EXHIBIT 13
EXCERPTS FROM ANNUAL REPORT TO SHAREHOLDERS
FIVE YEAR FINANCIAL OVERVIEW
TOTAL DEPOSITS
In millions of dollars
2000 ________________ 453.1
1999 ________________ 452.6
1998 ________________ 455.7
1997 ________________ 431.1
1996 ________________ 438.5
BASIC EARNINGS PER SHARE
In dollars
2000 ________________ 1.44
1999 ________________ 1.35
1998 ________________ 1.33
1997 ________________ 1.34
1996 ________________ 1.29
TOTAL LOANS
In millions of dollars
2000 ________________ 360.9
1999 ________________ 347.8
1998 ________________ 352.4
1997 ________________ 358.3
1996 ________________ 340.5
DIVIDENDS PER SHARE
In dollars
2000 ________________ .87
1999 ________________ .85
1998 ________________ .78
1997 ________________ .73
1996 ________________ 1.56
RETURN ON AVERAGE ASSETS
Percent
2000 ________________ 1.46
1999 ________________ 1.42
1998 ________________ 1.46
1997 ________________ 1.53
1996 ________________ 1.50
BOOK VALUE PER SHARE
In dollars
2000 ________________ 11.11
1999 ________________ 10.41
1998 ________________ 10.51
1997 ________________ 9.26
1996 ________________ 9.38
ACNB Corporation & Subsidiary
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 financial holding company. Please read this
discussion in conjunction with the 2000 Annual Report to ACNB Corporation
stockholders. Current performance does not guarantee, assure or indicate
similar performance in the future.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this 2000 Annual Report contains
forward-looking statements. Forward-looking statements are subject to
certain risks and uncertainties. Actual results may 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". We caution readers not to
place undue reliance on these forward-looking statements. They only
reflect management's analysis as of this date. The corporation does not
revise or update these forward-looking statements to reflect events or
changed circumstances. Please 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 2001, and any Current Reports on
Form 8-K filed by the corporation.
COMPARATIVE AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
- -----------------------------------------------------------------------------------
DECEMBER 31
--------------------------------
2000
--------------------------------
ASSETS In thousands BALANCE INTEREST RATE
- -----------------------------------------------------------------------------------
Loans _____________________________________________ $352,666 $28,307 8.03%
Taxable investment securities 166,067 10,897 6.56%
Non-taxable investment securities _________________ 3,729 169 4.53%
Federal funds sold ________________________________ 1,916 122 6.37%
Interest bearing deposits with banks ______________ 4,884 342 7.00%
-------- -------
Total interest earning assets _____________________ 529,262 $39,837 7.53%
Cash and due from banks ___________________________ 17,024
Premises and equipment ____________________________ 4,521
Other assets ______________________________________ 7,492
Allowance for loan losses _________________________ (3,600)
--------
TOTAL ASSETS ______________________________________ $554,699
========
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------
Interest bearing demand deposits __________________ $ 68,596 $ 1,915 2.79%
Savings deposits __________________________________ 115,919 2,606 2.25%
Time deposits (excluding time certificates
of deposit of $100,000 or more) _________________ 188,120 9,606 5.11%
Time certificates of deposit of $100,000 or more __ 16,482 943 5.72%
Short-term borrowings _____________________________ 34,377 1,859 5.41%
-------- -------
Total interest bearing liabilities ________________ 423,494 $16,929 4.00%
- -----------------------------------------------------------------------------------
INTEREST RATE SPREAD ______________________________ 3.53%
- -----------------------------------------------------------------------------------
Demand deposits ___________________________________ 62,890
Other liabilities _________________________________ 8,334
Stockholders' equity ______________________________ 59,981
--------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ______________________________ $554,699
========
- -----------------------------------------------------------------------------------
INTEREST INCOME/EARNING ASSETS ____________________ $529,262 $39,837 7.53%
INTEREST EXPENSE/EARNING ASSETS ___________________ $529,262 $16,929 3.20%
NET YIELD ON EARNING ASSETS _______________________ $22,908 4.33%
- -----------------------------------------------------------------------------------
Loan fees of $335,000, $451,000 and $495,000 for 2000, 1999 and 1998,
respectively, are included for rate calculation purposes.
Average nonaccrual loans for 2000, 1999 and 1998 were $938,000, $1,532,000 and
$1,641,000, respectively.
ACNB Corporation & Subsidiary
16
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
EARNINGS PERFORMANCE
Net income for the year ended December 31, 2000, was $8.1 million, and
for the year ended 1999 was $7.8 million. Basic earnings per share were
$1.44 in 2000 and $1.35 in 1999.
We attribute the net income increase of $272,000 in 2000 to an increase
of $680,000, or 3.1%, in the corporation's net interest income and the
corporation's control of non-interest expense, which fell $58,000, most of
which was in net occupancy and equipment expense and other expense. These
items were partially offset by a decrease of $91,000 in non-interest
income.
The corporation recorded net income of $7.8 million for the year ended
December 31, 1999, compared to net income of $7.7 million in 1998. Basic
earnings per share was $1.35 in 1999, compared to $1.33 per share in 1998.
The $98,000 increase in net income in 1999 was due to a $152,000, or
0.7%, rise in net interest income and a reduction in the provision for
possible loan losses of $107,000 or 29.7%. These items were accompanied by
an increase of $477,000 in total non-interest income. We provide details
of the operating results, on a comparative basis, for each of the periods
ended December 31, 2000, 1999 and 1998 in the balance of this discussion
and analysis.
NET INTEREST INCOME
Net interest income is the difference between the interest and
dividends earned on loans and investment securities (interest earning
assets) and the interest paid on deposits and borrowings (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 $22.9 million in 2000. This is an increase
over net interest income of $22.2 million in 1999 and $22.1 million in
1998. The year 2000 increase was the result of growth in average loans,
which were up by $8.3 million, or 2.4%. In 1999, average loans declined
$11.8 million, or 3.3%, but the small increase in net interest income was
due to rising rates.
This growth is a reflection of interest rates in the over all economy.
As interest rates rise, residential mortgage borrowers shift to
adjustable-rate mortgages. While our mortgage portfolio has continued to
decline from an average balance in excess of $176 million in December 1998
to $166 million in December 1999 to $164 million in December 2000, the
decline slowed in fiscal year 2000 as compared to 1999. The slowing of the
decline in residential mortgages and the rise in commercial lending has
helped increase the loan portfolio overall. The growth in the portfolio
led to an increase in net yield on earning assets of 9 basis points in
2000, compared to a 13 basis point decline in 1999. Interest from loans
accounted for 71% of the corporation's interest income in 2000, as compared
to 71% in 1999 and 76% in 1998. Interest and dividends on investments were
$11.1 million in 2000, as compared to $10.0 million in 1999 and $8.6
million in 1998. The average yield on the taxable investment portfolio
increased to 6.56% for 2000, from 6.43% for the prior year. The yield
increase resulted largely from a general increase in interest rates during
1999, which carried over into early 2000.
- -------------------------------------------------------------------------------
December 31 December 31
- ----------------------------------- ---------------------------------------
1999 1998
- ----------------------------------- ---------------------------------------
Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------
$344,323 $27,137 7.88% $356,154 $29,176 8.19%
149,453 9,609 6.43% 130,553 8,417 6.45%
8,485 350 4.12% 4,719 218 4.62%
3,005 148 4.93% 3,765 201 5.34%
18,990 950 5.00% 9,519 520 5.46%
-------- ------- ------- -------
524,256 $38,194 7.29% 504,710 $38,532 7.63%
18,366 14,868
4,779 5,430
6,653 5,952
(3,594) (3,450)
-------- --------
$550,460 $527,510
======== ========
- -------------------------------------------------------------------------------
$ 67,191 $ 1,621 2.41% $ 60,985 $ 1,542 2.53%
117,991 2,833 2.40% 114,348 3,007 2.63%
195,315 9,446 4.84% 192,237 9,936 5.17%
21,469 1,093 5.09% 20,891 1,113 5.33%
22,711 973 4.28% 19,380 858 4.43%
-------- ------- -------- -------
424,677 $15,966 3.76% 407,931 $16,456 4.03%
- -------------------------------------------------------------------------------
3.53% 3.60%
- -------------------------------------------------------------------------------
60,363 55,076
4,678 3,935
60,742 60,568
------- --------
$550,460 $527,510
======== ========
- -------------------------------------------------------------------------------
$524,256 $38,194 7.29% $504,710 $38,532 7.63%
$524,256 $15,966 3.05% $504,710 $16,456 3.26%
$22,228 4.24% $22,076 4.37%
- -------------------------------------------------------------------------------
ACNB Corporation & Subsidiary
17
The Comparative Average Balance Sheet and Net Interest Analysis, a
table found on pages 16 and 17, 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. The average interest earning assets balance includes nonaccrual
loans. Interest income includes interest from nonaccrual loans only to the
extent that payments were received and to the extent that the corporation
believes it will recover the remaining principal balance of the loan.
Average balances are principally 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, is 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 shows the
net interest income and the interest rate spread.
Changes in the corporation's net interest income are a function of both
changes in rates and changes in volumes of interest earning assets and
interest bearing liabilities. The Analysis of Changes in Interest Income
and Expense Due to Volume and Rate Changes, a table found on page 18, shows
changes in interest income and expense for ACNB Corporation for the years
indicated. For each category of interest earning assets and interest
bearing liabilities, we provide data 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.
We compute the interest earning asset and interest bearing liability
balances principally using daily average balances.
NON-INTEREST INCOME
Growth in non-interest income is one of the corporation's long-term
strategies. Non-interest income for 2000 decreased by $91,000, or 3.2%,
compared to 1999, and increased by $477,000, or 19.8%, when 1999 is
compared to 1998. The primary cause of the fall-off in non-interest income
in fiscal year 2000 was the nonrecurrence of the proceeds of the life
insurance, as noted below. $73,000 of that shortfall was made up by an
increase in trust income, but that was offset by increases in trust
expense. The increase in trust income is the result of a new financial
advisor, as noted below.
In 1998, ACNB Corporation adjusted service fees on deposit accounts to
reflect the marketplace more closely. This adjustment occurred in the
second half of 1998, causing an increase to both 1998 and 1999 results.
The largest part of the increase in 1999 was the proceeds of a life
insurance policy paid on the death of a key employee. The proceeds were
$287,000, and amounted to 60% of the total increase in this category.
