UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
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Commission file number 0-11783
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ACNB CORPORATION
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(Exact name of corporation as specified in its charter)
PENNSYLVANIA 23-2233457
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16 LINCOLN SQUARE, GETTYSBURG, PA 17325
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(Address of principal executive offices) (Zip Code)
(717) 334-3161
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(corporation's telephone number, including area code)
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(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 _____
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 September 30, 2004 - 5,436,101
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PART I ITEM I FINANCIAL INFORMATION
ACNB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
DOLLARS IN THOUSANDS
Unaudited Unaudited
September 30 September 30 December 31
---------------------------------------------------
2004 2003 2003
ASSETS
Cash and Due from Banks $ 25,224 $ 20,913 $ 32,381
Interest bearing deposits with banks 932 1,086 1,033
Cash and Cash Equivalents 26,156 21,999 33,414
Investment Securities
Securities Held to Maturity 27,192 46,123 42,183
(Fair value $27,846, $47,123 and $43,076
respectively)
Securities Available for Sale 410,796 361,445 345,569
Mortgage loans held for sale 604 169 86
Loans 429,695 400,626 415,029
Less: Allowance for Loan Losses (4,170) (3,928) (3,978)
--------- -------- --------
Net Loans 425,525 396,698 411,051
Premises and Equipment 9,691 7,297 7,053
Restricted Investments in Bank Stocks 10,927 8,708 7,547
Foreclosed Real Estate 513 591 561
Other Assets 33,731 26,623 25,267
--------- -------- --------
TOTAL ASSETS $ 945,135 $ 869,653 $ 872,731
========= ======== ========
LIABILITIES
Deposits
Noninterest Bearing $ 76,520 $ 71,763 $ 75,819
Interest Bearing 578,010 559,212 563,569
--------- -------- --------
Total Deposits 654,530 630,975 639,388
Securities Sold Under
Agreement To Repurchase 39,839 38,717 39,906
Short -Term Borrowings 39,750 37,150 29,770
Long -Term Borrowings 132,000 87,000 87,000
Other Liabilities 5,382 5,801 4,276
--------- -------- --------
TOTAL LIABILITIES 871,501 799,643 800,340
SHAREHOLDERS' EQUITY Common Stock ($2.50 par value)
20,000,000 shares authorized:
5,436,101 shares issued and outstanding 13,590 13,590 13,590
Retained Earnings 61,664 56,806 58,711
Accumulated Other Comprehensive
Income (Loss) (1,620) (386) 90
--------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 73,634 70,010 72,391
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 945,135 $ 869,653 $ 872,731
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
Page 2
ACNB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
UNAUDITED UNAUDITED
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------------------------------------------------
2004 2003 2004 2003
INTEREST INCOME
Loan Interest and Fees $ 6,016 $ 5,943 $ 17,785 $ 17,836
Time deposits with banks 8 25 75 64
Taxable securities 3,751 2,774 9,576 9,007
Non-taxable securities 229 240 688 652
---------- ---------- ----------- ------------
TOTAL INTEREST INCOME 10,004 8,982 28,124 27,559
INTEREST EXPENSE
Interest bearing deposits 2,375 2,619 7,128 8,770
Other borrowed funds
Short Term 221 125 537 515
Long Term 895 548 1,980 1,431
---------- ---------- ----------- ------------
TOTAL INTEREST EXPENSE 3,491 3,292 9,645 10,716
---------- ---------- ----------- ------------
NET INTEREST INCOME 6,513 5,690 18,479 16,843
Provision for Loan Losses 75 60 225 180
---------- ---------- ----------- ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 6,438 5,630 18,254 16,663
NON-INTEREST INCOME
Trust Department 196 157 557 514
Service Charges on Deposit Accounts 453 430 1,335 1,312
Other Operating Income 375 453 1,164 1,430
Gain (Loss) on Foreclosed Real Estate - - -11 192
