- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________________ to
Commission file number 0-11783
ACNB CORPORATION
- --------------------------------------------------------------------------------
(Exact name of corporation as specified in its charter)
PENNSYLVANIA 23-2233457
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16 LINCOLN SQUARE, GETTYSBURG, PA 17325
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(717) 334-3161
- --------------------------------------------------------------------------------
(corporation's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the corporation (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
corporation was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark whether the corporation is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No _____
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the corporation has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ____ No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class - Common Stock ($2.50 par value)
Outstanding at June 30, 2003 - 5,436,101
PART I ITEM I FINANCIAL INFORMATION
ACNB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
June 30 December 31
----------------------------------------------------------------
2003 2002 2002
ASSETS In thousands
Cash and Due from Banks $ 24,853 $ 21,836 $ 18,089
Interest bearing deposits with banks 1,069 321 1,009
Investment Securities
Securities Held to Maturity 59,094 36,232 31,658
Securities Available for Sale 337,092 196,977 282,389
(Fair value $397,542, $235,066 and $316,874
respectively) ______ ______ ______
Total Investment Securities 396,186 233,209 314,047
Mortgage loans held for sale 1,173 681 2,544
Loans 384,898 370,140 372,306
Less: Reserve for Loan Losses -3,874 -3,778 -3,837
------- ------- -------
Net Loans 381,024 366,362 368,469
Premises and Equipment 7,370 6,612 7,182
Other Real Estate 446 807 559
Other Assets 24,536 19,054 22,745
-------- -------- --------
TOTAL ASSETS $ 836,657 $ 648,882 $ 734,644
======== ======== ========
LIABILITIES
Deposits
Noninterest Bearing $ 72,884 $ 75,857 $ 70,728
Interest Bearing 566,036 467,601 511,887
------- ------- -------
Total Deposits 638,920 543,458 582,615
Securities Sold Under
Agreement To Repurchase 28,638 25,999 35,945
Borrowing Federal Home Loan Bank 92,800 7,700 40,050
Demand Notes U.S. Treasury 450 450 450
Other Liabilities 5,279 5,120 5,484
------- ------- -------
TOTAL LIABILITIES 766,087 582,727 664,544
SHAREHOLDERS' EQUITY
Common Stock ($2.50 par value)
20,000,000 shares authorized:
5,436,101 shares issued and
outstanding at 06/30/03 and 06/30/02, respectively 13,590 13,590 13,590
Retained Earnings 54,798 50,998 52,781
Accumulated Other Comprehensive
Income (Loss) 2,182 1,567 3,729
------ ------ ------
TOTAL SHAREHOLDERS' EQUITY 70,570 66,155 70,100
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 836,657 $ 648,882 $ 734,644
======== ======== ========
The accompanying notes are an intregal part of the consolidated financial
statements.
PAGE 2
ACNB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30 Six Months Ended June 30
-----------------------------------------------------------
2003 2002 2003 2002
INTEREST INCOME, In thousands , except per share data
Loan Interest and Fees $ 5,840 $ 6,241 $ 11,893 $ 12,508
Time deposits with banks 24 12 39 23
Taxable securities 2,908 3,080 6,233 6,188
Non-taxable securities 240 17 412 40
----- ----- ----- -----
TOTAL INTEREST INCOME 9,012 9,350 18,577 18,759
INTEREST EXPENSE
Deposits 3,042 3,008 6,151 6,062
Other Borrowed Funds 686 199 1,273 458
----- ----- ----- -----
TOTAL INTEREST EXPENSE 3,728 3,207 7,424 6,520
NET INTEREST INCOME 5,284 6,143 11,153 12,239
Provision for Loan Losses 60 60 120 120
NET INTEREST INCOME AFTER PROVISION _____ _____ _____ _____
FOR LOAN LOSSES 5,224 6,083 11,033 2,119
NON-INTEREST INCOME
Trust Department 195 225 357 377
Service Charges on Deposit Accounts 479 418 942 817
Other Operating Income 402 239 917 742
Gain (Loss) on Other Real Estate (30) 121 192 121
