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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-11783
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ACNB CORPORATION
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2233457
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
675 OLD HARRISBURG ROAD, GETTYSBURG, PA 17325
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(Address of principal executive offices) (Zip Code)
(717) 334-3161
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ____
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ____ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class - Common Stock ($2.50 par value)
Outstanding at August 3, 1999 - 5,783,453
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PART I ITEM I FINANCIAL INFORMATION
ACNB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
30-Jun 30-Jun 31-Dec
1999 1998 1998
--------- --------- ---------
(000 omitted)
ASSETS
Cash and Due from Banks $ 43,700 $ 18,167 $ 20,803
Investment Securities
Securities Held to Maturity 46,786 45,205 47,505
Securities Available for Sale 105,849 90,989 113,258
--------- --------- ---------
Total Investment Securities 152,635 136,194 160,763
Federal Funds Sold 3,186 5,308 2,718
Loans 342,875 358,361 352,355
Less: Reserve for Loan Losses (3,641) (3,437) (3,594)
--------- --------- ---------
Net Loans 339,234 354,924 348,761
Premises and Equipment 4,585 5,056 4,877
Other Real Estate 154 594 250
Other Assets 8,097 6,461 6,091
--------- --------- ---------
TOTAL ASSETS $ 551,591 $ 526,704 $ 544,263
========= ========= =========
LIABILITIES
Deposits
Noninterest Bearing 59,870 56,371 60,745
Interest Bearing 406,375 388,778 394,955
--------- --------- ---------
Total Deposits 466,245 445,149 455,700
Securities Sold Under
Agreement To Repurchase 19,896 16,765 22,658
Borrowing Federal Home Loan Bank 0 0 0
Demand Notes U.S. Treasury 450 450 100
Other Liabilities 4,577 4,189 4,060
--------- --------- ---------
TOTAL LIABILITIES 491,168 466,553 482,518
SHAREHOLDERS EQUITY
Common Stock ($2.50 par value)
20,000,000 shares authorized:
5,783,453 shares issued and
outstanding at 6/30/99 14,459 14,538 14,538
Surplus 2,621 3,028 3,028
Retained Earnings 44,341 41,535 42,845
Net unrealized gains on securities
available for sale (998) 1,050 1,334
--------- --------- ---------
TOTAL SHAREHOLDERS EQUITY 60,423 60,151 61,745
--------- --------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $ 551,591 $ 526,704 $ 544,263
========= ========= =========
See accompanying notes to financial statements.
Page 2
ACNB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
6/30 6/30
------------------ --------------------
1999 1998 1999 1998
------ ------ ------- -------
(000 omitted) (000 omitted)
INTEREST INCOME
Loan Interest and Fees $6,682 $7,359 $13,505 $14,726
Interest and Dividends on
Investment Securities 2,489 1,951 4,990 3,867
Interest on Federal Funds Sold 32 58 72 89
Interest on Balances with
Depository Institutions 283 257 370 356
------ ------ ------- -------
TOTAL INTEREST INCOME 9,486 9,625 18,937 19,038
INTEREST EXPENSE
Deposits 3,829 3,910 7,647 7,727
Other Borrowed Funds 181 187 385 346
------ ------ ------- -------
TOTAL INTEREST EXPENSE 4,010 4,097 8,032 8,073
NET INTEREST INCOME 5,476 5,528 10,905 10,965
Provision for Loan Losses 90 90 180 180
------ ------ ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 5,386 5,438 10,725 10,785
OTHER INCOME
Trust Department 141 214 294 284
Service Charges on Deposit Accounts 246 192 479 377
Other Operating Income 509 265 753 526
Securities Gains 0 0 0 0
------ ------ ------- -------
TOTAL OTHER INCOME 896 671 1,526 1,187
OTHER EXPENSES
Salaries and Employee Benefits 1,985 1,766 3,833 3,582
Premises and Fixed Assets 521 485 1,044 977
Other Expenses 1,042 791 1,833 1,514
------ ------ ------- -------
TOTAL OTHER EXPENSE 3,548 3,042 6,710 6,073
INCOME BEFORE INCOME TAX 2,734 3,067 5,541 5,899
Applicable Income Tax 825 1,003 1,728 1,928
------ ------ ------- -------
NET INCOME $1,909 $2,064 $ 3,813 $ 3,971
====== ====== ======= =======
EARNINGS PER SHARE* $ 0.33 $ 0.35 $ 0.66 $ 0.68
DIVIDENDS PER SHARE* 0.20 0.18 0.40 0.36
* Based on 5,794,050 shares outstanding in 1999 and 5,815,246 in 1998
See accompanying notes to financial statements.