Bank Owned Life Insurance 210 192 507 537
Proceeds from Officer's Life Insurance - 646 - 646
Securities Gains (Losses) 243 996 1,014 1,991
---------- ---------- ----------- ------------
TOTAL NON-INTEREST INCOME 1,477 2,874 4,566 6,622
---------- ---------- ----------- ------------
NON-INTEREST EXPENSE
Salaries and Employee Benefits 2,485 2,443 7,687 7,356
Net occupancy expense 204 233 724 702
Equipment expense 464 497 1,544 1,394
Other taxes 235 226 731 695
Professional services 127 83 364 236
Other expense 1,098 941 3,081 2,869
---------- ---------- ----------- ------------
TOTAL NON-INTEREST EXPENSE 4,613 4,423 14,131 13,252
---------- ---------- ----------- ------------
INCOME BEFORE INCOME TAXES 3,302 4,081 8,689 10,033
Applicable Income Taxes 863 930 2,311 2,530
---------- ---------- ----------- ------------
NET INCOME $ 2,439 $ 3,151 $ 6,378 $ 7,503
========== ========== =========== ============
PER COMMON SHARE DATA *
Basic earnings $0.45 $0.58 $1.17 $1.38
Cash dividends paid $0.21 $0.21 $0.63 $0.63
The accompanying notes are an integral part of the consolidated financial
statements.
Page 3
ACNB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS
UNAUDITED
NINE MONTHS ENDED SEPTEMBER 30
2004 2003
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and Dividends Received $ 28,858 $ 29,721
----------- -----------
Fees and Commissions Received 5,043 7,202
Interest Paid (9,718) (11,111)
Cash Paid to Suppliers and Employees (14,189) (16,365)
Income Taxes Paid (1,955) (2,366)
Loans Originated for Sale (6,445) (17,154)
Proceeds of Mortgage Loans Sold 5,927 19,529
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 7,521 9,456
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Maturities of Investment Securities Held-to-Maturity 14,991 (5,366)
Proceeds from Sales and Maturities of Investment Securities Available-for-Sale 268,735 269,079
Purchase of Investment Securities Held-to Maturity - (28,539)
Purchase of Investment Securities Available-for-Sale (337,768) (348,136)
Purchase of Restricted Investments in Bank Stocks (3,380) -
Net (Increase) in Loans (14,666) (28,320)
Purchase of Bank Owned Life Insurance (4,400) -
Investment in Low Income Housing Partnership (1,683) -
Capital Expenditures (3,276) (701)
Proceeds from Sale of Foreclosed Real Estate 37 523
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (81,410) (141,460)
CASH FLOW FROM FINANCING ACTIVITIES
Net Increase in Demand Deposits, NOW Accounts, and
Savings Accounts 8,546 59,153
Net Increase (Decrease) in Certificates of Deposit 6,597 (7,245)
Net Increase (Decrease) in Securities Sold Under Agreement to Repurchase (67) 2,772
Dividends Paid (3,425) (3,425)
Net Increase in Short-Term Borrowings 9,980 16,650
Proceeds from Long-Term Borrowings 45,000 67,000
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 66,631 134,905
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,258) 2,901
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 33,414 19,098
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,156 $ 21,999
----------- -----------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
- --------------------------------------------------------------------------------------------------------------------------------
Net Income $ 6,378 $ 7,503
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Depreciation and Amortization 638 586
Provision for Loan Losses 225 180
Deferred Income Taxes 146 (404)
Amortization (Accretion) of Investment Securities Premiums (Discounts) 2,073 2,372
Increase (Decrease) in Taxes Payable 211 568
(Increase) Decrease in Interest Receivable (935) 360
Increase (Decrease) in Interest Payable (73) (395)
Increase (Decrease) in Accrued Expenses 750 539
Decrease (Increase) in Mortgage Loans Held for Sale (518) 2,375
(Increase) Decrease in Other Assets (1,446) (4,237)
Increase (Decrease) in Other Liabilities 72 9
----------- -----------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $ 7,521 $ 9,456
The accompanying notes are an integral part of the consolidated financial
statements.
