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 March 31, 2005
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Commission file number 0-11783
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ACNB CORPORATION
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2233457
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16 LINCOLN SQUARE, GETTYSBURG, PENNSYLVANIA 17325-3129
- ------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 334-3161
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COMMON STOCK, PAR VALUE $2.50 PER SHARE
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_|
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant at March 31, 2005 was approximately $136,198,000.
The number of shares of Registrant's Common Stock outstanding on April 26, 2005
was 5,436,101.
PART I
ACNB CORPORATION
ITEM I FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CONDITION
March 31, March 31, December 31,
2005 2004 2004
--------- --------- ---------
Unaudited Unaudited
Dollars in thousands, except per share data
ASSETS
Cash and due from banks $ 23,008 $ 19,362 $ 21,757
Interest-bearing deposits in banks 892 1,047 938
--------- --------- ---------
Cash and Cash Equivalents 23,900 20,409 22,695
Securities available for sale 378,412 349,518 381,383
Securities held to maturity, fair value $23,354; $40,678; 23,154
$ 25,089 39,509 24,560
Loans held for sale 890 286 511
Loans, net of allowance for loan losses $3,989; $4,043; 444,872
$ 3,938 414,701 436,631
Premises and equipment 13,080 6,901 11,992
Restricted investment in bank stocks 10,592 7,720 10,271
Investment in bank owned life insurance 19,346 14,292 19,198
Investments in low income housing partnerships 6,094 4,040 6,153
Intangible asset 3,230 -- --
Goodwill 2,334 -- --
Other assets 14,277 8,569 10,794
--------- --------- ---------
TOTAL ASSETS $ 940,181 $ 865,945 $ 924,188
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing $ 79,310 $ 73,137 $ 74,667
Interest bearing 579,569 579,586 572,205
--------- --------- ---------
TOTAL DEPOSITS 658,879 652,723 646,872
Short-term borrowings 64,446 47,155 64,966
Long-term borrowings 137,957 87,000 132,000
Other liabilities 8,106 5,547 5,829
--------- --------- ---------
TOTAL LIABILITIES 869,388 792,425 849,667
--------- --------- ---------
STOCKHOLDERS' EQUITY
Common stock, $2.50 par value; 20,000,000 shares authorized; 13,590 13,590
5,436,101 shares issued and outstanding 13,590
Retained earnings 64,067 59,667 63,127
Accumulated other comprehensive income (loss) (6,864) 263 (2,196)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 70,793 73,520 74,521
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 940,181 $ 865,945 $ 924,188
========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
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2
ACNB Corporation
Consolidated Statements of Income
Three Months Ended March 31,
2005 2004
------- -------
Unaudited
Dollars in thousands, except per share data
Interest Income
Loans, including fees $ 6,306 $ 5,887
Securities:
Taxable 3,485 2,721
Tax-exempt 229 230
Dividends 59 41
Other 17 59
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TOTAL INTEREST INCOME 10,096 8,938
------- -------
Interest Expense
Deposits 2,390 2,386
Short-term borrowings 353 141
Long-term debt 1,003 542
------- -------
TOTAL INTEREST EXPENSE 3,746 3,069
------- -------
NET INTEREST INCOME 6,350 5,869
PROVISION FOR LOAN LOSSES 90 75
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NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,260 5,794
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OTHER INCOME
Service charges on deposit accounts 395 435
Income from fiduciary activities 156 169
Earnings on investment in bank owned life insurance 166 99
Gains on sales of securities -- 817
Service charges on ATM and debit card transactions 164 128
Commissions from Insurance Sales 1,038 --
Other 374 308
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TOTAL OTHER INCOME 2,293 1,956
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OTHER EXPENSES
Salaries and employee benefits 3,230 2,627
Net occupancy expense 322 270
Equipment expense 572 527
Professional services 271 124
Other tax expense 275 319
Supplies and postage 184 149
Other operating 1,230 820
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TOTAL OTHER EXPENSES 6,084 4,836
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INCOME BEFORE INCOME TAXES 2,469 2,914
PROVISION FOR INCOME TAXES 387 793
------- -------
NET INCOME $ 2,082 $ 2,121
======= =======
PER SHARE DATA
Basic earnings 0.38 0.39
======= =======
Cash dividends declared 0.21 0.21
======= =======
The accompanying notes are an integral part of the
consolidated financial statements.
