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 September 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 ___________________
Commission file number 0-1178
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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
- --------------------------------------- -------------------
(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 October 27, 1999 - 5,764,078
PART I
ITEM 1 FINANCIAL INFORMATION
ACNB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
30-Sep 30-Sep 31-Dec
1999 1998 1998
ASSETS (000 omitted)
Cash and Due from Banks $ 36,417 $ 18,550 $ 20,803
Investment Securities
Securities Held to Maturity 57,123 42,917 47,505
Securities Available for Sale 102,947 107,990 113,258
--------- --------- ---------
Total Investment Securities 160,070 150,907 160,763
Federal Funds Sold 2,874 4,343 2,718
Loans 341,831 357,216 352,355
Less: Reserve for Loan Losses (3,551) (3,510) (3,594)
--------- --------- ---------
Net Loans 338,280 353,706 348,761
Premises and Equipment 4,648 4,961 4,877
Other Real Estate 213 463 250
Other Assets 8,774 6,535 6,091
--------- --------- ---------
TOTAL ASSETS $ 551,276 $ 539,465 $ 544,263
========= ========= =========
LIABILITIES
Deposits
Noninterest Bearing 58,367 56,428 60,745
Interest Bearing 397,978 389,865 394,955
--------- --------- ---------
Total Deposits 456,345 446,293 455,700
Securities Sold Under
Agreement To Repurchase 28,766 25,812 22,658
Borrowing Federal Home Loan Bank 0 0 0
Demand Notes U.S. Treasury 450 286 100
Other Liabilities 5,000 5,107 4,060
--------- --------- ---------
TOTAL LIABILITIES 490,561 477,498 482,518
SHAREHOLDERS EQUITY
Common Stock ($2.50 par value)
20,000,000 shares authorized:
5,774,145 shares issued and
outstanding at 9/30/99 14,435 14,538 14,538
Surplus 2,487 3,028 3,028
Retained Earnings 45,120 42,408 42,845
Net unrealized gains on securities available
for sale (1,327) 1,993 1,334
--------- --------- ---------
TOTAL SHAREHOLDERS EQUITY 60,715 61,967 61,745
TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY $ 551,276 $ 539,465 $ 544,263
========= ========= =========
See accompanying notes to financial statements.
PAGE 2
ACNB CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Nine Months
Ended Ended
9/30 9/30
1999 1998 1999 1998
(000 omitted) (000 omitted)
INTEREST INCOME
Loan Interest and Fees $6,785 $7,336 $20,290 $22,062
Interest and Dividends on
Investment Securities 2,414 2,243 7,404 6,110
Interest on Federal Funds Sold 42 67 114 156
Interest on Balances with
Depository Institutions 356 120 726 476
------ ------ ------- -------
TOTAL INTEREST INCOME 9,597 9,766 28,534 28,804
INTEREST EXPENSE
Deposits 3,718 3,929 11,365 11,656
Other Borrowed Funds 252 227 637 573
------ ------ ------- -------
TOTAL INTEREST EXPENSE 3,970 4,156 12,002 12,229
NET INTEREST INCOME 5,627 5,610 16,532 16,575
Provision for Loan Losses 50 90 230 270
NET INTEREST INCOME AFTER PROVISION ------ ------ ------- -------
FOR LOAN LOSSES 5,577 5,520 16,302 16,305
OTHER INCOME
Trust Department 131 129 425 413
Service Charges on Deposit Accounts 238 221 717 598
Other Operating Income 339 246 1,092 772
Securities Gains 0 0 0 0
------ ------ ------- -------
TOTAL OTHER INCOME 708 596 2,234 1,783
OTHER EXPENSES
Salaries and Employee Benefits 1,818 1,812 5,651 5,394
Premises and Fixed Assets 498 522 1,542 1,499
Other Expenses 870 801 2,703 2,315
------ ------ ------- -------
TOTAL OTHER EXPENSE 3,186 3,135 9,896 9,208
INCOME BEFORE INCOME TAX 3,099 2,981 8,640 8,880
Applicable Income Tax 1,154 980 2,882 2,908
------ ------ ------- -------
NET INCOME $1,945 $2,001 $5,758 $5,972
====== ====== ====== ======
EARNINGS PER SHARE* $0.34 $0.34 $0.99 $1.03
DIVIDENDS PER SHARE* 0.20 0.19 0.60 0.58
*Based on 5,790,058 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
Nine months ended
9/30
1999 1998
(000 omitted)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Cash Flows from Operating Activities:
Interest and Dividends Received $ 28,638 $ 28,421
Fees and Commissions Received 2,521 2,166
Interest Paid (11,824) (12,229)
Cash Paid to Suppliers and Employees (11,614) (9,208)
Income Taxes Paid (3,079) (2,908)
Net Cash Provided by Operating Activities 4,642 6,242
Cash Flows from Investing Activities:
Proceeds from Maturities of Investment Securities
and Interest Bearing Balances with Other Banks 13,266 15,996
Purchase of Investment Securities and Interest
Bearing Balances with Other Banks (13,900) (59,848)
Principal Collected on Loans 44,027 67,626
Loans Made to Customers (33,739) (60,734)
Capital Expenditures (256) (126)
Net Cash Used in Investing Activities 9,398 (37,086)
Cash Flow from Financing Activities:
Net Increase in Demand Deposits, NOW Accounts, and
Savings Accounts 10,128 15,265
Proceeds from Sale of Certificates of Deposit 29,698 37,365
