EXHIBIT 13
EXCERPTS FROM ANNUAL REPORT TO SHAREHOLDERS
FIVE-YEAR FINANCIAL OVERVIEW
TOTAL DEPOSITS
In millions of dollars
2001 ________________ 509.2
2000 ________________ 453.1
1999 ________________ 452.6
1998 ________________ 455.7
1997 ________________ 431.1
TOTAL LOANS
In millions of dollars
2001 ________________ 361.5
2000 ________________ 360.9
1999 ________________ 347.8
1998 ________________ 352.4
1997 ________________ 358.3
RETURN ON AVERAGE ASSETS
Percent
2001 ________________ 1.45
2000 ________________ 1.46
1999 ________________ 1.42
1998 ________________ 1.46
1997 ________________ 1.53
BASIC EARNINGS PER SHARE
In dollars
2001 ________________ 1.53
2000 ________________ 1.44
1999 ________________ 1.35
1998 ________________ 1.33
1997 ________________ 1.34
DIVIDENDS PER SHARE PAID
In dollars
2001 ________________ .88
2000 ________________ .87
1999 ________________ .85
1998 ________________ .78
1997 ________________ .73
BOOK VALUE PER SHARE
In dollars
2001 ________________ 11.53
2000 ________________ 11.11
1999 ________________ 10.41
1998 ________________ 10.51
1997 ________________ 9.26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION AND
FORWARD-LOOKING STATEMENTS
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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
2001 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 2001 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 2002, and any Current
Reports on Form 8-K filed by the corporation.
COMPARATIVE AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
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DECEMBER 31
--------------------------------
2001
--------------------------------
ASSETS IN THOUSANDS BALANCE INTEREST RATE
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Loans.............................................. $359,404 $ 27,892 7.76%
Taxable investment securities ..................... 159,722 10,396 6.51%
Non-taxable investment securities.................. 2,299 117 5.09%
Federal funds sold................................. 3,182 157 4.93%
Interest bearing deposits with banks............... 16,510 599 3.63%
-------- --------
Total interest earning assets...................... 541,117 $ 39,161 7.24%
Cash and due from banks............................ 17,642
Premises and equipment............................. 5,081
Other assets....................................... 13,836
Allowance for loan losses.......................... (3,669)
--------
TOTAL ASSETS....................................... $574,007
========
LIABILITIES AND STOCKHOLDERS' EQUITY
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Interest bearing demand deposits................... $ 74,658 $ 1,497 2.01%
Savings deposits................................... 117,973 2,554 2.16%
Time deposits (excluding time certificates of
deposit of $100,000 or more).................... 191,486 9,699 5.06%
Time certificates of deposit of $100,000 or more... 20,640 940 4.55%
Short-term borrowings.............................. 36,355 1,366 3.76%
-------- --------
Total interest bearing liabilities................. 441,112 $ 16,056 3.64%
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INTEREST RATE SPREAD 3.60%
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Demand deposits.................................... 66,052
Other liabilities.................................. 4,361
Stockholders' equity............................... 62,482
--------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY............................... $574,007
========
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INTEREST INCOME/EARNING ASSETS..................... $541,117 $ 39,161 7.24%
INTEREST EXPENSE/EARNING ASSETS.................... $541,117 $ 16,056 2.97%
NET YIELD ON EARNING ASSETS........................ $ 23,105 4.27%
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December 31 December 31
- -------------------------------- ------------------------------------
2000 1999
- -------------------------------- ------------------------------------
Balance Interest Rate Balance Interest Rate
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$ 352,666 $ 28,307 8.03% $ 344,323 $ 27,137 7.88%
166,067 10,897 6.56% 149,453 9,609 6.43%
3,729 169 4.53% 8,485 350 4.12%
1,916 122 6.37% 3,005 148 4.93%
4,884 342 7.00% 18,990 950 5.00%
- --------- -------- --------- ---------
529,262 $ 39,837 7.53% 524,256 $ 38,194 7.29%
17,024 18,366
4,521 4,779
7,492 6,653
(3,600) (3,594)
- --------- ---------
$ 554,699 $ 550,460
========= =========
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$ 68,596 $ 1,915 2.79% $ 67,191 $ 1,621 2.41%
115,919 2,606 2.25% 117,991 2,833 2.40%
188,120 9,606 5.11% 195,315 9,446 4.84%
16,482 943 5.72% 21,469 1,093 5.09%
34,377 1,859 5.41% 22,711 973 4.28%
- --------- -------- --------- ---------
423,494 $ 16,929 4.00% 424,677 $ 15,966 3.76%
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3.53% 3.53%
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62,890 60,363
8,334 4,678
59,981 60,742
- --------- ---------
$ 554,699 $ 550,460
========= =========
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$ 529,262 $ 39,837 7.53% $ 524,256 $ 38,194 7.29%
$ 529,262 $ 16,929 3.20% $ 524,256 $ 15,966 3.05%
$ 22,908 4.33% $ 22,228 4.24%
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Loan fees of $416,000, $335,000 and $451,000 for 2001, 2000 and 1999,
respectively, are included for rate calculation purposes.
Average nonaccrual loans for 2001, 2000 and 1999 were $1,172,000, $938,000 and
$1,532,000, respectively.
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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EARNINGS PERFORMANCE
Net income for the year ended December 31, 2001, was $8.3 million, and for
the year ended 2000 was $8.1 million. Basic earnings per share were $1.53 in
2001 and $1.44 in 2000.
We attribute the net income increase of $242,000 in 2001 to a $197,000, or
0.9%, increase in the corporation's net interest income, a $359,000 increase in
service fees on deposits, and a $431,000 increase in other income. The increase
in other income was due primarily to the tax-exempt earnings recognized through
the purchase of bank-owned life insurance (BOLI). The combined impact of lower
pretax earnings and increased tax-exempt earnings from BOLI and other tax-exempt
securities during 2001 resulted in decreased taxes of $482,000.
The corporation recorded net income of $8.1 million for the year ended
December 31, 2000, compared to net income of $7.8 million in 1999. Basic
earnings per share was $1.44 in 2000, compared to $1.35 per share in 1999. The
$272,000 increase in net income in 2000 was due to a $680,000, or 3.1%, rise in
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
expenses. These items were partially offset by a decrease of $91,000 in
non-interest income.
We provide details of the operating results, on a comparative basis, for
each of the periods ended December 31, 2001, 2000 and 1999 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 $23.1 million in 2001. This is an increase over net
interest income of $22.9 million in 2000 and $22.2 million in 1999. The improved
net interest income during 2001 was driven by lower interest rates. The
corporation experienced a larger reduction in its cost of funds on its interest
bearing liabilities versus the reduced earnings levels on its interest earning
assets. In 2000, the increase was the result of growth in average loans which
were up $8.3 million, or 2.4%. Interest rates fell dramatically during the year
2001. The Federal Reserve Bank lowered the fed funds rate from 6.5% in January
2001 to 1.75% in December 2001. The corporation was able to lower deposit and
borrowing expense to a greater degree than it was required to lower loan and
security rates.
Higher interest rates and a stronger economy caused an increase of nine
basis points in net yield on earning assets in 2000, while declining interest
rates caused a decrease of six basis points in 2001. Interest from loans
accounted for 71% of the
corporation's interest income in 2001, as compared to 71% in 2000 and 71% in
1999. Interest and dividends on investments were $10.5 million in 2001, as
compared to $11.1 million in 2000 and $10.0 million in 1999. The average yield
on the taxable investment portfolio decreased to 6.51% for 2001, from 6.56% for
the prior year. The yield decrease resulted largely from a general decline in
interest rates during 2001, compared to an increase in 2000.
The Comparative Average Balance Sheet and Net Interest Analysis, a table
found on pages 8 and 9, 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 10, 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 2001 increased by $736,000, or 26.3%,
compared to 2000, and decreased by $91,000, or 3.2%, when 2000 is compared to
1999. The causes of the increase in non-interest income in fiscal year 2001 were
the $359,000, or 36.3%, increase in service fees on deposit accounts and the
$431,000, or 36.4%, increase in other income.
