-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Uc4lExliPzW/ZFwyWpu1Xdi/+bYx5w1X4QXFXtyGd9HrxJGufetfMiRVmFty2aHY kvOrcvOC55/ZUZTuktiUoQ== 0000950115-96-000270.txt : 19960328 0000950115-96-000270.hdr.sgml : 19960328 ACCESSION NUMBER: 0000950115-96-000270 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960327 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACNB CORP CENTRAL INDEX KEY: 0000715579 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232233457 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-11783 FILM NUMBER: 96539002 BUSINESS ADDRESS: STREET 1: 675 OLD HARRISBURG RD STREET 2: P O BOX 3129 CITY: GETTYSBURG STATE: PA ZIP: 17325 BUSINESS PHONE: 7173343161 MAIL ADDRESS: STREET 1: P O BOX 3129 STREET 2: 675 OLD HARRISBURG RD CITY: GETTYSBURG STATE: PA ZIP: 17325 10-K405 1 ANNUAL REPORT 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, 1995 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 29, 1996, ACNB Corporation had outstanding 5,307,756 shares of Common Stock. The aggregate market value of such Common Stock held by nonaffiliates as of February 29, 1996 was approximately $84,668,000. 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 12/31/95 are incorporated by reference into Parts II and IV. Portions of the Proxy Statement for the annual shareholders meeting to be held May 7, 1996 are incorporated by reference into Part III. Page 1 of 17 ACNB CORPORATION FORM 10-K INDEX PAGE Part I Item 1. Business 3 Item 2. Properties 11 Item 3. Legal Proceedings 11 Item 4. Submission of Matters to a Vote of Security Holders 11 Part II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters 11 Item 6. Selected Financial Data 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 8. Financial Statements and Supplementary Data 11 Item 9. Disagreements on Accounting and Financial Disclosure 12 Part III Item 10. Directors and Executive Officers of the Registrant 12 Item 11. Management Remuneration 12 Item 12. Security Ownership of Certain Beneficial Owners and Management 12 Item 13. Certain Relationships and Related Transactions 12 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 13 Signatures 17 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 2 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, 1995, the Registrant had a total of 152 full-time and 73 part-time employees. SUPERVISION AND REGULATION The Registrant and the Bank are considered "affiliates" for purposes of Section 23A of the Federal Reserve Act and as such are subject to certain limitations specified therein on the making of loans on, extensions of credit to, or investments in each other. The Federal Bank Holding Company Act of 1956 restricts the Registrant's activities, whether conducted directly or through subsidiary corporations, to specified activities functionally related to banking. Permissible activities under 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. 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 55 Director and President of the Corporation and the Bank John W. Krichten 49 Secretary/Treasurer of the Corporation and Senior Vice President, Cashier, and Chief Financial Officer of the Bank Lynda L. Glass 35 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. INVESTMENT PORTFOLIO The following tables show the year-end composition of the investment security portfolio for the three years ended December 31, 1995; the maturity distribution of the portfolio at December 31,1995; and the weighted average yield of the portfolio at December 31, 1995. Book Value December 31, HELD TO MATURITY 1995 1994 1993 (in thousands) U.S. Government and Federal Agency Obligations $101,400 $141,140 $142,769 State and Political Subdivision Obligations 962 1,509 1,296 Other Securities 2,480 2,256 3,737 -------- -------- -------- TOTAL $104,842 $144,905 $147,802 Maturity Distribution Book Value After After 1 year 1 to 5 5 to 10 Over or less years years 10 years (in thousands) U.S. Government and Federal Agency Obligations $39,326 $62,074 $ 0 $ 0 State and Political Subdivision Obligations 37 253 423 249 Other Securities 0 0 0 2,480 ------- ------- ------- ------- TOTAL $39,363 $62,327 $ 423 $ 2,729 * 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 After After 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 4.63% 6.12% 5.54% State and Political Subdivision Obligations 9.09% 9.09% 9.09% 9.09% 9.09% 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%. LOAN PORTFOLIO The following summary shows the composition of the loan portfolio for the five years ended December 31, 1995: 1995 1994 1993 1992 1991 Domestic Loans: Commercial, Financial, and Agricultural $ 9,268 $ 10,785 $ 14,100 $ 16,104 $ 17,038 Real Estate Loans 284,943 268,944 250,242 250,359 261,145 R/E Construction 12,951 12,632 4,791 4,732 4,938 Consumer 18,150 17,444 17,950 20,867 23,387 -------- -------- -------- -------- -------- Total Loans $325,312 309,805 287,083 292,062 306,508 Unearned Discount 2.184 3,883 3,785 4,239 4,708 -------- -------- -------- -------- -------- Total $323,128 $305,922 $283,298 $287,823 $301,800 The following table shows the repricing opportunities for all loans outstanding as of December 31, 1995. Those loans with immediately adjustable rates (such as loans tied to prime) will be totaled in the thirty 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 From 30 After Thirty Days To 1 to 5 After Days 1 year Years 5 Years Total (in thousands) Commercial, Financial, and Agricultural $56,915 $ 14,103 $27,486 $2,866 $101,370 Consumer 5,565 14,519 18,512 38,596 Real Estate 7,922 145,961 30,288 1,175 185,346 ------- -------- ------- ------ -------- Total $70,402 $174,583 $76,286 $4,041 $325,312 Included in the Real Estate total due within one year are $151,000,000 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. 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 1995 1994 1993 1992 1991 (in thousands) Loans accounted for on a nonaccrual basis $1,093 $ 854 $ 977 $ 905 $1,093 Loans contractually past due 90 days or more as to inte- rest or principal payments 2.780 2,219 2,614 3,900 3,800 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 0 377 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 689 1,037 850 1,110 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. 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 1995 1994 1993 1992 1991 Balance of reserve for loan losses at beginning of period $3,370 $3,581 $3,417 $2,815 $2,366 Loans charged off: Commercial, financial, and agricultural 0 8 37 90 77 Real estate-mortgage 44 178 35 75 102 Real estate-construction 0 0 0 0 34 Consumer 90 70 120 125 148 ------ ------ ------ ------ ------ Total loans charged off 134 256 192 290 361 Recovery of charged off loans: Commercial, financial, and agricultural 12 5 8 22 3 Real estate-mortgage 1 13 1 1 22 Real estate-construction 0 0 0 0 17 Consumer 25 27 32 14 23 ------ ------ ------ ------ ------ Total recoveries 38 45 41 37 65 Net loans charged off 96 211 151 253 296 Additions to reserve 0 0 315 855 745 Balance at end of period $3,274 $3,370 $3,581 $3,417 $2,815 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, 1995. 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 1995. 1996 net losses for all loan categories are expected to approximate $150,000. 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 1995 1994 1993 1992 1991 (in thousands) Balances Average total loans $319,712 $289,350 $288,790 $293,075 $307,489 Total loans at yearend 323,128 305,922 283,298 287,823 301,800 Net charge-offs 96 211 151 253 296 Reserve for loan losses at yearend 3,274 3,370 3,581 3,417 2,815 Ratios Net charge-offs to: Average total loans .03% .07% .05% .09% .10% Total loans at yearend .03 .07 .05 .09 .10 Reserve for loan losses 2.93 6.26 4.22 7.40 10.52 Reserve for loan losses to: Average total loans 1.02 1.16 1.24 1.17 .92 Total loans at yearend 1.01 1.10 1.26 1.19 .93 DEPOSITS The average daily amounts of deposits are summarized below: Year ended December 31 1995 1994 1993 (in thousands) Demand deposits $40,027 $ 38,772 $ 33,906 Interest-bearing demand deposits 48,805 56,420 50,563 Savings 116,660 137,910 127,785 Time deposits (excluding time cer- tificates of deposit of $100,000 or more) 169,276 162,366 173,880 Time certificates of $100,000 or more 11.720 13,856 18,255 -------- -------- -------- Total $386,488 $409,324 $404,389 Maturities of time deposits of $100,000 or more outstanding at December 31, 1995 are summarized as follows (in thousands): 3 months or less $ 4,324 Over 3 through 6 months 3,785 Over 6 through 12 months 5,276 Over 12 months 3,064 ------- Total $16,449 FINANCIAL RATIOS The following ratios are among those commonly used in analyzing bank holding company statements. Year ended December 31 1995 1994 1993 1992 1991 Profitability ratios: Rate of return on average: Earning assets 1.47% 1.49% 1.57% 1.66% 1.51% Total assets 1.41 1.43 1.51 1.59 1.45 Total stockholders equity 12.84 14.15 15.61 17.63 16.85 Liquidity and capital ratios: Average primary (1) capital to average total assets 11.68 10.85 10.48 9.74 9.21 Average total stockholders eq- uity to average earning assets 11.41 10.54 10.07 9.40 8.95 Average total stockholders eq- uity to average total assets 10.96 10.12 9.70 9.04 8.62 Common dividend payout ratio (2) 54.30 50.45 44.73 40.68 42.74 (1) includes total stockholders equity and reserve for loan losses. (2) Cash dividends paid on common stock as a percentage of net income. 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.; and a supermarket office at 400 Eisenhower Drive, Hanover, Pa. ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings pending against the Registrant or the Bank. Note K on page 33 of the Annual Report is herein incorporated by reference. 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, 1995, are herein incorporated by reference. ITEM 6. SELECTED FINANCIAL DATA Selected Financial Data on page 36 of the Annual Report to Shareholders for the year ended December 31, 1995, 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, 1995, 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, 1995, are incorporated herein by reference. 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 10, 1996, 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 10, 1996, 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 29,1996, 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 10, 1996, 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 10, 1996, 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, 1995, 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 14. 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, 1995, are incorporated by reference in Item 8: Consolidated Balance Sheets - December 31, 1995 and 1994 Consolidated Statements of Income - Years ended December 31, 1995, 1994, and 1993 Consolidated Statements of Cash Flows - December 31, 1995, 1994, and 1993 Consolidated Statements of Changes in Equity Capital - Years ended December 31, 1995, 1994, and 1993 Condensed Financial Information of Registrant - Years ended December 31, 1995 and 1994 Notes to Consolidated Financial Statements - December 31, 1995 and 1994 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), of the Annual Report on Form 10-K for the year ended December 31, 1992. 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. Exhibit 21 Subsidiary of the Registrant. Exhibit 23 Consent of Experts and Counsel. ITEM 14(b) Reports on Form 8-K: No reports on Form 8-K were filed during the fourth quarter of 1995. 