Payments for Maturing Certificates of Deposit (34,333) (28,688)
Dividends Paid (3,470) (3,166)
Increase (Decrease) in Borrowings 350 0
Retirement of Common Stock (643) 0
Net Cash Provided by Financing Activities 1,730 20,776
Net Increase in Cash and Cash Equivalents 15,770 (10,068)
Cash and Cash Equivalents: Beginning of Period 23,521 32,961
End of Period $ 39,291 $ 22,893
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net Income $ 5,758 $ 5,972
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 485 500
Provision for Possible Credit Losses 230 270
Provision for Deferred Taxes (137) 0
Amortization of Investment Securities Premiums (90) (92)
Increase (Decrease) in Taxes Payable (60) (59)
(Increase) Decrease in Interest Receivable 129 (460)
Increase (Decrease) in Interest Payable 178 698
Increase (Decrease) in Accrued Expenses 709 70
(Increase) Decrease in Other Assets (2,912) (1,592)
Increase (Decrease) in Other Liabilities 352 935
Net Cash Provided by Operating Activities $ 4,642 $ 6,242
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 September 30, 1999 and 1998 and
December 31, 1998 and the results of its operations for the nine months
ended September 30, 1999 and 1998 and changes in financial position for the
nine months then ended. All such adjustments are of a normal recurring
nature.
The accounting policies followed by the Corporation are set forth in
Note A to the Corporation'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 September 30,
1999 and December 31, 1998 were as follows:
9/30/99 12/31/98
Amortized Fair Amortized Fair
Cost Value Cost Value
(000 omitted)
U.S. Treasury and U.S. Government
Agencies (held to maturity) $ 43,163 $ 43,135 $ 36,309 $ 37,727
State and Municipal (held to maturity) 8,272 8,232 5,090 5,139
Corporate (held to maturity) 5,688 5,666 3,131 3,135
U.S. Government Agencies (available for sale) 101,502 99,491 111,184 113,221
Other Investments (available for sale) 3,456 3,456 3,012 3,012
-------- -------- -------- --------
TOTAL $162,081 $159,980 $158,726 $162,234
Income earned on investment securities was as follows:
Nine Months Ended September 30
1999 1998
(000 omitted)
U.S. Treasury $ 912 $1,100
U.S. Government Agencies 5,885 4,678
State and Municipal 267 161
Other Investments 340 171
------ ------
$7,404 $6,110
Page 5
3. Gross loans are summarized as follows:
September 30, 1999 December 31, 1998
(000 omitted)
Real Estate $303,173 $309,030
Real Estate Construction 12,746 14,661
Commercial and Industrial 12,206 13,043
Consumer 13,706 15,621
-------- -------
Total Loans $341,831 $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 nine month periods ended September 30, 1998 and 1998 were 5,790,058
and 5,815,246 respectively.
5. Dividends per share were $.60 and $.58 for the nine month periods ended
September 30, 1999 and 1998 respectively. This represented a 61% payout
of net income in 1999 and a 56% payout in 1998.
6. The results of operations for the nine month periods ended September 30,
1999 and 1998 are not necessarily indicative of the results to be expected
for the full year.
Page 6
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
Management's discussion and analysis of the significant changes in the results
of operations, capital resources and liquidity presented in the accompanying
consolidated financial statements for ACNB Corporation, a bank holding company
(the Corporation), and its wholly-owned subsidiaries, Adams County National Bank
and Farmers National Bank of Newville (the Bank) follows. 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 Corporation's 1998 Annual
Report. Current performance does not guarantee, assure, nor is it 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 September 30,1999 compared to three months ended September
30, 1998
Net Income for the three-month period ending September 30, 1999 was $1,945,000,
down $56,000 from the third quarter of 1998. The decrease in net income was due
primarily to a decrease in total interest income and a $51,000 increase in other
expenses as discussed below. Net income per share, for the third quarter, was
$.34, comparable to the $.34 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 third three-month period of 1999 was $9,597,000,
down $169,000 or 2% below the $9,766,000 earned in the same period of 1998. The
$169,000 decrease in interest income was due to pressure on interest rate margin
and lack of loan growth. The average yield on earning assets has decreased 24
basis points over the same quarter in 1998. In an effort to manage interest rate
risk, the Corporation continues to invest in mortgage-backed securities
classified as available-for-sale and now holds a total volume of over $82
million. The shift from loans to securities has caused a shift in income of
$382,000 between the two categories.