Page 3
ACNB CORPORATION AND SUBSIDIARY
STATEMENT OF CASH FLOWS
Six months ended
6/30
-------------------------
1999 1998
-------- --------
(000 omitted)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash Flows from Operating Activities:
Interest and Dividends Received $ 17,741 $ 19,276
Fees and Commissions Received 1,733 1,524
Interest Paid (8,300) (8,051)
Cash Paid to Suppliers and Employees (6,292) (6,324)
Income Taxes Paid (2,115) (1,941)
Net Cash Provided by Operating Activities 2,767 4,484
Cash Flows from Investing Activities:
Proceeds from Maturities of Investment Securities
and Interest Bearing Balances with Other Banks 11,030 9,760
Purchase of Investment Securities and Interest
Bearing Balances with Other Banks (3,900) (40,160)
Principal Collected on Loans 30,540 39,111
Loans Made to Customers (21,084) (39,427)
Capital Expenditures (55) (34)
Net Cash Used in Investing Activities 16,531 (30,750)
Cash Flow from Financing Activities:
Net Increase in Demand Deposits, NOW Accounts, and
Savings Accounts 9,033 9,386
Proceeds from Sale of Certificates of Deposit 21,051 23,052
Payments for Maturing Certificates of Deposit (23,561) (17,251)
Dividends Paid (2,320) (2,075)
Increase (Decrease) in Borrowings 350 0
Repurchase of Dissenting Shares (486) 0
Net Cash Provided by Financing Activities 4,067 13,112
Net Increase in Cash and Cash Equivalents 23,365 (13,154)
Cash and Cash Equivalents: Beginning of Period 23,521 36,629
End of Period $ 46,886 $ 23,475
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net Income $ 3,813 $ 3,971
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 347 334
Provision for Possible Credit Losses 180 180
Provision for Deferred Taxes (211) 0
Amortization of Investment Securities Premiums (90) (49)
Increase (Decrease) in Taxes Payable (176) (10)
(Increase) Decrease in Interest Receivable 337 209
Increase (Decrease) in Interest Payable (268) 10
Increase (Decrease) in Accrued Expenses 1,060 386
(Increase) Decrease in Other Assets (989) (1,133)
Increase (Decrease) in Other Liabilibes (1,236) 586
Net Cash Provided by Operating Activities $ 2,767 $ 4,484
DISCLOSURE OF ACCOUNTING POLICY
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods.
Page 4
ACNB CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
ACNB Corporation's financial position as of June 30, 1999 and 1998 and
December 31, 1998 and the results of its operations for the six months
ended June 30, 1999 and 1998 and changes in financial position for the six
months then ended. All such adjustments are of a normal recurring nature.
The accounting policies followed by the company are set forth in Note A to
the company's financial statements in the 1998 ACNB Corporation Annual
Report and Form 10-K filed with the Securities and Exchange Commission
under file no. 0-11783.
