[ACNB LOGO]
ACNB
Corporation
ANNUAL REPORT 1996
------------------
Important Proxy Materials Enclosed FIRST CLASS MAIL
c/o Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
Forwarding & Address
Correction Requested
ACNB CORPORATION 1996 ANNUAL REPORT
[PICTURE SHOWING TABLE BEING BALANCED]
CREATING BALANCE
[PICTURE SHOWING IMBALANCES]
Creating balance in an environment full of imbalances. This was the
organizational challenge in 1996 for ACNB Corporation, a single-bank holding
company, with Adams County National Bank as its sole and wholly-owned
subsidiary. ACNB Corporation's 1996 Annual Report explores the strategic and
simultaneous attainment of equilibrium on multiple planes to ensure longevity of
performance as an independent community banking organization.
CONTENTS
1
Financial Highlights / Business Profile
2
Report to Stockholders
5
Creating Balance
14
Index to Financial Information
15
Five-Year Financial Overview
16
Management's Discussion and Analysis
23
Independent Auditors' Report
24
Consolidated Financial Statements
28
Notes to Consolidated Financial Statements
39
Quarterly Results of Operations
39
Five-Year Financial Summary
40
Form 10-K Cross-Reference Index
41
Form 10-K
45
Common Stock Information
46
Board of Directors
47
Officers
48
Community Banking Office Locations
ACNB Corporation & Subsidiary 1996 Annual Report
FINANCIAL HIGHLIGHTS
- ---------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income $18,740,000 $17,776,000 $18,220,000
- ---------------------------------------------------------------------------------------------------------------------------
Net income 7,109,000 6,459,000 6,773,000
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends 9,018,000 3,507,000 3,417,000
- ---------------------------------------------------------------------------------------------------------------------------
PER SHARE STATISTICS*
- ---------------------------------------------------------------------------------------------------------------------------
Net income $1.34 $1.22 $1.27
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends 1.70 .66 .64
- ---------------------------------------------------------------------------------------------------------------------------
Book value (year-end) 9.37 9.70 9.15
- ---------------------------------------------------------------------------------------------------------------------------
AT YEAR-END
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $472,445,000 $459,353,000 $472,032,000
- ---------------------------------------------------------------------------------------------------------------------------
Total loans 324,927,000 323,128,000 305,922,000
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 403,127,000 392,243,000 388,798,000
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 49,436,000 51,463,000 48,647,000
- ---------------------------------------------------------------------------------------------------------------------------
KEY RATIOS
- ---------------------------------------------------------------------------------------------------------------------------
Return on average stockholders' equity 14.77% 12.84% 14.15%
- ---------------------------------------------------------------------------------------------------------------------------
Return on average assets 1.53% 1.41% 1.43%
- ---------------------------------------------------------------------------------------------------------------------------
Dividend payout 127% 54% 50%
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity to assets 10.46% 11.20% 10.31%
- ---------------------------------------------------------------------------------------------------------------------------
*Data restated to reflect two-for-one stock split in the form of a 100% stock
dividend issued in 1994.
BUSINESS PROFILE
ACNB Corporation is a single-bank holding company with Adams County
National Bank as its sole and wholly-owned subsidiary. Adams County National
Bank, a full-service community bank in existence since 1857, provides a wide
array of consumer, commercial and fiduciary banking services to the individuals,
businesses, public entities and community organizations in its trading area.
With assets of $472 million, it is the largest community bank headquartered in
Adams County.
ACNB Corporation and its subsidiary, Adams County National Bank, possess a
history abundant in the traditions of community banking. Indeed, the
organizational focus remains constant -- providing the basic banking services
essential to fulfilling the savings and borrowing needs of all community
members. Integral to this steadfast strategy is the reinvestment of customers'
deposits in loans to others in our local marketplace -- primarily via mortgage
loans. A business philosophy predicated upon traditional, customer-oriented
values is the common thread running through Adams County National Bank's history
- -- and its future -- as a responsible, committed and sound community banking
organization.
Adams County National Bank's marketplace encompasses Adams County,
Pennsylvania, and its environs -- western York County, eastern Franklin County,
southern Cumberland County, and the northern sections of those counties in
Maryland that are adjacent to Adams County. Fourteen banking offices and 222
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.
ACNB Corporation & Subsidiary
REPORT TO STOCKHOLDERS
Creating balance in an environment full of imbalances was the challenge facing
ACNB Corporation and its wholly-owned subsidiary, Adams County National Bank, in
1996. Undeniably, maintaining an equilibrium in today's financial services
marketplace requires a continual flow of organizational energy, as well as a
constant focal point. [GRAPHIC OMITTED] Change and adaptation are now inherent
and integral factors in our approach to the business of banking. Our energies in
recent years reflect our commitment to organizational adaptation. In fact, at
ACNB Corporation and Adams County National Bank, change has been pervasive
primarily due to the array of stimuli in the environment. Illustrations of these
external 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; banking industry
regulations; advancements in technology; and, the economic climate with its
intrinsic cycles of expansion and contraction as market forces of supply and
demand interact. Creating organizational balance through adaptation in an
ever-changing environment is vital to our long-term strength and, ultimately,
our survival. [GRAPHIC OMITTED] The organization's steadfast focus was
formalized in the writing of a new mission statement in 1996. This mission
statement resulted from the strategic planning process in which the Bank's
Senior Management, in tandem with the Board of Directors, conducted assessments
of the Bank's strengths and weaknesses from the perspectives of financial
condition, marketing, operations and organizational structure -- as well as
identified the opportunities and threats exhibited in the external environment.
Specifically, this mission statement reads as follows: "Adams County National
Bank is the sole and wholly-owned subsidiary of ACNB Corporation and, as such,
is a publicly-owned community bank which takes pride in its independence. The
Bank serves Adams County and the surrounding
2
environs. As a community banking organization, its people are committed to
delivering a broad range of financial products and services to the market area
- -- reinvesting customers' deposits through loans to others in the community.
Management is dedicated to building ACNB Corporation stockholder value through
providing quality financial products and services to ensure customer
satisfaction; maintaining a productive and growth-oriented work environment for
employees; optimizing the utilization of resources for the dual purpose of
effectively serving customers' financial needs and contributing to the
organization's profitability; and, continuing the Bank's role as a responsible
and caring business leader in the community." This mission statement, founded in
our fundamental pursuit of independence as a community banking organization,
serves as the focal point in our plans now... as well as for the future.
[GRAPHIC OMITTED] For ACNB Corporation and Adams County National Bank, the
outcome of this business strategy was a year of record earnings in 1996. Net
income for 1996 rose by 10% over 1995 to $7,109,000, or $1.34 per share. At
year-end 1995, earnings totaled $6,459,000, or $1.22 per share. The increase of
$650,000 in net income from 1995 to 1996 can be attributed to a combination of
factors including rises in net interest income of 6% and non-interest income of
22% -- coupled with a minimal increase of 3% in non-interest expense. [GRAPHIC
OMITTED] As in prior years, the Corporation's financial performance was
characterized by a strong efficiency ratio. This ratio, which is calculated by
dividing non-interest expense by the sum of net interest income and non-interest
income, is a measure of the organization's efficiency in utilizing its
resources, generally through expense control, to maximize income. The efficiency
ratio for ACNB Corporation was 49% at year-end 1996 -- compared to 51% at the
end of 1995, which is an improvement of 2%. [GRAPHIC OMITTED] The key financial
performance ratios of return on average assets and return on average
3
stockholders' equity also exhibited improvement in 1996 over 1995. The
Corporation's return on average assets was 1.53% at year-end 1996 and 1.41% at
year-end 1995. The return on average stockholders' equity was 14.77% and 12.84%
for the years ending 1996 and 1995, respectively. [GRAPHIC OMITTED] Our
sustained earnings and capital strength, in conjunction with our expectations
for future growth, resulted in the payment of a Special Dividend, in the amount
of $1.00, on January 15, 1996, to stockholders of record on January 4, 1996.
Additionally, the Board of Directors declared regular quarterly dividends in the
aggregate amount of $.70 during 1996. ACNB Corporation's effective dividend
payout ratio for the year ending December 31, 1996, was 127%. [GRAPHIC OMITTED]
Effective July 1, 1996, the initial step occurred in the restructuring of the
Board of Directors for both the Corporation and the Bank. As of this date, four
longtime members of the Board of Directors were appointed Directors Emeriti of
ACNB Corporation and Adams County National Bank, due to the adoption of a
mandatory retirement age of 72 for current and future members of the Board of
Directors. The Directors Emeriti include C. F. Ditzler, J. Glenn Guise, Charles
E. Ritter and Ralph W. Tyson. Each of these four dedicated individuals has
contributed to the accomplishments of our organization, providing guidance and
sharing insights for more than three decades. [GRAPHIC OMITTED] As always, I
would be remiss not to thank you, our stockholders. While there will undoubtedly
be challenges in the future, time and events have proven that ACNB Corporation's
strategy -- as an independent community banking organization -- is both enduring
and adaptable. The people of Adams County National Bank are critical to the
ongoing vitality of this strategy. People are, indeed, the synergistic link to
overcoming the challenges in the years ahead. Thus, speaking for all of us at
ACNB Corporation and Adams County National Bank, you can be assured that the
utmost effort will be put forth to merit your continued confidence in our
organization. Sincerely, Ronald L. Hankey, President & CEO
4
[PICTURE OF SPINNING TOP]
Creating balance intrinsically implies the attainment of a state of
equilibrium. An equipoise between contrasting or interacting elements. Without
balance, there is no stability... no proportionate integration of elements.
[GRAPHIC OMITTED] In a business setting, a lack of balance results in an
organization spinning without control, moving and swaying from side to side.
There is no single point of focus to ensure strategic direction as the demands
of the marketplace are encountered. [GRAPHIC OMITTED] At Adams County National
Bank, the sole and wholly-owned subsidiary of ACNB Corporation, the need to
create balance is multidimensional.
6
[PICTURE OF BALL BEING BALANCED ON A FINGER]
[PICTURE OF CHECKERS]
The proper equilibrium of elements on five interdependent
planes are fundamental to the future as an independent community banking
organization. Further, like a game of checkers, each business decision impacts
other players on the same plane or another plane and, oftentimes, must be
counterbalanced to maintain the position of stability. [GRAPHIC OMITTED] On the
basal plane, Adams County National Bank must define the balance between
tradition and change. Continuity of tradition is essential in its role as a
community-based bank, especially one whose origins are so closely aligned with
the trading area it serves. However, change is also a significant factor in that
Adams County
[PICTURE OF CHECKERS]
National Bank needs to adapt to an ever-evolving environment in
order to be the financial services provider its customers expect and deserve.
Thus, for the Bank, it is imperative to explore new opportunities and to embrace
new ideas -- but to always do so from the perspective of a responsible,
committed and sound community banking organization. [GRAPHIC OMITTED] Cost
versus benefit and efficiency versus risk are two dimensions against which any
change in the Bank's mode of operation must be evaluated. From capital
expenditures to the hiring of additional staff members to the opening of new
office locations, there are associated costs and benefits which, in turn, may be
direct or
[PICTURE OF A MAN ON A UNICYCLE]
10
indirect. Once assessed, the aggregate benefits should exceed the
costs to ensure a positive return on the Bank's investment of resources.
[GRAPHIC OMITTED] Efficiency and risk, as opposite ends on a continuum, are key
considerations throughout the organization. One of the Bank's objectives is to
be as efficient as possible in the delivery of quality, customer-oriented
products and services -- maximizing profitability and stockholder value over
time. But, despite the potential for short-term gains in earnings due to
increased efficiencies, long-term earnings strength could be jeopardized without
the prudent management of risk. At Adams County National Bank, risk assessment
is a major component of the business philosophy whether making customer credit
decisions, investing in securities, setting deposit and loan interest rates, or
addressing any of a myriad of other issues. [GRAPHIC OMITTED] Technology is
truly an interrelated factor at all levels in today's business of banking.