Page 7
Total interest expense for the third three-month period of 1999 was $3,970,000,
down $186,000 or 4% below the $4,156,000 incurred for the same period in 1998.
The $186,000 decrease in interest expense was due primarily to a lowering of
savings rates to bring the Corporation closer to current market conditions.
Net interest income after provision for loan losses for the third three-month
period of 1999 was $5,577,000, compared to the $5,520,000 earned in the same
period of 1998. This is due mainly to a smaller provision for loan losses.
Margins are tightening and the Corporation is feeling the effect.
Total non-interest income for the third three-month period of 1999 at $708,000,
was $112,000 or 19% greater than the same quarter in 1998. This was primarily
due to improved service charges on deposits, decreasing holding company
expenses, and other miscellaneous income.
Total non-interest expense for the third three-month period of 1999 was
$3,186,000, up $51,000 or 2% more than the $3,135,000 incurred for the third
quarter of 1998. The increase was due to small changes in miscellaneous
expenses.
The provision for income taxes in the third quarter increased $174,000 because
of higher pretax income and loss of tax benefit from acquisition costs.
Nine months ended September 30, 1999 compared to nine months ended September 30,
1998
Net income for the first nine months of 1999 was $5,758,000, down $214,000 or 4%
below the $5,972,000 earned for the same period of 1998. The decrease in net
income was due primarily to other expense as explained below. For the nine-month
period (annualized) of 1999, the return on average assets (ROA) and return on
average equity (ROE) were 1.40% and 12.50%, respectively, compared to 1.53% and
13.25%, respectively, for 1998.
At September 30, 1999, total assets were approximately $551 million, reflecting
a $12 million or 2% increase above September 30, 1998. As explained more fully
under Capital Management section, book value per share was $10.51 on September
30, 1999, compared to $10.66 on September 30, 1998. The Corporation's capital
remained sound as evidenced by a Total Shareholder's Equity Capital Ratio of
11.5% and a Total Risk-Based Capital Ratio of 20.6% on September 30, 1999.
Total interest income for the current nine-month period was $28,534,000, down
$270,000 or 1% from the $28,804,000 earned in the same period of 1998. The
$270,000 decrease in total interest income was due primarily to a decline in the
loan portfolio.
Total interest expense for the current nine-month period was $12,002,000, down
$227,000 or 2% below the $12,229,000 incurred for the same period in 1998. The
$227,000 decrease in total interest expense was due to a decrease in savings
rates. Savings rates were lowered to bring the Corporation in line with
prevailing savings rates.
Net interest income was $16,532,000 for the current period, down $43,000 below
the first nine months of 1998. Margins are declining and effecting net interest
income. The Corporation has switched a large portion of its portfolio to
mortgage-backed securities, but this has been insufficient to make up the
difference.
Page 8
Total non-interest income for the current nine-month period was $2,234,000, up
$451,000 or 25% above the same period in 1998. The increase was due, mainly, to
an increase in service charges on deposit accounts and an insurance policy
collected on the death of a member of senior management.
Total non-interest expense for the current nine-month period was $9,896,000, up
$688,000 or 7% above the $9,208,000 incurred for the same period in 1998. The
increase came from the previously mentioned insurance policy and the settlement
of a lawsuit against the Trust Department.
The provision for income taxes was $2,882,000 for the current period, $26,000
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
Nine Months Ended
9/30/99 9/30/98
Rate Rate
Earning Assets 7.24% 7.71%
Interest Bearing Liabilities 3.79% 4.03%
Interest Rate Spread 3.45% 3.68%
Net Yield on Earning Assets 4.19% 4.43%
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 nine months of 1999, was down 24
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.
PROVISION AND RESERVE FOR POSSIBLE LOAN LOSSES
Reserve for Possible Loan Losses
(In Thousands Except Ratios)
Nine Months Ended
9/30/99 9/30/98
Balance at Beginning of Period $3,594 $3,350
Provision Charged to Expense 230 270
Loans Charged Off 313 187
Recoveries 40 77
Balance at End of Period $3,551 $3,510
Page 9
Ratios:
Net Charge-offs to:
Net Income 4.74% 1.84%
Total Loans .08% .03%
Reserve for Possible Loan Losses 7.69% 3.13%
Reserve for Possible Loan Losses to:
Total Loans 1.04% .98%
The Reserve for Possible Loan Losses at September 30, 1999 was $3,551,000 (1.04%
of Total Loans), an increase of $41,000 from $3,510,000 (.98% of Total Loans) at
the end of the first nine months of 1998. Loans past due 90 days and still
accruing amounted to $1,786,000 and non-accrual loans totaled $1,739,000 as of
September 30, 1999. The ratio of non-performing assets plus other real estate
owned to total assets was .67% at September 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 $1,395,000 in non-accrual loans, was
approximately $84,000 for the first nine 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. Impaired loans are measured 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 non-accrual status for all reported periods.