2. The book and approximate market values of securities owned at June 30, 1999
and December 31, 1998 were as follows:
6/30/99 12/31/98
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- --------
(000 omitted)
U.S. Treasury and U.S. Government
Agencies (held to maturity) 34,278 34,199 36,309 37,727
State and Municipal (held to maturity) 8,467 8,452 5,090 5,139
Corporate (held to maturity) 4,041 4,026 3,131 3,135
U.S. Government Agencies
(available for sale) 103,904 102,393 111,184 113,221
Other Investments (avail for sale) 3,456 3,456 3,012 3,012
-------- -------- -------- --------
TOTAL $154,146 $152,526 $158,726 $162,234
======== ======== ======== ========
Income earned on investment securities was as follows:
Six Months Ended June 30
------------------------
1999 1998
----- -----
(000 omitted)
U.S. Treasury 599 750
U.S. Government Agencies 3,892 2,899
State and Municipal 169 108
Other Investments 330 110
----- -----
4,990 3,867
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Page 5
3. Gross loans are summarized as follows:
June 30 December 31
--------------------------
1999 1998
------- -------
(000 omitted)
Real Estate 302,951 309,030
Real Estate Construction 13,971 14,661
Commercial and Industrial 12,021 13,043
Consumer 13,932 15,621
-------- -------
Total Loans $342,875 $352,355
======== ========
4. Earnings per share are based on the weighted average number of shares of
stock outstanding during each period. Weighted average shares outstanding
for the six month periods ended June 30, 1999 and 1998 were 5,794,050 and
5,815,246 respectively.
5. Dividends per share were $.40 and $.36 for the six month periods ended June
30, 1999 and 1998 respectively. This represented a 61% payout of net income
in 1999 and a 53% payout in 1998.
6. The results of operations for the six month periods ended June 30, 1999 and
1998 are not necessarily indicative of the results to be expected for the
full year.
7. All financial results have been restated to reflect the acquisition of
Farmers National Bancorp, Inc. by ACNB Corporation effective March 1, 1999.
Page 6
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
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 1998 Annual Report. Current performance does not guarantee, assure, or is
necessarily indicative of similar performance in the future.
In addition to historical information, this Form 10-Q may contain
forward-looking statements. From time to time, the corporation may publish
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new products,
research and development activities and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the
corporation notes that a variety of factors could cause the corporation's actual
results and experience to differ materially from the anticipated results or
other expectations expressed in the corporation's forward-looking statements.
The risks and uncertainties that may affect the operations, performance,
development and results of the corporation's business include the following:
general economic conditions, including their impact on capital expenditures;
business conditions in the banking industry; the regulatory environment; rapidly
changing technology and evolving banking industry standards; competitive
factors, including increased competition with community, regional and national
financial institutions; new service and product offerings by competitors and
price pressures; and similar items.
Three months ended June 30,1999 compared to three months ended June 30, 1998
Net Income for the three month period ending June 30, 1999 was $1,909,000, down
$155,000 from the second quarter of 1998. The decrease in net income was due
primarily to a decrease in total interest income and a $506,000 increase in
other expenses as discussed below. Net income per share, for the second quarter,
was $.33, comparable to the $.35 earned in the same period in 1998.
An explanation of the factors and trends that caused changes between the two
periods, by major earnings category, follows.
Total interest income for the second three month period of 1999 was $9,486,000,
down $139,000 or 1% below the $9,625,000 earned in the same period of 1998. The
$139,000 decrease in interest income was due to a pressure on interest rate
margin and lack of loan growth. The average yield on earning assets has
decreased 27 basis points over the same
Page 7
quarter in 1998. In an effort to manage interest rate risk, the bank continues
to invest in mortgage-backed securities classified as available-for-sale and now
holds a total volume of over $85 million. Income from securities and due from
banks during the current period decreased approximately $5 million as the bank
prepared for Y2K.
Total interest expense for the second three month period of 1999 was $4,010,000,
down $87,000 or 2% below the $4,097,000 incurred for the same period in 1998.
The $87,000 decrease in interest expense was due primarily to a lowering of
general interest rate markets of which the bank was able to take advantage.
Net interest income after provision for loan losses for the second three month
period of 1999 was $5,386,000, compared to the $5,438,000 earned in the same
period of 1998. Margins are tightening and the bank is feeling the effect.