Bank Owned Life Insurance 218 158 345 296
Securities Gains 545 - 995 -
----- ----- ----- -----
TOTAL NON-INTEREST INCOME 1,809 1,161 3,748 2,353
NON-INTEREST EXPENSE
Salaries and Employee Benefits 2,461 2,338 4,913 4,489
Net occupancy expense 336 490 583 497
Equipment expense 497 244 897 520
Other taxes 225 213 469 431
Professional services 86 113 153 215
Other expense 922 657 1,814 1,853
----- ----- ----- -----
TOTAL NON-INTEREST EXPENSE 4,527 4,055 8,829 8,005
INCOME BEFORE INCOME TAX 2,506 3,189 5,952 6,467
Applicable Income Tax 621 969 1,600 1,973
----- ----- ----- -----
NET INCOME $ 1,885 $ 2,220 $ 4,352 $ 4,494
===== ===== ===== =====
PER COMMON SHARE DATA *
Basic earnings $0.35 $0.41 $0.80 $0.83
Cash dividends paid 0.21 0.20 0.42 0.60
*Based on a weighted average of 5,436,101 shares outstanding in 2003 and
in 2002
The accompanying notes are an intregal part of the consolidated financial
statements.
Page 3
ACNB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30
----------------------------
2003 2002
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS In thousands
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and Dividends Received $ 20,495 $ 17,536
Fees and Commissions Received 4,072 2,408
Interest Paid (7,733) (7,123)
Cash Paid to Suppliers and Employees (10,549) (6,905)
Income Taxes Paid (1,689) (2,087)
Loans Originated for Sale (11,851) (7,096)
Proceeds of Mortgage Loans Sold 13,221 7,106
------ -----
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES 5,966 3,839
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Maturities of Investment Securities 5,366 -
Held-to-Maturity
Proceeds from Maturities of Investment Securities Available - 196,527 27,294
for- Sale
Purchase of Investment Securities Held - to - Maturity (32,802) -
Purchase of Investment Securities Available - for - Sale (251,230) (34,084)
Net Decrease (Increase) in Loans (12,592) (10,185)
Capital Expenditures (565) (1,199)
Proceeds From Sale of Other Real Estate Owned 523 960
--- ---
NET CASH USED IN INVESTING ACTIVITIES (94,773) (17,214)
CASH FLOW FROM FINANCING ACTIVITIES
Net Increase (Decrease) in Demand Deposits, NOW Accounts, and
Savings Accounts 60,027 42,993
Net Increase (Decrease) in Certificates of Deposit (7,556) (8,261)
Net Increase in Securities Sold Under Agreement to Repurchase (7,307) (7,751)
Dividends Paid (2,283) (3,262)
Net Increase (Decrease) in Borrowings 52,750 (10,112)
------ --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 95,631 13,607
------ ------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,824 232
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,098 21,925
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,922 $ 22,157
======== ========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
- -----------------------------------------------------------------------------------------------
Net Income $ 4,352 $ 4,494
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Depreciation and Amortization 377 291
Provision for Possible Loan Losses 120 120
Benefit for Deferred Taxes (404) (390)
Amortization (Accretion) of Investment Securities Premiums 1,550 (4)
(Discounts)
Increase (Decrease) in Taxes Payable 315 276
(Increase) Decrease in Interest Receivable 551 198
Increase (Decrease) in Interest Payable (309) (603)
Increase (Decrease) in Accrued Expenses 245 247
Decrease (Increase) in Mortgage Loans Held for Sale 1,370 100
(Increase) Decrease in Other Assets (2,342) 314
Increase (Decrease) in Other Liabilities 141 (1,204)
--- -------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ 5,966 $ 3,839
======= =======
The accompanying notes are an intregal part of the consolidated
financial statements.
Page 4
ACNB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present
fairly ACNB Corporation's financial position as of June 30, 2003 and
2002 and December 31, 2002 and the results of its operations for the
six months ended June 30, 2003 and 2002 and changes in financial
position for the six months then ended. All such adjustments are of a
normal recurring nature.