Trust service income rose by $20,000, or 3.8%, in 1999. The trust
department engaged a financial advisor and registered principal who works
through Raymond James Financial Services, Inc. He was engaged in the
fourth quarter of 1999, and contributed to trust earnings in the fiscal
year 2000.
Year-to-date service fees on deposit accounts increased over the last
two years due to improved average transaction account growth and the
reassessment of service fees. This first took effect in September 1998,
and was the main reason for the 9.5% increase in service fees on deposit
accounts in 1999. Another reassessment in August 2000 contributed to the
2.6% increase experienced in 2000. Average interest bearing liabilities
were up 4.1% in 1999 and down 0.3% in 2000. Average non-interest bearing
demand deposits were up 9.6% in 1999 and 2.1% in 2000.
NON-INTEREST EXPENSE
Non-interest expense was $13.2 million in 2000, a decrease of 0.4%
compared to 1999. In 1999, non-interest expense was $13.3 million,
reflecting an increase of 4.9% compared to 1998. The primary cause of the
decrease in non-interest expense was a decrease in other expenses.
Personnel expense increased by $36,000, or 0.5%, in 2000, compared to
1999, and by $70,000, or 0.9%, in 1999, compared to 1998. The increase in
2000 was due to normal merit raises. Management studied the impact of the
eventual retirement of certain loan officers. In anticipation of these
retirements, the corporation decided not to add additional loan officers,
but to evaluate the effect of the loss of these personnel and determine if
the corporation could offset the loss through internal promotion.
In addition to salary and employee benefit increases, there was a
significant decrease in other expenses. Costs were down by $204,000, or
6.5%, in 2000, compared to 1999, and up by $499,000, or 18.9%, in 1999,
compared to 1998. The decrease in 2000 is attributable to nonrecurring
1999 costs such as pension insurance premiums of $31,000 caused by a change
in plan year, litigation costs of $156,000, Farmers National Bancorp, Inc.
acquisition costs, other holding company costs of $125,000, and Year 2000
professional costs of $79,000 that were not repeated in 2000.
Analysis of Changes in Interest Income and Expense Due to Volume and Rate Changes
- --------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------------------
2000 VERSUS 1999 1999 versus 1998 1998 versus 1997
CHANGES DUE TO Changes Due To Changes Due To
----------------------------------------------------------------------------------------------
In thousands VOLUME RATE NET Volume Rate Net Volume Rate Net
----------------------------------------------------------------------------------------------
Interest earned on:
Loans ____________________ $ 654 $ 516 $ 1,170 $ (953) $(1,086) $(2,039) $ 216 $ (163) $ 53
Taxable investment
securities _____________ 1,088 200 1,288 1,219 (27) 1,192 967 (499) 468
Non-taxable investment
securities _____________ (213) 32 (181) 158 (26) 132 18 6 24
Federal funds sold _______ (62) 36 (26) (37) (16) (53) 39 -- 39
Time deposits with banks _ (896) 288 (608) 478 (48) 430 71 (10) 61
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest
Earning Assets _________ $ 571 $ 1,072 $ 1,643 $ 865 $(1,203) $ (338) $ 1,311 (666) 645
- ---------------------------------------------------------------------------------------------------------------------------
Interest paid on:
Interest bearing
demand deposits ________ $ 34 $ 260 $ 294 $ 154 $ (75) $ 79 $ 136 $ 5 $ 141
Savings deposits _________ (50) (177) (227) 94 (268) (174) (45) (145) (190)
Time deposits ____________ (631) 641 10 181 (691) (510) 280 31 311
Short-term borrowings ____ 587 299 886 145 (30) 115 114 7 121
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Bearing
Liabilities ____________ $ (60) $ 1,023 $ 963 $ 574 $(1,064) $ (490) $ 485 $(102) $ 383
- ---------------------------------------------------------------------------------------------------------------------------
NET INTEREST EARNINGS ____ $ 631 $ 49 $ 680 $ 291 $ (139) $ 152 $ 826 $(564) $ 262
- ---------------------------------------------------------------------------------------------------------------------------
ACNB Corporation & Subsidiary
18
FDIC insurance cost almost doubled in 2000. The cost for deposit
insurance was $90,000 in 2000 and $49,000 in 1999. This cost rose in 2000,
as there were several notorious and expensive bank failures in 1999.
OVERVIEW OF THE BALANCE SHEET
During 2000, ACNB Corporation's total assets increased by $21.4
million, or 3.9%. In 1999, total assets grew by $1.7 million, or 0.3%.
Deposits were up $0.5 million in 2000. Loans were up $13.5 million with
commercial loans replacing the runoff in residential mortgages. The
corporation continues to compete with traditional rivals, including several
local and nonlocal commercial banks, as well as nontraditional rivals, such
as mortgage brokers and brokerage houses for deposits and for loans.
The mix of assets and liabilities continues to change. Investment
securities increased $19.0 million, or 12.4%, while loans increased $13.5
million, or 3.9%, in 2000 after decreasing by $4.5 million, or 1.3%, in
1999. Premises and equipment increased by $164,000 in 2000, and decreased
by $353,000 in 1999. The increase in 2000 was caused by extensive
alterations to a branch office and capitalized Internet and Web site costs.
The decrease in 1999 was due to normal depreciation with very little
addition to then current premises and equipment.
On the liability side, non-interest bearing deposits were up by $5.0
million, or 8.1%, in 2000, and up by $1.0 million, or 1.6%, in 1999. Core
interest-bearing deposits decreased in 2000 by a total of $4.5 million.
Fiscal year 1999 showed a decrease of $4.0 million. Borrowings increased
by $19.1 million in 2000, compared to $6.7 million in 1999. This reflects
the continuing difficulties the corporation is experiencing in attracting
core deposits.
Capital continued to be strong and increased by $0.6 million, or 1.0%,
in 2000. Capital decreased by $1.3 million, or 2.1%, in 1999 due to a loss
in fair market value in securities available for sale and the beginning
effects of a stock repurchase program.
ASSET/LIABILITY AND MARKET RISK MANAGEMENT
- ------------------------------------------------------------------------------
INTEREST RATE RISK
Managing interest rate risk is fundamental to banking. Banking
institutions manage the inherently different maturity and repricing
characteristics of the lending and deposit-taking lines of business to
achieve a desired interest rate sensitivity position and to limit their
exposure to interest rate risk. ACNB Corporation manages its balance sheet
to achieve maximum stockholder value within the constraints of 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 manage net interest income growth, while
reducing exposure to the risks inherent in interest rate movements.
MARKET RISK
The Quantitative Disclosures of Market Risk, a table found on pages 20
and 21, provides information about the corporation's financial instruments
used for purposes other than trading that are sensitive to changes in
interest rates. For loans, securities and liabilities with contractual
maturities, this table presents principal cash flows and related
weighted-average interest rates by contractual maturities, as well as the
corporation's historical experience relative to the impact of interest rate
fluctuations on the prepayment of residential and home equity loans and
mortgage-backed securities. For core deposits -- such as demand deposit,
interest checking, savings and money market deposit accounts -- that have
no contractual maturity, the table presents principal cash flows and, as
applicable, related weighted-average interest rates based upon the
corporation's historical experience, management's judgment, and statistical
analysis, as applicable, concerning their most likely withdrawal behaviors.
Different assumptions would result in a change in cash flows and a change
in results.
Also, ACNB Corporation uses a simulation model as another 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 on the net interest margin.
Traditionally, the investment portfolio is used to alter the interest
rate sensitivity of the corporation. This is accomplished by holding
fixed-rate debt instruments in the securities portfolio. During 2000 and
1999, ACNB Corporation lengthened the maturity of prime rate loans,
continued to add fixed-rate mortgages with a maturity of 15 years or less
to the loan portfolio, and continued to purchase 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.
This is the most stable source of liquidity for a bank because of the
long-term relationship with depositors and the deposit insurance provided
by the FDIC. In 2000, 80% of total assets were funded by core deposits and
9% were funded with short-term purchased funds, compared to 83% and 5%,
respectively, in 1999. ACNB Corporation belongs to the Federal Home Loan
Bank of Pittsburgh. This membership serves the dual purposes of emergency
and long-term liquidity. The corporation's borrowing capacity with the
Federal Home Loan Bank stood at $256 million at year-end 2000.
Parent company liquidity is maintained by the cash flow from dividends
received from the subsidiary bank. Dividends from the subsidiary bank are
the corporation's primary source of funds to pay dividends to the
corporation's shareholders. The amount of dividends paid by the subsidiary
bank is subject to certain regulatory restrictions, detailed in Note L of
the Notes to Consolidated Financial Statements, "Restrictions on Subsidiary
Dividends, Loans and Advances". The parent company financial statements
are presented in Note Q of the Notes to Consolidated Financial Statements,
"ACNB Corporation (Parent Company Only) Financial Information".
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. The corporation's off-balance sheet items consist
solely of loan commitments and letters of credit.
ACNB Corporation & Subsidiary
19
LOAN REVIEW AND ALLOWANCE
FOR LOAN LOSS ANALYSIS
- ------------------------------------------------------------------------------
GENERAL
ACNB Corporation's lending activities are carried on through the
subsidiary bank. As of December 31, 2000, the corporation's total loan
portfolio, carried at historical cost, of $361 million included:
o $222.7 million in mortgage loans secured by liens on one-to-four
family residential properties;
o $83.1 million in mortgage loans secured by commercial properties,
such as apartment buildings, office buildings, warehouses, and
medical office buildings;
o $15.8 million in construction loans;
o $12.5 million in consumer loans; and,
o $26.9 million in commercial and agricultural credits.
In originating loans, the corporation must compete with savings banks,
savings and loan associations, other commercial banks, mortgage companies,
and credit unions. 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 have a direct impact on
residential lending volumes.
RESIDENTIAL REAL ESTATE LOANS
The corporation makes a full range of residential loans, including
conventional fixed-rate loans and adjustable-rate mortgage loans, available
to borrowers in its primary consumer market area. Adjustable-rate
mortgages, or ARMs, are advantageous to the corporation because
adjustable-rate loans are a closer match to the repricing of the
corporation's core deposits. However, the corporation's ability to
originate ARMs, in lieu of fixed-rate loans, varies in response to changes
in market interest rates. ARMs are often refinanced to fixed-rate loans
when market interest rates fall, which leads to runoff in the corporation's
loan portfolio. Even with higher rates in 1999 and 2000, ACNB Corporation
continued to exhibit runoff in its residential adjustable-rate mortgage
portfolio. Currently, ARMs 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 and Federal Home Loan Mortgage Corporation
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 loan applications come in through various
channels, primarily via a network of 16 community banking offices.