Total non-interest income for the second three month period of 1999 at $896,000,
was $225,000 or 34% greater than the same quarter in 1998. This was primarily
due to the settlement of an insurance policy on a key employee who died
prematurely. The bank benefited accordingly.
Total non-interest expense for the second three month period of 1999 was
$3,548,000, up $506,000 or 17% more than the $3,042,000 incurred for the second
quarter of 1998. Most of the increase was due to the expense associated with the
key man employee insurance and the final settlement of a minor lawsuit against
the bank.
The provision for income taxes in the second quarter decreased $178,000 because
the proceeds of the key man insurance were nontaxable.
Six months ended June 30,1999 compared to six months ended June 30,1998
Net income for the first six months of 1999 was $3,813,000, down $158,000 or 4%
below the $3,971,000 earned for the same period of 1998. The decrease in net
income was due primarily to other expense as explained below. For the six month
period (annualized) of 1999, the return on average assets (ROA) and return on
average equity (ROE) were 1.40% and 12.40%, respectively, compared to 1.54% and
13.38%, respectively, for 1998.
At June 30, 1999, total assets were approximately $552 million, reflecting a $25
million or 5% increase above June 30, 1998. As explained more fully under
Capital Management section, book value per share was $10.95 on June 30,1999,
compared to $11.42 on June 30,1998. The corporation's capital remained sound as
evidenced by a Tier 1 Risked-Based Capital Ratio of 19.5% and a Total Risk-Based
Capital Ratio of 20.8% on June 30,1999.
Total interest income for the current six month period was $18,937,000 down
$101,000 or 1% from the $19,038,000 earned in the same period of 1998. The
$101,000 decrease in total interest income was due primarily to shrinking of
interest rate margins.
Total interest expense for the current six month period was $8,032,000, down
$41,000 or 1% below the $8,073,000 incurred for the same period in 1998. The
$41,000 decrease in total
Page 8
interest expense was due to a decrease in average interest bearing liabilities.
The year to date average volume of interest bearing liabilities increased
approximately $19 million or 5% above the same period of 1998.
Net interest income was $10,905,000 for the current period, down $60,000 below
the first six months in 1998. Margins are declining and effecting total interest
income. The bank has switched a large portion of its portfolio to mortgage
backed securities but this has been insufficient to make up the difference.
Total non-interest income for the current six month period was $1,526,000, up
$339,000 or 29% above the same period in 1998. Improvement was centered in
service charges on deposit accounts and the insurance policy mentioned earlier.
Total non-interest expense for the current six month period was $6,710,000, up
$637,000 or 10% above the $6,073,000 incurred for the same period in 1998. The
increase was located in the previously mentioned insurance policy and lawsuit.
The provision for income taxes was $1,728,000 for the current period, $200,000
below the same period in 1998 due to the tax free advantage gained from the
proceeds of the key man insurance.
INTEREST RATE SPREAD AND NET YIELD ON EARNING ASSETS
Six Months Ended
----------------------
6/30/99 6/30/98
------- -------
Rate Rate
---- ----
Earning Assets 7.23% 7.72%
Interest Bearing Liabilities 3.83% 4.03%
Interest Rate Spread 3.40% 3.69%
Net Yield on Earning Assets 4.17% 4.44%
Net Yield on Earning Assets is the difference, stated in percentages, between
the interest earned on loans and other investments and the interest paid on
deposits and other sources of funds. The Net Yield on Earning Assets is one of
the best analytical tools available to demonstrate the effect of interest rate
changes on the corporation's earning capacity.
The Net Yield on Earning Assets, for the first six months of 1999, was down 27
basis points compared to the same period in 1998. This is a result of lower
market yields on loans and securities, and a shift from loans to securities with
insufficient rate relief on the deposit side.