The accounting policies followed by the corporation are set forth in
Note A to the corporation's financial statements in the 2002 ACNB
Corporation Annual Report and Form 10-K, filed with the SEC on March
21, 2003.
2. The book and approximate market value of securities owned at June 30,
2003 and December 31, 2002 were as follows:
6/30/03 12/31/02
Amortized Fair Amortized Fair
Cost Value Cost Value
(000 omitted)
U.S. Treasury and U.S. Government
Agencies (held to maturity) $15,538 $17,392 $25,540 $ 28,350
State and Municipal (held to
maturity) 1,370 1,376 1,509 1,524
Corporate (held to maturity) 0 0 217 219
State and Municipal
(available for sale) 22,926 23,731 10,337 10,513
U.S. Government Agencies
(available for sale) 20,000 20,005 21,501 22,138
Mortgage Backed Securities
(available for sale) 192,400 193,723 180,696 184,893
Mortgage Backed Securites
(held to maturity) 34,828 34,481
Corporate (available for sale) 97,857 99,633 63,565 64,845
Restricted Equity Securities 7,201 7,201 4,392 4,392
-------- ------- ------- ------
TOTAL $392,120 $397,542 $307,757 $316,874
Income earned on investment securities was as follows:
Six Months Ended June 30
2003 2002
(000 omitted)
U.S. Treasury and U.S.
Government Agencies $916 $3,056
Mortgage Backed Securities 3,489 2,905
State and Municipal 412 40
Other Investments 1,828 227
------- ------
$6,645 $6,228
Page 5
3. Gross loans are summarized as follows:
June 30 December 31
(000 omitted)
2003 2002
Real Estate $335,639 $326,180
Real Estate Construction 16,121 16,096
Commercial and Industrial 23,336 21,128
Consumer 10,975 11,446
-------- -------
Total Loans $386,071 $374,850
4. Earnings per share are based on the weighted average number of shares
of stock outstanding during each period. Weighted average shares
outstanding for the six month periods ended June 30, 2003, and 2002
were 5,436,101 and 5,436,101, respectively.
5. Dividends paid per share were $.42 and $.60 for the six month periods
ended June 30, 2003, and 2002, respectively. This represented a 53%
payout of net income in 2003 and a 72% payout in 2002.
6. The results of operations for the six month periods ended June 30,
2003, and 2002, are not necessarily indicative of the results to be
expected for the full year.
7. During the second quarter of 2003, the corporation inadvertently sold a
portion of an investment security that was classified as
held-to-maturity. This does not represent a material contradiction with
the corporation's intent to hold those securities to maturity, nor does
this represent a pattern of such sales by the corporation.
The corporation has the intent and ability to hold the remaining
securities classified as held-to-maturity. The amortized cost of the
remaining portion of securities classified as held-to-maturity as of
June 30, 2003 was $51,736 or 13.2% of the entire investment portfolio
of the corporation.
The amortized cost of the debt security sold was $5,000,000 and the
related realized gain on the sale of the investment was $366,000.
8. Certain amounts in 2002 have been reclassified to conform with 2003
presentation.
Page 6
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The corporation's discussion and analysis of the significant changes in the
results of operations, capital resources and liquidity presented in the
accompanying consolidated financial statements for the Registrant, and its
wholly-owned subsidiaries, Adams County National Bank and Pennbanks Insurance
Company, follow. The corporation's consolidated statement of financial condition
and results of operations consist principally of the bank's financial condition
and results of operations. This discussion should be read in conjunction with
the corporation's 2002 Annual Report to Shareholders. Current performance does
not guarantee, assure, and is not necessarily indicative of similar performance
in the future.