Enhancements in technology are a means to heighten customer
11
[PICTURE OF A TOP]
service, as well as to offer alternative channels of service delivery. In
exemplification, Adams County National Bank installed its new 24-Hour Telephone
Banking Line in the fourth quarter of 1996. The introduction of this voice
response unit technology was not intended to replace human resources, but to
complement those resources as an additional connection for banking convenience.
The Bank is committed to effectively blending and balancing the utilization of
both people and technology in meeting its customers' expectations. [GRAPHIC
OMITTED] From an organizational perspective of the past, Adams County National
Bank has primarily exhibited a service culture -- in contrast to a sales
culture. The Bank's
[PICTURE OF A BALL]
12
[PICTURE OF CHECKERS]
position is that service and sales are not mutually exclusive and, therefore, do
not need to be at the polar extremes of the spectrum. Rather, a sales and
service culture is the correct approach. This proactive combination emphasizes
an exchange of value, meaning the needs and wants of the buying consumers are
being met at a profit for the Bank. [GRAPHIC OMITTED] As Adams County National
Bank pedals into the future, it must maintain its organizational balance on all
five of these dimensions -- tradition versus change, cost versus benefit,
efficiency versus risk, technology versus human resources, and sales versus
service -- to ensure stability in its niche as an independent community bank.
[PICTURE OF UNICYCLE]
13
INDEX TO FINANCIAL INFORMATION
Five-Year Financial Overview 15
Management's Discussion and Analysis of
Financial Condition and Results of Operations 16-23
Independent Auditors' Report 23
Consolidated Financial Statements
Consolidated Statements of Condition
at December 31, 1996 and 1995 24
Consolidated Statements of Income
for the years ended December 31, 1996, 1995 and 1994 25
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1996, 1995 and 1994 26
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994 27
Notes to Consolidated Financial Statements 28-38
Quarterly Results of Operations 39
Five-Year Summary of Selected Financial Data 39
Form 10-K Cross-Reference Index 40
Form 10-K 41-44
Common Stock Market Prices and Dividends 45
14
FIVE-YEAR FINANCIAL OVERVIEW
[Bar graphs depicting the following plot points.]
TOTAL DEPOSITS EARNINGS PER SHARE
In millions of dollars In dollars
[Bar graph depicting the following plot points.]
1996 403.1 1996 1.34
1995 392.2 1995 1.22
1994 388.8 1994 1.27
1993 412.7 1993 1.30
1992 402.4 1992 1.32
TOTAL LOANS DIVIDENDS PER SHARE
In millions of dollars In dollars
[Bar graph depicting the following plot points.]
1996 324.9 1996 1.70
1995 323.1 1995 .66
1994 305.9 1994 .64
1993 283.3 1993 .58
1992 287.8 1992 .54
RETURN ON AVERAGE ASSETS BOOK VALUE PER SHARE
Percent In dollars
[Bar graph depicting the following plot points.]
1996 1.53 1996 9.37
1995 1.41 1995 9.70
1994 1.43 1994 9.15
1993 1.51 1993 8.58
1992 1.59 1992 7.86
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION AND
FORWARD-LOOKING STATEMENTS
- -------------------------------------------------------------------------------
INTRODUCTION
The following is management's discussion and analysis of the significant
changes in the results of operations, capital resources and liquidity presented
in its accompanying consolidated financial statements for ACNB Corporation, a
bank holding company (the Corporation), and its wholly-owned subsidiary, Adams
County National Bank (the Bank). The Corporation's consolidated financial
condition and results of operations consist almost entirely of the Bank's
financial condition and results of operations. This discussion should be read in
conjunction with the 1996 Annual Report. Current performance does not guarantee,
assure, or indicate similar performance in the future.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this 1996 Annual Report contains
forward-looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected in the forward-looking statements.
Important factors that might cause such a difference include, but are not
limited to, those discussed in the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations". Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The Corporation
undertakes no obligation to publicly revise or update these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
Readers should carefully review the risk factors described in other documents
the Corporation files from time to time with the Securities and Exchange
Commission, including the Quarterly Reports on Form 10-Q, to be filed by the
Corporation in 1997, and any Current Reports on Form 8-K filed by the
Corporation.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
EARNINGS PERFORMANCE
ACNB Corporation recorded a 10.1% increase in profitability with net income
of $7.1 million for the year ended December 31, 1996, compared to the $6.5
million in net income recognized in 1995. Earnings per share of $1.34 in 1996
compare to 1995 earnings per share of $1.22.
The net income increase of $650,000 in 1996 represents the first rise in
earnings since 1992, and can be attributed to an increase of $994,000, or 5.6%,
in the Corporation's net interest income and an increase of $359,000, or 22.1%,
in non-interest income. These items were partially offset by non-interest
expense in 1996 of $320,000, or 3.3%, more than the previous fiscal period and
higher income tax expense of $353,000, or 11.3%.
The Corporation recorded lower net income of $6.5 million for the year
ended December 31, 1995, compared to net income of $6.8 million in 1994.
Earnings per share of $1.22 in 1995 compare to the $1.27 per share in 1994.
Reduced net income by $314,000 in 1995 was primarily due to a $444,000, or
2.4%, decrease in net interest income and an increase of $149,000, or 1.5%, in
non-interest expense. This was partially offset by a decrease in income tax
expense of $153,000, or 4.7%.
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, 1996, 1995 and 1994.
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 $18.8 million in 1996. This
Analysis of Changes in Interest Income and Expense Due to Volume and Rate Changes
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended December 31
-----------------------------------------------------------------------------------------------
1996 versus 1995 1995 versus 1994 1994 versus 1993
Changes Due To Changes Due To Changes Due To
-----------------------------------------------------------------------------------------------
In thousands Volume Rate Net Volume Rate Net Volume Rate Net
-----------------------------------------------------------------------------------------------
Interest earned on:
Loans $ 185 $ 360 $ 545 $ 2,450 $ 470 $ 2,920 $ 48 $(1,721) $(1,673)
Taxable investment securities (144) 942 798 (1,902) 929 (973) 976 (615) 361
Non-taxable investment securities (33) 23 (10) (75) 40 (35) 56 (30) 26
Federal funds sold -- (1) (1) (1,035) 640 (395) (261) 104 (157)
Time deposits with banks 362 (13) 349 76 (19) 57 (77) 37 (40)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Earning Assets $ 370 $ 1,311 $ 1,681 $ (486) $ 2,060 $ 1,574 $ 742 $(2,225) $(1,483)
- ------------------------------------------------------------------------------------------------------------------------------------
Interest paid on:
Interest bearing demand deposits $ 12 $ 6 $ 18 $ (187) $ (7) $ (194) $ 153 $ (165) $ (12)
Savings deposits (164) 10 (154) (581) (41) (622) 307 (698) (391)
Time deposits 646 332 978 190 2,060 2,250 (639) (605) (1,244)
Short-term borrowings (80) (75) (155) 203 381 584 209 (37) 172
- ------------------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing Liabilities $ 414 $ 273 $ 687 $ (375) $ 2,393 $ 2,018 $ 30 $(1,505) $(1,475)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST EARNINGS $ (44) $ 1,038 $ 994 $ (111) $ (333) $ (444) $ 712 $ (720) $ (8)
- ------------------------------------------------------------------------------------------------------------------------------------
16
result is up from $17.8 million and $18.2 million in 1995 and 1994,
respectively. The increase was a result of the turnaround in average asset
growth, which was up by $5.9 million, or 1.3%, and a shift to higher yields on
securities. Average earning assets decreased by $13.5 million, or 3.0%, in 1995.
The decline, leveling off, and subsequent increase of net yield on earning
assets reflects, in part, 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 78% of the Corporation's interest income
in 1996, as compared to 80% and 75% in 1995 and 1994, respectively. Interest and
dividends on investments amounted to $6.9 million in 1996, as compared to $6.1
million in 1995 and $7.1 million in 1994. The average yield on the taxable
investment portfolio rose to 6.01% at year-end 1996 from 5.18% at the prior
year-end. This increase resulted largely from a shift of U.S. Treasuries to
mortgage-backed securities, as the Corporation narrowed its positive gap and
lengthened maturities.
The Comparative Average Balance Sheet And Net Interest Analysis, a table
found on pages 18 and 19, presents for the periods indicated the total dollar
amount of interest income from average interest earning assets and resultant
yields, as well as the interest expense on average interest bearing liabilities
and the resultant costs, expressed both in dollars and rates. Nonaccrual loans
are included in the average interest earning assets balance. Interest from
nonaccrual loans is included in interest income only to the extent that payments
were received and 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 volume 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) and changes in volume (changes in
volume multiplied by old rate) with changes in rate volume (change in rate
multiplied by change in volume) factored in proportionally. Interest earning
asset and interest bearing liability balances in the calculations are computed
using daily average balances.
NON-INTEREST INCOME
The Corporation stresses the importance of growth in non-interest income as
one of its key long-term strategies. Non-interest income increased by $359,000,
or 22.1%, when comparing 1996 to 1995, and increased by $126,000, or 8.4%, when
comparing 1995 to 1994. In 1995, ACNB Corporation began to sell fixed-rate
mortgages on the secondary market to increase non-interest income, as well as
adjusted service fees on deposit accounts to reflect the marketplace more
closely. It is anticipated that these actions may positively impact non-interest
income as loan volumes increase.
Trust service income rose by 45.2% in 1996 and 21.9% in 1995. 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 in
1997; however, the increased income for 1996 may not be repeated, and there may
actually be a decrease in 1997, because a large portion of trust income was
centered in estate settlements. The number and size of these settlements
fluctuate greatly from year to year.
Service fees on deposit accounts have improved over the last two years,
even though the Corporation continued to experience marginal deposit growth. The
reasons for the 12.5% improvement in service fees on deposit accounts in 1996
over 1995, and the 12.6% improvement in 1995 over 1994, include growth in the
demand deposit area and service fee adjustments as mentioned above. While
average interest bearing liabilities were up only 1.5% in 1996 and down 4.8% in
1995, demand deposits were up 7.6% and 3.2%, respectively.
NON-INTEREST EXPENSE
Non-interest expense was $10.1 million in 1996, an increase of 3.3%
compared to 1995. In 1995, non-interest expense was $9.8 million, rising 1.5% in
comparison to 1994. The primary causes of the increases in non-interest expense
are salaries and employee benefits and equipment expense.
Personnel expense increased by $271,000, or 4.8%, in 1996, compared to
1995, and by $437,000, or 8.4%, in 1995, compared to 1994. The increase in 1996
was due to merit raises and a slight increase in the number of employees to
handle anticipated 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 decreased by $20,000, or 9.4%, as of year-end 1996 in
comparison to the end of the prior year. In 1995, 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. While these new
ventures continued to require additional advertising dollars when compared to
1994, the start-up costs associated with the new office opening in 1995 were not
repeated.
In addition to other increases, there was a significant rise in equipment
expense. Costs were up by $114,000, or 13.9%, in 1996, compared to 1995, and by
$115,000, or 16.2%, in 1995, compared to 1994. The increase in 1995 is
attributable to a complete upgrading of computer system hardware and
Interest Rate Sensitivity Gap at December 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Repricing Period
-------------------------------------------------------------------------
0-30 31-90 91-180 181-365 1-5 Over 5
In thousands Days Days Days Days Years Years
-------------------------------------------------------------------------
Interest earning assets $ 84,674 $ 32,180 $ 65,806 $113,176 $ 123,977 $ 30,749
Funds supporting interest earning assets $ 32,303 $ 48,081 $ 49,356 $ 55,607 $ 200,120 $ 34,846
- ---------------------------------------------------------------------------------------------------------------------------
Interest rate sensitivity gap $ 52,371 $(15,901) $ 16,450 $ 57,569 $(76,143) $ (4,097)
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative gap $ 52,371 $ 36,470 $ 52,920 $110,489 $ 34,346 $ 30,249
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative gap as a percentage of total assets 11.1% 7.7% 11.2% 23.4% 7.3% 6.4%
- ---------------------------------------------------------------------------------------------------------------------------
17
software in the third and fourth quarters of 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, and shortened the depreciation life of certain
equipment in 1996. This represents an additional change to earnings of less than
1.0%.