CAPITAL MANAGEMENT
Total Shareholders' Equity amounted to $60,715,000 at September 30, 1999
compared to $61,967,000 at September 30, 1998, a decrease of $1,252,000. The
ratio of Total Shareholders' Equity to Total Assets was 11.49% at September 30,
1998, 11.34% at December 31, 1998, and 11.01% at September 30, 1999. The total
risk-based capital ratio was 20.63% at September 30, 1999. The leverage ratio
was 10.89% at September 30, 1999, and 10.61% 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
Page 10
maturity investment securities maturing within one year) were 27% of total
assets at September 30, 1999. This mix of assets is readily available for
funding any cash requirements. In addition, the Bank has an approved line of
credit of $224,589,000 at the Federal Home Loan Bank of Pittsburgh with $.00
outstanding at September 30, 1999.
As of September 30, 1999, the cumulative asset sensitive gap was 8.4% of total
assets at one month, 3.9% at six months, and 8.3% 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 ("Y2K") issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Such computer systems
will be unable to interpret dates beyond the year 1999, which could cause a
system failure or other computer errors, leading to disruptions in operations.
If not corrected, many computer applications could fail or create erroneous
results by or at the year 2000. This could cause entire system failures,
miscalculations, and disruptions of normal business operations including, among
other things, a temporary inability to process transactions, send statements, or
engage in similar day to day business activities. The extent of the potential
impact of the Year 2000 Problem is not yet known, and if not timely corrected,
it could affect the global economy.
Page 11
The corporation has developed a five-phase program for Y2K information systems
compliance which include 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 has been completed as of December 31, 1997.
2. Assessment Phase
o Identify and inventory all information systems, technology
items, computer programs, business partners, environmental
systems, and data communication links
o Prioritize Mission Critical Systems
Obtain vendor certifications for all software, hardware, and
outsourced service providers
o Assess impact of Year 2000
This phase was completed 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 completed as of September 30, 1999.
4. Validation Phase
o Develop testing plan and strategy
o Establish test environment(s)
o Test all internal information systems, technology items,
computer programs, environmental systems, and data
communication links
o Test with and/or monitor testing of vendors and service
providers
This phase began in May 1998 and has been completed.
5. Implementation Phase
o Implement Y2K compliant systems and technology items
This phase began December 31, 1997 and will continue through
October 29, 1999
This phase is 95% complete.
Based on an ongoing assessment, the corporation has determined that it will be
required to modify or replace portions of its software so that its computer
systems will properly use dates beyond December 31, 1999. The corporation
presently believes, that as a result of modifications to existing software and
hardware and conversions to new software, the Year 2000 Problem can be
mitigated. However, if such modifications and conversions are not made, or are
not completed on a timely basis, the Year 2000 Problem could have a material
adverse impact on the operations of the corporation.
The major part of the corporation's software is designed and maintained by
companies well known throughout the banking industry. This process was 100%
complete at June 30, 1999. The cost of
Page 12
renovation will be primarily borne by the third-party providers. Even though the
corporation does not have direct control over the 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 three quarters of 1999
were $197,000 with $65,000 being internal costs with very little cash outlay and
will be absorbed by current operations. $132,000 has been spent on legal
consulting and miscellaneous Y2K related items in the first nine months 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.
Risks of Year 2000
At present, management believes it's 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
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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 its business
resumption contingency planning was approved by the Board of Directors in July
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.
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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 - Nothing to report.
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 September 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
/s/ Ronald L. Hankey
-------------------------------------
Ronald L. Hankey, President
October 29, 1999
(Date)
/s/ John W. Krichten
-------------------------------------
John W. Krichten, Secretary/Treasurer
Page 15
EXHIBIT INDEX
Exhibit Number
Exhibit 3(i) Articles of Incorporation of Registrant (Incorporated by
Reference to Exhibit 3 in Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994, filed with the Commission
on March 25, 1995).
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 in
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.
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EXHIBIT 11
Statement Regarding the Computation of Earnings Per Share
For the nine month period
ending September 30
1999 1998
------------------------------
Weighted average shares outstanding: 5,790,058 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 5,790,058 5,815,246
Net Income $5,758,000 $5,972,000
Net Income Per Share $ .99 $ 1.03
Fully Diluted Income Per Share $ .99 $ 1.03
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