In addition to historical information, this Form 10-Q contains forward-looking
statements. From time to time, the corporation may publish forward-looking
statements relating to such matters as anticipated financial performance,
business prospects, technological developments, new products, research and
development activities and similar matters. The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward-looking statements. In
order to comply with the terms of the safe harbor, the corporation notes that a
variety of factors could cause the corporation's actual results and experience
to differ materially from the anticipated results or other expectations
expressed in the corporation's forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development and
results of the corporation's business include the following: general economic
conditions, including their impact on capital expenditures; business conditions
in the banking industry; the regulatory environment; rapidly changing technology
and evolving banking industry standards; competitive factors, including
increased competition with community, regional and national financial
institutions; new service and product offerings by competitors and price
pressures; and similar items.
Three months ended June 30, 2003 compared to three months ended June 30, 2002
- -----------------------------------------------------------------------------
Net Income for the three month period ending June 30, 2003 was $1,885,000, down
$335,000 from the second quarter of 2002. Net interest income was down, total
other income was up and other expense was up. The second quarter decrease is due
to historically rapid prepayments on mortgage backed securities. Net income per
share, for the second quarter, was $.35, compared to the $.41 earned in the same
period in 2002. For the three month period (annualized) in 2003, the return on
average assets and return on average equity were .93% and 10.79%, respectively,
compared to 1.41% and 13.96%, respectively for 2002.
An explanation of the factors and trends that caused changes between the two
periods, by major earnings category, follows.
Total interest income for the second quarter period of 2003 was $9,012,000, down
$338,000 or 3.6% below the $9,350,000 earned in the same period of 2002. The
$338,000 decrease in interest income was due to a rapid mortgage backed security
prepayments during second quarter 2003. The average yield on earning assets
declined 112 basis points compared to the same quarter in 2002. In an effort to
manage interest rate risk, the corporation continues to lower interest rates on
transaction accounts and keep securities maturities short. Income from loans was
down approximately $401,000 due to lower interest rates while security income
was up approximately $51,000 due to greater volume of securities.
Page 7
Total interest expense for the second quarter month period of 2003 was
$3,728,000, up $521,000 or 16.2% from the $3,207,000 incurred for the same
period in 2002. The $521,000 increase in interest expense was due to successful
deposit promotions and increased borrowing. Because the increase in interest
expense exceeded the increase in interest income, net interest income decreased
$859,000.
Total other income for the second quarter period of 2003 at $1,809,000, was
$648,000 greater than the same quarter in 2002. The following are the primary
causes of the 56% increase in other income:
o A $108,000 increase in overdraft charges, as the overdraft
privilege program continues to be successful.
o Gain on sale of other real estate exceeded in 2002 by $72,000. The
majority of which gain was realized through the sale of the Carroll
Valley office.
o Net realized gains on securities of $545,000 (gross realized gain
of approximately $1,045,000 less gross realized loss of
approximately $500,000). Longer term securities with terms of
approximately 10 to 15 years were sold for gains, and the proceeds
reinvested in five year mortgage backed security balloons. Not all
of the funds were reinvested at higher rates, but the goal is to
slow down prepayments and lessen the volatility associated with
longer term securities.
o Additional income from bank owned life insurance of approximately
$60,000.
Interest margins continue to narrow, therefore, net earnings will increasingly
rely on other income for the remainder of the fiscal year.
Total other expense for the second quarter period of 2003 was $4,527,000, up
$472,000 from the $4,055,000 incurred for the second quarter of 2002. The
following are the primary causes of the 12% increase in other expense:
o A $123,000 or 5% increase in salaries and benefits caused by a
continuation of staffing efforts connected with a new branch in
Dillsburg, PA, and upgrading of loan personnel.
o A $99,000 increase in premises and equipment expense, which was
spread across the entire category and not confined to a specific
area.
o An $265,000 increase spread across the entire other expense
category.
The provision for income taxes in the second quarter decreased $348,000, due to
a higher level of tax-free income, low income housing tax credits, and lower
income before taxes.
