance Sheet And Net Interest Analysis ------------------------------------------------------------------------- December 31 -------------------------------- 1994 -------------------------------- ASSETS In thousands Balance Interest Rate ------------------------------------------------------------------------- Loans $289,350 $22,998 7.95% Taxable investment securities 150,188 7,021 4.67% Non-taxable investment securities 2,605 107 4.11% Federal funds sold 10,766 401 3.72% Interest bearing deposits with banks 1,457 112 7.69% -------- ------- Total interest earning assets 454,366 $30,639 6.74% Cash and due from banks 11,582 Premises and equipment 5,702 Other assets 4,984 Reserve for loan losses (3,448) -------- TOTAL ASSETS $473,186 ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------------------------------------------- Interest bearing demand deposits $ 56,420 $ 1,383 2.45% Savings deposits 137,910 3,824 2.77% Time deposits 176,222 6,818 3.87% Short-term borrowings 14,186 394 2.78% -------- ------- Total interest bearing liabilities 384,738 $12,419 3.23% ------------------------------------------------------------------------- INTEREST RATE SPREAD 3.51% ------------------------------------------------------------------------- Demand deposits 38,772 Other liabilities 1,783 Stockholders' equity 47,893 -------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $473,186 ======== ------------------------------------------------------------------------- INTEREST INCOME/EARNING ASSETS $454,366 $30,639 6.74% INTEREST EXPENSE/EARNING ASSETS $454,366 $12,419 2.73% NET YIELD ON EARNING ASSETS $18,220 4.01% -------------------------------------------------------------------------
Loan fees of $442,000, $485,000 and $590,000 for 1994, 1993 and 1992, respectively, are included for rate calculation purposes. 8 ACNB Corporation & Subsidiary ----------
-------------------------------------------------------------------------------------------------------------- December 31 December 31 -------------------------------- -------------------------------- 1993 1992 -------------------------------- -------------------------------- ASSETS In thousands Balance Interest Rate Balance Interest Rate -------------------------------------------------------------------------------------------------------------- Loans $288,790 $24,671 8.54% $293,075 $27,677 9.44% Taxable investment securities 129,953 6,660 5.12% 106,260 6,622 6.23% Non-taxable investment securities 1,394 81 5.81% 1,647 102 6.19% Federal funds sold 18,258 558 3.06% 20,215 708 3.50% Interest bearing deposits with banks 2,539 152 5.99% 3,785 271 7.16% -------- ------- -------- ------- Total interest earning assets 440,934 $32,122 7.28% 424,982 $35,380 8.33% Cash and due from banks 10,463 10,328 Premises and equipment 4,712 4,140 Other assets 5,121 5,538 Reserve for loan losses (3,538) (3,108) -------- -------- TOTAL ASSETS $457,692 $441,880 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY -------------------------------------------------------------------------------------------------------------- Interest bearing demand deposits $ 50,563 $ 1,395 2.76% $ 46,302 $ 1,640 3.54% Savings deposits 127,785 4,215 3.30% 102,406 4,124 4.03% Time deposits 192,135 8,062 4.20% 215,032 11,670 5.43% Short-term borrowings 6,812 222 3.26% 4,064 148 3.64% -------- ------- -------- ------- Total interest bearing liabilities 377,295 $13,894 3.68% 367,804 $17,582 4.78% -------------------------------------------------------------------------------------------------------------- INTEREST RATE SPREAD 3.60% 3.55% -------------------------------------------------------------------------------------------------------------- Demand deposits 33,906 30,826 Other liabilities 2,080 3,320 Stockholders' equity 44,411 39,930 -------- -------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $457,692 $441,880 ======== ======== -------------------------------------------------------------------------------------------------------------- INTEREST INCOME/EARNING ASSETS $440,934 $32,122 7.28% $424,982 $35,380 8.33% INTEREST EXPENSE/EARNING ASSETS $440,934 $13,894 3.15% $424,982 $17,582 4.14% NET YIELD ON EARNING ASSETS $18,228 4.13% $17,798 4.19% --------------------------------------------------------------------------------------------------------------
