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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 June 30, 2004
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Commission file number 0-11783
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ACNB CORPORATION
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(Exact name of corporation as specified in its charter)
PENNSYLVANIA 23-2233457
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16 LINCOLN SQUARE, GETTYSBURG, PA 17325
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(Address of principal executive offices) (Zip Code)
(717) 334-3161
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(corporation's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the corporation (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
corporation was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the corporation is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class - Common Stock ($2.50 par value)
Outstanding at June 30, 2004 - 5,436,101
PART I
ITEM I FINANCIAL INFORMATION
ACNB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
Unaudited Unaudited
June 30 June 30 December 31
--------- --------- -----------
2004 2003 2003
Dollars In Thousands, except per share data
ASSETS
Cash and Due from Banks $ 25,734 $ 24,853 $ 32,381
Interest bearing deposits with banks 1,117 1,069 1,033
Investment Securities
Securities Held to Maturity 35,100 51,893 42,183
(Fair value $35,455, $53,249 and $43,076
respectively)
Securities Available for Sale 366,296 337,092 345,569
Mortgage loans held for sale 302 1,173 86
Loans 422,168 384,898 415,029
Less: Allowance for Loan Losses (4,096) (3,874) (3,978)
-------- -------- --------
Net Loans 418,072 381,024 411,051
Premises and Equipment 7,786 7,370 7,053
Restricted Investments in Bank Stocks 9,002 7,201 7,547
Foreclosed Real Estate 513 446 561
Other Assets 34,504 24,536 25,267
-------- -------- --------
TOTAL ASSETS $898,426 $836,657 $872,731
======== ======== ========
LIABILITIES
Deposits
Noninterest Bearing $ 73,044 $ 72,884 $ 75,819
Interest Bearing 593,319 566,036 563,569
-------- -------- --------
Total Deposits 666,363 638,920 639,388
Securities Sold Under
Agreements To Repurchase 27,166 28,638 39,906
Short -Term Borrowings 19,160 6,250 29,770
Long -Term Borrowings 112,000 87,000 87,000
Other Liabilities 4,545 5,279 4,276
-------- -------- --------
TOTAL LIABILITIES 829,234 766,087 800,340
SHAREHOLDERS' EQUITY
Common Stock ($2.50 par value)
20,000,000 shares authorized;
5,436,101 shares issued and outstanding 13,590 13,590 13,590
Retained Earnings 60,367 54,798 58,711
Accumulated Other Comprehensive
Income (Loss) (4,765) 2,182 90
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 69,192 70,570 72,391
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $898,426 $836,657 $872,731
======== ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
Page 2
ACNB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Unaudited Unaudited
Three Months Ended June 30 Six Months Ended June 30
-------------------------- -------------------------
2004 2003 2004 2003
Dollars in thousands, except per share data
INTEREST INCOME
Loan Interest and Fees $ 5,882 $ 5,840 $ 11,769 $ 11,893
Time deposits with banks 8 24 67 39
Taxable securities 3,063 2,908 5,825 6,233
Non-taxable securities 229 240 459 412
TOTAL INTEREST INCOME 9,182 9,012 18,120 18,577
INTEREST EXPENSE
Interest bearing deposits 2,367 3,042 4,753 6,151
Other borrowed funds
Short Term 175 169 316 390
Long Term 543 517 1,085 883
________ ________ ________ ________
TOTAL INTEREST EXPENSE 3,085 3,728 6,154 7,424
NET INTEREST INCOME 6,097 5,284 11,966 11,153
Provision for Loan Losses 75 60 150 120
NET INTEREST INCOME AFTER PROVISION _____ _____ _____ _____
FOR LOAN LOSSES 6,022 5,224 11,816 11,033
NON-INTEREST INCOME
Trust Department 192 195 361 357
Service Charges on Deposit Accounts 447 479 882 942
Other Operating Income 353 402 789 917
Gain (Loss) on Foreclosed Real Estate (11) (30) (11) 192
Bank Owned Life Insurance 198 218 297 345
Securities Gains (Losses) (46) 545 771 995