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3
ACNB CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (UNAUDITED)
ACCUMULATED
OTHER TOTAL
COMMON RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK EARNINGS INCOME (LOSS) EQUITY
-------- -------- ------------- --------
Dollars in thousands
Balance - December 31, 2003 $ 13,590 $ 58,711 $ 442 $ 72,743
--------
Comprehensive income:
Net income -- 2,121 -- 2,121
Change in net unrealized gains on securities available for
sale,
net of reclassification adjustment and taxes -- -- (179) (179)
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TOTAL COMPREHENSIVE INCOME -- -- -- 1,942
--------
Cash dividends declared -- (1,165) -- (1,165)
-------- -------- -------- --------
BALANCE - MARCH 31, 2004 $ 13,590 $ 59,667 $ 263 $ 73,520
======== ======== ======== ========
BALANCE - DECEMBER 31, 2004 $ 13,590 $ 63,127 $ (2,196) $ 74,521
Comprehensive income:
Net income -- 2,082 -- 2,082
Change in net unrealized losses on securities available for
sale,
net of reclassification adjustment and taxes -- -- (4,668) (4,668)
--------
TOTAL COMPREHENSIVE LOSS -- -- -- (2,586)
--------
Cash dividends declared -- (1,142) -- (1,142)
-------- -------- -------- --------
BALANCE - MARCH 31, 2005 $ 13,590 64,067 (6,864) (70,793)
======== ======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
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4
ACNB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
-------------------------
2005 2004
--------- ---------
UNAUDITED
In thousands
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and dividends received $ 9,950 $ 10,970
Fees and commissions received 1,965 2,011
Interest paid (3,491) (2,972)
Cash paid to suppliers and employees (5,310) (4,416)
Income taxes paid -- (1,237)
Loans originated for sale (2,681) (1,587)
Proceeds on mortgage loans sold 2,332 1,417
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,765 4,256
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities held-to-maturity 1,381 2,675
Proceeds from maturities of investment securities available-for-sale 10,266 30,528
Proceeds from sales of securities available-for-sale -- 91,340
Purchase of investment securities held-to-maturity -- (674)
Purchase of investment securities available-for-sale (14,862) (125,685)
Purchase of restricted investment in bank stocks (321) (673)
Net increase in loans (8,331) (3,714)
Cash paid for purchase of Russell Insurance Group, Inc., net of cash acquired (5,035) --
Investments in low income housing partnerships -- (669)
Capital expenditures (1,467) (61)
Proceeds from sales of property and foreclosed real estate 507 --
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (17,862) (6,933)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, interest-bearing deposits, and savings accounts 6,138 2,972
Net increase in time certificates of deposit 5,869 10,363
Net decrease in short-term borrowings (520) (11,162)
Dividends paid (1,142) (1,142)
Proceeds from long-term borrowings 6,000 --
Repayments on long-term borrowings (43) (11,359)
--------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 16,302 (10,328)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,205 (13,005)
CASH AND CASH EQUIVALENTS - BEGINNING 22,695 33,414
--------- ---------
CASH AND CASH EQUIVALENTS - ENDING 23,900 $ 20,409
========= =========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net income $ 2,082 $ 2,121
Adjustments to reconcile net income to net cash provided by operating activities:
Gains on sales of loans, property and foreclosed real estate (162) (30)
Earnings on investment in bank owned life insurance (166) (99)
Gains on sales of securities -- (817)
Depreciation and amortization 217 213
Provision for loan losses 90 75
(Benefit) expense for deferred taxes -- 146
Amortization of investment securities premiums 409 827
(Increase) decrease in interest receivable (555) 138
Increase (decrease) in interest payable 255 97
(Increase) decrease in mortgage loans held for sale (349) (170)
(Increase) decrease in other assets 500 628
Increase (decrease) in other liabilities 444 1,127
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,765 $ 4,256
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
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5
ACNB CORPORATION
ITEM 1 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
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 March 31, 2005 and
2004, and the results of its operations, changes in stockholders'
equity and cash flows for the three months ended March 31, 2005 and
2004. 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 2004 ACNB
Corporation Annual Report and Form 10-K, filed with the SEC on March
15, 2005. The results of operations for the three month periods ended
March 31, 2005 are not necessarily indicative of the results to be
expected for the full year. For comparative purposes, the March 31,
2004 balances have been reclassified to conform with the 2005
presentation. Such reclassifications had no impact on net income.