Page 9
PROVISION AND RESERVE FOR POSSIBLE LOAN LOSSES
Reserve for Possible Loan Losses
(In Thousands)
Six Months Ended
-----------------------
6/30/99 6/30/98
------- -------
Balance at Beginning of Period 3,594 3,350
Provision Charged to Expense 180 180
Loans Charged Off 159 144
Recoveries .26 51
Balance at End of Period 3,641 3,437
Ratios:
Net Charge-offs to:
Net Income 3.49% 2.34%
Total Loans .04% .03%
Reserve for Possible Loan Losses 3.65% 2.70%
Reserve for Possible Loan Losses to:
Total Loans 1.06% .96%
The Reserve for Possible Loan Losses at June 30, 1999 was $3,641,000 (1.06% of
Total Loans), an increase of $204,000 from $3,437,000 (.96% of Total Loans) at
the end of the first six months of 1998. Loans past due 90 days and still
accruing amounted to $1,648,000 and non-accrual loans totaled $1,109,000 as of
June 30, 1999. The ratio of non-performing assets plus other real estate owned
to total assets was .51% at June 30,1999. All properties are carried at the
lower of market or book value and are not considered to represent significant
threat of loss to the bank.
Loans past due 90 days and still accruing were $2,350,000 at year end 1998 while
non-accruals stood at $1,450,000. The bulk of the corporation's real estate
loans are in owner occupied dwellings. Management believes that internal loan
review procedures will be effective in recognizing and correcting any real
estate lending problems that may occur due to current economic conditions.
Interest not accrued, due to an average of $1,280,000 in non-accrual loans, was
approximately $51,000 for the first six months of 1999.
The bank considers a loan impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts
due. We measure impaired loans based on the present value of expected future
cash flows, discounted at the loan's effective interest rate, or as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. If the measure of the impaired
loan is less than its recorded investment a creditor must recognize an
impairment by creating, or adjusting, a valuation allowance with a corresponding
charge to loan loss expense. The corporation uses the cash basis method to
recognize interest income on loans that are impaired. All of the corporation's
impaired loans were on a non-accrual status for all reported periods.
Page 10
CAPITAL MANAGEMENT
Total Shareholders' Equity amounted to $60,423,000 at June 30,1999 compared to
$60,151,000 at June 30, 1998, an increase of $272,000. The ratio of Total
Shareholders' Equity to Total Assets was 11.42% at June 30, 1998, 11.34% at
December 31, 1998, and 10.95% at June 30, 1999. The total risk-based capital
ratio was 20.78% at June 30, 1999. The leverage ratio was 10.77% at June 30,
1999, and 11.50% during the same period in 1998. Capital at the corporation
remains strong even with a 61% dividend payout ratio.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Management believes that the corporation's liquidity is adequate. Liquid assets
(cash and due from banks, federal funds sold, money market instruments,
available for sale securities and held to maturity investment securities
maturing within one year) were 28% of total assets at June 30, 1999. This mix of
assets would be readily available for funding any cash requirements. In
addition, the bank has an approved line of credit of $229,511,000 at the Federal
Home Loan Bank of Pittsburgh with $.00 outstanding at June 30, 1999.
As of June 30, 1999, the cumulative asset sensitive gap was 10.5% of total
assets at one month, 8.4% at six months, and 12.6% at one year. Adjustable rate
mortgages, which have an annual interest rate cap of 2%, are considered rate
sensitive. Passbook savings and NOW accounts are carried in the one to five year
category while half of money market deposit accounts are spread over the four to
twelve month category and the other half are shown to mature in the one to three
year category.
There are no known trends or 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. Aside from those matters described above,
management does not currently believe that there are any known trends or
uncertainties which would have a material impact on future operating results,
liquidity or capital resources nor is it aware of any current recommendations by
the regulatory authorities which if they were to be implemented would have such
an effect, although the general cost of compliance with numerous and multiple
federal and state laws and regulation does have and in the future may have a
negative impact on the corporation's results of operations.
COMPANY IS IN THE PROCESS OF BECOMING YEAR 2000 COMPLIANT - EXPENSES NOT
MATERIAL
YEAR 2000 ISSUE
The following section contains forward-looking statements which involve risks
and uncertainties. The actual impact on the corporation of the Year 2000 issue
could materially differ from that which is anticipated in the forward-looking
statements as a result of certain factors identified below.
