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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-11783
ACNB CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-2233457
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
16 LINCOLN SQUARE, GETTYSBURG, PENNSYLVANIA 17325-3129
- ------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (717) 334-3161
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Securities registered pursuant to Section 12(b) of the Act: NONE Securities
registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $2.50 PER SHARE
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(TITLE OF CLASS)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_|
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant at June 30, 2003 was approximately $134,849,000.
The number of shares of Registrant's Common Stock outstanding on March 1, 2004
was 5,436,101.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 2004 Annual Meeting Proxy Statement are
incorporated by reference into Part III of this report.
ACNB CORPORATION
TABLE OF CONTENTS
PART I PAGE
----
Item 1. Business ..............................................................................3
Item 2. Properties ............................................................................9
Item 3. Legal Proceedings .....................................................................9
Item 4. Submission of Matters to a Vote of Shareholders .......................................9
PART II
Item 5. Market for the Registrant's Common Stock Equity
and Related Shareholder Matters and Issuer Purchases
of Equity Securities..................................................................10
Item 6. Selected Financial Data ..............................................................11
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........................................12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................27
Item 8. Financial Statements and Supplementary Data...........................................28
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................................................50
Item 9A. Controls and Procedures...............................................................51
PART III
Item 10. Directors and Executive Officers of the Registrant....................................51
Item 11. Executive Compensation................................................................51
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters ......................................................51
Item 13. Certain Relationships and Related Transactions........................................51
Item 14. Principal Accountant Fees and Services ...............................................51
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................52
Signatures............................................................................53
Exhibit: Index........................................................................54
2
PART I
The management of ACNB Corporation has made forward-looking statements in this
Annual Report on Form 10-K. These forward-looking statements may be subject to
risks and uncertainties. Forward-looking statements include the information
concerning possible or assumed future results of operations of ACNB Corporation
and its wholly-owned subsidiaries, Adams County National Bank and Pennbanks
Insurance Company. When words such as "believes", "expects", "anticipates",
"may", "could", "should", "estimates", or similar expressions occur in this
annual report, management is making forward-looking statements.
Shareholders should note that many factors, some of which are discussed
elsewhere in this report, could affect the future financial results of ACNB
Corporation and its subsidiaries, both individually and collectively, and could
cause those results to differ materially from those expressed in this report.
These risk factors include the following:
o Operating, legal and regulatory risks;
o Economic, political and competitive forces impacting our various lines of
business;
o The risk that our analysis of these risks and forces could be incorrect
and/or that the strategies developed to address them could be
unsuccessful;
o The possibility that increased demand or prices for ACNB's financial
services and products may not occur;
o Volatility in interest rates; and/or,
o Other risks and uncertainties.
ACNB undertakes no obligation to publicly revise or update these forward-looking
statements to reflect events or circumstances that arise after the date of this
report. Readers should carefully review the risk factors described in other
documents ACNB files periodically with the Securities and Exchange Commission,
including Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.
ITEM I - BUSINESS
ACNB CORPORATION
ACNB Corporation is a $872.7 million financial holding company headquartered in
Gettysburg, Pennsylvania. Through its banking and nonbanking subsidiaries, ACNB
provides a full range of banking and financial services to individuals and
businesses, including commercial and retail banking, trust, accounting and
insurance. ACNB's operations are conducted through its primary operating
subsidiary, Adams County National Bank with nineteen offices in Adams,
Cumberland and York Counties. The corporation was organized in 1983 and has had
no acquisitions for the previous five years.
ACNB's major source of operating funds is dividends that it receives from its
subsidiary bank. ACNB's expenses consist principally of losses from low-income
housing investments. Dividends that ACNB pays to shareholders consist of
dividends declared and paid to ACNB by the subsidiary bank.
ACNB and its subsidiaries are not dependent upon a single customer or a small
number of customers, the loss of which would have a material adverse effect on
the Corporation. ACNB does not depend on foreign sources of funds, nor does it
make foreign loans.
The common stock of ACNB is listed on the Over The Counter Bulletin Board under
the symbol ACNB.
The corporation has four operating segments which include commercial, consumer,
mortgage lending and investment securities. The corporation's marketplace is
south central 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 to possible loan losses to arrive at income before income taxes for
each respective segment.
3
BANKING SUBSIDIARY
ADAMS COUNTY NATIONAL BANK
Adams County National Bank is a full-service commercial bank operating under
charter from the Office of the Comptroller of the Currency. The bank's principal
market area is Adams County, Pennsylvania, which is located in south central
Pennsylvania. Adams County depends on agriculture, industry and tourism to
provide employment for its residents. No single sector dominates the county's
economy. At December 31, 2003, Adams County National Bank had total assets of
$869 million, total loans of $415 million and total deposits of $639 million.
The main office of the bank is located at 16 Lincoln Square, Gettysburg,
Pennsylvania. In addition to its main office, the bank has thirteen branches in
Adams County, two branches in York County, and three branches in Cumberland
County. Adams County National Bank's service delivery channels for its customers
also include the ATM network, Customer Contact Center, Internet and telephone
banking. The bank is subject to regulation and periodic examination by the
Office of the Comptroller of the Currency. The Federal Deposit Insurance
Corporation, as provided by law, insures the bank's deposits.
NONBANKING SUBSIDIARY
PENNBANKS INSURANCE CO.
Pennbanks Insurance Co. was organized in 2000 and holds an unrestricted Class
"B" Insurer's License under Cayman Islands Insurance Law. The segregated
portfolio is engaged in the business of reinsuring credit life and credit
accident and disability risks. Total assets of the segregated portfolio as of
December 31, 2003, totaled $562,000.
COMPETITION
The financial services industry in ACNB's market area is highly competitive,
including competition from commercial banks, savings banks, credit unions,
finance companies and nonbank providers of financial services. Several of ACNB's
competitors have legal lending limits that exceed those of ACNB's subsidiary, as
well as funding sources on the capital markets that exceed ACNB's availability.
The increased competition has resulted from a changing legal and regulatory
climate, as well as from the economic climate.
In addition, savings banks, savings and loan associations, credit unions, money
market and other mutual funds, mortgage companies, leasing companies, finance
companies, and other financial services companies offer competitive products and
services similar in terms to those offered by ACNB.
Many bank holding companies have elected to become financial holding companies
under the Gramm-Leach-Bliley Act, which gives them a broader range of products
with which the bank must compete. Although the long-range effects of this
development cannot be predicted, most probably it will further narrow the
differences and intensify competition among commercial banks, investment banks,
insurance firms and other financial services companies.
SUPERVISION AND REGULATION
BANK HOLDING COMPANY REGULATION
ACNB is a financial holding company and is subject to the regulations of the
Board of Governors of the Federal Reserve System under the Bank Holding Company
Act of 1956. Bank holding companies are required to file periodic reports with
and are subject to examination by the Federal Reserve. The Federal Reserve has
issued regulations under the Bank Holding Company Act that require a financial
holding company to serve as a source of financial and managerial strength to its
subsidiary bank. As a result, the Federal Reserve may require ACNB to stand
ready to use its resources to provide adequate capital funds to the bank during
periods of financial stress or adversity.
Under the Bank Holding Company Act, the Federal Reserve may require a financial
holding company to end a nonbanking business if the nonbanking business
constitutes a serious risk to the financial soundness and stability of any bank
subsidiary of the financial holding company.
The Bank Holding Company Act prohibits ACNB from acquiring direct or indirect
control of more than 5% of the outstanding voting stock of any bank, or
substantially all of the assets of any bank, or merge with another bank holding
company, without the prior approval of the Federal Reserve. The Bank Holding
Company Act allows interstate bank acquisitions and interstate branching by
acquisition and consolidation in those states that had not elected out by the
required deadline. The Pennsylvania Department of Banking also must approve any
similar consolidation. Pennsylvania law permits Pennsylvania financial holding
companies to control an unlimited number of banks.
In addition, the Bank Holding Company Act restricts ACNB's nonbanking activities
to those that are determined by the Federal Reserve Board to be financial in
nature, incidental to such financial activity, or complementary to a financial
activity. The Bank Holding Company Act does not place territorial restrictions
on the activities of nonbank subsidiaries of financial holding companies.
4
The Federal Deposit Insurance Corporation Improvement Act requires a bank
holding company to guarantee the compliance of any insured depository
institution subsidiary that may become "undercapitalized", as defined by
regulations, with the terms of any capital restoration plan filed by such
subsidiary with its appropriate federal banking agency, up to specified limits.
RECENT LEGISLATION
USA PATRIOT ACT OF 2001 - In October 2001, the USA Patriot Act of 2001 was
enacted in response to the terrorist attacks in New York, Pennsylvania and
Washington, D.C., which occurred on September 11, 2001. The Patriot Act is
intended to strengthen U.S. law enforcement's and the intelligence communities'
abilities to work cohesively to combat terrorism on a variety of fronts. The
potential impact of the Patriot Act on financial institutions of all kinds is
significant and wide ranging. The Patriot Act contains sweeping anti-money
laundering and financial transparency laws and imposes various regulations,
including standards for verifying client identification at account opening, and
rules to promote cooperation among financial institutions, regulators and law
enforcement entities in identifying parties that may be involved in terrorism or
money laundering.
FINANCIAL SERVICES MODERNIZATION LEGISLATION - In November 1999, the
Gramm-Leach-Bliley Act of 1999, or the GLB, was enacted. The GLB repeals
provisions of the Glass-Steagall Act which restricted the affiliation of Federal
Reserve member banks with firms "engaged principally" in specified securities
activities, and which restricted officer, director or employee interlocks
between a member bank and any company or person "primarily engaged" in specified
securities activities.
In addition, the GLB also contains provisions that expressly preempt any state
law restricting the establishment of financial affiliations, primarily related
to insurance. The general effect of the law is to establish a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms and other financial service providers by revising and expanding
the Bank Holding Company Act framework to permit a holding company to engage in
a full range of financial activities through a new entity known as a "financial
holding company". "Financial activities" is broadly defined to include not only
banking, insurance and securities activities, but also merchant banking and
additional activities that the Federal Reserve Board, in consultation with the
Secretary of the Treasury, determines to be financial in nature, incidental to
such financial activities or complementary activities that do not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally.
The GLB also permits national banks to engage in expanded activities through the
formation of financial subsidiaries. A national bank may have a subsidiary
engaged in any activity authorized for national banks directly or any financial
activity, except for insurance underwriting, insurance investments, real estate
investment or development, or merchant banking, which may only be conducted
through a subsidiary of a financial holding company. Financial activities
include all activities permitted under new sections of the Bank Holding Company
Act or permitted by regulation.
To the extent that the GLB permits banks, securities firms and insurance
companies to affiliate, the financial services industry may experience further
consolidation. The GLB is intended to grant to community banks certain powers as
a matter of right that larger institutions have accumulated on an ad hoc basis
and which unitary savings and loan holding companies already possess.
Nevertheless, the GLB may have the result of increasing the amount of
competition that ACNB faces from larger institutions and other types of
companies offering financial products, many of which may have substantially more
financial resources than ACNB has.
SARBANES-OXLEY ACT OF 2002 - On July 30, 2002, President Bush signed into law
the Sarbanes-Oxley Act of 2002, or the SOA. The stated goals of the SOA are to
increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies, and to
protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities law.
The SOA is the most far-reaching U.S. securities legislation enacted in some
time. The SOA generally applies to all companies, both U.S. and non-U.S., that
file or are required to file periodic reports with the Securities and Exchange
Commission (the "SEC") under the Securities Exchange Act of 1934, or the
Exchange Act. Given the extensive SEC role in implementing rules relating to
many of the SOA's new requirements, the final scope of these requirements
remains to be determined.
The SOA includes very specific additional disclosure requirements and new
corporate governance rules; requires the SEC and securities exchanges to adopt
extensive additional disclosure, corporate governance and other related rules;
and, mandates further studies of certain issues by the SEC. The SOA represents
significant federal involvement in matters traditionally left to state
regulatory systems, such as the regulation of the accounting profession, and to
state corporate law, such as the relationship between a board of directors and
management and between a board of directors and its committees.
The SOA addresses, among other matters:
o Audit committees for all reporting companies;
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o Certification of financial statements by the chief executive officer and
the chief financial officer;
o The forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and senior
officers in the twelve-month period following initial publication of any
financial statements that later require restatement;
o A prohibition on insider trading during pension plan black out periods;
o Disclosure of off-balance sheet transactions;
o A prohibition on personal loans to directors and officers;
o Expedited filing requirements for Forms 4s;
o Disclosure of a code of ethics and filing a Form 8-K for a change or
waiver of such code;
o "Real time" filing of periodic reports;
o Formation of a public accounting oversight board;
o Auditor independence; and,
o Increased criminal penalties for violations of securities laws.
The SOA contains provisions that became effective upon enactment on July 30,
2002 and provisions that will become effective from within 30 days to one year
from enactment. The SEC has been delegated the task of enacting rules to
implement various provisions with respect to, among other matters, disclosure in
periodic filings pursuant to the Exchange Act.
REGULATION W - Transactions between a bank and its "affiliates" are
quantitatively and qualitatively restricted under the Federal Reserve Act. The
Federal Deposit Insurance Act applies Sections 23A and 23B to insured nonmember
banks in the same manner and to the same extent as if they were members of the
Federal Reserve System. The Federal Reserve Board has also recently issued
Regulation W, which codifies prior regulations under Sections 23A and 23B of the
Federal Reserve Act, and interpretative guidance with respect to affiliate
transactions. Regulation W incorporates the exemption from the affiliate
transaction rules, but expands the exemption to cover the purchase of any type
of loan or extension of credit from an affiliate. Affiliates of a bank include,
among other entities, the bank's holding company and companies that are under
common control with the bank. ACNB Corporation is considered to be an affiliate
of Adams County National Bank. In general, subject to certain specified
exemptions, a bank or its subsidiaries are limited in their ability to engage in
"covered transactions" with affiliates:
o To an amount equal to 10% of the bank's capital and surplus, in the case
of covered transactions with any one affiliate; and,
o To an amount equal to 20% of the bank's capital and surplus, in the case
of covered transactions with all affiliates.
In addition, a bank and its subsidiaries may engage in covered transactions and
other specified transactions only on terms and under circumstances that are
substantially the same, or at least as favorable to the bank or its subsidiary,
as those prevailing at the time for comparable transactions with nonaffiliated
companies. A "covered transaction" includes:
o Loan or extension of credit to an affiliate;
o Purchase of, or an investment in, securities issued by an affiliate;
o Purchase of assets from an affiliate, with some exceptions;
o Acceptance of securities issued by an affiliate as collateral for a loan
or extension of credit to any party; and
o Issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate.
In addition, under Regulation W:
o A bank and its subsidiaries may not purchase a low-quality asset from an
affiliate;
o Covered transactions and other specified transactions between a bank or
its subsidiaries and an affiliate must be on terms and conditions that
are consistent with safe and sound banking practices; and,
o With some exceptions, each loan or extension of credit by a bank to an
affiliate must be secured by collateral with a market value ranging from
100% to 130%, depending on the type of collateral, of the amount of the
loan or extension of credit.
6
Regulation W generally excludes all nonbank and nonsavings association
subsidiaries of banks from treatment as affiliates, except to the extent that
the Federal Reserve Board decides to treat these subsidiaries as affiliates.
Concurrently with the adoption of Regulation W, the Federal Reserve Board has
proposed a regulation that would further limit the amount of loans that could be
purchased by a bank from an affiliate to not more than 100% of the bank's
capital and surplus.
DIVIDENDS
ACNB is a legal entity separate and distinct from its subsidiary bank. ACNB's
revenues, on a parent company only basis, result almost entirely from dividends
paid to the corporation by its subsidiary. Federal and state laws regulate the
payment of dividends by ACNB's subsidiary. See "Regulation of Bank" below.
REGULATION OF BANK
The operations of the subsidiary bank are subject to federal and state statutes
applicable to banks chartered under the banking laws of the United States, to
members of the Federal Reserve System, and to banks whose deposits are insured
by the FDIC. The bank's operations are also subject to regulations of the Office
of the Comptroller of the Currency, Federal Reserve, FDIC, and Pennsylvania
Department of Banking.
