- -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 ------------------ OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________ to _______________________ Commission file number 0-11783 ------- ACNB CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-2233457 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 675 OLD HARRISBURG ROAD, GETTYSBURG, PA 17325 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (717) 334-3161 ---------------------------------------------------- (Registrant's telephone number, including area code) ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No ____ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ____ No ____ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class - Common Stock ($2.50 par value) Outstanding at November 5, 1998 - 5,253,278 - --------------------------------------------------------------------------------
PART I ITEM I FINANCIAL INFORMATION ACNB CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CONDITION <TABLE> <CAPTION> 30-Sep 30-Sep 31-Dec 1998 1997 1997 -------- -------- -------- (000 omitted) <S> <C> <C> <C> ASSETS Cash and Due from Banks $ 15,944 $ 21,223 $ 28,734 Investment Securities Securities Held to Maturity 30,908 49,788 32,988 Securities Available for Sale 101,488 47,499 55,935 -------- -------- -------- Total Investment Securities 132,396 97,287 88,923 Federal Funds Sold 0 100 100 Loans 340,095 343,181 341,808 Less: Reserve for Loan Losses (3,334) (3,176) (3,174) -------- -------- -------- Net Loans 336,761 340,005 338,634 Premises and Equipment 4,560 5,079 4,949 Other Real Estate 365 210 401 Other Assets 5,775 6,046 5,096 -------- -------- -------- TOTAL ASSETS $495,801 $469,950 $466,837 ======== ======== ======== LIABILITIES Deposits Noninterest Bearing 48,945 43,250 46,839 Interest Bearing 359,954 348,184 348,734 -------- -------- -------- Total Deposits 408,899 391,434 395,573 Securities Sold Under Agreement To Repurchase 25,812 22,290 15,021 Borrowing Federal Home Loan Bank 0 0 0 Demand Notes U.S. Treasury 286 450 450 Other Liabilities 4,615 3,835 3,175 -------- -------- -------- TOTAL LIABILITIES 439,612 418,009 414,219 SHAREHOLDERS EQUITY Common Stock ($2.50 par value) 20,000,000 shares authorized: 5,253,278 shares issued and outstanding at 9/30/98 13,133 13,133 13,133 Surplus 3,647 3,647 3,647 Retained Earnings 37,444 34,454 34,968 Net unrealized gains on securities available for sale 1,965 707 870 -------- -------- -------- TOTAL SHAREHOLDERS EQUITY 56,189 51,941 52,618 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $495,801 $469,950 $466,837 ======== ======== ======== </TABLE> See accompanying notes to financial statements. PAGE 2
ACNB CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Three Months Ended Nine Months Ended Sep-98 Sep-98 ------------------- -------------------- 1998 1997 1998 1997 ------ ------ ------- ------- (000 omitted) (000 omitted) <S> <C> <C> <C> <C> INTEREST INCOME Loan Interest and Fees $6,939 $6,994 $20,902 $20,596 Interest and Dividends on Investment Securities 1,980 1,776 5,299 5,493 Interest on Federal Funds Sold 0 1 1 4 Interest on Balances with Depository Institutions 112 88 451 169 ------ ------ ------- ------- TOTAL INTEREST INCOME 9,031 8,859 26,653 26,262 INTEREST EXPENSE Deposits 3,621 3,590 10,755 10,597 Other Borrowed Funds 227 184 573 519 ------ ------ ------- ------- TOTAL INTEREST EXPENSE 3,848 3,774 11,328 11,116 NET INTEREST INCOME 5,183 5,085 15,325 15,146 Provision for Loan Losses 90 60 270 150 ------ ------ ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,093 5,025 15,055 14,996 OTHER INCOME Trust Department 129 112 413 349 Service Charges on Deposit Accounts 217 195 588 569 Other Operating Income 202 105 653 414 Securities Gains 0 0 0 0 ------ ------ ------- ------- TOTAL OTHER INCOME 548 412 1,654 1,332 OTHER EXPENSES Salaries and Employee Benefits 1,664 1,608 4,955 4,897 Premises and Fixed Assets 489 477 1,408 1,342 Other Expenses 727 614 2,093 1,941 ------ ------ ------- ------- TOTAL OTHER EXPENSE 2,880 2,699 8,456 8,180 INCOME BEFORE INCOME TAX 2,761 2,738 8,253 8,148 Applicable Income Tax 913 906 2,731 2,693 ------ ------ ------- ------- NET INCOME $1,848 $1,832 $ 5,522 $ 5,455 ====== ====== ======= ======= EARNINGS PER SHARE* $ 0.35 $ 0.35 $ 1.05 $ 1.04 DIVIDENDS PER SHARE* 0.20 0.19 0.58 0.55 </TABLE> - ---------- *Based on 5,253,278 shares outstanding in 1998 and 5,255,021 in 1997 See accompanying notes to financial statements. Page 3
