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, 2005
--------------------------------
Commission file number 0-11783
ACNB CORPORATION
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(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2233457
- ------------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16 LINCOLN SQUARE, GETTYSBURG, PENNSYLVANIA 17325-3129
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(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 September 30, 2005 was approximately $117,778,000.
The number of shares of Registrant's Common Stock outstanding on September 30,
2005 was 5,436,101.
PART I
ACNB CORPORATION
ITEM I FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF CONDITION
UNAUDITED UNAUDITED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
2005 2004 2004
------------- ------------- ------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
ASSETS
Cash and due from banks $ 21,645 $ 25,224 $ 21,757
Interest-bearing deposits in banks 892 932 938
--------- --------- ---------
Cash and Cash Equivalents 22,537 26,156 22,695
Securities available for sale 357,717 410,796 381,383
Securities held to maturity,
fair value $20,217; $27,846; $25,089 20,101 27,192 24,560
Loans held for sale 470 604 511
Loans, net of allowance for
loan losses $4,226; $4,170; $3,938 473,935 425,525 436,631
Premises and equipment 14,798 9,691 11,992
Restricted investment in bank stocks 9,137 10,927 10,271
Investment in bank owned life insurance 20,922 19,034 19,198
Investments in low income housing partnerships 5,794 5,542 6,153
Intangible asset 3,356 -- --
Foreclosed real estate -- 513 --
Goodwill 2,186 -- --
Other assets 12,427 9,155 10,794
--------- --------- ---------
TOTAL ASSETS $ 943,380 $ 945,135 $ 924,188
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing $ 81,616 $ 76,520 $ 74,667
Interest bearing 598,487 578,010 572,205
--------- --------- ---------
Total Deposits 680,103 654,530 646,872
Short-term borrowings 55,721 79,589 64,966
Long-term borrowings 125,839 132,000 132,000
Other liabilities 7,460 5,382 5,829
--------- --------- ---------
TOTAL LIABILITIES 869,123 871,501 849,667
--------- --------- ---------
STOCKHOLDERS' EQUITY
Common stock, $2.50 par value; 20,000,000 shares authorized; 13,590 13,590 13,590
5,436,101 shares issued and outstanding
Retained earnings 65,297 61,664 63,127
Accumulated other comprehensive loss (4,630) (1,620) (2,196)
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY 74,257 73,634 74,521
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 943,380 $ 945,135 $ 924,188
========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
2
ACNB CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED UNAUDITED
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
2005 2004 2005 2004
-------- -------- -------- --------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
INTEREST INCOME
Loans, including fees $ 6,965 $ 6,016 $ 19,892 $ 17,785
Securities:
Taxable 3,423 3,714 10,298 9,472
Tax-exempt 229 229 687 688
Dividends 61 37 214 104
Other 24 8 64 75
-------- -------- -------- --------
TOTAL INTEREST INCOME 10,702 10,004 31,155 28,124
-------- -------- -------- --------
INTEREST EXPENSE
Deposits 3,084 2,375 8,212 7,128
Short-term borrowings 301 221 838 537
Long-term debt 1,063 895 3,145 1,980
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 4,448 3,491 12,195 9,645
-------- -------- -------- --------
NET INTEREST INCOME 6,254 6,513 18,960 18,479
PROVISION FOR LOAN LOSSES 168 75 348 225
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 6,086 6,438 18,612 18,254
-------- -------- -------- --------
OTHER INCOME
Service charges on deposit accounts 453 453 1,287 1,335
Income from fiduciary activities 206 196 567 557
Earnings on investment in bank owned life
insurance 200 210 561 507
Gains (losses) on sales of securities 8 243 (264) 1,014
Losses on foreclosed real estate -- -- (87) (11)
Service charges on ATM and debt card
transactions 192 81 540 429
Commissions from insurance sales 1,035 -- 3,074 --
Other 273 294 993 735
-------- -------- -------- --------
TOTAL OTHER INCOME 2,367 1,477 6,671 4,566
-------- -------- -------- --------
OTHER EXPENSES
Salaries and employee benefits 3,148 2,485 9,672 7,687
Net occupancy expense 419 204 1,083 724
Equipment expense 617 464 1,743 1,544
Professional services 187 127 693 364
Other tax expense 244 235 760 731
Supplies and postage 246 142 595 491
Other operating 1,420 956 4,042 2,590
-------- -------- -------- --------
TOTAL OTHER EXPENSES 6,281 4,613 18,588 14,131
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 2,172 3,302 6,695 8,689
PROVISION FOR INCOME TAXES 388 863 1,100 2,311
-------- -------- -------- --------
NET INCOME $ 1,784 $ 2,439 $ 5,595 $ 6,378
======== ======== ======== ========
PER SHARE DATA
Basic earnings $ 0.33 $ 0.45 $ 1.03 $ 1.17
======== ======== ======== ========
Cash dividends paid $ 0.21 $ 0.21 $ 0.63 $ 0.63
======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
3
ACNB CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