________ ________ ________ ________
TOTAL NON-INTEREST INCOME 1,133 1,809 3,089 3,748
NON-INTEREST EXPENSE
Salaries and Employee Benefits 2,575 2,461 5,202 4,913
Net occupancy expense 250 222 520 469
Equipment expense 553 497 1,080 897
Other taxes 177 225 496 469
Professional services 113 86 237 153
Other expense 1,014 1,036 1,983 1,928
________ ________ ________ ________
TOTAL NON-INTEREST EXPENSE 4,682 4,527 9,518 8,829
INCOME BEFORE INCOME TAXES 2,473 2,506 5,387 5,952
Applicable Income Taxes 655 621 1,448 1,600
________ ________ ________ ________
NET INCOME $ 1,818 $ 1,885 $ 3,939 $ 4,352
======== ======== ======== ========
PER COMMON SHARE DATA:
Basic earnings $ 0.33 $ 0.35 $ 0.72 $ 0.80
Cash dividends paid $ 0.21 $ 0.21 $ 0.42 $ 0.42
The accompanying notes are an integral part of the consolidated
financial statements.
Page 3
ACNB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Six Months Ended June 30
--------- ---------
2004 2003
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Dollars In thousands
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Interest and Dividends Received $ 18,697 $ 20,495
Fees and Commissions Received 3,405 4,072
Interest Paid (6,247) (7,733)
Cash Paid to Suppliers and Employees (11,270) (10,307)
Income Taxes Paid (1,429) (1,689)
Loans Originated for Sale (3,604) (11,851)
Proceeds of Mortgage Loans Sold 3,388 13,221
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,940 6,208
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Maturities of Investment Securities Held-to-Maturity 7,084 5,366
Proceeds from Sales and Maturities of Investment Securities Available - for- Sale 185,258 196,527
Purchase of Investment Securities Held - to - Maturity - (32,802)
Purchase of Investment Securities Available - for - Sale (212,386) (251,230)
Purchase of Restricted Investments in Bank Stocks (1,455) -
Net Decrease (Increase) in Loans (7,138) (12,592)
Purchase of Bank Owned Life Insurance (4,400) -
Investment in Low Income Housing Partnerships (1,683) (242)
Purchases of Bank Pemises and Equipment (1,163) (565)
Proceeds From Sale of Foreclosed Real Estate 37 523
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (35,846) (95,015)
CASH FLOW FROM FINANCING ACTIVITIES
Net Increase in Demand Deposits, NOW Accounts, and
Savings Accounts 16,646 60,027
Net Increase (Decrease) in Certificates of Deposit 10,330 (7,556)
Net (Decrease) in Securities Sold Under Agreement to Repurchase (12,740) (7,307)
Dividends Paid (2,283) (2,283)
Net (Decrease) in Short-Term Borrowings (10,610) (14,250)
Proceeds from Long-Term Borrowings 25,000 67,000
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 26,343 95,631
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,563) 6,824
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 33,414 19,098
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,851 $ 25,922
========= =========
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
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Net Income $ 3,939 $ 4,352
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Depreciation and Amortization 430 377
Provision for Loan Losses 150 120
Benefit for Deferred Taxes 146 (404)
Net Amortization of Investment Securities Premiums 1,622 1,550
Increase (Decrease) in Taxes Payable (126) 315
(Increase) Decrease in Interest Receivable (642) 551
Increase (Decrease) in Interest Payable (93) (309)
Increase (Decrease) in Accrued Expenses 429 245
Decrease (Increase) in Mortgage Loans Held for Sale (216) 1,370
(Increase) Decrease in Other Assets (2,611) (2,100)
Increase (Decrease) in Other Liabilities (88) 141
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,940 $ 6,208
========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
Page 4
ITEM 1
ACNB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present
fairly ACNB Corporation's (the "Corporation") financial position as of
June 30, 2004 and 2003 and December 31, 2003 and the results of its
operations for the three and six months ended June 30, 2004 and 2003
and cash flows for the six months then ended. All such adjustments are
of a normal recurring nature.