The increase in service fees on deposit accounts can be traced to a $40,000
increase in service charges on demand deposits and a $358,000 increase in
overdraft fees. The increase in service fees was the result of a reassessment
and rise in overall deposit account fees in August 2000. The increase in
overdraft fees was due partially to the reassessment done in August 2000, but
was mainly the result of the introduction of a new service called Overdraft
Privilege. This new service allows checking account overdrafts, up to a preset
dollar amount, with a fee for every check paid.
Other income has been greatly enhanced by the purchase of bank-owned life
insurance (BOLI). BOLI is used by banks as a deferred income strategy, as well
as a tax-exempt boost to earnings. The total additional income from BOLI was
$320,000 in 2001. The tax equivalent yield was $492,000. In addition to BOLI,
safe deposit box rental fees were up $40,000 and a new public accounting service
brought in $37,000 in its first year.
Trust income in 2001 was down by $54,000 due to a decrease in personal
trusts, estates and agency fees. The result was an 8.7% drop.
The primary cause of the fall off in non-interest income in fiscal year
2000 was the nonrecurrence of the proceeds from life insurance, as noted below.
Of the shortfall, $73,000 was made up by an increase in trust income, but then
offset by increases in trust expense. The increase in trust income was the
result of a new financial advisor, as explained below. In 1999, the largest part
of the increase in non-interest income was the proceeds of a life insurance
policy paid on the death of a key employee. The proceeds were $287,000, and were
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.
Also, in 1999, the main reason for the 9.5% increase in service fees on
deposit accounts was a reassessment of overall deposit account fees in 1998.
Another reassessment, in August 2000, contributed to the 2.6% increase
experienced in 2000. Average interest bearing liabilities were down 0.3% in 2000
and up 4.2% in 2001. Average non-interest bearing demand deposits were up 4.2%
in 2000 and 5.0% in 2001.
ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE DUE TO VOLUME AND RATE CHANGES
YEAR ENDED DECEMBER 31
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2001 VERSUS 2000 2000 Versus 1999 1999 Versus 1998
CHANGES DUE TO Changes Due To Changes Due To
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In thousands VOLUME RATE NET Volume Rate Net Volume Rate Net
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Interest earned on:
Loans .................................. $ 540 $ (955) $ (415) $ 654 $ 516 $ 1,170 $ (953) $(1,086) $(2,039)
Taxable investment securities .......... (418) (83) (501) 1,088 200 1,288 1,219 (27) 1,192
Non-taxable investment securities ...... (70) 18 (52) (213) 32 (181) 158 (26) 132
Federal funds sold ..................... 69 (34) 35 (62) 36 (26) (37) (16) (53)
Time deposits with banks ............... 514 (257) 257 (896) 288 (608) 478 (48) 430
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Total Interest Earning Assets .......... $ 635 $(1,311) $ (676) $ 571 $ 1,072 $ 1,643 $ 865 $(1,203) $ (338)
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Interest paid on:
Interest bearing demand deposits ....... $ 157 $ (575) $ (418) $ 34 $ 260 $ 294 $ 154 $ (75) $ 79
Savings deposits ....................... 48 (100) (52) (50) (177) (227) 94 (268) (174)
Time deposits .......................... 382 (292) 90 (631) 641 10 181 (691) (510)
Short-term borrowings .................. 102 (595) (493) 587 299 886 145 (30) 115
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Total Interest Bearing Liabilities ..... $ 689 $(1,562) $ (873 $ (60) $ 1,023 $ 963 $ 574 $(1,064) $ (490)
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NET INTEREST EARNINGS .................. $ (54) $ 251 $ 197 $ 631 $ 49 $ 680 $ 291 $ (139) $ 152
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NON-INTEREST EXPENSE
Non-interest expense was $14.3 million in 2001, an increase of 8.4%
compared to 2000. In 2000, non-interest expense was $13.2 million, a decrease of
0.4% compared to 1999. The cause of the increase in non-interest expense in 2001
crossed all the major areas of that category.
Personnel expense increased by $351,000, or 4.6%, in 2001. Normal merit
raises and new hiring delayed during 2000 were the main causes of the increase.
Net occupancy expense was up by $72,000, or 8.7%. This increase was primarily
due to leased offices. New facilities were leased, but the expense for upkeep of
the old facilities had not yet been eliminated.
The largest increase for 2001 was in the other expense category. Some of
the items that caused this increase included amortization of core deposit
intangible of $58,000, advertising of $65,000, postage of $68,000, supplies of
$77,000, and professional fees of $327,000. The professional fees were monies
spent for technology consulting, a market study, new Overdraft Privilege
introduction costs, merging two bank subsidiaries, legal, recruiting, and
accounting.
In 2000, personnel expense increased by $36,000, or 0.5%, compared to 1999.
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 for 2000. Costs were down by $204,000, or
6.5%, in 2000, compared to 1999. 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.
FDIC insurance cost remained the same in 2001. The cost for deposit
insurance was $85,000 in 2001 and $85,000 in 2000.
OVERVIEW OF THE BALANCE SHEET
During 2001, ACNB Corporation's total assets increased by $62.9 million, or
11.1%. In 2000, total assets grew by $21.4 million, or 3.9%. Deposits were up
$56.1 million in 2001. Approximately $24 million of this increase in deposits
came by purchase from Farmers & Mechanics Bank of Frederick, MD. Adams County
National Bank purchased the Fairfield, PA, and Gettysburg, PA, offices of
Farmers & Mechanics Bank in November 2001. The remainder of these deposits,
excluding normal growth, probably resulted from investors' retreat from Wall
Street.
Loans increased $1.6 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 $51.4 million, or 29.9%, as the new deposits outstripped
loan demand, while loans increased $1.6 million in 2001 after rising by $13.5
million in 2000. Premises and equipment increased by $1.0 million in 2001 and by
$164,000 in 2000. The increase in 2001 was caused by extensive alterations to
one branch office and purchase of another. Other assets increased over $10
million as the bank purchased approximately $8 million in bank-owned life
insurance and acquired approximately $24 million in core deposits at a premium
of $734,000. In addition, the corporation advanced over $700,000 in equity for a
new low-income housing project in Red Lion, PA.
On the liability side, non-interest bearing deposits increased $4.2
million, or 6.2%, in 2001 and by $5.0 million, or 8.1%, in 2000. Core interest
bearing deposits increased in 2001 by a total of $51.9 million. Fiscal year 2000
showed an increase of $4.5 million. Deposits increased rapidly because of stock
market turmoil and the purchase of approximately $24 million for a premium of
$734,000, as mentioned above. Borrowings increased by $2.6 million to $51.1
million in 2001, compared to an increase of $19.1 million in 2000. The increase
in 2001 helped fund a strategy to take advantage of low overall interest and
increase earnings.
Capital continued to be strong and increased by $2.3 million, or 3.8%, in
2001. Capital increased by $0.6 million, or 1.0%, in 2000. The increase was due
to strong retained earnings in 2001, but growth was constrained by a stock
repurchase program during 2000.
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-gathering 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, 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 12 and
13, 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 2001 and 2000, 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
2001, 81% of total assets were funded by core deposits and 8% were funded with
short-term purchased funds, compared to 80% and 9%, respectively, in 2000. 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 $266 million at
year-end 2001 with $18 million in outstanding borrowings.
Parent company liquidity is maintained by the cash flow from dividends
received from the subsidiary bank. Dividends from the subsidiary bank are the
corporation's primary source of funds to pay dividends to the corporation's
shareholders. The amount of dividends paid by the subsidiary bank is subject to
certain regulatory restrictions, detailed in Note L of the Notes to Consolidated
Financial Statements, "Restrictions on Subsidiary Dividends, Loans and
Advances". The parent company financial statements are presented in Note Q of
the Notes to Consolidated Financial Statements, "ACNB Corporation (Parent
Company Only) Financial Information".
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
In the normal course of business, ACNB Corporation does not use off-balance
sheet financial instruments to hedge potential fluctuations in income or market
values. The corporation's off-balance sheet items consist solely of loan
commitments and letters of credit.