Page 4
ITEM 1
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 (the "Corporation") financial position as of
September 30, 2004 and 2003 and December 31, 2003 and the results of
its operations for the three and nine months ended September 30, 2004
and 2003 and cash flows for the nine months then ended. All such
adjustments are of a normal recurring nature.
The accounting policies followed by the Corporation are set forth in
Note A to the Corporation's financial statements in the 2003 ACNB
Corporation Annual Report on Form 10-K, filed with the SEC on March 12,
2004. The results of operations for the three and nine month periods
ended September 30, 2004 are not necessarily indicative of the results
to be expected for the full year.
2. Earnings per share are based on the weighted average number of shares
of stock outstanding during each period. Weighted average shares
outstanding for the three and nine month periods ended September 30,
2004 and 2003 were 5,436,101. The Corporation does not have any
dilutive securities outstanding.
3. Components of Net Periodic Benefit Cost
The components of net periodic benefit costs for the three and nine
months ended September 30 were as follows:
Net Periodic Benefit Cost
September 30, 2004
THREE MONTHS ENDED SEPT 30 NINE MONTHS ENDED SEPT 30
--------------------------- -------------------------
2004 2003 2004 2003
(IN THOUSANDS)
SERVICE COST $ 109 $ 89 $ 327 $ 267
INTEREST COST 195 184 587 552
EXPECTED RETURN ON PLAN ASSETS (185) (161) (555) (483)
RECOGNIZED NET ACTUARIAL LOSS 18 12 56 36
OTHER, NET 16 21 46 63
--------- ------- --------- ---------
NET PERIODIC BENEFIT COST $ 153 $ 145 $ 461 $ 435
======== ======== ======== ========
The Corporation previously disclosed in its financial statements for
the year ended December 31, 2003, that it expected to contribute
$1,155,000 to its pension plan in 2004. As of September 30, 2004,
$1,155,000 of contributions have been made. The Corporation further
anticipates to contribute additional funds to its pension plan in the
fourth quarter of 2004.
Page 5
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4. Guarantees
The Corporation does not issue any guarantees that would require
liability recognition or disclosure, other than its standby letters of
credit. Standby letters of credit are written conditional commitments
issued by the Corporation to guarantee the performance of a customer to
a third party. Generally, all letters of credit, when issued have
expiration dates within one year. The credit risk involved in issuing
letters of credit is essentially the same as those that are involved in
extending loan facilities to customers. The Corporation, generally,
holds collateral and/or personal guarantees supporting these
commitments. The Corporation had $5,979,000 in standby letters of
credit, as of September 30, 2004. Management believes that the proceeds
obtained through a liquidation of collateral and the enforcement of
guarantees should be sufficient to cover the potential amount of future
payment required under the corresponding guarantees. The current amount
of the liability, as of September 30, 2004, for guarantees under
standby letters of credit issued is not material.
5. Comprehensive Income
The Corporation's other comprehensive income items are unrealized gains
(losses) on securities available for sale and unfunded pension
liability. There was no change in the unfunded pension liability during
the nine month period ended September 30, 2004. The components of total
comprehensive income for the nine months ended September 30 were as
follows:
Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
---- ---- ---- ----
(IN THOUSANDS)
Unrealized holding gains/(losses) on
available for sale securities arising
during the period $ 5,080 $(3,319) $(1,618) $(4,705)
Gains on AFS Securities
realized during period 243 630 1,014 1,625
------- -------- ------- -------
Net unrealized gains/(losses) 4,837 (3,949) (2,632) (6,330)
Tax effect (1,692) 1,374 922 2,208
------- -------- ------- -------
Net of Tax Effect 3,145 (2,575) (1,710) (4,122)
Change in minimum pension liability - 10 - 10
Tax Effect - (3) - (3)
------- -------- ------- -------
Net of Tax Effect - 7 - 7
Other Comprehensive Income (loss) 3,145 (2,568) (1,710) (4,115)
Net Income 2,439 3,151 6,378 7,503
------- -------- ------- -------
Total Comprehensive Income $ 5,584 $ 583 $ 4,668 $ 3,388
======== ======== ======== =======
6. 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 debt security
sold was $5,000,000 and the related realized gain on the sale of the
investment was $366,000.