The Office of the Comptroller of the Currency, which has primary supervisory
authority over national banks, regularly examines banks in such areas as
reserves, loans, investments, management practices, and other aspects of
operations. These examinations are designed for the protection of the bank's
depositors rather than ACNB's shareholders. The subsidiary bank must file
quarterly and annual reports to the Federal Financial Institutions Examinations
Council or FFIEC.
The National Bank Act requires the subsidiary national bank to obtain the prior
approval of the Office of the Comptroller of the Currency for the payment of
dividends if the total of all dividends declared by the bank in one year would
exceed the bank's net profits in the current year, as defined and interpreted by
regulation, plus returned earnings for the two preceding years, less any
required transfers to surplus. In addition, the bank may only pay dividends to
the extent that the retained net profits, including the portion transferred to
surplus, exceed statutory bad debts, as defined by regulation. These
restrictions have not had, nor are they expected to have, any impact on the
corporation's dividend policy. Under the Federal Deposit Insurance Corporation
Insurance Act of 1991, any depository institution, including the bank, is
prohibited from paying any dividends, making other distributions or paying any
management fees if, after such payment, it would fail to satisfy the minimum
capital requirement.
A subsidiary bank of a bank holding company is subject to certain restrictions
imposed by the Federal Reserve Act, including:
o Extensions of credit to the bank holding company or its subsidiaries;
o Investments in the stock or other securities of the bank holding company
or its subsidiaries; and,
o Taking such stock or securities as collateral for loans.
The Federal Reserve Act and Federal Reserve regulations also place certain
limitations and reporting requirements on extensions of credit by a bank to the
principal shareholders of its parent holding company, among others, and to
related interests of principal shareholders. In addition, such legislation and
regulations may affect the terms upon which any person becoming a principal
shareholder of a holding company may obtain credit from banks with which the
subsidiary bank maintains a correspondent relationship.
ACNB and its subsidiary bank are affected by the monetary and fiscal policies of
government agencies, including the Federal Reserve and FDIC. Through open market
securities transactions and changes in its discount rate and reserve
requirements, the Board of Governors of the Federal Reserve exerts considerable
influence over the cost and availability of funds for lending and investment.
The nature of monetary and fiscal policies on future business and earnings of
ACNB cannot be predicted at this time.
OTHER
From time to time, various federal and state legislation is proposed that could
result in additional regulation of, and restrictions on, the business of ACNB
and the subsidiary bank, or otherwise change the business environment.
Management cannot predict whether any of this legislation will have a material
effect on the business of ACNB.
ACCOUNTING POLICY DISCLOSURE
Disclosure of the corporation's significant accounting policies is included in
Note A to the consolidated financial statements. Some of these policies are
7
particularly sensitive requiring significant judgments, estimates and
assumptions to be made by management. Additional information is contained in
Management's Discussion and Analysis for the most sensitive of these issues,
including the provision and allowance for loan losses which are located in Note
D to the consolidated financial statements.
Management in determining the allowance for loan losses makes significant
estimates. Consideration is given to a variety of factors in establishing this
estimate. In estimating the allowance for loan losses, management considers
current economic conditions, diversification of the loan portfolio, delinquency
statistics, results of internal loan review, financial and managerial strengths
of borrowers, adequacy of collateral, if collateral dependent, or present value
of future cash flows, and other relevant factors.
8
STATISTICAL DISCLOSURES
The following statistical disclosures are included in Management's Discussion
and Analysis, Item 7 hereof, and are incorporated by reference in this Item 1:
o Interest Rate Sensitivity Analysis
o Interest Income and Expense, Volume and Rate Analysis
o Investment Portfolio
o Loan Maturity and Interest Rate Sensitivity
o Loan Portfolio
o Allocation of Allowance for Loan Losses
o Deposits
o Short-Term Borrowings
AVAILABLE INFORMATION
The corporation's reports, proxy statements and other information are
available for inspection and copying at the Public Reference Room at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, DC, 20549, at prescribed rates. The
public may obtain information on the operation of the Public Reference Room by
calling the Commission at 1-800-SEC-0330. The corporation is an electronic filer
with the Commission. The Commission maintains a website that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of the Commission's
website is HTTP://WWW.SEC.GOV.
Upon a shareholder's written request, a copy of the corporation's
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports
on Form 8-K, as required to be filed with the SEC pursuant to Securities
Exchange Act Rule 13a-1, may be obtained, without charge, from John W. Krichten,
Secretary/Treasurer, 16 Lincoln Square, P.O. Box 3129, Gettysburg, PA 17325, or
visit our website at HTTP://WWW.ACNB.COM.
EMPLOYEES
As of December 31, 2003, ACNB had 207 full-time equivalent employees.
None of these employees are represented by a collective bargaining agreement,
and ACNB believes it enjoys good relations with its personnel.
ITEM 2 - PROPERTIES
ACNB Corporation owns no real estate.
Adams County National Bank, in addition to its main office, had an office
network of eighteen offices at December 31, 2003. All offices are located in
Adams County with the exception of three offices located in Cumberland County
and two offices located in York County. Offices at fourteen locations are owned,
while four are leased. All real estate owned by the subsidiary bank is free and
clear of encumbrances.
ITEM 3 - LEGAL PROCEEDINGS
As of December 31, 2003, there were no material pending legal proceedings, other
than ordinary routine litigation incidental to the business, to which ACNB or
its subsidiaries are a party or by which any of their property is the subject.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
There were no matters submitted to a vote of shareholders during the fourth
quarter of 2003.
9
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK EQUITY AND RELATED SHAREHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ACNB Corporation's common stock trades on the Over The Counter Bulletin Board
under the symbol ACNB. There were 20,000,000 shares of common stock authorized
at December 31, 2003, and 5,436,101 shares outstanding. As of March 1, 2004,
ACNB had approximately 2,900 stockholders of record. There is no other class of
stock authorized or outstanding. ACNB is restricted as to the amount of
dividends that it can pay to shareholders by virtue of the restrictions on the
subsidiary's ability to pay dividends to ACNB. ACNB Corporation has no equity
compensation plans.
There have been no unregistered sales of stock in 2003, 2002 or 2001.
The following table reflects the quarterly high and low prices of ACNB's common
stock for the periods indicated and the cash dividends on the common stock for
the periods indicated.
PRICE RANGE PER SHARE PER SHARE
2003 HIGH LOW DIVIDEND
---- ---- --- --------
First Quarter $26.65 $21.00 $ .21
Second Quarter $25.75 $22.80 $ .21
Third Quarter $26.50 $24.05 $ .21
Fourth Quarter $28.50 $25.25 $ .26
PRICE RANGE PER SHARE PER SHARE
2002 HIGH LOW DIVIDEND
---- ---- --- --------
First Quarter $18.50 $17.10 $ .40
Second Quarter $22.40 $17.80 $ .20
Third Quarter $21.50 $19.65 $ .20
Fourth Quarter $21.60 $20.75 $ .28
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ITEM 6 - SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31
(Dollars in thousands, except per share data)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
SUMMARIES OF INCOME
Interest income $ 36,689 $ 37,794 $ 39,161 $ 39,837 $ 38,194
Interest expense 13,945 13,453 16,056 16,929 15,966
---------- ----------- ----------- ----------- -----------
Net interest income 22,744 24,341 23,105 22,908 22,228
Provision for loan losses 265 370 240 240 253
---------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 22,479 23,971 22,865 22,668 21,975
Non-interest income 9,429 5,028 3,533 2,797 2,888
Non-interest expenses 17,998 16,988 14,327 13,212 13,270
---------- ----------- ----------- ----------- -----------
Income before income taxes 13,910 12,011 12,071 12,253 11,593
Applicable income taxes 3,142 3,107 3,734 4,158 3,770
---------- ----------- ----------- ----------- -----------
NET INCOME $ 10,768 $ 8,904 $ 8,337 $ 8,095 $ 7,823
========== =========== =========== =========== ===========
FINANCIAL CONDITION AT YEAR END
Assets $ 872,731 $ 734,644 $ 630,234 $ 567,330 $ 545,952
Loans, net 411,051 368,469 357,816 357,159 343,811
Deposits 639,388 582,615 509,235 453,149 452,633
Borrowed money 156,676 76,445 51,501 48,957 29,827
Stockholders' equity 72,391 70,100 62,693 60,437 59,863
PER COMMON SHARE DATA
Earnings per share - basic $ 1.98 $ 1.64 $ 1.53 $ 1.44 $ 1.35
Earnings per share - diluted 1.98 1.64 1.53 1.44 1.35
Cash dividends paid .89 1.08 0.88 0.87 0.85
Book value 13.32 12.90 11.53 10.75 10.35
Weighted average number of
common shares:
Basic 5,436,000 5,436,000 5,436,000 5,623,000 5,783,000
Diluted 5,436,000 5,436,000 5,436,000 5,623,000 5,783,000
Dividend payout ratio 45% 66% 58% 60% 63%
PROFITABILITY RATIOS ON EARNINGS
Return on average assets 1.32% 1.35% 1.45% 1.46% 1.42%
Return on average equity 15.41% 13.45% 13.34% 13.50% 12.88%
Equity to assets 8.29% 9.54% 9.95% 10.65% 10.96%
SELECTED ASSET QUALITY RATIOS
Nonperforming loans to total
loans 1.21% 0.65% 0.51% 0.79% 1.01%
Net charge-offs to average loans
outstanding .03% 0.07% 0.06% 0.02% 0.09%
Allowance for loan losses to
total loans .96% 1.02% 1.03% 1.02% 1.02%
Allowance for loan losses to
nonperforming loans 79.3% 158.8% 202.3% 129.8% 100.2%
11
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION AND FORWARD-LOOKING STATEMENTS
INTRODUCTION
The following is management's discussion and analysis of the significant changes
in the results of operations, capital resources and liquidity presented in its
accompanying consolidated financial statements for ACNB Corporation, a financial
holding company. Please read this discussion in conjunction with the
consolidated financial statements and disclosures included herein. Current
performance does not guarantee, assure or indicate similar performance in the
future.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this 2003 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. 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, filed by the
corporation in 2004 and any Current Reports on Form 8-K filed by the
corporation.
CRITICAL ACCOUNTING POLICIES
The accounting policies that the Corporation's management deems to be most
important to the portrayal of its financial condition and results of operations,
and that require management's most difficult, subjective or complex judgment,
often result in the need to make estimates about the effect of such matters
which are inherently uncertain. The following policy is deemed to be a critical
accounting policy by management:
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses represents management's estimate of probable
losses inherent in our loan portfolio. Management makes numerous assumptions,
estimates and adjustments in determining an adequate allowance. The Corporation
assesses the level of potential loss associated with its loan portfolio and
provides for that exposure through an Allowance for Loan Losses. The allowance
is established through a provision for loan losses charged to earnings. The
allowance is an estimate of the losses inherent in the loan portfolio as of the
end of each reporting period. The Corporation assesses the adequacy of its
allowance on a quarterly basis. The specific methodologies applied on a
consistent basis are discussed in greater detail under the caption "Allowance
for Loan Losses" in a subsequent section of the following Management's
Discussion and Analysis of Financial Condition and Results of Operations.
RESULTS OF OPERATIONS
OVERVIEW
ACNB's 2003 net income was $10,768,000, or $1.98 per share, compared to
$8,904,000, or $1.64 per share in 2002, and $8,337,000, or $1.53 per share in
2001.
Returns on average equity were 15.41% in 2003, 13.45% in 2002, and 13.34% in
2001. Returns on average assets were 1.32% in 2003, 1.35% in 2002, and 1.45% in
2001.
NET INTEREST INCOME
The primary source of ACNB's traditional banking revenue is net interest income,
which represents the difference between interest income on earning assets and
interest expense on liabilities used to fund those assets. Earning assets
include loans, securities, and federal funds sold. Interest-bearing funds
include deposits and borrowings.
Net interest income is affected by changes in interest rates, volume of interest
bearing assets and liabilities, and the composition of those assets and
liabilities. The "interest rate spread" and "net interest margin" are two common
statistics related to changes in net interest income. The interest rate spread
represents the difference between the yields earned on interest earning assets
and the rates paid for interest bearing liabilities. The net interest margin is
defined as the percentage of net interest income to average earning assets. Due
to demand deposits and stockholders' equity, the net interest margin exceeds the
interest rate spread, as these funding sources are non-interest bearing.
Table 1 presents net interest income, interest rate spread, and net interest
margin for the years ending December 31, 2003, 2002 and 2001. Table 2 analyzes
the changes in net interest income for the periods broken down by their rate and
volume components.
12
Net interest income in 2003 was $22,744,000, compared to $24,341,000 in 2002 and
$23,105,000 in 2001. ACNB was able to increase its net interest income from 2001
to 2002 primarily through an increase in average earning assets, but interest
rates fell too far in late 2002 and 2003 for the same strategy to work in 2003.
The interest rate spread and net interest margin have compressed over the last
three years. The interest rate spread was 2.71% in 2003, down from 3.47% in 2002
and 3.60% in 2001. The net yield on earning assets experienced similar results,
totaling 2.96% in 2003, down from 3.91% in 2002 and 4.27% in 2001. Several
factors impacted the net interest margin for 2003. First, ACNB was in an asset
sensitive interest rate risk position in 2003, and interest earning assets
repriced more quickly than interest bearing liabilities. Longer-term funding
sources, including certificates of deposit, have to reach their maturity date to
reprice. Second, ACNB had a less profitable interest earning asset mix, as
deposits and borrowings were used to fund securities because loan growth
remained weak. Finally, the market area served by ACNB is highly competitive,
resulting in financial institutions pricing quality credits competitively in
order to increase volume.
Average earning assets were $767,597,000 in 2003, an increase of 23.2% over the
2002 balance of $622,890,000. Average earning assets for 2001 were $541,117,000.
Securities growth was the primary contributor to the increase in average earning
assets during these periods with loans remaining a secondary source.
Average securities were $373,582,000 for the year ended December 31, 2003,
compared to $253,060,000 in 2002 and $162,021,000 in 2001. Weak loan growth,
coupled with strong growth in transaction accounts, required increased emphasis
on the securities portfolio, which resulted in growth of 47.6%, in 2003,
compared to 56.2% in 2002. Because the bank has traditionally been a mortgage
lender and mortgage-backed securities carry higher interest rates than other
agency securities, most of the securities growth in 2002 was in mortgage-backed
securities. Mortgage backed securities grew from $102,419,000 at December 31,
2001, to $184,893,000 at December 31, 2002. In addition, corporate securities
increased from $1,957,000 to $65,068,000 or 3,236% during the same time period.
During 2003, the trend reversed itself. Because of the Registrant's pronounced
exposure to mortgage backed securities and the attendant prepayment risk,
securities purchase strategy changed to emphasize corporate securities rather
than mortgage backed securities. At December 31, 2003, mortgage backed
securities had increased to $202,262,000, while corporate securities had grown
65% to $106,401,000. The significant increase of corporate securities was caused
by extremely low U.S. Treasury and agency rates. The rate spread between
corporate and government securities indicated the need for a strong preference
for corporate securities. The securities have a relatively short duration that
should provide sufficient liquidity to assist in the funding of loan demand, and
opportunities in the bond market should rates rise in 2004. Overall loan income
is down due to lower rates, but slow loan growth prevented the increase in
volume from making up for the decrease.
Average loans were $388,842,000 in 2003, versus $367,494,000 in 2002 and
$359,404,000 in 2001. The greater increase in loans, in part, reflects a
decision to keep shorter term fixed rate mortgages in the bank's portfolio.
Average interest bearing liabilities were $672,581,000 in 2003, up from
$516,897,000 in 2002 and $441,112,000 in 2001. Funding to support loan and
securities growth came from an increase in interest bearing liabilities in 2003
and 2002, with a continued shift in mix from time deposits to borrowed money and
lower-cost demand and savings deposits.