2. EARNINGS PER SHARE
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 month periods ended March 31, 2005 and 2004
were 5,436,101. The Corporation does not have dilutive securities
outstanding.
3. COMPONENTS OF NET PERIODIC BENEFIT COST
The components of net periodic benefit costs for the three months ended
March 31 were as follows:
2005 2004
----- -----
Service cost $ 134 $ 109
Interest cost 206 196
Expected return on plan assets (219) (185)
Recognized net actuarial loss 38 19
Amortization of transition asset 3 3
Amortization of prior service cost 10 12
----- -----
NET PERIODIC BENEFIT COST $ 172 $ 154
===== =====
The Corporation previously disclosed in its financial statements for
the year ended December 31, 2004 that it expected to contribute
$1,250,000 to its pension plan in 2005. As of March 31, 2005,
$1,250,000 of contributions have been made.
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 $4,953,000 in standby letters of
credit, as of March 31, 2005. 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 March 31, 2005 for guarantees under standby
letters of credit issued is not material.
6
ACNB CORPORATION
ITEM 1 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 three month periods ended March 31, 2005 and 2004. The components
of total comprehensive income for the three months ended March 31 were
as follows:
2005 2004
------- -------
Unrealized holding gains (losses) on available
for sale securities arising during the period $(7,183) $ 541
Reclassification of gains realized in net income -- (817)
------- -------
NET UNREALIZED GAINS (LOSSES) (7,183) (276)
Tax effect 2,515 97
------- -------
OTHER COMPREHENSIVE INCOME (LOSS) $(4,668) $ (179)
======= =======
6. ACQUISITION OF RUSSELL INSURANCE GROUP, INC.
On November 19, 2004, the Corporation, through its acquisition
subsidiary, entered into a definitive agreement to purchase Russell
Insurance Group Inc. Under the terms of the definitive agreement, the
Corporation agreed to pay $4,750,000 in cash to acquire Russell
Insurance Group Inc. Additional consideration of up to $2,882,000 is
subject to performance criteria for payment over the next three years.
In addition, the Corporation through its acquisition subsidiary has
entered into a three-year employment contract with Frank Russell, Jr.,
the President of Russell Insurance Group Inc. On January 5, 2005, the
acquisition was completed. The purchase price of $5,663,000, which
includes closing costs of $220,000, is expected to be allocated as
follows (in thousands):
Cash $ 628
Intangible asset 3,230
Goodwill 2,334
Other assets 1,049
Other liabilities (1,578)
-------
$ 5,663
=======
The intangible asset, representing the customer base, will be amortized
over 10 years. Goodwill will not be amortized but will be analyzed
annually for impairment. Amortization of goodwill and the intangible
asset will be deductible for tax purposes.
7
ACNB CORPORATION
ITEM 2 - 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 (the
Corporation or ACNB), a financial holding company. The consolidated financial
statements include its wholly-owned subsidiaries, Adams County National Bank,
Russell Insurance Group Inc. and Pennbanks Insurance Company. Please read this
discussion in conjunction with the consolidated financial statements and
disclosures included herein. Current performance does not guarantee or assure
and is not necessarily indicative of similar performance in the future.
Forward-Looking Statements
In addition to historical information, this Form 10-Q contains forward-looking
statements. Examples of forward-looking statements include, but are not limited
to, (a) projections or statements regarding future earnings, expenses, net
interest income, other income, earnings or loss per share, asset mix and
quality, growth prospects, capital structure and other financial terms, (b)
statements of plans and objectives of management or the board of directors, and
(c) statements of assumptions, such as economic conditions in the Corporation's
market areas. Such forward-looking statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "intends,"
"will," "should," "anticipates," or the negative of any of the foregoing or
other variations thereon or comparable terminology, or by discussion of
strategy. 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 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 policies are deemed to be critical
accounting policies by management:
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.