However, all residential loans are currently originated by the subsidiary
bank, and mortgage insurance is required on all residential 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 for others.
RESIDENTIAL CONSTRUCTION LOANS
The corporation provides financing for two different categories of
residential construction loans. A custom construction loan is made to the
intended occupant of a house to finance its construction. Speculative
construction loans are made to borrowers who are in the business of
building homes for resale. Speculative construction loans are made on a
house-by-house basis, and not as lines of credit to builders. This type of
construction loan involves somewhat more risk than custom construction
loans, and the corporation uses 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.
QUANTITATIVE DISCLOSURES OF MARKET RISK
- -------------------------------------------------------------------------------
Principal Amount Maturing In FAIR VALUE
------------------------------------------------------------------------ DECEMBER 31,
RATE SENSITIVE ASSETS
In thousands 2001 2002 2003 2004 2005 Thereafter TOTAL 2000
- --------------------------------------------------------------------------------------------------------------------------
Fixed interest rate loans ______ $ 10,514 $ 10,962 $ 10,313 $ 8,171 $ 6,001 $ 36,176 $ 82,137 $ 84,064
Average interest rate __________ 8.60% 8.20% 7.95% 8.01% 7.80% 7.88% 8.03%
Variable interest rate loans ___ $ 57,575 $ 39,894 $ 43,483 $23,595 $ 18,388 $ 95,782 $278,717 $278,917
Average interest rate __________ 7.72% 7.40% 7.37% 7.23% 7.71% 7.12% 7.37%
Fixed interest rate securities _ $ 20,518 $ 14,044 $ 7,929 $ 3,100 $ 10,450 $114,203 $170,519 $172,152
Average interest rate __________ 6.12% 6.11% 5.93% 6.37% 6.98% 6.72% 6.58%
Variable interest rate
securities ___________________ $ 66 $ 75 $ 84 $ 93 $ 105 $ 249 $ 672 $ 672
Average interest rate __________ 5.95% 5.95% 5.95% 5.95% 5.95% 5.95% 5.95%
Other interest bearing assets __ $ 5,119 $ -- $ -- $ -- $ -- $ -- $ 5,119 $ 5,119
Average interest rate __________ 6.50% 0.00% 0.00% 0.00% 0.00% 0.00% 6.50%
RATE SENSITIVE LIABILITIES
- --------------------------------------------------------------------------------------------------------------------------
Non-interest bearing checking __ $ 16,685 $ 15,016 $ 15,016 $ 6,674 $ 6,674 $ 6,674 $ 66,739 $ 66,739
Average interest rate __________ 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Savings and interest
bearing checking _____________ $ 9,015 $ 54,090 $ 54,090 $16,227 $16,227 $ 30,651 $180,300 $180,300
Average interest rate __________ 2.53% 2.34% 2.34% 2.34% 2.34% 2.34% 2.35%
Time deposits __________________ $161,099 $ 28,336 $ 11,355 $ 5,292 $ 28 $ -- $206,110 $206,811
Average interest rate __________ 5.42% 5.66% 5.43% 5.99% 4.70% 0.00% 5.48%
Variable interest
rate borrowings ______________ $ 32,853 $ 4,831 $ 4,831 $ 3,221 $ 3,221 $ -- $ 48,957 $ 48,957
Average interest rate __________ 6.06% 5.41% 5.41% 5.41% 5.41% 0.00% 5.85%
ACNB Corporation & Subsidiary
20
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 upon 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 upon 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 practice 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:
o manufactured housing loans;
o second mortgage loans for a variety of purposes, including purchase,
renovation or remodeling of property, and for uses unrelated to the
underlying collateral;
o loans for the purchase of automobiles, pleasure boats, and
recreational vehicles;
o student loans; and,
o 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 the 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 upon 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
We are required to review asset quality on a regular basis, and to
classify loans if certain weaknesses are noted. Adequate allowances must
be maintained for assets classified as substandard or doubtful. Any assets
classified as a loss must be written off immediately. The 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 to
evaluate the need for an adjustment to the allowance account. Classified
assets consist of:
o nonaccrual loans;
o loans under foreclosure;
o other real estate owned, or OREO; and,
o performing loans and securities that exhibit credit quality
weaknesses.
ACNB Corporation & Subsidiary
21
The principal measures of asset problems are:
o the levels of nonaccruing loans;
o loans under foreclosure;
o other real estate owned;
o the size of the provision for loan losses;
o loan charge-offs; and,
o 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 include
loans on which payment is 90 days or more delinquent, whether or not
interest is still being accrued. The Nonperforming Assets Analysis, a
table found on page 22, presents figures relative to nonperforming assets
and net charge-offs for 2000 and 1999.
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 OREO is less
than the loan balance, the loan is written down at that time by a charge to
the allowance for loan losses. OREO currently consists of four properties
valued at $981,000 as of December 31, 2000, up from $171,000 at December
31, 1999. Three of the properties are residential real estate, of which
two are under contract to sell, and the fourth is a subdivision
development, valued at approximately $772,000 under option to sell. All
are carried on the corporation's books at the lower of the loan value or
market value.
PROVISION FOR LOAN LOSSES
AND ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is based upon management's continuing
analysis of certain factors underlying the quality of the loan portfolio.
These factors include:
o changes in the size and composition of the portfolio;
o historical loan loss trends; o the industry's loss experience; and,
o current and anticipated economic conditions.
To determine 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 the corporation confirms that specific loans or
portions of loans are uncollectible, these amounts are charged against the
allowance for loan losses. The existence of some or all of the following
criteria generally confirms that a loss has been incurred:
o the loan is significantly delinquent and the borrower has not
evidenced the ability or intent to bring the loan current;
o the corporation has no recourse to the borrower or, if it does, the
borrower has insufficient assets to pay the debt; or,
o 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,
their relatively small balances, and historically low level of losses.
The Allocation of the Allowance for Loan Losses is presented in Note E
of the Notes to Consolidated Financial Statements, "Allowance for Loan
Losses". This table shows a breakdown of the allowance as it applies to
different types of loans in the portfolio.
CAPITAL MANAGEMENT
- ------------------------------------------------------------------------------
During 2000, ACNB Corporation's capital increased by $0.6 million, or
1.0%. During 1999, the capital base decreased by $1.3 million, or 2.1%.
At year-end 2000, the risk-based capital ratios of Tier 1 capital and Total
capital were 19.03% and 20.19%, which exceed the minimum ratios required by
the Federal Reserve Board. Capital ratios are reported in a table, Capital
Ratios at Year-End, on page 23.
Capital management is an ongoing process, which consists of providing
equity and long-term debt for current and future financial positioning.
ACNB Corporation manages its capital, as set forth in its strategic
business plan, to support its growth and investments.
ACNB Corporation and its bank 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, 2000, the corporation and bank were in compliance with the
capital requirements of these regulatory agencies. Management expects them
to remain in compliance with these capital requirements in the future.
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, 2000, the capital ratios
of the corporation exceeded these levels. Management expects the
corporation's ratios to remain in excess of the minimum ratios required of
a well-capitalized institution.
NONPERFORMING ASSETS ANALYSIS
- -----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
---------------------------------------------------
2000 1999
------------------------ -------------------------
NONPERFORMING NET Nonperforming Net
ASSETS CHARGE-OFFS Assets Charge-offs
In thousands ------------------------ -------------------------
Real estate loans
(1-to-4 family dwellings) ___ $1,783 $ 35 $2,506 $ 43
Real estate loans (other) _____ 956 5 988 50
Commercial and industrial _____ 49 6 -- 53
Consumer ______________________ 58 42 41 158
------ ----- ------ ------
TOTAL _________________________ $2,846 $ 88 $3,535 $ 304
====== ===== ====== ======
ACNB Corporation & Subsidiary
22
The corporation's quarterly common stock cash dividend remained at $.20
per share during 2000, with a special dividend of an additional $.07 per
share during the fourth quarter, for a total of $.87 per share. Annual
dividends per share during 1999 were $.85, which also included a $.05
special dividend declared in the fourth quarter of the year.
The corporation's total stockholders' equity at December 31, 2000, was
$60.4 million, or 10.65% of total assets, compared with $59.9 million, or
10.96% of total assets, at December 31, 1999. The increase in capital is
the result of lower interest rates that changed unrealized losses on
securities of $2.2 million at December 31, 1999, to unrealized gains of
$0.6 million at December 31, 2000.
REGULATORY ACTIVITY
- ------------------------------------------------------------------------------
Recently, Pennsylvania enacted a law that permits state-chartered
banking institutions to sell insurance. This follows the U.S. Supreme
Court decision in favor of nationwide insurance sales by banks, which also
bars states from blocking insurance sales by national banks in towns with
populations of no more than 5,000. The Office of the Comptroller of the
Currency has issued guidelines for national banks to sell insurance. The
corporation is evaluating its options regarding the sale of insurance.
Congress repealed the Glass-Steagall Act, which prohibits commercial
banks from engaging in the securities industry. Consequently, equity
underwriting activities of banks may increase in the near future. The
corporation does not currently anticipate entering into these activities.
FINANCIAL SERVICES
MODERNIZATION LEGISLATION
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999, also called the Financial Services
Modernization Act. The Financial Services Modernization Act repeals the
two affiliation provisions of the Glass-Steagall Act:
o Section 20, which restricted the affiliation of Federal Reserve Member
Banks with firms "engaged principally" in specified securities
activities; and,
o Section 32, which restricted officer, director or employee interlocks
between a member bank and any company or person "primarily engaged" in
specified securities activities.
In addition, the Financial Services Modernization Act contains
provisions that expressly preempt any state insurance law. The general
effect of the law is to establish a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms,
and other financial service providers by revising and expanding the Bank
Holding Company Act framework to permit a holding company system to engage
in a full range of financial activities through a new entity known as a
Financial Holding Company. "Financial activities" is broadly defined to
include not only banking, insurance and securities activities, but also
merchant banking and additional activities that the Federal Reserve, in
consultation with the Secretary of the Treasury, determines to be financial
in nature, incidental to such financial activities, or complementary
activities that do not pose a substantial risk to the safety and soundness
of depository institutions or the financial system generally.