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 ----------------------------- Ronald L. Hankey, President By -------------------------------------- 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. - ------------------------ ----------------------- ------------------------ - ------------------------ ----------------------- ------------------------ - ------------------------ ----------------------- ------------------------ - ------------------------ ----------------------- ------------------------ - ------------------------ ----------------------- ------------------------ - ------------------------ ----------------------- ------------------------ - ------------------------ ----------------------- ------------------------ EX-13 2 1995 ANNUAL REPORT EXHIBIT 13 1995 Annual Report [GRAPHIC - LEAF] ACNB Corporation 1995 Annual Report CONTENTS Inherent in the process of adaptation is responsiveness to changes in the environment. These changes may be in the physical or the cultural environment, or both, depending upon the context. Regardless, however, adaptation is a necessity. A necessity for long-term survival. Like a living tree, Adams County National Bank is subject to the elements of the environment. These elements may not be the weather, the changing of seasons, or the surrounding flora and fauna. But, similarly, a multitude of environmental forces are beyond the control of the Bank. External changes in the financial services industry and in the local community require organizational adaptation. Still, at the core of the Bank's adaptation processes is the simultaneous commitment to customers, employees, ACNB Corporation stockholders, and the local marketplace. Both prudent adaptation and this steadfast commitment ensure the ongoing vitality of Adams County National Bank as a community banking organization. ACNB Corporation is a single-bank holding company with Adams County National Bank as its sole and wholly-owned subsidiary. These two entities are, thus, closely intertwined. ACNB Corporation's 1995 Annual Report reflects this relationship, as well as the means of organizational adaptation in the past, present and future. Financial Highlights 1 Business Profile 1 Report to Stockholders 2 Organizational Adaptation 5 Five-Year Financial Overview 14 Management's Discussion and Analysis 15 Consolidated Financial Statements 22 Notes to Consolidated Financial Statements 26 Report of Independent Accountants 35 Quarterly Results of Operations 36 Five-Year Financial Summary 36 Common Stock Information 37 Board of Directors 38 Officers 39 Community Banking Office Locations 40 ACNB CORPORATION & SUBSIDIARY 1995 ANNUAL REPORT FINANCIAL HIGHLIGHTS FOR THE YEAR 1995 1994 1993 ---- ---- ---- Net interest income $17,776,000 $18,220,000 $18,228,000 Net income 6,459,000 6,773,000 6,933,000 Cash dividends 3,507,000 3,417,000 3,101,000 PER SHARE STATISTICS* Net income $1.22 $1.27 $1.30 Cash dividends .66 .64 .58 Book value (year-end) 9.70 9.15 8.58 AT YEAR-END Total assets $459,353,000 $472,032,000 $471,415,000 Total loans 323,128,000 305,922,000 283,298,000 Total deposits 392,243,000 388,798,000 412,686,000 Total stockholders' equity 51,463,000 48,647,000 45,862,000 KEY RATIOS Return on average stockholders' equity 12.84% 14.15% 15.61% Return on average assets 1.41% 1.43% 1.51% Dividend payout 54% 50% 45% Stockholders' equity to assets 11.20% 10.31% 9.73% *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 $459 million, it is the largest community bank headquartered in Adams County. ACNB Corporation and its subsidiary, Adams County National Bank, possess a history abundant in the traditions of community banking. Indeed, the organizational focus remains constant -- providing the basic banking services essential to fulfilling the savings and borrowing needs of all community members. Integral to this steadfast strategy is the reinvestment of customers' deposits in loans to others in our local marketplace -- primarily via mortgage loans. A business philosophy predicated upon traditional, customer-oriented values is the common thread running through Adams County National Bank's history - -- and its future -- as a responsible, committed and sound community banking organization. Adams County National Bank's marketplace encompasses Adams County, Pennsylvania, and its environs -- western York County, eastern Franklin County, southern Cumberland County, and the northern sections of those counties in Maryland that are adjacent to Adams County. Fourteen banking offices and 215 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. REPORT TO STOCKHOLDERS During my twenty years as President of Adams County National Bank and then ACNB Corporation, I have had the privilege to communicate with you, the stockholders, on many occasions -- recounting the achievements of the past and projecting the plans for the future. But, rarely have I peered into the face of the future with such excitement. This optimism is founded in the knowledge that many internal strides have been taken to ensure the future growth of Adams County National Bank as an independent community banking organization. These strides reflect the need to adapt in an ever-changing environment. They also take various forms such as product and service enhancements, organizational restructuring, and technological advancements. In the fourth quarter of 1995, the Bank's Board of Directors and senior management embarked upon a formalized strategic planning process. After the initial assessment of the organization's strengths and weaknesses, as well as the identification of the opportunities and threats posed by the external environment, this process prompted a dialogue with regard to the challenges ahead for Adams County National Bank and ACNB Corporation. Specific to our organization, the intent of strategic planning is to focus future endeavors on the organization's quest to remain independent as a community bank. This mission can be fulfilled only through efforts to maximize stockholder value; to meet or exceed customers' needs and wants in the financial services arena; to provide a productive and growth-oriented work environment for employees; and, to contribute to the community as a responsible and caring business leader. It is clearly evident at this stage of the strategic planning process that Adams County National Bank must attain, and then maintain, a proper balance of technology and human resources -- supported by proactive marketing endeavors -- as a financial services provider in the local marketplace. Organizational adaptation has been and is currently underway throughout Adams County National Bank, as is evidenced in this 1995 Annual Report for ACNB Corporation. Adaptation in response to changes in the environment is a necessity. In fact, without a commitment to organizational adaptation, there exists a high probability that the organization will lose its vitality and, therefore, its very existence. At Adams County National Bank and ACNB Corporation, long-term survival through organizational adaptation is a given, not a choice. From a financial perspective, ACNB Corporation ended 1995 with earnings of $6,459,000. This amount reflects a decrease of $314,000, or 5%, in comparison to year-end 1994. Not only did weaker net interest income contribute to this decline, but expenses associated with salaries and employee benefits, occupancy and equipment rose by 9%. The aggregate increase in these key operating expenses was directly related to the establishment of the Bank's Retail Mortgage Division and the opening of the new Super Kmart (Registration Mark) Center Office in Hanover. However, these expenses also represent an investment in the future of the Corporation's subsidiary, Adams County National Bank. Expense control continues to be a strength of the organization. One measurement of this is the efficiency ratio, which is calculated by dividing other operating expense by the sum of net interest income and other operating income. At year-end 1995, the efficiency ratio for ACNB Corporation stood at 51% -- far better than the ratios experienced by the Corporation's peers in recent years. Other key financial performance ratios include the Corporation's return on average assets and return on average stockholders' equity. These ratios were 1.41% and 12.84%, respectively, as of year-end 1995. With a dividend payout ratio of 54%, the stockholders of ACNB Corporation received an annual cash dividend of $.66 per share as of December 15, 1995. In 1994, the total annual cash dividend paid to stockholders was $.64 per share, after restatement to reflect the two-for-one common stock split effective December 31, 1994. Annual cash dividends, therefore, rose by 3% in the last year. The Board of Directors also announced the declaration of a Special Dividend in November 1995. This Special Dividend, in the amount of $1.00 per share, was payable on January 15, 1996, to stockholders of record on January 4, 1996. As the Special Dividend was the result of a strong capital base due to the prior performance of the Corporation's bank subsidiary, it served as a means to distribute these prior earnings to the stockholders -- as well as to enhance long-term stockholder value. On a more somber note, S. M. Raffensperger died on January 16, 1996. Mr. Raffensperger, as a partner in Bigham & Raffensperger, was legal counsel to our organization for many years. He was initially elected to the Board of Directors of The First National Bank of Gettysburg, a predecessor institution, in 1955. He later joined the Board of Directors of Adams County National Bank and ACNB Corporation upon their respective formations in 1962 and 1983. This gentleman was a true friend to our organization for more than four decades. His presence will be missed, and his imprint on the lives of others will be long remembered. In closing, I assure you that there is a niche for community banks in today's banking environment -- despite the acceleration of consolidations in the industry and the advent of multistate bank holding companies in anticipation of nationwide interstate banking as of June 1997. Adaptation will continue to be integral to the future of Adams County National Bank. In this sense, adaptation does not imply a transformation, but a reaffirmation of our role as a true community bank. In addition, I would like to express my confidence in the personnel of Adams County National Bank. They demonstrate the spirit it takes to make our organization a success in our marketplace. As a valued investor in ACNB Corporation, your continued support of Adams County National Bank helps to further ensure our success. Thank you for sharing my enthusiasm for the future, as well as for your ongoing investment in ACNB Corporation. Sincerely, Ronald L. Hankey President & CEO 1995 ADAPTATION [GRAPHIC- ACORNS] PHYSICAL ADAPTATION Physically, Adams County National Bank is like a mature tree. Once just a fragile mass of roots and a single stem, but now grown and branching out to new heights. Each successive year, since the founding of the Bank in 1857, another annual ring is formed -- strengthening the trunk that supports the future growth of this community banking organization. The trunk expands; however, it still continues in its fundamental role of providing sustenance and protection to the organizational structure. [GRAPHIC--ROOT] In late March 1995, Adams County National Bank branched out with the opening of another office location in Hanover, York County. The site of this community banking office is inside the new Super Kmart (Registration Mark) Center at 400 Eisenhower Drive. Adapting to in-store banking presents many challenges from the numerous physical accommodations necessary -- primarily due to the size limitations of the office -- to modifications in training for staff members, who are required to be in the store aisles speaking to current and prospective Bank customers about their financial service needs. Adams County National Bank's roots run deep in the local marketplace. Fourteen community banking offices located throughout Adams County and in Hanover stem from this fact. [GRAPHIC -- TREE BRANCH] PROCESS ADAPTATION [GRAPHIC -- LOG] Raw materials are transformed into everyday, usable products by means of various processes. Trees provide consumers with a wide spectrum of products resulting from varying levels of refinement. From firewood to ornate, hand carved furniture. From paper towels to elegant, embossed writing papers. In banking, there is a direct correlation between process adaptation and technology. Adams County National Bank's experience is no exception to this statement. As technology advances at an ever-quickening pace, the Bank adapts by modifying its portfolio of products and services. Sometimes, these adaptations are simply an alternative means of delivering the banking service to the consumer. Other times, too, technological changes enhance levels of customer service due to the more efficient use of the Bank's human and other resources. Nevertheless, Adams County National Bank is still in the basic banking business of protecting customers' deposits and making loans in the local community. Adams County National Bank converted to new computer system hardware and software in the third quarter of 1994. During 1995, the technological changes continued with the implementation of additional software to generate nearly all deposit account forms via laser printer, as a result of data entered at the teller station. Further, the focal emphasis switched in the latter part of the year to realizing the full potential of this new technology. On the loan side, there was also a need to adapt to new processes in 1995 due to the efforts of the Retail Mortgage Division. With a presence in the secondary mortgage market and specialized retail mortgage loan officers, Adams County National Bank's portfolio of mortgage loan products now includes an expanded array of options for home buyers -- both on an adjustable-rate and fixed-rate basis. [GRAPHIC -- PAPER TOWELS] ENVIRONMENTAL ADAPTATION [GRAPHIC -- TREE BRANCH] In reality, many of the physical and process adaptations in the banking industry are behaviors in response to the stimuli presented by the environment and its uncontrollable factors. Illustrations of these environmental stimuli include competition from banks and other financial service providers, located both inside and outside of the local trading area; changing consumer demographics exemplified in new needs and wants; and, banking industry