8
The evaluation of securities for other than temporary impairment requires a
significant amount of judgment. In estimating other than temporary
impairment losses, management considers various factors, including length
of time the fair value has been below cost, the financial condition of the
issuer and the intent and ability of the corporation to hold the securities
until recovery. Declines in fair value that are determined to be other than
temporary are charged against earnings.
The evaluation of goodwill and intangibles for impairment requires a
significant amount of judgment, and includes consideration of various
factors, including estimates of future income from the customer base.
Impairment would be recognized through a charge to earnings.
New Accounting Standards
SAB 105
In March 2004, the SEC released Staff Accounting Bulletin (SAB) No. 105,
"Application of Accounting Principles to Loan Commitments." SAB 105 provides
guidance about the measurements of loan commitments recognized at fair value
under FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SAB 105 also requires companies to disclose their accounting policy
for those loan commitments including methods and assumptions used to estimate
fair value and associated hedging strategies. SAB 105 is effective for all loan
commitments accounted for as derivatives that are entered into after March 31,
2004. The adoption of SAB 105 did not have any impact on our consolidated
financial statements.
SOP 03-3
In December 2003, the Accounting Standards Executive Committee issued Statement
of Position 03-3 (SOP 03-3), "Accounting for Certain Loans or Debt Securities
Acquired in a Transfer." SOP 03-3 addresses accounting for differences between
contractual cash flows and cash flows expected to be collected from an
investor's initial investment in loans or debt securities acquired in a
transfer, including business combinations, if those differences are
attributable, at least in part, to credit quality. SOP 03-3 is effective for
loans for debt securities acquired in fiscal years beginning after December 15,
2004. The adoption of SOP 03-3 on January 1, 2005 did not have any impact on our
consolidated financial statements.
RESULTS OF OPERATIONS
Net interest income totaled $6,350,000 during the period ended March 31, 2005
compared to $5,869,000 for the same period in 2004. The increase in net interest
income during 2004 was primarily related to an increase in average earning
assets.
The net interest spread during the first three months of 2005 was 2.67% compared
to 2.64% during the same period in 2004. The yield on interest earning assets
increased by 0.22% and cost of interest bearing liabilities increased by 0.19%
during 2005. The net interest margin was 2.95% for the first quarter of 2005 and
2004.
Average earning assets were $861,549,000 during 2005, a increase of $65,831,000
over the 2004 average of $795,718,000. Average interest bearing liabilities were
$771,314,000 in 2005, up from $695,460,000 in 2004.
Provision for Loan Losses
The provision for loan losses charged against earnings was $90,000 in 2005
compared to $75,000 in 2004. The increase was primarily a result of loan growth.
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. It was increased in 2005 to account for loan growth experienced in
2005.
9
Other Income
Total other income was $2,293,000 for the three months ended March 31, 2005, a
$337,000 increase from 2004. The increase was primarily the result of
commissions from insurance sales totaling $1,038,000 recognized by the
Corporation's new subsidiary, Russell Insurance Group, Inc. (see footnote 6).
This increase was partially offset by an $817,000 decrease in gains on
securities sales.
Income from fiduciary activities, which includes both institutional and personal
trust management services and brokerage service fees, totaled $156,000 for the
three months ended March 31, 2005, as compared to $169,000 during 2004. The
decrease in income was the result of a decrease in estate settlements from
$47,000 during the first quarter of 2004 to $9,000 during the first quarter of
2005.
Other income was $374,000 for the three months ended March 31, 2005, as compared
to income of $308,000 during the same period in 2004. The major factor in the
increase was the sale of two bank properties for a gain of $220,000, partially
offset by a loss on sale of foreclosed real estate of $88,000.