In brief, the Financial Services Modernization Act:
o repeals historical restrictions on, and eliminates many federal and
state law barriers to, affiliations among banks, securities firms,
insurance companies, and other financial service providers;
o provides a uniform framework for the functional regulation of the
activities of banks, savings institutions, and their holding
companies;
o broadens the activities that may be conducted by national banks,
banking subsidiaries of bank holding companies, and their financial
subsidiaries;
o provides an enhanced framework for protecting the privacy of consumer
information;
o adopts a number of provisions related to the capitalization,
membership, corporate governance, and the other measures designed to
modernize the Federal Home Loan Bank system;
o modifies the laws governing the implementation of the Community
Reinvestment Act (CRA); and,
o addresses a variety of other legal and regulatory issues affecting
both day-to-day operations and long-term activities of financial
institutions.
In order for the corporation to take advantage of the ability to
affiliate with other financial service providers, the corporation must
become a Financial Holding Company, as permitted under an amendment to the
Bank Holding Company Act. To become a Financial Holding Company, the
corporation would file a declaration with the Federal Reserve, electing to
engage in activities permissible for Financial Holding Companies and
certifying that it is eligible to do so because its insured depository
institution subsidiary is well-capitalized and well-managed. In addition,
the Federal Reserve must determine that the insured depository institution
subsidiary of the corporation has at least a "satisfactory" CRA rating.
The corporation met these requirements to make an election to become a
Financial Holding Company and, subsequently, formed a Financial Holding
Company. The corporation is currently examining its strategic business
plan to determine whether, based on market conditions, the relative
financial conditions of the corporation and its subsidiary, regulatory
capital requirements, general economic conditions, and other factors, there
is a desire to utilize any of its expanded powers provided in the Financial
Services Modernization Act.
CAPITAL RATIOS AT YEAR-END
- ---------------------------------------------------------------------
2000 1999
---- ----
Common stockholders' equity to assets ___ 10.65% 10.96%
Tier 1 leverage ratio ___________________ 10.90% 10.88%
Tier 1 risk-based capital ratio _________ 19.03% 19.54%
Total risk-based capital ratio __________ 20.19% 20.68%
ACNB Corporation & Subsidiary
23
The Financial Services Modernization Act also permits national banks to
engage in expanded activities through the formation of financial
subsidiaries. A national bank may have a subsidiary engaged in any
activity authorized for national banks directly or any financial activity,
except for insurance underwriting, insurance investments, real estate
investment or development, or merchant banking, which may only be conducted
through a subsidiary of a Financial Holding Company. Financial activities
include all activities permitted under new sections of the Bank Holding
Company Act or permitted by regulation.
A national bank seeking to have a financial subsidiary, and each of its
depository institution affiliates, must be "well-capitalized" and
"well-managed". The total assets of all financial subsidiaries may not
exceed the lesser of 45% of a bank's total assets or $50 billion. A
national bank must exclude from its assets and equity all equity
investments, including retained earnings, in a financial subsidiary. The
assets of the subsidiary may not be consolidated with the bank's assets.
The bank must also have policies and procedures to assess financial
subsidiary risk and to protect the bank from such risks and potential
liabilities.
The corporation and the subsidiary bank do not believe that the
Financial Services Modernization Act will have a material adverse effect on
our operations in the near term. However, to the extent that it permits
banks, securities firms, and insurance companies to affiliate, the
financial services industry may experience further consolidation. The
Financial Services Modernization Act is intended to grant to community
banks certain powers as a matter of right that larger institutions have
accumulated on an ad hoc basis. Nevertheless, this act may have the result
of increasing the amount of competition that the corporation and the
subsidiary bank face from larger institutions and other types of companies
offering financial products, many of which may have substantially more
financial resources than the corporation.
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. Management
cannot predict whether such legislation will be enacted or, if enacted, how
the 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 impact 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 corporation's
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.
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 also expects increased diversification of financial products and
services offered by the corporation and its competitors. Management
believes that such consolidations and mergers, as well as the expanded
diversification of products and services, may enhance its competitive
position as a community banking organization.
ACNB Corporation & Subsidiary
24
INDEPENDENT AUDITORS' REPORT
To The Stockholders and Board of Directors [LOGO] Stambaugh.Ness
ACNB Corporation ---------------------
Gettysburg, Pennsylvania CERTIFIED PUBLIC ACCOUNTANTS
We have audited the accompanying consolidated statements of condition
of ACNB Corporation and subsidiary as of December 31, 2000 and 1999, and
the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 2000. These financial statements are the responsibility of
the corporation's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ACNB
Corporation and subsidiary as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000, in conformity with generally
accepted accounting principles.
/S/ STAMBAUGH NESS, PC
York, Pennsylvania
January 11, 2001
ACNB Corporation & Subsidiary
25
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31
---------------------
ASSETS In thousands 2000 1999
- ---------------------------------------------------------------
Cash and due from banks ______________ $ 18,597 $ 29,840
Interest bearing deposits with banks__ 1,605 3,839
Investment securities
(fair value $172,824 and
$152,234, respectively) ____________ 172,066 153,105
Federal funds sold ___________________ 3,514 1,711
Mortgage loans held for sale _________ 136 433
Loans ________________________________ 360,854 347,354
Allowance for possible loan losses ___ (3,695) (3,543)
-------- --------
Net loans ____________________________ 357,159 343,811
Premises and equipment _______________ 4,688 4,524
Other real estate ____________________ 981 171
Other assets _________________________ 8,584 8,518
-------- --------
TOTAL ASSETS _________________________ $567,330 $545,952
======== ========
LIABILITIES
- ---------------------------------------------------------------
Non-interest bearing deposits ________ $ 66,739 $ 61,711
Interest bearing deposits ____________ 386,410 390,922
-------- --------
TOTAL DEPOSITS _______________________ 453,149 452,633
Securities sold under
agreement to repurchase ____________ 32,207 29,377
Borrowings, Federal Home Loan Bank ___ 16,300 --
Demand notes, U.S. Treasury __________ 450 450
Other liabilities ____________________ 4,787 3,629
-------- --------
TOTAL LIABILITIES ____________________ 506,893 486,089
STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------
Common stock (par value $2.50;
20,000,000 shares authorized;
5,440,826 and 5,748,732 issued
and outstanding shares
on 12/31/00 and 12/31/99,
respectively) ______________________ 13,602 14,372
Additional paid-in capital ___________ -- 1,963
Retained earnings ____________________ 46,258 45,761
Accumulated other
comprehensive income _______________ 577 (2,233)
-------- --------
TOTAL STOCKHOLDERS' EQUITY ___________ 60,437 59,863
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY _______________ $567,330 $545,952
======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
ACNB Corporation & Subsidiary
26
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
---------------------------------
INTEREST INCOME
In thousands, except per share data 2000 1999 1998
- ------------------------------------------------------------------------
Loans (including fees) ______________ $28,307 $27,137 $29,176
Time deposits with banks ____________ 342 950 520
Federal funds sold __________________ 122 148 201
Taxable securities __________________ 10,897 9,609 8,417
Non-taxable securities ______________ 169 350 218
------- -------- -------
TOTAL INTEREST INCOME _______________ 39,837 38,194 38,532
INTEREST EXPENSE
- ------------------------------------------------------------------------
Interest bearing deposits ___________ 15,070 14,993 15,598
Other borrowed funds ________________ 1,859 973 858
------- ------- -------
TOTAL INTEREST EXPENSE ______________ 16,929 15,966 16,456
NET INTEREST INCOME _________________ 22,908 22,228 22,076
Provision for possible loan losses __ 240 253 360
------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN LOSSES __ 22,668 21,975 21,716
NON-INTEREST INCOME
- ------------------------------------------------------------------------
Trust income ________________________ 623 550 530
Service fees on deposit accounts ____ 989 964 880
Other income ________________________ 1,185 1,374 1,001
------- ------- -------
TOTAL NON-INTEREST INCOME ___________ 2,797 2,888 2,411
NON-INTEREST EXPENSE
- ------------------------------------------------------------------------
Salaries and employee benefits ______ 7,591 7,555 7,485
Net occupancy expense _______________ 831 871 809
Equipment expense ___________________ 1,078 1,174 1,185
Other taxes _________________________ 782 536 536
Other expense _______________________ 2,930 3,134 2,635
------- ------- -------
TOTAL NON-INTEREST EXPENSE __________ 13,212 13,270 12,650
INCOME BEFORE INCOME TAXES __________ 12,253 11,593 11,477
Applicable income taxes _____________ 4,158 3,770 3,752
------- ------- -------
NET INCOME __________________________ $ 8,095 $ 7,823 $ 7,725
======= ======= =======
PER COMMON SHARE DATA*
- ------------------------------------------------------------------------
Basic earnings ______________________ $ 1.44 $ 1.35 $ 1.33
Cash dividends ______________________ $ .87 $ .85 $ .78
*Based on a weighted average of 5,623,137 shares in 2000,
5,782,930 shares in 1999, and 5,815,246 in 1998.
The accompanying notes are an integral part
of the consolidated financial statements.
ACNB Corporation & Subsidiary
27
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income Total
- -------------------------------------------------------------------------------------------
In thousands
BALANCE AT JANUARY 1, 1998 _________ $14,458 $ 2,480 $39,640 $ 876 $57,454
Comprehensive income:
Net income _____________________ -- -- 7,725 -- 7,725
Net change in unrealized
gains on securities
available-for-sale -- -- -- 458 458
-------
Total comprehensive income ___ -- -- -- -- 8,183
-------
Cash dividends _____________________ -- -- (4,519) -- (4,519)
------- ------- ------- ------ -------
BALANCE AT DECEMBER 31, 1998 14,458 2,480 42,846 1,334 61,118
Comprehensive income:
Net income _______________________ -- -- 7,823 -- 7,823
Net change in unrealized
losses on securities
available-for-sale _____________ -- -- -- (3,567) (3,567)
-------
Total comprehensive income ___ -- -- -- -- 4,256
-------
Cash dividends _____________________ -- -- (4,908) -- (4,908)
Retirement of 34,721 shares ________ (86) (517) -- -- (603)
------- ------- ------- ------ -------
BALANCE AT DECEMBER 31, 1999 _______ 14,372 1,963 45,761 (2,233) 59,863
Comprehensive income:
Net income _______________________ -- -- 8,095 -- 8,095
Net change in unrealized
gains on securities
available-for-sale _____________ -- -- -- 2,810 2,810
-------
Total comprehensive income __ 10,905
-------
Cash dividends _____________________ -- -- (4,876) -- (4,876)
Retirement of 307,906 shares _______ (770) (1,963) (2,722) -- (5,455)
------- ------- ------- ------ -------
BALANCE AT DECEMBER 31, 2000 _______ $13,602 $ -- $46,258 $ 577 $60,437
======= ======= ======= ====== =======
The accompanying notes are an integral part
of the consolidated financial statements.