13
TABLE 1 - COMPARATIVE AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
YEAR ENDED DECEMBER 31
2003 2002
-------------------------------- ---------------------------------
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ----
ASSETS IN THOUSANDS
Loans $ 388,842 $ 23,670 6.09% $367,494 $ 24,752 6.74%
Taxable investment securities 351,346 12,062 3.43% 247,272 12,727 5.15%
Non-taxable investment securities 22,236 882 3.97% 5,788 241 4.16%
Federal funds sold -- -- -- -- -- --
Interest bearing deposits with
banks 5,173 75 1.45% 2,336 74 3.17%
--------- --------- -------- ---------
Total interest earnings assets 767,597 $ 36,689 4.78% 622,890 $ 37,794 6.07%
Cash and due from banks 20,974 19,050
Premises and equipment 7,371 6,338
Other assets 25,628 14,783
Allowance for loan losses (3,887) (3,722)
--------- --------
TOTAL ASSETS $ 817,683 $659,339
========= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing demand deposits $ 100,586 $ 1,088 1.08% $ 83,825 $ 1,134 1.35%
Savings deposits 225,099 3,415 1.52% 158,804 3,070 1.93%
Time deposits (excluding time
certificates of deposits of
$100,000 or more) 207,599 6,164 2.97% 202,036 6,779 3.36%
Time certificates of deposit of
$100,000 or more 17,444 557 3.19% 21,272 1,275 5.99%
Borrowings 121,853 2,721 2.23% 50,960 1,195 2.34%
--------- --------- --------- ----------
Total interest bearing
liabilities 672,581 13,945 2.07% 516,897 $ 13,453 2.60%
INTEREST RATE SPREAD 2.71% 3.47%
Demand deposits 71,474 72,408
Other liabilities 3,744 3,829
Stockholders' equity 69,884 66,205
--------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 817,683 $ 659,339
========= =========
INTEREST INCOME/
EARNING ASSETS $ 767,597 36,689 4.78% $ 622,890 $ 37,794 6.07%
INTEREST EXPENSE/
EARNING ASSETS (767,597) (13,945) 1.82% (622,890) (13,453) (2.16)%
---------- --------- ----- ---------- --------- -------
NET YIELD ON
EARNING ASSETS -- $ 22,744 2.96% -- $ 24,341 3.91%
========== ========= ===== =========== ========= =====
TABLE 1 - COMPARATIVE AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
YEAR ENDED DECEMBER 31
2001
--------------------------------------
BALANCE INTEREST RATE
------- -------- ----
ASSETS IN THOUSANDS
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 earnings 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 $ 547,007
=========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing demand deposits $ 74,658 $ 1,497 2.01%
Savings deposits 117,973 2,554 2.16%
Time deposits (excluding time
certificates of deposits 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%
Borrowings 36,355 1,366 3.76%
------ -----------
Total interest bearing
liabilities 441,112 $ 16,056 3.64%
INTEREST RATE SPREAD 3.60%
Demand deposits 66,052
Other liabilities 4,361
Stockholders' equity 62,482
------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 574,007
=========
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%
========= ========= ========
The rate-volume variance analysis set forth in the table below compares changes
in net interest income for the periods indicated by their rate and volume
components. The change in interest income/expense due to both volume and rate
has been factored in proportionally.
TABLE 2 - ANALYSIS OF CHANGES IN NET INTEREST INCOME
2003 VERSUS 2002 2002 Versus 2001
----------------------------------------- -----------------------------------------------
DUE TO CHANGES IN Due to Changes in
\
IN THOUSANDS VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
Interest earned on:
Loans $ 1,389 $(2,471) $(1,082) $ 613 $(3,753) $(3,140)
Taxable investment securities 4,372 (5,037) (665) 4,833 (2,502) 2,331
Non-taxable investment securities 653 (12) 641 149 (25) 124
Federal funds sold -- -- -- (79) (78) (157)
Time deposits with banks 56 (55) 1 (457) (68) (525)
---------- -------- -------- --------- ---------- ---------
Total Interest Earning Assets 6,470 (7,575) (1,105) 5,059 (6,426) (1,367)
-------- -------- -------- -------- -------- --------
Interest paid on:
Interest bearing demand deposits 203 (249) (46) 169 (532) (363)
Savings deposits 1,092 (747) 345 810 (294) 516
Time deposits (393) (940) (1,333) (2,453) (132) (2,585)
Short-term borrowings 1,585 (59) 1,526 444 (615) (171)
------- --------- -------- --------- --------- ---------
Total Interest Bearing Liabilities 2,487 (1,995) 492 (1,030) (1,573) (2,603)
-------- -------- --------- -------- -------- --------
NET INTEREST EARNINGS $ 3,983 $(5,580) $(1,597) $ 6,089 $(4,853) $ 1,236
======= ======= ======= ======== ======= =======
14
PROVISION FOR LOAN LOSSES
The provision for loan losses charged against earnings was $265,000 in 2003,
compared to $370,000 in 2002 and $240,000 in 2001. ACNB adjusts the provision
for loan losses periodically as necessary to maintain the allowance at a level
deemed to meet the risk characteristics of the loan portfolio. The $130,000, or
54.0%, increase in the provision for loan losses during 2002, compared to 2001,
reflects increases in net charge-offs and some growth in the loan portfolio. The
28.4% decrease was indicative of conditions during the major part of 2003, but
greater activity at the end of 2003 may cause a larger provision for 2004.
See further discussion in the asset quality discussion of this annual report.
NON-INTEREST INCOME
Non-interest income was $9,429,000 for the year ended December 31, 2003, an
87.5% increase over 2002. For the year ended December 31, 2002, non-interest
income totaled $5,028,000, an increase of 42.3% over 2001 totals.
The 2003 gain in non-interest income is directly attributable to $2,161,000 of
insurance proceeds due to the death of an executive officer, $1,992,000 of
securities gains realized through sale of securities and $173,000 of gain on the
sale of other real estate. The insurance proceeds will not recur in 2004, there
may be gains on other real estate, but probably not as significant as 2003. If
yields can be improved or overall income enhancements achieved, gains will be
realized, but with flat or rising interest rates, this may be difficult to
accomplish.
Income from fiduciary activities, which includes both institutional and personal
trust management services and brokerage service fees, shrank slightly to
$663,000 for the year ended December 31, 2003, down 3% from $683,000 in 2002,
which was up 20% from $569,000 in 2001. At December 31, 2003, ACNB had total
assets under administration of approximately $64,000,000, up 8% compared to
$59,000,000 at the end of 2002, which was down 14% from $69,000,000 at the end
of 2001. The 2001 numbers include assets of approximately $11,000,000 in a
non-profit organization bond fund. These funds inflated 2001 totals, but were
paid out by the end of 2002. The decrease in income for 2003 came from brokerage
fees, while the increase in 2002 resulted from estate management and brokerage
fees.
Service fees on deposit accounts were $1,788,000 in 2003, a 1.8% increase over
2002's total of $1,755,000. 2002 experienced a larger increase over 2001's
results, which were $1,348,000. The increase in both 2003 and 2002 is the result
of a new service called Overdraft Privilege. The new service allows checking
account overdrafts, up to a preset dollar amount, with a fee for every check
paid. The large increase from 2001 to 2002 was not repeated in 2003 and probably
will not recur in 2004.
Other non-interest income was $1,930,000 for the year ended December 31, 2003,
an increase of $30,000 or 1.5%, over 2002's amount of $1,900,000. Earnings on
bank-owned life insurance (BOLI) was up $150,000. Non-interest income for 2002
was up 59.6%, but various other categories were down. Income was enhanced during
2002 by an increase in BOLI of $151,000, a $60,000 litigation fee and gain on
public accounting services of $14,000. BOLI is used to fund various employee
benefit plans, and all employees affected are aware of their insured status.
NON-INTEREST EXPENSE
The largest component of non-interest expense is salaries and employee benefits,
which increased $448,000, or 4.7%, to $9,902,000 in 2003, after increasing by
$1,512,000, or 19.0%, in 2002. The increase in salaries and employee benefits
during 2003 is attributable to the following factors:
o Normal merit increases to employees;
o Increases in administrative personnel expense as the bank's strategic
direction continues to focus on greater growth; and,
o Increases in employee benefit costs, particularly health and welfare
benefit plans, consistent with the rising health care cost trend noted
nationwide and increased net periodic pension costs due to the
underperformance of investments in the pension plan.
Net occupancy expense was $1,164,000 in 2003, $829,000 in 2002, and $701,000 in
2001. The 40.4% increase experienced in 2003 was the result of additional
operational expenses and depreciation associated with the overall bank growth.
The several branches brought on line in 2001 and 2002 continue to cost more as
full year operations are achieved and increase.
The 38.9%, or $549,000, increase in furniture and equipment expense during 2003
versus 2002 was the result of increased maintenance costs associated with more
sophisticated delivery channels offered to the bank's customer base.
Professional service expense totaled $339,000 for the year ended December 31,
2003, a 25% decrease from 2002 results. The decrease in professional services
can be attributed to the following factor:
15
o Payments for the rights to and implementation of Overdraft Privilege, a
service the bank has been offering for several years. The payments were
completed in 2002.
Other non-interest expense totaled $3,696,000 during 2003, versus $3,967,000 in
2002 and $3,220,000 in 2001. Significant expense components in this category
include marketing and advertising, postage, supplies, amortization of core
deposit intangibles, and Pennsylvania Shares Tax. The increase in expense noted
during 2002 and 2001 was the direct result of ACNB's overall growth, which
requires many of these types of expenses to increase as well. The decrease in
2003 resulted from shifting certain operations to other areas of the bank.
INCOME TAXES
ACNB recognized income taxes of $3,142,000, or 22.6% of pre-tax income, in 2003.
Income tax expense was $3,107,000, or 25.9% of pre-tax income, in 2002 and
$3,734,000, or 30.9% of pre-tax income, in 2001. The variances from the federal
statutory rate of 35% are generally due to tax-exempt income and investments in
low-income housing partnerships (which qualify for federal tax credits).
The decline in the effective tax rate during 2003 is a result of life insurance
proceeds upon the death of an executive officer. The downward trend in the
effective tax rate from 2001 to 2003 is consistent with the increase in tax-free
investment securities and low income housing credits during this period.
FINANCIAL CONDITION
Average earning assets increased in 2003 to $767,597,000 or 23% from
$622,890,000 in 2002, and 15% or $541,117,000 in 2001. ACNB's investment
portfolio has increased over the last three years, as a result of planned growth
using borrowed funds. To a lesser degree, the slow growth in commercial and
consumer loans contributed to the increase in average earning assets. Average
funding sources, or interest bearing liabilities, increased in 2003 to
$672,581,000 from $516,897,000 in 2002 and $441,112,000 in 2001.
INVESTMENT SECURITIES
ACNB uses investment securities to generate interest and dividend income, to
manage interest rate risk, and to provide liquidity. The growth in the security
portfolio, in part, reflects the trends in loans, deposits, and borrowed funds
during 2003 and 2002. As deposit and borrowing growth outpaced loan growth
during 2002, excess funding was invested in the securities portfolio. Much of
the investment activity focused on U.S. Government agencies, tax-free municipal,
and corporate securities. These securities provide the appropriate
characteristics with respect to yield and maturity relative to the management of
the overall balance sheet.
At December 31, 2003, the securities balance included a net unrealized gain on
available-for-sale securities of $441,000, net of taxes, versus a net unrealized
gain of $4,089,000, net of taxes at December 31, 2002. The reduction in interest
rates during 2002 versus 2001 led to the appreciation in the fair value of
securities during 2002. In 2003, some securities were sold; the corporation
realized the gains, increasing income for that year. A total of $1,992,000 in
realized gains increased net income by $1,295,000. A major portion of these
gains were the by-product of the sale of certain corporate securities which
increased our income and decreased our mortgage backed security prepayments.
16
TABLE 3 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities at December
31, 2003 and 2002, were as follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------------------------------------------------------------------
2003 IN THOUSANDS
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 15,535 $ 1,265 $ -- $ 16,800
Mortgage backed securities 26,201 -- 372 25,829
Obligations of states and political subdivisions 447 -- -- 447
---------- ---------- ----------- -----------
Total debt securities 42,183 1,265 372 43,076
Restricted equity securities 7,547 -- -- 7,547
---------- ---------- ----------- -----------
Total Held-to-Maturity Securities $ 49,730 $ 1,265 $ 372 $ 50,623
========== ========== =========== ===========
AVAILABLE-FOR-SALE SECURITIES
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 40,000 $ 32 $ 196 $ 39,836
Mortgage backed securities 176,467 1,180 1,586 176,061
Obligations of states and political subdivisions 22,922 355 6 23,271
Corporate debt 105,500 957 56 106,401
---------- ---------- ----------- -----------
Total Available-for-Sale Securities $ 344,889 $ 2,524 $ 1,844 $ 345,569
========= ========== ========== =========
2002 IN THOUSANDS
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 25,540 $ 2,810 $ -- $ 28,350
Obligations of states and political subdivisions 1,509 15 -- 1,524
Corporate debt 217 2 -- 219
---------- ---------- ----------- -----------
Total debt securities 27,266 2,827 -- 30,093
Restricted equity securities 4,392 -- -- 4,392
---------- ---------- ----------- -----------
Total Held-to-Maturity Securities $ 31,658 $ 2,827 $ -- $ 34,485
========== ========== =========== ==========
AVAILABLE-FOR-SALE SECURITIES
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies 31,621 807 -- 32,428
Mortgage-backed securities 180,696 4,197 -- 184,893
Corporate debt 63,782 1,286 -- 65,068
---------- ---------- ----------- -----------
Total Available-for-Sale Securities $ 276,099 $ 6,290 $ -- $ 282,389
========== ========== =========== =========
2001 IN THOUSANDS
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 72,429 775 606 72,598
Mortgage-backed securities 101,416 1,588 585 102,419
---------- ---------- ----------- ----------
Total Available-for-Sale Securities $ 173,845 $ 2,363 $ 1,191 $ 175,017
========== ========== =========== ==========
17
The amortized cost and estimated fair value of debt securities at December 31,
2003, 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 COST FAIR VALUE AMORTIZED COST FAIR VALUE
-------------- ---------- -------------- ----------
IN THOUSANDS
Within one year $ 93 $ 93 $ 46,831 $ 47,274
After one year through five years 41,555 42,448 192,849 192,680
After five years through ten years 535 535 59,868 59,882
After ten years -- -- 45,341 45,733
---------- ---------- --------- ---------
Total Debt Securities $ 42,183 $ 43,076 $ 344,889 $ 345,569
========== ========== ========= =========
TABLE 4 - INVESTMENT SECURITIES (YIELDS)
U.S. Government State
and Federal and Other Taxable
Agency Municipal Securities Total Equivalent Yield
-------------------------------------------------------------------------------------------------
DECEMBER 31, 2003 IN THOUSANDS
Amortized Cost
Within one year $ -- $ 93 $ 46,831 $ 46,924 3.50%
After one year through five years 175,381 354 58,669 234,404 3.53%
After five years through ten years 51,770 8,633 -- 60,403 4.63%
After ten years 31,052 14,289 -- 45,341 5.56%
No set maturity -- -- 7,547 7,547 1.60%
--------- ---------- --------- ---------
Total $ 258,203 $ 23,369 $ 113,047 $ 394,619
========= =========== ========= =========
Fair Value $ 258,526 $ 23,718 $ 113,948 $ 396,192
========= =========== ========= =========
Taxable Equivalent Yield 3.75% 6.09% 2.88%
DECEMBER 31, 2002 IN THOUSANDS
Amortized Cost $ 227,737 $ 11,846 $ 68,174 $ 307,757
========= =========== ========== =========
DECEMBER 31, 2001 IN THOUSANDS
Amortized Cost $ 214,589 $ 2,123 $ 5,613 $ 222,325
========= ============ ========= =========
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, 2003 and 2002, assets with a carrying value of $130,424,000 and
$92,123,000, respectively, were pledged as required or permitted by law to
secure certain public and trust deposits, repurchase agreements, or for other
purposes.
LOANS
Loans outstanding increased $42,723,000, or 11.5% in 2003, compared to 3.0%
growth experienced in 2002. The growth in loans is consistent with a stable
local economy and lending to support existing customers. The commercial loan
portfolio experienced solid growth during the period, increasing by
approximately $17,000,000. The growth experienced in 2003 is the result of
actively marketing commercial loans to local businesses. Additionally, ACNB has
been able to participate with other institutions on larger loans.