Page 6
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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 Corporation, and its
wholly-owned subsidiaries, Adams County National Bank, the "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 2003 Annual Report to Shareholders. Current
performance does not guarantee or 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.
Critical Accounting Policies
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, which require the
Corporation to make estimates and assumptions (see footnote A to the December
31, 2003 financial statements). The Corporation believes that of its significant
accounting policies, the allowance for loan losses may involve a higher degree
of judgment and complexity.
The allowance for loan losses is established through a charge to the provision
for loan losses. In determining the balance in the allowance for loan losses,
consideration is given to a variety of factors in establishing this estimate. In
estimating the allowance for loan losses, management considers current economic
conditions, diversification of the loan portfolio, delinquency statistics,
results of internal loan reviews, borrowers' perceived financial and managerial
strengths, the adequacy of the underlying collateral, if collateral dependent,
or present value of future cash flows and other relevant factors. The use of
different estimates or assumptions could produce different provisions for loan
losses. Additional information is provided in the discussion below about the
Provision for Loan Losses.
Page 7
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Three months ended September 30, 2004 compared to three months ended September
30, 2003
Net Income for the third quarter ended September 30, 2004 was $2,439,000, down
$712,000 from the third quarter of 2003. The decline was primarily the result of
$646,000 proceeds from officers life insurance during 2003, which did not recur
during 2004. Net interest income was up, total other income was down and other
expense was up. The third quarter decrease is principally due to a decline in
realized gains on securities and gains from officers life insurance. Net income
per share, for the third quarter, was $.45, compared to the $.58 earned in the
same period in 2003. For the three month period (annualized) in 2004, the return
on average assets and return on average equity were 1.05% and 13.63%,
respectively, compared to 1.51% and 18.18%, respectively for 2003.
An explanation of the factors and trends that caused changes between the two
periods, by major earnings category, follows.
Total interest income for the third quarter of 2004 was $10,004,000, up
$1,022,000 or 11.4% more than the $8,982,000 earned in the same period of 2003.
The $1,022,000 increase in interest income was due to higher volumes of interest
earning assets exceeding the impact of a lower yield on earning assets during
2004 compared to 2003. The yield on earning assets declined 38 basis points
compared to the same quarter in 2003. 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 up approximately $73,000
due to greater volume while security income was up approximately $966,000, also
due to greater volume.
Total interest expense for the third quarter of 2004 was $3,491,000, up $199,000
or 6.0% from the $3,292,000, incurred for the same period in 2003. The $199,000
increase in interest expense was due to higher interest rates on increased
borrowings. Although interest expense increased, interest income increased at a
faster rate and net interest income increased by $823,000.
Total other income for the third quarter of 2004 at $1,477,000, was $1,397,000
less than the same quarter in 2003. The significant changes in other income were
within the following categories:
o Realized gains on sales of securities of $243,000, was down
$753,000 or 76% below realized gains of $996,000 in 2003. Short
term securities and rapidly prepaying mortgage backed securities
were sold with offsetting gains and losses, and the proceeds
reinvested in agency securities to improve interest income.
o Proceeds from officers life insurance totaled $646,000 in 2003.
The income in 2003 is a non-recurring item.
o Fees on sale of mortgages (included in other operating income) decreased
$46,000 or 56% to $36,000 in 2004. Fewer mortgages are being sold
because of a decline in refinancing activity.
Total other expense for the third quarter of 2004 was $4,613,000, up $190,000
from the $4,423,000, incurred for the third quarter of 2003. The following are
the primary causes of the 4% increase in other expense:
Page 8
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o A $42,000 or 2% increase in salaries and benefits primarily caused
by year-end merit increases and increase in staffing levels.
o A $214,000 or 24% increase spread across items such as taxes,
professional services, and electronic information delivery
services.