regulations. But, the economic climate is still the predominant factor in the environment. As the seasons change -- producing bud, then leaf -- in the life of a tree, the business cycles of the local and national economies impact Adams County National Bank over time. The Bank is not isolated from economic conditions -- or, in some scenarios, the consumer perception of economic conditions. The peaks and valleys of the business cycle reflect the natural expansion and contraction of the economy, as market forces of supply and demand interact. Continuing the trend originated in the second half of 1994, loan demand at Adams County National Bank climbed in 1995. The supply of deposits, however, grew by only a modest amount. Market interest rates, which are a direct function of the economic climate, contributed to these results. The cyclical progression of the seasons is predictable...spring precedes summer, and winter follows autumn. The same can be said for business cycles. The unknown manifests itself in the duration and the severity of each phase in the cycle, as well as via any abrupt changes in conditions. Adams County National Bank adapts to the fluctuations in economic conditions by managing interest rate risk and sensitivity -- thus, preparing itself to weather the volatility caused by any storms on the horizon. [GRAPHIC -- LEAF] THE SYNERGIES OF ADAPTATION [GRAPHIC -- APPLES] An apple tree bears fruit each fall. But, good soil and a favorable climate are not enough to ensure this occurrence. At harvest time, the size of the apple crop is dependent upon the ability of each tree in the orchard to adapt during the growing season, throughout the year, and during its lifetime. The fruit grower -- the human element -- nurtures this adaptation process by various means such as carefully pruning the tree, while it is in its dormant stage. Likewise, it is the human element that guides and directs the process of organizational adaptation at Adams County National Bank. People provide the synergistic energy to create change, the total effect of which is greater than the sum of the individual pieces. Further, to yield fruit year after year, the Bank's human resources must be properly blended with the technological advances to optimize the positive attributes of both, individually and in concert. The yield is not measured solely in the form of profits at Adams County National Bank. Rather, profits are at the center of attaining other goals...similar to apples becoming the filling for a pie. Customer satisfaction, a rewarding work environment for people, a fair return on the investment of ACNB Corporation stockholders, and a responsibility to the community are organizational values predicated upon, as well as contributing to, profitability. Ultimately, the mixing of all these ingredients serves to strengthen Adams County National Bank's position as an independent community banking organization in the marketplace. [GRAPHIC -- PIE] ACNB Corporation & Subsidiary FIVE-YEAR FINANCIAL OVERVIEW [GRAPHIC] The printed version shows a bar graph with the plot points outlined below: 1995 392.2 1994 388.8 1993 412.7 1992 402.4 1991 384.6 TOTAL DEPOSITS in millions of dollars [GRAPHIC] The printed version shows a bar graph with the plot points outlined below: 1995 323.1 1994 305.9 1993 283.3 1992 287.8 1991 301.8 TOTAL LOANS in millions of dollars [GRAPHIC] The printed version shows a bar graph with the plot points outlined below: 1995 1.41 1994 1.43 1993 1.51 1992 1.59 1991 1.45 RETURN ON AVERAGE ASSETS Percent [GRAPHIC] The printed version shows a bar graph with the plot points outlined below: 1995 1.22 1994 1.27 1993 1.30 1992 1.32 1991 1.15 EARNINGS PER SHARE in dollars [GRAPHIC] The printed version shows a bar graph with the plot points outlined below: 1995 .66 1994 .64 1993 .58 1992 .54 1991 .49 DIVIDENDS PER SHARE in dollars [GRAPHIC] The printed version shows a bar graph with the plot points outlined below: 1995 9.70 1994 9.15 1993 8.58 1992 7.86 1991 7.08 BOOK VALUE PER SHARE in dollars ACNB Corporation & Subsidiary MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION AND RESULTS OF OPERATIONS EARNINGS PERFORMANCE ACNB Corporation had a second consecutive year of reduced profitability with net income of $6.5 million for the year ended December 31, 1995, compared to the $6.8 million in net income recognized in 1994. Earnings per share of $1.22 in 1995 compare to 1994 earnings per share of $1.27. The reduction in net income by $314,000 in 1995 represents a 4.5% decrease from 1994, and can be attributed to a decline of $444,000, or 2.4%, in the Corporation's net interest income and an increase of $149,000, or 1.5%, in other operating expense. However, the Corporation's other operating income in 1995 was higher than the previous period by $126,000, or 8.4%. The cumulative impact of these items was partially offset by lower income tax expense, which decreased by $153,000. The Corporation also recorded lower net income of $6.8 million for the year ended December 31, 1994, compared to net income of $6.9 million in 1993. Earnings per share of $1.27 in 1994 compare to the $1.30 per share in 1993. Reduced net income of $160,000 in 1994 was primarily due to a $94,000, or 5.9%, decrease in other operating income and an increase of $468,000, or 5.1 %, in other operating expense. These trends were not offset by any rise in net interest income because this item was essentially flat from 1993 to 1994. The balance of this discussion and analysis is intended to provide details on the operating results, on a comparative basis, for each of the periods ended December 31, 1995, 1994 and 1993. NET INTEREST INCOME Net interest income is the difference between the interest and dividends earned on loans and investment securities, or interest earning assets, and the interest paid on deposits and borrowings, or interest bearing liabilities. Net interest income is affected principally by the spread between the yield on interest earning assets and the cost of interest bearing liabilities, as well as by the relative dollar amounts of such assets and liabilities. Net interest income was $17.8 million in 1995. This result is down from $18.2 million in both 1994 and 1993, respectively. The decline reflects an involuntary downsizing in 1995, as average interest earning assets decreased by $13.5 million, or 3.0%. The slight decline in net interest income for 1994 was caused primarily by a contraction in the net yield on earning assets from 4.13% in 1993 to 4.01% in 1994. The decline and leveling off of net yield on earning assets is a result, in part, of the rising interest rate environment which began in 1994, as the Corporation's deposits repriced more rapidly than the loan portfolio. Interest from loans accounted for 80.5% of the Corporation's interest income in 1995, as compared to 75.1% and 76.8% in 1994 and 1993, respectively. Interest and dividends on investments amounted to $6.1 million in 1995, as compared to $7.1 million in 1994 and $6.7 million in 1993. The average yield on the taxable investment portfolio rose to 5.18% at year-end 1995 from 4.67% at the prior year end. This increase resulted largely from the higher prevailing interest rates paid on short-term investments in which the Corporation invests to maintain its liquidity ratios. The Comparative Average Balance Sheet And Net Interest Analysis, a table found on pages 18 and 19, presents for the period indicated the total dollar amount of interest income from average interest earning assets and resultant yields, as well as the interest expense on average interest bearing liabilities and the resultant costs, expressed both in dollars and rates. Nonaccrual loans are included in the average interest earning assets balance. Interest from nonaccrual loans is included in interest income only to the extent that payments were received and the Corporation believes it will recover the remaining principal balance of the loan. Average balances are computed using a daily average balance during the period. The net yield on earning assets, which reflects the Corporation's relative level of interest earning assets to interest bearing liabilities, equals the difference between interest income on interest earning assets and interest expense on interest bearing liabilities, divided by average interest earning assets for the period. This table also sets forth the net interest income and the interest rate spread. Changes in the Corporation's net interest income are a function of both changes in rates and changes in volumes of interest earning assets and interest bearing liabilities. The Analysis of Changes in Interest Income and Expense Due to Volume and Rate Changes, a table found on page 16, sets forth information regarding changes in interest income and expense for ACNB Corporation for the years indicated. For each category of interest earning asset and interest bearing liability, data is provided on the changes attributed to changes in rate (changes in rate multiplied by old volume), changes in volume (changes in volume multiplied by old rate) with changes in rate and volume (change in rate multiplied by change in volume) factored in proportionally. Interest earning asset and interest bearing liability balances in the calculations are computed using daily average balances. OTHER OPERATING INCOME The Corporation stresses the importance of growth in other operating, or non-interest, income as one of its key long-term strategies. Non-interest income increased by $126,000, or 8.4%, when comparing 1995 to 1994; but, decreased by $94,000, or 5.9%, when comparing 1994 to 1993. In 1995, ACNB Corporation began to sell fixed-rate mortgages on the secondary market to increase non-interest income, as well as adjusted service charges on deposit accounts to reflect the marketplace more closely. Trust income increased by 21.9% in 1995 and 5.0% in 1994. The Bank has initiated a study with a consulting firm to improve operations and revenues in the Trust Department. These recommendations should show positive results late this year and into 1997. Service charges on deposit accounts have improved over the last two years, even though the Corporation continued to experience marginal deposit growth. The reasons for the 12.6% improvement in service charges on deposit accounts in 1995 over 1994, and the 5.9% improvement in 1994 over 1993, include growth in the demand deposit area and service charge adjustments as ACNB Corporation & Subsidiary mentioned above. While overall deposits were up only 0.9% in 1995 and down 5.8% in 1994, demand deposits were up 19.6% over that same two-year period. OTHER OPERATING EXPENSE Other operating, or non-interest, expense was $9.8 million in 1995, an increase of 1.5% compared to 1994. In 1994, non-interest expense was $9.7 million, rising 5.1% in comparison to 1993. The primary causes of the increases in non-interest expense are salaries and employee benefits and equipment expense. Personnel expense increased by $437,000, or 8.4%, in 1995, compared to 1994, and by $178,000, or 3.6%, in 1994, compared to 1993. The increase in 1994 was due to merit raises and a slight increase in the number of employees to handle normal growth. In 1995, however, in addition to normal recurring increases, the Bank opened a new branch office in Hanover, PA, and hired new personnel to create a separate mortgage division. The Retail Mortgage Division has begun to generate fee income for the Corporation by packaging and selling fixed-rate mortgages into the secondary market. It is anticipated that this division will create enough new fees and the new community banking office will generate enough new deposits to have a positive effect on net income within the next several years. Marketing expense increased by $44,000, or 26.1%, as a result of several factors, including the Bank's entry into new market segments and additional advertising programs. The new community banking office in Hanover necessitated specific expenditures, since it was a start-up operation, and loan advertising required additional attention to assist the Retail Mortgage Division in its penetration of the local market. In addition to these increases there was a significant rise in equipment expense. Costs were up by $115,000, or 16.2%, in 1995, compared to 1994, and by $84,000, or 13.5%, in 1994, compared to 1993. This is directly attributable to a complete upgrading of computer hardware and software in 1994. While this satisfied a critical need at the time, management realizes this will be an ongoing area of concern, particularly because of the rapid technological changes taking place in the financial services industry. Partially offsetting these increases was the decrease in FDIC insurance. After rising by $27,000, or 3.0%, in 1994, the annual expense for deposit insurance fell by $467,000, or 50.3%, in 1995. This was due to the final recapitalization of the Federal Deposit Insurance Corporation's Bank Insurance Fund in May of 1995 and, the dramatic reduction in insurance