The approximately $15,000,000 increase in real estate mortgage loans is due to a
change in pricing policy. Management decided that since 15-year mortgage backed
securities were offering yields in the mid 3% range, the bank could afford to
hold a certain portion of 10-year to 20-year fixed rate mortgages yielding 5.50%
to 6.00% in the portfolio. Currently this portion of mortgages totals
approximately $20,000,000.
18
TABLE 5 - LOAN PORTFOLIO
Loans at December 31 are summarized as follows:
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
IN THOUSANDS
Commercial, financial and agricultural $ 18,080 $ 21,128 $ 18,027 $ 18,376 $ 12,697
Real estate - construction 22,298 16,096 15,497 15,786 13,188
Real estate - mortgage 363,515 326,180 316,928 314,385 308,241
Consumer 11,222 11,446 12,127 12,443 13,661
--------- ---------- ---------- ---------- ----------
Total Loans $415,115 $374,850 $362,579 $360,990 $347,787
======== ======== ======== ======== ========
TABLE 6 - LOAN MATURITY AND INTEREST SENSITIVITY
The following table outlines the repricing opportunities for all loans
outstanding as of December 31, 2003. 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
-------------------------------------------------------
AFTER ONE YEAR
WITHIN THROUGH AFTER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
-------- ---------- ---------- -----
IN THOUSANDS
Commercial, financial and agricultural $ 8,973 $ 5,688 $3,419 $ 18,080
Real estate - construction 13,144 8,882 272 22,298
-------- -------- ------ --------
Total $ 22,117 $ 14,570 $3,691 $ 40,378
======== ======== ====== ========
Fixed loans with predetermined interest rates $ 5,167 $ 9,457 $3,664 $ 18,288
Loans with variable interest rates 16,950 5,113 27 22,090
-------- -------- ------ --------
Total $ 22,117 $ 14,570 $3,691 $ 40,378
======== ======== ====== ========
ASSET QUALITY
ACNB loan portfolios are subject to varying degrees of credit risk. Credit risk
is mitigated through prudent underwriting standards, on-going credit review, and
monitoring and reporting asset quality measures. Additionally, loan portfolio
diversification, limiting exposure to a single industry or borrower, and
requiring collateral also reduces ACNB's credit risk.
ACNB's commercial, consumer and residential mortgage loans are principally to
borrowers in south central Pennsylvania and northern Maryland. As the majority
of ACNB's loans are located in this area, a substantial portion of the debtor's
ability to honor their obligations may be affected by the level of economic
activity in the market area.
The unemployment rate in ACNB's market area remained below the national average
during 2003. Additionally, reasonably low interest rates, a stable local economy
and minimal inflation continued to support favorable economic conditions in the
area.
Nonperforming assets include nonaccrual and restructured loans, accruing loans
past due 90 days or more and other foreclosed assets. ACNB's general policy has
been to cease accruing interest on loans when management determines that a
reasonable doubt exists as to the collectibility of additional interest. When
management places a loan on non-accrual status, it reverses unpaid interest
credited to income in the current year. ACNB recognizes income on these loans
only to the extent that it receives cash payments. ACNB occasionally returns
nonaccrual loans to performing status when the borrower brings the loan current
and performs in accordance with contractual terms for a reasonable period of
time. ACNB categorizes a loan as restructured if it changes the terms of the
loan such as interest rate, repayment schedule or both, to terms that it
otherwise would not have granted originally.
19
TABLE 7 - NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The following table presents information concerning the aggregate amount of
nonperforming assets as of December 31:
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
IN THOUSANDS
Nonaccrual loans $ 4,413 $ 1,037 $ 837 $ 1,318 $ 1,615
90 days past due still accruing 606 1,379 1,003 1,528 1,920
------- -------- -------- -------- --------
Nonperforming loans 5,019 2,416 1,840 2,846 3,535
Other real estate 561 559 1,646 981 171
------- ------- ------- ------- -------
Total Nonperforming Assets $ 5,580 $ 2,975 $ 3,486 $ 3,827 $ 3,706
======= ======= ======= ======= =======
If interest due on all nonaccrual loans had been accrued at original contract
rates, it is estimated that income before income taxes would have been greater
by $82,000 in 2003, $55,000 in 2002, and $99,000 in 2001.
The corporation does not accrue interest on any loan when principal or interest
is 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.
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------------------------
2003 2002 2001
--------------------------------- ----------------------------- ----------------------------
NONPERFORMING NET NONPERFORMING NET NONPERFORMING NET
LOANS CHARGE-OFFS LOANS CHARGE-OFFS LOANS CHARGE-OFFS
IN THOUSANDS
Real estate loans (1-to-4
family dwellings) $ 512 $ 25 $ 987 $ -- $ 1,341 $ 31
Real estate loans (other) 4,505 -- 1,370 170 462 97
Commercial and industrial -- 84 37 60 11 (10)
Consumer 2 15 22 26 26 94
------- ------- ------- ------- ------- -------
TOTAL $ 5,019 $ 124 $ 2,416 $ 256 $ 1,840 $ 212
======= ======= ======= ======= ======= =======
As of December 31, 2003, nonperforming loans totaled $5,019,000, an increase of
$2,603,000 or 107.7% from December 31, 2002. The increase in nonperforming loans
is primarily the result of a large credit that was moved into nonaccrual status
during 2003. The loan is fully secured by real estate and paying erratically.
Although nonperforming loans increased, these levels are within acceptable
limits and are generally secured by real estate which facilitates collection
activity and keeps ultimate losses within reasonable totals.
Potential problem loans are defined as performing loans that have
characteristics that cause management to have serious doubts as to the ability
of the borrower to perform under present loan repayment terms and which may
result in the reporting of these loans as nonperforming loans in the future.
Total potential problem loans approximated $4.0 million at December 31, 2003.
The majority of these loans are secured by real estate with acceptable
loan-to-value ratios.
ALLOWANCE FOR LOAN LOSSES
ACNB maintains the allowance for loan losses at a level believed adequate by
management to absorb potential losses in the loan portfolio and is established
through a provision for loan losses charged to earnings. Quarterly, the
corporation utilizes a defined methodology in determining the adequacy of the
allowance for loan losses, which considers specific credit reviews, past loan
loss historical experience, and qualitative factors. This methodology, which has
remained consistent for the past several years, results in an allowance
consisting of two components, "allocated" and "unallocated".
Management assigns internal risk ratings for each significant commercial lending
relationship. Utilizing migration analysis for the previous eight quarters,
management develops a loss factor test, which it then uses to estimate losses
for non-rated and non-classified loans. When management finds loans with
uncertain collectibility of principal and interest, it places those loans on the
"problem list", and evaluates a specific reserve on a quarterly basis in order
to estimate potential losses. Management's analysis considers:
o adverse situations that may affect the borrower's ability to repay;
o estimated value of underlying collateral; and,
o prevailing market conditions.
20
If management determines that a specific reserve allocation is not required, it
assigns the general loss factor to determine the reserve. For homogeneous loan
types, such as consumer and residential mortgage loans, management bases
specific allocations on the average loss ratio for the previous three years for
each specific loan pool. Additionally, management adjusts projected loss ratios
for other factors, including the following:
o trends in delinquency levels;
o trends in non-performing and potential problem loans;
o trends in composition, volume and terms of loans;
o effects in changes in lending policies or underwriting procedures;
o experience, ability and depth of management;
o national and local economic conditions;
o concentrations in lending activities; and,
o other factors that management may deem appropriate.
Management determines the unallocated portion of the allowance for loan losses
based on the following criteria:
o risk of error in the specific and general reserve allocations;
o other potential exposure in the loan portfolio;
o variances in management's assessment of national and local economic
conditions; and,
o other internal or external factors that management believes appropriate
at that time.
Management believes the above methodology accurately reflects losses inherent in
the portfolio. Management charges actual loan losses to the allowance for loan
losses. Management periodically updates the methodology discussed above, which
reduces the difference between actual losses and estimated losses.
Management bases the provision for loan losses, or lack of provision, on the
overall analysis taking into account the methodology discussed above.
21
TABLE 8 - SUMMARY OF LOAN LOSS EXPERIENCE
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
IN THOUSANDS
Balance of allowance for loan losses at
beginning of period $ 3,837 $ 3,723 $ 3,695 $ 3,543 $ 3,594
Loans charged-off:
Commercial, financial and agricultural 90 87 39 11 58
Real estate - construction -- -- -- -- --
Real estate - mortgage 32 192 131 42 128
Consumer 47 57 139 84 204
--------- --------- --------- --------- ---------
Total loans charged-off 169 336 309 137 390
Recovery of charged-off loans:
Commercial, financial and agricultural 6 27 49 5 5
Real estate - construction -- -- -- -- --
Real estate - mortgage 7 22 3 2 35
Consumer 32 31 45 42 46
--------- --------- --------- --------- ---------
Total recoveries 45 80 97 49 86
Net loans charged-off 124 256 212 88 304
Provision for possible loan losses 265 370 240 240 253
--------- --------- --------- --------- ---------
Balance at end of period $ 3,978 $ 3,837 $ 3,723 $ 3,695 $ 3,543
========= ========= ========= ========= =========
TOTAL LOAN BALANCES IN THOUSANDS
- ------------------------------------------------------------------------------------------------------------------------------
Average total loans $ 388,842 $ 367,494 $ 359,404 $ 352,666 $ 344,323
Total loans at year-end 415,115 374,850 362,579 360,990 347,787
RATIOS
- ------------------------------------------------------------------------------------------------------------------------------
Net charge-offs to:
Average total loans 0.03% 0.07% 0.06% 0.02% 0.09%
Total loans at year-end 0.03% 0.07% 0.06% 0.02% 0.09%
Allowance for loan losses 3.14% 6.67% 5.69% 2.38% 8.58%
Allowance for loan losses to:
Average total loans 1.02% 1.04% 1.04% 1.05% 1.03%
Total loans at year-end .96% 1.02% 1.03% 1.02% 1.02%
The allowance for loan losses increased $141,000 from $3,837,000 at December 31,
2002, to $3,978,000 at December 31, 2003. The allowance represents .96% of loans
outstanding at December 31, 2003, versus 1.02% as of the prior year-end.
Net charge-offs were $124,000 for the year ended December 31, 2003, versus
$256,000 in 2002, a decrease of 51.6%. Charge-offs for 2004 will most likely
total between $200,000 and $300,000.
22
TABLE 9 - ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
2003 2002 2001 2000 1999
------------------ ----------------- ------------------ ------------------ ---------------
% 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 $ 2,571 0.62% $ 2,582 0.68% $ 2,633 0.73% $ 2,590 0.72% $ 1,042 0.30%
Agricultural
Real estate - construction 105 0.03% 65 0.02% 122 0.03% 205 0.05% 246 0.07%
Real estate - mortgage 579 0.14% 402 0.11% 533 0.15% 495 0.13% 1,474 0.43%
Consumer 504 0.12% 375 0.10% 360 0.10% 132 0.04% 251 0.07%
Unallocated 219 0.05% 413 0.11% 75 0.02% 273 0.08% 530 0.15%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total $ 3,978 0.96% $ 3,837 1.02% $ 3,723 1.03% $ 3,695 1.02% $ 3,543 1.02%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
The allocation of the allowance for loan losses between the various loan
portfolios has changed over the past few years, consistent with the historical
net loss experience in each of the portfolios.
The largest reserve allocation is to the commercial, financial and agricultural
loan portfolio, which represents approximately 65% of the reserve balance. This
is because of specific allocations to the reserve for troubled credits and
continued loan growth in that category.
Nonperforming loans have increased during the year, this was primarily the
result of one large credit. Absent this credit, the overall credit rating of the
commercial portfolio would have been approximately the same as 2002. This
nonhomogeneous loan portfolio continues to represent the greatest risk exposure
to ACNB, as the credits generally are significantly larger than the remainder of
the portfolio and the related collateral is not as marketable.
Over the past several years, the allowance for loan losses as a percent of
outstanding loan balance has remained steady at approximately 1.00%. The
unallocated portion of the allowance reflects estimated inherent losses within
the portfolio that have not been detected. The unallocated portion of the
reserve exists due to risk of error in the specific and general reserve
allocations, other potential exposure in the loan portfolio, variances in
management's assessment of national and local economic conditions, and other
internal and external factors that management believes appropriate at the time.
The unallocated portion of the reserve has decreased due to variances in
management's assessment of national and local economic conditions as may be
affected by the current political environment and other external factors.
While management believes ACNB's allowance for loan losses is adequate based on
information currently available, future adjustments to the reserve may be
necessary due to changes in economic conditions, and management's assumptions as
to future delinquencies or loss rates.
DEPOSITS
ACNB continues to rely on deposit growth as the primary source of funds for
lending activities. Average deposits increased 18.2% or $85 million in 2003.
This increase is greater than the 15.1% growth achieved in 2002. This growth has
been accomplished through the marketing of a special money market rate account
to compete with money market mutual funds. Additionally, due to consumers'
confidence slipping in the stock and mutual fund markets, deposits have grown as
these consumers migrate towards deposit products, which are generally regarded
as safer, more liquid investments. ACNB will continue to explore new products
for its customers, to attract and retain other funds seeking safe havens. As the
stock market recovers in the months ahead, ACNB's ability to maintain and add to
its deposit base will probably come under additional competitive pressures.
23
TABLE 10 - TIME DEPOSITS
Time deposits in denominations of $100,000 or more at December 31, 2003, 2002
and 2001, are summarized in the following table. The interest expense related to
time certificates of deposit in denominations of $100,000 or more totaled
$1,153,000 in 2003, $1,275,000 in 2002, and $1,583,000 in 2001.
IN THOUSANDS 2003 2002 2001
---- ---- ----
Time certificates of deposit $ 35,003 $ 33,657 $ 33,746
Other time deposits 1,000 1,000 1,000
Maturities of time deposits of $100,000 or more outstanding at December 31,
2003, 2002 and 2001, are summarized as follows:
IN THOUSANDS 2003 2002 2001
---- ---- ----
Three months or less $ 7,420 $ 7,432 $ 12,049
Over three through six months 3,245 6,560 9,898
Over six through twelve months 4,928 5,007 5,974
Over twelve months 20,410 15,658 6,825
-------- -------- --------
Total $ 36,003 $ 34,657 $ 34,746
======== ======== ========
BORROWINGS
Short-term borrowings are comprised primarily of securities sold under
agreements to repurchase, and overnight borrowings at the Federal Home Loan Bank
in Pittsburgh. As of December 31, 2003, short-term borrowings were $69,676,000,
an increase of $13,231,000, or 23.4%, from the December 31, 2002 balance of
$56,445,000.
Long-term debt consists of advances from the Federal Home Loan Bank to fund
ACNB's growth in its securities portfolio. Long-term debt totaled $87,000,000 at
December 31, 2003, versus $20,000,000 outstanding at December 31, 2002. ACNB
increased its reliance on long-term debt during 2002 to match maturities with
long-term tax-free securities at positive spreads. The increase of $67,000,000
in long-term debt during 2003 was a direct result of management's intention to
capitalize on the 30 year lows in interest rates.
CAPITAL
The management of capital in a regulated financial services industry must
properly balance return on equity to stockholders while maintaining sufficient
capital levels and related risk-based capital ratios to satisfy regulatory
requirements. Capital management must also consider growth opportunities that
may exist, and the resulting need for additional capital. ACNB's capital
management strategies have been developed to provide attractive rates of returns
to stockholders, while maintaining its "well-capitalized" position.
The primary source of additional capital to ACNB is earnings retention, which
represents net income less dividends declared. During 2003, ACNB retained
$5,930,000, or 55%, of its net income.
ACNB is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on ACNB.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, ACNB must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The capital amounts
and reclassifications are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
requires ACNB to maintain minimum amounts and ratios of total and Tier 1 capital
to average assets. Management believes, as of December 31, 2003 and 2002, that
ACNB met all minimum capital adequacy requirements to which they are subject and
are categorized as "well-capitalized". There are no conditions or events since
the notification that management believes have changed the subsidiary bank's
category.
24
TABLE 11 - RISKED-BASED CAPITAL
ACNB's capital ratios are as follows:
2003 2002
---- ----
Common stockholders' equity to assets 8.29% 9.54%
Tier 1 leverage ratio 8.81% 9.00%
Tier 1 risk-based capital ratio 13.86% 15.13%
Total risk-based capital ratio 14.63% 16.03%
LIQUIDITY
Effective liquidity management ensures the cash flow requirements of depositors
and borrowers, as well as the operating cash needs of ACNB are met.