ACNB CORPORATION AND SUBSIDIARY STATEMENT OF CASH FLOWS <TABLE> <CAPTION> Nine months ended Sept 30 ----------------------- 1998 1997 -------- -------- (000 omitted) <S> <C> <C> INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Cash Flows from Operating Activities: Interest and Dividends Received $ 26,472 $ 25,473 Fees and Commissions Received 2,014 1,742 Interest Paid (10,630) (10,467) Cash Paid to Suppliers and Employees (8,136) (7,467) Income Taxes Paid (2,790) (2,682) Net Cash Provided by Operating Activities 6,930 6,599 Cash Flows from Investing Activities: Proceeds from Maturities of Investment Securities and Interest Bearing Balances with Other Banks 15,996 33,299 Purchase of Investment Securities and Interest Bearing Balances with Other Banks (58,281) (13,560) Principal Collected on Loans 61,626 51,301 Loans Made to Customers (59,987) (68,907) Capital Expenditures (80) (149) Net Cash Used in Investing Activities (40,726) 1,984 Cash Flow from Financing Activities: Net Increase in Demand Deposits, NOW Accounts, and Savings Accounts 14,144 2,026 Proceeds from Sale of Certificates of Deposit 34,811 30,471 Payments for Maturing Certificates of Deposit (24,838) (38,636) Dividends Paid (3,047) (2,889) Increase (Decrease) in Borrowings (164) 0 Repurchase of Common Stock 0 (410) Net Cash Provided by Financing Activities 20,906 (9,438) Net Increase in Cash and Cash Equivalents (12,890) (855) Cash and Cash Equivalents: Beginning of Period 28,834 22,178 End of Period $ 15,944 $ 21,323 RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net Income $ 5,522 $ 5,455 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 469 485 Provision for Possible Credit Losses 270 150 Provision for Deferred Taxes 0 73 Amortization of Investment Securities Premiums (92) (68) Increase (Decrease) in Taxes Payable (59) (62) (Increase) Decrease in Interest Receivable (460) (221) Increase (Decrease) in Interest Payable 698 649 Increase (Decrease) in Accrued Expenses 70 381 (Increase) Decrease in Other Assets (219) (153) Increase (Decrease) in Other Liabilities 731 (90) Net Cash Provided by Operating Activities $ 6,930 $ 6,599 DISCLOSURE OF ACCOUNTING POLICY For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. </TABLE> Page 4
ACNB CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly ACNB Corporation's financial position as of September 30, 1998 and 1996 and December 31, 1997 and the results of its operations for the nine months ended September 30, 1998 and 1997 and changes in financial position for the nine months then ended. All such adjustments are of a normal recurring nature. The accounting policies followed by the Corporation are set forth in Note A to the Corporation's financial statements in the 1997 ACNB Corporation Annual Report and Form 10-K filed with the Securities and Exchange Commission under file no. 0-11783. 2. The book and approximate market values of securities owned at September 30, 1998 and December 31, 1997 were as follows: <TABLE> <CAPTION> 9/30/98 12/31/97 Amortized Fair Amortized Fair Cost Value Cost Value --------- -------- --------- ------- (000 omitted) <S> <C> <C> <C> <C> U.S. Treasury and U.S. Government Agencies (held to maturity) $ 30,119 $ 31,725 $32,156 $32,286 State and Municipal (held to maturity) 789 789 832 832 U.S. Government Agencies (available for sale) 95,536 98,513 51,756 53,074 Other Investments (available for sale) 2,975 2,975 2,861 2,861 ------- -------- ------- ------- TOTAL $129,419 $134,002 $87,605 $89,053 </TABLE> Income earned on investment securities was as follows: Nine Months Ended September 30 ------------------------------ 1998 1997 ------ ------ (000 omitted) U.S. Treasury $ 684 $1,132 U.S. Government Agencies 4,434 4,189 State and Municipal 38 41 Other Investments 143 131 ------ ------ $5,299 $5,493 Page 5
3. Gross loans are summarized as follows: September 30 December 31 ------------ ----------- (000 omitted) Real Estate $298,966 $303,270 Real Estate Construction 14,897 13,674 Commercial and Industrial 11,816 9,758 Consumer 14,416 15,106 -------- -------- Total Loans $340,095 $341,808 4. Earnings per share are based on the weighted average number of shares of stock outstanding during each period. Weighted average shares outstanding for the nine month periods ended September 30, 1998 and 1997 were 5,253,278 and 5,255,021 respectively. 5. Dividends per share were $.58 and $.55 for the nine month periods ended September 30, 1998 and 1997 respectively. This represented a 55% payout of net income in 1998 and a 53% payout in 1997. 