fees for the second half of the year. The savings in 1996 should be every bit as impressive, since the Bank is currently paying a rate that will total $2,000 for the entire year. OVERVIEW OF THE BALANCE SHEET During 1995, ACNB Corporation's total assets shrank by $12.7 million, or 2.7%. The primary cause of this reduction was management's decision to allow federal funds purchased to be reduced to zero as government securities matured. These federal funds were purchased to replace deposits that had been withdrawn in the search for higher rates during heated competition in 1994. During 1995, the flow of deposits reversed and were up by $3.5 million, or 0.9%. The mix of assets and liabilities continued to change in 1995. Investment securities fell by $40.1 million, or 27.7%, as maturities were used to fund loans or reduce federal funds purchased. Loans increased by $18.1 million, or 5.9%, while federal funds were repaid entirely in the amount of $16.8 million. Additionally, interest bearing deposits with banks increased from $47,000 to $8.8 million. Premises and equipment showed a slight decrease as fixed assets were depreciated faster than new equipment was put into service, while other real estate declined by $348,000, or 33.6%, as efforts to reduce the number of properties were successful. On the liability side, non-interest bearing deposits were up by $5.7 million, or 14.7%. This is a result of lower rates on savings and NOW accounts. While most of the shift from these accounts went into certificates of deposit, some did move to demand deposits as lower rates lessened the urgency to move funds to an interest paying transaction account. As noted above, federal funds purchased were completely liquidated and core deposits showed weak, but positive, growth. Capital continued to increase, up $2.8 million, or 5.8%, despite the Corporation's liberal dividend policy. Analysis of Changes in Interest Income and Expense Due to Volume and Rate Changes
Year ended December 31 ------------------------------------------------------------------------------------------------- 1995 versus 1994 1994 versus 1993 1993 versus 1992 Changes Due To Changes Due To Changes Due To ------------------------------------------------------------------------------------------------- IN THOUSANDS Volume Rate Net Volume Rate Net Volume Rate Net ------ ---- --- ------ ---- --- ------ ---- --- Interest earned on: Loans $ 2,450 $ 470 $ 2,920 $ 48 $(1,721) $(1,673) $ (399) $(2,607) $(3,006) Taxable investment securities (1,902) 929 (973) 976 (615) 361 1,332 (1,294) 38 Non-taxable investment securities (75) 40 (35) 56 (30) 26 (15) (6) (21) Federal funds sold (1,035) 640 (395) (261) 104 (157) (65) (85) (150) Time deposits with banks 76 (19) 57 (77) 37 (40) (80) (39) (119) ------- ------- ------- ------- ------- ------- ------- ------- ------- Total Interest Earning Assets $ (486) $ 2,060 $ 1,574 $ 742 $(2,225) $(1,483) $ 773 $(4,031) $(3,258) ------- ------- ------- ------- ------- ------- ------- ------- ------- Interest paid on: Interest bearing demand deposits $ (187) $ (7) $ (194) $ 153 $ (165) $ (12) $ 135 $ (380) $ (245) Savings deposits (581) (41) (622) 307 (698) (391) 921 (830) 91 Time deposits 190 2,060 2,250 (639) (605) (1,244) (1,149) (2,459) (3,608) Short-term borrowings 203 381 584 209 (37) 172 90 (16) 74 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total Interest Bearing Liabilities $ (375) $ 2,393 $ 2,018 $ 30 $(1,505) $(1,475) $ (3) $(3,685) $(3,688) ------- ------- ------- ------- ------- ------- ------- ------- ------- NET INTEREST EARNINGS $ (111) $ (333) $ (444) $ 712 $ (720) $ (8) $ 776 $ (346) $ 430 ------- ------- ------- ------- ------- ------- ------- ------- -------
ACNB Corporation & Subsidiary ASSET/LIABILITY RISK MANAGEMENT INTEREST RATE RISK Managing interest rate risk is fundamental to banking. Banking institutions manage the inherently different maturity and repricing characteristics of the lending and deposit-taking lines of business to achieve a desired interest rate sensitivity position and to limit their exposure to interest rate risk. ACNB Corporation manages its balance sheet to achieve maximum stockholder value within the constraints of its interest rate risk discipline, the maintenance of high credit quality, and sound leverage and liquidity positions. The primary objective of interest rate sensitivity management is to maintain net interest income growth, while reducing exposure to the risks inherent in interest rate movements. MEASUREMENT OF INTEREST RATE SENSITIVITY RISK One measure of interest rate risk is the gap report, which details the repricing differences for assets and liabilities for given periods. As the table below indicates at December 31, 1995, the balance sheet was asset sensitive with $134.3 million more in assets than liabilities repricing within one year. The Corporation maintains such a position because of a major investment in adjustable-rate mortgages, which reprice slowly. An asset sensitive gap indicates that, over the course of a year, an upward movement in interest rates will positively impact the net interest margin, since assets will reprice faster than liabilities. The gap report has some limitations, including the fact that it is a static measurement (point in time); it does not capture basis risk; and, it does not capture risk that varies non-proportionally with interest rate movements. Due to the limitations of gap reports, ACNB Corporation has begun to use a simulation model as its primary method of measuring interest rate risk. The simulation model, because of its dynamic nature, forecasts the effects of future balance sheet trends, changing slopes of the yield curve, different patterns of rate movements, and changing relationships between rates. The results of the simulation analysis will be used by management to evaluate possible corrective actions to reduce any negative impact to net interest margin. The traditional investment portfolio is used to alter the interest rate sensitivity position of the Corporation. This is accomplished by holding fixed-rate debt instruments in the securities. During 1994 and 1995, ACNB Corporation lengthened the maturity of prime rate loans and, thus, restructured the asset sensitive position resulting from a short maturity investment portfolio. LIQUIDITY MANAGEMENT Liquidity management involves planning to meet anticipated funding needs at a reasonable cost, as well as contingency plans to meet unanticipated funding needs or a loss of funding sources. Liquidity management is governed by policies formulated and monitored by senior management, which take into account the marketability of assets, the sources and stability of funding, and the level of unfunded commitments. Long-term liquidity needs are provided by a large core deposit base, which is the most stable source of liquidity a bank can have due to the long-term relationship with depositors and the deposit insurance provided by the FDIC. In 1995, 85.5% of total assets were funded by core deposits and 2.9% were funded with short-term purchased funds, compared to 82.4% and 6.8%, respectively, in 1994. ACNB Corporation joined the Federal Home Loan Bank of Pittsburgh in 1994 to serve the dual purpose of emergency and long-term liquidity. The Corporation's borrowing capacity stood at $227.8 million at year-end 1995. ACNB Corporation liquidity is maintained by cash flows stemming from dividends collected from the Bank, which represents the primary source of funds to pay dividends to stockholders. The amount of dividends from bank subsidiaries is subject to certain regulatory restrictions, as detailed in Note G of the Notes to Consolidated Financial Statements. The parent company's financial statements are presented in Note F of the Notes to Consolidated Financial Statements. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS In the normal course of business, ACNB Corporation does not use off-balance sheet financial instruments to hedge potential fluctuations in income or market values. Off-balance sheet items consist solely of commitments to lend and letters of credit. LOAN REVIEW AND PROVISION AND RESERVE FOR POSSIBLE LOAN LOSSES GENERAL ACNB Corporation's lending activities are carried on through its banking subsidiary, Adams County National Bank. As of December 31, 1995, the Corporation's total loan portfolio, carried at historical cost, of $324 million included $197 million in mortgage loans secured by first liens on one-to-four family residential properties; $57 million in mortgage loans secured by commercial properties such as apartment buildings, office buildings, warehouses, and medical office buildings; $13 million in Interest Rate Sensitivity Gap at December 31, 1995
Repricing Period --------------------------------------------------------------------------------------------- 0-30 31-90 91-180 181-365 1-5 Over 5 days days days days years years ---------------------------------------------------------------------------------------------- IN THOUSANDS Interest earning assets $ 90,140 $ 34,475 $ 62,321 $125,313 $121,916 $ 3,084 Funds supporting interest earning assets 28,544 41,279 49,932 58,213 194,830 35,012 --------- --------- --------- --------- --------- --------- Interest rate sensitivity gap $ 61,596 $ (6,804) $ 12,389 $ 67,100 $ (72,914) $ (31,928) --------- --------- --------- --------- --------- --------- Cumulative gap $ 61,596 $ 54,792 $ (67,181) $ 134,281 $ 61,367 $ 29,439 --------- --------- --------- --------- --------- --------- Cumulative gap as a percentage of total assets 13.4% 11.9% 14.6% 29.2% 13.4% 6.4% --------- --------- --------- --------- --------- ---------
ACNB Corporation & Subsidiary construction loans; $40 million in consumer loans; and, $17 million in commercial and agricultural credits. The amounts for 1994 were total loans of $306 million; mortgage loans secured by first liens on one-to-four family residential properties of $188 million; mortgage loans secured by commercial properties of $48 million; construction loans of $13 million; consumer loans of $37 million; and, commercial and agricultural credits of $20 million. In originating loans, the Corporation must compete with savings banks, savings and loan associations, other commercial banks, mortgage companies, and credit unions. In addition, the Corporation's lending activities are heavily influenced by economic trends affecting the availability of funds and by general interest rate levels. More specifically, the condition of the construction industry and the demand for housing directly impact residential lending volumes. RESIDENTIAL REAL ESTATE LOANS The Corporation makes available to borrowers in its primary consumer market area a full range of residential real estate loans, including conventional fixed-rate mortgage loans for terms of 5, 15 or 30 years and adjustable-rate mortgage loans, or ARMs. Adjustable-rate mortgages are advantageous to the Corporation because adjustable-rate loans better match its natural liability base. However, the ability to originate ARMs, in lieu of fixed-rate loans, has varied in response to changes in market interest rates. Between 1990 and 1993, ARMs were refinanced to fixed-rate loans, reflecting continuing lower market interest rates and leading to runoff in the Corporation's loan portfolio. With the rise in interest rates in 1994 and 1995, ARMs have been a larger share of total loan originations and the Corporation's portfolio has resumed its long-term growth. Currently, the Corporation's adjustable-rate mortgage loans are indexed to the Federal Housing Finance Board's Contract Rate for Major Lenders and have an annual cap of 2%. All of the Corporation's residential mortgage lending is subject to nondiscriminatory underwriting standards, and most is subject to loan origination and documentation procedures acceptable to the secondary market. Residential mortgage loans are originated using standard Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, or FHLMC, applications and appraisal forms. All loans are subject to underwriting review and approval by various levels of Bank personnel, depending upon the size of the loan. Residential real estate loan applications come through various channels, primarily the Corporation's community Comparative Average Balance Sheet And Net Interest Analyis December 31, ------------------------------------ 1995 ------------------------------------ ASSETS IN THOUSANDS Balance Interest Rate ------- -------- ---- Loans $ 319,712 $ 25,918 8.11% Taxable investment securities 116,672 6,048 5.18% Non-taxable investment securities 1,407 72 5.12% Federal funds sold 100 6 6.00% Interest bearing deposits with banks 2,947 169 5.73% --------- --------- Total interest earning assets 440,838 $ 32,213 7.31% Cash and due from banks 10,996 Premises and equipment 5,922 Other assets 4,703 Reserve for loan losses (3,323) --------- TOTAL ASSETS $ 459,136 ========= LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing demand deposits $ 48,805 $ 1,189 