Other Expense
The largest component of other expense is salaries and employee benefits, which
increased $603,000, or 23%, to $3,230,000 during the first three months of 2005
as compared to the same period a year ago. The increase in salary and employee
benefits was the result of:
o The first quarter of 2005 included $473,000 of salaries and
benefits expense related to Russell Insurance Group, Inc.;
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 totaled $322,000 and equipment expense totaled $572,000
during the period ended March 31, 2005 as compared to $270,000 and $527,000
during the same period in 2004, respectively. The increases were the result of
additional operational expenses and maintenance associated with the overall bank
growth and more sophisticated delivery channels offered to the bank's customer
base as well as additional expenses relating to the New Oxford branch opened in
early 2005.
Professional services expense totaled $271,000 during 2005, as compared to
$124,000 for 2004. The increase was a result of internal audit services and
expenses relating to Sarbanes-Oxley ss. 404 compliance.
Other operating expenses totaled $1,230,000 during the quarter ended March 31,
2005, compared to $820,000 during 2004. Significant expense components in this
category include marketing and advertising and expenses incurred by Russell
Insurance Group, Inc., which totaled $215,000 during the first quarter of 2005.
10
Income Tax Expense
ACNB recognized income taxes of $387,000, or 15.7% of pretax income during the
first three months of 2005 as compared to $793,000, or 27.2% of pre-tax income
during the same period in 2004. 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 effective tax rate during the quarters ended March 31, 2005 and 2004
included historical and low income housing tax credits of $272,000 and $71,000,
respectively, associated with low income housing projects.
FINANCIAL CONDITION
Average earning assets during the quarter ended March 31, 2005 increased to
$861,549,000 from $795,718,000 during the same period. Average funding sources,
or interest bearing liabilities, increased in 2005 to $771,314,000 from
$695,460,000 in 2004.
Investment Securities
ACNB uses investment securities to generate interest and dividend income, to
manage interest rate risk, and to provide liquidity. 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 March 31, 2005, the securities balance included a net unrealized loss on
available for sale securities of $6,864,000, net of taxes, versus a net
unrealized loss of $2,196,000, net of taxes at December 31, 2004. The increase
in interest rates during 2004 and 2005 led to the depreciation in the fair value
of securities during 2005. Management has determined that the declines in fair
value are not other than temporary.
Loans
Loans outstanding increased $30,117,000 from March 31, 2004 to March 31, 2005
and $8,292,000 from December 31, 2004 to March 31, 2005. The growth in loans is
consistent with a stable local economy and lending to support existing
customers. The commercial loan growth experienced in 2005 is the result of
actively marketing to local businesses. Additionally, ACNB has been able to
participate with other institutions on larger loans.
Most of the Corporation's activities are with customers located within the south
central Pennsylvania and northern Maryland region of the country. The
Corporation does not have any significant concentrations greater than 10% of
loans to any one industry or customer.
Allowance for Loan Losses
The allowance for loan losses at March 31, 2005 was $3,989,000 or 0.90% of
loans, as compared to $4,043,000 or 0.97% of loans at the end of the first
quarter of 2004 and $3,938,000 or 0.89% at December 31, 2004. Loans past due 90
days and still accruing were $120,000 and non-accrual loans were $7,628,000 as
of March 31, 2005. The ratio of non-performing assets plus forclosed assets to
total assets was 0.84% at March 31, 2005 as compared to 0.67% at March 31, 2004
and 0.91% at December 31, 2004.
Loans past due 90 days and still accruing were $160,000 at December 31, 2004,
while non-accruals were $8,054,000. Nonaccrual and impaired loans include three
commercial loan relationships. Payments on these loans were current as of
December 31, 2004 and March 31, 2005, however, cash flows reported to the Bank
by each of the related companies are not sufficient to service the debt. As a
result, the loans have been classified as impaired. The loans were also
classified as nonaccrual as a result of a banking regulatory requirement to stop
accruing interest on loans for which full payment of principal and interest is
not expected. All three of the loans are collateralized by real estate.
No additional funds are committed to be advanced in connection with impaired
loans.
11
Allowance for Loan Losses (continued)
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.