6. The results of operations for the nine month periods ended September 30, 1997 and 1997 are not necessarily indicative of the results to be expected for the full year. Page 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following is management's discussion and analysis of the significant changes in the results of operations, capital resources and liquidity presented in the accompanying consolidated financial statements for ACNB Corporation, a Pennsylvania corporation and registered bank holding company (the Corporation), and its wholly-owned subsidiary, Adams County National Bank (the Bank). The Corporation's consolidated financial condition and results of operations consist almost entirely of the Bank's financial condition and results of operations. This discussion should be read in conjunction with the Corporation's 1997 Annual Report and Form 10-K. Current performance does not guarantee, assure, or is necessarily indicative of similar performance in the future. In addition to historical information, this Form 10-Q may contain forward-looking statements. From time to time, the Corporation may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Corporation notes that a variety of factors could cause the Corporation's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Corporation's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Corporation's business include the following: general economic conditions, including their impact on capital expenditures; business conditions in the banking industry; the regulatory environment; rapidly changing technology and evolving banking industry standards; competitive factors, including increased competition with community, regional and national financial institutions; new service and product offerings by competitors and price pressures; and similar items. Three months ended September 30, 1998 compared to three months ended September 30, 1997 Net Income for the three month period ending September 30, 1998 was $1,848,000, up $16,000 from the third quarter of 1997. The increase in net income was due primarily to increased net interest income. Net income per share, for the third quarter, was $.35, comparable to the $.35 earned in the same period in 1997. An explanation of the factors and trends that caused changes between the two periods, by major earnings category, follows. Total interest income for the third three month period of 1998 was $9,031,000, up $172,000 or 2% above the $8,859,000 earned in the same period of 1997. The $172,000 increase in interest income was due to a greater volume of securities and due from banks. The average yield on earning assets has decreased 7 basis points over the same quarter in 1997. In an effort to manage interest rate risk, the Bank continues to invest in mortgage-backed securities classified as available-for-sale and now holds a total volume of over $91 million. Income from securities and due from banks during the current period increased due to growth of approximately $30 million. Page 7
Total interest expense for the third three month period of 1998 was $3,848,000, up $74,000 or 2% above the $3,774,000 incurred for the same period in 1997. The $74,000 increase in interest expense was due primarily to a increase in the average volume of interest bearing liabilities, which was $16.6 million greater in the current quarter compared to the same quarter in 1997. Net interest income after provision for loan losses for the third three month period of 1998 was $5,093,000, compared to the $5,025,000 earned in the same period of 1997. Income before provision for loan losses was even greater in 1998, but a $30,000 greater provision reduced it to $68,000 greater than 1997. Total non-interest income for the third three month period of 1998 at $548,000, was $136,000 or 33% greater than the same quarter in 1997. This was primarily due to ATM surcharges, which the Corporation did not levy in 1997, Visa debit card fees, another service instituted in late 1997, and a good quarter for the Bank's Trust Department which settled a large estate. Total non-interest expense for the third three month period of 1998 was $2,880,000, up $181,000 or 7% more than the $2,699,000 incurred for the third quarter of 1997. Most of the increase was in supplies, teller long and short, and miscellaneous expenses. The provision for income taxes in the third quarter increased $7,000 due to a higher level of pretax earnings. Nine months ended September 30, 1998 compared to nine months ended September 30, 1997 Net income for the first nine months of 1998 was $5,522,000, up $67,000 or 1% above the $5,455,000 earned