2.44% Savings deposits 116,660 3,202 2.74% Time deposits 180,996 9,068 5.01% Short-term borrowings 19,953 978 4.90% --------- --------- ----- Total interest bearing liabilities 366,414 $ 14,437 3.94% --------- --------- ----- INTEREST RATE SPREAD 3.37% --------- --------- ----- Demand deposits 40,027 Other liabilities 2,378 Stockholders' equity 50,317 --------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 459,136 ========= INTEREST INCOME/EARNING ASSETS $ 440,838 $ 32,213 7.31% INTEREST EXPENSE/EARNING ASSETS $ 440,838 $ 14,437 3.28% NET YIELD ON EARNING ASSETS $ 17,776 4.03% Loan fees of $396,000, $442,000 and $485,000 for 1995, 1994 and 1993, respectively, are included for rate calculation purposes. ACNB Corporation & Subsidiary banking offices. However, all residential real estate loans are originated by the Corporation's banking subsidiary, and mortgage insurance is currently required on all residential real estate loans originated at a loan-to-value ratio over 85%. In addition to interest earned on loans, the Corporation receives fees for originating loans and for providing loan commitments. The Corporation also assesses fees for loan modifications, late payments, changes of property ownership, and other miscellaneous services. RESIDENTIAL CONSTRUCTION LOANS ACNB Corporation provides financing for two different categories of residential construction loans. A custom construction loan is made to the intended occupant of a house to finance its construction. Speculative construction loans are made to borrowers who are in the business of building homes for resale. Speculative construction loans are made on a house-by-house basis, and not as lines of credit to builders. Nevertheless, this type of construction loan involves somewhat more risk than custom construction loans and different underwriting considerations. All construction loans require approval by various levels of Bank personnel, depending upon the size of the loan. Construction loans for nonconforming residential properties, which are properties other than single-family detached houses, are subject to more stringent approval requirements. COMMERCIAL REAL ESTATE LOANS In all commercial real estate lending, the Corporation considers the location, marketability and overall attractiveness of the project. Current underwriting guidelines on commercial real estate loans require an economic analysis of each property, with regard to the annual revenue and expenses, debt service coverage and fair market value, to determine the maximum loan amount. Commercial real estate loans require approval by various levels of Bank personnel, depending upon the size of the loan. Commercial real estate lending generally entails greater risks than residential mortgage lending. This type of lending typically involves large loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties usually depends on the successful operation of the related real estate project and, thus, may be subject, to a greater extent, to adverse conditions in the real estate market or in the general economy. In order to monitor its commercial real estate loan ACNB Corporation & Subsidiary
December 31 December 31 -------------------------------------- -------------------------------- 1994 1993 -------------------------------------- -------------------------------- Balance Interest Rate Balance Interest Rate ------- -------- ---- ------- -------- ---- Loans $ 289,350 $ 22,998 7.95% $ 288,790 $ 24,671 8.54% Taxable investment securities 150,188 7,021 4.67% 129,953 6,660 5.12% Non-taxable investment securities 2,605 107 4.11% 1,394 81 5.81% Federal funds sold 10,766 401 3.72% 18,258 558 3.06% Interest bearing deposits with banks 1,457 112 7.69% 2,539 152 5.99% --------- --------- --------- --------- Total interest earning assets 454,366 $ 30,639 6.74% 440,934 $ 32,122 7.28% Cash and due from banks 11,582 10,463 Premises and equipment 5,702 4,712 Other assets 4,984 5,121 Reserve for loan losses (3,448) (3,538) --------- --------- TOTAL ASSETS $ 473,186 $ 457,692 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing demand deposits $ 56,420 $ 1,383 2.45% $ 50,563 $ 1,395 2.76% Savings deposits 137,910 3,824 2.77% 127,785 4,215 3.30% Time deposits 176,222 6,818 3.87% 192,135 8,062 4.20% Short-term borrowings 14,186 394 2.78% 6,812 222 3.26% --------- --------- --------- --------- Total interest bearing liabilities 384,738 $ 12,419 3.23% 377,295 $ 13,894 3.68% --------- --------- ----- --------- --------- ----- INTEREST RATE SPREAD 3.51% 3.60% Demand deposits 38,772 33,906 Other liabilities 1,783 2,080 Stockholders' equity 47,893 44,411 --------- --------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 473,186 $ 457,692 ========= ========= INTEREST INCOME/EARNING ASSETS $ 454,366 $ 30,639 6.74% $ 440,934 $ 32,122 7.28% INTEREST EXPENSE/EARNING ASSETS $ 454,366 $ 12,419 2.73% $ 440,934 $ 13,894 3.15% NET YIELD ON EARNING ASSETS $ 18,220 4.01% $ 18,228 4.13%
portfolio, the Corporation periodically inspects real estate collateral based on the loan risk classification, the loan size, and the location of the collateral; analyzes the economic condition of markets in which the company has a geographic concentration; and, reviews operating statements and rent rolls, updated financial and tax statements of borrowers, evidence of insurance coverage, and evidence that real estate taxes have been paid. These procedures are designed to analyze the economic viability of the property, as well as to determine whether or not the debt service coverage and loan-to-value ratios remain consistent with the Corporation's underwriting policies. It is the intention of management to perform a continual review of the commercial real estate loan portfolio in light of the condition of the real estate market. Based upon the above procedures, the Corporation classifies loans that fall below underwriting standards into various risk categories. MANUFACTURED HOUSING, SECOND MORTGAGE AND OTHER CONSUMER LOANS The Corporation offers consumer loan programs that include the following: manufactured housing loans; second mortgage loans for a variety of purposes such as for purchase, renovation or remodeling of property, and for uses unrelated to the security; loans for the purchase of automobiles, pleasure boats and recreational vehicles; student loans; and, loans for general household purposes, including home equity lines of credit. Consumer loans, in addition to being an important part of the Corporation's orientation toward consumer financial services, promote greater net interest income stability because of their somewhat shorter maturities and faster prepayment characteristics. Lending in this area may involve special risks, including decreases in the value of collateral and transaction costs associated with foreclosure and repossession. Consumer loans are generally secured loans and are made based on an evaluation of the collateral and the borrower's creditworthiness, including such factors as income, other indebtedness and credit history. Secured consumer loan amounts typically do not exceed 85% of the value of the collateral, less the outstanding balance of any first mortgage loan. Lines of credit are subject to periodic review, revision and, when deemed appropriate by the Corporation, cancellation as a result of changes in the borrower's financial circumstances. ASSET QUALITY Banks are required to review their assets on a regular basis, and to classify them if any weaknesses are noted. Adequate reserves must be maintained for assets classified as substandard or doubtful. Any assets classified as a loss must be immediately written off. ACNB Corporation has a comprehensive process for classifying assets, and asset reviews are performed on a quarterly basis. The objective of the review process is to identify any trends and to determine the levels of loss exposure in evaluating the need for an adjustment to the reserve accounts. Classified assets consist of nonaccrual loans, loans under foreclosure, other real estate owned, and performing loans and securities that exhibit credit quality weaknesses. The principal measures of asset problems are the levels of nonaccruing loans, loans under foreclosure, other real estate owned, the size of the provision for loan losses, loan charge-offs, and the size of the write-downs in the value of other real estate owned. See below. Management ceases to accrue interest income on any loan that becomes 90 days or more delinquent and is not in the process of collection. Thereafter, interest income is accrued only if and when, in management's opinion, projected cash proceeds are deemed sufficient to repay both principal and interest. All loans on which interest is not being accrued are referred to as loans on nonaccrual status. Nonperforming loans include those loans which are on nonaccrual status and loans on which payment is 90 days or more delinquent, but still accruing. Real estate that served as security for a defaulted loan and that then became other real estate owned is recorded on the Corporation's books at the lower of the outstanding loan balance or fair market value, the determination of which takes into account the effect of sales and financing concessions that may be required to market the property. If management's estimate of fair market value at the time a property becomes other real estate owned is less than the loan balance, the loan is written down at that time by a charge to the reserve for loan losses. Other real estate owned consisted of four properties valued at $689,000 as of December 31, 1995, down from $1.0 million as of December 31, 1994. PROVISION AND RESERVE FOR LOAN LOSSES Reserves are based upon management's continuing analysis of pertinent factors underlying the quality of the loan portfolio. These factors include changes in the size and composition of the portfolio, historical loan loss trends, the industry's loss experience, and current and anticipated economic conditions. As part of the process of determining the adequacy of the reserve for loan losses, the Corporation reviews its loan portfolio for specific weaknesses. A portion of the reserve is then allocated to reflect the potential loss exposure of those specific weaknesses. When available information confirms that specific loans or portions thereof are uncollectible, these amounts are charged-off against the reserve for loan losses. The existence of some or all of the following criteria generally confirm that a loss has been incurred the loan is significantly delinquent and the Nonperforming Assets Analysis
Year ended December 31 ------------------------------------------------------- 1995 1994 -------------------------- -------------------------- Nonperforming Net Nonperforming Net IN THOUSANDS Assets Charge-offs Assets Charge-offs -------------------------- -------------------------- Real estate loans (1-4 family dwellings) $2,000 $ 31 $2,080 $ 76 Real estate loans (other) 1,589 12 796 89 Commercial and industrial 184 -- 98 3 Consumer 100 53 99 43 ------ ----- ------ ------ TOTAL $3,873 $ 96 $3,073 $ 211 ====== ===== ====== ======