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 -- 6,378 -- 6,378
Change in net unrealized losses on
securities available for sale,
net of reclassification adjustment and taxes -- -- (2,062) (2,062)
--------
TOTAL COMPREHENSIVE INCOME 4,316
--------
Cash dividends declared -- (3,425) -- (3,425)
-------- -------- -------- --------
BALANCE - SEPTEMBER 30, 2004 $ 13,590 $ 61,664 $ (1,620) $ 73,634
======== ======== ======== ========
BALANCE - DECEMBER 31, 2004 $ 13,590 $ 63,127 $ (2,196) $ 74,521
Comprehensive income:
Net income -- 5,595 -- 5,595
Change in net unrealized losses on
securities available for
sale, net of reclassification adjustment and taxes -- -- (2,434) (2,434)
--------
TOTAL COMPREHENSIVE INCOME 3,161
--------
Cash dividends declared -- (3,425) -- (3,425)
-------- -------- -------- --------
BALANCE - SEPTEMBER 30, 2005 $ 13,590 $ 65,297 $ (4,630) $ 74,257
======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
4
ACNB CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2005 2004
--------- ---------
IN THOUSANDS
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and dividends received $ 32,109 $ 28,858
Fees and commissions received 6,374 5,043
Interest paid (12,151) (9,718)
Cash paid to suppliers and employees (18,840) (14,189)
Income tax (benefit) paid 1,517 (1,955)
Loans originated for sale (13,236) (6,445)
Proceeds from mortgage loans sold 13,277 5,927
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,050 7,521
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities held-to-maturity 4,289 14,991
Proceeds from maturities of investment securities available-for-sale 30,610 98,572
Proceeds from sales of securities available-for-sale 22,761 170,163
Purchase of investment securities available-for-sale (34,813) (337,768)
Purchase of restricted investment in bank stocks (2,849) (3,380)
Proceeds from sales of restricted investments in bank stocks 3,983 --
Purchase of bank owned life insurance (1,200) (4,400)
Net increase in loans (37,652) (14,666)
Cash paid for purchase of Russell Insurance Group, Inc., net of cash acquired (5,542) --
Investments in low income housing partnerships (78) (1,683)
Capital expenditures (3,809) (3,276)
Proceeds from sales of property and foreclosed real estate 692 37
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (23,608) (81,410)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts, and savings accounts 6,949 8,546
Net increase in time certificates of deposit 26,282 6,597
Net increase (decrease) in short-term borrowings (9,245) 9,913
Dividends paid (3,425) (3,425)
Proceeds from long-term borrowings 51,000 45,000
Repayments on long-term borrowings (57,161) --
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,400 66,631
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (158) (7,258)
CASH AND CASH EQUIVALENTS - BEGINNING 22,695 33,414
--------- ---------
CASH AND CASH EQUIVALENTS - ENDING $ 22,537 $ 26,156
========= =========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net income $ 5,595 $ 6,378
Adjustments to reconcile net income to net cash provided by operating activities:
(Gains) losses on sales of loans, property and foreclosed real estate (138) 11
Earnings on investment in bank owned life insurance (561) (507)
(Gains) losses on sales of securities 264 (1,014)
Deferred income taxes (569) 146
Depreciation and amortization 1,104 638
Provision for loan losses 348 225
Net amortization of investment securities premiums 1,269 2,073
Decrease in taxes payable -- 211
Decrease in accrued expenses -- 750
(Increase) in interest receivable (315) (935)
Increase (decrease) in interest payable 44 (73)
(Increase) decrease in mortgage loans held for sale 41 (518)
(Increase) decrease in other assets 381 64
Increase in other liabilities 1,587 72
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 9,050 $ 7,521
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
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 September 30, 2005
and 2004, and the results of its operations, changes in stockholders'
equity and cash flows for the three months and nine months ended
September 30, 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 and nine month
periods ended September 30, 2005 are not necessarily indicative of the
results to be expected for the full year. For comparative purposes, the
September 30, 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 and nine month periods ended September
30, 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 month and
nine month periods ended September 30 were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2005 2004 2005 2004
----- ----- ----- -----
Service cost $ 134 $ 109 $ 402 $ 327
Interest cost 206 195 618 587
Expected return on plan assets (219) (185) (657) (555)
Recognized net actuarial loss 38 18 114 56
Other, net 13 16 39 46
----- ----- ----- -----
NET PERIODIC BENEFIT COST $ 172 $ 153 $ 516 $ 461
===== ===== ===== =====
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 September 30, 2005,
$1,250,000 of contributions have been made.