The accounting policies followed by the Corporation are set forth in
Note A to the corporation's financial statements in the 2003 ACNB
Corporation Annual Report and Form 10-K, filed with the SEC on March
12, 2004. The results of operations for the three and six month periods
ended June 30, 2004 are not necessarily indicative of the results to be
expected for the full year.
2. Earnings per share are based on the weighted average number of shares
of stock outstanding during each period. Weighted average shares
outstanding for the three and six month periods ended June 30, 2004 and
2003 were 5,436,101. The Corporation does not have any dilutive
securities outstanding.
3. Components of Net Periodic Benefit Cost
The components of net periodic benefit costs for the three and six
months ended June 30 were as follows:
Net Periodic Benefit Cost Footnote
June 30, 2004
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- ------------------------
2004 2003 2004 2003
(in thousands)
SERVICE COST $ 109 $ 89 $ 218 $ 178
INTEREST COST 196 184 392 368
EXPECTED RETURN ON PLAN ASSETS (185) (161) (370) (322)
RECOGNIZED NET ACTUARIAL LOSS 19 12 38 24
OTHER, NET 15 21 30 42
----- ----- ----- -----
NET PERIODIC BENEFIT COST $ 154 $ 145 $ 308 $ 290
===== ===== ===== =====
The Corporation previously disclosed in its financial statements for
the year ended December 31, 2003, that it expected to contribute
$1,155,000 to its pension plan in 2004. As of June 30, 2004, $1,155,000
of contributions have been made. The Corporation further anticipates to
contribute additional funds to its pension plan in the fourth quarter
of 2004.
Page 5
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 $6,062,000 in standby letters of
credit, as of June 30, 2004. Management believes that the proceeds
obtained through a liquidation of collateral and the enforcement of
guarantees should be sufficient to cover the potential amount of future
payment required under the corresponding guarantees. The current amount
of the liability, as of June 30, 2004, for guarantees under standby
letters of credit issued is not material.
5. Comprehensive Income
The Corporation's other comprehensive income items are unrealized gains
(losses) on securities available for sale and unfunded pension
liability. There was no change in the unfunded pension liability during
the six month periods ended June 30, 2004 and 2003. The components of
total comprehensive income for the six months ended June 30 were as
follows:
Three Months Ended Six Months Ended
June 30 June 30
2004 2003 2004 2003
------- ------- ------- -------
Unrealized holding losses on
available for sale securities arising
during the period $(7,147) $(3,286) $(6,698) $(1,386)
Gains (Losses) on AFS Securities
realized during period (46) 545 771 995
Net unrealized losses (7,193) (2,741) (7,469) (2,381)
Tax effect 2,517 960 2,614 834
------- ------- ------- -------
Other Comprehensive Income (loss) (4,676) (1,781) (4,855) (1,547)
Net Income 1,818 1,885 3,939 4,352
Total Comprehensive Income (loss) $(2,858) $ 104 $ (916) $ 2,805
======= ======= ======= =======
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 Corporation, 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 2003 Annual Report to Shareholders. Current performance does
not guarantee or assure, and is not necessarily indicative of, similar
performance in the future.