The provision for income taxes in the third quarter decreased $67,000 or 7% due
to a $779,000 decline in pretax income. The effective tax rate for the three
months ended September 30, 2004 was 26.1% compared to 22.8% for the same period
in 2003. The effective rate during 2003 was lower than 2004 primarily as a
result of higher non-taxable income as a percentage of pretax income. The
$646,000 gain on proceeds from officers' life insurance recognized during 2003
was not taxable.
Nine months ended September 30,2004 compared to nine months ended September 30,
2003
Net income for the first nine months of 2004 was $6,378,000, down $1,125,000 or
15% below the $7,503,000 earned for the same period of 2003. The decrease in net
income was due primarily to non-recurring items and lower securities gains. In
addition, other expenses continued to grow. For the nine month period
(annualized) of 2004, the return on average assets (ROA) and return on average
equity (ROE) were .96% and 11.93%, respectively, compared to 1.25% and 14.36%,
respectively, for 2003.
Total interest income for the current nine month period was $28,124,000 up
$565,000 or 2% from the $27,559,000 earned in the same period of 2003. The
$565,000 increase in total interest income was primarily due to growth in
securities. The increased growth in loans did not add significantly to income,
as the effect of additional amounts outstanding was offset by lower yields. All
of the increase in income is a result of growth in securities and repositioning
of maturities as interest rates rise and fall.
Total interest expense for the current nine month period was $9,645,000, down
$1,071,000 or 10% below the $10,716,000 incurred for the same period in 2003.
The $1,071,000 decrease in total interest expense was due to continued
monitoring of market conditions and cutting of rates where possible.
Net interest income was $18,479,000 for the current period, $1,636,000 above the
first nine months in 2003 primarily as a result of an increase in earning
assets. Margins are slowly improving and assets are increasing. The bank is in a
funds purchased position, and has improved the dollar margin and the ratio. The
reason for the growth in the margin has been a slow down in prepayments on
mortgage backed securities and slow increases in interest rates.
Total non-interest income for the current nine month period was $4,566,000, a
decrease of $2,056,000 or 31% below the same period in 2003. The decrease was
caused by the following:
o A $30,000 decrease in income on Bank Owned Life Insurance;
o A $203,000 decrease in gains on sale of foreclosed real estate.
o A $977,000 decrease in gains on securities sold;
Page 9
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o A decrease of $244,000 in fees on mortgages sold; and
o A decrease of $646,000 in proceeds from officers life insurance.
Total non-interest expense for the current nine month period was $14,131,000,
$879,000 or 7% above the $13,252,000 incurred for the same period in 2003. The
increase was due to a $331,000 increase in salaries and benefits, and $548,000
increase spread across equipment expense, professional services and
miscellaneous other expenses.
The provision for income taxes was $2,311,000 for the current period, $219,000
below the same period in 2003 due to lower pretax income. The Corporation's
effective rate was 26.6% for the nine month periods ended September 30, 2004,
25.2% for the same period in 2003. The effective rate is below the statutory
rate as a result of tax-exempt income on loans, securities and bank-owned life
insurance and tax credits from low income housing investments.
OVERVIEW OF THE BALANCE SHEET
At September 30, 2004, total assets were approximately $945,000,000, reflecting
a $75,000,000 or 9% increase above September 30, 2003. This increase in assets
is primarily the result of a $15,000,000 increase in loans and a $50,000,000
increase in securities, which were funded by a $15,000,000 increase in deposits
and a $55,000,000 increase in borrowings. The growth in deposits 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 $13.53 on September 30, 2004, compared to $12.88
on September 30, 2003. The Corporation's capital remained sound as evidenced by
Total Capital Ratio of 7.79% and a Total Risk-Based Capital Ratio of 13.96% on
September 30, 2004.
The changes in the balance sheet have been driven by strong growth in interest
bearing transaction accounts and borrowings. The following are some of the
results:
o Total investment securities were $437,988,000, at September 30, 2004, an
increase of $30,420,000 or 7% since September 30, 2003. Securities make up
46% of total assets. Of these securities, $5,500,000 mature in 2004, with a
total of $10,000,000 maturing in 2005. In addition, mortgage backed
security paydowns are returning approximately $4,500,000 per month. These
funds should be available for reinvestment when interest rates rise.
