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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, 2003
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-11783
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ACNB CORPORATION
-------------------------------------------------------
(Exact name of corporation as specified in its charter)
PENNSYLVANIA 23-2233457
------------------------------ -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16 LINCOLN SQUARE, GETTYSBURG, PA 17325
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(717) 334-3161
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(corporation's telephone number, including area code)
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the corporation (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
corporation was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No ____
Indicate by check mark whether the corporation is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes __X__ No _____
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the corporation has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes ____ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class - Common Stock ($2.50 par value)
Outstanding at September 30, 2003 - 5,436,101
PART I ITEM I
FINANCIAL INFORMATION
ACNB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
September 30 December 31
------------------------- -----------
2003 2002 2002
ASSETS In thousands
Cash and Due from Banks $ 20,913 $ 24,670 $ 18,089
Interest bearing deposits with banks 1,086 982 1,009
Investment Securities
Securities Held to Maturity 54,831 27,378 31,658
Securities Available for Sale 361,445 272,249 282,389
(Fair value $417,276, $302,589 and $316,874
respectively) -------- -------- ---------
Total Investment Securities 416,276 299,627 314,047
Mortgage loans held for sale 169 1,551 2,544
Loans 400,626 366,988 372,306
Less: Reserve for Loan Losses -3,928 -3,652 -3,837
-------- -------- ---------
Net Loans 396,698 363,336 368,469
Premises and Equipment 7,297 6,748 7,182
Other Real Estate 591 585 559
Other Assets 26,623 19,193 22,745
-------- -------- ---------
TOTAL ASSETS $ 869,653 $ 716,692 $ 734,644
======== ======== =========
LIABILITIES
Deposits
Noninterest Bearing $ 71,763 $ 75,947 $ 70,728
Interest Bearing 559,212 483,777 511,887
-------- -------- ---------
Total Deposits 630,975 559,724 582,615
Securities Sold Under
Agreement To Repurchase 38,717 39,717 35,945
Borrowing Federal Home Loan Bank 123,700 37,300 40,050
Demand Notes U.S. Treasury 450 450 450
Other Liabilities 5,801 7,290 5,484
-------- -------- ---------
TOTAL LIABILITIES 799,643 644,481 664,544
SHAREHOLDERS' EQUITY
Common Stock ($2.50 par value)
20,000,000 shares authorized:
5,436,101 shares issued and
outstanding at 09/30/03 and 09/30/02, respectively 13,590 13,590 13,590
Retained Earnings 56,806 52,215 52,781
Accumulated Other Comprehensive
Income (Loss) -386 6,406 3,729
-------- -------- ---------
TOTAL SHAREHOLDERS' EQUITY 70,010 72,211 70,100
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 869,653 $ 716,692 $ 734,644
======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
PAGE 2
ACNB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30 Nine Months Ended September 30
------------------------------ -------------------------------
2003 2002 2003 2002
INTEREST INCOME, In thousands , except per share data
Loan Interest and Fees $5,943 $6,208 $17,836 $18,716
Time deposits with banks 25 37 64 60
Taxable securities 2,774 3,170 9,007 9,358
Non-taxable securities 240 76 652 116
------ ------ ------- -------
TOTAL INTEREST INCOME 8,982 9,491 27,559 28,250
INTEREST EXPENSE
Deposits 2,619 3,042 8,770 9,104
Other Borrowed Funds 673 282 1,946 740
------ ------ ------- -------
TOTAL INTEREST EXPENSE 3,292 3,324 10,716 9,844
NET INTEREST INCOME 5,690 6,167 16,843 18,406
Provision for Loan Losses 60 60 180 180
------ ------ ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 5,630 6,107 16,663 18,226
NON-INTEREST INCOME
Trust Department 157 140 514 517
Service Charges on Deposit Accounts 260 456 1,202 1,273
Other Operating Income 623 454 1,540 1,196
Gain (Loss) on Other Real Estate - 13 192 134
Bank Owned Life Insurance 192 136 537 432
Gain from officer's life insurance 646 - 646 -
Securities Gains 996 - 1,991 -
------ ------ ------- -------
TOTAL NON-INTEREST INCOME 2,874 1,199 6,622 3,552
NON-INTEREST EXPENSE
Salaries and Employee Benefits 2,443 2,338 7,356 6,827
Net occupancy expense 290 246 873 743
Equipment expense 497 508 1,394 1,028
Other taxes 226 216 695 647
Professional services 83 132 236 347
Other expense 884 769 2,698 2,622
------ ------ ------- -------
TOTAL NON-INTEREST EXPENSE 4,423 4,209 13,252 12,214
INCOME BEFORE INCOME TAX 4,081 3,097 10,033 9,564