for the same period of 1997. The increase in net income was due primarily to a greater volume of loans. For the nine month period (annualized) of 1998, the return on average assets (ROA) and return on average equity (ROE) were 1.54% and 13.85%, respectively, compared to 1.57% and 14.50%, respectively, for 1997. At September 30, 1998, total assets were approximately $496 million, reflecting a $29 million or 6% increase above September 30, 1997. As explained more fully under Capital Management section, book value per share was $10.32 on September 30, 1998, compared to $9.75 on September 30, 1997. The Corporation's capital remained sound as evidenced by a Tier I Risked-Based Capital Ratio of 18.6% and a Total Risk-Based Capital Ratio of 19.8% on September 30, 1998. Total interest income for the current nine month period was $26,653,000, up $391,000 or 1% above the $26,262,000 earned in the same period of 1997. The $391,000 increase in total interest income was due primarily to a larger volume of securities and due from banks. Securities totaled $132,396 at September 30, 1998 compared to $97,287,000 at September 30,1997. Total interest expense for the current nine month period was $11,328,000, up $212,000 or 2% above the $11,116,000 incurred for the same period in 1997. The $212,000 increase in total interest expense was due to an increase in average interest bearing liabilities, principally time deposits. The year to date average volume of interest bearing liabilities increased approximately $7.7 million or 2% above the same period of 1997. Page 8
Net interest income was $15,325,000 for the current period, up $179,000 above the first nine months of 1997. Income from a larger volume of investment securities out paced funding costs. Nevertheless, the net yield on average earning assets was 4.50% for the current nine month period compared to 4.54% for the same period in 1997. The additional income was not sufficient to offset a decline in margins. Total non-interest income for the current nine month period was $1,654,000, up $322,000 or 24% above the same period in 1997. Improvement was in major categories but centered mainly in the Bank's Trust Department, which was up $64,000, caused by greater activity in estate settlements, and other operating income due to ATM surcharges and debit card fees. Total non-interest expense for the current nine month period was $8,456,000, up $276,000 or 3% above the $8,180,000 incurred for the same period in 1997. The increase in total non-interest expense was primarily the result of increases in ATM costs and building repair and maintenance. The provision for income taxes was $2,731,000 for the current period, $38,000 above the same period in 1997 due to a higher level of pretax earnings. INTEREST RATE SPREAD AND NET YIELD ON EARNING ASSETS Nine Months Ended ------------------------ 9/30/98 9/30/97 ------- ------- Rate Rate ---- ---- Earning Assets 7.80% 7.87% Interest Bearing Liabilities 4.04% 4.04% Interest Rate Spread 3.76% 3.83% Net Yield on Earning Assets 4.50% 4.54% Net Yield on Earning Assets is the difference, stated in percentages, between the interest earned on loans and other investments and the interest paid on deposits and other sources of funds. The Net Yield on Earning Assets is one of the best analytical tools available to demonstrate the effect of interest rate changes on the Corporation's earning capacity. The Net Yield on Earning Assets, for the first nine months of 1998, was down 4 basis points compared to the same period in 1997. This is a result of lower market yields on loans and securities without relief on the deposit side. Page 9
PROVISION AND RESERVE FOR POSSIBLE LOAN LOSSES Reserve for Possible Loan Losses (In Thousands Except Ratios) Nine Months Ended --------------------- 9/30/98 9/30/97 ------- ------- Balance at Beginning of Period $3,174 $3,183 Provision Charged to Expense 270 150 Loans Charged Off 183 173 Recoveries 73 16 ------ ------ Balance at End of Period $3,334 $3,176 Ratios: Net Charge-offs to: Net Income 1.99% 2.88% Total Loans .03% .05% Reserve for Possible Loan Losses 3.30% 4.94% Reserve for Possible Loan Losses to: Total Loans .98% .93% The Reserve for Possible Loan Losses at September 30, 1998 was $3,334,000 (.98% of Total Loans), an increase of $158,000 from $3,176,000 (.93% of Total Loans) at the end of the first nine months of 1997. Loans past due 90 days and still accruing amounted to $1,837,000 and non-accrual loans totaled $1,382,000 as of September 30, 1998. The ratio of non-performing assets