Partially offsetting these increases was the decrease in FDIC insurance.
After falling by $467,000, or 50.3%, in 1995, the annual expense for deposit
insurance decreased by $459,000, or 99.6%, in 1996. This was due to the final
recapitalization of the Federal Deposit Insurance Corporation's Bank Insurance
Fund in May of 1995, and the dramatic reduction in deposit insurance fees for
the second half of that year. The savings in 1996 were every bit as impressive,
since the Bank paid $2,000 for the entire year. The estimate for FDICinsurance
expense for 1997 is approximately $50,000.
OVERVIEW OF THE BALANCE SHEET
During 1996, ACNB Corporation's total assets grew by $13.1 million, or
2.9%. The slow growth was a turnaround from 1995 when total assets decreased by
$12.7 million, or 2.7%. Loans and deposits continue to be difficult to acquire
as the Bank is faced with its traditional competitors -- several local and
nonlocal commercial banks -- and nontraditional competitors, such as mortgage
brokers and brokerage houses.
The mix of assets and liabilities continues to change. Investment
securities rose by $11.7 million, or 11.1%, as deposits were up, because loans
did not grow fast enough to utilize all the deposit growth in 1996. Loans
increased by $925,000, or 0.3%, while other asset totals remained fairly
constant. Premises and equipment showed a slight decrease as fixed assets were
depreciated faster than new equipment was put into service, while other real
estate increased by $326,000, or 47.0%.
On the liability side, non-interest bearing deposits were up by $8.3
million, or 18.8%, in 1996, and by $5.7 million, or 14.7%, in 1995. This is a
result of lower rates on savings and NOW accounts. While most of the shift from
savings and NOW accounts went into certificates of deposit, some did move to
demand deposits, as lower rates lessened the urgency to move funds to an
interest bearing transaction account. Core deposits showed weak, but positive,
growth.
Capital continued to be strong. Although the Corporation paid $9.0 million
in cash dividends in 1996, capital decreased by only $2.0 million, or 3.9%. It
grew by $2.8 million, or 5.8%, in 1995.
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
Comparative Average Balance Sheet And Net Interest Analysis
- ------------------------------------------------------------------------------------------------------------------------------------
December 31
--------------------------------------------------------------
1996
--------------------------------------------------------------
ASSETS In thousands Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Loans $321,979 $26,463 8.22%
Taxable investment securities 113,818 6,846 6.01%
Non-taxable investment securities 1,013 62 6.12%
Federal funds sold 100 5 5.00%
Interest bearing deposits with banks 9,843 518 5.26%
-------- -------
Total interest earning assets 446,753 $33,894 7.59%
Cash and due from banks 11,227
Premises and equipment 5,586
Other assets 5,666
Allowance for loan losses (3,248)
--------
TOTAL ASSETS $465,984
========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Interest bearing demand deposits $ 49,288 $ 1,207 2.45%
Savings deposits 110,740 3,048 2.75%
Time deposits (excluding time certificates of deposit
of $100,000 or more) 178,687 9,254 5.18%
Time certificates of deposit of $100,000 or more 14,903 792 5.31%
Short-term borrowings 18,248 823 4.51%
-------- -------
Total interest bearing liabilities 371,866 $15,124 4.07%
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE SPREAD 3.52%
- ------------------------------------------------------------------------------------------------------------------------------------
Demand deposits 43,073
Other liabilities 2,929
Stockholders' equity 48,116
--------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $465,984
========
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME/EARNING ASSETS $446,753 $33,894 7.59%
INTEREST EXPENSE/EARNING ASSETS $446,753 $15,124 3.39%
NET YIELD ON EARNING ASSETS $18,770 4.20%
- ------------------------------------------------------------------------------------------------------------------------------------
Loan fees of $569,000, $396,000 and $442,000 for 1996, 1995 and 1994,
respectively, are included for rate calculation purposes. Average nonaccrual
loans for 1996, 1995 and 1994 were $1,043,000, $973,000 and $916,000,
respectively.
18
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. At December
31, 1996, the balance sheet was asset sensitive with $110.5 million more in
assets than liabilities repricing within one year. This data is exhibited in a
table, Interest Rate Sensitivity Gap at December 31, 1996, as found on page 17.
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 as of a given point in time; it does not capture basis
risk; and, it does not capture risk that varies non-proportionally with rate
movements.
Due to the limitations of gap reports, ACNB Corporation uses 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 are used by management to evaluate possible corrective
actions to reduce any negative impact to net interest margin.
Traditionally, the 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 1996 and 1995, ACNB
Corporation lengthened the maturity of prime rate loans and purchased
approximately $35.0 million in mortgage-backed securities, thus restructuring
the asset sensitive position resulting from a short maturity investment
portfolio.
LIQUIDITY MANAGEMENT
Liquidity management involves planning to meet anticipated funding needs at
a reasonable cost, as well as contingency plans to meet unanticipated funding
needs or a loss of funding sources. Liquidity management is governed by policies
formulated and monitored by senior management, which take into account the
marketability of assets, the sources and stability of funding, and the level of
unfunded commitments. Long-term liquidity needs are provided by a large core
deposit base, which is the most stable source of liquidity a bank can have due
to the long-term relationship with depositors and the deposit insurance provided
by the FDIC. In 1996, 85% of total assets were funded by core deposits and 4.0%
were funded with short-term purchased funds, compared to 85% and 3%,
respectively, in 1995. In 1994, ACNB Corporation joined the Federal Home Loan
Bank of Pittsburgh to serve the dual purpose of emergency and long-term
liquidity. The Corporation's borrowing capacity stood at $223.9 million at
year-end 1996 with $0 borrowed as of December 31, 1996.
- ------------------------------------------ -----------------------------------------
December 31 December 31
1995 1994
Balance Interest Rate Balance Interest Rate
- ------------------------------------------ -----------------------------------------
$319,712 $25,918 8.11% $289,350 $22,998 7.95%
116,672 6,048 5.18% 150,188 7,021 4.67%
1,407 72 5.12% 2,605 107 4.11%
100 6 6.00% 10,766 401 3.72%
2,947 169 5.73% 1,457 112 7.69%
-------- ------- -------- -------- ----
440,838 $32,213 7.31% 454,366 $30,639 6.74%
10,996 11,582
5,922 5,702
4,703 4,984
(3,323) (3,448)
-------- --------
$459,136 $473,186
======== ========
- ------------------------------------------------------------------------------------------------------------------
$ 48,805 $ 1,189 2.44% $ 56,420 $ 1,383 2.45%
116,660 3,202 2.74% 137,910 3,824 2.77%
169,276 8,479 5.01% 162,366 6,292 3.88%
11,720 589 5.03% 13,856 526 3.80%
19,953 978 4.90% 14,186 394 2.78%
-------- ------- --------- -------
366,414 $14,437 3.94% 384,738 $12,419 3.23%
- ------------------------------------------------------------------------------------------------------------------
3.37% 3.51%
- ------------------------------------------------------------------------------------------------------------------
40,027 38,772
2,378 1,783
50,317 47,893
--------- --------
$459,136 $473,186
======== ========
- ------------------------------------------------------------------------------------------------------------------
$440,838 $32,213 7.31% $454,366 $30,639 6.74%
$440,838 $14,437 3.28% $454,366 $12,419 2.73%
$17,776 4.03% $18,220 4.01%
- ------------------------------------------------------------------------------------------------------------------
19
Parent company liquidity is maintained by cash flows stemming from
dividends collected from the Bank, which represents the primary source of funds
to pay dividends to stockholders. The amount of dividends from the bank
subsidiary is subject to certain regulatory restrictions, as detailed in Note L
of the Notes to Consolidated Financial Statements, "Restrictions on Subsidiary
Dividends, Loans and Advances". The parent company's financial statements are
presented in Note Q of the Notes to Consolidated Financial Statements, "ACNB
Corporation (Parent Company Only) Financial Information". There are no known
trends or any known demands, commitments, events or uncertainties that will
result in, or that are reasonably likely to result in, liquidity increasing or
decreasing in any material way.
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 ALLOWANCE
FOR BAD DEBT ANALYSIS
- --------------------------------------------------------------------------------
GENERAL
ACNB Corporation's lending activities are carried on through its banking
subsidiary, Adams County National Bank. As of December 31, 1996, the
Corporation's total loan portfolio, carried at historical cost, of $325 million
included $209.3 million in mortgage loans secured by liens on one-to-four family
residential properties; $65.9 million in mortgage loans secured by commercial
properties such as apartment buildings, office buildings, warehouses, and
medical office buildings; $11.2 million in construction loans; $21.8 million in
consumer loans; and, $16.8 million in commercial and agricultural credits.
At December 31, 1996, there were no loan concentrations over 10% of loans
outstanding in any one category or to any one borrower. The Bank has no foreign
loans, and the impact of nonaccrual, restructured troubled debt and delinquent
loans on total interest income was not material.
Management does not believe that there are any trends or uncertainties
which are reasonably expected to materially impact future operating results,
liquidity or capital resources, and management is not aware of any information
not previously disclosed which causes it to have serious doubts as to the
ability of borrowers to comply with the loan repayment terms.
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 the repricing of the
Corporation's liability base. However, the Corporation's ability to originate
ARMs, in lieu of fixed-rate loans, has varied in response to changes in market
interest rates. Between 1990 and 1993, ARMs were refinanced to fixed-rate
loans, reflecting continuing lower market interest rates and leading to runoff
in the Corporation's loan portfolio. With the rise in interest rates in 1995 and
1996, ARMs comprised a larger share of total loan originations and the
Corporation's portfolio resumed its long-term growth. In 1996, however, the
situation reversed itself and ACNB Corporation again suffered runoff in its
residential adjustable-rate mortgage portfolio. Currently, the Corporation's
adjustable-rate mortgage loans are indexed to the Federal Housing Finance
Board's Contract Rate for Major Lenders and One-Year U.S. Treasury Bills with
constant maturity, and have limits on annual increases of 2% over the prior
year's rate.
All of the Corporation's residential mortgage lending is subject to
nondiscriminatory underwriting standards, and most is subject to loan
origination and documentation procedures acceptable to the secondary market.
Residential mortgage loans are originated using standard Federal National
Mortgage Association, or FNMA, and Federal Home Loan Mortgage Corporation, or
FHLMC, applications and appraisal forms. All loans are subject to underwriting
review and approval by various levels of Bank personnel, depending upon the size
of the loan. Residential real estate loan applications come in through various
channels, primarily the Corporation's community 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 -- as well as receives fees for the
servicing of loans, which were sold prior to 1996.
RESIDENTIAL CONSTRUCTION LOANS
ACNB Corporation provides financing for two different categories of
residential construction loans.
Nonperforming Assets Analysis
- ---------------------------------------------------------------------------------------------------------------------------
Year ended December 31
------------------------------------------------------------------------------
1996 1995
-------------------------------- -------------------------------------
Nonperforming Net Nonperforming Net
In thousands Assets Charge-offs Assets Charge-offs
-------------------------------- -------------------------------------
Real estate loans (1 to 4 family dwellings) $1,918 $ 2 $2,000 $ 31
Real estate loans (other) 953 (12) 1,589 12
Commercial and industrial 175 28 184 --
Consumer 123 103 100 53
------ ------- ------ -------
TOTAL $3,169 $ 121 $3,873 $ 96
====== ======= ====== =======
20
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.