ACNB's funds are available from a variety of sources, including assets that are
readily convertible to cash (federal funds sold, short-term investments),
securities portfolio, scheduled repayments of loans receivable, core deposit
base, and the FHLB. At December 31, 2003, ACNB could borrow approximately
$365,000,000 from the FHLB; $116,320,000 was outstanding.
The liquidity of the parent company also represents an important aspect of
liquidity management. The parent company's cash outflows consist principally of
dividends to shareholders and corporate expenses. The main source of funding for
the parent company is the dividends it receives from its banking subsidiary.
Federal and state banking regulations place certain restrictions on dividends
paid to the parent company from the subsidiary banks. The total amount of
dividends that may be paid from the subsidiary bank to ACNB were $8,568,000 at
December 31, 2003. For a discussion of ACNB's dividend restrictions, see Item 1
- - "Business" above.
ACNB manages liquidity by monitoring projected cash inflows and outflows on a
daily basis, and believes it has sufficient funding sources to maintain
sufficient liquidity under varying degrees of business conditions. Management
expects to incur approximately $10,000,000 in capital expenditures during
2004-2005, approximately $7,000,000 for a proposed operations center and
$3,000,000 for low income housing projects. See footnote N for other off balance
sheet commitments. The following tables illustrate contractual obligations for
years 2003, 2002 and 2001.
PAYMENT DUE BY PERIOD (12/31/2003)
----------------------------------------------------------------------------
LESS THAN 1-3 3-5 MORE THAN
TOTAL 1 YEAR YEARS YEARS 5 YEARS
----- --------- ----- ----- ---------
IN THOUSANDS
Contractual Obligations
Long-Term Debt Obligations $ 87,000 $ -- $ 67,000 $ -- $ 20,000
Operating Lease Obligations 1,600 437 709 276 178
Total $ 88,600 $ 437 $ 67,709 $ 276 $ 20,178
PAYMENT DUE BY PERIOD (12/31/2002)
----------------------------------------------------------------------------
LESS THAN 1-3 3-5 MORE THAN
TOTAL 1 YEAR YEARS YEARS 5 YEARS
----- --------- ----- ----- ---------
IN THOUSANDS
Contractual Obligations
Long-Term Debt Obligations $ 20,000 $ -- $ -- $ -- $ 20,000
Operating Lease Obligations 993 184 321 175 313
Total $ 20,993 $ 184 $ 321 $ 175 $ 20,313
PAYMENT DUE BY PERIOD (12/31/2001)
----------------------------------------------------------------------------
LESS THAN 1-3 3-5 MORE THAN
TOTAL 1 YEAR YEARS YEARS 5 YEARS
----- --------- ----- ----- ---------
IN THOUSANDS
Contractual Obligations
Long-Term Debt Obligations $ -- $ -- $ -- $ -- $ --
Operating Lease Obligations 857 134 217 193 313
Total $ 857 $ 134 $ 217 $ 193 $ 313
25
TABLE 12 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Principal Amount Maturing In FAIR VALUE
---------------------------------------------------------------------- DECEMBER 31,
RATE SENSITIVE ASSETS IN THOUSANDS 2004 2005 2006 2007 2008 Thereafter TOTAL 2003
- ---------------------------------------------------------------------------------------------------------------------------
Fixed interest rate loans $ 35,478 $ 37,535 $30,704 $13,621 $ 3,643 $ 1,107 $ 122,088 $ 122,091
Average interest rate 6.35% 6.20% 6.10% 6.08% 6.09% 5.69% 6.15%
Variable interest rate loans $215,990 $ 55,043 $ 9,566 $10,396 $ 1,794 $ 152 $ 292,941 $ 293,190
Average interest rate 4.95% 5.83% 6.52% 5.99% 6.09% 7.13% 5.21%
Fixed interest rate securities $178,410 $107,275 $42,484 $10,447 $ -- $55,556 $ 394,172 $ 395,745
Average interest rate 3.82% 3.43% 2.29% 6.03% 3.61% 3.58%
Variable interest rate securities $ 93 $ 105 $ 118 $ 131 $ -- $ -- $ 447 $ 447
Average interest rate 2.98% 2.98% 2.98% 2.98% 0.00% 0.00% 2.98%
Other interest bearing assets $ 1,033 $ -- $ -- $ -- $ -- $ -- $ 1,033 $ 1,033
Average interest rate 1.00% 0.00% 0.00% 0.00% 0.00% 0.00% 1.00%
RATE SENSITIVE LIABILITIES
- ---------------------------------------------------------------------------------------------------------------------------
Non-interest bearing checking $ -- $ -- $ -- $ -- $ -- $75,819 $ 75,819 $ 73,259
Average interest rate 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Savings and interest bearing
checking $ 85,360 $ -- $ -- $ -- $ -- $256,080 $ 341,440 $ 318,904
Average interest rate 1.02% 0.00% 0.00% 0.00% 0.00% 1.02% 1.02%
Time deposits $118,644 $ 42,980 $25,675 $22,859 $11,971 $ -- $ 222,129 $ 223,459
Average interest rate 1.97% 3.51% 3.83% 3.96% 3.60% 0.00% 2.78%
Fixed interest rate borrowings $ -- $ 57,000 $10,000 $ -- $ -- $20,000 $ 87,000 $ 90,648
Average interest rate 0.00% 1.83% 2.32% 0.00% 0.00% 4.34% 2.46%
Variable interest rate borrowings $ 39,747 $ -- $ -- $ -- $ -- $29,929 $ 69,676 $ 67,745
Average interest rate 1.27% 0.00% 0.00% 0.00% 0.00% 1.48% 1.36%
Financial institutions can be exposed to several market risks that may impact
the value or future earnings capacity of an organization. These risks involve
interest rate risk, foreign currency exchange risk, commodity price risk and
equity market price risk. ACNB's primary market risk is interest rate risk.
Interest rate risk is inherent because as a financial institution, ACNB derives
a significant amount of its operating revenue from "purchasing" funds (customer
deposits and borrowings) at various terms and rates. These funds are then
invested into earning assets (loans, leases, investments, etc.) at various terms
and rates. This risk is further discussed below.
ACNB does not have any exposure to foreign currency exchange risk, commodity
price risk or equity market risk.
INTEREST RATE RISK
Interest rate risk is the exposure to fluctuations in the corporation's future
earnings (earnings at risk) and value (value at risk) resulting from changes in
interest rates. This exposure results from differences between the amounts of
interest earning assets and interest bearing liabilities that reprice within a
specified time period as a result of scheduled maturities and repayment and
contractual interest rate changes.
The primary objective of the corporation's asset/liability management process is
to maximize current and future net interest income within acceptable levels of
interest rate risk while satisfying liquidity and capital requirements.
Management recognizes that a certain amount of interest rate risk is inherent,
appropriate, and necessary to ensure the corporation's profitability. Thus the
goal of interest rate risk management is to maintain a balance between risk and
reward such that net interest income is maximized while risk is maintained at a
tolerable level.
Management endeavors to control the exposure to changes in interest rates by
understanding, reviewing and making decisions based on its risk position. The
bank subsidiary asset/liability committee is responsible for these decisions.
The corporation primarily uses the securities portfolios and FHLB advances to
manage its interest rate risk position. Additionally, pricing, promotion and
product development activities are directed in an effort to emphasize the loan
and deposit term or repricing characteristics that best meet current interest
rate risk objectives. At present, there is no use of off-balance sheet
instruments.
The committee operates under management policies defining guidelines and limits
on the level of risk. These policies are approved by the Board of Directors.
The corporation uses simulation analysis to assess earnings at risk and net
present value analysis to assess value at risk. These methods allow management
to regularly monitor both the direction and magnitude of the corporation's
interest rate risk exposure. These modeling techniques involve assumptions and
estimates that inherently cannot be measured with complete precision. Key
26
assumptions in the analyses include maturity and repricing characteristics of
both assets and liabilities, prepayments on amortizing assets, non-maturity
deposit sensitivity and loan deposit pricing. These assumptions
are inherently uncertain due to the timing, magnitude and frequency of rate
changes and changes in market conditions and management strategies, among other
factors. However, the analyses are useful in quantifying risk and provide a
relative gauge of the corporation's interest rate risk position over time.
EARNINGS AT RISK
Simulation analysis evaluates the effect of upward and downward changes in
market interest rates on future net interest income. The analysis involves
changing the interest rates used in determining net interest income over the
next twelve months. The resulting percentage change in net interest income in
various rate scenarios is an indication of the corporation's shorter-term
interest rate risk. The analysis utilizes a "static" balance sheet approach. The
measurement date balance sheet composition (or mix) is maintained over the
simulation time period, with maturing and repayment dollars being rolled back
into like instruments for new terms at current market rates. Additional
assumptions are applied to modify volumes and pricing under the various rate
scenarios. These include prepayment assumptions on mortgage assets, the
sensitivity of non-maturity deposit rates, and other factors deemed significant.
The simulation analysis results are presented in Table 13a. These results as of
December 31, 2003, indicate that the corporation would expect net interest
income to increase over the next twelve months by 4.4% assuming an immediate
upward shift in market interest rates of 3.00% and to decrease by 17.6% if rates
shifted downward in the same manner. This profile reflects an asset sensitive
short-term rate risk position and exceeds guidelines set by policy. With
interest rates already so low, liability rates could not fall 3.00%, so the
accuracy of the results is not as good as could be expected during a more normal
rate environment.
Net interest income declines with both up and down directions of interest rates
because of a large amount of transaction accounts positioned to change rates
overnight. Since they are theoretically positioned to change rates immediately
they cause a negative change in net interest income regardless of direction of
interest rates. In actual practice, management would change these rates much
more gradually than the model predicts. Since interest rates are at 50-year
lows, an asset sensitive position will enable the corporation to capitalize on
rising rates.
VALUE AT RISK
The net present value analysis provides information on the risk inherent in the
balance sheet that might not be taken into account in the simulation analysis
due to the shorter time horizon used in that analysis. The net present value of
the balance sheet is defined as the discounted present value of expected asset
cash flows minus the discounted present value of the expected liability cash
flows. The analysis involves changing the interest rates used in determining the
expected cash flows and in discounting the cash flows. The resulting percentage
change in net present value in various rate scenarios is an indication of the
longer term repricing risk and options embedded in the balance sheet.
The net present value analysis results are presented in Table 13b. These
results, as of December 31, 2003, indicate that the net present value would
decrease 4.0% assuming an immediate upward shift in market interest rates of
3.00% and to increase 1.4% if rates shifted downward in the same manner. The
risk position of ACNB is within the guidelines set by policy. Again, with rates
so low, these results are not as accurate as they would normally be.
The corporation's current strategy is to extend liability maturities and keep
asset maturities relatively short to protect against both greater earnings at
risk and value at risk.
DECEMBER 31, 2003 DECEMBER 31,2003
- -------------------------------------------------------------------------
TABLE 13A TABLE 13B
NET INTEREST INCOME PROJECTIONS PRESENT VALUE EQUITY
- -------------------------------------------------------------------------
Changes in Changes in
Basis Points % Change Basis Points % Change
- -------------------------------------------------------------------------
(300) (17.56)% (300) 2.70%
(100) (9.89)% (100) (1.38)%
-- 0.0% -- 0.0%
100 (3.38)% 100 2.85%
300 4.39% 300 3.98%
DECEMBER 31, 2002 DECEMBER 31,2002
- -------------------------------------------------------------------------
TABLE 13A TABLE 13B
NET INTEREST INCOME PROJECTIONS PRESENT VALUE EQUITY
- -------------------------------------------------------------------------
Changes in % Change Changes in % Change
Basis Points Basis Points
- -------------------------------------------------------------------------
(300) (8.9)% (300) 2.0%
(100) (2.1)% (100) 1.0%
-- 0.0% -- 0.0%
100 (0.7)% 100 (1.3)%
300 (0.4)% 300 (4.6)%
27
Item 8 - Financial Statements
(a) The following audited consolidated financial statements and related
documents are set forth in this Annual Report on Form 10-K on the
following pages:
PAGE
----
Independent Auditor's Report ...........................................29
Consolidated Statements of Condition ...................................30
Consolidated Statements of Income ......................................31
Consolidated Statements of Changes in Stockholders' Equity .............32
Consolidated Statements of Cash Flows ..................................33
Notes to Consolidated Financial Statements .............................34
28
INDEPENDENT AUDITOR'S REPORT
To The Stockholders and Board of Directors
ACNB Corporation
Gettysburg, Pennsylvania
We have audited the accompanying consolidated statements of condition of ACNB
Corporation and subsidiaries as of December 31, 2003 and 2002, 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, 2003. 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 upon 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 significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe 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
subsidiaries as of December 31, 2003 and 2002, and the results of operations and
their cash flows for each of the three years in the period ended December 31,
2003, in conformity with accounting principles generally accepted in the United
States of America.