Applicable Income Tax 930 803 2,530 2,776
------ ------ ------- -------
NET INCOME $3,151 $2,294 $7,503 $6,788
PER COMMON SHARE DATA* ====== ====== ======= =======
Basic earnings $0.58 $0.42 $1.38 $1.25
Cash dividends paid 0.21 0.20 0.63 0.80
*BASED ON A WEIGHTED AVERAGE OF 5,436,101 SHARES OUTSTANDING IN 2003 AND IN 2002
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
page 3
ACNB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30
-------------------------------
2003 2002
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS In thousands
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and Dividends Received $ 29,721 $ 27,045
Fees and Commissions Received 7,202 3,866
Interest Paid (11,111) (10,394)
Cash Paid to Suppliers and Employees (16,365) (12,810)
Income Taxes Paid (2,366) (2,810)
Loans Originated for Sale (17,154) (10,644)
Proceeds of Mortgage Loans Sold 19,529 10,023
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ---------- ----------
9,456 4,276
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Maturities of Investment Securities Held-to-Maturity (5,366) -
Proceeds from Maturities of Investment Securities Available - for- Sale 269,079 80,241
Purchase of Investment Securities Held - to - Maturity (28,539) -
Purchase of Investment Securities Available - for - Sale (348,136) (147,090)
Net Decrease (Increase) in Loans (28,320) (5,262)
Capital Expenditures (701) (1,502)
Proceeds From Sale of Other Real Estate Owned 523 960
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (141,460) (72,653)
CASH FLOW FROM FINANCING ACTIVITIES
Net Increase (Decrease) in Demand Deposits, NOW Accounts, and
Savings Accounts 59,153 49,939
Net Increase (Decrease) in Certificates of Deposit (7,245) 1,059
Net Increase in Securities Sold Under Agreement to Repurchase 2,772 5,967
Dividends Paid (3,425) (4,349)
Net Increase (Decrease) in Borrowings 83,650 19,488
--------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 134,905 72,104
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,901 3,727
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,098 21,925
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,999 $ 25,652
========= =========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
- ---------------------------------------------------------------------------------------------------------------------
Net Income $ 7,503 $ 6,788
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Depreciation and Amortization 586 458
Provision for Possible Loan Losses 180 180
Benefit for Deferred Taxes (404) (390)
Amortization (Accretion) of Investment Securities Premiums (Discounts) 2,372 252
Increase (Decrease) in Taxes Payable 568 356
(Increase) Decrease in Interest Receivable 360 62
Increase (Decrease) in Interest Payable (395) (550)
Increase (Decrease) in Accrued Expenses 539 554
Decrease (Increase) in Mortgage Loans Held for Sale 2,375 (621)
(Increase) Decrease in Other Assets (4,237) (1,609)
Increase (Decrease) in Other Liabilities 9 (1,204)
--------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES $9,456 $4,276
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
PAGE 4
ACNB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present
fairly ACNB Corporation's financial position as of September 30, 2003
and 2002 and December 31, 2002 and the results of its operations for
the nine months ended September 30, 2003 and 2002 and changes in
financial position for the nine months then ended. All such adjustments
are of a normal recurring nature.
The accounting policies followed by the corporation are set forth in
Note A to the corporation's financial statements in the 2002 ACNB
Corporation Annual Report and Form 10-K, filed with the SEC on March
21, 2003.
2. The book and approximate market value of securities owned at September
30, 2003 and December 31, 2002 were as follows:
9/30/03 12/31/02
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- -------- --------- --------
(000 omitted)
U.S. Treasury and U.S. Government
Agencies (held to maturity) $ 15,537 $ 17,023 $ 25,540 28,350
State and Municipal (held to
maturity) 1,370 1,377 1,509 1,524
Corporate (held to maturity) 0 0 217 219
State and Municipal
(available for sale) 22,924 23,089 10,337 10,513
U.S. Government Agencies
(available for sale) 40,000 39,945 21,501 22,138
Mortgage Backed Securities
(available for sale) 192,371 191,262 180,696 184,893
Mortgage Backed Securites
(held to maturity) 29,216 28,723
Corporate (available for sale) 106,190 107,149 63,565 64,845
Restricted Equity Securities 8,708 8,708 4,392 4,392
-------- -------- -------- --------
TOTAL $416,316 $417,276 $307,757 $316,874
Income earned on investment securities was as follows:
Nine Months Ended September 30
2003 2002
-------- ----------
(000 omitted)
U.S. Treasury and U.S.