ACNB Corporation & Subsidiary
28
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
INCREASE (DECREASE) IN CASH ------------------------------
AND CASH EQUIVALENTS In thousands 2000 1999 1998
- ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and dividends received _______________ $ 39,299 $ 37,141 $ 38,197
Fees and commissions received _________________ 3,132 3,038 2,870
Interest paid _________________________________ (16,443) (16,190) (16,215)
Cash paid to suppliers and employees __________ (11,982) (14,420) (12,155)
Income taxes paid _____________________________ (4,109) (4,061) (4,013)
Loans originated for sale _____________________ (4,615) (11,888) (21,294)
Proceeds of mortgage loans sold _______________ 4,912 11,959 21,360
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES _____ 10,194 5,579 8,750
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment
securities held-to-maturity _________________ 4,861 11,168 12,925
Proceeds from maturities of investment
securities available-for-sale _______________ 9,385 18,732 16,822
Purchase of investment securities
held-to-maturity ____________________________ (749) (21,299) (10,403)
Purchase of investment securities
available-for-sale __________________________ (29,635) (4,700) (70,757)
Net decrease (increase) in loans (14,516) 4,279 5,758
Capital expenditures __________________________ (647) (288) (197)
Proceeds from sale of other real estate owned _ 118 64 249
Proceeds from officer life insurance policies _ -- 383 --
-------- -------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES ________________________ (31,183) 8,339 (45,603)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
and savings accounts ________________________ 3,599 6,604 14,014
Net increase (decrease) in certificates
of deposit __________________________________ (3,083) (9,583) 10,630
Net increase in securities sold under
agreement to repurchase _____________________ 2,830 6,719 7,637
Dividends paid ________________________________ (4,876) (4,908) (4,519)
Net increase (decrease) in borrowed funds _____ 16,300 350 (350)
Retirement of common stock ____________________ (5,455) (1,231) --
-------- -------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES ________________________ 9,315 (2,049) 27,412
-------- -------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ________________________ (11,674) 11,869 (9,441)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR ________________________ 35,390 23,521 32,962
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ______ $ 23,716 $ 35,390 $ 23,521
======== ======== ========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
- ------------------------------------------------------------------------------
Net income ____________________________________ $ 8,095 $ 7,823 $ 7,725
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization _________________ 483 641 670
Provision for possible loan losses ____________ 240 253 360
Benefit for deferred taxes ____________________ (166) (200) (312)
Amortization (Accretion) of investment
securities premiums (discounts) _____________ 13 (45) (122)
Increase (Decrease) in taxes payable __________ 215 (105) 87
Increase in interest receivable _______________ (792) (127) (129)
Increase (Decrease) in interest payable _______ 486 (225) 257
Increase (Decrease) in accrued expenses _______ 25 801 (39)
Decrease in mortgage loans held for sale ______ 297 71 66
Decrease (Increase) in other assets ___________ 722 (2,612) (252)
Increase (Decrease) in other liabilities ______ 576 (696) 439
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES _____ $ 10,194 $ 5,579 $ 8,750
======== ======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
ACNB Corporation & Subsidiary
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------------------------------------------
BUSINESS
ACNB Corporation provides banking and financial services to businesses
and consumers through its wholly-owned banking subsidiary of Adams County
National Bank. The corporation engages in full-service commercial and
consumer banking and trust services through its sixteen locations in Adams,
Cumberland and York counties.
The corporation's primary source of revenue is interest income on
loans and investment securities and fee income on its products and
services. Expenses consist of interest expense on deposits and borrowed
funds, provisions for loan losses, and other operating expenses.
BASIS OF FINANCIAL STATEMENTS
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and include the accounts of
the corporation and its wholly-owned subsidiary. 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' consolidated 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, as
accumulated other comprehensive income 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.
There is not a material difference between the straight-line method and
the interest method. Gains and losses are determined using the specific
identification 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.
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, 2000 and 1999, all of the corporation's impaired loans were on
nonaccrual status for all reported periods.
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.
ACNB Corporation & Subsidiary
30
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
- -----------------------------------------------------------------------
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
Basic earnings per share of common stock is computed on the basis of
the weighted average number of shares of common stock outstanding. The
corporation does not have diluted earnings per share.
ADVERTISING COSTS
Costs of advertising are expensed when incurred.
COMPREHENSIVE INCOME
The corporation adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income", as of January 1, 1998. Accounting
principles generally require that recognized revenue, expenses, gains and
losses be included in income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of
the statement of condition, such items, along with net income, are
components of comprehensive income. The adoption of Statement of Financial
Accounting Standards No. 130 had no effect on the corporation's net income
or stockholders' equity other than expanded disclosure.
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, 2000 and 1999, were approximately $8,455,000 and
$7,622,000, respectively.
ACNB Corporation & Subsidiary
31
NOTE C
INVESTMENT SECURITIES
- ---------------------------------------------------------------------------
The amortized cost and estimated fair value of investment securities
at December 31, 2000 and 1999, were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
2000 In thousands Cost Gains Losses Value
- ---------------------------------------------------------------------------
Held-to-Maturity Securities
U.S. Treasury securities
and obligations of
U.S. Government corporations
and agencies ________________ $ 50,955 $ 768 $ 12 $ 51,711
Obligations of states and
political subdivisions ______ 2,624 2 20 2,606
Corporate debt ________________ 6,619 23 3 6,639
-------- -------- -------- --------
Total debt securities _________ 60,198 793 35 60,956
Restricted equity securities __ 3,526 -- -- 3,526
-------- -------- -------- --------
Total Held-to-Maturity
Securities __________________ $ 63,724 $ 793 $ 35 $ 64,482
======== ======== ======== ========
Available-for-Sale Securities
U.S. Treasury securities
and obligations of
U.S. Government corporations
and agencies ________________ $107,467 $ 1,307 $ 432 $108,342
======== ======== ======== ========
1999 In thousands
- ----------------------------------------------------------------------------
Held-to-Maturity Securities
U.S. Treasury securities
and obligations of
U.S. Government corporations
and agencies ________________ $ 42,249 $ 93 $ 865 $ 41,477
Obligations of states and
political subdivisions ______ 4,321 4 59 4,266
Corporate debt ________________ 7,904 2 46 7,860
-------- -------- -------- --------
Total debt securities _________ 54,474 99 970 53,603
Restricted equity securities __ 3,456 -- -- 3,456
======== ======== ======== ========
Total Held-to-Maturity
Securities __________________ $ 57,930 $ 99 $ 970 $ 57,059
======== ======== ======== ========
Available-for-Sale Securities
U.S. Treasury securities
and obligations of
U.S. Government corporations
and agencies ________________ $ 98,558 $ 74 $ 3,457 $ 95,175
======== ======== ======== ========
The amortized cost and estimated fair value of debt securities at
December 31, 2000, 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
In thousands Cost Value Cost Value
-------- -------- -------- --------
Within one year _______________ $ 20,184 $ 20,206 $ 400 $ 400
After one year through
five years __________________ 18,176 18,347 17,979 18,024
After five years through
ten years ___________________ 21,838 22,403 320 315
After ten years _______________ -- -- 88,768 89,603
-------- -------- -------- --------
Total Debt Securities _________ $ 60,198 $ 60,956 $107,467 $108,342
======== ======== ======== ========
ACNB Corporation & Subsidiary
32
NOTE C
INVESTMENT SECURITIES (continued)
- -------------------------------------------------------------------------------
U.S.
Government Taxable
DECEMBER 31, 2000 and Federal State and Other Equivalent
In thousands Agency Municipal Securities Total Yield
- -------------------------------------------------------------------------------
Amortized Cost
Within one year ___________ $ 15,608 $ 331 $ 4,645 $ 20,584 6.12%
After one year through
five years ______________ 33,179 1,002 1,974 36,155 6.40%
After five years
through ten years _______ 20,867 1,291 -- 22,158 6.78%
After ten years ___________ 88,768 -- -- 88,768 6.69%
No set maturity ___________ -- -- 3,526 3,526 6.97%
-------- -------- -------- --------
Total _____________________ $158,422 $ 2,624 $ 10,145 $171,191
======== ======== ======== ========
Fair Value ________________ $160,053 $ 2,606 $ 10,165 $172,824
======== ======== ======== ========
Taxable Equivalent Yield __ 6.57% 7.08% 6.66%
December 31, 1999
In thousands
- -------------------------------------------------------------------------------
Amortized Cost ____________ $140,807 $ 4,321 $ 11,360 $156,488
======== ======== ======== ========
December 31, 1998
In thousands
- -------------------------------------------------------------------------------
Amortized Cost ____________ $147,493 $ 5,090 $ 6,143 $158,726
======== ======== ======== ========
The weighted average yield of tax-exempt obligations has been
calculated on a taxable equivalent basis. The taxable equivalent
adjustments are based on an effective tax rate of 35%. The yield
information does not give effect to changes in fair value that are
reflected as a component of stockholders' equity.