Corporation's State of Readiness
The Year 2000 Problem is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Such computer systems
may be unable to interpret dates beyond the year 1999, which could cause a
system failure or other computer errors, leading to disruptions in operations.
If not corrected, many computer applications could fail or create erroneous
results by or at the Year 2000. This could cause entire system failures,
Page 11
miscalculations, and disruptions of normal business operations including, among
other things, a temporary inability to process transactions, send statements, or
engage in similar day-to-day business activities. The extent of the potential
impact of the Year 2000 Problem is not yet known, and if not timely corrected,
it could affect the global economy.
The corporation has developed a five-phase program for Y2K information and
non-information systems compliance which includes the following:
1. Awareness Phase
o Establish Year 2000 Task Force
o Define Year 2000 Problem
o Develop Year 2000 Plan and Strategy
This phase was completed as of December 31, 1997.
2. Assessment Phase
o Identify and inventory information systems, technology items,
computer programs, business partners, environmental systems, and
data communication links
o Prioritize mission critical systems
o Obtain vendor status for software, hardware, and outsourced
service providers
o Assess impact of Year 2000
This phase was completed as of December 31, 1998.
3. Renovation Phase
o Implement hardware and software upgrades
o Replace systems and technology items
o Monitor vendor and service provider progress
This phase was substantially completed as of December 31, 1998.
4. Validation Phase
o Develop testing plan and strategy
o Establish test environment(s)
o Test internal information systems, technology items, computer
programs, environmental systems, and data communication links
o Test with and/or monitor testing of vendors and service providers
o Obtain vendor certifications
This phase began in May 1998 and has been completed.
5. Implementation Phase
o Implement Y2K compliant systems and technology items
This phase began in December 1997 and will continue through October 29,
1999.
This phase is 85% complete.
Based on an ongoing assessment, the corporation has determined that it will be
required to modify or replace portions of its hardware and software so that its
computer systems will properly use dates beyond December 31, 1999. The
corporation presently believes, that as a result of modifications to existing
software and hardware and conversions to new software, the Year 2000 Problem can
be mitigated. However, if such modifications and conversions are not made, or
are not completed on a timely basis, the Year 2000 Problem could have a material
adverse impact on the operations of the corporation.
Page 12
The major part of the corporation's software is designed and maintained by
companies well known throughout the banking industry. This process was 100%
complete at June 30, 1999. The cost of renovation will be primarily borne by the
third-party providers. Even though the corporation does not have direct control
over the software renovation process, it is monitoring the progress of its
third-party vendors to assess the status of their Y2K readiness efforts.
However, because most computer systems are, by their very nature,
interdependent, it is possible that noncompliant third-party computers could
impact the corporation's computer systems. The corporation could be adversely
affected by the Year 2000 Problem if it or unrelated parties fail to
successfully and timely address the problem. The corporation has taken steps to
communicate with the unrelated parties with whom it deals to coordinate Year
2000 compliance. Additionally, the corporation is dependent on external
suppliers, such as wire transfer systems, telephone systems, electric companies,
and other utility companies, for continuation of service. The corporation is
also assessing the impact, if any, the century date change may have on its
credit risk and fiduciary risk.
Costs of Year 2000
The total cost to implement the five-phase program ranges from approximately
$400,000 to $450,000. Internal costs should approximate $235,000, while outside
consultants for legal work, contingency planning, and verification of testing
will approximate $190,000. Actual costs during the first two quarters of 1999
were $173,000 with $63,000 being internal costs with very little cash outlay and
will be absorbed by current operations. $110,000 has been spent on legal
consulting and miscellaneous Y2K related items in the first half of 1999.
$53,000 was spent on consultant and legal work in 1998. Fiscal year 1999
expenses have been budgeted at $109,000 for internal costs and $140,000 for
consultant and legal work. There has been a shift in personnel resulting from
the untimely death of a key employee which will require that the corporation
outsource additional work at higher costs in 1999.