Government Agencies $ 1,326 $4,348
Mortgage Backed Securities 4,926 4,478
State and Municipal 652 116
Other Investments 2,755 532
------- ------
$9,659 $9,474
Page 5
3. Gross loans are summarized as follows:
September 30 December 31
2003 2002
------------ ----------
(000 omitted)
Real Estate $349,628 $326,180
Real Estate Construction 19,939 16,096
Commercial and Industrial 19,860 21,128
Consumer 11,368 11,446
-------- -------
Total Loans $400,795 $374,850
4. Earnings per share are based on the weighted average number of shares
of stock outstanding during each period. Weighted average shares
outstanding for the nine month periods ended September 30, 2003, and
2002 were 5,436,101 and 5,436,101, respectively.
5. Dividends paid per share were $.63 and $.80 for the nine month periods
ended September 30, 2003, and 2002, respectively. This represented a
46% payout of net income in 2003 and a 64% payout in 2002.
6. The results of operations for the nine month periods ended September
30, 2003, and 2002, are not necessarily indicative of the results to be
expected for the full year.
7. During the second quarter of 2003, the corporation inadvertently sold a
portion of an investment security that was classified as
held-to-maturity. This does not represent a material contradiction with
the corporation's intent to hold those securities to maturity, nor does
this represent a pattern of such sales by the corporation.
The corporation has the intent and ability to hold the remaining
securities classified as held-to-maturity.
The amortized cost of the debt security sold was $5,000,000 and the
related realized gain on the sale of the investment was $366,000.
8. Certain amounts in 2002 have been reclassified to conform with 2003
presentation.
Page 6
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The corporation's discussion and analysis of the significant changes in the
results of operations, capital resources and liquidity presented in the
accompanying consolidated financial statements for the Registrant, and its
wholly-owned subsidiaries, Adams County National Bank and Pennbanks Insurance
Company, follow. The corporation's consolidated statement of financial condition
and results of operations consist principally of the bank's financial condition
and results of operations. This discussion should be read in conjunction with
the corporation's 2002 Annual Report to Shareholders. Current performance does
not guarantee, assure, and is not necessarily indicative of similar performance
in the future.
In addition to historical information, this Form 10-Q contains forward-looking
statements. From time to time, the corporation may publish forward-looking
statements relating to such matters as anticipated financial performance,
business prospects, technological developments, new products, research and
development activities and similar matters. The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward-looking statements. In
order to comply with the terms of the safe harbor, the corporation notes that a
variety of factors could cause the corporation's actual results and experience
to differ materially from the anticipated results or other expectations
expressed in the corporation's forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development and
results of the corporation's business include the following: general economic
conditions, including their impact on capital expenditures; business conditions
in the banking industry; the regulatory environment; rapidly changing technology
and evolving banking industry standards; competitive factors, including
increased competition with community, regional and national financial
institutions; new service and product offerings by competitors and price
pressures; and similar items.
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2002
Net Income for the three month period ending September 30, 2003 was $3,151,000,
up $857,000, or 37% from the third quarter of 2002. Net interest income was
down, total other income was up and other expense was up. The third quarter
decrease in net interest income is due to historically rapid prepayments on
mortgage backed securities. Net income per share, for the third quarter, was
$.58, compared to the $.42 earned in the same period in 2002. For the three
month period (annualized) in 2003, the return on average assets and return on
average equity were 1.51% and 18.18%, respectively, compared to 1.37% and
13.45%, respectively for 2002.
An explanation of the factors and trends that caused changes between the two
periods, by major earnings category, follows.
Total interest income for the third quarter period of 2003 was $8,982,000, down
$509,000 or 5.4% below the $9,491,000 earned in the same period of 2002. The
$509,000 decrease in interest income was due to rapid mortgage backed security
prepayments during third quarter 2003. The average yield on earning assets
declined 112 basis points compared to the same quarter in 2002. In an effort to
manage interest rate risk, the corporation continues to lower interest rates on
transaction accounts and keep securities maturities short. Income from loans was
down approximately $265,000 due to lower interest rates while taxable security
income was down approximately $396,000 due to rapid prepayments on mortgage
backed securities and overall lower interest rates.