ACNB Corporation underwriting guidelines on commercial real estate loans
currently require an economic analysis of each property, with regard to the
annual revenue and expenses, debt service coverage and fair market value, to
determine the maximum loan amount. Commercial real estate loans require approval
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 form of lending typically involves large loan
balances concentrated with single borrowers or groups of related borrowers. In
addition, the payment experience on loans secured by income-producing properties
usually depends on the successful operation of the related real estate project
and, thus, may be subject, to a greater extent, to adverse conditions in the
real estate market or in the general economy.
In order to monitor its commercial real estate loan portfolio, the
Corporation periodically inspects real estate collateral based on the loan risk
classification, the loan size, and the location of the collateral; analyzes the
economic condition of markets in which the Corporation has a geographic
concentration; and, reviews operating statements and rent rolls, updated
financial and tax statements of borrowers, evidence of insurance coverage, and
evidence that real estate taxes have been paid. These procedures are designed to
analyze the economic viability of the property, as well as to determine whether
or not the debt service coverage and loan-to-value ratios remain consistent with
the Corporation's underwriting policies. It is the intention of management to
perform a continual review of the commercial real estate loan portfolio in light
of the condition of the real estate market. Based upon the above procedures, the
Corporation classifies loans that fall below underwriting standards into various
risk or watch categories.
MANUFACTURED HOUSING, SECOND
MORTGAGE AND OTHER CONSUMER LOANS
The Corporation offers consumer loan programs that include the following:
manufactured housing loans; second mortgage loans for a variety of purposes
including purchase, renovation or remodeling of property, and for uses unrelated
to the security; loans for the purchase of automobiles, pleasure boats and
recreational vehicles; student loans; and, loans for general household purposes,
including home equity lines of credit. Consumer loans, in addition to being an
important part of the Corporation's orientation toward consumer financial
services, promote greater net interest income stability because of their
somewhat shorter maturities and faster prepayment characteristics. Lending in
this area may involve special risks, including decreases in the value of
collateral and transaction costs associated with foreclosure and repossession.
Consumer loans are generally secured loans and are made based on an
evaluation of the collateral and the borrower's creditworthiness, including such
factors as income, other indebtedness and credit history. Secured consumer loan
amounts typically do not exceed 85% of the value of the collateral, less the
outstanding balance of any first mortgage loan. Lines of credit are subject to
periodic review, revision and, when deemed appropriate by the Corporation,
cancellation as a result of changes in the borrower's financial circumstances.
ASSET QUALITY
Banks are required to review their assets on a regular basis, and to
classify them if any weaknesses are noted. Adequate allowances must be
maintained for assets classified as substandard or doubtful. Any assets
classified as a loss must be 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 allowance accounts. Classified assets consist of nonaccrual
loans, loans under foreclosure, other real estate owned, and 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.
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 are loans on which payment is 90 days or
more delinquent. Nonperforming Assets Analysis, a table found on page 20,
presents figures relative to nonperforming assets and net charge-offs for 1996
and 1995.
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 allowance
for loan losses. Other real estate owned consisted of seven properties valued at
$1.015
Capital Ratios at Year-end
- ----------------------------------------------------------------------------------------------------------------
1996 1995
------ ------
Common stockholders' equity to assets 10.46% 11.20%
Tier I leverage ratio 10.61% 11.21%
Tier I risk-based capital ratio 18.81% 20.11%
Total risk-based capital ratio 20.01% 21.36%
21
million as of December 31, 1996, up from $689,000 as of December 31,
1995. Five of these properties have been sold, but must be carried in other real
estate owned until the terms, under which they were disposed of, meet current
accounting standards. One of the properties was sold since December 31, 1996.
The remaining property is a single-family dwelling with an appraised value well
in excess of book value.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
Allowances are based upon management's continuing analysis of pertinent
factors underlying the quality of the loan portfolio. These factors include
changes in the size and composition of the portfolio, historical loan loss
trends, the industry's loss experience, and current and anticipated economic
conditions.
As part of the process of determining the adequacy of the allowance for
loan losses, the Corporation reviews its loan portfolio for specific weaknesses.
A portion of the allowance is then allocated to reflect the potential loss
exposure of those specific weaknesses. When available information confirms that
specific loans or portions thereof are uncollectible, these amounts are
charged-off against the allowance for loan losses. The existence of some or all
of the following criteria generally confirm that a loss has been incurred: the
loan is significantly delinquent and the borrower has not evidenced the ability
or intent to bring the loan current; the Corporation has no recourse to the
borrower or, if it does, the borrower has insufficient assets to pay the debt;
or, the fair market value of the loan collateral is significantly below the
current loan balance, and there is little or no near-term prospect for
improvement. Residential real estate and consumer loans are not individually
analyzed for loss exposure because of the significant number of loans, as well
as their relatively small balances and historically low level of losses.
The chart, Allocation of the Allowance for Loan Losses, as found on this
page, details the breakdown of the allowance as it applies to different types of
loans contained within the portfolio.
CAPITAL MANAGEMENT
- --------------------------------------------------------------------------------
During 1996, ACNB Corporation's capital base decreased by $2.0 million, or
3.9%. This was due to a Special Dividend of $1.00 per share paid in the first
quarter of 1996. At year-end 1996, the risk-based capital ratios of Tier 1
capital and Total capital were 18.81% and 20.01%, respectively, exceeding the
minimum ratios specified by the Federal Reserve Board. Capital ratios are
highlighted in a table, Capital Ratios at Year-End, as found on page 21.
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,
1996, 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, 1996, the capital ratios of the
Corporation exceeded these levels and are expected to be in excess of the
minimum ratios required of a well-capitalized institution in the future. The
risk-based capital guidelines are designed to measure Tier 1 and Total capital,
which is comprised of Tier 1 and Tier 2, in relation to the credit risk of both
on- and off-balance sheet items.
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. As of February 28, 1997, 62,844 shares had been
repurchased. Due to the repurchase program, capital was reduced by approximately
$1,015,000.
The Corporation's Board of Directors increased the quarterly common stock
cash dividend to $.17 per share during the third quarter of 1995, and further
increased the quarterly dividend to $.18 per share during the third quarter of
1996. The annual dividend per share for 1995 was $.66 and was $.64 in 1994.
During 1996, the dividend was $1.70 per share due to the $1.00 Special Dividend
paid in January. Pursuant to limitations under the National Bank Act and the
Pennsylvania Business Corporation Law of 1988, as amended, the Corporation may
not pay dividends in 1997 in excess of net income for 1997 plus $4,399,000.
The Corporation's total stockholders' equity at December 31, 1996, was
$49.4 million, or 10.46%, of total assets, compared with $51.5 million, or
11.20%, at December 31, 1995. The decrease in stockholders' equity was due to
the Special Dividend, the repurchase of common stock in the amount of $475,000,
and the payment of regular dividends of $3.7 million.
ALLOCATION OFTHEALLOWANCE FOR LOAN LOSSES
- ---------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- -------------- -------------- -------------
% of % of % of % of % of
Gross Gross Gross Gross Gross
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
In thousands
Commercial, financial and
agricultural $ 92 0.03% $ 95 0.03% $ 98 0.03% $ 104 0.04% $ 99 0.03%
Real estate - construction 47 0.01% 48 0.01% 51 0.02% 54 0.02% 51 0.02%
Real estate - mortgage 1,672 0.52% 1,719 0.53% 1,769 0.57% 1,880 0.65% 1,794 0.61%
Consumer 156 0.05% 160 0.05% 165 0.05% 175 0.06% 167 0.06%
Unallocated 1,216 0.37% 1,252 0.39% 1,287 0.42% 1,368 0.48% 1,306 0.45%
-------- ---- -------- ---- ------- ---- ------- ---- ------- -----
Total $ 3,183 0.98% $ 3,274 1.01% $ 3,370 1.09% $ 3,581 1.25% $ 3,417 1.17%
======== ==== ======== ==== ======= ==== ======= ==== ======= =====
22
OTHER INFORMATION
- --------------------------------------------------------------------------------
From time to time, various types of federal and state legislation have been
proposed that could result in additional regulation of, and restrictions on, the
business of the Corporation and the Bank. It cannot be predicted whether such
legislation will be adopted or, if adopted, how such legislation would affect
the business of the Corporation and the Bank. As a consequence of the extensive
regulation of commercial banking activities in the United States, the
Corporation's and the Bank's business is particularly susceptible to being
affected by federal legislation and regulations that may increase the cost of
doing business. Except as specifically described above, management believes that
the effect of the provisions of the aforementioned legislation on the liquidity,
capital resources, and results of operations of the Corporation will be
immaterial. Management is not aware of any other current specific
recommendations by regulatory authorities or proposed legislation, which if they
were implemented, would have a material adverse effect upon the liquidity,
capital resources, or results of operations, although the general cost of
compliance with numerous and multiple federal and state laws and regulations
does have, and in the future may have, a negative impact on the Corporation's
results of operations.
Further, the business of the Corporation is also affected by the state of
the financial services industry in general. As a result of legal and industry
changes, management predicts that the industry will continue to experience an
increase in consolidations and mergers as the financial services industry
strives for greater cost efficiencies and market share. Management believes that
such consolidations and mergers may enhance its competitive position as a
community bank.
Independent Auditors Report
To The Stockholders and Board of Directors StambaughoNess
ACNB Corporation CERTIFIED PUBLIC ACCOUNTANTS
Gettysburg, Pennsylvania
We have audited the accompanying consolidated statement of condition of
ACNB Corporation and Subsidiary as of December 31, 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended. 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 audit. The consolidated statement of condition
of ACNB Corporation and Subsidiary as of December 31, 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the two years in the period ended December 31, 1995, were audited by Harry
Ness & Company, whose report dated January 11, 1996, expressed an unqualified
opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ACNB
Corporation and Subsidiary as of December 31, 1996, and the consolidated results
of their operations and their consolidated cash flows for the year then ended,
in conformity with generally accepted accounting principles.
Stambaugh o Ness, P.C.