QUANTITATIVE DISCLOSURES OF MARKET RISK
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Principal Amount Maturing In FAIR VALUE
--------------------------------------------------------------------------- DECEMBER 31,
RATE SENSITIVE ASSETS In thousands 2002 2003 2004 2005 2006 Thereafter TOTAL 2001
- --------------------------------------------------------------------------------------------------------------------------------
Fixed interest rate loans .............$ 17,454 $ 13,827 $ 12,042 $ 10,788 $ 11,441 $ 24,076 $ 89,628 $ 91,705
Average interest rate ................. 8.03% 8.05% 7.85% 7.68% 7.40% 7.73% 7.72%
Variable interest rate loans ..........$ 61,638 $ 36,409 $ 35,621 $ 24,383 $ 20,395 $ 94,505 $272,951 $275,674
Average interest rate ................. 5.51% 7.11% 7.48% 8.05% 7.96% 6.83% 6.72%
Fixed interest rate securities ........$ 39,412 $ 20,393 $ 16,992 $ 30,287 $ 49,698 $ 64,937 $221,719 $224,555
Average interest rate ................. 6.36% 6.08% 5.71% 5.19% 5.04% 6.31% 5.81%
Variable interest rate securities .....$ 75 $ 84 $ 93 $ 105 $ 118 $ 131 $ 606 $ 606
Average interest rate ................. 6.30% 6.30% 6.30% 6.30% 6.30% 6.30% 6.30%
Other interest bearing assets .........$ 740 $ -- $ -- $ -- $ -- $ -- $ 740 $ 740
Average interest rate ................. 1.75% 0.00% 0.00% 0.00% 0.00% 0.00% 1.75%
RATE SENSITIVE LIABILITIES
- --------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing checking .........$ 17,726 $ 15,954 $ 15,954 $ 7,091 $ 7,091 $ 7,091 $ 70,907 $ 70,907
Average interest rate ................. 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Savings and interest bearing checking..$ 11,394 $ 62,556 $ 62,550 $ 18,948 $ 18,948 $ 37,308 $211,704 $211,704
Average interest rate ................. 2.22% 1.64% 1.64% 1.59% 1.59% 1.59% 1.65%
Time deposits .........................$176,356 $ 27,880 $ 10,261 $ 12,022 $ 105 $ -- $226,624 $229,301
Average interest rate ................. 4.03% 4.73% 5.26% 4.81% 5.95% 0.00% 4.23%
Variable interest rate borrowings .....$ 34,882 $ 4,846 $ 4,986 $ 3,311 $ 3,476 $ -- $ 51,501 $ 51,501
Average interest rate ................ 2.00% 2.28% 2.28% 2.28% 2.28% 0.00% 2.09%
LOAN REVIEW AND ALLOWANCE
FOR LOAN LOSS ANALYSIS
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GENERAL
ACNB Corporation's lending activities are carried on through the subsidiary
bank. As of December 31, 2001, the corporation's total loan portfolio, carried
at historical cost, of $363 million included:
o $219.5 million in mortgage loans secured by liens on one-to-four
family residential properties;
o $89.8 million in mortgage loans secured by commercial properties, such
as apartment buildings, office buildings, warehouses, and medical
office buildings;
o $15.5 million in construction loans;
o $12.1 million in consumer loans; and,
o $25.7 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. With the volatile interest rates in 2000 and 2001,
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
the bank's network of 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.
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.
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 14, presents figures
relative to nonperforming assets and net charge-offs for 2001 and 2000.
NONPERFORMING ASSETS ANALYSIS
- ------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
--------------------------------------------------------
2001 2000
--------------------------- ---------------------------
NONPERFORMING NET Nonperforming Net
In thousands ASSETS CHARGE-OFFS Assets Charge-offs
--------------------------- ---------------------------
Real estate loans (1-to-4 family dwellings) $1,341 ........... $1,341 $ 31 $1,783 $ 35
Real estate loans (other) .................................... 462 97 956 5
Commercial and industrial .................................... 11 (10) 49 6
Consumer ..................................................... 26 94 58 42
------ ------ ------ ------
TOTAL ........................................................ $1,840 $ 212 $2,846 $ 88
====== ====== ====== ======
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 six properties valued at $1,646,000 as of December
31, 2001, up from $981,000 at December 31, 2000. Four of the properties are
residential real estate, of which one is under contract to sell, the fifth is a
subdivision development, valued at approximately $800,000 under option to sell,
and the sixth is a decommissioned branch under lease until it can be sold. 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 2001, ACNB Corporation's capital increased by $2.3 million, or 3.8%.
During 2000, the capital base increased by $0.6 million, or 1.0%. At year-end
2001, the risk-based capital ratios of Tier 1 capital and Total capital were
18.46% and 19.36%, 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 15.
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,
2001, 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, 2001,
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.
The corporation's quarterly common stock cash dividend remained at $.20 per
share during 2001, with an extra dividend of $.08 per share in the fourth
quarter, for a total of $.88 per share paid. In addition, a special dividend of
$.20 per share ($1,087,000) was declared in 2001, payable on January 15, 2002.
Annual dividends per share during 2000 were $.87, which also included a $.07
extra dividend declared in the fourth quarter of the year.
The corporation's total stockholders' equity at December 31, 2001, was
$62.7 million, or 9.95% of total assets, compared with $60.4 million, or 10.65%
of total assets, at December 31, 2000. The increase in capital is the result of
$3.5 million in retained earnings for the year 2001, compared to a reduction of
$2.2 million for the year 2000 from unrealized losses on available-for-sale
securities.
CAPITAL RATIOS AT YEAR-END
- --------------------------------------------------------------------------------
2001 2000
---- ----
Common stockholders' equity to assets ........ 9.95% 10.65%
Tier 1 leverage ratio ........................ 10.33% 10.90%
Tier 1 risk-based capital ratio .............. 18.46% 19.03%
Total risk-based capital ratio ............... 19.36% 20.19%
REGULATORY ACTIVITY
- --------------------------------------------------------------------------------
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. Management is not aware of any 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 these consolidations
and mergers, as well as the expanded diversification of products and services,
may enhance its competitive position as a community banking organization.
INDEPENDENT AUDITOR'S REPORT
StambaughoNess
----------------------------
CERTIFIED PUBLIC ACCOUNTANTS
To The Stockholders and Board of Directors
ACNB Corporation
Gettysburg, Pennsylvania
We have audited the accompanying consolidated statements of condition of
ACNB Corporation and subsidiary as of December 31, 2001 and 2000, 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, 2001.