Page 7
Total interest expense for the third quarter of 2003 was $3,292,000, down
$32,000 or 1% from the $3,324,000 incurred for the same period in 2002. The
$32,000 decrease in interest expense was due to aggressive cutting of deposit
rates. Because the decrease in interest income exceeded the decrease in interest
expense, net interest income decreased $477,000.
Total other income for the third quarter of 2003 at $2,874,000, was $1,675,000
greater than the same quarter in 2002. The following are the primary causes of
the 140% increase in other income:
o Net realized gains on securities of $996,000. Longer term
securities with terms of approximately 10 to 15 years were sold
for gains, and the proceeds reinvested in five year mortgage
backed security balloons. Not all of the funds were reinvested at
higher rates, but the goal is to slow down prepayments and lessen
the volatility associated with longer term securities.
o Additional income from bank owned life insurance of approximately
$56,000.
o The financial results for the third quarter of 2003 reflects the
gain from the proceeds of two split-dollar life insurance policies
on the life of an executive officer of the Bank that passed away
during the third quarter. The Bank was the beneficiary of these
life insurance policies. The Bank's gain of $646,000 represents
the excess of the death benefit proceeds over the cash surrender
value on the two policies. The estate of the executive officer
received the contractual death benefit from the split-dollar
policies directly from the insurers.
The Bank has two additional life insurance policies covering the
life of the deceased executive officer. The estimated death
benefit proceeds of the remaining policies are approximately
$2,229,000. The estimated gain from these policies is $1,560,000.
The death benefits proceeds have not been received by the Bank
because each policy is within the contestable period and is under
routine investigation by the insurers.
Interest margins continue to narrow, therefore, net earnings will increasingly
rely on other income for the remainder of the fiscal year.
Total other expense for the third quarter of 2003 was $4,423,000, up $214,000
from the $4,209,000 incurred for the third quarter of 2002. The following are
the primary causes of the 5% increase in other expense:
o A $105,000 or 5% increase in salaries and benefits caused by a
continuation of staffing efforts connected with a new branch in
Dillsburg, PA, and upgrading of loan personnel.
o An $115,000 increase in the other expense category.
The provision for income taxes in the third quarter increased $127,000, due to a
higher level of taxable income.
Page 8
NINE MONTHS ENDED SEPTEMBER 30,2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
Net income for the first nine months of 2003 was $7,503,000, up $715,000 or
10.5% above the $6,788,000 earned for the same period of 2002. The increase in
net income was due primarily to realized gains on securities and proceeds from
two insurance policies paid due to the death of an executive officer. Net
interest income has been affected by narrowing interest margins and rapid
prepayments on mortgage backed securities. For the nine month period
(annualized) of 2003, the return on average assets (ROA) and return on average
equity (ROE) were 1.25% and 14.36%, respectively, compared to 1.42% and 13.97%,
respectively, for 2002.
At September 30, 2003, total assets were approximately $870 million, reflecting
a $153 million or 21% increase above September 30, 2002. This increase in assets
stems from migration of funds from the equities market, in the form of a deposit
account called Classic Money Market, and increased borrowings from the Federal
Home Loan Bank. Book value per share was $12.88 on September 30, 2003, compared
to $13.28 on September 30, 2002. The corporation's capital remained sound as
evidenced by Total Shareholders Capital Ratio of 8.05% and a Total Risk-Based
Capital Ratio of 14.59% on September 30, 2003.
Total interest income for the current nine month period was $27,559,000 down
$691,000 or 2% from the $28,250,000 earned in the same period of 2002. The
$691,000 decrease in total interest income was due to falling interest rates in
the general market economy in 2002 translating to lower rates on new loans and
securities. In addition, rapid prepayments on mortgage backed securities have
lowered yields on those securities and negatively affected interest income.
Total interest expense for the current nine month period was $10,716,000, up
$872,000 or 9% above the $9,844,000 incurred for the same period in 2002. The
$872,000 increase in total interest expense was due to growth in deposits as
they returned from Wall Street, and additional borrowings from the Federal Home
Loan Bank of Pittsburgh.
Net interest income was $16,843,000 for the current period, $1,563,000 below the
first nine months in 2002. Margins are slipping, and assets are increasing, but,
not rapidly enough to offset changes in interest expenses. The bank shifted to a
funds purchased position, but has not improved either the dollar margin or the
ratio. The reason for the narrowing of the margin has been historically rapid
prepayments on mortgage backed securities. These securities (many of which were
bought at a premium) require accelerated write-offs of the acquired premium.