Securities at September 30, 2004 consisted of 37% callable or structured
U.S. Government agency bonds, 36% mortgage backed securities, and 17%
corporate bonds. 92% of total loans are secured by various types of real
estate with no apparent concentrations.
o Total deposits have grown from $630,975,000, at September 30, 2003, to
$654,530,000, at September 30, 2004, an increase of $23,555,000 or 4%.
Approximately $95,629,000 of total deposits are classic money market at
September 30,2004. This is a transaction account, which will require a
movement of interest rates, similar to general money market rates, when the
economy improves. Borrowings have increased from $162,867,000, at September
30, 2003, to $211,589,000, at September 30, 2004. Of these, $132,000,000
are term borrowings ranging from four months to 8.2 years in maturity.
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o Accumulated other comprehensive loss has increased from $386,000, at
September 30, 2003, to ($1,620,000), at September 30, 2004. This reflects
the after tax effect in the change in fair value of the available for sale
securities portfolio. This shift is the result of management's decision to
realize certain securities gains via sales of securities and the increase
in interest rates. The resulting cash flow was reinvested in short term (18
to 45 months) corporates and callable agencies. The portfolio has
sufficient liquidity to cope with changes in interest rates.
INTEREST RATE SPREAD AND NET YIELD ON EARNING ASSETS
Nine Months Ended
9/30/04 9/30/03
-----------------------
Earning Assets 4.46% 4.84%
Interest Bearing Liabilities 1.76% 2.17%
Interest Rate Spread 2.70% 2.67%
Net Yield on Earning Assets 2.93% 2.96%
Net Yield on Earning Assets is the difference, stated in percentages, between
the interest earned on loans and other investments and the interest paid on
deposits and other sources of funds. The Net Yield on Earning Assets is one of
the best analytical tools available to demonstrate the effect of interest rate
changes on the Corporation's earning capacity.
The Net Yield on Earning Assets, for the first nine months of 2004, was down 3
basis points compared to the same period in 2003. 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 ALLOWANCE FOR LOAN LOSSES
(In Thousands)
Nine Months Ended
9/30/04 9/30/03
------------------
Balance at Beginning of Period $3,978 $3,837
Provision Charged to Expense 225 180
Loans Charged Off (73) (127)
Recoveries 40 38
------ ------
Balance at End of Period $4,170 $3,928
====== ======
Ratios:
Net Charge-offs to:
Net Income .52% 1.19%
Total Loans .01% .02%
Allowance for Loan Losses .79% 2.27%
Allowance for Loan Losses to:
Total Loans .97% .98%
The Allowance for Loan Losses at September 30, 2004 was $4,170,000 (.97% of
Total Loans), an increase of $242,000 from $3,928,000 (.98% of Total Loans) at
the end of the third quarter
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of 2003. Loans past due 90 days and still accruing were $533,000 and non-accrual
loans were $5,017,000, as of September 30, 2004. The ratio of non-performing
assets plus foreclosed real estate to total assets was .64%, at September 30,
2004. Foreclosed real estate is carried at the lower of market or book value and
is not considered to represent a significant threat of loss to the bank.
Loans past due 90 days and still accruing were $606,000, at year end 2003, while
non-accruals were $4,413,000. 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 $4,813,000 in non-accrual loans, was approximately
$180,000 for the third quarter of 2004.
The Corporation 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 $73,634,000, at September 30, 2004, compared to
$70,010,000, at September 30, 2003, an increase of $3,624,000 or 5.2% over that
period. The ratio of Total Shareholders' Equity to Total Assets was 8.31%, at
December 31, 2003, 8.05%, at September 30, 2003, and 7.79%, at September 30,
2004. The total risk-based capital ratio was 13.96%, at September 30, 2004. The
leverage ratio was 8.35%, at September 30, 2004, and 8.40%, at the same date in
2003. Management believes that the Corporation's current capital and liquidity
positions are adequate to support its operations. They are not aware of any
recommendations by any regulatory authority, which, if it were to be
implemented, would have a material effect on the Corporation's capital.