9 ACNB Corporation & Subsidiary ---------- LIQUIDITY AND INTEREST RATE SENSITIVITY -------------------------------------------------------------------------------- The maintenance of adequate liquidity is necessary for the Corporation to meet its financial obligations to depositors, investors and loan customers. In order to meet these demands for funds, liquidity must be actively managed through the use of federal funds and short-term securities. As of December 31, 1994, liquid assets -- consisting of cash, federal funds, and investment securities maturing within one year -- totaled $56,553,000. Of this amount, $33,053,000 is available without compromising the Corporation's hold-to-maturity investment strategy. An additional $86,050,000 in investment securities, predominantly U.S. Government, are scheduled to mature throughout 1996 and 1997. All of these assets could be used to fund the Corporation's obligations. Core deposits, defined as those deposits drawn from a bank's local community of businesses and consumers, comprised 100% of the Corporation's deposits at year-end. The Corporation had $11,942,000 in time deposits in denominations of $100,000 or more; however, these deposits were drawn from the local community and do not represent purchased funds. Although core deposits are generally more stable than purchased funds, the Corporation did experience deposit runoff during 1994 as consumers searched for higher yields. In order to manage this in an orderly fashion and to provide an additional source of liquidity, the Corporation joined the Federal Home Loan Bank of Pittsburgh in the fourth quarter of 1994. Interest rate sensitivity must be managed as carefully as liquidity. As the general level of interest rates change through the business cycle and control by the Federal Reserve, the Corporation's net interest income can widen or narrow as the average yield on assets changes more rapidly or more slowly than does the average cost of funds. The table below illustrates the results of the steps taken to minimize the effects of these changes. The table indicates that $187,227,000 in liabilities and $199,371,000 in assets will be eligible for repricing within six months. By the end of twelve months, liabilities of $251,601,000 and assets of $300,251,000 will be eligible. NOW accounts, savings and demand deposits are interest rate sensitive to a different degree than other assets and liabilities. Historical data has shown some of these funds are longer term funds parked in these accounts until interest rates rise, and that interest rates paid on the funds remaining do not change as often or as much as other rates. The amounts of these funds estimated to be affected by interest rates have been placed in the appropriate categories across the repricing spectrum. Interest rates rose steadily throughout 1994. Interest expense on deposits began to rise while loan demand was still soft and the net interest margin continued to decline through the first half of the year. The yield on average interest earning assets fell 0.54% from 1993 to 1994, while the cost of average interest bearing liabilities fell only 0.45%. This produced a net yield on earning assets 0.12% lower than in 1993. There were four factors that affected net yield on earning assets in 1994: improved loan demand, movement from lower yielding assets to higher yielding assets, movement of lower cost deposits to higher cost liabilities, and significantly higher deposit rates. These same four factors will influence the Corporation in 1995. The Corporation is in position to take advantage of a greater loan volume, higher rate situation. The speed of the deposit shift to higher rates will be one of the major determining factors in the financial results for 1995. Management continues to feel that an adjustable-rate loan portfolio is one of the Corporation's main strengths, and the ratio of adjustable-rate loans to total loans at year-end was approximately 86%. Approximately $22,000,000 of these loans have a five-year fixed rate before they convert to the Corporation's prime rate.