(Successor to Harry Ness & Company)
York, Pennsylvania
January 10, 1997
23
CONSOLIDATED STATEMENTS OF CONDITION
December 31
---------------------------
ASSETS In thousands 1996 1995
- ------------------------------------------------------------------------------------------------------
Cash and due from banks $ 13,039 $ 14,135
Interest bearing deposits with banks 9,039 8,765
Investment securities
(market value $116,587 and $105,144, respectively) 116,496 104,842
Federal funds sold 100 100
Mortgage loans held for sale -- 874
Loans
(net of unearned discount of $728 and $2,184, respectively) 324,927 323,128
Allowance for possible loan losses (3,183) (3,274)
-------- --------
Net loans 321,744 319,854
Premises and equipment 5,415 5,767
Other real estate 1,015 689
Other assets 5,597 4,327
-------- --------
TOTAL ASSETS $472,445 $459,353
======== ========
LIABILITIES
- ------------------------------------------------------------------------------------------------------
Non-interest bearing deposits $ 52,666 $ 44,318
Interest bearing deposits 350,461 347,925
-------- --------
TOTAL DEPOSITS 403,127 392,243
Securities sold under agreement to repurchase 16,736 13,203
Demand notes, U.S. Treasury 450 199
Other liabilities 2,696 2,245
-------- --------
TOTAL LIABILITIES 423,009 407,890
STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------
Common stock (par value $2.50; 20,000,000 shares authorized;
5,278,472 issued and outstanding shares on 12/31/96 and
5,307,756 on 12/31/95) 13,196 13,269
Additional paid-in capital 3,994 4,396
Retained earnings 31,889 33,798
Net unrealized gains on securities available-for-sale 357 --
-------- --------
TOTAL STOCKHOLDERS' EQUITY 49,436 51,463
-------- --------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $472,445 $459,353
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
24
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31
-----------------------------------
INTEREST INCOME In thousands, except per share data 1996 1995 1994
- --------------------------------------------------------------------------------------------------
Loans (including fees) $26,463 $25,918 $22,998
Time deposits with banks 518 169 112
Federal funds sold 5 6 401
Taxable securities 6,846 6,048 7,021
Non-taxable securities 62 72 107
------- ------- -------
TOTAL INTEREST INCOME 33,894 32,213 30,639
INTEREST EXPENSE
- --------------------------------------------------------------------------------------------------
Interest bearing deposits 14,301 13,459 12,025
Other borrowed funds 823 978 394
------- ------- -------
TOTAL INTEREST EXPENSE 15,124 14,437 12,419
NET INTEREST INCOME 18,770 17,776 18,220
Provision for possible loan losses 30 -- --
------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN LOSSES 18,740 17,776 18,220
NON-INTEREST INCOME
- --------------------------------------------------------------------------------------------------
Trust income 517 356 292
Service fees on deposit accounts 756 672 597
Other income 713 599 612
------- ------- -------
TOTAL NON-INTEREST INCOME 1,986 1,627 1,501
NON-INTEREST EXPENSE
- --------------------------------------------------------------------------------------------------
Salaries and employee benefits 5,881 5,610 5,173
Net occupancy expense 770 695 651
Equipment expense 937 823 708
FDIC insurance 2 461 928
Other taxes 424 401 392
Other expense 2,115 1,819 1,808
------- ------- -------
TOTAL NON-INTEREST EXPENSE 10,129 9,809 9,660
INCOME BEFORE INCOME TAXES 10,597 9,594 10,061
Applicable income taxes 3,488 3,135 3,288
------- ------- -------
NET INCOME $ 7,109 $ 6,459 $ 6,773
======= ======= =======
PER COMMON SHARE DATA*
- --------------------------------------------------------------------------------------------------
Net income $1.34 $1.22 $1.27
Cash dividends $1.70 $ .66 $ .64
*Based on a weighted average of 5,300,569 shares in 1996, 5,314,521 shares in
1995, and 5,342,101 shares in 1994. Data restated to reflect two-for-one stock
split in the form of a 100% stock dividend issued in 1994.
The accompanying notes are an integral part of the
consolidated financial statements.
25
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Net
Common Paid-in Retained Unrealized
Stock Capital Earnings Gains Total
- -------------------------------------------------------------------------------------------------------------
In thousands
BALANCE AT JANUARY 1, 1994 $13,370 $ 5,002 $27,490 $ -- $45,862
Net income -- -- 6,773 -- 6,773
Cash dividends -- -- (3,417) -- (3,417)
Retirement of 31,714 shares (80) (491) -- -- (571)
------- -------- ------- -------- -------
BALANCE AT DECEMBER 31, 1994 13,290 4,511 30,846 -- 48,647
Net income -- -- 6,459 -- 6,459
Cash dividends -- -- (3,507) -- (3,507)
Retirement of 8,366 shares (21) (115) -- -- (136)
------- -------- ------- -------- -------
BALANCE AT DECEMBER 31, 1995 13,269 4,396 33,798 -- 51,463
Net income -- -- 7,109 -- 7,109
Cash dividends -- -- (9,018) -- (9,018)
Retirement of 29,284 shares (73) (402) -- -- (475)
Net change in unrealized gains on
securities available-for-sale -- -- -- 357 357
------- -------- ------- -------- -------
BALANCE AT DECEMBER 31, 1996 $13,196 $ 3,994 $31,889 $ 357 $49,436
======= ======== ======= ======== =======
The accompanying notes are an integral part of the
consolidated financial statements.
26
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31
INCREASE (DECREASE) IN CASH ----------------------------------
AND CASH EQUIVALENTS In thousands 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and dividends received $ 33,563 $ 32,634 $ 31,895
Fees and commissions received 2,555 2,023 1,943
Interest paid (14,940) (13,875) (12,394)
Cash paid to suppliers and employees (10,481) (9,759) (8,920)
Income taxes paid (3,438) (3,478) (2,419)
Loans originated for sale (10,538) (5,138) --
Proceeds of mortgage loans sold 11,412 4,264 --
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,133 6,671 10,105
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities held-to-maturity
and interest bearing balances with other banks 59,124 68,885 56,677
Proceeds from maturities of investment securities available-for-sale 804 -- --
Purchase of investment securities held-to-maturity
and interest bearing balances with other banks (37,236) (29,481) (55,559)
Purchase of investment securities available-for-sale (34,334) -- --
Net increase in loans (2,253) (16,961) (23,031)
Capital expenditures (235) (474) (938)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (14,130) 21,969 (22,851)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW accounts and savings accounts 347 (12,741) (4,787)
Net increase (decrease) in certificates of deposit 14,070 14,776 (15,290)
Dividends paid (9,018) (3,507) (3,417)
Net increase (decrease) in borrowed funds 251 (17,051) 16,800
Retirement of common stock (475) (136) (571)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 5,175 (18,659) (7,265)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (822) 9,981 (20,011)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 23,000 13,019 33,030
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 22,178 $ 23,000 $ 13,019
======== ======== ========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
- ------------------------------------------------------------------------------------------------------------------
Net income $ 7,109 $ 6,459 $ 6,773
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 640 588 457
Provision for possible loan losses 30 -- --
Provision (Benefit) for deferred taxes 91 88 (67)
Amortization of investment securities premiums 356 760 1,850
Increase (Decrease) in taxes payable (41) (431) 936
Decrease (Increase) in interest receivable (30) 414 (152)
Increase (Decrease) in interest payable 184 562 25
Increase (Decrease) in accrued expenses 301 (351) 275
Decrease (Increase) in mortgage loans held for sale 874 (874) --
Decrease (Increase) in other assets (1,240) (180) 17
Decrease in other liabilities (141) (364) (9)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 8,133 $ 6,671 $ 10,105
======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ------------------------------------------------------------------------------
The accounting and reporting policies followed by ACNB Corporation and its
principal subsidiary, Adams County National Bank, conform with generally
accepted accounting principles and with general practice within the banking
industry.
BASIS OF FINANCIAL STATEMENTS
The consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiary, Adams County National Bank. All
significant intercompany transactions have been eliminated.
Financial statements prepared in accordance with generally accepted
accounting principles require management to make estimates and assumptions that
affect the reported amounts and disclosure of contingencies. Actual results
could differ from these estimates.
Income and expenses are recorded on the accrual basis of accounting,
except for trust department income and certain other fees which are recorded
primarily on the cash basis. Recognition of such income on an accrual basis is
impractical and would not materially affect net income.
For comparative purposes, prior years' financial statements have been
reclassified to conform with report classifications of the current year.
CASH EQUIVALENTS
For the purpose of presentation in the consolidated statements of cash
flows, cash and cash equivalents include cash on hand, amounts due from banks,
and federal funds sold. Generally, federal funds are purchased and sold for
one-day periods.
INVESTMENT SECURITIES
Under Statement of Financial Accounting Standards No. 115, securities are
required to be classified into one of three categories: held-to-maturity,
available-for-sale, or trading. Investments in securities which the Corporation
has the positive intent and ability to hold to maturity are classified as
held-to-maturity. These securities are accounted for at amortized cost. Other
securities are classified as available-for-sale. The difference between
amortized cost and fair value is an unrealized holding gain or loss included,
net of taxes, in Stockholders' Equity. Management will reassess the
appropriateness of the classifications each quarter.
Amortization of premium and accretion of discount for investment securities
is computed by the straight-line method to the maturity date or call date. There
is not a material difference between the straight-line method and the interest
method. Gains and losses are determined using the specific indentification
method. Income is accrued the month it is earned.
MORTGAGE LOANS HELD FOR SALE
The mortgages held for sale are carried at the lower of aggregate cost or
estimated market value.
LOANS
Loans are stated net of unearned interest on consumer installment loans.
Beginning in 1995, interest on new installment loans is recognized on the simple
interest method. Interest on installment loans opened prior to 1995 is
recognized using the sum-of-the-month-digits method, which is not materially
different from the interest method. Interest on commercial and real estate loans
is recognized based upon the principal amount outstanding. Loan fees are
recorded on the cash basis, since there is not a material difference to the
amount of income that would be recognized under Statement of Financial
Accounting Standards No. 91.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The provision for possible loan losses charged to income is based upon
management's evaluation of outstanding loans, the historical loan loss
experience of the subsidiary, and the adequacy of the allowance for possible
loan losses. A significant change in this estimate could result in a material
change to net income.
Loans are deemed impaired when it is probable that the Corporation will be
unable to collect all amounts due in accordance with the loan agreement. The
Corporation evaluates collectively for impairment large groups of smaller
balance homogeneous loans. At December 31, 1996 and 1995, the Corporation did
not have any loans that would be classified as impaired loans.
PREMISES AND EQUIPMENT
Land is carried at cost. Bank premises and furniture and equipment are
carried at cost, less accumulated depreciation computed principally by the
straight-line method.
NONPERFORMING ASSETS
Nonperforming assets are comprised of loans for which the accrual of
interest has been discontinued due to a serious weakening of the borrower's
financial condition.
Loans are generally placed on a nonaccrual basis when principal or interest
is past due 90 days or more and when, in the opinion of management, full
collection of principal or interest is unlikely. At the time a loan is placed on
nonaccrual status, the accrual of interest is discontinued. Income on such loans
is then recognized only to the extent of cash received.
The basis in foreclosed real estate is carried at the lower of fair market
value, less costs to sell, or the carrying value of the related loan at the time
of acquisition.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently-enacted
income tax rates applicable to the period in which deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
NET INCOME PER SHARE
Net income per share of common stock is computed on the basis of the
weighted average number of shares of common stock outstanding.
ADVERTISING COSTS
Costs of advertising are expensed when incurred.
28
NOTE B
RESTRICTIONS ON CASH
AND DUE FROM BANK ACCOUNTS
- -------------------------------------------------------------------------------
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank. The average amount of these reserve balances for the years ended
December 31, 1996 and 1995, were approximately $4,881,000 and $4,386,000,
respectively. 29
NOTE C
INVESTMENT SECURITIES
- -------------------------------------------------------------------------------
The amortized cost and estimated fair value of investment securities at December
31, 1996 and 1995, were as follows:
- --------------------------------------------------------------------------------------------------------
1996 In thousands Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 78,930 $275 $185 $ 79,020
Obligations of states and political subdivisions 925 1 -- 926
-------- ---- ---- --------
Total debt securities 79,855 276 185 79,946
Restricted equity securities 2,570 -- -- 2,570
-------- ---- ---- --------
Total Held-to-Maturity Securities $ 82,425 $276 $185 $ 82,516
======== ==== ==== ========
Available-for-Sale Securities
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 33,530 $541 $ -- $ 34,071
======== ==== ==== ========
1995 In thousands
- --------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities
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
Restricted equity securities 2,480 -- -- 2,480
-------- ---- ---- --------
Total Held-to-Maturity Securities $104,842 $621 $ 319 $105,144
======== ==== ==== ========
The Corporation did not have any available-for-sale
securities at December 31, 1995.
The amortized cost and estimated fair value of debt securities at December
31, 1996, 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.
Held-to-Maturity Available-for-Sale
------------------------- -----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- --------
In thousands
Within one year $30,073 $30,186 $ -- $ --
After one year through five years 44,176 44,132 -- --
After five years through ten years 5,475 5,497 -- --
After ten years 131 131 33,530 34,071
------- ------- ------- -------
Total Debt Securities $79,855 $79,946 $33,530 $34,071
======= ======= ======= =======
29
NOTE C
INVESTMENT SECURITIES (continued)
- ------------------------------------------------------------------------------------------------------
U.S.