At December 31, 2000 and 1999, assets with a carrying value of
$98,999,000 and $82,964,000, 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:
2000 1999 1998 1997 1996
In thousands -------- -------- -------- -------- --------
Commercial, financial and
agricultural _______________ $ 18,376 $ 12,697 $ 13,163 $ 11,160 $ 11,029
Real estate - construction ___ 15,786 13,188 14,661 13,923 11,453
Real estate - mortgage _______ 314,385 308,241 309,030 316,078 301,010
Consumer _____________________ 12,443 13,661 15,523 17,299 17,775
-------- -------- -------- -------- --------
360,990 347,787 352,377 358,460 341,267
Less: Unearned discount
on loans ___________________ -- -- 22 166 728
-------- -------- -------- -------- --------
Total Loans __________________ $360,990 $347,787 $352,355 $358,294 $340,539
======== ======== ======== ======== ========
The following table outlines the repricing opportunities for all
loans outstanding as of December 31, 2000. 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__ $ 7,689 $ 6,886 $ 14,575
Real estate - construction _____________ 7,053 7,461 14,514
-------- -------- --------
Total __________________________________ $ 14,742 $ 14,347 $ 29,089
======== ======== ========
Loans with predetermined interest rates_ $ 5,322 $ 7,226 $ 12,548
Loans with variable interest rates _____ 8,895 7,646 16,541
-------- -------- --------
Total __________________________________ $ 14,217 $ 14,872 $ 29,089
======== ======== ========
ACNB Corporation & Subsidiary
33
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, 2000 and 1999, was $3,065,000 and $3,106,000, 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
2000 Additions Collected 2000 Debtors
- ---------------------------------------------------------------
$3,106,000 $434,000 $475,000 $3,065,000 5
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 2000 1999 1998 1997 1996
-------- -------- -------- -------- -------
Balance of allowance for
loan losses at beginning
of period __________________ $ 3,543 $ 3,594 $ 3,350 $ 3,376 $ 3,475
Loans charged-off:
Commercial, financial and
agricultural _______________ 11 58 20 49 34
Real estate - construction ___ -- -- -- -- --
Real estate - mortgage _______ 42 128 4 34 31
Consumer _____________________ 84 204 195 181 142
-------- -------- -------- -------- --------
Total loans charged-off ______ 137 390 219 264 207
Recovery of charged-off loans:
Commercial, financial and
agricultural _______________ 5 5 -- 1 6
Real estate - construction ___ -- -- -- -- --
Real estate - mortgage _______ 2 35 12 -- 41
Consumer _____________________ 42 46 91 27 31
-------- -------- -------- -------- --------
Total recoveries _____________ 49 86 103 28 78
Net loans charged-off ________ 88 304 116 236 129
Provision for possible
loan losses ________________ 240 253 360 210 30
-------- -------- -------- -------- --------
Balance at end of period _____ $ 3,695 $ 3,543 $ 3,594 $ 3,350 $ 3,376
======== ======== ======== ======== ========
TOTAL LOAN BALANCES
In thousands
- -------------------------------------------------------------------------------
Average total loans __________ $352,666 $344,323 $356,154 $353,553 $337,259
Total loans at year-end ______ 360,990 347,787 352,355 358,294 340,539
RATIOS
- -------------------------------------------------------------------------------
Net charge-offs to:
Average total loans __________ 0.02% 0.09% 0.03% 0.07% 0.04%
Total loans at year-end ______ 0.02% 0.09% 0.03% 0.07% 0.04%
Allowance for loan losses ____ 2.38% 8.58% 3.23% 7.04% 3.82%
Allowance for loan losses to:
Average total loans __________ 1.05% 1.03% 1.01% 0.95% 1.00%
Total loans at year-end ______ 1.02% 1.02% 1.02% 0.93% 0.99%
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,
2000. 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 2000. Management anticipates that
charge-off amounts will approximate $250,000 in 2001.
ACNB Corporation & Subsidiary
34
NOTE E
ALLOWANCE FOR LOAN LOSSES (continued)
- -------------------------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- -------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-------------- -------------- -------------- -------------- ---------------
% 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 __ $ 2,590 0.72% $ 1,042 0.30% $ 838 0.24% $ 735 0.20% $ 98 0.03%
Real estate -
construction ______ 205 0.05% 246 0.07% 107 0.03% 72 0.02% 50 0.01%
Real estate -
mortgage __________ 495 0.13% 1,474 0.43% 1,152 0.33% 1,602 0.45% 1,773 0.52%
Consumer ____________ 132 0.04% 251 0.07% 238 0.07% 211 0.06% 165 0.05%
Unallocated _________ 273 0.08% 530 0.15% 1,259 0.35% 730 0.20% 1,290 0.38%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total $ 3,695 1.02% $ 3,543 1.02% $ 3,594 1.02% $ 3,350 0.93% $ 3,376 0.99%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
NOTE F
PREMISES AND EQUIPMENT
- -------------------------------------------------------------------------------
The composition of corporation premises and equipment at December 31
was as follows:
2000 1999
In thousands ------- -------
Land ______________________________________________________ $ 904 $ 904
Bank premises _____________________________________________ 6,502 6,389
Furniture and equipment ___________________________________ 5,389 5,410
Less: Accumulated depreciation and amortization ___________ (8,107) (8,179)
------- -------
Total _____________________________________________________ $ 4,688 $ 4,524
======= =======
A summary of depreciation and amortization expenses is as follows:
2000 1999 1998
In thousands ----- ----- -----
Bank premises _______________________________________ $ 171 $ 224 $ 198
Furniture and equipment _____________________________ 312 417 472
----- ----- -----
Total _______________________________________________ $ 483 $ 641 $ 670
===== ===== =====
NOTE G
INVESTMENT IN REAL ESTATE PARTNERSHIPS
- -------------------------------------------------------------------------------
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 in Gettysburg, PA. ACNB Corporation owns a 99% limited
partner's interest in the partnership. The corporation also owns a 62%
share, as a limited partner, of a residential low-income project called
Poplar Creek Apartments in York, PA. These investments are accounted for
under the equity method of accounting. At December 31, 2000 and 1999, the
carrying value of these investments was approximately $1,151,711 and
$918,988, respectively.
ACNB Corporation & Subsidiary
35
NOTE H
NONPERFORMING ASSETS
- -------------------------------------------------------------------------------
The following table presents information concerning the aggregate
amount of nonperforming assets at December 31:
In thousands 2000 1999 1998 1997 1996
------ ------ ------ ------ ------
Nonaccrual loans _______________________ $1,318 $1,615 $1,450 $1,908 $1,092
90 days past due still accruing ________ 1,528 1,920 2,350 1,360 2,515
Restructured loans _____________________ -- -- -- -- --
Other real estate owned ________________ 981 171 250 401 1,015
------ ------ ------ ------ ------
Total Nonperforming Assets _____________ $3,827 $3,706 $4,050 $3,669 $4,622
====== ====== ====== ====== ======
The gross interest income that would have been recorded on
nonaccrual loans at December 31, 2000, under original terms was
approximately $84,000. The amount of interest income on these loans
that was included in net income for the year ended December 31, 2000,
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, 2000
and 1999, are summarized in the following table: The interest expense
related to time certificates of deposit in denominations of $100,000 or
more totaled $943,000 in 2000, $1,044,000 in 1999, and $1,113,000 in 1998.
In thousands 2000 1999
------- -------
Time certificates of deposit __________ $20,432 $20,149
Other time deposits ___________________ 1,000 1,000
Maturities of time deposits of $100,000 or more outstanding at
December 31, 2000, are summarized as follows:
In thousands
Three months or less __________________ $ 5,313
Over three through six months _________ 4,455
Over six through twelve months ________ 6,688
Over twelve months ____________________ 4,976
-------
Total $21,432
=======
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 $95,164,
$119,140 and $109,308 for the years ended December 31, 2000, 1999 and
1998, 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:
2001 _________________________ $ 65,280
2002 _________________________ 44,253
2003 _________________________ 30,600
2004 _________________________ 31,200
2005 _________________________ 31,800
Later years __________________ $120,000
--------
Total Minimum Payments _______ $323,133
========
ACNB Corporation & Subsidiary
36
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, 2000, 1999 and 1998, respectively:
In thousands 2000 1999 1998
------- ------- -------
Amount outstanding at year-end ________________ $48,957 $29,827 $22,758
Average interest rate at year-end _____________ 5.83% 4.70% 4.33%
Maximum amount outstanding at any month-end ___ $56,550 $29,827 $25,812
Average amount outstanding ____________________ $34,377 $22,711 $19,380
Weighted average interest rate ________________ 5.41% 4.29% 4.41%
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, 2000, $2,310,000 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,
2000, the maximum amount available for transfer from the bank to the
corporation in the form of loans was approximately $6,208,400.
NOTE M
INCOME TAXES
- -------------------------------------------------------------------------------
The composition of applicable income taxes (benefits) for the years
ended December 31 was allocated as follows:
In thousands 2000 1999 1998
------ ------- ------
Income from continuing operations _____ $4,158 $ 3,770 $3,752
Stockholders' equity for other
comprehensive income ________________ 297 (1,842) 240
------ ------- ------
Total _________________________________ $4,455 $ 1,928 $3,992
====== ======= ======
Income tax expense attributable to other
comprehensive income consists of the
following at December 31:
In thousands 2000 1999 1998
------ ------- ------
Unrealized gains (losses) on securities
arising during the period ___________ $ 297 $(1,842) $ 240
Reclassification adjustment for gains
(losses) included in net income _____ -- -- --
------ ------- ------
Income Tax (Benefit) Expense Related
to Other Comprehensive Income _______ $ 297 $(1,842) $ 240
====== ======= ======
Income tax expense attributable to income
from continuing operations consists of
the following at December 31:
In thousands 2000 1999 1998
------ ------- ------
Currently payable _____________________ $4,379 $ 3,945 $3,771
Deferred tax benefit __________________ (221) (175) (19)
------ ------- ------
Applicable Income Taxes _______________ $4,158 $ 3,770 $3,752
====== ======= ======
ACNB Corporation & Subsidiary
37
NOTE M
INCOME TAXES (continued)
- -------------------------------------------------------------------------------
For the years ended December 31, the applicable income tax expense
attributable to income from continuing operations differs from the tax
expense computed by applying the federal statutory rate to pretax
earnings. The components of the differences are as follows:
In thousands 2000 1999 1998
------ ------ ------
Income taxes at statutory rate __________________ $4,288 $4,054 $4,009
Increase (Decrease) resulting from:
Tax-exempt income _______________________________ (145) (103) (91)
Rehabilitation and low-income housing credits ___ (186) (73) (73)
Other ___________________________________________ 201 (108) (93)
------ ------ ------
Applicable Income Taxes _________________________ $4,158 $3,770 $3,752
====== ====== ======
The significant components of deferred tax assets and deferred tax
liabilities at December 31, 2000 and 1999, are as follows:
In thousands 2000 1999
------ ------
Deferred tax assets:
Allowance for possible loan losses _____________________ $ 875 $ 683
Deferred compensation __________________________________ 268 234
Net unrealized losses on available-for-sale securities__ -- 1,150
Other __________________________________________________ 132 62
------ ------
Total gross deferred tax assets ________________________ 1,275 2,129
------ ------
Deferred tax liabilities:
Depreciation ___________________________________________ 11 45
Net unrealized gains on available-for-sale securities __ 297 --
Pension ________________________________________________ 4 45
------ ------
Total gross deferred tax liabilities ___________________ 312 90
------ ------
Net Deferred Tax Assets ________________________________ $ 963 $2,039
====== ======
Since the corporation has historically had strong earnings,
management believes the deferred tax assets are realizable.