ACNB Corporation & Subsidiary borrower has not evidenced the ability or intent to bring the loan current; the Corporation has no recourse to the borrower or, if it does, the borrower has insufficient assets to pay the debt; or, the fair market value of the loan collateral is significantly below the current loan balance, and there is little or no near-term prospect for improvement. Residential real estate and consumer loans are not individually analyzed for loss exposure because of the significant number of loans, as well as their relatively small balances and historically low level of losses. After study of economic conditions, review of loan quality and collateral, and past history of bad debts, management has not seen the need for additional provisions to the reserve over the last two years. This decision will be closely reviewed in 1996 and thereafter. CAPITAL MANAGEMENT During 1995, ACNB Corporation increased its capital base through retained earnings. At year-end 1995, the risk-based capital ratios of Tier 1 capital and Total capital were 20.11% and 21.36%, respectively, exceeding the minimum ratios specified by the Federal Reserve Board. Capital ratios are included in the table below. Capital management is an ongoing process that consists of providing equity and long-term debt for both current and future financial positioning. ACNB Corporation manages its capital to execute its strategic business plans and to support its growth and investments. ACNB Corporation and its banking subsidiary are subject to the capital adequacy guidelines of various federal banking agencies, such as the Federal Reserve Board and the Office of the Comptroller of the Currency. At December 31, 1995, the Corporation and its banking subsidiary were in compliance with the capital requirements of their respective regulatory agencies and, further, are expected to remain in compliance in the future. Additionally, pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA, the federal banking regulators have set the minimum capital ratios for a well-capitalized banking institution at 6% Tier 1 capital, 10% Total capital, and 5% Tier 1 leverage. At December 31, 1995, the capital ratios of the Corporation's banking subsidiary exceeded these levels and are expected to be in excess of the minimum ratios required of a well-capitalized institution in the future. The risk-based capital guidelines are designed to measure Tier 1 and Total capital, which is comprised of Tier 1 and Tier 2, in relation to the credit risk of both on- and off-balance sheet items. In the fourth quarter of 1995, ACNB Corporation announced a stock repurchase program to purchase up to 100,000 shares of its common stock over the next 12 to 18 months. Management believes this is a prudent use of the Corporation's ample capital, and the repurchased shares will be retired. The Corporation's Board of Directors increased the quarterly common stock cash dividend to $.16 per share during the first quarter of 1995, and further increased the quarterly dividend to $.17 per share during the third quarter of 1995. The annual dividend during 1994 was $.64 and $.58 in 1993. The Corporation's total stockholders' equity at December 31, 1995, was $51.5 million, or 11.2%, of total assets, compared with $48.7 million, or 10.31%, at December 31, 1994. The growth in stockholders' equity was due to the increase from retained earnings, reduced by the repurchase of common stock of $136,000 and the declaration of dividends of $3.5 million. OUTLOOK ON FUTURE OPERATING RESULTS AND SUBSEQUENT EVENTS The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights", which was effective January 1, 1996. It will not effect the Corporation since mortgage servicing rights are not retained on sold residential mortgages. The Financial Accounting Standards Board also issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation", which was effective January 1, 1996. The Corporation does not offer stock-based compensation and, therefore, Statement of Financial Accounting Standards No. 123 is not applicable. Another accounting pronouncement that took effect on January 1, 1996, is Statement of Financial Accounting Standards No. 121, and this statement concerns impairment of long-lived assets. The Corporation reviews such assets as conditions warrant and makes adjustments that are necessary to reflect the value of its assets accurately. On January 15, 1996, the Corporation paid to its stockholders a special cash dividend of $1.00 per share. This dividend had the dual effect of lowering the Corporation's capital ratio, which should improve return on equity, and sharing the earnings of the last decade with the Corporation's stockholders. The trend that will have the greatest effect in 1996, and beyond, is the increasing difficulty experienced in attracting deposits. Should this difficulty continue, the Corporation will be required to look elsewhere for funding sources. Management has considered this and, while core deposits have been the foundation of historic growth, future growth may have to come from the Federal Home Loan Bank and similar sources. Capital Ratios at Year-end 1995 1994 ---- ---- Common stockholders' equity to assets 11.20% 10.31% Tier I leverage ratio 11.21% 10.25% Tier I risk-based capital ratio 20.11% 20.61% Total risk-based capital ratio 21.36% 21.86% ACNB Corporation & Subsidiary CONSOLIDATED STATEMENTS OF CONDITION December 31 ---------------------- ASSETS In thousands 1995 1994 ---- ---- Cash and due from banks $ 14,135 $ 12,872 Interest bearing deposits with banks 8,765 47 Investment securities (market value $105,144 and $140,604, respectively) 104,842 144,905 Federal funds sold 100 100 Mortgage loans held for sale 874 -- Loans (net of unearned discount of $2,184 and $3,883, respectively) 323,128 305,922 Reserve for possible loan losses (3,274) (3,370) --------- --------- Net loans 319,854 302,552 Premises and equipment 5,767 5,874 Other real estate 689 1,037 Other assets 4,327 4,645 --------- --------- TOTAL ASSETS $ 459,353 $ 472,032 ========= ========= LIABILITIES Non-interest bearing deposits $ 44,318 $ 38,639 Interest bearing deposits 347,925 350,159 --------- --------- TOTAL DEPOSITS 392,243 388,798 Securities sold under agreement to repurchase 13,203 14,613 Federal funds purchased -- 16,800 Demand notes, U.S. Treasury 199 450 Other liabilities 2,245 2,724 --------- --------- TOTAL LIABILITIES 407,890 423,385 STOCKHOLDERS' EQUITY Common stock (par value $2.50; 20,000,000 shares authorized; 5,307,756 issued and outstanding shares on 12/31/95 and 5,316,122 on 12/31/94) 13,269 13,290 Additional paid-in capital 4,396 4,511 Retained earnings 33,798 30,846 --------- --------- TOTAL STOCKHOLDERS' EQUITY 51,463 48,647 --------- --------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 459,353 $ 472,032 ========= ========= ACNB Corporation & Subsidiary CONSOLIDATED STATEMENTS OF INCOME Year ended December 31 --------------------------- INTEREST INCOME In thousands, except per share data 1995 1994 1993 ---- ---- ---- Loans (including fees) $25,918 $22,998 $24,671 Time deposits with banks 169 112 152 Federal funds sold 6 401 558 Taxable securities 6,048 7,021 6,660 Non-taxable securities 72 107 81 ------- ------- ------- TOTAL INTEREST INCOME 32,213 30,639 32,122 INTEREST EXPENSE Interest bearing deposits 13,459 12,025 13,672 Other borrowed funds 978 394 222 ------- ------- ------- TOTAL INTEREST EXPENSE 14,437 12,419 13,894 NET INTEREST INCOME 17,776 18,220 18,228 Provision for possible loan losses -- -- 315 ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN LOSSES 17,776 18,220 17,913 OTHER OPERATING INCOME Trust income 356 292 278 Service charges on deposit accounts 672 597 564 Other income 599 612 660 Securities gains -- -- 93 ------- ------- ------- TOTAL OTHER OPERATING INCOME 1,627 1,501 1,595 OTHER OPERATING EXPENSE Salaries and employee benefits 5,610 5,173 4,995 Net occupancy expense 695 651 589 Equipment expense 823 708 624 FDIC insurance 461 928 901 Other taxes 401 392 353 Other expense 1,819 1,808 1,730 ------- ------- ------- TOTAL OTHER OPERATING EXPENSE 9,809 9,660 9,192 INCOME BEFORE INCOME TAXES 9,594 10,061 10,316 Applicable income taxes 3,135 3,288 3,383 ------- ------- ------- NET INCOME $ 6,459 $ 6,773 $ 6,933 ======= ======= ======= PER COMMON SHARE DATA* Net income $ 1.22 $ 1.27 $ 1.30 Cash dividends $ .66 $ .64 $ .58 * Based on a weighted average of 5,314,521 shares in 1995, 5,342,101 shares in 1994, and 5,347,836 shares in 1993. Data restated to reflect two-for-one stock split in the form of a 100% stock dividend issued in 1994. ACNB Corporation & Subsidiary CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Additional Common Paid-in Retained Stock Capital Earnings Total ----- ------- -------- ----- In thousands BALANCE AT JANUARY 1, 1993 $ 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 (7,490) 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 Net income -- -- (6,459) 6,459 Cash dividends -- -- (3,507) (3,507) Retirement of 8,366 shares (21) (115) -- (136) -------- -------- -------- -------- BALANCE AT DECEMBER 31, 1995 $ 13,269 $ 4,396 $ 33,798 $ 51,463 ======== ======== ======== ======== ACNB Corporation & Subsidiary CONSOLIDATED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH Year ended December 31 AND CASH EQUIVALENTS --------------------------------- In thousands 1995 1994 1993 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Interest and dividends received $ 32,634 $ 31,895 $ 35,002 Fees and commissions received 2,023 1,943 2,080 Interest paid (13,875) (12,394) (14,166) Cash paid to suppliers and employees (9,759) (8,920) (8,755) Income taxes paid (3,478) (2,419) (2,705) Loans originated for sale (5,138) -- -- Proceeds of mortgage loans sold 4,264 -- -- -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 6,671 10,105 11,456 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investment securities and interest bearing balances with other banks 68,885 56,677 47,526 Purchase of investment securities and interest bearing balances with other banks (29,481) (55,559) (77,954) Net (increase) decrease in loans (16,961) (23,031) 4,595 Capital expenditures (474) (938) (1,615) -------- -------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 21,969 (22,851) (27,448) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in demand deposits, NOW accounts and savings accounts (12,741) (4,787) 35,225 Net increase (decrease) in certificates of deposit 14,776 (15,290) (18,465) Dividends paid (3,507) (3,417) (3,101) Net increase (decrease) in federal funds purchased (17,051) 16,800 -- Retirement of common stock (136) (571) -- -------- -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (18,659) (7,265) 13,659 -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,981 (20,011) (2,333) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 13,019 33,030 35,363 -------- -------- -------- CASH AND CASH EQUIVALENTS AT ENDOFYEAR $ 23,000 $ 13,019 $ 33,030 ======== ======== ======== RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net income $ 6,459 $ 6,773 $ 6,933 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Securities gains -- -- 93 Depreciation and amortization 588 457 406 Provision for possible loan losses -- -- 315 Provision (Benefit) for deferred taxes 88 (67) 943 Amortization of investment securities premiums 760 1,850 1,798 Increase (Decrease) in taxes payable (431) 936 (265) Decrease (Increase) in interest receivable 414 (152) 1,474 Increase (Decrease) in interest payable 562 25 (272) Increase (Decrease) in accrued expenses (351) 275 107 Increase in mortgage loans held for sale (874) -- -- Decrease (Increase) in other assets (180) 17 (37) Decrease in other liabilities (364) (9) (39) -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 6,671 $ 10,105 $ 11,456 ======== ======== ======== 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. Financial statements prepared in accordance with generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts and disclosure of contingencies. Actual results could differ from these estimates. 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, 1995 and 1994. 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 Under Statement of Financial Accounting Standards No. 109, 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. The effect of deferred taxes is recognized in income in the period that includes the enactment date. 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 cost 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. A significant change in this estimate could result in a material change to net income. Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by Statement of Financial Accounting Standards No. 118, was effective January 1, 1995. The Corporation considers all consumer loans and residential mortgage loans to be excluded, unless restructured in a troubled debt restructuring. Other real estate loans are also excluded because the loans are carried at the lower of fair value or carrying value at the time of acquisition. At December 31, 1995, the Corporation did not have any loans that would be classified as impaired under Statement of Financial Accounting Standards No. 114. 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. ADVERTISING COSTS Costs of advertising are expensed when incurred. 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 1995 and 1994, approximately 98% of the Corporation's assets and 88% and 89%, respectively, of its liabilities are considered financial instruments as defined in Statement of Financial Accounting Standards No. 107. Many of the Corporation's financial instruments, however, lack an available trading market as characterized by a willing buyer and a willing seller engaging in an exchange transaction. Therefore, significant estimations and present value calculations were used by the Corporation for the purposes of this disclosure. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate the value. Financial instruments actively traded in a secondary market have been valued using quoted available market prices.
December 31, 1995 December 31, 1994 ----------------------------- ------------------------------ Estimated Fair Carrying Estimated Fair Carrying Value Amount Value Amount In thousands --------------- --------- ---------------- ----------- Cash and due from banks $ 14,135 $ 14,135 $ 12,872 $ 12,872 Interest bearing deposits with banks 8,765 8,765 47 47 Federal funds sold 100 100 100 100 Investment securities 105,144 104,842 140,604 144,905 Interest receivable 2,766 2,766 3,270 3,270
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, 1995 and 1994. 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, 1995 and 1994, which was 7.52% and 7.56%, respectively, and consumer loans were revalued using rates being charged by the Corporation at year-end 1995 and 1994. Fair value for nonperforming loans is based on current valuations of underlying collateral.