Interest Rate Sensitivity Gap at December 31, 1994 ---------------------------------------------------------------------------------------------------------------------------- Repricing Period ------------------------------------------------------------------------- 0-30 31-90 91-180 181-365 1-5 Over 5 In thousands days days days days years years ------------------------------------------------------------------------- Interest earning assets $ 90,416 $ 40,315 $ 68,640 $100,880 $149,553 $ 1,170 Funds supporting interest earning assets 96,859 37,341 53,027 64,374 80,766 49,655 ---------------------------------------------------------------------------------------------------------------------------- Interest rate sensitivity gap $ (6,443) $ 2,974 $ 15,613 $ 36,506 $ 68,787 $(48,485) ---------------------------------------------------------------------------------------------------------------------------- Cumulative gap $ (6,443) $ (3,469) $ 12,144 $ 48,650 $117,437 $ 68,952 ---------------------------------------------------------------------------------------------------------------------------- Cumulative gap as a percentage of total assets (1.4%) (0.7%) 2.6% 10.3% 24.9% 14.6% ----------------------------------------------------------------------------------------------------------------------------
10 ACNB Corporation & Subsidiary -------- CAPITAL MANAGEMENT -------------------------------------------------------------------------------- As of December 31, 1992, banking organizations are required to have capital equivalent to 8% of assets, weighted by risk. The Corporation's capital position must consist of at least 4% Tier 1 capital (common stockholders' equity, retained earnings, and perpetual preferred stock) and 4% Tier 2 capital (limited-life preferred stock and subordinated debt, and loan loss reserves up to certain limits). Total capital resources of the Corporation, including stockholders' equity and the reserve for possible loan losses, showed steady growth in 1994, rising 5.2% after increasing 8.8% in 1993. The following table shows the Corporation's capital ratios at year-end. Cash dividends declared totaled $3,417,000 in 1994, a 10.2% increase over the $3,101,000 declared in 1993, which exceeded the 1992 total of $2,861,000 by 8.4%. These dividend levels resulted in a dividend payout ratio of 50%, 45% and 41% in 1994, 1993 and 1992, respectively. In addition, the Corporation acquired and then retired 31,714 shares at public auction during the fourth quarter of 1994.
Capital Ratios at Year-end -------------------------------------------------------------------------------- 1994 1993 ------ ------ Common stockholders' equity to assets 10.31% 9.73% Tier I leverage ratio 10.28% 10.02% Tier I risk-based capital ratio 20.61% 21.26% Total risk-based capital ratio 21.86% 22.51%
11 ACNB Corporation & Subsidiary ----------------------------- CONSOLIDATED STATEMENTS OF CONDITION
December 31 ----------------------- ASSETS In thousands 1994 1993 --------------------------------------------------------------------------- Cash and due from banks........................... $ 12,872 $ 13,949 Interest bearing deposits with banks.............. 47 2,021 Investment securities............................. (market value $140,604 and $148,268, respectively)................................ 144,905 147,802 Federal funds sold................................ 100 17,060 Loans (net of unearned discount of $3,883 and $3,785, respectively).................... 305,922 283,298 Reserve for possible loan losses.................. (3,370) (3,581) -------- -------- Net loans......................................... 302,552 279,717 Premises and equipment............................ 5,874 5,384 Other real estate................................. 1,037 850 Other assets...................................... 4,645 4,632 -------- -------- TOTAL ASSETS...................................... $472,032 $471,415 ======== ======== LIABILITIES --------------------------------------------------------------------------- Non-interest bearing deposits..................... $ 38,639 $ 37,042 Interest bearing deposits......................... 350,159 375,644 -------- -------- TOTAL DEPOSITS.................................... 388,798 412,686 Securities sold under agreement to repurchase..... 14,613 10,802 Federal funds purchased........................... 16,800 -- Demand notes, U.S. Treasury....................... 450 450 Other liabilities................................. 2,724 1,615 -------- -------- TOTAL LIABILITIES................................. 423,385 425,553 STOCKHOLDERS' EQUITY --------------------------------------------------------------------------- Common stock (par value $2.50; 20,000,000 shares authorized; 5,316,122 issued and outstanding shares on 12/31/94 and 5,347,836 on 12/31/93)................... 13,290 13,370 Additional paid-in capital........................ 4,511 5,002 Retained earnings................................. 30,846 27,490 -------- -------- TOTAL STOCKHOLDERS' EQUITY........................ 48,647 45,862 -------- -------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY.......... $472,032 $471,415 ======== ========