Six months ended June 30,2003 compared to six months ended June 30, 2002
- ------------------------------------------------------------------------
Net income for the first six months of 2003 was $4,352,000, down $142,000 or 3%
below the $4,494,000 earned for the same period of 2002. The decrease in net
income was due primarily to continued weakness in net interest income with
insufficient offset in total other income, as explained below. In addition,
other expenses continued its strong growth. For the six month period
(annualized) of 2003, the return on average assets (ROA) and return on average
equity (ROE) were 1.10% and 12.47%, respectively, compared to 1.44% and 14.25%,
respectively, for 2002.
At June 30, 2003, total assets were approximately $837 million, reflecting a
$188 million or 29% increase above June 30, 2002. This increase in assets stems
from migration of funds from the equities market, in the form of a deposit
account called Classic Money Market, and increased borrowings from the Federal
Home Loan Bank. Book value per share was $12.98 on June 30, 2003, compared to
$12.17 on June 30, 2002. The corporation's capital remained sound as evidenced
by Total Shareholders Capital Ratio of 8.43% and a Total Risk-Based Capital
Ratio of 14.37% on June 30, 2003.
Page 8
Total interest income for the current six month period was $18,577,000 down
$182,000 or 1% from the $18,759,000 earned in the same period of 2002. The
$182,000 decrease in total interest income was due to falling interest rates in
the general market economy in 2002 translating to lower rates on new loans and
securities. In 2002, market rates fell rapidly and the effect is still strongly
affecting yields on components of the corporation's balance sheet.
Total interest expense for the current six month period was $7,424,000, up
$904,000 or 14% above the $6,520,000 incurred for the same period in 2002. The
$904,000 increase in total interest expense was due to growth in deposits as
they returned from Wall Street.
Net interest income was $11,153,000 for the current period, $1,086,000 below the
first six months in 2002. Margins are slipping, and assets are increasing, but,
not rapidly enough to offset changes in interest expenses. The bank shifted to a
funds purchased position, but has not improved either the dollar margin or the
ratio. The reason for the narrowing of the margin has been historically rapid
prepayments on mortgage backed securities. These securities (many of which were
bought at a premium) require accelerated write-offs of the acquired premium.
This cost approximately $500,000 in May and June of 2003.
Total non-interest income for the current six month period was $3,748,000 ,an
increase of $1,395,000 or 59% above the same period in 2002. The increase was
caused by a $125,000 increase in service charges on deposit accounts, $49,000 on
Bank Owned Life Insurance, $71,000 in gains on sale of other real estate, and
$995,000 in gains on securities sold. The gain in securities sold is the result
of a desire to improve yields by judicious extension of maturity (sale of a one
year maturity bond and its replacement with a two to three year bond with a
higher yield, with the realization of a gain on the security sold), or a need to
sell longer term securities to lessen volatility. Prepayment of mortgage backed
securities has been very rapid during the second quarter of 2002. Some
securities gains have been realized to offset the effect of the rapid
prepayments.
Total non-interest expense for the current six month period was $8,829,000,
$824,000 or 10% above the $8,005,000 incurred for the same period in 2002. The
increase was due to a $424,000 increase in salaries and benefits, and a $463,000
increase in premises and equipment. This last is traceable to new technology and
a new branch in Dillsburg.
The provision for income taxes was $1,600,000 for the current period, $373,000
below the same period in 2002 due to lower pretax income and greater tax free
municipal bond income.
OVERVIEW OF THE BALANCE SHEET
The changes in the balance sheet have been driven by strong growth in deposits.
The following are some of the results:
o Total investment securities were $396,098,000 at June 30, 2003, an increase
of $162,889,000 or 70% since June 30, 2002. Securities have increased from
36% of total assets to 47% of total assets.
o Total deposits have grown from $543,458,000, at June 30, 2002, to
$638,920,000, at June 30, 2003, an increase of $95,462,000 or 18%.
Certificates of deposit were down $777,000 from the June 30, 2002 total.
More than 100% of the $95,462,000 increase was from transaction accounts.
This has increased our liability sensitivity, as measured by the bank's
internal gap (see below).