6
ACNB CORPORATION
ITEM 1 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $4,615,000 in standby letters of
credit, as of September 30, 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 September 30, 2005 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 three month and nine month periods ended September 30, 2005 and
2004. The components of total comprehensive income for the three month
and nine month periods ended September 30 were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2005 2004 2005 2004
------- ------- ------- -------
Unrealized holding gains (losses) on
available for sale securities
arising during the period $ (992) $ 4,427 $(4,009) $(2,158)
Reclassification of gains (losses)
realized in net income 8 243 (264) 1,014
------- ------- ------- -------
NET UNREALIZED GAINS (LOSSES) (1,000) 4,184 (3,745) (3,172)
TAX EFFECT
Tax effect 350 (1,391) 1,311 1,110
------- ------- ------- -------
OTHER COMPREHENSIVE INCOME $ (650) $ 2,793 $(2,434) $(2,062)
(LOSS)
======= ======= ======= =======
7
ACNB CORPORATION
ITEM 1 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. ("RIG"). 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, has been
allocated as follows (in thousands):
Cash $ 628
Intangible asset 3,230
Goodwill 2,186
Other assets 1,197
Other liabilities (1,578)
-------
$ 5,663
=======
The intangible asset, representing the customer base, is being
amortized over 10 years. Goodwill will not be amortized but will be
analyzed annually for impairment. Amortization on goodwill and the
intangible asset will be deductible for tax purposes.
During the nine months ended 2005, RIG acquired two additional books of
business with an aggregate purchase price of $368,000. This amount is
being amortized over 10 years.
7. NEW ACCOUNTING STANDARDS
EITF 03-1
In January 2003, the FASB's Emerging Issues Task Force (EITF) issued
EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investors" ("EITF 03-1"), and in March
2004, the EITF issued an update. EITF 03-1 addresses the meaning of
other-than-temporary impairment and its application to certain debt and
equity securities. EITF 03-1 aids in the determination of impairment of
an investment and gives guidance as to the measurement of impairment
loss and the recognition and disclosures of other-than-temporary
investments. EITF 03-1 also provides a model to determine
other-than-temporary impairment using evidence-based judgment about the
recovery of the fair value up to the cost of the investment by
considering the severity and duration of the impairment in relation to
the forecasted recovery of the fair value. In July 2005, FASB adopted
the recommendation of its staff to nullify key parts of EITF 03-1. The
staff's recommendations were to nullify the guidance on the
determination of whether an investment is impaired as set forth in
paragraphs 10-18 of Issue 03-1 and not to provide additional guidance
on the meaning of other-than temporary impairment. Instead, the staff
recommends that entities recognize other-than-temporary impairments by
applying existing accounting literature such as paragraph 16 of SFAS
115.
8
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.
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.
9
CRITICAL ACCOUNTING POLICIES (CONTINUED)
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.
RESULTS OF OPERATIONS
Net income totaled $5,595,000 during the nine months ended September 30, 2005.
Earnings per share totaled $1.03 for the same period. Net income during the nine
months ended September 30, 2004 totaled $6,378,000 and earnings per share
totaled $1.17. The decrease in net income and earnings per share was primarily
driven by a lack of realized gains on securities and increases in occupancy,
equipment, and professional services expense. The downward trend in income will
continue through the fourth quarter because of a flat yield curve and a large
shortfall in tax credits. Historical tax credits were used in the fourth quarter
of 2004 but will drop from approximately $800,000 in 2004 to $-0- in 2005.