--------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. 12 ACNB Corporation & Subsidiary ----------------------------- CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31 ----------------------------- INTEREST INCOME In thousands, except per share data 1994 1993 1992 ------------------------------------------------------------------------------------- Loans (including fees)................................ $22,998 $24,671 $27,677 Time deposits with banks.............................. 112 152 271 Federal funds sold.................................... 401 558 708 Taxable securities.................................... 7,021 6,660 6,622 Non-taxable securities................................ 107 81 102 ------- ------- ------- TOTAL INTEREST INCOME................................. 30,639 32,122 35,380 INTEREST EXPENSE ------------------------------------------------------------------------------------- Interest bearing deposits............................. 12,025 13,672 17,434 Other borrowed funds.................................. 394 222 148 ------- ------- ------- TOTAL INTEREST EXPENSE................................ 12,419 13,894 17,582 NET INTEREST INCOME................................... 18,220 18,228 17,798 Provision for possible loan losses.................... -- 315 855 ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES.................... 18,220 17,913 16,943 OTHER OPERATING INCOME ------------------------------------------------------------------------------------- Trust income.......................................... 292 278 309 Service charges on deposit accounts................... 597 564 317 Other income.......................................... 612 660 713 Securities gains...................................... -- 93 55 ------- ------- ------- TOTAL OTHER OPERATING INCOME.......................... 1,501 1,595 1,394 OTHER OPERATING EXPENSE ------------------------------------------------------------------------------------- Salaries and employee benefits........................ 5,173 4,995 4,717 Net occupancy expense................................. 651 589 575 Equipment expense..................................... 708 624 564 FDIC insurance........................................ 928 901 881 Other taxes........................................... 392 353 330 Other expense......................................... 1,808 1,730 1,590 ------- ------- ------- TOTAL OTHER OPERATING EXPENSE......................... 9,660 9,192 8,657 INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF THE CHANGE IN ACCOUNTING FOR INCOME TAXES.......... 10,061 10,316 9,680 Applicable income taxes............................... 3,288 3,383 3,088 ------- ------- ------- INCOME BEFORE CUMULATIVE EFFECT OF THE CHANGE IN ACCOUNTING FOR INCOME TAXES.......... 6,773 6,933 6,592 Cumulative effect of the change in accounting for income taxes..................................... -- -- 446 ------- ------- ------- NET INCOME............................................ $ 6,773 $ 6,933 $ 7,038 ======= ======= ======= PER COMMON SHARE DATA* ------------------------------------------------------------------------------------- Income before cumulative effect of the change in accounting for income taxes................... $1.27 $1.30 $1.23 Cumulative effect of the change in accounting for income taxes..................................... -- -- $ .09 Net income............................................ $1.27 $1.30 $1.32 Cash dividends........................................ $ .64 $ .58 $ .54
*Based on a weighted average of 5,342,101 shares in -------------------------------------------------- 1994 and 5,347,836 shares in 1993 and 1992. Data ------------------------------------------------ restated to reflect two-for-one stock split in the -------------------------------------------------- form of a 100% stock dividend issued in 1994. -------------------------------------------- ------------------------------------------------------------------------------ The accompanying notes are an integral part of the consolidated financial statements. 13
Additional Common Paid-in Retained Stock Capital Earnings Total -------------------------------------------------------------------------------------------------- In thousands ------------ BALANCE AT JANUARY 1, 1992.......... $13,370 $5,002 $19,481 $37,853 Net income.......................... -- -- 7,038 7,038 Cash dividends...................... -- -- (2,861) (2,861) ------- ------ ------- ------- BALANCE AT DECEMBER 31, 1992........ 13,370 5,002 23,658 42,030 Net income.......................... -- -- 6,933 6,933 Cash dividends...................... -- -- (3,101) (3,101) ------- ------ ------- ------- BALANCE AT DECEMBER 31, 1993........ 13,370 5,002 27,490 45,862 Net income.......................... -- -- 6,773 6,773 Cash dividends...................... -- -- (3,417) (3,417) Retirement of 31,714 shares......... (80) (491) -- (571) ------- ------ ------- ------- BALANCE AT DECEMBER 31, 1994........ $13,290 $4,511 $30,846 $48,647 ======= ====== ======= =======
------------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. 14 ACNB Corporation & Subsidiary ----------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH Year ended December 31 AND CASH EQUIVALENTS In thousands ------------------------------------ ------------ 1994 1993 1992 ----------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Interest and dividends received........................ $31,895 $35,002 $35,789 Fees and commissions received.......................... 1,943 2,080 1,984 Interest paid.......................................... (12,394) (14,166) (18,133) Cash paid to suppliers and employees................... (8,920) (8,755) (8,354) Income taxes paid...................................... (2,419) (2,705) (3,528) ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES.............. 10,105 11,456 7,758 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investment securities and interest bearing balances with other banks........... 56,677 47,526 42,888 Purchase of investment securities and interest bearing balances with other banks........... (55,559) (77,954) (72,871) Principal collected on loans........................... 86,383 100,281 121,131 Loans made to customers................................ (109,414) (95,686) (108,518) Capital expenditures................................... (938) (1,615) (257) ------- ------- ------- NET CASH USED IN INVESTING ACTIVITIES.................. (22,851) (27,448) (17,627) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in demand deposits, NOW accounts and savings accounts......................... (4,787) 35,225 37,134 Proceeds from sale of certificates of deposit.......... 