Page 9
o Accumulated other comprehensive income has decreased from $3,729,000, at
December 31, 2002, to $2,182,000, at June 30, 2003. This indicates the
after tax effect in the change in market value of the available for sale
securities portfolio. Although declining rates would normally cause
comprehensive income to increase, management felt that due to the rapid
prepayment of mortgage backed securities, it was better to take the profits
rather than let them disappear through this prepayment or rising interest
rates.
INTEREST RATE SPREAD AND NET YIELD ON EARNING ASSETS
Three Months Ended
6/30/03 6/30/02
Rate Rate
Earning Assets 5.04% 6.36%
Interest Bearing Liabilities 2.31% 2.67%
Interest Rate Spread 2.73% 3.69%
Net Yield on Earning Assets 3.03% 4.15%
Net Yield on Earning Assets is the difference, stated in percentages, between
the interest earned on loans and other investments and the interest paid on
deposits and other sources of funds. The Net Yield on Earning Assets is one of
the best analytical tools available to demonstrate the effect of interest rate
changes on the corporation's earning capacity.
The Net Yield on Earning Assets, for the first six months of 2003, was down 112
basis points compared to the same period in 2002. Yields on loans and securities
have changed more rapidly than deposit rates as interest rates in the general
economy have remained at record low levels after falling dramatically in 2001
and 2002.
PROVISION AND RESERVE FOR POSSIBLE LOAN LOSSES
Reserve for Possible Loan Losses
(In Thousands)
Three Months Ended
6/30/03 6/30/02
Balance at Beginning of Period $3,837 $3,723
Provision Charged to Expense 120 120
Loans Charged Off 117 115
Recoveries 34 50
------- ------
Balance at End of Period $3,874 $3,778
Ratios:
Net Charge-offs to:
Net Income 1.92% 1.45%
Total Loans .02% .02%
Reserve for Possible Loan Losses 2.14% 1.72%
Reserve for Possible Loan Losses to:
Total Loans 1.00% 1.02%
Page 10
The Reserve for Possible Loan Losses at June 30, 2003 was $3,874,000 (1.00% of
Total Loans), an increase of $96,000 from $3,778,000 (1.02% of Total Loans) at
the end of the first six months of 2002. Loans past due 90 days and still
accruing were $1,036,000 and non-accrual loans were $541,000, as of June 30,
2003. The ratio of non-performing assets plus other real estate owned to total
assets was .24%, at June 30, 2003. All properties are carried at the lower of
market or book value and are not considered to represent significant threat of
loss to the bank. In addition, a parcel of other real estate owned with a book
value of $782,000 was sold during the second quarter of 2002 for $890,000,
reducing other real estate owned (OREO) by almost 50%.
Loans past due 90 days and still accruing were $1,379,000, at year end 2002,
while non-accruals were $1,037,000. The bulk of the corporation's real estate
loans are in residential mortgages. Management believes that internal loan
review procedures will be effective in recognizing and correcting any real
estate lending problems that may occur due to current economic conditions.
Interest not accrued, due to an average of $781,000 in non-accrual loans, was
approximately $23,000 for the first six months of 2003.
The bank considers a loan impaired when, based on current information and
events, it is probable that a lender will be unable to collect all amounts due.
We measure impaired loans based on the present value of expected future cash
flows, discounted at the loan's effective interest rate, or as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. If the measure of the impaired
loan is less than its recorded investment a lender must recognize an impairment
by creating, or adjusting, a valuation allowance with a corresponding charge to
loan loss expense. The corporation uses the cash basis method to recognize
interest income on loans that are impaired. All of the corporation's impaired
loans were on a non-accrual status for all reported periods.