Total non-interest income for the current nine month period was $6,622,000, an
increase of $3,070,000 or 86% above the same period in 2002. The increase was
caused by a $105,000 increase on Bank Owned Life Insurance, $58,000 in gains on
sale of other real estate, $1,991,000 in gains on securities sold, and the
excess of death benefit proceeds over the cash surrender value of two insurance
policies held on an executive officer. The gain in securities sold is the result
of a desire to improve yields by judicious extension of maturity (sale of a one
year maturity bond and its replacement with a two to three year bond with a
higher yield, with the realization of a gain on the security sold), or a need to
sell longer term securities to lessen volatility. Prepayment of mortgage backed
securities has been very rapid during the second and third quarters of 2003.
Some securities gains have been realized to offset the effect of the rapid
prepayments.
The financial results for the third quarter of 2003 reflects the gain from the
proceeds of two split-dollar life insurance policies on the life of an executive
officer of the Bank that passed away during the third quarter. The Bank was the
beneficiary of these life insurance policies. The Bank's gain of $646,000
represents the excess of the death benefit proceeds over the cash surrender
value on the two policies. The estate of the executive officer received the
contractual death benefit from the split-dollar policies directly from the
insurers.
Page 9
The Bank has two additional life insurance policies covering the life of the
deceased executive officer. The estimated death benefit proceeds of the
remaining policies are approximately $2,229,000. The estimated gain from these
policies is $1,560,000. The death benefits proceeds have not been received by
the Bank due to both policies are within the contestable period and are under
routine investigation by the insurers.
Total non-interest expense for the current nine month period was $13,252,000,
$1,038,000 or 8% above the $12,214,000 incurred for the same period in 2002. The
increase was due to a $529,000 increase in salaries and benefits, and a $496,000
increase in premises and equipment. This last is traceable to new technology and
a new branch in Dillsburg.
The provision for income taxes was $2,530,000 for the current period, $246,000
below the same period in 2002 due to tax-free insurance income mentioned above
and greater tax-free municipal bond income.
OVERVIEW OF THE BALANCE SHEET
The changes in the balance sheet have been driven by strong growth in deposits.
The following are some of the results:
o Total investment securities were $416,276,000 at September 30, 2003, an
increase of $116,649,000 or 39% since September 30, 2002. Securities have
increased from 42% of total assets to 48% of total assets.
o Total deposits have grown from $559,724,000, at September 30, 2002, to
$630,975,000, at September 30, 2003, an increase of $71,251,000 or 13%.
Certificates of deposit were down $10,417,000 from the September 30, 2002
total. All of the $71,251,000 increase was from transaction accounts. This
has increased our liability sensitivity, as measured by the bank's internal
gap (see below).
o Accumulated other comprehensive income has decreased from $3,729,000, at
December 31, 2002, to $(386,000), at September 30, 2003. This indicates the
after tax effect in the change in market value of the available for sale
securities portfolio. Although declining rates would normally cause
comprehensive income to increase, management felt that due to the rapid
prepayment of mortgage backed securities, it was better to take the profits
rather than let them disappear through this prepayment or rising interest
rates. In a defensive move the resulting funds have been reinvested short
term in securities such as two-year corporates or five-year mortgage backed
securities balloons.
INTEREST RATE SPREAD AND NET YIELD ON EARNING ASSETS
Nine Months Ended
9/30/03 9/30/02
Rate Rate
------- -------
Earning Assets 4.84% 6.26%
Interest Bearing Liabilities 2.17% 2.63%
Interest Rate Spread 2.67% 3.63%
Net Yield on Earning Assets 2.96% 4.08%
Net Yield on Earning Assets is the difference, stated in percentages, between
the interest earned on loans and other investments and the interest paid on
deposits and other sources of funds. The Net Yield on Earning Assets is one of
the best analytical tools available to demonstrate the effect of interest rate
changes on the corporation's earning capacity.
Page 10
The Net Yield on Earning Assets, for the first nine months of 2003, was down 112
basis points compared to the same period in 2002. Yields on loans and securities
have changed more rapidly than deposit rates as interest rates in the general
economy have remained at record low levels after falling dramatically in 2001
and 2002.