14,677 15,265 24,468 Payments for maturing certificates of deposit.......... (29,967) (33,730) (42,586) Dividends paid......................................... (3,417) (3,101) (2,861) Net increase in federal funds purchased................ 16,800 -- -- Retirement of common stock............................. (571) -- -- ------- ------- ------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.... (7,265) 13,659 16,155 ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................... (20,011) (2,333) 6,286 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................... 33,030 35,363 29,077 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR............... $13,019 $33,030 $35,363 ======= ======= ======= RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES ----------------------------------------------------------------------------------------------- Income before cumulative effect of the change in accounting for income taxes........................... $6,773 $6,933 $6,592 ADJUSTMENTS TO RECONCILE INCOME BEFORE CUMULATIVE EFFECT TO NET CASH PROVIDED BY OPERATING ACTIVITIES Securities gains....................................... -- 93 55 Depreciation and amortization.......................... 457 406 452 Provision for possible loan losses..................... -- 315 855 Provision (Benefit) for deferred taxes................. (67) 943 (659) Amortization of investment securities premiums......... 1,850 1,798 1,196 Increase (Decrease) in taxes payable................... 936 (265) 219 Decrease (Increase) in interest receivable............. (152) 1,474 (253) Increase (Decrease) in interest payable................ 25 (272) (551) Increase (Decrease) in accrued expenses................ 275 107 (55) Decrease (Increase) in prepaid expenses................ 17 (37) 23 Decrease in deferred loan production costs............. (9) (39) (116) ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES.............. $10,105 $11,456 $7,758 ======= ======= =======
------------------------------------------------------------------------------ The accompanying notes are an integral part of the consolidated financial statements. 15 ACNB Corporation & Subsidiary ----------------------------- 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. 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. INVESTMENT SECURITIES On December 31, 1993, the Corporation adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. The Statement requires each debt and equity security 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. The Corporation classified all securities as held-to-maturity at December 31, 1994 and 1993. 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. Book value is the basis for reporting security gains and losses on the income statement. Income is accrued the month it is earned. INCOME TAXES The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, which required a change from the deferred method to the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to the differences between the financial statement carrying amounts and the tax bases of the existing assets and liabilities. Under Statement of Financial Accounting Standards No. 109, the effect of deferred taxes is recognized in income in the period that includes the enactment date. Under the deferred method, deferred taxes were recognized using the tax rate applicable to the year of the calculation and were not adjusted for subsequent changes in tax rates. The Corporation elected to adopt Statement of Financial Accounting Standards No. 109 in 1992, and has reported the cumulative effect of the change in the method of accounting for income taxes as of the beginning of the 1992 fiscal year in the consolidated statements of income. LOANS Loans are stated net of unearned interest on consumer installment loans. Interest on installment loans 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 recording methods under Statement of Financial Accounting Standards No. 91. PREMISES AND EQUIPMENT Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is charged over the estimated useful life of buildings and equipment, computed generally by the straight-line method. When property is retired or sold, the accounts are relieved of the applicable cost and accumulated depreciation, and any gain or loss is reflected in operating income. Maintenance and repairs are charged to operating expenses, and the costs of major improvements are capitalized. RESERVE FOR POSSIBLE LOAN LOSSES The provision for possible loan losses charged to income is based upon management's evaluation of outstanding loans, the historical loan loss experience of the subsidiary, and the adequacy of the reserve for possible loan losses. STATEMENT OF CASH FLOWS For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. 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 other real estate is carried at the lower of fair market value or the carrying value of the related loan at the time of acquisition. 16 ACNB Corporation & Subsidiary ----------------------------- NOTE B ------ 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 1994 and 1993, approximately 98% of the Corporation's assets and 89% and 90%, respectively, of its liabilities are considered financial instruments as defined in Statement of Financial Accounting Standards No. 107. Many of the Corporation's financial instruments, however, lack an available trading market as characterized by a willing buyer and a willing seller engaging in an exchange transaction. Therefore, significant estimations and present value calculations were used by the Corporation for the purposes of this disclosure. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value. Financial instruments actively traded in a secondary market have been valued using quoted available market prices.