CAPITAL MANAGEMENT
Total Shareholders' Equity was $70,570,000, at June 30, 2003, compared to
$66,155,000, at June 30, 2002, an increase of $4,415,000 or 6.7% over that
period. The ratio of Total Shareholders' Equity to Total Assets was 9.54%, at
December 31, 2002, 10.20%, at June 30, 2002, and 8.43%, at June 30, 2003. The
total risk-based capital ratio was 14.37%, at June 30, 2003. The leverage ratio
was 8.97%, at June 30, 2003, and 9.69%, during the same period in 2002. Capital
at the corporation remains strong. The payment of a special 20 cents per share
dividend in January 2002 has not slowed capital growth from the previous period.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Management believes that the corporation's liquidity is adequate. Liquid assets
(cash and due from banks, federal funds sold, money market instruments,
available for sale securities and held to maturity investment securities
maturing within one year) were 44% of total assets, at June 30, 2003. This mix
of assets would be readily available for funding any cash requirements. In
addition, the Bank has an approved line of credit of $350,872,000 at the Federal
Home Loan Bank of Pittsburgh with $92,800,000 outstanding at June 30, 2003.
As of June 30, 2003, the cumulative asset sensitive gap was 1.6% of total assets
at one month, 7.2% at six months, and 15.2% at one year. Adjustable rate
mortgages, which have an annual interest rate cap of 2%, are considered rate
sensitive. Twenty-five (25%) percent of passbook and statement savings, NOW and
money market deposit accounts are calculated to reprice overnight. The remaining
75% are carried in the over 5-year category.
Page 11
Other than the construction of a new operations center, costing approximately
$7,000,000 over the next 18 months, there are no known trends or demands,
commitments, events or uncertainties that will result in, or that are reasonably
likely to result in, liquidity increasing or decreasing in any material way.
Aside from those matters described above, management does not currently believe
that there are any known trends or uncertainties that would have a material
impact on future operating results, liquidity or capital resources nor is it
aware of any current recommendations by the regulatory authorities, which, if
they were to be implemented, would have such an effect, although the general
cost of compliance with numerous and multiple federal and state laws and
regulation does have and in the future may have a negative impact on the
corporation's results of operations.
Page 12
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Management monitors and evaluates changes in market conditions on a regular
basis. Based upon the most recent review, management has determined that there
have been changes in interest rates which have been affecting the corporation as
outlined above. For further discussion of year end information, refer to the
annual report.
ITEM 4
CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the corporation carried out
an evaluation, under the supervision and with the participation of the
corporation's management, including the corporation's Chief Financial Officer,
of the effectiveness of the design and operation of the corporation's disclosure
controls and procedures pursuant to the Securities Exchange Act of 1934
("Exchange Act") Rule 13a-14. Based upon that evaluation, the corporation's
Chief Executive Officer along with the corporation's Chief Financial Officer
concluded that the corporation's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
corporation (including its consolidated subsidiaries) required to be included in
the corporation's periodic SEC filings. There have been no significant changes
in the corporation's internal controls or in other factors which could
significantly affect these controls subsequent to the date the corporation
carried out its evaluation. Disclosure controls and procedures are corporation
controls and other procedures that are designed to ensure that information
required to be disclosed by the Corporation in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - Nothing to report.
Item 2. Changes in Securities and Use of Proceeds - Nothing to report.
Item 3. Defaults Upon Senior Securities - Nothing to report.
Item 4. Submission of Matters to a Vote of Security Holders
(a) An annual meeting of shareholders was held at 1:00 p.m. on May 13,
2003 at the main office of Adams County National Bank, 675 Old
Harrisburg Road, Gettysburg, PA 17325.
(b) Five matters were voted upon, as follows:
Proposal to fix the number of Directors of ACNB Corporation at eleven (11):
Votes Cast Votes Cast Votes
"FOR" "AGAINST" ABSTAINED
------------ --------- ---------
3,874,711 13,399 9,805
Proposal to fix the number of Class 1 Directors at four (4):
Votes Cast Votes Cast Votes
"FOR" "AGAINST" ABSTAINED
------------ --------- ---------
3,866,801 23,021 8,093
Page 13
Proposal to fix the number of Class 2 Directors at three (3):
Votes Cast Votes Cast Votes
"FOR" "AGAINST" ABSTAINED
------------ --------- ---------
3,863,399 26,207 8,309
Proposal to fix the number of Class 3 Directors at four (4):
Votes Cast Votes Cast Votes
"FOR" "AGAINST" ABSTAINED
------------ --------- ---------
3,863,419 22,147 12,349
Election of three (3) Class 2 Directors to serve for a three-year term:
Votes Cast Votes
Director Term Expires "FOR" "WITHHELD"
- -------- ------------ ------------ ----------
Wayne E. Lau 2006 3,854,859 43,056
Jennifer L. Weaver 2006 3,834,524 63,391
Harry L. Wheeler 2006 3,836,619 61,296
Item 5. Other Information - Nothing to report.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are included in this Report:
Exhibit 3(i) Articles of Incorporation of Registrant (Incorporated
by Reference to Exhibit 3 ( i ) in Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999).