PROVISION AND RESERVE FOR POSSIBLE LOAN LOSSES
Reserve for Possible Loan Losses
(In Thousands)
Nine Months Ended
9/30/03 9/30/02
------- -------
Balance at Beginning of Period $3,837 $3,723
Provision Charged to Expense 180 180
Loans Charged Off 127 304
Recoveries 38 53
------ ------
Balance at End of Period $3,928 $3,652
Ratios:
Net Charge-offs to:
Net Income 1.19% 3.70%
Total Loans .02% .07%
Reserve for Possible Loan Losses 2.27% 6.87%
Reserve for Possible Loan Losses to:
Total Loans .98% .99%
The Reserve for Possible Loan Losses at September 30, 2003 was $3,928,000 (.98%
of Total Loans), an increase of $276,000 from $3,652,000 (.99% of Total Loans)
at the end of the first nine months of 2002. Loans past due 90 days and still
accruing were $439,000 and non-accrual loans were $387,000, as of September 30,
2003. The ratio of non-performing assets plus other real estate owned to total
assets was .16%, at September 30, 2003. All properties are carried at the lower
of market or book value and are not considered to represent significant threat
of loss to the bank. In addition, a parcel of other real estate owned with a
book value of $782,000 was sold during the second quarter of 2002 for $890,000,
reducing other real estate owned (OREO) by almost 50%.
Loans past due 90 days and still accruing were $1,379,000, at year end 2002,
while non-accruals were $1,037,000. The bulk of the corporation's real estate
loans are in residential mortgages. Management believes that internal loan
review procedures will be effective in recognizing and correcting any real
estate lending problems that may occur due to current economic conditions.
Interest not accrued, due to an average of $507,000 in non-accrual loans, was
approximately $25,000 for the first nine months of 2003.
The bank considers a loan impaired when, based on current information and
events, it is probable that a lender will be unable to collect all amounts due.
We measure impaired loans based on the present value of expected future cash
flows, discounted at the loan's effective interest rate, or as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. If the measure of the impaired
loan is less than its recorded investment a lender must recognize an impairment
by creating, or adjusting, a valuation allowance with a corresponding charge to
loan loss expense. The corporation uses the cash basis method to recognize
interest income on loans that are impaired. All of the corporation's impaired
loans were on a non-accrual status for all reported periods.
Page 11
CAPITAL MANAGEMENT
Total Shareholders' Equity was $70,010,000, at September 30, 2003, compared to
$72,211,000, at September 30, 2002, a decrease of $2,201,000 or 3.0% over that
period. The ratio of Total Shareholders' Equity to Total Assets was 9.54%, at
December 31, 2002, 10.08%, at September 30, 2002, and 8.05%, at September 30,
2003. The total risk-based capital ratio was 14.59%, at September 30, 2003. The
leverage ratio was 8.40%, at September 30, 2003, and 11.29%, during the same
period in 2002. Capital at the corporation remains strong.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Management believes that the corporation's liquidity is adequate. Liquid assets
(cash and due from banks, federal funds sold, money market instruments,
available for sale securities and held to maturity investment securities
maturing within one year) were 44% of total assets, at September 30, 2003. This
mix of assets would be readily available for funding any cash requirements. In
addition, the Bank has an approved line of credit of $294,546,000 at the Federal
Home Loan Bank of Pittsburgh with $123,700,000 outstanding at September 30,
2003.
As of September 30, 2003, the cumulative asset sensitive gap was -2.6% of total
assets at one month, 1.1% at six months, and 18.7% at one year. Adjustable rate
mortgages, which have an annual interest rate cap of 2%, are considered rate
sensitive. Twenty-five (25%) percent of passbook and statement savings, NOW and
money market deposit accounts are calculated to reprice overnight. The remaining
75% are carried in the over 5-year category.
Other than the construction of a new operations center, costing approximately
$7,000,000, and funding of investment tax credits of approximately $3,000,000
over the next 18 months, there are no known trends or demands, commitments,
events or uncertainties that will result in, or that are reasonably likely to
result in, liquidity increasing or decreasing in any material way. Aside from
those matters described above, management does not currently believe that there
are any known trends or uncertainties that would have a material impact on
future operating results, liquidity or capital resources nor is it aware of any
current recommendations by the regulatory authorities, which, if they were to be
implemented, would have such an effect, although the general cost of compliance
with numerous and multiple federal and state laws and regulation does have and
in the future may have a negative impact on the corporation's results of
operations.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Management monitors and evaluates changes in market conditions on a regular
basis. Based upon the most recent review of September 30, 2003, management has
determined that there have been changes in interest rates that have been
affecting the corporation as outlined above. For further discussion of year end
information, refer to the annual report.