December 31, 1994 December 31, 1993 ---------------------------- ----------------------------- Estimated Fair Carrying Estimated Fair Carrying In thousands Value Amount Value Amount ------------ -------------- ------- ------------- -------- Cash and due from banks............... $ 12,872 $ 12,872 $ 13,949 $ 13,949 Interest bearing deposits with banks.. 47 47 2,036 2,021 Federal funds sold.................... 100 100 17,060 17,060 Investment securities................. 140,604 144,905 148,268 147,802
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, 1994 and 1993. Adjustable-rate residential mortgages and consumer loans reprice frequently at market rates, and the estimate of their fair value is considered to be the same as carrying value. Fixed-rate mortgages and consumer loans have been revalued using discounted cash flows. The mortgages were estimated using the Federal Housing Finance Board Index at December 31, 1994 and 1993, which was 7.56% and 6.59%, respectively, and consumer loans were revalued using rates being charged by the Corporation at year-end 1994 and 1993. Fair value for nonperforming loans is based on current valuations of underlying collateral.
December 31, 1994 December 31, 1993 ---------------------------- ----------------------------- Estimated Fair Carrying Estimated Fair Carrying In thousands Value Amount Value Amount ------------ -------------- ------- ------------- -------- Net loans............................. $302,036 $302,552 $285,009 $279,717
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, 1994 and 1993. 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.
December 31, 1994 December 31, 1993 ---------------------------- ----------------------------- Estimated Fair Carrying Estimated Fair Carrying In thousands Value Amount Value Amount ------------ -------------- ------- ------------- -------- Deposits with no stated maturities.... $216,227 $216,227 $225,022 $225,022 Deposits with stated maturities....... 171,269 172,571 188,534 187,664 Repurchase agreements................. 14,613 14,613 10,802 10,802 Federal funds purchased and demand notes..................... 17,250 17,250 -- --
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.
December 31, 1994 December 31, 1993 ---------------------------- ----------------------------- Estimated Fair Carrying Estimated Fair Carrying In thousands Value Amount Value Amount ------------ -------------- ------- ------------- -------- Commitments to extend credit.......... $ 24,821 $ 24,821 $ 17,686 $ 17,686 Standby letters of credit............. 1,324 1,324 1,088 1,088
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. 17 EX-21 4 SUBS OF THE REGISTRANTS 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. 17 EX-23 5 CONSENT OF THE ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in this Form 10-K of ACNB Corporation and Subsidiary of our report dated January 13, 1995, included in the 1994 Annual Report to Stockholders of ACNB Corporation and Subsidiary. s/s HARRY NESS & COMPANY York, Pennsylvania March 15, 1995 18 EX-27 6 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1994 DEC-31-1994 12,872 47 100 0 0 144,905 140,604 305,922 3,370 472,032 388,798 31,863 2,724 0 13,290 0 0 35,357 472,032 22,998 7,128 513 30,639 12,025 12,419 18,220 0 0 9,660 10,061 10,061 0 0 6,773 1.27 1.27 4.01 854 2,219 0 0 3,581 256 45 3,370 3,370 0 0