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 46% of total assets, at September 30, 2004. This
mix of assets would be readily available for funding any cash requirements. In
addition, the Bank has an approved line of credit of $422,153,000 at the Federal
Home Loan Bank of Pittsburgh with $171,300,000 outstanding at September 30,
2004.
As of September 30, 2004, the cumulative asset sensitive gap was 6.9% of total
assets at one month, 0.7% at nine months, and 1.0% at one year. Adjustable rate
mortgages, which have an annual interest rate cap of 2%, are considered rate
sensitive. Thirteen percent (13%) of passbook and statement savings, NOW and
money market deposit accounts are calculated to reprice in twelve months. Of the
remaining 87% of these deposits, 53% are carried in the 1 to 5 year category and
the remainder over 5 years.
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Other than the construction of a new operations center, costing approximately
$3,500,000 over the next 10 months, and $800,000 for low income housing
projects, yet to be disbursed, 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.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management monitors and evaluates changes in market conditions on a regular
basis. Based upon the most recent review management has determined that there
have been no material changes in market risks since year end. For further
discussion of year end information, refer to the annual report for the year
ended December 31, 2003.
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 Executive Officer
and 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.
There was no change in our internal control over financial reporting during our
fiscal quarter ended September 30, 2004 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Management is not aware of any litigation that would have a material
adverse effect on the consolidated financial position of the Corporation. There
are no proceedings pending other than the ordinary routine litigation incident
to the business of the Corporation and its subsidiaries. In addition, no
material proceedings are pending or are known to be threatened or contemplated
against the Corporation and its subsidiaries by government authorities.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds -
Nothing to report.
Item 3. Defaults Upon Senior Securities - Nothing to report.
Item 4. Submission of Matters to a Vote of Security Holders - Nothing to report.
Item 5. Other Information - Nothing to report.
Item 6. Exhibits and Reports 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, filed with the
Commission on April 26, 2000).
Exhibit 3(ii) Bylaws of Registrant (Incorporated by Reference to
Exhibit 99 in Registrant's Report of Form 8-K, filed with the
Commission on December 19, 2003).
Exhibit 10.1 Executive Employment Agreement Dated as of January 1,
2000 between Adams County National Bank, ACNB Corporation and
Thomas A. Ritter (Incorporated by Reference to Exhibit 99 of
the Registrant's Current Report on Form 8-K, filed with the
Commission on March 26, 2001).
Exhibit 31.1 Chief Executive Officer Certification of Form 10-Q
Exhibit 31.2 Chief Financial Officer Certification of Form 10-Q
Exhibit 32.1 Certification of Chief Executive Officer
Exhibit 32.2 Certification of Chief Financial Officer
(b) Report on Form 8-K
Form 8-K filed August 13, 2004 - Press Release announcing Registrant's Second
Quarter Earnings
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
------------------------------------------
/s/ Thomas A. Ritter, President/CEO
October 29, 2004
------------------------------------------
/s/ John W. Krichten, Secretary/Treasurer
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EXHIBIT INDEX
Exhibit Number
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, filed
with the Commission on April 26, 2000).
Exhibit 3(ii) Bylaws of Registrant (Incorporated by Reference to Exhibit
99 in Registrant's Report of Form 8-K, filed with the
Commission on December 19, 2003).
Exhibit 10.1 Executive Employment Agreement Dated as of January 1, 2000
between Adams County National Bank, ACNB Corporation and
Thomas A. Ritter (Incorporated by Reference to Exhibit 99 of
the Registrant's Current Report on Form 8-K, filed with
the Commission on March 26, 2001).
Exhibit 31.1 Chief Executive Officer Certification of Form 10-Q
Exhibit 31.2 Chief Financial Officer Certification of Form 10-Q
Exhibit 32.1 Certification of Chief Executive Officer
Exhibit 32.2 Certification of Chief Financial Officer
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