These consolidated financial statements are the responsibility of the
corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 consolidated
financial statements. An audit also includes assessing the accounting principles
used and estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide 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, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Stambaugh Ness, PC
- ----------------------
York, Pennsylvania
January 15, 2002
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31
------------------------
ASSETS In thousands 2001 2000
- ------------------------------------------------------------------------------------------
Cash and due from banks ...................................... $ 21,185 $ 18,597
Interest bearing deposits with banks ......................... 740 1,605
Investment securities
(fair value $225,161 and $172,824, respectively) .......... 223,497 172,066
Federal funds sold ........................................... -- 3,514
Mortgage loans held for sale ................................. 1,040 136
Loans ........................................................ 361,539 360,854
Allowance for possible loan losses ........................... (3,723) (3,695)
-------- --------
Net loans .................................................... 357,816 357,159
Premises and equipment ....................................... 5,704 4,688
Other real estate............................................. 1,646 981
Other assets ................................................. 18,606 8,584
-------- --------
TOTAL ASSETS ................................................. $630,234 $567,330
======== ========
LIABILITIES
- ------------------------------------------------------------------------------------------
Non-interest bearing deposits ................................ $ 70,907 $ 66,739
Interest bearing deposits .................................... 438,328 386,410
-------- --------
TOTAL DEPOSITS ............................................... 509,235 453,149
Securities sold under agreement to repurchase ................ 33,239 32,207
Borrowings, Federal Home Loan Bank ........................... 17,850 16,300
Demand notes, U.S. Treasury................................... 412 450
Other liabilities............................................. 6,805 4,787
-------- --------
TOTAL LIABILITIES ............................................ 567,541 506,893
STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------
Common stock (par value $2.50; 20,000,000 shares authorized;
5,436,101 and 5,440,826 issued and outstanding shares
on 12/31/01 and 12/31/00, respectively).................... 13,590 13,602
Retained earnings............................................. 48,661 46,258
Accumulated other comprehensive income ....................... 442 577
-------- --------
TOTAL STOCKHOLDERS' EQUITY.................................... 62,693 60,437
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................... $630,234 $567,330
======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
----------------------------------------
INTEREST INCOME In thousands, except per share data 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Loans (including fees) ....................................... $ 27,892 $ 28,307 $ 27,137
Time deposits with banks ..................................... 599 342 950
Federal funds sold ........................................... 157 122 148
Taxable securities ........................................... 10,396 10,897 9,609
Non-taxable securities ....................................... 117 169 350
-------- -------- --------
TOTAL INTEREST INCOME ........................................ 39,161 39,837 38,194
INTEREST EXPENSE
- ----------------------------------------------------------------------------------------------------------
Interest bearing deposits .................................... 14,690 15,070 14,993
Other borrowed funds ......................................... 1,366 1,859 973
-------- -------- --------
TOTAL INTEREST EXPENSE ....................................... 16,056 16,929 15,966
NET INTEREST INCOME .......................................... 23,105 22,908 22,228
Provision for possible loan losses ........................... 240 240 253
-------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN LOSSES ........................... 22,865 22,668 21,975
NON-INTEREST INCOME
- ----------------------------------------------------------------------------------------------------------
Trust income ................................................. 569 623 550
Service fees on deposit accounts ............................. 1,348 989 964
Other income ................................................. 1,616 1,185 1,374
-------- -------- --------
TOTAL NON-INTEREST INCOME .................................... 3,533 2,797 2,888
NON-INTEREST EXPENSE
- ----------------------------------------------------------------------------------------------------------
Salaries and employee benefits ............................... 7,942 7,591 7,555
Net occupancy expense ........................................ 903 831 871
Equipment expense............................................. 1,088 1,078 1,174
Other taxes .................................................. 836 782 536
Professional services ........................................ 540 212 259
Other expense ................................................ 3,018 2,718 2,875
-------- -------- --------
TOTAL NON-INTEREST EXPENSE.................................... 14,327 13,212 13,270
INCOME BEFORE INCOME TAXES.................................... 12,071 12,253 11,593
Applicable income taxes ...................................... 3,734 4,158 3,770
-------- -------- --------
NET INCOME ................................................... $ 8,337 $ 8,095 $ 7,823
======== ======== ========
PER COMMON SHARE DATA*
- ----------------------------------------------------------------------------------------------------------
Basic earnings ............................................... $ 1.53 $ 1.44 $ 1.35
Cash dividends paid .......................................... $ .88 $ .87 $ .85
*Based on a weighted average of 5,436,117 shares in 2001,
5,623,137 shares in 2000, and 5,782,930 shares in 1999.
The accompanying notes are an integral part
of the consolidated financial statements.
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, 1999......................................... $ 14,458 $ 2,480 $ 42,846 $ 1,334 $ 61,118
Comprehensive income:
Net income ..................................................... -- -- 7,823 -- 7,823
Change in unrealized losses on securities, net of tax .......... -- -- -- (3,567) (3,567)
--------
Total comprehensive income .................................. 4,256
--------
Cash dividends paid ............................................... -- -- (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
Change in unrealized gains on securities, net of tax ........... -- -- -- 2,810 2,810
--------
Total comprehensive income .................................. 10,905
--------
Cash dividends paid ............................................... -- -- (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
Comprehensive income:
Net income ..................................................... -- -- 8,337 -- 8,337
Change in unrealized gains on securities, net of tax ........... -- -- -- 197 197
Change in unfunded pension liability, net of tax................ -- -- -- (332) (332)
--------
Total comprehensive income .................................. 8,202
--------
Cash dividends paid and declared .................................. -- -- (5,870) -- (5,870)
Retirement of 4,725 shares......................................... (12) -- (64) -- (76)
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 2001 ...................................... $ 13,590 $ -- $ 48,661 $ 442 $ 62,693
======== ======== ======== ======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
INCREASE (DECREASE) IN CASH ------------------------------------
AND CASH EQUIVALENTS In thousands 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and dividends received ............................................... $ 37,634 $ 39,299 $ 37,141
Fees and commissions received ................................................. 3,949 3,132 3,038
Interest paid ................................................................. (16,167) (16,443) (16,190)
Cash paid to suppliers and employees .......................................... (26,933) (11,982) (14,420)
Income taxes paid.............................................................. (3,970) (4,109) (4,061)
Loans originated for sale ..................................................... (15,962) (4,615) (11,888)
Proceeds of mortgage loans sold ............................................... 15,058 4,912 11,959
-------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ........................... (6,391) 10,194 5,579
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities held-to-maturity ............ 21,872 4,861 11,168
Proceeds from maturities of investment securities available-for-sale .......... 42,759 9,385 18,732
Purchase of investment securities held-to-maturity ............................ (5,000) (749) (21,299)
Purchase of investment securities available-for-sale........................... (105,774) (29,635) (4,700)
Net decrease (increase) in loans .............................................. (1,618) (14,516) 4,279
Capital expenditures .......................................................... (1,470) (647) (288)
Proceeds from sale of other real estate owned ................................. 60 118 64
Proceeds from officer life insurance policies ................................. -- -- 383
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ........................... (49,171) (31,183) 8,339
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts
and savings accounts ....................................................... 34,965 3,599 6,604
Net increase (decrease) in certificates of deposit ............................ 20,644 (3,083) (9,583)
Net increase in securities sold under agreement to repurchase.................. 1,509 2,830 6,719
Dividends paid ................................................................ (4,783) (4,876) (4,908)
Net increase in borrowed funds ................................................ 1,512 16,300 350
Retirement of common stock..................................................... (76) (5,455) (1,231)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ........................... 53,771 9,315 (2,049)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......................... (1,791) (11,674) 11,869
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................................ 23,716 35,390 23,521
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ...................................... $ 21,925 $ 23,716 $ 35,390
======== ======== ========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
- ----------------------------------------------------------------------------------------------------------------------
Net income .................................................................... $ 8,337 $ 8,095 $ 7,823
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization ................................................. 454 483 641
Provision for possible loan losses ............................................ 240 240 253
Benefit for deferred taxes..................................................... (475) (166) (200)
Amortization (Accretion) of investment securities premiums (discounts)......... (138) 13 (45)
Increase (Decrease) in taxes payable .......................................... (151) 215 (105)
Increase in interest receivable ............................................... (293) (792) (127)
Increase (Decrease) in interest payable ....................................... (111) 486 (225)
Increase (Decrease) in accrued expenses ....................................... (340) 25 801
Decrease (Increase) in mortgage loans held for sale ........................... (904) 297 71
Decrease (Increase) in other assets............................................ (12,720) 722 (2,612)
Increase (Decrease) in other liabilities ...................................... (290) 576 (696)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ........................... $ (6,391) $ 10,194 $ 5,579
======== ======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
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 eighteen locations in Adams, Cumberland and York
counties.
During 2000, the corporation, along with seven other banks, entered into a
joint venture to form Pennsbank Insurance Company, an offshore reinsurance
company. Each participating entity owns an insurance cell through which its
premiums and losses from credit life, health and accident insurance are funded.
Each entity is responsible for the activity in its respective cell. The
financial activity for the insurance cell has been reported in the consolidated
financial statements.
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 wholl y-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.
REVENUE RECOGNITION
Loans are stated at their principal amount outstanding, except for
mortgages held for sale which are carried at the lower of aggregate cost or
market value. Interest income on loans is accrued as earned.
LOAN ORIGINATION FEES AND COSTS
Loan origination fees and the related direct origination costs are offset,
and the net amount is deferred and amortized over the life of the loan as an
adjustment to interest income.