Exhibit 3(ii) Bylaws of Registrant (Incorporated by Reference to
Exhibit 3(ii) in Registrant's Report of Form 8-K, filed
with the Commission on March 25, 1998).
Exhibit 10.1 Executive Employment Agreement Dated as of January 1, 2000
between Adams County National Bank, ACNB Corporation and
Thomas A. Ritter (Incorporated by Reference to Exhibit 99
of the Registrant's Current Report on Form 8-K, filed with
the Commission on March 26, 2001).
Exhibit 11 Statement Regarding Computation of Earnings Per Share.
Exhibit 99.1 Certification of Chairman of the Board and Chief Executive
Officer
Exhibit 99.2 Certification of Chief Financial Officer
(b) Report on Form 8-K.
Item 12 - Results of Operations and Financial Condition
Page 14
Pursuant to the requirements of the Securities Exchange Act of 1934, the
corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACNB CORPORATION
Ronald L. Hankey, Chairman of the Board/CEO
August 1, 2003
John W. Krichten, Secretary/Treasurer
Page 15
CERTIFICATION
I, Ronald L. Hankey, Chairman of the Board/Chief Executive Officer, certify,
that:
1. I have reviewed this quarterly report on Form 10-Q of ACNB
Corporation.
2. Based on my knowledge, the quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of the end of the period covered
by this quarterly report; and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date; and
(d) there were no changes in internal controls of financial
reporting that occurred during the quarter that materially
affected or is reasonably likely to materially affect the
registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or
operation of the internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls.
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
the internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
By:
-------------------------------------------
Ronald L. Hankey, Chairman of the Board/CEO
Date: August 1, 2003
Page 16
CERTIFICATION
I, John W. Krichten, Secretary/Treasurer, certify, that:
1. I have reviewed this quarterly report on Form 10-Q of ACNB
Corporation.
2. Based on my knowledge, the quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of the end of the period covered
by this quarterly report; and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date; and
(d) there were no changes in internal controls of financial
reporting that occurred during the quarter that materially
affected or is reasonably likely to materially affect the
registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or
operation of the internal controls which could adversely affect the
registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls.
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
the internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
By:
-------------------------------------
John W. Krichten, Secretary/Treasurer
Date: August 1, 2003
Page 17
EXHIBIT INDEX
Exhibit Number
Exhibit 3(i) Articles of Incorporation of Registrant (Incorporated
by Reference to Exhibit 3 ( i ) of Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999).
Exhibit 3(ii) Bylaws of Registrant (Incorporated by Reference to
Exhibit 3(ii) of Registrant's Report on Form 8-K, filed
with the Commission on March 25, 1998).
Exhibit 10.1 Executive Employment Agreement Dated as of January 1,
2000 between Adams County National Bank, ACNB Corporation
and Thomas A. Ritter (Incorporated by Reference to Exhibit
99 of the Registrant's Current Report on Form 8-K, filed
with the Commission on March 26, 2001).
Exhibit 11 Statement Regarding Computation of Earnings Per Share.
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Added
by Section of 906 of the Sarbanes-Oxley Act of 2002 by
Ronald L. Hankey
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350 as Added
by Section of 906 of the Sarbanes-Oxley Act of 2002 by
John W. Krichten
Page 18