With actual costs of $184,000 in 1998 and estimated costs of $250,000 for 1999,
the financial impact to the corporation of Year 2000 compliance has not been and
is not anticipated to be material to the corporation's financial position or
results of operations in any given year. However, if compliance is not achieved
in a timely manner by the corporation or any of its significant related third
parties, be it a supplier of services or customer, the Y2K issue could possibly
have a material effect on the corporation's operations and financial position.
The cost of the Y2K project and the dates when the corporation plans to complete
both Year 2000 modifications and systems conversions are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third-party
modification plans, and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, the
failure of a related third party to achieve Y2K compliance, and similar
uncertainties.
Page 13
Risks of Year 2000
At present, management believes its progress in remedying the corporation's
systems, programs and applications and installing Y2K compliant upgrades is on
target. The Y2K computer problem creates risk for the corporation from
unforeseen problems in its own computer systems and from third-party vendors who
provide the majority of mainframe and PC-based computer applications. Failure of
third-party systems relative to the Y2K issue could have a material impact on
the corporation's ability to conduct business.
Contingency Plans
In compliance with Y2K regulatory guidance, the corporation has completed
remediation contingency planning for mission critical systems and will finalize
its business resumption contingency planning by June 30, 1999. Remediation
contingency planning for mission critical systems encompassed the identification
of alternative means of achieving Y2K readiness in the event the mission
critical system service provider or software vendor cannot complete critical
efforts by predetermined trigger dates. The corporation's development of the
business resumption contingency plan includes organizational planning
guidelines, a business impact analysis, a written disaster recovery/contingency
plan, and validation of the plan. Both forms of contingency planning are the
corporation's efforts to minimize any potential disruptions to business
operations due to a Y2K-related issue.
Other Year 2000 Endeavors
The corporation has also undertaken other endeavors to address the challenges of
the Year 2000 Problem. These include:
1. Stakeholder Communications
o Customer awareness program
o Bank employee communications and training
o Corporation shareholder communications
2. Commercial Customer Credit Risk Control Process
o Due diligence process for current and future material customers
o Assessment of customer Year 2000 readiness
3. Fiduciary Client Risk Control Process
o Due diligence process for fiduciary account and asset
administration servicers including investment providers, third
parties, counterparties and transfer agents
o Assessment of servicer Year 2000 readiness
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Management monitors and evaluates changes in market conditions on a regular
basis. Based upon the most recent review management has determined that there
have been no material changes in market risks since year end. For further
discussion of year end information, refer to the annual report.
Page 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - Nothing to report.
Item 2. Changes in Securities and Use of Proceeds - Nothing to report.
Item 3. Defaults Upon Senior Securities - Nothing to report.
Item 4. Submission of Matters to a Vote of Security Holders
(a) An annual meeting of shareholders was held at 1:00 p.m. on May 4, 1999 at
the main office of Adams County National Bank, 675 Old Harrisburg Road,
Gettysburg, PA 17325.