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, 2001 and 2000, 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.
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 has elected to reflect the statement of comprehensive
income within the consolidated statement of changes in stockholders' equity.
Comprehensive income reflects the impact of the change in unrealized gains and
losses on available-for-sale investments, net of tax, and the unfunded pension
liability, net of tax. During the years ended December 31, 2001, 2000 and 1999,
comprehensive income did not include reclassification adjustments for net
realized investment gains or losses that were included in net income.
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, 2001 and 2000, were approximately $9,507,000 and $8,455,000,
respectively.
NOTE C
INVESTMENT SECURITIES
- ------------------------------------------------------------------------------------------------------------------------
The amortized cost and estimated fair value of investment securities at December 31, 2001 and 2000, were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
2001 In thousands Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------
Held-to-Maturity Securities
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies................... $ 40,744 $ 1,644 $ -- $ 42,388
Obligations of states and political subdivisions ............. 2,123 11 8 2,126
Corporate debt ............................................... 1,957 17 -- 1,974
--------- --------- --------- --------
Total debt securities ........................................ 44,824 1,672 8 46,488
Restricted equity securities ................................. 3,656 -- -- 3,656
--------- --------- --------- --------
Total Held-to-Maturity Securities ............................ $ 48,480 $ 1,672 $ 8 $ 50,144
========= ========= ========= ========
Available-for-Sale Securities
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies................... $ 173,845 $ 2,363 $ 1,191 $175,017
========= ========= ========= ========
2000 In thousands
- ------------------------------------------------------------------------------------------------------------------------
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
========= ========= ========= ========
The amortized cost and estimated fair value of debt securities at December
31, 2001, 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 ........................................ $ 12,553 $ 12,624 $ 10,900 $ 10,876
After one year through five years ...................... 10,873 11,146 61,329 61,514
After five years through ten years ..................... 21,398 22,718 50,279 50,469
After ten years ........................................ -- -- 51,337 52,158
--------- --------- --------- --------
Total Debt Securities .................................. $ 44,824 $ 46,488 $ 173,845 $175,017
========= ========= ========= ========
NOTE C
INVESTMENT SECURITIES (continued)
- -------------------------------------------------------------------------------------------------------------------------------
U.S.
Government Taxable
and Federal State and Other Equivalent
DECEMBER 31, 2001 In thousands Agency Municipal Securities Total Yield
- -------------------------------------------------------------------------------------------------------------------------------
Amortized Cost
Within one year ................................. $ 21,100 $ 615 $ 1,738 $ 23,453 6.55%
After one year through five years ............... 71,329 654 219 72,202 4.87%
After five years through ten years .............. 70,823 854 -- 71,677 6.03%
After ten years ................................. 51,337 -- -- 51,337 6.48%
No set maturity ................................. -- -- 3,656 3,656 6.00%
-------- -------- -------- --------
Total ........................................... $214,589 $ 2,123 $ 5,613 $222,325
======== ======== ======== ========
Fair Value ...................................... $217,405 $ 2,126 $ 5,630 $225,161
======== ======== ======== ========
Taxable Equivalent Yield ........................ 5.82% 6.18% 6.25%
December 31, 2000 In thousands
- -------------------------------------------------------------------------------------------------------------------------------
Amortized Cost .................................. $158,422 $ 2,624 $ 10,145 $171,191
======== ======== ======== ========
December 31, 1999 In thousands
- -------------------------------------------------------------------------------------------------------------------------------
Amortized Cost .................................. $140,807 $ 4,321 $ 11,360 $156,488
======== ======== ======== ========
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, 2001 and 2000, assets with a carrying value of $77,744,000
and $98,999,000, respectively, were pledged as required or permitted by law to
secure certain public and trust deposits, repurchase agreements, or for other
purposes.
The corporation did not sell any securities over the past three years.
NOTE D
LOANS
- -------------------------------------------------------------------------------------------------
Loans at December 31 are summarized as follows:
In thousands 2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Commercial, financial and agricultural $ 18,027 $ 18,376 $ 12,697 $ 13,163 $ 11,160
Real estate - construction ........... 15,497 15,786 13,188 14,661 13,923
Real estate - mortgage ............... 316,928 314,385 308,241 309,030 316,078
Consumer ............................. 12,127 12,443 13,661 15,523 17,299
--------- --------- --------- --------- ---------
362,579 360,990 347,787 352,377 358,460
Less: Unearned discount on loans ..... -- -- -- 22 166
--------- --------- --------- --------- ---------
Total Loans .......................... $ 362,579 $ 360,990 $ 347,787 $ 352,355 $ 358,294
========= ========= ========= ========= =========
The following table outlines the repricing opportunities for all loans
outstanding as of December 31, 2001. Loans with immediately adjustable rates,
such as loans tied to prime rate, are included in the within one year column.
Loans with rates that are adjustable at some time over the life of the loan are
included under the time heading when they become adjustable. All fixed-rate
loans are included under the heading in which they mature.
Repricing Period
------------------------------------
Within After One Year
One Through
In thousands Year Five Years Total
-------- -------- --------
Commercial, financial and agricultural.. $ 8,203 $ 9,824 $ 18,027
Real estate - construction ............. 6,754 8,743 15,497
-------- -------- --------
Total .................................. $ 14,957 $ 18,567 $ 33,524
======== ======== ========
Loans with predetermined interest rates. $ 5,642 $ 12,318 $ 17,960
Loans with variable interest rates ..... 9,737 5,827 15,564
-------- -------- --------
Total .................................. $ 15,379 $ 18,145 $ 33,524
======== ======== ========
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, 2001 and
2000, was $1,280,000 and $3,221,000, 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
2001 Additions Collected 2001 Debtors
- --------------------------------------------------------------------------------
$3,221,000 $1,008,000 $2,949,000 $1,280,000 10
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 2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Balance of allowance for loan losses at beginning of period ....... $ 3,695 $ 3,543 $ 3,594 $ 3,350 $ 3,376
Loans charged-off:
Commercial, financial and agricultural ............................ 39 11 58 20 49
Real estate - construction-- ...................................... -- -- -- -- --
Real estate - mortgage ............................................ 131 42 128 4 34
Consumer........................................................... 139 . 84 204 195 181
--------- --------- --------- --------- ---------
Total loans charged-off ........................................... 309 137 390 219 264
Recovery of charged-off loans:
Commercial, financial and agricultural ............................ 49 5 5 -- 1
Real estate - construction......................................... -- -- -- -- --
Real estate - mortgage ............................................ 3 2 35 12 --
Consumer........................................................... 45 42 46 91 27
--------- --------- --------- --------- ---------
Total recoveries .................................................. 97 49 86 103 28
Net loans charged-off ............................................. 212 88 304 116 236
Provision for possible loan losses ................................ 240 240 253 360 210
--------- --------- --------- --------- ---------
Balance at end of period .......................................... $ 3,723 $ 3,695 $ 3,543 $ 3,594 $ 3,350
========= ========= ========= ========= =========
TOTAL LOAN BALANCES In thousands
- ----------------------------------------------------------------------------------------------------------------------------------
Average total loans ............................................... $ 359,404 $ 352,666 $ 344,323 $ 356,154 $ 353,553
Total loans at year-end ........................................... 362,579 360,990 347,787 352,355 358,294
RATIOS
- ----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs to:
Average total loans ............................................... 0.06% 0.02% 0.09% 0.03% 0.07%
Total loans at year-end ........................................... 0.06% 0.02% 0.09% 0.03% 0.07%
Allowance for loan losses ......................................... 5.69% 2.38% 8.58% 3.23% 7.04%
Allowance for loan losses to:
Average total loans ............................................... 1.04% 1.05% 1.03% 1.01% 0.95%
Total loans at year-end ........................................... 1.03% 1.02% 1.02% 1.02% 0.93%
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, 2001. 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 2001.
Management anticipates that charge-off amounts will approximate $250,000 in
2002.