Premises and Equipment
The increase in premises and equipment from $6,901,000 at March 31, 2004 to
$13,080,000 at March 31, 2005 and $1,088,000 from December 31, 2004 to March 31,
2005 is primarily related to the Corporation's new Operations Center, which is
scheduled to be completed later this year. Additionally, the Corporation
anticipates incurring an additional $2,000,000 related to the Operations Center.
Deposits
ACNB continues to rely on deposit growth as the primary source of funds for
lending activities. Deposits increased $6,156,000 from March 31, 2004 to March
31, 2005 and $12,007,000 from December 31, 2004 to March 31, 2005. Deposits have
grown as the bank has continued to expand its market area. ACNB will continue to
explore new products for its customers, to attract and retain other funds
seeking safe havens. However, ACNB's ability to maintain and add to its deposit
base may experience additional competitive pressures from the stock market
and/or other alternative investment products offered by the insurance industry
and others.
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 (FHLB). As of March 31, 2005, short-term borrowings were
$64,446,000, as compared to $64,966,000 at December 31, 2004 and $47,155,000 at
March 31, 2004.
Long-term debt consists primarily of advances from the Federal Home Loan Bank to
fund ACNB's growth in its securities portfolio. Long-term debt totaled
$137,957,000 at March 31, 2005, versus $132,000,000 at December 31, 2004. The
increase during the first quarter includes a $6,000,000 borrowing from a local
institution to fund the purchase of Russell Insurance Group, Inc. The borrowing
was dated January 5, 2005 and will mature on January 5, 2020. The interest rate
is fixed at 6.5% for the first ten years at which time it will convert to a
variable rate based upon the Wall Street Prime rate.
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 2005, ACNB retained
$940,000, or 45%, of its net income as compared to $979,000 or 46% during the
same period in 2004.
12
Capital (continued)
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 classifications 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 March 31, 2005, that ACNB's
banking subsidiary 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.
Risked-Based Capital
ACNB's capital ratios are as follows:
March 31, December 31,
2005 2004
-------- -----------
Tier 1 leverage ratio (to average assets) 7.67% 8.34%
Tier 1 risk-based capital ratio
(to risk-weighted assets) 13.04 13.91
Total risk-based capital ratio 13.78 14.64
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 such as cash and federal funds sold, maturities and
repayments from the securities portfolio, scheduled repayments of loans
receivable, the core deposit base, and the ability to borrow from the FHLB. At
March 31, 2005, ACNB could borrow approximately $410,881,000 from the FHLB of
which $237,144,000 was available.
Another source of liquidity is securities sold under repurchase agreements to
customers of ACNB's banking subsidiary totaling $22,259,000 and $28,744,000 at
March 31, 2005 and December 31, 2004, respectively.
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 stockholders 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 $6,684,000 at
March 31, 2005.
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.
13
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-15e. 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 not effective, as a result of the material weaknesses identified
during the Corporation's assessment of internal control over financial reporting
as of December 31, 2004, in timely alerting them to material information
relating to the Corporation (including its consolidated subsidiaries) required
to be included 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.
The material weaknesses are described as follows: segregation of duties over the
system used to post journal entries and ineffective controls over the
application of generally accepted accounting principles to certain significant,
complex, non-routine transactions and the related financial statement
disclosures. During 2005, the Corporation implemented controls to address the
segregation of duties over the Corporation's system used to post certain types
of journal entries. Additionally, the Corporation intends to actively search for
experienced financial personnel to enhance the Corporation's financial reporting
capabilities and expects to engage outside consultants to provide expertise on
non-routine matters when they arise.
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 were no changes in our internal control over financial reporting during
our fiscal quarter ended March 31, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting except for the controls that were implemented to address the
segregation of duties over the Corporation's system used to post certain types
of journal entries.
14
PART II
ACNB CORPORATION
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Management is not aware of any litigation that would have a material adverse
effect on the consolidated results of operations or 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
The following Exhibits are included in this Report:
Exhibit 3(i) Articles of Incorporation of ACNB Corporation,
as amended (Incorporated by Reference to Exhibit 3(i)
of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2004, filed with the
Commission on March 15, 2005).