[SIG OMITTED]
Stambaugh Ness, PC
York, Pennsylvania
January 17, 2004
29
CONSOLIDATED STATEMENTS OF CONDITION
DECEMBER 31
-----------------------
2003 2002
ASSETS IN THOUSANDS
Cash and Due from Banks $ 32,381 $ 18,089
Interest bearing deposits with banks 1,033 1,009
Investment securities
(fair value $396,192 and $316,874, respectively)
Securities held to maturity 49,730 31,658
Securities available for sale 345,569 282,389
--------- ---------
Total Investment Securities 395,299 314,047
Mortgage loans held for sale 86 2,544
Loans 415,029 372,306
Less: provision for possible loan losses (3,978) (3,837)
--------- ---------
Net loans 411,051 368,469
Premises and equipment 7,053 7,182
Other real estate 561 559
Bank owned life insurance 14,683 14,289
Other assets 10,584 8,456
--------- ---------
TOTAL ASSETS $ 872,731 $ 734,644
========= =========
LIABILITIES
Non-interest bearing deposits $ 75,819 $ 70,728
Interest bearing deposits 563,569 511,887
--------- ---------
Total Deposits 639,388 582,615
Securities sold under agreement to repurchase 39,906 35,945
Borrowings, Federal Home Loan Bank 116,320 40,050
Demand notes, U.S. Treasury 450 450
Other liabilities 4,276 5,484
--------- ---------
TOTAL LIABILITIES 800,340 664,544
STOCKHOLDERS' EQUITY
Common stock ($2.50 par value;
20,000,000 shares authorized;
5,436,101 shares issued and
outstanding at 12/31/03 and 12/31/02, respectively) 13,590 13,590
Retained earnings 58,711 52,781
Accumulated other comprehensive income 90 3,729
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 72,391 70,100
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 872,731 $ 734,644
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
30
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
-------------------------------
2003 2002 2001
---- ---- ----
INTEREST INCOME IN THOUSANDS, EXCEPT PER SHARE DATA
Loans (including fees) $ 23,670 $ 24,752 $ 27,892
Time deposits with banks 75 74 599
Federal funds sold -- -- 157
Taxable securities 12,062 12,727 10,396
Non-taxable securities 882 241 117
-------- -------- --------
TOTAL INTEREST INCOME 36,689 37,794 39,161
INTEREST EXPENSE
Interest bearing deposits 11,224 12,258 14,690
Short term borrowings 741 961 1,366
Long term borrowings 1,980 234 --
-------- -------- --------
TOTAL INTEREST EXPENSE 13,945 13,453 16,056
NET INTEREST INCOME 22,744 24,341 23,105
Provision for possible loan losses 265 370 240
-------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR POSSIBLE LOAN LOSSES 22,479 23,971 22,865
NON-INTEREST INCOME
Trust income 663 683 569
Service fees on deposit accounts 1,788 1,755 1,348
Gain on other real estate 173 118 5
Bank owned life insurance 722 572 421
Gain from officer's life insurance 2,161 -- --
Securities gains 1,992 -- --
Other income 1,930 1,900 1,190
-------- -------- --------
TOTAL NON-INTEREST INCOME 9,429 5,028 3,533
NON-INTEREST EXPENSE
Salaries and employee benefits 9,902 9,454 7,942
Net occupancy expense 1,164 829 701
Equipment expense 1,960 1,411 1,088
Other taxes 937 875 836
Professional services 339 452 540
Other expense 3,696 3,967 3,220
-------- -------- --------
TOTAL NON-INTEREST EXPENSE 17,998 16,988 14,327
INCOME BEFORE INCOME TAXES 13,910 12,011 12,071
Applicable income taxes 3,142 3,107 3,734
-------- -------- --------
NET INCOME $ 10,768 $ 8,904 $ 8,337
======== ======= =======
PER COMMON SHARE DATA *
Basic earnings $1.98 $ 1.64 $1.53
Cash dividends paid $ .89 $ 1.08 $ .88
*BASED ON A WEIGHTED AVERAGE OF 5,436,101 SHARES IN 2003, 5,436,101
SHARES IN 2002, AND 5,436,117 SHARES IN 2001.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
31
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Accumulated
Other
Common Additional Retained Comprehensive
Stock Paid-In Capital Earnings Income Total
--------- --------------- --------------- -------------- --------------
IN THOUSANDS
BALANCE AT JANUARY 1, 2001 $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
Comprehensive income:
Net income -- -- 8,904 -- 8,904
Change in unrealized gains on securities, net of tax -- -- -- 3,315 3,315
Change in unfunded pension liability, net of tax (28) (28)
-------------
Total comprehensive income 12,191
---------
Cash dividends paid -- -- (4,784) -- (4,784)
-- ------------ ---------- ------------ ----------
BALANCE AT DECEMBER 31, 2002 $ 13,590 $ -- $ 52,781 $ 3,729 $ 70,100
Comprehensive income:
Net income -- -- 10,768 -- 10,768
Change in unrealized gains on securities, net of tax -- -- -- (3,647) (3,647)
Change in unfunded pension liability, net of tax 8 8
------------
Total comprehensive income 7,129
---------
Cash dividends paid -- -- (4,838) -- (4,838)
--------- ---------
BALANCE AT DECEMBER 31, 2003 $ 13,590 $ -- $ 58,711 $ 90 $ 72,391
======== ============ ======== ========= ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
32
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
-----------------------------------------
2003 2002 2001
---- ---- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
IN THOUSANDS
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and dividends received $ 39,469 $ 38,754 $ 37,634
Fees and commissions received 10,173 5,458 3,949
Interest paid (14,417) (13,998) (16,167)
Cash paid to suppliers and employees (20,921) (20,855) (26,933)
Income taxes paid (3,053) (3,959) (3,970)
Loans originated for sale (18,735) (22,360) (15,962)
Proceeds of mortgage loans sold 21,193 20,856 15,058
--------- ----------- ----------
NET CASH PROVIDED (USED IN) BY OPERATING ACTIVITIES 13,709 3,896 (6,391)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities
held-to-maturity 5,366 16,821 21,872
Proceeds from maturities of investment securities
available-for-sale 277,347 117,852 42,759
Purchase of investment securities held-to-maturity (23,438) -- (5,000)
Purchase of investment securities available-for-sale (348,135) (222,683) (105,774)
Net decrease (increase) in loans (42,723) (12,271) (1,618)
Capital expenditures (675) (2,109) (1,470)
Proceeds from sale of other real estate owned 699 1,140 60
--------- ---------- --
NET CASH (USED IN) INVESTING ACTIVITIES (131,559) (101,250) (49,171)
CASH FLOW FROM FINANCING ACTIVITIES
Net Increase (decrease) in demand deposits,
NOW accounts, and savings accounts 63,507 73,770 34,965
Net increase (decrease) in certificates of deposit (6,734) 1,684 20,644
Net increase in securities sold under agreement
to repurchase 3,961 2,706 1,509
Dividends paid (4,838) (5,871) (4,783)
Net increase (decrease) in borrowed funds 76,270 22,238 1,512
Retirement of common stock -- -- (76)
--------- ---------- ---
NET CASH PROVIDED BY FINANCING ACTIVITIES 132,166 94,527 53,771
--------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14,316 (2,827) (1,791)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 19,098 21,925 23,716
--------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 33,414 $ 19,098 $ 21,925
========= ========= =========
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income $ 10,768 $ 8,904 $ 8,337
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Depreciation and amortization 804 631 454
Provision for possible loan losses 265 370 240
Benefit (expense) for deferred taxes 146 (794) (475)
Amortization (Accretion) of investment securities
premiums (discounts) 3,240 795 (138)
Increase (Decrease) in taxes payable 493 (58) (151)
Decrease (Increase) in interest receivable 538 759 (293)
Increase (Decrease) in interest payable (472) (545) (111)
Increase (Decrease) in accrued expenses (668) 400 (340)
Decrease (Increase) in mortgage loans held for sale 2,458 (1,504) (904)
Decrease (Increase) in other assets (3,059) (4,899) (12,720)
Increase (Decrease) in other liabilities (804) (163) (290)
---- ----
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 13,709 $ 3,896 $ (6,391)
========= ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.
33
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 seventeen locations in Adams, Cumberland and York
counties.
During 2000, the corporation, along with seven other banks, entered into a joint
venture to form Pennbanks 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 wholly owned subsidiaries. All significant inter-company
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 disclosures 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 and accounted for at fair market
value. 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.
LOANS AND 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.
34
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, 2003 and 2002, all of the
corporation's impaired loans were on non-accrual 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. Depreciation is recorded based on the assets' estimated useful lives.
NONPERFORMING ASSETS
Nonperforming assets are comprised of loans for which the accrual of interest
has been discontinued due to a serious weakening of the borrower's financial
condition.
Loans are generally placed on a nonaccrual basis when principal or interest is
past due 90 days or more and when, in the opinion of management, full collection
of principal or interest is unlikely. At the time a loan is placed on nonaccrual
status, the accrual of interest is discontinued. Income on such loans is then
recognized only to the extent of cash received.
The basis in foreclosed real estate is carried at the lower of fair market
value, less costs to sell, or the carrying value of the related loan at the time
of acquisition.
INCOME TAXES
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which deferred tax assets or liabilities
are expected to be realized or settled. As changes in tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through the provision
for income taxes.
NET INCOME PER SHARE
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. Cost of advertising was
$369,000, $312,000 and $260,000, for the years ending December 31, 2003, 2002
and 2001, respectively.
COMPREHENSIVE INCOME
The corporation has elected to reflect the statement of comprehensive income
within the consolidated statements 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.
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, 2003 and 2002, were approximately $13,145,000 and $11,613,000,
respectively.
35
NOTE C
INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities at December
31, 2003 and 2002, were as follows:
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
-----------------------------------------------------------------------
2003 IN THOUSANDS
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 15,535 $ 1,265 $ -- $ 16,800
Mortgage backed securities 26,201 -- 372 25,829
Obligations of states and political subdivisions 447 -- -- 447
--- ------------ ------------ -------------
Total debt securities 42,183 1,265 372 43,076
Restricted equity securities 7,547 -- -- 7,547
----- ------------ ------------ ------------
Total Held-to-Maturity Securities $ 49,730 $ 1,265 $ 372 $ 50,623
========== ========== =========== ==========
AVAILABLE-FOR-SALE SECURITIES
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 40,000 $ 32 $ 196 $ 39,836
Mortgage backed securities 176,467 1,180 1,586 176,061
Obligations of states and political subdivisions 22,922 355 6 23,271
Corporate debt 105,500 957 56 106,401
--------- ----------- ------------- ----------
Total Available-for-Sale Securities $ 344,889 $ 2,524 $ 1,844 $ 345,569
========= ========= ========== =========
2002 IN THOUSANDS
HELD-TO-MATURITY SECURITIES
U.S. Treasury securities and obligations of
_U.S. Government corporations and agencies $ 25,540 $ 2,810 $ -- $ 28,350
Obligations of states and political subdivisions 1,509 15 -- 1,524
Corporate debt 217 2 -- 219
---- -------------- ------------ -------------
Total debt securities 27,266 2,827 -- 30,093
Restricted equity securities 4,392 -- -- 4,392
--------- ----------- ------------- ----------
Total Held-to-Maturity Securities $ 31,658 $ 2,827 $ -- $ 34,485
========== ========== =========== ==========
AVAILABLE-FOR-SALE SECURITIES
U.S. Treasury securities and obligations of $
U.S. Government corporations and agencies 31,621 $ 807 -- $ 32,428
Mortgage-backed securities 180,696 4,197 -- 184,893
Corporate debt 63,782 1,286 -- 65,068
--------- ----------- ------------- ----------
Total Available-for-Sale Securities $ 276,099 $ 6,290 $ -- $ 282,389
========== ========== =========== =========
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.
The amortized cost and estimated fair value of debt securities at December 31,
2003, by contractual maturity are shown below.
Held-to-Maturity Available-for-Sale
---------------------------------- ------------------------------
Amortized Fair Amortized Fair
COST VALUE COST VALUE
IN THOUSANDS
Within one year $ 93 $ 93 $ 46,831 $ 47,274
After one year through five years 41,555 42,448 192,849 192,680
After five years through ten years 535 535 59,868 59,882
After ten years -- -- 45,341 45,733
---------- ---------- --------- --------
9
Total Debt Securities $ 42,183 $ 43,076 $ 344,88 $345,569
========== ========== ======== =========
36
U.S.
Government Other Taxable
and Federal State and Equivalent
Agency Municipal Securities Total Yield
--------------- ----------------- ----------------- ---------------- ------------
DECEMBER 31, 2003 IN THOUSANDS
Amortized Cost
Within one year $ -- $ 93 $ 46,831 $ 46,924 3.50%
After one year through five years 175,381 354 58,669 234,404 3.53%
After five years through ten years 51,770 8,633 -- 60,403 4.63%
After ten years 31,052 14,289 -- 45,341 5.56%
No set maturity -- -- 7,547 7,547 1.60%
------------- -------------- ------------ ------------
Total $ 258,203 $ 23,369 $ 113,047 $ 394,619
========= =========== ========= =========
Fair Value $ 258,526 $ 23,718 $ 113,948 $ 396,192
========= =========== ========= =========
Taxable Equivalent Yield 3.75% 6.09% 2.88%
December 31, 2002 IN THOUSANDS
Amortized Cost $ 227,737 $ 11,846 $ 68,174 $ 307,757
========= =========== ========== =========
December 31, 2001 IN THOUSANDS
Amortized Cost $ 214,589 $ 2,123 $ 5,613 $ 222,325
========= ============ =========== =========
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, 2003 and 2002, assets with a carrying value of $130,424,000 and
$92,123,000, respectively, were pledged as required or permitted by law to
secure certain public and trust deposits, repurchase agreements, or for other
purposes.
NOTE D
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31 are summarized as follows:
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
IN THOUSANDS
Commercial, financial and agricultural $ 18,080 $ 21,128 $ 18,027 $ 18,376 $ 12,697
Real estate - construction 22,298 16,096 15,497 15,786 13,188
Real estate - mortgage 363,515 326,180 316,928 314,385 308,241
Consumer 11,222 11,446 12,127 12,443 13,661
--------- -------- -------- --------- --------
$ 415,115 $374,850 $362,579 $ 360,990 $347,787
========= ======== ======== ========= ========
The following table outlines the repricing opportunities for all loans
outstanding as of December 31, 2003. 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
----------------------------------------------------------------
After One
Within Year Through After
One Year Five Years Five Years Total
IN THOUSANDS
Commercial, financial and agricultural $ 8,973 $ 5,688 $ 3,419 $18,080
Real estate - construction 13,144 8,882 272 22,298
-------- ------- ------- -------
Total $ 22,117 $14,570 $ 3,691 $40,378
======== ======= ======= =======
Fixed loans with predetermined interest rates $ 5,167 $ 9,457 $ 3,664 $18,288
Loans with variable interest rates 16,950 5,113 27 22,090
-------- ------- ------- -------
Total $ 22,117 $14,570 $ 3,691 $40,378
======== ======= ======= =======
37
Transactions in the valuation portion of the allowance for loan losses for the
past five years at December 31 are shown below:
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
IN THOUSANDS
Balance of allowance for loan losses at beginning
of period $ 3,837 $ 3,723 $ 3,695 $ 3,543 $ 3,594
LOANS CHARGED-OFF:
Commercial, financial and agricultural 90 87 39 11 58
Real estate - construction -- -- -- -- --
Real estate - mortgage 32 192 131 42 128
Consumer 47 57 139 84 204
----------- ----------- ----------- ------------ -----------
Total loans charged-off 169 336 309 137 390
RECOVERY OF CHARGED-OFF LOANS:
Commercial, financial and agricultural 6 27 49 5 5
Real estate - construction -- -- -- -- --
Real estate - mortgage 7 22 3 2 35
Consumer 32 31 45 42 46
----------- ----------- ----------- ------------ -----------
Total recoveries 45 80 97 49 86
Net loans charged-off 124 256 212 88 304
Provision for possible loan losses 265 370 240 240 253
----------- ----------- ----------- ------------ -----------
Balance at end of period $ 3,978 $ 3,837 $ 3,723 $ 3,695 $ 3,543
=========== =========== =========== =========== ===========
TOTAL LOAN BALANCES IN THOUSANDS
- ------------------------------------------------------------------------------------------------------------------------------------
Average total loans $ 388,842 $ 367,494 $ 359,404 $ 352,666 $ 344,323
Total loans at year-end $ 415,115 $ 374,850 $ 362,579 $ 360,990 $ 347,787
RATIOS
- ------------------------------------------------------------------------------------------------------------------------------------
NET CHARGE-OFFS TO:
Average total loans 0.03% 0.07% 0.06% 0.02% 0.09%
Total loans at year-end 0.03% 0.07% 0.06% 0.02% 0.09%
Allowance for loan losses 3.14% 6.67% 5.69% 2.38% 8.58%
ALLOWANCE FOR LOAN LOSSES TO:
Average total loans 1.02% 1.04% 1.04% 1.05% 1.03%
Total loans at year-end 0.96% 1.02% 1.03% 1.02% 1.02%
The amounts of additional provision to the allowance were based on management's
judgment 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 of 93% of the corporation's total loan portfolio at
December 31, 2003. 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 2003.
Management anticipates that charge-off amounts will approximate $200,000 to
$300,000 in 2004.
s 38
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
2003 2002 2001 2000 1999
---------------- ---------------- ----------------- ---------------- ----------------
% 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 $ 2,571 0.62% $2,582 0.68% $2,633 0.73% $2,590 0.72% $1,042 0.30%
Real estate -
construction 105 0.03% 65 0.02% 122 0.03% 205 0.05% 246 0.07%
Real estate - mortgage 579 0.14% 402 0.11% 533 0.15% 495 0.13% 1,474 0.43%
Consumer 504 0.12% 375 0.10% 360 0.10% 132 0.04% 251 0.07%
Unallocated 219 0.05% 413 0.11% 75 0.02% 273 0.08% 530 0.15%
--- ----- ---- ----- -- ----- --- ----- --- -----
Total $3,978 0.96% $3,837 1.02% $3,723 1.03% $3,695 1.02% $3,543 1.02%
====== ====== ====== ===== ====== ===== ====== ===== ====== =====
NOTE E
PREMISES AND EQUIPMENT
The composition of corporation premises and equipment at December 31 was as
follows:
2003 2002
---- ----
IN THOUSANDS
Land $ 1,343 $ 1,378
Bank premises 7,607 7,422
Furniture and equipment 6,427 7,112
Less: Accumulated depreciation and
amortization 8,324 8,730
--------- --------
Total $ 7,053 $ 7,182
======== =======
A summary of depreciation and amortization expenses is as follows:
2003 2002 2001
---- ---- ----
IN THOUSANDS
Bank premises $ 211 $ 203 $ 172
Furniture and equipment 592 428 282
------- ------- ------
Total $ 803 $ 631 $ 454
====== ====== =====
NOTE F
INVESTMENT IN REAL ESTATE PARTNERSHIPS
ACNB Corporation is a limited partner in five partnerships, 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, 2003
and 2002, the carrying value of these investments was approximately $3,371,000
and $2,558,000, respectively.