December 31, 1995 December 31, 1994 ----------------------------- ------------------------------ Estimated Fair Carrying Estimated Fair Carrying Value Amount Value Amount In thousands --------------- --------- ---------------- ----------- Net loans $320,778 $319,854 $302,036 $302,552 Mortgage loans held for sale 874 874 -- --
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, 1995 and 1994. 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, 1995 December 31, 1994 ----------------------------- ------------------------------ Estimated Fair Carrying Estimated Fair Carrying Value Amount Value Amount In thousands --------------- --------- ---------------- ----------- Deposits with no stated maturities $204,779 $204,779 $216,227 $216,227 Deposits with stated maturities 185,034 187,464 171,269 172,571 Repurchase agreements 13,203 13,203 14,613 14,613 Federal funds purchased and demand notes 199 199 17,250 17,250 Interest payable 2,145 2,145 1,582 1,582
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, 1995 December 31, 1994 ---------------------- --------------------- Estimated Carrying Estimated Carrying Fair Value Amount Fair Value Amount ----------- -------- ---------- -------- In thousands Commitments to extend credit $28,993 $28,993 $24,821 $24,821 Standby letters of credit 1,837 1,837 1,324 1,324 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. ACNB Corporation & Subsidiary NOTE C INVESTMENT SECURITIES The amortized cost and estimated fair value of investment securities were as follows:
December 31, 1995 -------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Held-to-Maturity Securities In thousands Cost Gains Losses Value --------- ---------- ---------- -------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $101,400 $619 $319 $101,700 Obligations of states and political subdivisions 962 2 -- 964 -------- ----- ---- -------- Total debt securities 102,362 621 319 102,664 Other equity securities 2,480 -- -- 2,480 -------- ----- ---- -------- Total Investment Securities $104,842 $621 $319 $105,144 ======== ===== ==== ======== December 31, 1994 -------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Held-to-Maturity Securities In thousands Cost Gains Losses Value --------- ---------- ---------- -------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $141,139 $ 9 $4,307 $136,841 Obligations of states and political subdivisions 1,509 1 4 1,506 Mortgage-backed securities 1 -- -- 1 -------- --- ------ -------- Total debt securities 142,649 10 4,311 138,348 Other equity securities 2,256 -- -- 2,256 -------- --- ------ -------- Total Investment Securities $144,905 $10 $4,311 $140,604 ======== === ====== ========
The amortized cost and estimated fair value of debt securities at December 31, 1995, by contractual maturity are shown below. Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without call or prepayment penalties. December 31, 1994 December 31, 1995 ----------------- ----------------- Amortized Fair Amortized Fair Held-to-Maturity Securities In thousands Cost Value Cost Value --------- -------- --------- -------- Due in one year or less $ 54,363 $ 54,288 $ 54,813 $ 54,236 Due after one year through five years 47,327 47,704 87,103 83,379 Due after five years through ten years 423 423 378 378 Due after ten years 249 249 354 354 Mortgage-backed securities -- -- 1 1 -------- -------- -------- -------- Total Debt Securities $102,362 $102,664 $142,649 $138,348 ======== ======== ======== ======== At December 31, 1995 and 1994, assets with an amortized cost of $37,731,000 and $34,866,000, respectively, were pledged as required or permitted by law to secure certain public and trust deposits, repurchase agreements, or for other purposes. ACNB Corporation & Subsidiary NOTE D LOANS AND RESERVES FOR LOAN LOSSES Loans at December 31 are summarized as follows: In thousands 1995 1994 1993 ---- ---- ---- Real estate $284,943 $268,944 $250,242 Real estate - construction 12,951 12,632 4,791 Commercial, financial and agricultural 9,268 10,785 14,100 Consumer 18,150 17,444 17,950 -------- -------- -------- 325,312 309,805 287,083 Less: Unearned discount on loans 2,184 3,883 3,785 -------- -------- -------- Total Loans $323,128 $305,922 $283,298 ======== ======== ======== Transactions in the valuation portion of the reserve for loan losses were as follows: In thousands 1995 1994 1993 ---- ---- ---- Balance - January 1 $3,370 $3,581 $3,417 Recoveries credited to reserve 38 45 41 Provision charged to operating expense -- -- 315 Loans charged-off (134) (256) (192) ------ ------ ------ Balance - December 31 $3,274 $3,370 $3,581 ====== ====== ====== The reserve for loan losses for federal income tax purposes was $1,591,000 in 1995, 1994 and 1993. Total nonaccrual loans for 1995 and 1994 were $1,093,000 and $854,000, respectively. Interest lost due to nonaccrual loans was $100,000 and $75,000 for 1995 and 1994, respectively. At December 31, 1995, residential mortgage loans with a book value of $873,500 were committed for sale and awaiting settlement. The cumulative market value exceeded the book value of these loans. NOTE E INCOME TAXES The composition of applicable income taxes for the years 1995, 1994 and 1993 was as follows: In thousands 1995 1994 1993 ---- ---- ---- Current $3,049 $3,199 $3,451 Deferred 86 89 (68) ------ ------ ------ $3,135 $3,288 $3,383 ====== ====== ====== Income taxes paid during 1995, 1994 and 1993 were $2,931,000, $3,265,000 and $3,640,000, respectively. Differences between applicable income taxes (benefit) included in net income and the maximum federal income tax rates were comprised as follows: In thousands 1995 1994 1993 ---- ---- ---- Income taxes at statutory rates $3,262 $3,421 $ 3,511 Increases (Decreases) resulting from: Tax-free income (60) (84) (95) Tax preference interest expense 6 8 6 Rehabilitation and low-income housing credit (73) (57) (120) Other, net -- -- 81 ------- ------- ------- Applicable Income Tax $3,135 $3,288 $3,383 ======= ======= ======= At December 31, 1995 and 1994, the Corporation had deferred liabilities of $303,000 and $244,000 and deferred tax assets of $572,000 and $605,000, respectively. The principal temporary differences were depreciation ($165,000), reserve for bad debts ($572,000), and accounting for pension contributions ($135,000) in 1995 and depreciation ($118,000), reserve for bad debts ($605,000), and accounting for pension contributions ($127,000) in 1994. Federal income taxes on securities gains were $0 in 1995, $0 in 1994 and $32,000 in 1993. Since the Corporation has historically had strong earnings, management believes the deferred tax asset is realizable. ACNB Corporation & Subsidiary NOTE F ACNB CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION December 31 ------------------- STATEMENTS OF CONDITION In thousands 1995 1994 ---- ---- ASSETS Cash $ 202 $ 202 Securities and other assets 356 417 Investment in common stock of subsidiary 49,180 48,011 Receivable from subsidiary 1,725 17 ------- ------- TOTAL ASSETS $51,463 $48,647 ======= ======= STOCKHOLDERS' EQUITY Common stock (par value $2.50; 20,000,000 shares authorized; 5,307,756 issued and outstanding shares on 12/31/95 and 5,316,122 on 12/31/94) $13,269 $13,290 Additional paid-in capital 4,396 4,511 Retained earnings 33,798 30,846 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $51,463 $48,647 ======= ======= Year ended December 31 ------------------------------- STATEMENTS OF INCOME In thousands 1995 1994 1993 ---- ---- ---- INCOME Dividend from subsidiary $5,257 $5,851 $3,381 Other -- -- 93 ------ ------ ------ EXPENSE 61 37 25 ------ ------ ------ INCOME BEFORE TAXES AND EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARY 5,196 5,814 3,449 Applicable tax benefit (93) (70) (97) ------ ------ ------ INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARY 5,289 5,884 3,546 Equity in undistributed net income of subsidiary 1,170 889 3,387 ------ ------ ------ NET INCOME $6,459 $6,773 $6,933 ====== ====== ====== ACNB Corporation & Subsidiary Year ended December 31 ---------------------------------- STATEMENTS OF CASH FLOWS In thousands 1995 1994 1993 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Dividends received $ 3,643 $ 5,851 $ 3,381 ------- ------- ------- Net Cash Provided by Operating Activities 3,643 5,851 3,381 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of investment securities -- -- 200 Purchase of equity investment -- -- (480) ------- ------- ------- Net Cash Used in Investing Activities -- -- (280) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (3,507) (3,417) (3,101) Purchase of common stock of subsidiary -- (2,000) -- Retirement of common stock (136) (434) -- ------- ------- ------- Net Cash Used in Financing Activities (3,643) (5,851) (3,101) ------- ------- ------- CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 202 202 202 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 202 $ 202 $ 202 ======= ======= ======= RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net income $ 6,459 $ 6,773 $ 6,933 Securities gains -- -- (93) Increase in investment in common stock of subsidiary (1,170) (889) (3,387) Decrease in due to subsidiary -- -- (14) Decrease (Increase) in receivable from subsidiary (1,707) 66 (83) Loss on equity investment 61 38 25 Non-cash dividend -- (137) -- ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 3,643 $ 5,851 $ 3,381 ======= ======= ======= NOTE G RESTRICTIONS ON SUBSIDIARY DIVIDENDS, LOANS AND ADVANCES Certain restrictions exist regarding the ability of the Bank to transfer funds to the Corporation in the form of cash dividends, loans or advances. The approval of the Office of the Comptroller of the Currency is required to pay dividends in excess of earnings retained in the current year plus retained net profits for the preceding two years. As of December 31, 1995, $5,447,000 of undistributed earnings of the Bank, included in consolidated retained earnings, was available for distribution to the Corporation as dividends without prior regulatory approval. Under national banking laws, the Bank is also limited as to the amount it may loan to its affiliates, including the Corporation, unless such loans are collateralized by specific obligations. At December 31, 1995, the maximum amount available for transfer from the Bank to the Corporation in the form of loans was approximately $5,474,000. NOTE H INVESTMENT IN REAL ESTATE PARTNERSHIP ACNB Corporation is the sole limited partner in a partnership named Gettysburg Scattered Site Associates, whose purpose is to develop, manage and operate a residential low-income development comprised of sixteen dwelling units. ACNB Corporation owns a 99% limited partner's interest in the partnership. The investment is accounted for under the equity method of accounting. At December 31, 1995 and 1994, the carrying value of this investment was approximately $356,514 and $417,704, respectively. ACNB Corporation & Subsidiary NOTE I PREMISES AND EQUIPMENT The composition of Corporation premises and equipment at December 31 was as follows: In thousands 1995 1994 ---- ---- Land $ 857 $ 857 Bank premises 5,746 5,492 Furniture and equipment 4,784 4,594 Less: Accumulated depreciation and amortization (5,620) (5,069) ------- ------- TOTAL $ 5,767 $ 5,874 ======= ======= A summary of depreciation and amortization expenses is as follows: In thousands 1995 1994 1993 ---- ---- ---- Bank premises $193 $158 $127 Furniture and equipment 388 291 240 ---- ---- ---- TOTAL $581 $449 $367 ==== ==== ==== NOTE J RETIREMENT PLANS The subsidiary has a non-contributory pension plan covering all eligible employees. The plan provides retirement benefits which are a function of both the years of service and the highest level of compensation during any consecutive five-year period. It is the subsidiary's funding policy to contribute annually the amount that is sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act. The total pension expense for the years ended December 31, 1995, 1994 and 1993 was $277,000, $266,000 and $260,000, respectively. The following table sets forth the plan's funded status as of October 31, 1995 and 1994, and amounts recognized in the Corporation's consolidated financial statements at December 31: In thousands 1995 1994 ---- ---- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $3,755 for 1995 and $2,905 for 1994 $ 3,792 $(2,929) ======= ======= In thousands Projected benefit obligation for service rendered to date $(5,794) $(4,325) Plan assets at fair value 4,462 4,029 ------- ------- Projected benefit obligation in excess of plan assets (1,332) (296) Unrecognized transition asset (92) (105) Unrecognized loss 1,191 133 Unrecognized prior service cost 307 344 Contributions from November 1 through December 31 300 60 ------- ------- Prepaid pension cost included in other assets $ 374 $ 136 ======= ======= In thousands Net pension cost for 1995 and 1994 included the following components: Service cost $ 216 $ 230 Interest cost 355 360 Actual return on plan assets (262) (188) Amortization and deferral (32) (136) ------- ------- Net periodic pension cost $ 277 $ 266 ======= ======= There was a settlement during 1994 under Statement of Financial Accounting Standards No. 88, resulting in an additional cost of $27,275 due to annuity purchases. The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.00% and 8.00% for 1995 and 1994, respectively, and the rate of increase in future compensation levels was 6.00% for 1995 and 1994. The weighted-average expected long-term rate of return on plan assets was 7.50% for 1995 and 1994. Plan assets consist of certificates of deposit, government securities, a deposit administration contract, and an investment of 37,560 shares of common stock with ACNB Corporation at December 31, 1995 and 1994. The Corporation has a 401(k) Salary Deferral Plan, which covers all eligible employees who elect to contribute to the plan. An eligible employee is anyone over the age of 20 1/2, who has completed six months of service. The Corporation's contribution equals 100% of the employee's contribution, up to a maximum of 2% of annual salary. The annual expense included in salaries and benefits amounted to $84,000 and $77,000 for 1995 and 1994, respectively. ACNB Corporation & Subsidiary NOTE K COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit and financial guarantees which involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statements of condition. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of significant commitments and contingent liabilities at December 31, 1995 and 1994, is presented below: In thousands 1995 1994 ---- ---- Commitments to extend credit $28,993 $24,821 Standby letters of credit 1,837 1,324 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses, and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management's credit evaluation of the creditor. The type of collateral may vary; however, a significant portion of these financial instruments is secured through real estate. Standby letters of credit and financial guarantees written are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. CONCENTRATIONS OF CREDIT RISK The Corporation has a diversified loan portfolio and grants agribusiness commercial and residential loans to customers, substantially all of whom are local residents to the Corporation's fourteen offices. CONTINGENT LIABILITIES The Corporation is party to litigation and claims arising in the normal course of business. Management, after consultation with legal counsel, believes that the liabilities, if any, arising from such litigation and claims will not be material to the consolidated financial position. NOTE L RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS The Bank is required to maintain average reserve balances with the Federal Reserve Bank. The average amount of these reserve balances for the year ended December 31, 1995, was approximately $4,386,000. NOTE M TIME DEPOSITS Time deposits in denominations of $100,000 or more at December 31, 1995 and 1994, are summarized in the following table: In Thousands 1995 1994 ---- ---- Time certificates of deposit $15,449 $10,942 Other time deposits 1,000 1,000 The interest expense related to time certificates of deposit in denominations of $100,000 or more totaled $589,000 in 1995, $526,000 in 1994 and $757,000 in 1993. ACNB Corporation & Subsidiary NOTE N LOANS TO RELATED PARTIES The aggregate balance of loans (in excess of $60,000) made to directors and executive officers in the normal course of business as of December 31, 1995 and 1994, was $3,752,565 and $2,649,901, respectively. The terms for these loans were substantially the same as those for unrelated parties. Balance at Balance at Number January 1, Amounts December 31, of 1995 Additions Collected 1995 Debtors - ----------------------------------------------------------------------------- $2,649,901 $2,351,373 $1,248,709 $3,752,565 11 NOTE O LEASE COMMITMENTS Certain branch offices and equipment are leased under agreements which expire at varying dates through 2010. Most leases contain renewal provisions at the Corporation's option. The total rental expense for all operating leases was $72,816, $44,873 and $41,873 for the years ended December 31, 1995, 1994 and 1993, respectively. The following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31: 1996 $ 64,200 1997 $ 64,200 1998 $ 64,200 1999 $ 59,400 2000 $ 47,500 Later years $455,000 -------- Total Minimum Payments $754,500 ======== NOTE P FUTURE EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights", which is effective January 1, 1996. Statement of Financial Accounting Standards No. 122 will not effect the Corporation since mortgage servicing rights are not retained on sold residential mortgages. The Financial Accounting Standards Board has also issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation", which is effective January 1, 1996. Since the Corporation does not offer stock-based compensation, Statement of Financial Accounting Standards No. 123 is not applicable. ACNB Corporation & Subsidiary REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To The Stockholders and Board of Directors ACNB Corporation Gettysburg, Pennsylvania We have audited the accompanying consolidated statements of condition of ACNB Corporation and Subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ACNB Corporation and Subsidiary as of December 31, 1995 and 1994, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. York, Pennsylvania January 11, 1996 ACNB Corporation & Subsidiary QUARTERLY RESULTS OF OPERATIONS Selected quarterly information for the years ended December 31, 1995 and 1994, is as follows: First Second Third Fourth 1995 In thousands, except per share data Quarter Quarter Quarter Quarter ------- ------- ------- ------- Interest income $7,799 $8,002 $8,146 $8,266 ------ ------ ------ ------ Interest expense 3,358 3,610 3,713 3,756 ------ ------ ------ ------ Net income 1,545 1,466 1,682 1,766 ------ ------ ------ ------ Net income per share .29 .28 .32 .33 ------ ------ ------ ------ Return on average assets 1.34% 1.28% 1.47% 1.53% ------ ------ ------ ------ 1994 Interest income $7,608 $7,628 $7,665 $7,738 ------ ------ ------ ------ Interest expense 3,147 3,028 3,087 3,157 ------ ------ ------ ------ Net income 1,695 1,709 1,686 1,683 ------ ------ ------ ------ Net income per share** .32 .32 .31 .32 ------ ------ ------ ------ Return on average assets 1.43% 1.44% 1.42% 1.43% ------ ------ ------ ------ FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA The following table sets forth financial data for the last five years: In thousands, except per share data 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- Total interest income $ 32,213 $ 30,639 $ 32,122 $ 35,380 $ 39,189 Total interest expense 14,437 12,419 13,894 17,582 22,446 Net interest income 17,776 18,220 18,228 17,798 16,743 Provision for loan losses -- -- 315 855 745 Net income* 6,459 6,773 6,933 7,038 6,130 PER SHARE DATA** Net income* $ 1.22 $ 1.27 $ 1.30 $ 1.32 $ 1.15 Cash dividends .66 .64 .58 .54 .49 BALANCE SHEET TOTALS Average stockholders' equity $ 50,317 $ 47,893 $ 44,411 $ 39,930 $ 36,387 Average assets 459,136 473,186 457,692 441,880 421,915 RATIOS Return on average stockholders' equity 12.84% 14.15% 15.61% 17.63% 16.85% Return on average assets 1.41% 1.43% 1.51% 1.59% 1.45% Dividend payout 54% 50% 45% 41% 43% Stockholders' equity to assets 11.20% 10.31% 9.73% 9.32% 8.82% * 1992 includes $446,000, or $.09 per share, related to the cumulative effect of the change in accounting for income taxes. ** Data restated to reflect two-for-one stock split in the form of a 100% stock dividend issued in 1994. See Notes to Consolidated Financial Statements. ACNB Corporation & Subsidiary COMMON STOCK MARKET PRICES AND DIVIDENDS The common stock of ACNB Corporation is traded in the over-the-counter market. As of December 31, 1995, the approximate number of shareholders of the Corporation's common stock was 3,036. Prices were provided by the local office of Smith Barney Inc. and F.J. Morrissey & Co., Inc. of Philadelphia. High and low bid prices of common shares and dividends for the last two years were: 1995 1994 --------------------------- --------------------------- Bid Price Cash Bid Price* Cash Quarter ---------------- Dividend ----------------- Dividend Ended High Low Paid High Low Paid* ------ ------ -------- ------- ------ -------- March 31 $18.00 $14.25 $.16 $23.50 $21.00 $.15 June 30 20.00 18.00 .16 23.50 23.00 .15 September 30 19.50 15.75 .17 23.75 21.00 .15 December 31 18.50 15.75 .17 18.00 15.37 .20 * Data restated to reflect two-for-one stock split in the form of a 100% stock dividend issued in 1994. The bid prices for ACNB Corporation common stock for the periods indicated represent inter-dealer prices without adjustment for retail mark-up, mark-down or commission, and do not necessarily represent actual transactions. Trades have generally occurred in relatively small lots, and the prices quoted herein are not necessarily indicative of the market value of a substantial block. While the Corporation expects to continue its policy of regular quarterly dividend payment, no assurance of future dividend payment can be given. Future dividend payments will depend upon maintenance of a continued strong financial condition, future earnings, and capital requirements. The Corporation has no restrictions affecting the payment of dividends, except as indicated in Note G of the Notes to Consolidated Financial Statements. The following firms make a market in ACNB Corporation common stock: Ferris, Baker Watts, Incorporated Frederick, MD (301)662-6488/(800)950-6488 Janney Montgomery Scott, Inc. York, PA (717)845-5611/(800)999-0503 Hopper Soliday & Co., Inc. Lancaster, PA (717)560-3015/(800)456-9234 F.J. Morrissey & Co., Inc. Philadelphia, PA (215)563-8500/(800)842-8928 Smith Barney Inc. Gettysburg, PA (717)334-9101 ACNB Corporation & Subsidiary BOARD OF DIRECTORS ACNB CORPORATION AND ADAMS COUNTY NATIONAL BANK Philip P. Asper Owner Philip P. Asper, Builder Robert G. Bigham Partner Bigham & Raffensperger Attorneys-at-Law Vice Chairman ACNB Corporation & Adams County National Bank C. F. Ditzler Home Builder Guy F. Donaldson Fruit Grower Frank Elsner, Jr. Chairman Elsner Engineering Works, Inc. Richard L. Galusha Realtor D. Richard Guise President Adams County Motors Corp. J. Glenn Guise Chairman Adams County Motors Corp. Ronald L. Hankey Chairman, President & CEO ACNB Corporation & Adams County National Bank Jennifer W. Hartman Director Gettysburg Center of Harrisburg Area Community College Philip M. Jones CEO Times & News Publishing Company Wayne E. Lau Sales Representative Destinations: A Travel Company William B. Lower President Boyer Nurseries & Orchards, Inc. Paul G. Pitzer Fruit Grower S. M. Raffensperger Partner Bigham & Raffensperger Attorneys-at-Law Charles E. Ritter Retired Shoe Manufacturer Ralph S. Sandoe Fruit Broker Marian B. Schultz Assistant Dean Division of Undeclared Majors Shippensburg University L. Robert Snyder Chairman of the Board & President Littlestown Hardware & Foundry Co., Inc. Ralph W. Tyson Fruit Grower ADAMS COUNTY NATIONAL BANK ADVISORY BOARD Donald H. Hershey Marvin G. Kime William T. Timmins, Jr. ADAMS COUNTY NATIONAL BANK HONORARY DIRECTORS Dale G. Crum J. C. Donley ACNB Corporation & Subsidiary OFFICERS ACNB CORPORATION RONALD L. HANKEY President & CEO JOHN W. KRICHTEN Secretary & Treasurer Lynda L. Glass Assistant Secretary ADAMS COUNTY NATIONAL BANK Ronald L. Hankey President & CEO Elizabeth H. Beall Senior Vice President Human Resources Lynda L. Glass Senior Vice President Community Banking Administration & Marketing John M. Kiehl Senior Vice President Operations & Security John W. Krichten Senior Vice President, Cashier & Chief Financial Officer Nancy L. Reichart Senior Vice President & Trust Officer Victor L. Reynolds Senior Vice President & Senior Loan Officer CARL L. RICKER Senior Vice President Retail Mortgage Division John E. Salisbury Senior Vice President Audit VICE PRESIDENTS - --------------- Helen L. Altland H. William Black Robert L. Brewer Jack W. Chambers Wayne G. Crum David W. Deaner Thelma E. Griffie Robert A. Hahn Ronald L. Hoffman Ronald E. Lindbeck Stanley E. Mummert William H. Yohe, Jr. ASSISTANT VICE PRESIDENTS - --------------- Steven E. Ebersole George R. Guise Terry L. Pottorff Shelby L. Stone ASSISTANT CASHIERS - ------------------ Beverly S. Kress Diana K. Kuntz Linda L. Leer TRUST OFFICER - ------------- Ronald D. Baker ACNB Corporation & Subsidiary ADAMS COUNTY NATIONAL BANK OFFICE LOCATIONS Arendtsville 101 Main Street Arendtsville, PA 17303 BENDERSVILLE 101 North Main Street Bendersville, PA 17306 BIGLERVILLE 3459 South Main Street Biglerville, PA 17307 CARROLL VALLEY 104 Sanders Road Carroll Valley, PA 17320 EAST BERLIN 1677 Abbottstown Pike East Berlin, PA 17316 FRANKLIN TOWNSHIP 10 High Street Cashtown, PA 17310 HANOVER 1127 Eichelberger Street Hanover, PA 17331 LINCOLN SQUARE 2 Chambersburg Street Gettysburg, PA 17325 LITTLES TOWN 17 South Queen Street Littlestown, PA 17340 McSHERRYSTOWN 369 Main Street McSherrystown, PA 17344 NORTH GETTYSBURG 675 Old Harrisburg Road Gettysburg, PA 17325 SUPER KMART(Registration Mark) CENTER 400 Eisenhower Drive Hanover, PA 17331 WEST LITTLESTOWN 444 West King Street Littlestown, PA 17340 YORK SPRINGS 202 Main Street York Springs, PA 17372 EX-21 3 SUBSIDIARY OF THE REGISTRANT The Registrant has one subsidiary, Adams County National Bank, a national bank, which is wholly owned by the Registrant. EX-23 4 CONSENT 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 11, 1996, included in the 1995 Annual Report to Stockholders of ACNB Corporation and Subsidiary. /s/ HARRY NESS & COMPANY York, Pennsylvania March 21, 1996 EX-27 5 ARTICLE 9 FDS FOR ACNB
9 YEAR DEC-31-1995 DEC-31-1995 14,135 8,765 100 0 0 104,842 105,144 323,128 3,274 459,353 392,243 13,402 4,327 0 0 0 13,269 38,194 459,353 25,918 6,120 175 32,213 13,459 14,437 17,776 0 0 9,809 9,594 9,594 0 0 6,459 1.22 1.22 4.03 1,093 2,780 0 0 3,370 134 38 3,274 3,274 0 0
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