Exhibit 3(ii) Bylaws of Registrant; a copy of the Bylaws, as
amended (Incorporated by Reference to Exhibit 99 of
the 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 10.2 ACNB Corporation, ACNB Acquisition Subsidiary
LLC, Russell Insurance Group, Inc. Stock Purchase
Agreement. (Incorporated by reference to Exhibit 10.2
of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2004, filed with the
Commission on March 15, 2005.)
Exhibit 10.3 Salary Continuation Agreement - applicable to
Thomas A. Ritter, Lynda L. Glass, John W. Krichten,
John M. Kiehl, Carl L. Ricker and Ronald L. Hankey.
(Incorporated by reference to Exhibit 10.3 of the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 2004, filed with the Commission on
March 15, 2005.)
Exhibit 10.4 Executive Supplemental Life Insurance Plan -
applicable to Gary Bennett, Lynda L. Glass, Ronald L.
Hankey, John M. Kiehl, John W. Krichten, Carl L.
Ricker and Thomas A. Ritter. (Incorporated by
reference to Exhibit 10.4 of the Registrant's Annual
Report on Form 10-K for the year ended December 31,
2004, filed with the Commission on March 15, 2005.)
15
Exhibit 10.5 Director Supplemental Life Insurance Plan -
applicable to Philip P. Asper, Frank Elsner, III, D.
Richard Guise, Wayne E. Lau, William B. Lower, Daniel
W. Potts, Marian B. Schultz, Jennifer L. Weaver and
Harry L. Wheeler. (Incorporated by reference to
Exhibit 10.5 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2004, filed
with the Commission on March 15, 2005.)
Exhibit 10.6 Director Deferred Fee Agreement - applicable to Frank
Elsner, III, D. Richard Guise, Marian B. Schlutz,
Jennifer L. Weaver and Harry L. Wheeler.
(Incorporated by reference to Exhibit 10.6 of the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 2004, filed with the Commission on
March 15, 2005.)
Exhibit 10.7 Adams County National Bank Salary Savings Plan.
(Incorporated by reference to Exhibit 10.7 of the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 2004, filed with the Commission on
March 15, 2005.)
Exhibit 10.8 Group Pension Plan for Employees of Adams County
National Bank. (Incorporated by reference to Exhibit
10.8 of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2004, filed with the
Commission on March 15, 2005.)
Exhibit 14 Code of Ethics (incorporated by reference to
Exhibit 14 of the registrants annual report on Form
10-K for the year ended December 31, 2003, filed with
the Commission on March 12, 2004)
Exhibit 16.1 Letter re Change in Certifying Accountant
(Incorporated by reference to Exhibit 16.1 of the
Registrant's annual report on Form 10-K for the year
ended December 31, 2003, filed with the Commission
March 12, 2004)
Exhibit 23 Consent of Stambaugh Ness, P.C. (Incorporated by
reference to Exhibit 23 of the Registrant's annual
report on Form 10-K for the year ended December 31,
2004, filed with the Commission on March 15, 2005).
Exhibit 31.1 Chief Executive Officer Certification of quarterly
report on Form 10-Q
Exhibit 31.2 Chief Financial Officer Certification of quarterly
report on Form 10-Q
Exhibit 32.1 Chief Executive Officer certification pursuant to 18
U.S.C. Section 1350 as Added by Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 Chief Financial Officer certification pursuant to 18
U.S.C. Section 1350 as Added by Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 99 Independent Auditors' Report for the consolidated
statement of condition of ACNB Corporation and
subsidiaries as of December 31, 2003 and the related
consolidated statements of income, changes in
stockholders' equity and cash flows for each of the
years in the two-year period ended December 31, 2003.
(Incorporated by reference to Exhibit 99 of the
Registrant's annual report on Form 10-K for the year
ended December 31, 2004, filed with the Commission on
March 15, 2005).
16
SIGNATURES
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.
April 28, 2005 /s/ Thomas A. Ritter
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Thomas A. Ritter, President/Chief Executive Officer
/s/ John W. Krichten
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John W. Krichten, Secretary/Treasurer