Net interest income totaled $18,960,000 during the nine month period ended
September 30, 2005 compared to $18,479,000 for the same period in 2004. The
increase in net interest income during 2005 was primarily related to an increase
in interest rates.
The net interest spread during the first nine months of 2005 was 2.66% compared
to 2.70% during the same period in 2004. The yield on interest earning assets
increased by 0.33% and cost of interest bearing liabilities increased by 0.37%
during 2005. The net interest margin was 2.90% for the first nine months of 2005
compared to 2.93% for the same period in 2004.
Average earning assets were $871,654,000 during 2005, an increase of $30,800,000
over the 2004 average of $840,854,000. Average interest bearing liabilities were
$768,142,000 in 2005, up from $732,519,000 in 2004.
PROVISION FOR LOAN LOSSES
The provision for loan losses charged against earnings was $348,000 for the
first nine months of 2005 compared to $225,000 for the same period in 2004. The
provision for loan losses totaled $168,000 for the third quarter of 2005 as
compared to $75,000 for the third quarter of 2004. The increase was primarily a
result of loan growth and strengthening of the reserve as ACNB continues to
emphasize commercial lending. 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.
10
OTHER INCOME
During the first nine months of 2005, total other income was $6,671,000, a
$2,105,000 increase from 2004. The increase was primarily the result of
commissions from insurance sales totaling $3,074,000 recognized by the
Corporation's new subsidiary, Russell Insurance Group, Inc. (see footnote 6),
partially offset by a decrease in gains on sales of securities of $1,278,000.
Total other income during the third quarter of 2005 was $2,367,000 as compared
to $1,477,000 during the second quarter of 2004. The increase was primarily the
result of commissions from insurance sales totaling $1,035,000.
Income from fiduciary activities, which includes both institutional and personal
trust management services and brokerage service fees, totaled $567,000 for the
first nine months of 2005, as compared to $557,000 during 2004. During the third
quarter of 2005, income totaled $206,000 as compared to $196,000 during the
third quarter of 2004.
Other income was $906,000 for the nine months ended September 30, 2005, as
compared to income of $735,000 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 EXPENSES
The largest component of other expenses is salaries and employee benefits, which
increased $1,985,000, or 26%, to $9,672,000 during the first nine months of 2005
as compared to the same period a year ago. Salaries and employee benefits
totaled $3,148,000 during the third quarter of 2005 as compared to $2,485,000
during the third quarter of 2004. The increase in salary and employee benefits
was the result of:
o Salaries and benefits included expenses related to Russell
Insurance Group, Inc. totaling $1,513,000 and $502,000 during the
first nine months of 2005 and the third quarter of 2005,
respectively.
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 $1,083,000 and equipment expense totaled
$1,743,000 during the nine month period ended September 30, 2005 as compared to
$724,000 and $1,544,000 during the same period in 2004, respectively. During the
third quarter of 2005, net occupancy expense totaled $419,000 and equipment
expense totaled $617,000 as compared to $204,000 and $464,000, respectively,
during the third quarter of 2004. 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
and the new operations center which was placed into service in May 2005.
Professional services expense totaled $693,000 during the first nine months of
2005, as compared to $364,000 for the same period in 2004. During the third
quarter of 2005, professional services expense totaled $187,000 as compared to
$127,000 during the second quarter of 2004. The increase was primarily a result
of internal audit services and expenses relating to Sarbanes-Oxley ss. 404
compliance.
11
Other operating expenses totaled $4,042,000 during the nine month period ended
September 30, 2005, compared to $2,590,000 during the same period in 2004.
During the third quarter of 2005, other operating expenses totaled $1,420,000 as
compared to $956,000 during the third quarter of 2004. Significant expense
components in this category include marketing and advertising and expenses
incurred by Russell Insurance Group, Inc., which totaled $1,048,000 and $593,000
during the first nine months and third quarter of 2005, respectively.
INCOME TAX EXPENSE
During the nine month period ended September 30, 2005, ACNB recognized income
taxes of $1,100,000, or 16.4% of pretax income as compared to $2,311,000, or
26.6% of pre-tax income during the same period in 2004. The effective tax rate
during the third quarter of 2005 was 17.9% as compared to 26.1% during the third
quarter of 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 periods ended September 30, 2005 and 2004
included historical and low income housing tax credits of $593,000 and $213,000,
respectively, associated with low income housing projects.