(b) (c) Four matters were voted upon, as follows:
Proposal to fix the number of Directors of ACNB at sixteen (16):
Votes Cast Votes Cast Votes
"FOR" "AGAINST" "ABSTAINED"
---------- ---------- -----------
4,094,526 54,047 49,254
Proposal to fix the number of Class 3 Directors at four (4):
Votes Cast Votes Cast Votes
"FOR" "AGAINST" "ABSTAINED"
---------- ---------- -----------
4,098,252 48,520 51,055
Election of four (4) Class 3 Directors to serve for a three-year term:
Votes Cast Votes
Reelected Term Expires "FOR" "WITHHELD"
- --------- ------------ ---------- ----------
Guy F. Donaldson 2002 4,112,077 85,750
William B. Lower 2002 4,117,023 80,804
Thomas A. Ritter 2002 4,111,191 86,636
Ralph S. Sandoe 2002 4,116,905 80,922
Proposal to fix the number of Class 2 Directors at seven (7):
Votes Cast Votes Cast Votes
"FOR" "AGAINST" "ABSTAINED"
---------- ---------- -----------
4,094,869 61,302 41,656
Election of three (3) additional Class 2 Directors to serve until the 2000
Annual Meeting:
Votes Cast Votes
Director Term Expires "FOR" "WITHHELD"
- -------- ------------ ---------- ----------
Philip M. Jones 2000 4,091,771 106,056
L. Robert Snyder 2000 4,122,025 75,802
Harry L. Wheeler 2000 4,125,239 72,588
Page 15
Proposal to fix the number of Class 1 Directors at five (5):
Votes Cast Votes Cast Votes
"FOR" "AGAINST" "ABSTAINED"
---------- ---------- -----------
4,086,215 75,047 36,565
Election of one (1) additional Class 1 Director to serve until the 2001 Annual
Meeting:
Votes Cast Votes
Director Term Expires "FOR" "WITHHELD"
- -------- ------------ ---------- ----------
Edgar S. Heberlig 2001 4,057,926 139,901
Directors whose term continued after meeting:
(Class 2 Directors) (Class 1 Directors)
- ------------------- -------------------
Richard L. Galusha (2000) Philip P. Asper (2001)
Wayne E. Lau (2000) D. Richard Guise (2001)
Paul G. Pitzer (2000) Ronald L. Hankey (2001)
Jennifer L. Weaver (2000) Marian B. Schultz (2001)
Item 5. Other Information - Nothing to report.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are included in this Report:
Exhibit 3(i) Articles of Incorporation of Registrant (Incorporated by
Reference to Exhibit 3(i) in Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994).
Exhibit 3(ii) Bylaws of Registrant (Incorporated by Reference to
Exhibit 3(ii) in Registrant's Report of Form 8-K, filed with
the Commission on March 25, 1998).
Exhibit 10.1 Executive Employment Agreement Dated as of January 1, 1998
between Adams County National Bank, ACNB Corporation and Ronald
L. Hankey (Incorporated By Reference to Exhibit 99 of the
Registrant's Current Report on Form 8-K, Filed with the
Commission on March 25, 1998).
Exhibit 11 Statement Regarding Computation of Earnings Per Share.
Exhibit 27 Financial Data Schedule.
(b) Report on Form 8-K.
The Registrant filed no Current Report on Form 8-K during the quarter ended June
30, 1999.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACNB CORPORATION
----------------------------------------
Ronald L. Hankey, President
August 3, 1999
----------------------------------------
John W. Krichten, Secretary/Treasurer
Page 16
EXHIBIT INDEX
Exhibit Number
- --------------
Exhibit 3(i) Articles of Incorporation of Registrant (Incorporated by
Reference to Exhibit 3(i) of Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994).
Exhibit 3(ii) Bylaws of Registrant (Incorporated by Reference to
Exhibit 3(ii) of Registrant's Report on Form 8-K, filed with
the Commission on March 25, 1998).
Exhibit 10.1 Executive Employment Agreement Dated as of January 1, 1998
between Adams County National Bank, ACNB Corporation and Ronald
L. Hankey (Incorporated By Reference to Exhibit 99 of the
Registrant's Current Report on Form 8-K, Filed with the
Commission on March 25, 1998).
Exhibit 11 Statement Regarding Computation of Earnings Per Share.
Exhibit 27 Financial Data Schedule.
Page 17
EXHIBIT 11
Statement Regarding the Computation of Earnings Per Share
For the six month period
ending June 30,
---------------------------
1999 1998
--------- ---------
Weighted average shares outstanding: 5,794,050 5,815,246
Common Stock
Common Stock Equivalents
Stock Options 0 0
Stock Awards 0 0
ESOP Shares 0 0
Total Common Stock Equivalents 0 0
Total weighted average shares outstanding 5,794,050 5,815,246
Net Income 3,813,000 3,971,000
Net Income Per Share .66(cent) .68(cent)
Fully Diluted Income Per Share .66(cent) .68(cent)
Page 18