NOTE E
ALLOWANCE FOR LOAN LOSSES (continued)
- ----------------------------------------------------------------------------------------------------------------------------------
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- ----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------- --------------- --------------- --------------- ----------------
% 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 $ 2,633 0.73% $ 2,590 0.72% $ 1,042 0.30% $ 838 0.24% $ 735 0.20%
Real estate - construction............ 122 0.03% 205 0.05% 246 0.07% 107 0.03% 72 0.02%
Real estate - mortgage ............... 533 0.15% 495 0.13% 1,474 0.43% 1,152 0.33% 1,602 0.45%
Consumer ............................ 360 0.10% 132 0.04% 251 0.07% 238 0.07% 211 0.06%
Unallocated .......................... 75 0.02% 273 0.08% 530 0.15% 1,259 0.35% 730 0.20%
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Total ................................ $ 3,723 1.03% $ 3,695 1.02% $ 3,543 1.02% $ 3,594 1.02% $ 3,350 0.93%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
NOTE F
PREMISES AND EQUIPMENT
- --------------------------------------------------------------------------------
The composition of corporation premises and equipment at December 31 was
as follows:
In thousands 2001 2000
------ ------
Land ............................................ $ 836 $ 904
Bank premises ................................... 6,757 6,502
Furniture and equipment ......................... 6,442 5,389
Less: Accumulated depreciation and amortization.. 8,331 8,107
------ ------
Total ........................................... $5,704 $4,688
====== ======
A summary of depreciation and amortization expenses is as follows:
In thousands 2001 2000 1999
---- ---- ----
Bank premises ................................... $172 $171 $224
Furniture and equipment.......................... 282 312 417
---- ---- ----
Total ........................................... $454 $483 $641
==== ==== ====
NOTE G
INVESTMENT IN REAL ESTATE PARTNERSHIPS
- --------------------------------------------------------------------------------
ACNB Corporation is a limited partner in three partnerships named
Gettysburg Scattered Site Associates, Poplar Creek Apartments and Red Lion Opera
House II, whose purpose is to develop, manage and operate residential low-income
properties. These investments are accounted for under the equity method of
accounting. At December 31, 2001 and 2000, the carrying value of these
investments was approximately $1,179,000 and $1,152,000, respectively.
NOTE H
NONPERFORMING ASSETS
- --------------------------------------------------------------------------------
The following table presents information concerning the aggregate amount of
nonperforming assets at December 31:
In thousands 2001 2000 1999 1998 1997
------ ------ ------ ------ ------
Nonaccrual loans ................ $ 837 $1,318 $1,615 $1,450 $1,908
90 days past due still accruing . 1,003 1,528 1,920 2,350 1,360
Restructured loans .............. -- -- -- -- --
Other real estate owned ......... 1,646 981 171 250 401
------ ------ ------ ------ ------
Total Nonperforming Assets....... $3,486 $3,827 $3,706 $4,050 $3,669
====== ====== ====== ====== ======
If interest due on all nonaccrual loans had been accrued at original
contract rates, it is estimated that income before taxes would have been greater
by $99,000 in 2001, $84,000 in 2000, and $127,000 in 1999.
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, 2001 and
2000, are summarized in the following table:
The interest expense related to time certificates of deposit in
denominations of $100,000 or more totaled $1,583,000 in 2001, $943,000 in 2000,
and $1,044,000 in 1999.
In thousands 2001 2000
------- -------
Time certificates of deposit.... $33,746 $20,432
Other time deposits ............ 1,000 1,000
Maturities of time deposits of $100,000 or more outstanding at December 31,
2001, are summarized as follows:
In thousands
Three months or less ........... $12,049
Over three through six months... 9,898
Over six through twelve months.. 5,974
Over twelve months ............. 6,825
-------
Total .......................... $34,746
=======
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 $151,000, $95,000 and
$119,000 for the years ended December 31, 2001, 2000 and 1999, 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:
In thousands
2002 ................................. $ 134
2003 ................................. 115
2004 ................................. 102
2005 ................................. 103
2006 ................................. 90
Later years .......................... 313
-----
Total Minimum Payments ............... $ 857
=====
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, 2001, 2000 and 1999, respectively:
In thousands 2001 2000 1999
------- ------- -------
Amount outstanding at year-end ................. $51,501 $48,957 $29,827
Average interest rate at year-end .............. 2.13% 5.83% 4.70%
Maximum amount outstanding at any month-end..... $57,965 $56,550 $29,827
Average amount outstanding...................... $36,355 $34,377 $22,711
Weighted average interest rate ................. 3.76% 5.41% 4.29%
At December 31, 2001, the bank had an overnight advance from the Federal
Home Loan Bank of $17,850,000 at an interest rate of 1.85% and a similar
borrowing of $16,300,000 at December 31, 2000.
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, 2001, $1,827,000 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, 2001, the maximum amount
available for transfer from the bank to the corporation in the form of loans was
approximately $6,457,000.
NOTE M
INCOME TAXES
- --------------------------------------------------------------------------------
The composition of applicable income taxes (benefits) for the years ended
December 31 was allocated as follows:
In thousands 2001 2000 1999
------- ------- -------
Income from continuing operations ................................... $ 3,734 $ 4,158 $ 3,770
Stockholders' equity for other comprehensive income.................. 219 297 (1,842)
------- ------- -------
Total ............................................................... $ 3,953 $ 4,455 $ 1,928
======= ======= =======
Income tax expense attributable to other comprehensive income consists of the
following at December 31:
In thousands 2001 2000 1999
------- ------- -------
Unrealized gains (losses) on securities arising during the period... $ 398 $ 297 $(1,842)
Unfunded pension liability .......................................... (179) -- --
------- ------- -------
Income Tax (Benefit) Expense Related to Other Comprehensive Income... $ 219 $ 297 $(1,842)
======= ======= =======
Income tax expense attributable to income from continuing operations consists of
the following at December 31:
In thousands 2001 2000 1999
------- ------- -------
Currently payable.................................................... $ 4,124 $ 4,379 $ 3,945
Deferred tax benefit................................................. (390) (221) (175)
------- ------- -------
Applicable Income Taxes.............................................. $ 3,734 $ 4,158 $ 3,770
======= ======= =======
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 2001 2000 1999
------ ------ ------
Income taxes at statutory rate ................ $4,225 $4,288 $4,054
Increase (Decrease) resulting from:
Tax-exempt income ............................. (266) (145) (103)
Rehabilitation and low-income housing credits.. (186) (186) (73)
Other ......................................... (39) 201 (108)
------ ------ ------
Applicable Income Taxes ....................... $3,734 $4,158 $3,770
====== ====== ======
The significant components of deferred tax assets and deferred tax
liabilities at December 31, 2001 and 2000, are as follows:
In thousands 2001 2000
------ ------
Deferred tax assets:
Allowance for possible loan losses .................. $ 976 $ 875
Deferred compensation ............................... 400 268
Unfunded pension liability .......................... 179 --
Other ............................................... 274 132
------ ------
Total gross deferred tax assets ..................... 1,829 1,275
------ ------
Deferred tax liabilities:
Depreciation ........................................ -- 11
Net unrealized gains on available-for-sale securities 398 297
Pension ............................................. -- 4
------ ------
Total gross deferred tax liabilities ................ 398 312
------ ------
Net Deferred Tax Assets ............................. $1,431 $ 963
====== ======
Since the corporation has historically had strong earnings, management
believes the deferred tax assets are realizable.
Income taxes paid during 2001, 2000 and 1999 were $4,090,000, $4,326,000
and $3,969,000, respectively.