FINANCIAL CONDITION
Average earning assets during the nine months ended September 30, 2005 increased
to $871,654,000 from $840,854,000 during the same period in 2004. Average
funding sources, or interest bearing liabilities, increased in 2005 to
$768,142,000 from $732,519,000 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 September 30, 2005, the securities balance included a net unrealized loss on
available for sale securities of $4,630,000, 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 not recognized other than temporary
impairment on any of the securities and believes the losses are solely related
to changes in interest rates.
LOANS
Loans outstanding increased $48,332,000 from September 30, 2004 to September 30,
2005 and $37,551,000 from December 31, 2004 to September 30, 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, which totaled
$14,558,000, 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.
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ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses at September 30, 2005 was $4,226,000 or 0.88% of
loans, as compared to $4,170,000 or 0.97% of loans at the end of the third
quarter of 2004 and $3,938,000 or 0.89% at December 31, 2004. Loans past due 90
days and still accruing were $255,000 and non-accrual loans were $6,931,000 as
of September 30, 2005. The ratio of non-performing loans plus foreclosed assets
to total assets was 0.77% at September 30, 2005 as compared to 0.64% at
September 30, 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 September 30, 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.
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.
PREMISES AND EQUIPMENT
The increase in premises and equipment from $9,691,000 at September 30, 2004 to
$14,798,000 at September 30, 2005 and $11,992,000 from December 31, 2004 to
September 30, 2005 is primarily related to the Corporation's new Operations
Center, which was completed in the second quarter in 2005.
DEPOSITS
ACNB continues to rely on deposit growth as the primary source of funds for
lending activities. Deposits increased $25,573,000 from September 30, 2004 to
September 30, 2005 and $33,231,000 from December 31, 2004 to September 30, 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 September 30, 2005, short-term borrowings were
$55,721,000, as compared to $64,966,000 at December 31, 2004 and $79,589,000 at
September 30, 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
$125,839,000 at September 30, 2005, versus $132,000,000 at December 31, 2004.
Borrowings include 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.
13
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
$2,170,000, or 39%, of its net income as compared to $2,953,000 or 46% during
the same period in 2004.
ACNB Corporation 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 Corporation. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, ACNB Corporation must meet
specific capital guidelines that involve quantitative measures of their assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and reclassifications are also subject
to qualitative judgments by the regulators about components, risk-weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
requires ACNB Corporation to maintain minimum amounts and ratios of total and
Tier 1 capital to average assets. Management believes, as of September 30, 2005,
that ACNB Corporation'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 Corporation's capital ratios are as follows:
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
Tier 1 leverage ratio (to average assets) 8.06% 8.34%
Tier 1 risk-based capital ratio (to risk-weighted assets) 13.79 13.91
Total risk-based capital ratio 14.55 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
September 30, 2005, ACNB could borrow approximately $428,079,000 from the FHLB
of which $278,084,000 was available.
Another source of liquidity is securities sold under repurchase agreement to
customers of ACNB's banking subsidiary totaling $25,726,000 and $27,166,000 at
September 30, 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 $7,337,000 at
September 30, 2005.
14
ACNB CORPORATION
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 quarterly 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 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 a material weakness 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 weakness is described as follows: ineffective controls over the
application of generally accepted accounting principles to certain significant,
complex, non-routine transactions and the related statement disclosures. 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 was no change in our internal control over financial reporting during our
fiscal quarter ended September 30, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
15
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 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 10K 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 8K, 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 8K, 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 10K 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 10K 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 10K for the year ended December 31,
2004, filed with the Commission on March 15, 2005.)
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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 10K 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 10K 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 10K 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 10K
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
10K 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 10K 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 10K 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 10Q
Exhibit 31.2 Chief Financial Officer Certification of quarterly
report on Form 10Q
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 10K for the year
ended December 31, 2004, filed with the Commission on
March 15, 2005).
17
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.
NOVEMBER 7, 2005 /S/ THOMAS A. RITTER
- ---------------- -----------------------------------------
Thomas A. Ritter, Chief Executive Officer
/S/ JOHN W. KRICHTEN
-----------------------------------------
John W. Krichten, Chief Financial Officer
18