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
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
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.
PART II
ITEM 5
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
ITEM 7
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.
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.
TABLE 1 - COMPARATIVE AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
YEAR ENDED DECEMBER 31 -------------------------------------- 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
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:
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.
TABLE 3 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities at December 31, 2003 and 2002, were as follows:
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.
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.
TABLE 5 - LOAN PORTFOLIO
Loans at December 31 are summarized as follows:
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.
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.
TABLE 7 - NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The following table presents information concerning the aggregate amount of nonperforming assets as of December 31:
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.
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.
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.
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.
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.
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.
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.
TABLE 12 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
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)%
Item 8
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
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
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
*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.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
ACNB Corporation provides banking and financial services to businesses and consumers through its wholly-owned banking subsidiary of Adams County National Bank. The corporation engages in full-service commercial and consumer banking and trust services through its 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.
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.
NOTE C
INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities at December 31, 2003 and 2002, were as follows:
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.
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:
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.
Transactions in the valuation portion of the allowance for loan losses for the past five years at December 31 are shown below:
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
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:
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 ======
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:
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.
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% ============ ============
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.
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.
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.
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.
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
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.
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.
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
STATEMENTS OF INCOME
STATEMENTS OF CASH FLOWS
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
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:
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
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.
QUARTERLY RESULTS OF OPERATIONS
Selected quarterly information for the years ended December 31, 2003 and 2002, is as follows:
ITEM 9
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).
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
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
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
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
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
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
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."
PART IV
ITEM 15
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
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
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.
EXHIBIT INDEX