Government Taxable
and Federal State and Other Equivalent
December 31, 1996 In thousands Agency Municipal Securities Total Yield
- ------------------------------------------------------------------------------------------------------
Amortized Cost
Within one year $ 29,980 $ 93 $ -- $ 30,073 5.86%
After one year through five years 43,950 226 -- 44,176 6.56%
After five years through ten years 5,000 475 -- 5,475 8.13%
After ten years 33,530 131 -- 33,661 7.32%
No set maturity -- -- 2,570 2,570 6.22%
Total $112,460 $ 925 $2,570 $115,955
======== ====== ====== ========
Fair Value $113,091 $ 926 $2,570 $116,587
======== ====== ====== ========
Taxable Equivalent Yield 6.66% 9.52% 6.22%
December 31, 1995 In thousands
- ------------------------------------------------------------------------------------------------------
Amortized Cost $101,400 $ 962 $2,480 $104,842
======== ====== ====== ========
December 31, 1994 In thousands
- ------------------------------------------------------------------------------------------------------
Amortized Cost $141,140 $1,509 $2,256 $144,905
======== ====== ====== ========
The weighted average yield of tax-exempt obligations has been calculated on
a taxable equivalent basis. The amounts of the taxable equivalent adjustments
are based on an effective tax rate of 34%.
At December 31, 1996 and 1995, assets with a carrying value of $47,351,000
and $37,731,000, respectively, were pledged as required or permitted by law to
secure certain public and trust deposits, repurchase agreements, or for other
purposes.
The Corporation did not sell any securities over the past three years.
NOTE D
LOANS
- ------------------------------------------------------------------------------------------------------------
Loans at December 31 are summarized as follows:
In thousands 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Commercial, financial and agricultural $ 9,866 $ 9,268 $ 10,785 $ 14,100 $ 16,104
Real estate - construction 11,207 12,951 12,632 4,791 4,732
Real estate - mortgage 288,588 284,943 268,944 250,242 250,359
Consumer 15,994 18,150 17,444 17,950 20,867
-------- -------- -------- -------- --------
325,655 325,312 309,805 287,083 292,062
Less: Unearned discount on loans 728 2,184 3,883 3,785 4,239
-------- -------- -------- -------- --------
Total Loans $324,927 $323,128 $305,922 $283,298 $287,823
======== ======== ======== ======== ========
The following table outlines the repricing opportunities for all loans
outstanding as of December 31, 1996. Loans with immediately adjustable rates
(such as loans tied to prime rate) are included in the within one year column.
Loans with rates that are adjustable at some time over the life of the loan are
included under the time heading when they become adjustable. All fixed-rate
loans are included under the heading in which they mature.
Repricing Period
------------------------------------
Within After One Year
One Through
In thousands Year Five Years Total
------- -------------- -------
Commercial, financial and agricultural $ 8,609 $1,257 $ 9,866
Real estate - construction 11,047 160 11,207
------- ------ -------
Total $19,656 $1,417 $21,073
======= ====== =======
Loans with predetermined interest rates $ 2,711 $1,257 $ 3,968
Loans with variable interest rates 16,945 160 17,105
------- ------ -------
Total $19,656 $1,417 $21,073
======= ====== =======
30
NOTE D
LOANS (continued)
- --------------------------------------------------------------------------------
The aggregate balance of loans (in excess of $60,000) made to directors and
executive officers in the normal course of business as of December 31, 1996 and
1995, was $3,933,667 and $3,575,561, 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
1996 Additions Collected 1996 Debtors
- --------------------------------------------------------------------------------
$3,575,561 $1,275,936 $917,830 $3,933,66 9
NOTE E
ALLOWANCE FOR LOAN LOSSES
- -----------------------------------------------------------------------------------------------------------------
Transactions in the valuation portion of the allowance for loan losses for the
past five years at December 31, are shown below:
In thousands 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Balance of allowance for loan losses at
beginning of period $ 3,274 $ 3,370 $ 3,581 $ 3,417 $ 2,815
Loans charged-off:
Commercial, financial and agricultural 34 -- 8 37 90
Real estate - construction -- -- -- -- --
Real estate - mortgage 31 44 178 35 75
Consumer 131 90 70 120 125
-------- -------- -------- -------- --------
Total loans charged-off 196 134 256 192 290
Recovery of charged-off loans:
Commercial, financial and agricultural 6 12 5 8 22
Real estate - construction -- -- -- -- --
Real estate - mortgage 41 1 13 1 1
Consumer 28 25 27 32 14
-------- -------- -------- -------- --------
Total recoveries 75 38 45 41 37
Net loans charged-off 121 96 211 151 253
Provision for possible loan losses 30 -- -- 315 855
-------- -------- -------- -------- --------
Balance at end of period $ 3,183 $ 3,274 $ 3,370 $ 3,581 $ 3,417
======== ======== ======== ======== ========
TOTAL LOAN BALANCES In thousands
- -----------------------------------------------------------------------------------------------------------------
Average total loans $321,979 $319,712 $289,350 $288,790 $293,075
Total loans at year-end 324,927 324,002 305,922 283,298 287,823
RATIOS
- -----------------------------------------------------------------------------------------------------------------
Net charge-offs to:
Average total loans 0.04% 0.03% 0.07% 0.05% 0.09%
Total loans at year-end 0.04% 0.03% 0.07% 0.05% 0.09%
Allowance for loan losses 3.80% 2.93% 6.26% 4.22% 7.40%
Allowance for loan losses to:
Average total loans 0.99% 1.02% 1.16% 1.24% 1.17%
Total loans at year-end 0.98% 1.01% 1.10% 1.26% 1.19%
The amounts of additional provision to the allowance were based on
management's judgement after considering an analysis of larger loans, all loans
known to management to have unusual risk characteristics, nonperforming or
problem loans, historical patterns of charge-offs and recoveries, and actual net
charge-offs. Further consideration was given to current economic and employment
conditions both nationally and in the Corporation's local service area. Loans
secured by real estate comprised 92% of the Corporation's total loan portfolio
at December 31, 1996. The majority of loans in both the commercial, financial
and agricultural category and the consumer category are also secured by personal
property, negotiable assets, or business assets. This conservative policy
explains the low ratio of losses to loans experienced by the Corporation over
the last five years. This policy did not change during the year ending 1996.
Management anticipates that charge-off amounts will approximate $175,000
in 1997.
31
NOTE E
ALLOWANCE FOR LOAN LOSSES (continued)
- -----------------------------------------------------------------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- -----------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
% of % of % of % of % of
Gross Gross Gross Gross Gross
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
In thousands ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Commercial, financial and agricultural $ 92 0.03% $ 95 0.03% $ 98 0.03% $ 104 0.04% $ 99 0.03%
Real estate - construction 47 0.01% 48 0.01% 51 0.02% 54 0.02% 51 0.02%
Real estate - mortgage 1,672 0.52% 1,719 0.53% 1,769 0.57% 1,880 0.65% 1,794 0.61%
Consumer 156 0.05% 160 0.05% 165 0.05% 175 0.06% 167 0.06%
Unallocated 1,216 0.37% 1,252 0.39% 1,287 0.42% 1,368 0.48% 1,306 0.45%
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total $3,183 0.98% $3,274 1.01% $3,370 1.09% $3,581 1.25% $3,417 1.17%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
NOTE F
PREMISES AND EQUIPMENT
- --------------------------------------------------------------------------------
The composition of Corporation premises and equipment at December 31 was as
follows:
In thousands 1996 1995
------- -------
Land $ 857 $ 857
Bank premises 5,770 5,746
Furniture and equipment 4,984 4,784
Less: Accumulated depreciation and amortization (6,196) (5,620)
Total $ 5,415 $ 5,767
A summary of depreciation and amortization
expenses is as follows:
In thousands 1996 1995 1994
---- ---- ----
Bank premises $200 $193 $158
Furniture and equipment 433 388 291
Total $633 $581 $449
NOTE G
INVESTMENT IN REAL ESTATE PARTNERSHIP
- --------------------------------------------------------------------------------
32
- --------------------------------------------------------------------------------
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, 1996 and 1995, the carrying value of this investment
was approximately $363,319 and $356,514, respectively.
32
NOTE H
NONPERFORMING ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
The following table presents information concerning the aggregate amount of
nonperforming assets at December 31;
In thousands 1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Nonaccrual loans $ 994 $1,092 $ 854 $ 977 $ 905
90 days past due still accruing 2,175 2,780 2,219 2,614 3,900
Restructured loans -- -- -- 377 --
Other real estate owned 1,015 689 1,037 850 1,110
------ ------ ------ ------ ------
Total Nonperforming Assets $4,184 $4,561 $4,110 $4,818 $5,915
====== ====== ====== ====== ======
The gross interest income that would have been recorded on nonaccrual loans
at December 31, 1996, under original terms was approximately $94,000. The amount
of interest income on these loans that was included in net income for the year
ended December 31, 1996, was $0.
The Corporation does not accrue interest on any loan when principal or
interest are in default for 90 days or more, unless the loan is well secured and
in the process of collection. Consumer loans and residential real estate loans
secured by 1 to 4 family dwellings shall ordinarily not be subject to these
guidelines.
When a loan is placed in a nonaccrual status, all previously accrued, but
uncollected, interest is charged against the interest income account. Previously
accrued interest is not charged-off if principal and interest are protected by
sound collateral values.
NOTE I
TIME DEPOSITS
- --------------------------------------------------------------------------------
Time deposits in denominations of $100,000 or more at December 31, 1996 and
1995, are summarized in the following table:
The interest expense related to time certificates of deposit in
denominations of $100,000 or more totaled $792,000 in 1996, $589,000 in 1995 and
$526,000 in 1994.
In thousands 1996 1995
------- -------
Time certificates of deposit $16,417 $15,449
Other time deposits 1,000 1,000
Maturities of time deposits of $100,000 or more outstanding at December 31,
1996, are summarized as follows:
In thousands
Three months or less $ 5,807
Over three through six months 3,593
Over six through twelve months 4,607
Over twelve months 3,410
-------
Total $17,417
=======
NOTE J LEASE COMMITMENTS
- --------------------------------------------------------------------------------
Certain branch offices and equipment are leased under agreements which expire at
varying dates through 2010. Most leases contain renewal provisions at the
Corporation's option.
The total rental expense for all operating leases was $96,473, $72,816 and
$44,873 for the years ended December 31, 1996, 1995 and 1994, 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:
1997 $ 64,200
1998 64,200
1999 59,400
2000 47,500
2001 48,000
Later years 407,000
--------
Total Minimum Payments $690,300
========
33
NOTE K
SHORT-TERM BORROWINGS
- --------------------------------------------------------------------------------
Federal funds purchased, securities sold under agreements to repurchase,
and other short-term borrowings generally mature within one to 90 days from the
date originated.
The following is a summary of aggregate short-term borrowings for the years
ended December 31, 1996, 1995 and 1994, respectively:
In thousands 1996 1995 1994
------- ------- -------
Amount outstanding at year-end $17,186 $13,402 $31,863
Average interest rate at year-end 4.36% 4.20% 3.60%
Maximum amount outstanding at any month-end $38,057 $28,665 $31,863
Average amount outstanding $18,248 $19,953 $14,186
Weighted average interest rate 4.51% 4.90% 2.78%
NOTE L
RESTRICTIONS ON SUBSIDIARY
DIVIDENDS, LOANS AND ADVANCES
- --------------------------------------------------------------------------------
Certain restrictions exist regarding the ability of the Bank to transfer
funds to the Corporation in the form of cash dividends, loans or advances. The
approval of the Office of the Comptroller of the Currency is required to pay
dividends in excess of earnings retained in the current year plus retained net
profits for the preceding two years. As of December 31, 1996, $4,399,000 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, 1996, the maximum amount
available for transfer from the Bank to the Corporation in the form of loans was
approximately $5,226,000.