Income taxes paid during 2000, 1999 and 1998 were $4,326,000,
$3,969,000 and $3,992,000, respectively.
ACNB Corporation & Subsidiary
38
NOTE N
RETIREMENT PLANS
- -------------------------------------------------------------------------------
The corporation's subsidiary has non-contributory pension plans. The
plan covering the employees of the subsidiary acquired in March 1999 was
frozen under the terms of the plan as of March 1993. Retirement benefits
under both plans are a function of both years of service and compensation.
The funding policy is 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, 2000, 1999 and 1998 was $341,000, $408,000 and $427,000,
respectively.
The following tables provide a reconciliation of the changes in the
plan benefit obligations and fair value of plan assets for the two plan
years ending December 31, 2000 and 1999, and a statement of the funded
status as of December 31, 2000 and 1999:
In thousands 2000 1999
------- -------
Reconciliation of benefit obligations:
Benefit obligations - beginning of year ________ $ 9,285 $ 9,845
Service costs __________________________________ 327 367
Interest costs _________________________________ 594 536
Actuarial (gains) losses _______________________ (318) (1,275)
Benefit payments _______________________________ (214) (188)
Plan changes ___________________________________ 358 --
------- -------
Benefit Obligations - End of Year ______________ 10,032 9,285
------- -------
Reconciliation of fair value of plan assets:
Fair value of plan assets - beginning of year __ 7,957 7,630
Actual return on plan assets ___________________ 438 255
Employer contributions _________________________ 322 260
Benefits paid __________________________________ (214) (188)
------- -------
Fair Value of Plan Assets - End of Year ________ 8,503 7,957
------- -------
Reconciliation of funded assets:
Funded status at December 31
(under funded) over funded ___________________ (1,529) (1,328)
Unrecognized net actuarial loss ________________ 914 1,054
Unrecognized transition asset __________________ 117 116
Unrecognized prior service costs _______________ 476 156
------- -------
Net Accrued Pension ____________________________ $ (22) $ (2)
======= =======
ACNB Corporation & Subsidiary
39
NOTE N
RETIREMENT PLANS (continued)
- -------------------------------------------------------------------------------
The following table provides the components of net periodic benefit
costs for the years ending December 31, 2000, 1999 and 1998:
In thousands
Components of net periodic benefit costs: 2000 1999 1998
----- ----- -----
Service costs _____________________________ $ 327 $ 367 $ 328
Interest costs ____________________________ 595 535 517
Expected return on assets _________________ (636) (613) (492)
Recognized net actuarial loss _____________ 19 83 34
Amortization of transition asset __________ (2) (14) (13)
Amortization of prior service costs _______ 38 50 53
----- ----- -----
Net Periodic Benefit Costs ________________ $ 341 $ 408 $ 427
===== ===== =====
The assumptions used in the measurement of the benefit obligations
are shown in the following table:
Weighted average assumptions
as of December 31: 2000 1999 1998
---------- ---------- ----------
Discount rate _____________________ 6.00-6.75% 6.00-6.50% 5.00-5.50%
Expected return on plan assets ____ 6.00-8.25% 6.00-8.25% 6.00-8.25%
Rate of compensation increase
(Frozen plan assumes no
increase in compensation) _______ 4.66% 4.69% 4.62%
Plan assets consist of a deposit administration contract, various
pooled separate accounts, annuities, and an investment of 37,560 shares
of common stock with ACNB Corporation at December 31, 2000 and 1999.
The corporation's subsidiary has a 401(k) Salary Deferral Plan,
which covers all eligible employees. The annual expense included in
salaries and benefits amounted to $225,000, $221,000 and $222,000 for
2000, 1999 and 1998, respectively.
The corporation has non-qualified salary agreements with certain
senior management. The future commitments under these arrangements have
been funded through corporate-owned variable life insurance policies.
At December 31, 2000 and 1999, the present value of the future
obligations was $682,000 and $586,000, respectively. The insurance
policies included in other assets had a total cash value of $1,866,000
and $1,701,000, respectively, at December 31, 2000 and 1999.
ACNB Corporation & Subsidiary
40
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, 2000
and 1999, is presented below:
In thousands 2000 1999
-------- --------
Commitments to extend credit _________ $ 35,313 $ 31,226
Standby letters of credit ____________ 3,871 3,457
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 in the corporation's primary marketplace.
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 2000 and 1999, approximately 97% of the corporation's assets and 89% 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, 2000 December 31, 1999
------------------------ ------------------------
ESTIMATED FAIR CARRYING Estimated Fair Carrying
VALUE AMOUNT Value Amount
-------------- -------- -------------- --------
In thousands
Cash and due from banks ____ $ 18,597 $ 18,597 $ 29,840 $ 29,840
Interest bearing deposits
with banks _______________ 1,605 1,605 3,839 3,839
Federal funds sold _________ 3,514 3,514 1,711 1,711
Investment securities ______ 172,824 171,191 152,234 153,105
Interest receivable ________ 3,865 3,865 3,225 3,225
ACNB Corporation & Subsidiary
41
NOTE P
DISCLOSURES ABOUT FAIR VALUE
OF FINANCIAL INSTRUMENTS (continued)
- -------------------------------------------------------------------------------
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, 2000 and
1999. Mortgages and consumer loans have been revalued using discounted
cash flows. The mortgages were estimated using market rates at December
31, 2000 and 1999, and consumer loans were revalued using rates being
charged by the corporation at year-end 2000 and 1999. Fair value for
nonperforming loans is based on current valuations of underlying
collateral.
DECEMBER 31, 2000 December 31, 1999
------------------------ ------------------------
ESTIMATED FAIR CARRYING Estimated Fair Carrying
VALUE AMOUNT Value Amount
-------------- -------- -------------- --------
In thousands
Net loans _____________ $359,286 $357,159 $344,189 $343,811
Mortgage loans held
for sale ____________ 136 136 433 433
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,
2000 and 1999. 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, 2000 December 31, 1999
------------------------ ------------------------
ESTIMATED FAIR CARRYING Estimated Fair Carrying
VALUE AMOUNT Value Amount
-------------- -------- -------------- --------
In thousands
Deposits with no stated
maturities __________ $247,039 $247,039 $243,817 $243,817
Deposits with stated
maturities ___________ 206,811 206,110 208,862 208,816
Repurchase agreements __ 32,207 32,207 29,377 29,377
Federal funds purchased
and demand notes _____ 450 450 450 450
Federal Home Loan
Bank borrowings ______ 16,300 16,300 -- --
Interest payable _______ 3,058 3,058 2,637 2,637
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, 2000 December 31, 1999
------------------------ ------------------------
ESTIMATED FAIR CARRYING Estimated Fair Carrying
VALUE AMOUNT Value Amount
-------------- -------- -------------- --------
In thousands
Commitments to extend
credit __________________ $35,313 $35,313 $31,226 $31,226
Standby letters of credit__ 3,871 3,871 3,457 3,457
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include deferred tax assets
and liabilities and property and equipment. In addition, the tax
ramifications related to the realization of unrealized gains and losses
can have a significant effect on the fair value estimates.
ACNB Corporation & Subsidiary
42
NOTE Q
ACNB CORPORATION (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
DECEMBER 31
-------------------------------
STATEMENTS OF CONDITION In thousands 2000 1999
- -------------------------------------------------------------------------------
ASSETS
Cash __________________________________________ $ 391 $ 291
Securities and other assets ___________________ 1,493 919
Investment in common stock of subsidiary ______ 57,813 60,845
Receivable from subsidiary ____________________ 258 41
------- -------
TOTAL ASSETS __________________________________ $59,955 $62,096
======= =======
LIABILITIES
Accrued Expenses ______________________________ $ 95 $ --
------- -------
STOCKHOLDERS' EQUITY
Common stock (par value $2.50; 20,000,000
shares authorized; 5,440,826 and
5,748,732 issued and outstanding shares
on 12/31/00 and 12/31/99, respectively) _____ 13,602 14,372
Additional paid-in capital ____________________ -- 1,963
Retained earnings _____________________________ 46,258 45,761
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ____ $59,955 $62,096
======= =======
YEAR ENDED DECEMBER 31
-------------------------------
STATEMENTS OF INCOME In thousands 2000 1999 1998
- -------------------------------------------------------------------------------
INCOME
Dividend from subsidiary ______________________ $11,000 $5,928 $4,519
Interest income _______________________________ 6 -- --
EXPENSE _______________________________________ 97 107 167
------- ------ ------
INCOME BEFORE TAXES AND (DEFICIT) EQUITY
IN UNDISTRIBUTED NET INCOME OF SUBSIDIARY _____ 10,909 5,821 4,352
Applicable tax benefit ________________________ (218) (84) (130)
------- ------ ------
INCOME BEFORE (DEFICIT) EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARY ________ 11,127 5,905 4,482
(Deficit) Equity in undistributed net
income of subsidiary ________________________ (3,032) 1,918 3,243
------- ------ ------
NET INCOME ____________________________________ $8,095 $7,823 $7,725
======= ====== ======
YEAR ENDED DECEMBER 31
-------------------------------
STATEMENTS OF CASH FLOWS In thousands 2000 1999 1998
- -------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Dividends and interest received _______________ $11,006 $5,928 $4,519
------- ------ ------
Net Cash Provided by Operating Activities _____ 11,006 5,928 4,519
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in equity investments ______________ (304) (188) --
Investment in other assets ____________________ (271) -- --
------- ------ ------
Net Cash Used in Investing Activities _________ (575) (188) --
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid ________________________________ (4,876) (4,908) (4,519)
Retirement of common stock ____________________ (5,455) (603) --
Purchase of dissenters' shares ________________ -- (140) --
------- ------ ------
Net Cash Used in Financing Activities _________ (10,331) (5,651) (4,519)
------- ------ ------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ____________________________ 100 89 --
------- ------ ------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR_ 291 202 202
------- ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR ______ $ 391 $ 291 $ 202
======= ====== ======
ACNB Corporation & Subsidiary
43
NOTE Q
ACNB CORPORATION (PARENT COMPANY ONLY)
FINANCIAL INFORMATION (continued)
- -------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
-------------------------------
STATEMENTS OF CASH FLOWS (continued) 2000 1999 1998
- -------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income ____________________________________ $ 8,095 $7,823 $7,725
Decrease (Increase) in investment in
common stock of subsidiary __________________ 3,032 (1,918) (3,243)
Increase in receivable from subsidiary (217) (16) (7)
Loss on equity investment _____________________ 96 39 44
------- ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES _____ $11,006 $5,928 $4,519
======= ====== ======
NOTE R
FINANCIAL INFORMATION
RELATING TO OPERATING SEGMENTS
- -------------------------------------------------------------------------------
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures
about Segments of an Enterprise and Related Information". SFAS No. 131
establishes standards and disclosure requirements for the manner entities
report information about operating segments. Operating segments are
defined based upon the way management organizes segments for making
operating decisions and evaluating performance.