plus other real estate owned to total assets was .76% at September 30, 1998. All properties are carried at the lower of market or book value and are not considered to represent significant threat of loss to the bank. Loans past due 90 days and still accruing were $1,197,000 at year end 1997 while non-accruals stood at $1,640,000. The bulk of the Corporation's real estate loans are in owner occupied dwellings. Management believes that internal loan review procedures will be effective in recognizing and correcting any real estate lending problems that may occur due to current economic conditions. Interest not accrued, due to an average of $1,613,000 in non-accrual loans, was approximately $145,000 for the first nine months of 1998. A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due. Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate, or as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than its recorded investment a creditor must recognize an impairment by creating, or adjusting, a valuation allowance with a corresponding charge to loan loss expense. The Corporation uses the cash basis method to recognize interest income on loans that are impaired. All of the Corporation's impaired loans were on non-accrual status for all reported periods. CAPITAL MANAGEMENT Total Shareholders' Equity amounted to $56,189,000 at September 30, 1998 compared to $51,941,000 at September 30, 1997, an increase of $4,248,000 or 8% over that period. The ratio of Total Shareholders' Equity to Total Assets was 11.33% at September 30, 1997, 11.27% at December 31, 1997, and 11.05% at September 30, 1998. The total risk-based capital ratio was 19.78% at September 30, 1998. The leverage ratio was 10.78% at September 30, 1998 and 10.61% during the same period in 1997. Capital at the Corporation remains strong even with a 55% dividend payout ratio. Page 10
LIQUIDITY AND INTEREST RATE SENSITIVITY Management believes that the Corporation's liquidity is adequate. Liquid assets (cash and due from banks, federal funds sold, money market instruments, available for sale securities and held to maturity investment securities maturing within one year) were 24% of total assets at September 30, 1998. This mix of assets is readily available for funding any cash requirements. In addition, the Bank has an approved line of credit of $221,582,000 at the Federal Home Loan Bank of Pittsburgh with $-0- outstanding at September 30, 1998. As of September 30, 1998, the cumulative asset sensitive gap was 6.5% of total assets at one month, 2.8% at nine months, and 11.2% at one year. Adjustable rate mortgages, which have an annual interest rate cap of 2%, are considered rate sensitive. Passbook savings and NOW accounts are carried in the one to five year category while half of money market deposit accounts are spread over the four to twelve month category and the other half are shown to mature in the one to three year category. There are no known trends or demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way. Aside from those matters described above, management does not currently believe that there are any known trends or uncertainties which would have a material impact on future operating results, liquidity or capital resources nor is it aware of any current recommendations by the regulatory authorities which if they were to be implemented would have such an effect, although the general cost of compliance with numerous and multiple federal and state laws and regulation does have and in the future may have a negative impact on the corporation's results of operations. COMPANY IS IN THE PROCESS OF BECOMING YEAR 2000 COMPLIANT - EXPENSES NOT MATERIAL YEAR 2000 ISSUE The following section contains forward-looking statements which involve risks and uncertainties. The actual impact on the Corporation of the Year 2000 issue could materially differ from that which is anticipated in the forward-looking statements as a result of certain factors identified below. Corporation's State of Readiness The Year 2000 ("Y2K") issue is the result of computer programs using a two-digit format, as opposed to four digits, to indicate the year. Such computer systems will be unable to interpret dates beyond the year 1999, which could cause a system failure or other computer errors, leading to disruptions in operations. If not corrected, many computer applications could fail or create erroneous results by or at the year 2000. This could cause entire system failures, miscalculations, and disruptions of normal business operations including, among other things, a temporary inability to process transactions, send statements, or engage in similar day to day business activities. The extent of the potential impact of the Year 2000 Problem is not yet known, and if not timely corrected, it could affect the global economy. Page 11