NOTE M
INCOME TAXES
- --------------------------------------------------------------------------------
The composition of applicable income taxes for the years 1996, 1995 and 1994 was
as follows:
In thousands 1996 1995 1994
------ ------ ------
Current $3,453 $3,049 $3,199
Deferred 35 86 89
------ ------ ------
$3,488 $3,135 $3,288
====== ====== ======
Income taxes paid during 1996, 1995 and 1994 were $3,440,000, $2,931,000
and $3,265,000, respectively. Differences between applicable income taxes
included in net income and the maximum federal income tax rates were comprised
as follows:
In thousands 1996 1995 1994
------ ------ ------
Income taxes at statutory rates $3,603 $3,262 $3,421
Increases (Decreases) resulting from:
Tax-free income (45) (60) (84)
Tax preference interest expense 5 6 8
Rehabilitation and low-income housing credits (75) (73) (57)
------ ------ ------
Applicable Income Tax $3,488 $3,135 $3,288
====== ====== ======
The significant components of deferred tax assets and deferred tax liabilities
at December 31, 1996 and 1995, are as follows:
In thousands 1996 1995
-------- --------
Deferred tax assets:
Allowance for loan losses $541,000 $572,000
Deferred tax liabilities:
Depreciation 185,000 165,000
Pension 127,000 135,000
Other -- 3
-------- --------
Total gross deferred tax liabilities 312,000 303,000
-------- --------
Net Deferred Tax Assets $229,000 $269,000
======== ========
Federal income taxes on securities gains were $0 in 1996, 1995 and 1994.
Since the Corporation has historically had strong earnings, management believes
the deferred tax asset is realizable.
34
NOTE N
RETIREMENT PLANS
- --------------------------------------------------------------------------------
The Corporation's subsidiary has a non-contributory pension plan covering
all eligible employees. The plan provides retirement benefits which are a
function of both the years of service and the highest level of compensation
during any consecutive five-year period. It is the subsidiary's funding policy
to contribute annually the amount that is sufficient to meet the minimum funding
requirements set forth in the Employee Retirement Income Security Act. The total
pension expense for the years ended December 31, 1996, 1995 and 1994 was
$374,000, $277,000 and $266,000, respectively.
The following table sets forth the plan's funded status as of October 31,
1996 and 1995, and amounts recognized in the Corporation's consolidated
financial statements at December 31:
In thousands 1996 1995
------- -------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$4,308 for 1996 and $3,755 for 1995 $(4,369) $(3,792)
======= =======
In thousands
Projected benefit obligation for service rendered to date $(6,341) $(5,794)
Plan assets at fair value 4,931 4,462
------- -------
Projected benefit obligation in excess of plan assets (1,410) (1,332)
Unrecognized transition asset (78) (92)
Unrecognized loss 1,220 1,191
Unrecognized prior service cost 269 307
Contributions from November 1 through December 31 -- 300
------- -------
Prepaid pension cost included in other assets $ 1 $ 374
======= =======
In thousands
Net pension cost for 1996 and 1995 included the following components:
Service cost $ 250 $ 216
Interest cost 406 355
Actual return on plan assets (267) (262)
Amortization and deferral (15) (32)
------- -------
Net periodic pension cost $ 374 $ 277
======= =======
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.00% for 1996 and 1995,
and the rate of increase in future compensation levels was 5.62% and 6.00% for
1996 and 1995, respectively. The weighted average expected long-term rate of
return on plan assets was 7.50% for 1996 and 1995.
Plan assets consist of a deposit administration contract, money market
account, balanced fund, and an investment of 37,560 shares of common stock with
ACNB Corporation at December 31, 1996 and 1995.
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 201/2, who has completed six months of service. The
Corporation's contribution equals 100% of the employee's contribution, up to a
maximum of 4% and 2% of annual salary, respectively, for 1996 and 1995. The
annual expense included in salaries and benefits amounted to $169,000 and
$84,000 for 1996 and 1995, respectively.
In 1996, the Corporation established non-qualified salary continuation
plans for certain senior management. The future commitments under these
arrangements have been funded through Corporate-owned variable life insurance
policies. At December 31, 1996, the present value of the future obligations was
$91,107. The insurance policies included in other assets had total cash value of
$1,747,000 at December 31, 1996.
35
NOTE O
COMMITMENTS, CONTINGENCIES
AND CONCENTRATIONS OF CREDIT
- --------------------------------------------------------------------------------
FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK
The Corporation is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit and financial guarantees which involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
consolidated statements of condition. The Corporation uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance sheet instruments. A summary of significant commitments and
contingent liabilities at December 31, 1996 and 1995, is presented below:
In thousands 1996 1995
------- -------
Commitments to extend credit $32,456 $28,993
Standby letters of credit 2,068 1,837
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses,
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the creditor. The type of collateral may vary;
however, a significant portion of these financial instruments is secured through
real estate.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Corporation to guarantee the performance of a customer
to a third party. These guarantees are primarily issued to support borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans to customers.
CONCENTRATIONS OF CREDIT RISK
The Corporation has a diversified loan portfolio and grants agribusiness,
commercial and residential loans to customers, substantially all of whom are
local residents to the Corporation's fourteen offices.
CONTINGENT LIABILITIES
The Corporation is party to litigation and claims arising in the normal
course of business. Management, after consultation with legal counsel, believes
that the liabilities, if any, arising from such litigation and claims will not
be material to the consolidated financial position.
NOTE P
DISCLOSURES ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments", requires all entities to disclose the
estimated fair value of its financial instrument assets and liabilities. For
1996 and 1995, approximately 98% of the Corporation's assets and 89% and 88%,
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, 1996 December 31, 1995
----------------------------- ---------------------------
Estimated Fair Carrying Estimated Fair Carrying
Value Amount Value Amount
- -------------------------------------------------------------------------------------------------------------
In thousands
Cash and due from banks $ 13,039 $ 13,039 $ 14,135 $ 14,135
- ------------------------------------------------------------------------------------------------------------
Interest bearing deposits with banks 9,039 9,039 8,765 8,765
Federal funds sold 100 100 100 100
Investment securities 116,587 116,496 105,144 104,842
Interest receivable 2,719 2,719 2,776 2,776
- -------------------------------------------------------------------------------------------------------------
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, 1996 and 1995. 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, 1996 and 1995, which was
7.55% and 7.22%, respectively, and consumer loans were revalued using rates
being charged by the Corporation at year-end 1996 and 1995. Fair value for
nonperforming loans is based on current valuations of underlying collateral.
36
NOTE P
DISCLOSURES ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS (continued)
- -------------------------------------------------------------------------------------------------------------
December 31, 1996 December 31, 1995
----------------------------- ---------------------------
Estimated Fair Carrying Estimated Fair Carrying
Value Amount Value Amount
- -------------------------------------------------------------------------------------------------------------
In thousands
Net loans $321,546 $321,744 $320,778 $319,854
- -------------------------------------------------------------------------------------------------------------
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, 1996 and 1995. 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, 1996 December 31, 1995
----------------------------- ---------------------------
Estimated Fair Carrying Estimated Fair Carrying
Value Amount Value Amount
- -------------------------------------------------------------------------------------------------------------
In thousands
Deposits with no stated maturities $210,228 $210,228 $204,779 $204,779
- -------------------------------------------------------------------------------------------------------------
Deposits with stated maturities 193,421 192,899 185,034 187,464
Repurchase agreements 16,736 16,736 13,203 13,203
Federal funds purchased and demand notes 450 450 199 199
Interest payable 2,329 2,329 2,145 2,145
- -------------------------------------------------------------------------------------------------------------
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, 1996 December 31, 1995
----------------------------- ---------------------------
Estimated Fair Carrying Estimated Fair Carrying
Value Amount Value Amount
- -------------------------------------------------------------------------------------------------------------
In thousands
Commitments to extend credit $32,456 $32,456 $28,993 $28,993
- -------------------------------------------------------------------------------------------------------------
Standby letters of credit 2,068 2,068 1,837 1,837
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.
NOTE Q
ACNB CORPORATION (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
December 31
------- -------
STATEMENTS OF CONDITION In thousands 1996 1995
- --------------------------------------------------------------------------------
ASSETS
Cash $ 202 $ 202
Securities and other assets 363 356
Investment in common stock of subsidiary 47,192 49,180
Receivable from subsidiary 1,322 1,725
------- --------
TOTAL ASSETS $49,079 $51,463
======= =======
STOCKHOLDERS' EQUITY
Common stock (par value $2.50; 20,000,000 shares
authorized; 5,278,472 issued and outstanding shares
on 12/31/96 and 5,307,756 on 12/31/95) $13,196 $13,269
Additional paid-in capital 3,994 4,396
Retained earnings 31,889 33,798
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $49,079 $51,463
======= =======
37
NOTE Q
ACNB CORPORATION (PARENT COMPANY ONLY)
FINANCIAL INFORMATION (continued)
- --------------------------------------------------------------------------------
----------------------------------
Year ended December 31
- ------------------------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME In thousands 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
INCOME
Dividend from subsidiary $9,018 $5,257 $5,851
------ ------ ------
EXPENSE (7) 61 37
INCOME BEFORE TAXES AND EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARY 9,025 5,196 5,814
Applicable tax benefit (72) (93) (70)
------ ------ ------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARY 9,097 5,289 5,884
Equity in undistributed net income of subsidiary (1,988) 1,170 889
------ ------ ------
NET INCOME $7,109 $6,459 $6,773
====== ====== ======
Year ended December 31
----------------------------------
STATEMENTS OF CASH FLOWS In thousands 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Dividends received $9,493 $3,643 $5,851
------ ------ ------
Net Cash Provided by Operating Activities 9,493 3,643 5,851
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (9,018) (3,507) (3,417)
Purchase of common stock of subsidiary -- -- (2,000)
Retirement of common stock (475) (136) (434)
------ ------ ------
Net Cash Used in Financing Activities (9,493) (3,643) (5,851)
------ ------ ------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 202 202 202
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 202 $ 202 $ 202
====== ====== ======
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income $7,109 $6,459 $6,773
Decrease (Increase) in investment in common stock of subsidiary 1,988 (1,170) (889)
Decrease (Increase) in receivable from subsidiary 403 (1,707) 66
Loss (Gain) on equity investment (7) 61 38
Non-cash dividend -- -- (137)
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES $9,493 $3,643 $5,851
====== ====== ======
NOTE R
FUTURE EFFECT OF RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", which is effective January
1, 1997. Certain provisions of SFAS No. 125 have been deferred for one year
under SFAS No. 127. Earlier or retroactive application is not permitted under
either Standard. The Standards establish new criteria to determine whether a
transfer of assets should be accounted for as a sale or as a pledge of
collateral in a secured borrowing. Additionally, SFASNo. 125 establishes new
accounting requirements for pledged collateral. The adoption of these Standards
is not expected to have a material impact on the Corporation's financial
condition.