Management of the corporation monitors and evaluates four segments
of its operations, which include commercial, consumer and mortgage
lending and investment securities. The corporation's marketplace is
southcentral Pennsylvania which encompasses Adams County and areas in
contiguous counties of York, Franklin and Cumberland, as well as
sections of northern Maryland.
Commercial lending includes commercial mortgages, real estate
development, accounts receivable financing, and agricultural loans.
Consumer lending programs include home equity loans, automobile and
recreational vehicle loans, and manufactured housing loans. Mortgage
lending programs include personal residential mortgages, residential
construction loans, and speculative construction loans.
Management measures the net interest income of each segment based
upon the earnings and fees for each segment recognized less the charge
for the funds used. The charge for funds used is based on the average
cost of funds used by the respective segment. Other non-interest
expense, which includes salaries and employee benefits, occupancy and
equipment expense, and other expenses, is allocated to each segment and
is netted against net interest income after provision for possible loan
losses to arrive at income before income taxes for each respective
segment.
The following tables are for the years ending December 31, 2000 and
1999, by the four operating segments:
Commercial Consumer Mortgage Investment
2000 In thousands Lending Lending Lending Securities Other Total
- --------------------------------------------------------------------------------------
Total interest income __ $ 11,749 $ 3,892 $ 12,665 $ 11,531 $ -- $ 39,837
Charge for funds used __ (7,265) (2,166) (8,457) (8,786) 9,745 (16,929)
-------- -------- -------- -------- -------- --------
Net Interest Income ____ 4,484 1,726 4,208 2,745 9,745 22,908
Provision for
possible loan losses__ (103) (77) (60) -- -- (240)
-------- -------- -------- -------- -------- --------
Net Interest Income
After Provision
for Possible Loan
Losses _______________ 4,381 1,649 4,148 2,745 9,745 22,668
Non-interest income ____ 143 112 220 94 2,228 2,797
Non-interest expense ___ (1,060) (498) (1,212) (55) (10,387) (13,212)
-------- -------- -------- -------- -------- --------
Income Before
Income Taxes _________ $ 3,464 $ 1,263 $ 3,156 $ 2,784 $ 1,586 $ 12,253
======== ======== ======== ======== ======== ========
Average Funds Used _____ $143,470 $ 42,718 $166,612 $172,430 $ 29,469 $554,699
======== ======== ======== ======== ======== ========
ACNB Corporation & Subsidiary
44
NOTE R
FINANCIAL INFORMATION
RELATING TO OPERATING SEGMENTS (continued)
- -------------------------------------------------------------------------------
Commercial Consumer Mortgage Investment
1999 In thousands Lending Lending Lending Securities Other Total
- --------------------------------------------------------------------------------------
Total interest income __ $ 10,874 $ 3,531 $ 12,696 $ 11,057 $ 36 $ 38,194
Charge for funds used __ (6,674) (1,905) (8,458) (8,069) 9,140 (15,966)
-------- -------- -------- -------- -------- --------
Net Interest Income ____ 4,200 1,626 4,238 2,988 9,176 22,228
Provision for
possible loan losses__ (95) (70) (88) -- -- (253)
-------- -------- -------- -------- -------- --------
Net Interest Income
After Provision
for Possible Loan
Losses _______________ 4,105 1,556 4,150 2,988 9,176 21,975
Non-interest income ____ 100 118 232 90 2,348 2,888
Non-interest expense ___ (1,075) (442) (1,236) (68) (10,449) (13,270)
-------- -------- -------- -------- -------- --------
Income Before
Income Taxes _________ $ 3,130 $ 1,232 $ 3,146 $ 3,010 $ 1,075 $ 11,593
======== ======== ======== ======== ======== ========
Average Funds Used _____ $135,074 $ 38,465 $170,780 $162,096 $ 44,045 $550,460
======== ======== ======== ======== ======== ========
NOTE S
EFFECT OF RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS
- -------------------------------------------------------------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
purposes. The statement requires that an entity recognize all derivatives
as either assets or liabilities in the statement of condition and measure
those instruments at fair value. The accounting for changes in fair value
of a derivative depends on the intended use of the derivative and the
resulting designation. If conditions are met, a derivative may be
specifically designated as a hedge of the exposure to changes in fair value
of a recognized asset or liability or unrecognized commitment, a hedge of
the exposure to variable cash flows of a forecasted transaction, or a hedge
of certain foreign currency exposures. SFAS No. 133 includes a provision
for the potential reclassification of investments from held-to-maturity to
available-for-sale. This statement became effective for the fiscal year
beginning after June 15, 1999. In June 1999, SFAS No. 137 was issued
deferring the effective date of SFAS No. 133 to all years beginning after
June 15, 2000. Management anticipates that the adoption of this statement
will not have a material effect on operating results or financial
condition.
NOTE T
BUSINESS COMBINATION
- -------------------------------------------------------------------------------
On March 1, 1999, the corporation issued approximately 530,000
shares of ACNB Corporation common stock in exchange for approximately
234,000 shares of Farmers National Bancorp, Inc. The transaction was
accounted for as a pooling of interests and, accordingly, the
consolidated financial statements for the periods presented have been
restated to include the accounts of ACNB Corporation and Farmers
National Bancorp, Inc.
Net interest income and net earnings of the separate entities for
the periods preceding the acquisition were as follows:
EARNINGS DATA
- -------------------------------------------------------------------------------
Net Interest Net
In thousands (unaudited) Income Earnings
------------ --------
Two months ended February 28, 1999:
ACNB Corporation _________________________________ $ 3,359 $ 1,223
Farmers National Bancorp, Inc. ___________________ 271 97
------- -------
Combined _________________________________________ $ 3,630 $ 1,320
======= =======
Year ended December 31, 1998:
ACNB Corporation, as previously reported _________ $20,390 $ 7,221
Farmers National Bancorp, Inc. ___________________ 1,686 504
------- -------
Combined _________________________________________ $22,076 $ 7,725
======= =======
ACNB Corporation & Subsidiary
45
QUARTERLY RESULTS OF OPERATIONS
Selected quarterly information for the years ended December 31, 2000
and 1999, is as follows:
2000 In thousands, except First Second Third Fourth
per share data Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------
Interest income $9,581 $9,859 $10,290 $10,107
- ------------------------------------------------------------------------------
Interest expense 3,938 4,031 4,385 4,575
- ------------------------------------------------------------------------------
Net interest income 5,643 5,828 5,905 5,532
- ------------------------------------------------------------------------------
Provision for possible loan losses 60 60 60 60
- ------------------------------------------------------------------------------
Net income 1,983 2,095 2,250 1,767
- ------------------------------------------------------------------------------
Basic earnings per share .35 .37 .40 .32
- ------------------------------------------------------------------------------
Return on average assets 1.47% 1.53% 1.59% 1.25%
- ------------------------------------------------------------------------------
1999
- ------------------------------------------------------------------------------
Interest income $9,451 $9,486 $9,597 $9,660
- ------------------------------------------------------------------------------
Interest expense 4,022 4,010 3,970 3,964
- ------------------------------------------------------------------------------
Net interest income 5,429 5,476 5,627 5,696
- ------------------------------------------------------------------------------
Provision for possible loan losses 90 90 50 23
- ------------------------------------------------------------------------------
Net income 1,904 1,909 1,945 2,065
- ------------------------------------------------------------------------------
Basic earnings per share .33 .33 .34 .35
- ------------------------------------------------------------------------------
Return on average assets 1.41% 1.38% 1.46% 1.49%
- ------------------------------------------------------------------------------
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 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------
Total interest income _______ $39,837 $38,194 $38,532 $37,887 $36,573
Total interest expense ______ 16,929 15,966 16,456 16,073 16,265
Net interest income _________ 22,908 22,228 22,076 21,814 20,308
Provision for possible
loan losses _______________ 240 253 360 210 30
Net income __________________ 8,095 7,823 7,725 7,770 7,589
PER SHARE DATA
- --------------------------------------------------------------------------------------
Basic earnings ______________ $1.44 $1.35 $1.33 $1.34 $1.29
Cash dividends ______________ .87 .85 .78 .73 1.56
BALANCE SHEET TOTALS
- --------------------------------------------------------------------------------------
Average stockholders' equity_ $ 59,981 $ 60,742 $ 60,568 $ 56,600 $ 53,022
Average assets ______________ 554,699 550,460 527,510 508,568 505,340
RATIOS
- --------------------------------------------------------------------------------------
Return on average assets ____ 1.46% 1.42% 1.46% 1.53% 1.50%
Return on average
stockholders' equity ______ 13.50% 12.88% 12.75% 13.78% 14.31%
Dividend payout _____________ 60% 63% 58% 55% 120%
Stockholders' equity
to assets _________________ 10.65% 10.96% 11.23% 11.31% 10.62%
ACNB Corporation & Subsidiary
46
COMMON STOCK MARKET PRICES AND DIVIDENDS
The common stock of ACNB Corporation is traded in the over-the-counter
market. As of December 31, 2000, the approximate number of shareholders of
the corporation's common stock was 3,044.
As quoted on the OTC Bulletin Board, high and low bid prices of common
shares and dividends for the last two years were:
2000 1999
- -------------------------------------------------------------------------------
BID PRICE CASH Bid Price Cash
Quarter ------------------ DIVIDEND ------------------ Dividend
Ended HIGH LOW PAID High Low Paid
- -------------------------------------------------------------------------------
March 31 $18.75 $17.00 $.20 $23.50 $21.00 $.20
June 30 17.88 16.75 .20 21.00 18.25 .20
September 30 18.00 17.88 .20 18.75 16.25 .20
December 31 18.00 15.50 .27 18.00 16.63 .25
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.
ACNB Corporation & Subsidiary
53