Page 12
ITEM 4
CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the corporation carried out
an evaluation, under the supervision and with the participation of the
corporation's management, including the corporation's Chief Financial Officer,
of the effectiveness of the design and operation of the corporation's disclosure
controls and procedures pursuant to the Securities Exchange Act of 1934
("Exchange Act") Rule 13a-14. Based upon that evaluation, the corporation's
Chief Executive Officer along with the corporation's Chief Financial Officer
concluded that the corporation's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
corporation (including its consolidated subsidiaries) required to be included in
the corporation's periodic SEC filings. There have been no significant changes
in the corporation's internal controls or in other factors which could
significantly affect these controls subsequent to the date the corporation
carried out its evaluation.
Disclosure controls and procedures are corporation controls and other procedures
that are designed to ensure that information required to be disclosed by the
Corporation in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - Nothing to report.
Item 2. Changes in Securities and Use of Proceeds - Nothing to report.
Item 3. Defaults Upon Senior Securities - Nothing to report.
Item 4. Submission of Matters to a Vote of Security Holders - Nothing to report.
Item 5. Other Information - Nothing to report.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are included in this Report:
Exhibit 3(i) Articles of Incorporation of Registrant (Incorporated
by Reference to Exhibit 3 ( i ) in Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999).
Exhibit 3(ii) Bylaws of Registrant (Incorporated by Reference to
Exhibit 3(ii) in Registrant's Report of Form 8-K, filed
with the Commission on March 25, 1998).
Exhibit 10.1 Executive Employment Agreement Dated as of January 1, 2000
between Adams County National Bank, ACNB Corporation and Thomas
A. Ritter (Incorporated by Reference to Exhibit 99
of the Registrant's Current Report on Form 8-K, filed with the
Commission on March 26, 2001).
Exhibit 11 Statement Regarding Computation of Earnings Per Share.
Exhibit 31.1 Certification of Chief Executive Officer
Exhibit 31.2 Certification of Chief Financial Officer
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350 as Added
by Section of 906 of the Sarbanes-Oxley Act of 2002 by
Ronald L. Hankey
Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350 as Added
by Section of 906 of the Sarbanes-Oxley Act of 2002 by
John W. Krichten
(b) Report on Form 8-K and Form 8-K/A
o Item 12 - Results of Operations and Financial Condition dated
August 1, 2003
o Item 4 - Changes In Registrant's Certifying Accountant and
Item 7 - Financial Statements, Pro Forma Financial
Information and Exhibits dated October 10, 2003
o Item 4 - Changes in Registrant's Certifying Accountant and
Item 7 - Financial Statements, Pro Forma Financial
Information and Exhibits dated October 17, 2003
o Item 12 - Results of Operations and Financial Condition dated
October 24, 2003
Page 13
Pursuant to the requirements of the Securities Exchange Act of 1934, the
corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACNB CORPORATION
-----------------------------------------------
/s/ Ronald L. Hankey, Chairman of the Board/CEO
October 31, 2003
----------------------------------------------
/s/ John W. Krichten, Secretary/Treasurer
Page 14
EXHIBIT INDEX
Exhibit Number
Exhibit 3(i) Articles of Incorporation of Registrant (Incorporated
by Reference to Exhibit 3 ( i ) of Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999).
Exhibit 3(ii) Bylaws of Registrant (Incorporated by Reference to
Exhibit 3(ii) of Registrant's Report on Form 8-K, filed
with the Commission on March 25, 1998).
Exhibit 10.1 Executive Employment Agreement Dated as of January 1,
2000 between Adams County National Bank, ACNB Corporation
and Thomas A. Ritter (Incorporated by Reference to Exhibit
99 of the Registrant's Current Report on Form 8-K, filed
with the Commission on March 26, 2001).
Exhibit 11 Statement Regarding Computation of Earnings Per Share.
Exhibit 31.1 Certification of Chief Executive Officer
Exhibit 31.2 Certification of Chief Financial Officer
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350 as Added
by Section of 906 of the Sarbanes-Oxley Act of 2002 by
Ronald L. Hankey
Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350 as Added
by Section of 906 of the Sarbanes-Oxley Act of 2002 by
John W. Krichten
Page 15