38
QUARTERLY RESULTS OF OPERATIONS
Selected quarterly information for the years ended December 31, 1996 and 1995,
is as follows:
First Second Third Fourth
1996 In thousands, except per share data Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------
Interest income $8,122 $8,302 $8,655 $8,815
- ---------------------------------------------------------------------------------------------------------------------------
Interest expense 3,699 3,721 3,838 3,866
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 4,423 4,581 4,817 4,949
- ---------------------------------------------------------------------------------------------------------------------------
Provision for loan losses -- -- -- 30
- ---------------------------------------------------------------------------------------------------------------------------
Net income 1,581 1,655 1,883 1,990
- ---------------------------------------------------------------------------------------------------------------------------
Net income per share .30 .31 .36 .37
- ---------------------------------------------------------------------------------------------------------------------------
Return on average assets 1.39% 1.43% 1.60% 1.68%
- ---------------------------------------------------------------------------------------------------------------------------
1995
- ---------------------------------------------------------------------------------------------------------------------------
Interest income $7,799 $8,002 $8,146 $8,266
- ---------------------------------------------------------------------------------------------------------------------------
Interest expense 3,358 3,610 3,713 3,756
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 4,441 4,392 4,433 4,510
- ---------------------------------------------------------------------------------------------------------------------------
Provision for loan losses -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
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%
- ---------------------------------------------------------------------------------------------------------------------------
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 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income $33,894 $32,213 $30,639 $32,122 $35,380
Total interest expense 15,124 14,437 12,419 13,894 17,582
Net interest income 18,770 17,776 18,220 18,228 17,798
Provision for loan losses 30 -- -- 315 855
Net income* 7,109 6,459 6,773 6,933 7,038
PER SHARE DATA**
- ---------------------------------------------------------------------------------------------------------------------------
Net income* $1.34 $1.22 $1.27 $1.30 $1.32
Cash dividends 1.70 .66 .64 .58 .54
BALANCE SHEET TOTALS
- ---------------------------------------------------------------------------------------------------------------------------
Average stockholders' equity $ 48,116 $ 50,317 $ 47,893 $ 44,411 $ 39,930
Average assets 465,984 459,136 473,186 457,692 441,880
RATIOS
- ---------------------------------------------------------------------------------------------------------------------------
Return on average assets 1.53% 1.41% 1.43% 1.51% 1.59%
Return on average stockholders' equity 14.77% 12.84% 14.15% 15.61% 17.63%
Dividend payout 127% 54% 50% 45% 41%
Stockholders' equity to assets 10.46% 11.20% 10.31% 9.73% 9.32%
* 1992 includes $446,000, or $.09 per share, related to the cumulative effect of
the change in accounting for income taxes.
**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.
39
FORM 10-K CROSS-REFERENCE INDEX
Portions of this Annual Report are not required by Form 10-K, and are not
filed with the Securities and Exchange Commission as part of the Corporation's
Report on Form 10-K for the year ended December 31, 1996. Only the sections
referenced in the index below are incorporated into this Form 10-K.
PART I PAGE(S)
Item 1 - Business 42
Item 2 - Properties 42
Item 3 - Legal Proceedings 43
Item 4 - Submission of Matters to a Vote of Security Holders 43
PART II
Item 5 - Market for the Registrant's Common Stock
and Related Security Holder Matters 45
Item 6 - Selected Financial Data 15 & 39
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 16 - 23
Item 8 - Financial Statements and Supplementary Data 24 - 38
Item 9 - Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 43
PART III
Item 10 - Directors and Executive Officers of the Registrant 43
Item 11 - Executive Compensation1
Item 12 - Security Ownership of Certain Beneficial Owners and Management1
Item 13 - Certain Relationships and Related Transactions1
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K
a. Financial Statements and Financial Statement Schedules2
b. Exhibits 43
c. Reports on Form 8-K3
Item 15 - Signatures 44
1 The information required by Item 11, Item 12 and Item 13 is incorporated
herein by reference to the Corporation's definitive Proxy Statement to be filed
with the Commission not later than 120 days after the close of the year ended
December 31, 1996, under the headings "Executive Compensation" and "Compensation
of Directors".
2 Financial statement schedules have been omitted because either they are not
applicable or the required information is included in the financial statements
or the notes thereto.
3 No reports on Form 8-K were filed during the quarter ended December 31, 1996.
40
COMMON STOCK MARKET PRICES AND DIVIDENDS
The common stock of ACNB Corporation is traded in the over-the-counter
market. As of December 31, 1996, the approximate number of shareholders of the
Corporation's common stock was 3,055.
Prices were provided by the OTCBulletin Board, which is a service of The
Nasdaq Stock Market, Inc. High and low bid prices of common shares and dividends
for the last two years were:
1996 1995
- ------------------------------------------------------------------------ -------------------------------------------
Bid Price Cash Bid Price Cash
Quarter Dividend Dividend
Ended High Low Paid High Low Paid
- ---------------------------------------------------------------------------------------------------------------------------
March 31 $18.25 $16.00 $1.17 $18.00 $14.25 $.16
June 30 16.25 16.00 .17 20.00 18.00 .16
September 30 17.00 16.25 .18 19.50 15.75 .17
December 31 16.25 16.00 .18 18.50 15.75 .17
The bid prices for ACNB Corporation common stock for the periods indicated
represent inter-dealer prices without adjustment for retail mark-up, mark-
down or commission, and do not necessarily represent actual transactions. Trades
have generally occurred in relatively small lots, and the prices quoted herein
are not necessarily indicative of the market value of a substantial block.
While the Corporation expects to continue its policy
of regular quarterly dividend payment, no assurance of future dividend payment
can be given. Future dividend payments will depend upon maintenance of a
continued strong financial condition, future earnings, and capital requirements.
The Corporation has no restrictions affecting the payment of dividends, except
as indicated in Note L of the Notes to Consolidated Financial Statements.
The following firms make a market in
ACNB Corporation common stock:
Ferris, Baker Watts, Incorporated F.J. Morrissey & Co., Inc.
Frederick, MD Philadelphia, PA
(301)662-6488/(800)950-6488 (215)563-8500/(800)842-8928
Hopper Soliday & Co., Inc. Smith Barney Inc.
Lancaster, PA Gettysburg, PA
(717)560-3015/(800)456-9234 (717)334-9101
Janney Montgomery Scott, Inc.
York, PA
(717)845-5611/(800)999-0503
45
BOARD OF DIRECTORS
ACNB CORPORATION AND ADAMS COUNTY NATIONAL BANK
- --------------------------------------------------------------------------------
PHILIP P. ASPER D. RICHARD GUISE PAUL G. PITZER
Owner President Fruit Grower
Philip P. Asper, Builder Adams County Motors Corp.
RALPH S. SANDOE
ROBERT G. BIGHAM RONALD L. HANKEY Fruit Broker
Partner Chairman, President & CEO ACNB
Bigham & Puhl Corporation &
Attorneys-at-Law Adams County National Bank MARIAN B. SCHULTZ
Vice Chairman Assistant Dean
ACNB Corporation & Division of Undeclared Majors
Adams County National Bank PHILIP M. JONES Shippensburg University
CEO
Times & News
GUY F. DONALDSON Publishing Company L. ROBERT SNYDER
Fruit Grower Chairman of the Board &
President
WAYNE E. LAU Littlestown Hardware &
FRANK ELSNER, JR. Sales Representative Foundry Co., Inc.
Chairman Destinations: A Travel Company
Elsner Engineering Works, Inc.
JENNIFER L. WEAVER
WILLIAM B. LOWER Director
RICHARD L. GALUSHA President Gettysburg Center of Harrisburg Area
Realtor Boyer Nurseries & Orchards, Inc. Community College
ACNB CORPORATION AND ADAMS COUNTY NATIONAL BANK DIRECTORS EMERITI
- --------------------------------------------------------------------------------
C. F. DITZLER CHARLES E RITTER
J. GLENN GUISE RALPH W. TYSON
ADAMS COUNTY NATIONAL BANK ADVISORY BOARD
- --------------------------------------------------------------------------------
DONALD H. HERSHEY WILLIAM T. TIMMINS, JR.
MARVIN G. KIME
ADAMS COUNTY NATIONAL BANK HONORARY DIRECTORS
- --------------------------------------------------------------------------------
DALE G. CRUM J. C. DONLEY
46
OFFICERS
ACNB CORPORATION
- --------------------------------------------------------------------------------
RONALD L. HANKEY JOHN W. KRICHTEN LYNDA L. GLASS
President & CEO Secretary & Treasurer Assistant Secretary
ADAMS COUNTY NATIONAL BANK
- --------------------------------------------------------------------------------
RONALD L. HANKEY VICE PRESIDENTS ASSISTANT
President & CEO --------------------- VICE PRESIDENTS
---------------------
ELIZABETH H. BEALL HELEN L. ALTLAND
Senior Vice President\ STEVEN E. EBERSOLE
Human Resources
H. WILLIAM BLACK
GEORGE R. GUISE
LYNDA L. GLASS
Senior Vice President & ROBERT L. BREWER
Chief Operating Officer TERRY L. POTTORFF
JACK W. CHAMBERS
JOHN M. KIEHL SHELBY L. STONE
Senior Vice President
Operations & Security WAYNE G. CRUM
ASSISTANT CASHIERS
---------------------
JOHN W. KRICHTEN DAVID W. DEANER
Senior Vice President, Cashier
& Chief Financial Officer BEVERLY S. KRESS
THELMA E. GRIFFIE
NANCY L. REICHART DIANA K. KUNTZ
Senior Vice President & ROBERT A. HAHN
Trust Officer
LINDA L. LEER
RONALD L. HOFFMAN
VICTOR L. REYNOLDS
Senior Vice President & TRUST OFFICER
Senior Loan Officer RONALD E. LINDBECK ---------------------
CARL L. RICKER STANLEY E. MUMMERT RONALD D. BAKER
Senior Vice President
Retail Mortgage Division
WILLIAM H. YOHE, JR.
JOHN E. SALISBURY
Senior Vice President
Audit
47
ADAMS COUNTY NATIONAL BANK OFFICE LOCATIONS
ARENDTSVILLE FRANKLINTOWNSHIP NORTHGETTYSBURG
101 Main Street 10 High Street 675 Old Harrisburg Road
Arendtsville, PA 17303 Cashtown, PA 17310 Gettysburg, PA 17325
BENDERSVILLE HANOVER SUPER KMART(R) CENTER
101 North Main Street 1127 Eichelberger Street 400 Eisenhower Drive
Bendersville, PA 17306 Hanover, PA 17331 Hanover, PA 17331
BIGLERVILLE LINCOLNSQUARE WESTLITTLESTOWN
3459 South Main Street 2 Chambersburg Street 444 West King Street
Biglerville, PA 17307 Gettysburg, PA 17325 Littlestown, PA 17340
CARROLL VALLEY LITTLESTOWN YORKSPRINGS
104 Sanders Road 17 South Queen Street 202 Main Street
Carroll Valley, PA 17320 Littlestown, PA 17340 York Springs, PA 17372
EASTBERLIN MCSHERRYSTOWN
1677 Abbottstown Pike 369 Main Street
East Berlin, PA 17316 McSherrystown, PA 17344
ADAMS COUNTY NATIONAL BANK
[Telephone Banking logo]
Banking Convenience is Just a Phone Call Away!
Toll-Free: 1-888-338-ACNB (2262) Local: 338-ACNB (2262)
48
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders for ACNB Corporation will be held on
Tuesday, May 6, 1997, at 1:00 p.m. at the Main Office of Adams County National
Bank, 675 Old Harrisburg Road, Gettysburg, PA.
FORM 10-K
A copy of ACNB Corporation's Form 10-K, as filed with the Securities and
Exchange Commission, may be obtained, without charge, by writing to:
Ronald L. Hankey
President & CEO
ACNB Corporation
P. O. Box 3129
Gettysburg, PA 17325
The Annual Report and other Corporation reports are also filed
electronically through the Electronic Data Gathering, Analysis, and Retrieval
System ("EDGAR"), which performs automated collection, validation, indexing,
acceptance, and forwarding of submissions to the Securities and Exchange
Commission, or SEC, and is accessible by the public using the Internet at
http://www.sec.gov./edgarhp.htm.
TRANSFER AGENT, REGISTRAR
AND DIVIDEND DISBURSING AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
For stockholder inquiries, call toll-free (800) 368-5948.