NOTE N
RETIREMENT PLANS
- --------------------------------------------------------------------------------
The corporation's subsidiary has non-contributory pension plans. The plan
covering the employees of the bank 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, 2001, 2000 and 1999 was
$406,000, $341,000 and $408,000, 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, 2001 and 2000, and a statement of the funded status as of December
31, 2001 and 2000:
In thousands 2001 2000
------- -------
Reconciliation of benefit obligations:
Benefit obligations - beginning of year .............. $10,032 $ 9,285
Service costs ........................................ 342 327
Interest costs ....................................... 665 594
Actuarial (gains) losses ............................. 648 (318)
Benefit payments ..................................... (322) (214)
Plan changes ......................................... 61 358
------- -------
Benefit Obligations - End of Year .................... 11,426 10,032
------- -------
Reconciliation of fair value of plan assets:
Fair value of plan assets - beginning of year ........ 8,503 7,957
Actual return on plan assets ......................... 207 438
Employer contributions ............................... 292 322
Benefits paid ........................................ (322) (214)
------- -------
Fair Value of Plan Assets - End of Year .............. 8,680 8,503
------- -------
Reconciliation of funded assets:
Funded status at December 31(under funded) over funded (2,746) (1,529)
Unrecognized net actuarial loss ...................... 2,074 914
Unrecognized transition asset (obligation) ........... (12) 117
Unrecognized prior service costs ..................... 549 476
Recognition of additional minimum liability .......... (511) --
------- -------
Net Accrued Pension .................................. $ (646) $ (22)
======= =======
NOTE N
RETIREMENT PLANS (continued)
- --------------------------------------------------------------------------------
The following table provides the components of net periodic benefit costs
for the years ending December 31, 2001, 2000 and 1999:
In thousands
Components of net periodic benefit costs: 2001 2000 1999
----- ----- -----
Service costs .................................... $ 343 $ 327 $ 367
Interest costs ................................... 665 595 535
Expected return on assets ........................ (662) (636) (613)
Recognized net actuarial loss .................... -- 19 83
Amortization of transition asset ................. (2) (2) (14)
Amortization of prior service costs............... 62 38 50
----- ----- -----
Net Periodic Benefit Costs........................ $ 406 $ 341 $ 408
===== ===== =====
The assumptions used in the measurement of the benefit obligations are shown in
the following table:
Weighted average assumptions as of December 31: 2001 2000 1999
------------ ------------ ------------
Discount rate ........................................ 6.00 - 6.25% 6.00 - 6.75% 6.00 - 6.50%
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).. 4.69% 4.66% 4.69%
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, 2001 and 2000.
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 $204,000, $225,000 and $221,000 for 2001, 2000 and 1999,
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, 2001
and 2000, the present value of the future obligations was $797,000 and $682,000,
respectively. The insurance policies included in other assets had a total cash
value of $3,237,000 and $1,866,000, respectively, at December 31, 2001 and 2000.
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, 2001 and 2000, is presented below:
In thousands 2001 2000
-------- --------
Commitments to extend credit............ $ 51,479 $ 35,313
Standby letters of credit............... 5,121 3,871
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
2001 and 2000, approximately 96% of the corporation's assets and 90% 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, 2001 December 31, 2000
------------------------- --------------------------
ESTIMATED FAIR CARRYING Estimated Fair Carrying
In thousands VALUE AMOUNT Value Amount
-------------- --------- -------------- ----------
Cash and due from banks $ 21,185 $ 21,185 $ 18,597 $ 18,597
Interest bearing deposits with banks 740 740 1,605 1,605
Federal funds sold -- -- 3,514 3,514
Investment securities 225,161 222,325 172,824 171,191
Interest receivable 3,763 3,763 3,865 3,865
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, 2001 and 2000. Mortgages and consumer loans have been
revalued using discounted cash flows. The mortgages were estimated using market
rates at December 31, 2001 and 2000, and consumer loans were revalued using
rates being charged by the corporation at year-end 2001 and 2000. Fair value for
nonperforming loans is based on current valuations of underlying collateral.
DECEMBER 31, 2001 December 31, 2000
-------------------------- ----------------------------
ESTIMATED FAIR CARRYING Estimated Fair Carrying
VALUE AMOUNT Value Amount
In thousands -------------- -------- -------------- --------
Net loans................................. $366,339 $357,816 $359,286 $357,159
Mortgage loans held for sale.............. 1,040 1,040 136 136
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, 2001 and 2000. 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, 2001 December 31, 2000
-------------------------- ----------------------------
ESTIMATED FAIR CARRYING Estimated Fair Carrying
VALUE AMOUNT Value Amount
In thousands -------------- -------- -------------- --------
Deposits with no stated maturities ....... $282,611 $282,611 $247,039 $247,039
Deposits with stated maturities .......... 229,301 226,624 206,811 206,110
Repurchase agreements .................... 33,239 33,239 32,207 32,207
Federal funds purchased and demand notes.. 412 412 450 450
Federal Home Loan Bank borrowings ........ 17,850 17,850 16,300 16,300
Interest payable ......................... 2,856 2,856 3,058 3,058
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, 2001 December 31, 2000
-------------------------- ----------------------------
ESTIMATED FAIR CARRYING Estimated Fair Carrying
VALUE AMOUNT Value Amount
In thousands -------------- -------- -------------- --------
Commitments to extend credit.............. $ 51,479 $ 51,479 $ 35,313 $ 35,313
Standby letters of credit................. 5,121 5,121 3,871 3,871
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include deferred tax assets and
liabilities and property and equipment. In addition, the tax ramifications
related to the realization of unrealized gains and losses can have a significant
effect on the fair value estimates.
NOTE Q
ACNB CORPORATION (PARENT COMPANY ONLY)
FINANCIAL INFORMATION
- -----------------------------------------------------------------------------------------------------
DECEMBER 31
STATEMENTS OF CONDITION In thousands 2001 2000
- -----------------------------------------------------------------------------------------------------
ASSETS ..............................................................
Cash ............................................................... $ 53 $ 391
Securities and other assets ......................................... 2,406 1,493
Investment in common stock of subsidiary ............................ 60,764 57,813
Receivable from subsidiary .......................................... 489 258
-------- --------
TOTAL ASSETS ........................................................ $ 63,712 $ 59,955
======== ========
LIABILITIES
Accrued expenses..................................................... $ 1,461 $ 95
-------- --------
STOCKHOLDERS' EQUITY
Common stock (par value $2.50; 20,000,000 shares authorized;
5,436,101 and 5,440,826 issued and outstanding shares
on 12/31/01 and 12/31/00, respectively) ........................... 13,590 13,602
Additional paid-in capital .......................................... -- --
Retained earnings ................................................... 48,661 46,258
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .......................... $ 63,712 $ 59,955
======== ========
YEAR ENDED DECEMBER 31
STATEMENTS OF INCOME In thousands 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
INCOME
Dividend from subsidiary ............................................ $ 5,284 $ 11,000 $ 5,928
Interest income ..................................................... 3 6 --
EXPENSE ............................................................. 132 97 107
-------- -------- --------
INCOME BEFORE TAXES AND EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARY .............................. 5,155 10,909 5,821
Applicable tax benefit .............................................. (231) (218) (84)
-------- -------- --------
INCOME BEFORE EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARY .............................. 5,386 11,127 5,905
(Deficit) Equity in undistributed net income of subsidiary .......... 2,951 (3,032) 1,918
-------- -------- --------
NET INCOME .......................................................... $ 8,337 $ 8,095 $ 7,823
======== ======== ========
YEAR ENDED DECEMBER 31
STATEMENTS OF CASH FLOWS In thousands 2001 2000 1999
-----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Dividends and interest received ..................................... $ 5,287 $ 11,006 $ 5,928
-------- -------- --------
Net Cash Provided by Operating Activities ........................... 5,287 11,006 5,928
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in equity investments .................................... (714) (304) (188)
Investment in other assets .......................................... (52) (271) --
-------- -------- --------
Net Cash Used in Investing Activities ............................... (766) (575) (188)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid ...................................................... (4,783) (4,876) (4,908)
Retirement of common stock .......................................... (76) (5,455) (603)
Purchase of dissenters' shares ...................................... -- -- (140)