NOTE G
NONPERFORMING ASSETS
The following table presents information concerning the aggregate amount of
nonperforming assets of December 31:
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
IN THOUSANDS
Nonaccrual loans $ 4,413 $ 1,037 $ 837 $ 1,318 $ 1,615
90 days past due still accruing 606 1,379 1,003 1,528 1,920
Restructured loans -- -- -- -- --
Other real estate owned 561 559 1,646 981 171
--------- --------- -------- --------- ---------
Total Nonperforming Assets $ 5,580 $ 2,975 $ 3,486 $ 3,827 $ 3,706
======= ======= ======= ======= =======
39
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
than$82,000 in 2003, $55,000 in 2002, and $99,000 in 2001.
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 H
TIME DEPOSITS
Time deposits in denominations of $100,000 or more at December 31, 2003 and
2002, are summarized in the following table.
The interest expense related to time certificates of deposit in denominations of
$100,000 or more totaled $,1,153,000 in 2003, $1,275,000 in 2002, and $1,583,000
in 2001.
2003 2002
---- ----
IN THOUSANDS
Time certificates of deposit $ 35,003 $ 33,657
Other time deposits 1,000 1,000
Maturities of time deposits of $100,000 or more outstanding at December 31, 2003
and 2002, are summarized as follows:
2003 2002
---- ----
IN THOUSANDS
Three months or less $ 7,420 $ 7,432
Over three through six months 3,245 6,560
Over six through twelve months 4,928 5,007
Over twelve months 20,410 15,658
--------- ---------
Total 36,003 $ 34,657
======== ========
NOTE I
LEASE COMMITMENTS
Certain branch offices and equipment are leased under agreements which expire at
varying dates through 2011. Most leases contain renewal provisions at the
corporation's option. The total rental expense for all operating leases was
$200,000, $192,000, and $151,000 for the years ended December 31, 2003, 2002 and
2001, respectively.
The following is a schedule by years of future minimum rental payments required
under operating leases that have initial or remaining non-cancelable lease terms
in excess of one year as of December 31:
IN THOUSANDS
2004.............................................................. $ 437
2005.............................................................. 416
2006.............................................................. 293
2007.............................................................. 170
2008.............................................................. 106
Later years....................................................... 178
--------
Total Minimum Payments............................................ $1,600
======
40
NOTE J
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 December 31, 2003, 2002 and 2001, respectively.
2003 2002 2001
---- ---- ----
IN THOUSANDS
Amount outstanding at year-end $ 69,676 $ 56,445 $ 51,501
Average interest rate at year-end 1.20% 1.84% 2.13%
Maximum amount outstanding at
any month-end $ 75,867 $ 73,064 $ 57,965
Average amount outstanding $ 47,472 $ 46,295 $ 36,355
Weighted average interest rate 1.64% 2.16% 3.76%
LONG TERM BORROWINGS
DECEMBER 31
--------------------------
IN THOUSANDS 2003 2002
---- ----
FHLB nonredeemable advance, 4.27% due 2012 $ 10,000 $ 10,000
FHLB nonredeemable advance, 4.41% due 2012 $ 10,000 $ 10,000
FHLB nonredeemable advance, 1.95% due 2005 $ 25,000 $ --
FHLB nonredeemable advance, 1.82% due 2005 $ 20,000 $ --
FHLB nonredeemable advance, 1.62% due 2005 $ 12,000 $ --
FHLB nonredeemable advance, 2.32% due 2006 $ 10,000 $ --
-------- ---------
Total $ 87,000 $ 20,000
======== =========
At December 31, 2003, the bank had an overnight advance from the Federal Home
Loan Bank of Pittsburgh of $29,320,000 at an interest rate of 1.03% and a
similar borrowing of $20,050,000 at December 31, 2002.
The Corporation's capacity to borrow from FHLB totaled approximately
$365,000,000 at December 31, 2003, with $116,320,000 outstanding as of that
date.
NOTE K
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, 2003, $8,568,000 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, 2003, the maximum amount
available for transfer from the bank to the corporation in the form of loans was
approximately $7,054,000.
NOTE L
INCOME TAXES
The composition of applicable income taxes (benefits) for the years ended
December 31 was allocated as follows:
2003 2002 2001
---- ---- ----
IN THOUSANDS
Income from continuing operations $ 3,142 $ 3,107 $ 3,734
Stockholders' equity for other comprehensive income (1,959) 1,789 (90)
------ ---------- ---
Total $ 1,183 $ 4,896 $ 3,644
========= ========= =========
41
Income tax expense attributable to other comprehensive income consists of the
following at December 31:
2003 2002 2001
---- ---- ----
IN THOUSANDS
Unrealized gains (losses) on securities arising
during the period $ (1,963) $ 1,803 $ 89
Unfunded pension liability 4 (14) (179)
--------- ------- -------
Income Tax (Benefit) Expense Related to Other
Comprehensive Income $ (1,959) $ 1,789 (90)
========= ======= ===
Income tax expense attributable to income from continuing operations consists of
the following at December 31:
2003 2002 2001
---- ---- ----
IN THOUSANDS
Currently payable $ 2,996 $ 3,456 $ 4,124
Deferred tax benefit 146 (349) (390)
--------- ------- -------
Applicable Income Tax $ 3,142 $ 3,107 $ 3,734
========= ========= =========
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:
2003 2002 2001
---- ---- ----
IN THOUSANDS
Income taxes at statutory rate $ 4,869 $ 4,204 $ 4,225
Increase (Decrease) resulting from:
Tax-exempt income (1,320) (353) (266)
Rehabilitation and low-income housing credits (336) (670) (186)
Other (71) (74) (39)
--------- ------- -------
Applicable Income Taxes $ 3,142 $ 3,107 $ 3,734
========= ======== ========
The significant components of deferred tax assets and deferred tax liabilities
at December 31, 2003 and 2002, are as follows:
IN THOUSANDS 2003 2002
---- ----
Deferred tax assets:
Allowance for loan losses $ 1,370 $ 1,322
Deferred compensation 440 450
Unfunded pension liability 189 193
Other 196 380
---------- ---------
Total gross deferred tax assets 2,195 2,345
--------- ---------
Deferred tax liabilities:
Depreciation 131 153
Net unrealized gains on available-for-sale
securities 238 2,201
---------- ---------
Total gross deferred tax liabilities 369 2,354
---------- ---------
Net Deferred Tax (Liability) Asset $ 1,826 $ (9)
======== ========
Since the corporation has historically had strong earnings, management believes
the deferred tax assets are realizable. Income taxes paid during 2003, 2002 and
2001, were $2,856,000, $4,004,000 and $4,090,000, respectively.
42
NOTE M
RETIREMENT PLANS
The corporation's subsidiary has a non-contributory pension plan. Retirement
benefits 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, 2003,
2002, 2001 was $567,000, $578,000 and $406,000, 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 ended December
31, 2003 and 2002, and a statement of the funded status as of December 31, 2003
and 2002.
2003 2002
IN THOUSANDS
RECONCILIATION OF BENEFIT OBLIGATIONS:
Benefit obligations - beginning of year $ 11,550 $ 11,426
Service costs 358 424
Interest costs 735 702
Actuarial (gains) losses 1,150 (849)
Benefit payments (483) (295)
Plan changes -- 142
------- --------
Benefit Obligations - End of Year 13,308 11,550
------- --------
RECONCILIATION OF FAIR VALUE OF PLAN ASSETS:
Fair value of plan assets - beginning of year 8,679 8,680
Actual return on plan assets 1,299 6
Employer contributions 1,154 288
Benefits paid (483) (295)
------- --------
Fair Value of Plan Assets - End of Year 8,679 10,649
------- --------
RECONCILIATION OF FUNDED ASSETS:
Funded status at December 31 (under funded) over (2,659) (2,871)
funded
Unrecognized net actuarial loss 2,225 1,776
Unrecognized transition asset (obligation) 107 119
Unrecognized prior service costs 478 550
------- --------
Prepaid (accrued) benefit cost 151 (426)
Recognition of additional minimum liability (540) (560)
------- --------
Net Accrued Pension $ (389) $ (986)
------- --------
The accumulated benefit obligation was $11,038,000 and $9,665,000 at December
31, 2003 and 2002, respectively.
During 2002, the frozen defined benefit plan of the bank acquired in 1999 was
merged into the existing plan. The following table provides the components of
net periodic benefit costs for the years ending December 31:
2003 2002 2001
---- ---- ----
IN THOUSANDS
COMPONENTS OF NET PERIODIC BENEFIT COSTS:
Service costs $ 344 $ 424 $ 343
Interest costs 735 702 665
Expected return on assets (644) (689) (662)
Recognized net actuarial loss 47 74 --
Amortization of transition asset 12 -- (2)
Amortization of prior service costs 73 67 62
------- ------- -------
Net Periodic Benefit Costs $ 567 $ 578 $ 406
===== ===== =====
The assumptions used in the measurement of the benefit obligations are shown in
the following table:
Weighted average assumptions as of December 31: 2003 2002 2001
---- ---- ----
Discount rate 6.00% 6.50% 6.25%
Expected return on plan assets 7.25% 7.75% 8.25%
Rate of compensation increase 4.66% 4.62% 4.69%
The corporation's pension plan weighted-average assets allocation at December
31, 2003 and 2002, by asset category are as follows:
Plan Assets
at December 31
---------------------------
Asset Category 2003 2002
- ------------------------- ------------ ------------
Equity Securities 30% 19%
Debt Securities 7% 5%
Real Estate 63% 75%
Other 0% 1%
------------ ------------
100% 100%
============ ============
43
Equity securities included corporation common stock in amounts of $962,000, 10%
of total plan assets and $791,000, 9% of total plan assets at December 31, 2003
and 2002, respectively.
The corporation expects to contribute $1,154,650 to its pension plan in 2004.
Based on current data and assumptions, the following benefit payments, which
reflect expected future service, as appropriate, are expected to be paid over
the next 10 fiscal years.
----------------------------- ----------------------------
YEAR BENEFIT PAYMENT
----------------------------- ----------------------------
2004 $550,000
----------------------------- ----------------------------
2005 $590,000
----------------------------- ----------------------------
2006 $660,000
----------------------------- ----------------------------
2007 $670,000
----------------------------- ----------------------------
2008 $690,000
----------------------------- ----------------------------
2009-2013 $5,750,000
----------------------------- ----------------------------
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 $251,000, $240,000 and $204,000 for 2003, 2002 and 2001,
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 rate life insurance policies. At December 31,
2003 and 2002, the present value of the future obligations was $943,000 and
$913,000, respectively. The insurance policies included in other assets had a
total cash value of $3,776,000 and $3,614,000, respectively, at December 31,
2003 and 2002.
NOTE N
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, 2003 and 2002, is presented below.
2003 2002
---- ----
IN THOUSANDS
Commitments to extend credit $ 68,654 $ 54,495
Standby letters of credit 5,915 5,775
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.
44
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 O
RELATED PARTY TRANSACTIONS
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, 2003 and
2002, was $1,377,000 and $1,568,000, respectively. The terms of these loans were
substantially the same as those for unrelated parties.
Balance at Balance at Number
January 1, Amounts December 31, of
2003 Additions Collected 2003 Debtors
- -----------------------------------------------------------------------------------------
$1,568,000 $694,000 $885,000 $1,377,000 9
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 2003 and
2002, 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, 2003 December 31, 2002
-------------------------- --------------------------
ESTIMATED CARRYING Estimated Carrying
FAIR VALUE AMOUNT Fair Value Amount
---------- -------- ---------- --------
IN THOUSANDS
Cash and due from banks $ 32,381 $ 32,381 $ 18,089 $ 18,089
Interest bearing deposits with banks 1,033 1,033 1,009 1,009
Investment securities 396,192 395,299 316,874 314,047
Interest receivable 2,470 2,470 4,300 4,300
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 based on 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, 2003 and 2002. Mortgages and consumer loans have been
revalued using discounted cash flows. The mortgages were estimated using market
rates at December 31, 2003 and 2002, and consumer loans were revalued using
rates being charged by the corporation at year-end 2003 and 2002. Fair value for
nonperforming loans is based on current valuations of underlying collateral.
DECEMBER 31, 2003 December 31, 2002
-------------------------- ------------------------------
ESTIMATED CARRYING Estimated Carrying
FAIR VALUE AMOUNT Fair Value Amount
---------- -------- ---------- --------
IN THOUSANDS
Net loans $ 415,195 $ 411,051 $ 370,973 $ 368,469
Mortgage loans held for sale 86 86 2,544 2,544
Under Statement of Financial Accounting Standards No. 107, for December 31, 2003
and 2002, the asset and liability price tables published by the Office of Thrift
Supervisor were used to value deposits with no stated maturities. The fair value
45
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 providing by the
deposit liabilities, compared to the cost of borrowing funds in the market.
DECEMBER 31, 2003 December 31, 2002
-------------------------- --------------------------
ESTIMATED CARRYING Estimated Carrying
FAIR VALUE AMOUNT Fair Value Amount
---------- -------- ---------- --------
IN THOUSANDS
Deposits with no stated maturities $ 392,163 $ 417,259 $ 330,498 $ 353,253
Deposits with stated maturities 223,459 222,129 232,920 229,362
Repurchase agreements 37,975 39,906 34,101 35,945
Federal funds purchased and demand notes 450 450 450 450
Federal Home Loan Bank borrowings 119,968 116,320 40,792 40,050
Interest payable 2,158 2,158 2,451 2,451
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, 2003 December 31, 2002
-------------------------- --------------------------
ESTIMATED CARRYING Estimated Carrying
FAIR VALUE AMOUNT Fair Value Amount
---------- -------- ---------- --------
IN THOUSANDS
Commitments to extend credit $ 68,654 $ 68,654 $ 54,495 $ 54,495
Standby letters of credit 5,915 5,915 5,775 5,775
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
STATEMENTS OF CONDITION
DECEMBER 31
--------------------------------
IN THOUSANDS 2003 2002
---- ----
ASSETS
Cash $ 1,523 $ 103
Securities and other assets 4,498 3,199
Investment in common stock of subsidiary 66,424 62,164
Receivable from subsidiary 185 1,219
--------- ---------
TOTAL ASSETS $ 72,630 $ 66,685
========= =========
LIABILITIES
Accrued expenses $ 408 $ 392
--------- ---------
STOCKHOLDERS' EQUITY
Common stock (par value $2.50; 20,000,000 shares
authorized; 5,436,101 and 5,436,101 issued and
outstanding shares on 12/31/03 and 12/31/02,
respectively) 13,590 13,590
Retained earnings 68.632 52,703
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 72,630 $ 66,685
======== =========
46
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
------------------------------------
IN THOUSANDS 2003 2002 2001
---- ---- ----
INCOME
Dividend from subsidiary $ 6,338 $ 6,871 $ 5,284
Interest income 5 -- 3
EXPENSE 213 112 132
---------- --- -----------
INCOME BEFORE TAXES AND EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARY 6,130 6,759 5,155
Applicable tax benefit (422) (730) (231)
----
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET
INCOME OF SUBSIDIARY 6,552 7,489 5,386
Equity in undistributed net income of subsidiary 4,216 1,415 2,951
---------- ---------- ----------
NET INCOME $ 10,768 $ 8,904 $ 8,337
======== ========= =========
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
---------------------------------
IN THOUSANDS 2003 2002 2001
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Dividends and interest received $ 6,343 $ 6,871 $ 5,287
--------- --------- ---------
Net Cash Provided by Operating Activities 6,871
6,343 5,287
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in equity investments (77) (950) (714)
Investments in other assets
(8) -- (52)
--------- --------- ---------
Net Cash Used in Investing Activities
(85) (950) (766)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (4,838) (5,871) (4,783)
Retirement of common stock
-- -- (76)
--------- --------- ---------
Net Cash Used in Financing Activities
(4,838) (5,871) (4,859)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,420 50 (338)
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 103 53 391
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,523 $ 103 $ 53
========= ========== =========
RECONCILIATION OF NET INCOME OF NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net income $ 10,768 $ 8,904 $ 8,337
Increase in investment in common stock
of subsidiary (4,216) (1,415) (2,951)
Decrease (Increase) in receivable from subsidiary 1,034 (730) (231)
Loss (Gain) on equity investment (1,243) 112 132
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 6,343 $ 6,871 $ 5,287
========= ========= =========
NOTE R
FINANCIAL INFORMATION RELATING TO OPERATING SEGMENTS (UNAUDITED)
Management of the corporation monitors and evaluates four segments of its
operations, which include commercial, consumer, mortgage lending and investment
securities. The corporation's marketplace is south central 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
47
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 to possible loan losses to arrive at income before income taxes for
each respective segment.