The Corporation has developed a five phase program for Y2K information systems compliance which include the following: 1. Awareness Phase o Establish Year 2000 Task Force o Define Year 2000 Problem o Develop Year 2000 Plan and Strategy This phase has been completed as of December 31, 1997. 2. Assessment Phase o Identify and inventory all information systems, technology items, computer programs, business partners, environmental systems, and data communication links o Prioritize Mission Critical Systems Obtain vendor certifications for all software, hardware, and outsourced service providers o Assess impact of Year 2000 This phase will be completed December 31, 1998 3. Renovation Phase o Implement hardware and software upgrades o Replace systems and technology items o Monitor vendor and service provider progress This phase will be in effect from January 1, 1998 through December 31, 1998 4. Validation Phase o Develop testing plan and strategy o Establish test environment(s) o Test all internal information systems, technology items, computer programs, environmental systems, and data communication links o Test with and/or monitor testing of vendors and service providers This phase began August 31, 1998 and will continue through June 30, 1999 5. Implementation Phase o Implement Y2K compliant systems and technology items This phase began December 31, 1997 and will continue through October 29, 1999 Based on an ongoing assessment, the Corporation has determined that it will be required to modify or replace portions of its software so that its computer systems will properly use dates beyond December 31, 1999. The Corporation presently believes that as a result of modifications to existing software and hardware and conversions to new software, the Year 2000 Problem can be mitigated. However, if such modifications and conversions are not made, or are not completed on a timely basis, the Year 2000 Problem could have a material adverse impact on the operations of the Corporation. The major part of the Corporation's software is designed and maintained by companies well known throughout the banking industry. This portion of the software has been or is in the Page 12
process of being renovated for compliance with the year 2000. The cost of renovation will be borne by the third party providers. Thus, even though the Corporation does not have direct control over the renovation process, it is monitoring the progress of its third-party vendors to assess the status of their Y2K readiness efforts. However, because most computer systems are, by their very nature, interdependent, it is possible that noncompliant third-party computers could impact the Corporation's computer systems. The Corporation could be adversely affected by the Y2K problem if it or unrelated parties fail to successfully address the problem. The Corporation has taken steps to communicate with the unrelated parties with whom it deals to coordinate Year 2000 compliance. Additionally, the Corporation is dependent on external suppliers, such as, wire transfer systems, telephone systems, electric companies, and other utility companies for continuation of service. The Corporation is also assessing the impact, if any, the century date change may have on its credit risk. Costs of Year 2000 The cost to implement the aforementioned five phase program will range from approximately $300,000 to $350,000. Internal costs should approximate $229,390, while outside consultants for both legal work and contingency planning will approximate $93,125. $42,000 of the consultant fees have already been expended with another $41,000 scheduled to be spent by year end 1998. The majority of the remainder of the approximated costs are internal costs, which will not be actual cash outlays but will be absorbed by current operations. The financial impact to the Corporation of Year 2000 compliance has not been and is not anticipated to be material to the Corporation's financial position or results of operations in any given year. However, if compliance is not achieved in a timely manner by the Corporation or any of its significant related third-parties, be it a supplier of services or customer, the Y2K issue could possibly have a material effect on the Corporation's operations and