Net Cash Used in Financing Activities ............................... (4,859) (10,331) (5,651)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................ (338) 100 89
-------- -------- --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ...................... 391 291 202
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............................ $ 53 $ 391 $ 291
======== ======== ========
NOTE Q
ACNB CORPORATION (PARENT COMPANY ONLY)
FINANCIAL INFORMATION (continued)
- --------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
--------------------------------
STATEMENTS OF CASH FLOWS (continued) 2001 2000 1999
- --------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income ..................................................... $ 8,337 $ 8,095 $ 7,823
Decrease (Increase) in investment in common stock of subsidiary. (2,951) 3,032 (1,918)
Increase in receivable from subsidiary ......................... (231) (217) (16)
Loss on equity investment ...................................... 132 96 39
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...................... $ 5,287 $ 11,006 $ 5,928
======== ======== ========
NOTE R
FINANCIAL INFORMATION
RELATING TO OPERATING SEGMENTS
- --------------------------------------------------------------------------------
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, 2001 and 2000,
by the four operating segments:
Commercial Consumer Mortgage Investment
2001 In thousands Lending Lending Lending Securities Other Total
- ----------------------------------------------------------------------------------------------------------------
Total interest income ............. $ 11,500 $ 4,123 $ 12,268 $ 11,270 $ -- $ 39,161
Charge for funds used ............. (7,861) (2,369) (7,806) (6,858) 8,838 (16,056)
--------- --------- --------- --------- --------- ---------
Net Interest Income ............... 3,639 1,754 4,462 4,412 8,838 23,105
Provision for
possible loan losses ............. 94 82 64 -- -- (240)
--------- --------- --------- --------- --------- ---------
Net Interest Income After Provision
for Possible Loan Losses ......... 3,545 1,672 4,398 4,412 8,838 22,865
Non-interest income ............... 39 70 91 -- 3,333 3,533
Non-interest expense .............. (1,279) (532) (1,141) (40) (11,335) (14,327)
--------- --------- --------- --------- ------- ---------
Income Before Income Taxes ........ $ 2,305 $ 1,210 $ 3,348 $ 4,372 $ 836 $ 12,071
========= ========= ========= ========= ========= =========
Average Funds Used ................ $ 153,221 $ 46,180 $ 152,142 $ 162,021 $ 60,443 $ 574,007
========= ========= ========= ========= ========= =========
NOTE R
FINANCIAL INFORMATION
RELATING TO OPERATING SEGMENTS (continued)
- ------------------------------------------------------------------------------------------------------------------
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
========= ========= ========= ========= ========= =========
NOTE S
EFFECT OF RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133 (as amended by Statement Nos. 137
and 138), "Accounting for Derivative Instruments and Hedging Activities", in
June 1998 and it became effective January 2001. This statement and its
amendments establish accounting and reporting standards for derivative
instruments and hedging activities, including certain derivative instruments
embedded in other contracts, and require that an entity recognize derivative
assets or liabilities in the balance sheet and measure them at fair value.
Management has reviewed the statement and has determined that the statement has
no impact on the corporation's financial condition or results of operations or
requires separate disclosure.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfer
and Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No.
140 is effective for transfers and servicing of financial assets and
extinguishment of liabilities that occurred after March 31, 2001. Management has
reviewed this statement and has determined that the statement has had no impact
on the corporation's financial condition or results of operations.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
all business combinations initiated after June 30, 2001, shall be accounted for
using the purchase method of accounting. The pooling method of accounting is
prohibited except for transactions initiated before July 1, 2001.
SFAS No. 142 prescribes accounting for all purchased goodwill and
intangible assets. The statement requires that acquired goodwill is not
amortized, but is tested for impairment at least annually or whenever an
impairment indicator arises. Acquired intangible assets, other than goodwill,
should be initially recognized at fair value and amortized over its useful life.
The corporation had $673,000 of recorded intangibles at December 31, 2001, which
represent unamortized intangibles related to acquisitions of deposits from other
banks. These intangibles are being amortized over the estimated useful lives.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". The statement is effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal periods. This statement will require an
entity to recognize an impairment loss if the carrying value amount of a
long-lived asset or asset group is not recoverable and exceeds fair value. This
statement is not expected to have a material impact on the corporation's
financial position or results of operations.
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
====== ======
QUARTERLY RESULTS OF OPERATIONS
Selected quarterly information for the years ended December 31, 2001 and 2000,
is as follows:
First Second Third Fourth
2001 In thousands, except per share data Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------
Interest income $10,133 $ 9,831 $ 9,637 $ 9,560
- ------------------------------------------------------------------------------------
Interest expense 4,514 4,107 3,841 3,594
- ------------------------------------------------------------------------------------
Net interest income 5,619 5,724 5,796 5,966
- ------------------------------------------------------------------------------------
Provision for possible loan losses 60 60 60 60
- ------------------------------------------------------------------------------------
Net income 2,028 1,985 2,113 2,211
- ------------------------------------------------------------------------------------
Basic earnings per share .37 .37 .39 .40
- ------------------------------------------------------------------------------------
Return on average assets 1.44% 1.42% 1.47% 1.48%
- ------------------------------------------------------------------------------------
2000
- ------------------------------------------------------------------------------------
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%
- ------------------------------------------------------------------------------------
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 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------
Total interest income ................ $ 39,161 $ 39,837 $ 38,194 $ 38,532 $ 37,887
Total interest expense ............... 16,056 16,929 15,966 16,456 16,073
Net interest income .................. 23,105 22,908 22,228 22,076 21,814
Provision for possible loan losses ... 240 240 253 360 210
Net income ........................... 8,337 8,095 7,823 7,725 7,770
PER SHARE DATA
- -------------------------------------------------------------------------------------------------
Basic earnings ....................... $ 1.53 $ 1.44 $ 1.35 $ 1.33 $ 1.34
Cash dividends paid .................. .88 .87 .85 .78 .73
BALANCE SHEET TOTALS
- -------------------------------------------------------------------------------------------------
Average stockholders' equity ......... $ 62,482 $ 59,981 $ 60,742 $ 60,568 $ 56,600
Average assets ....................... 574,008 554,699 550,460 527,510 508,568
RATIOS
- -------------------------------------------------------------------------------------------------
Return on average assets ............. 1.45% 1.46% 1.42% 1.46% 1.53%
Return on average stockholders' equity 13.34% 13.50% 12.88% 12.75% 13.78%
Dividend payout ...................... 58% 60% 63% 58% 55%
Stockholders' equity to assets ....... 9.95% 10.65% 10.96% 11.23% 11.31%
COMMON STOCK MARKET PRICES AND DIVIDENDS
The common stock of ACNB Corporation is traded in the over-the-counter
market. As of December 31, 2001, the approximate number of shareholders of the
corporation's common stock was 2,977.
As quoted on the OTC Bulletin Board, high and low bid prices of common
shares and dividends for the last two years were:
2001 2000
------------------------- ------------------------
BID PRICE CASH Bid Price Cash
Quarter ---------------- DIVIDEND ------------- Dividend
Ended HIGH LOW PAID High Low Paid
- ---------------------------------------------------------------------
March 31 ...... $16.38 $15.88 $.20 $18.75 $17.00 $.20
June 30 ....... 17.25 15.50 .20 17.88 16.75 .20
September 30 .. 19.00 17.00 .20 18.00 17.88 .20
December 31 ... 18.40 18.05 .28 18.00 15.50 .27
The bid prices for ACNB Corporation common stock for the periods indicated
represent inter-dealer prices without adjustment for retail mark-up, mark-down
or commission, and do not necessarily represent actual transactions. Trades have
generally occurred in relatively small lots, and the prices quoted herein are
not necessarily indicative of the market value of a substantial block.
While the corporation expects to continue its policy of regular quarterly
dividend payment, no assurance of future dividend payment can be given. Future
dividend payments will depend upon maintenance of a continued strong financial
condition, future earnings, and capital requirements. The corporation has no
restrictions affecting the payment of dividends, except as indicated in Note L
of the Notes to Consolidated Financial Statements.
The following firms make a market in ACNB Corporation common stock:
Ferris, Baker Watts, Inc.
Frederick, MD
(301)662-6488/(800)950-6488
F.J. Morrissey & Co., Inc.
Philadelphia, PA
(215)563-8500/(800)842-8928
Janney Montgomery Scott, Inc.
York, PA
(717)845-5611/(800)999-0503
Salomon Smith Barney Inc.
Gettysburg, PA
(717)334-9101/(800)344-3828