The following tables are for the years ending December 31, 2003 and 2002, by the
four operating segments:
Commercial Consumer Mortgage Investment
2003 IN THOUSANDS Lending Lending Lending Securities Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income $ 10,075 $ 5,385 $ 8,211 $ 13,018 $ -- $ 36,689
Charge for funds used (6,173) (2,763) (4,514) (11,969) 11,474 (13,945)
------------ ----------- ------------ ----------- ----------- -----------
Net Interest Income 3,902 2,622 3,697 1,049 11,474 22,744
Provision for possible loan losses 103 90 72 -- -- 265
------------- ------------- -------------- -------------- ------------- -------------
Net Interest Income After Provision
_for Possible Loan Losses 3,799 2,532 3,625 1,049 11,474 22,479
Non-interest income 47 13 147 1,992 7,230 9,429
Non-interest expense (1,515) (946) (1,574) (53) (13,910) (17,998)
------------ ------------ ------------ -------------- ---------- -----------
Income Before Income Taxes $ 2,331 $ 1,599 $ 2,198 $ 2,988 $ 4,794 $ 13,910
=========== ========== =========== =========== ========== ==========
Average Funds Used $ 178,471 $ 79,882 $ 130,509 $ 346,079 $ 77,387 $ 812,328
========= ========= ========= ========= ========= =========
Commercial Consumer Mortgage Investment
2002 IN THOUSANDS Lending Lending Lending Securities Other Total
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income $ 9,707 $ 5,390 $ 9,656 $ 13,041 $ -- $ 37,794
Charge for funds used (6,526) (2,894) (5,658) (9,175) 10,800 (13,453)
------------ ------------ ------------ ------------- ------------ ----------
Net Interest Income 3,181 2,496 3,998 3,866 10,800 24,341
Provision for
possible loan losses (144) (126) (100) -- -- 370
------------- ------------- ------------- -------------- -------------- -----------
Net Interest Income After
Provision
for Possible Loan Losses 3,037 2,370 3,898 3,866 10,800 23,971
Non-interest income 10 59 118 -- 4,841 5,028
Non-interest expense (1,333) (850) (1,293) (104) (13,408) (16,988)
------------ ------------- ------------ ---------- ----------- ----------
Income Before Income Taxes $ 1,714 $ 1,579 $ 2,723 $ 3,762 $ 2,233 $ 12,011
=========== =========== =========== ============ =========== ===========
Average Funds Used $ 159,088 $ 70,535 $ 137,929 $ 223,644 $ 68,143 $ 659,339
========= ========== ========= ========== ========== ==========
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) (11,335) (14,327)
----------- ------------ ------------ ----------- ---------- -----------
(40)
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 S
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets" in July 2001. 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. 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 event arises. The Corporation does not have goodwill recorded on its
books; accordingly these provisions have no impact on the Corporation's
financial condition or results of operations.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets"
was effective for 2002. This statement requires an entity to recognize an
48
impairment loss if the carrying value amount of a long-lived asset or asset
group is not recoverable and exceeds fair value. These authoritative guidelines
had no effect on the corporation's financial condition or results of operations.
SFAS No. 147, "Acquisitions of Certain Financial Institutions - an amendment of
SFAS No. 72 and 144 and Interpretation No. 9 issued in October 2002, provided
guidance on the application of the purchase method of accounting to acquisitions
of financial institutions. In addition, the Statement amends SFAS No. 144 to
include in its scope, long-term customer-relationship intangible assets of
financial institutions. Those assets are subject to the same recoverability and
impairment recognition and measurement provisions provided for SFAS No. 144
effective as of October 2002. The corporation has $417,000 and $673,000 of core
deposit intangibles at December 31, 2002 and 2001, respectively related to the
acquisition of deposits from another institution in 2001.
In addition, during 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," an amendment to SFAS No.
123 issued in December 2002; SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" issued in June 2002 and SFAS No. 145, "Rescission
of FASB Statements No. 4, 44 and 64." Based upon the corporation's current
activities, these standards do not impact its accounting and reporting
requirements.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities" issued April 2003, improved the reporting in Statement 133 by
requiring that contracts with comparable characteristics be accounted for
similarly as either derivatives or hybrid instruments. This Statement is
generally effective for contracts entered into or modified after June 30, 2003
with a few exceptions. This statement requires loan commitments that relate to
the origination of mortgage loans that will be held for sale to be accounted for
as derivative instruments by the issuer of the loan commitment. Under this
statement loan origination fees need to be adjusted to fair value at the balance
sheet date. This authoritative guidance had no effect on the corporation's
financial condition or results of operations as the loan origination fees on
mortgage loans held for sale by the corporation approximates fair value.
49
QUARTERLY RESULTS OF OPERATIONS
Selected quarterly information for the years ended December 31, 2003 and 2002,
is as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ---------------- --------------- ---------------
2003 IN THOUSANDS, EXCEPT PER SHARE DATA
Interest income $ 9,565 $ 9,012 $ 8,982 $ 9,130
Interest expense 3,696 3,728 3,292 3,229
---------- ---------- ---------- ----------
Net interest income 5,869 5,284 5,690 5,901
---------- ---------- ---------- ----------
Provision for possible loan losses 60 60 60 85
---------- ---------- ---------- ----------
Net income $ 2,467 $ 1,885 $ 3,151 $ 3,265
========= ========= ========= =========
Basic earnings per share 0.45 0.35 0.58 0.60
Return on average assets 1.30% 0.93% 1.51% 1.52%
2002
Interest income $ 9,409 $ 9,350 $ 9,491 $ 9,544
Interest expense 3,313 3,207 3,324 3,609
---------- ---------- ---------- ----------
Net interest income 6,096 6,143 6,167 5,935
---------- ---------- ---------- ----------
Provision for possible loan losses 60 60 60 190
---------- ---------- ---------- ----------
Net income $ 2,274 $ 2,220 $ 2,294 $ 2,116
========= ========= ========= =========
Basic earnings per share 0.42 0.41 0.42 0.39
Return on average assets 1.47% 1.41% 1.37% 1.28%
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
LETTER REGARDING CHANGE IN CERTIFYING ACCOUNTANT
On October 8, 2003, Stambaugh Ness, PC, the Registrant's principal accountants,
notified the Registrant that it will decline to stand for appointment after
completion of the current audit for calendar year 2003. Services to be provided
by Stambaugh Ness, PC, through the end of the calendar year 2003 included the
interim review for the third quarter ended September 30, 2003. Stambaugh Ness,
PC, has chosen not to continue to provide independent auditing services to
companies who report to the Securities and Exchange Commission. Stambaugh Ness,
PC, will provide a letter of final resignation in 2004.
On December 11, 2003, the Audit Committee of the Registrant's Board of Directors
voted to engage Beard Miller Company, LLP, as principal accountants to replace
Stambaugh Ness, PC. The change will become effective for the 2004 year end audit
including interim reviews commencing with the first quarter ending March 31,
2004.
In connection with audits of the two fiscal years ended December 31, 2002, and
subsequent interim periods through October 8, 2003, there were no disagreements
with Stambaugh Ness, PC, on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to Stambaugh Ness' satisfaction, would have caused
them to make reference to the subject matter of the disagreement in connection
with its report.
The audit reports of Stambaugh Ness, PC, on the financial statements of ACNB
Corporation as of and for the years ended December 31, 2002 and 2001, did not
contain any adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope, or accounting principles. We have
provided Stambaugh Ness, PC, with a copy of the foregoing disclosures. Attached
as Exhibit 16.1 is a copy of Stambaugh Ness' letter dated December 18, 2003,
stating that it has found no basis for disagreement with such statements.
During the years ended December 31, 2002 and 2001 and the subsequent interim
periods through the date of this Form 8-K, neither the registrant nor anyone on
its behalf consulted Beard Miller Company LLP on any matters or reportable
events listed in Item 304 (a)(2)(i) and (ii).
50
ACNB did not consult with Beard Miller Company LLP prior to its engagement
regarding the application of accounting principles to a specified transaction,
either completed or proposed, the type of audit opinion that might be rendered
on the financial statements of ACNB or any matter that was either the subject of
a disagreement or a reportable event within the meaning of Item 304(a)(1) of
Regulation S-K.
ITEM 9A - CONTROLS AND PROCECURES
Our management, including our principal executive and principal financial
officer, has evaluated the effectiveness of our disclosure controls and
procedures as of December 31, 2003. Our disclosure controls and procedures are
designed to provide reasonable assurance that the information required to be
disclosed in this Form 10-K annual report has been appropriately recorded,
processed, summarized and reported. Based on that evaluation, our principal
executive and principal financial officer has concluded that our disclosure
controls and procedures are effective at the reasonable assurance level.
Our management, including our principal executive and principal financial
officer, has evaluated any changes in our internal control over financial
reporting that occurred during the fourth quarter of 2003, and has concluded
that there was no change during the fourth quarter of 2003 that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item, relating to directors, executive
officers, and control persons, is set forth in sections "Principal Beneficial
Owners of the Corporation's Stock", "Information as to Nominees, Directors and
Executive Officers" and "Principal Officers of the Corporation" of the
Registrant's definitive Proxy Statement to be used in connection with the 2004
Annual Meeting of Shareholders, which pages are incorporated herein by
reference.
SECTION 16(A) BENEFICIAL OWNERSHIP COMPLIANCE. Section 16(a) of the Securities
Exchange Act of 1934, as amended, requires the Registrant's officers and
directors, and persons who own more than 10 percent of a registered class of the
Registrant's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission, or SEC. Officers,
directors and greater than 10 percent shareholders are required by SEC
regulation to furnish the Registrant with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of such forms received by it or written
representations from certain reporting persons that no Forms 5 were required for
those persons, the Registrant believes that during the period of January 1,
2003, through December 31, 2003, its officers and directors were in compliance
with all filing requirements applicable to them; except, however, that Lynda L.
Glass inadvertently filed one report, reporting one transaction, late.
ITEM 11 - EXECUTIVE COMPENSATION
Incorporated by reference is the information under the headings "Executive
Compensation" and "ACNB Corporation" in the 2004 Annual Meeting Proxy Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference is the information appearing under the headings "Share
Ownership" in the 2004 Annual Meeting Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference is the information appearing under the heading
"Transactions with Directors and Executive Officers" in the 2004 Annual Meeting
Proxy Statement and under "Notes to Consolidated Financial Statements - Note O -
Related Party Transactions" located elsewhere in this Form 10-K.
ITEM 14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required hereunder is incorporated by reference from the
corporation's 2004 Annual Meeting Proxy Statement under the section "Report of
the Audit Committee."
51
PART IV
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A)1. FINANCIAL STATEMENTS
The following financial statements are filed as part of this report:
o Consolidated Statements of Condition
o Consolidated Statements of Income
o Consolidated Statements of Changes in Shareholders' Equity
o Consolidated Statements of Cash Flows
o Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
Financial statement schedules are omitted because the required information is
either not applicable, not required or is shown in the respective financial
statements or in the notes thereto.
(B). EXHIBITS
3(i) - Articles of Incorporation of ACNB Corporation, as amended (incorporated
by reference to registrant's annual report on Form 10-K for the year ended
December 31, 2001, filed with the Commission on March 20, 2002).
3(ii) - Bylaws of Registrant; a copy of the Bylaws, as amended, of ACNB
Corporation is incorporated by reference to Exhibit 99 of the Registrant's
Current Report on Form 8-K, filed with the Commission on December 19, 2003.
10.1 - Executive Employment Agreement Dated as of January 1, 2000 between Adams
County National Bank, ACNB Corporation and Thomas A. Ritter. (Incorporated by
reference to Exhibit 99 of the Registrant's Current Report on Form 8-K, filed
with the Commission on March 26, 2001).
11 - Statement Regarding the Computation of Earnings Per Share
12 - Statements re: Computation of Ratios (Included herein on pages 11 and 25)
14 - Code of Ethics
21 - Subsidiaries of the Registrant
23 - Consents of Stambaugh Ness, P.C.
31.1 - Chief Executive Officer certification of annual report on Form 10-K
31.2 - Chief Financial Officer certification of annual report on Form 10-K
32.1 - Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350
as Added by Section 906 of the Sarbanes-Oxley Act of 2002
32.2 - Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350
as Added by Section 906 of the Sarbanes-Oxley Act of 2002
(C). REPORTS ON FORM 8-K
Form 8-K filed October 10, 2003 - Changes in Registrant's Certifying Accountant
Form 8-K/A filed October 17, 2003 - Changes in Registrant's Certifying
Accountant
Form 8-K filed October 24, 2003 - Press Release announcing Registrant's Third
Quarter Earnings
Form 8-K filed December 18, 2003 - Changes in Registrant's Certifying Accountant
Form 8-K filed December 19, 2003 - Bylaws of the Registrant
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ACNB CORPORATION (Registrant) MARCH 16, 2004
--------------
DATE
By: /S/ THOMAS A. RITTER By: /S/ JOHN W. KRICHTEN
-------------------------------------------- -------------------------------------------------
Thomas A. Ritter John W. Krichten
President & CEO Secretary & Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on March 16, 2004, by the following persons in the capacities
indicated.
/S/ PHILIP P. ASPER /S/ WAYNE E. LAU
--------------------------------------------- ----------------------------------------------------
Philip P. Asper Wayne E. Lau
Director Director
/S/ GUY F. DONALDSON /S/ THOMAS A. RITTER
--------------------------------------------- ----------------------------------------------------
Guy F. Donaldson Thomas A. Ritter
Director Director, President & CEO
/S/ FRANK ELSNER, III /S/ MARIAN B. SCHULTZ
--------------------------------------------- ----------------------------------------------------
Frank Elsner, III Marian B. Schultz
Director Director
/S/ D. RICHARD GUISE /S/ JENNIFER L. WEAVER
--------------------------------------------- ----------------------------------------------------
D. Richard Guise Jennifer L. Weaver
Director & Vice Chairman of the Director
Board
/S/ RONALD L. HANKEY /S/ HARRY L. WHEELER
--------------------------------------------- ----------------------------------------------------
Ronald L. Hankey Harry L. Wheeler
Director and Chairman Director
/S/ EDGAR S. HEBERLIG
---------------------------------------------
Edgar S. Heberlig
Director
53
EXHIBIT INDEX
PAGE
EXHIBIT 3(i) Articles of Incorporation of ACNB Corporation, as amended
(incorporated by reference to registrant's annual report on
Form 10-K for the year ended December 31, 2001, filed with the
Commission on March 20, 2002.)
EXHIBIT 3(ii) Bylaws of Registrant
A copy of the Bylaws, as amended, of ACNB Corporation is
incorporated by reference to Exhibit 3(ii) of the Registrant's
Current Report on Form 8-K, filed with the Commission on
December 19, 2003.
EXHIBIT 10.1 Executive Employment Agreement Dated as of January 1, 2000 between
Adams County National Bank, ACNB Corporation and Thomas A. Ritter.
(Incorporated by reference to Exhibit 99 of the Registrant's
Current Report on Form 8-K, filed with the Commission on March
26, 2001).
EXHIBIT 11 Statement Regarding the Computation of Earnings Per Share................................................55
EXHIBIT 12 Statements re: Computation of Ratios (Included herein on pages 11 and 25)
EXHIBIT 14 Code of Ethics............................................................................................56
EXHIBIT 21 Subsidiaries of the Registrant............................................................................60
EXHIBIT 23 Consent of Stambaugh Ness, P.C............................................................................61
EXHIBIT 31.1 Chief Executive Officer certification of annual report on Form 10-K.......................................62
EXHIBIT 31.2 Chief Financial Officer certification of annual report on Form 10-K.......................................63
EXHIBIT 32.1 Chief Executive Officer certification pursuant to 18 U.S.C. Section
1350 as Added by Section 906 of the Sarbanes-Oxley Act of 2002 ...........................................64
EXHIBIT 32.2 Chief Financial Officer certification pursuant to 18 U.S.C. Section
1350 as Added by Section 906 of the Sarbanes-Oxley Act of 2002 ...........................................65
54