financial position. The cost of the projects and the date on which the Corporation plans to complete both Year 2000 modifications and systems conversions are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. Risks of Year 2000 At present, management believes it's progress in remedying the Corporation's systems, programs and applications and installing Y2K compliant upgrades is on target. The Y2K computer problem creates risk for the Corporation from unforeseen problems in its own computer systems and from third-party vendors who provide the majority of mainframe and PC based computer applications. Failure of third-party systems relative to the Y2K issue could have a material impact on the Corporation's ability to conduct business. Page 13
Contingency Plans In conjunction with the Y2K Compliance, three major components have been established as part of this project. 1. Contingency Planning o Business Resumption Contingency Planning including Organizational Planning Guidelines, Business Impact Analysis, Written Plan, and Validation 2. Stakeholder Communications o Customer Awareness Program o Bank Employee Communications o Corporation Stockholder Communications 3. Commercial Customer Credit Risk Control Process o Due Diligence Process for Current and Future Material Customers o Assessment of Customer Year 2000 Readiness ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Management monitors and evaluates changes in market conditions on a regular basis. Based upon the most recent review management has determined that there have been no material changes in market risks since year end. For further discussion of year end information, refer to the annual report. PART II. OTHER INFORMATION Item 1. Legal Proceedings - Nothing to report. Item 2. Changes in Securities and Use of Proceeds - Nothing to report. Item 3. Defaults Upon Senior Securities - Nothing to report. Item 4. Submission of Matters to a Vote of Security Holders - Nothing to report. Item 5. Other Information - Nothing to report. Item 6. Exhibits and Reports of Form 8-K An 8-K concerning the acquisition of Farmers National Bancorp was filed on July 30, 1998. The following Exhibits are included in this Report: Exhibit 3(i) Articles of Incorporation of Registrant (Incorporated by Reference to Exhibit 3 in Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, filed with the Commission on March 25, 1995). Page 14
Exhibit 3(ii) Bylaws of Registrant as amended and restated (Incorporated by Reference to Exhibit 3(ii) in Registrant's Report of Form 8-K, filed with the Commission on March 25, 1998). Exhibit 10.1 Executive Employment Agreement dated as of January 1, 1998 between Adams County National Bank, ACNB Corporation and Ronald L. Hankey (Incorporated by Reference to Exhibit 99 in Registrant's Current Report on Form 8-K filed with the Commission on March 25, 1998). Exhibit 11 Statement Regarding Computation of Earnings Per Share. Exhibit 27 Financial Data Schedule. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ACNB CORPORATION ------------------------------------- Ronald L. Hankey, President November 5, 1998 (Date) ------------------------------------- John W. Krichten, Secretary/Treasurer Page 15
EXHIBIT INDEX Exhibit Number - -------------- Exhibit 3(i) Articles of Incorporation of Registrant (Incorporated by Reference to Exhibit 3 in Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, filed with the Commission on March 25, 1995). Exhibit 3(ii) Bylaws of Registrant as amended and restated (Incorporated by Reference to Exhibit 3(ii) in Registrant's Report of Form 8-K, filed with the Commission on March 25, 1998). Exhibit 10.1 Executive Employment Agreement dated as of January 1, 1998 between Adams County National Bank, ACNB Corporation and Ronald L. Hankey (Incorporated by Reference to Exhibit 99 in Registrant's Current Report on Form 8-K filed with the Commission on March 25, 1998). Exhibit 11 Statement Regarding Computation of Earnings Per Share. Exhibit 27 Financial Data Schedule. Page 16
EXHIBIT 11 Statement Regarding the Computation of Earnings Per Share For the nine month period ending September 30 ---------------------------- 1998 1997 --------- --------- Weighted average shares outstanding: 5,253,278 5,255,021 Common Stock Common Stock Equivalents Stock Options 0 0 Stock Awards 0 0 ESOP shares 0 0 Total Common Stock Equivalents 0 0 Total weighted average shares outstanding 5,253,278 5,255,021 Net Income $5,522,000 $5,455,000 Net Income Per Share $1.05 $1.04 Fully Diluted Income Per Share $1.05 $1.04 Page 17