In addition to historical information, this Form 10-Q contains forward-looking
statements. From time to time, the Corporation may publish forward-looking
statements relating to such matters as anticipated financial performance,
business prospects, technological developments, new products, research and
development activities and similar matters. The Private Securities Litigation
Reform Act of 1995 provides a safe harbor for forward-looking statements. In
order to comply with the terms of the safe harbor, the Corporation notes that a
variety of factors could cause the Corporation's actual results and experience
to differ materially from the anticipated results or other expectations
expressed in the corporation's forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development and
results of the Corporation's business include the following: general economic
conditions, including their impact on capital expenditures; business conditions
in the banking industry; the regulatory environment; rapidly changing technology
and evolving banking industry standards; competitive factors, including
increased competition with community, regional and national financial
institutions; new service and product offerings by competitors and price
pressures; and similar items.
Critical Accounting Policies
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, which require the
Corporation to make estimates and assumptions (see footnote A to the December
31, 2003 financial statements). The Corporation believes that of its significant
accounting policies, the allowance for loan losses may involve a higher degree
of judgment and complexity.
The allowance for loan losses is established through a charge to the provision
for loan losses. In determining the balance in the allowance for loan losses,
consideration is given to a variety of factors in establishing this estimate. In
estimating the allowance for loan losses, management considers current economic
conditions, diversification of the loan portfolio, delinquency statistics,
results of internal loan reviews, borrowers' perceived financial and managerial
strengths, the adequacy of the underlying collateral, if collateral dependent,
or present value of future cash flows and other relevant factors. The use of
different estimates or assumptions could produce different provisions for loan
losses. Additional information is provided in the discussion below about the
Provision for Loan Losses.
Page 7
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003
Net Income for the second quarter ended June 30, 2004 was $1,818,000, down
$67,000 from the second quarter of 2003. Net interest income was up, total other
income was down and other expense was up. The second quarter decrease is
principally due to a decline in realized gains on securities. Net income per
share, for the second quarter, was $.33, compared to the $.35 earned in the same
period in 2003. For the three month period (annualized) in 2004, the return on
average assets and return on average equity were .83% and 10.35%, respectively,
compared to 1.01% and 11.83%, respectively for 2003.
An explanation of the factors and trends that caused changes between the two
periods, by major earnings category, follows.
Total interest income for the second quarter of 2004 was $9,182,000, up $170,000
or 1.9% more than the $9,012,000 earned in the same period of 2003. The $170,000
increase in interest income was due to higher volumes of interest earning assets
exceeding the impact of a lower yield on earning assets during 2004 compared to
2003. The average yield on earning assets declined 62 basis points compared to
the same quarter in 2003. In an effort to manage interest rate risk, the
corporation continues to lower interest rates on transaction accounts and keep
securities maturities short. Income from loans was up approximately $42,000 due
to greater volume while security income was up approximately $144,000, also due
to greater volume.
Total interest expense for the second quarter of 2004 was $3,085,000, down
$643,000 or 17.2% from the $3,728,000, incurred for the same period in 2003. The
$643,000 decrease in interest expense was due to lower overall interest rates,
especially for transaction accounts. Because interest expense decreased and
interest income increased net interest income increased by $813,000.
Total other income for the second quarter of 2004 at $1,133,000, was $676,000
less than the same quarter in 2003. The decrease was 37% in other income, with
significant changes within the following categories:
o Realized losses on sales of securities of $46,000, was down $591,000
or 108% below realized gains of $545,000 in 2003. Short term
securities and rapidly prepaying mortgage backed securities were sold
with offsetting gains and losses, and the proceeds reinvested in
agency securities to improve interest income.
o Bank owned life insurance income declined approximately $20,000.
o Gains on sales of mortgages (included in other operating income)
decreased $88,000 or 78% to $25,000 in 2004. Fewer mortgages are being
sold because of a decline in refinancing activity.
Total other expense for the second quarter of 2004 was $4,682,000, up $155,000
from the $4,527,000, incurred for the second quarter of 2003. The following are
the primary causes of the 3% increase in other expense:
Page 8
o A $114,000 or 5% increase in salaries and benefits primarily caused by
year-end merit increases and increase in staffing levels.
o A $78,000 or 8% increase spread across items such as taxes,
professional services, and electronic information delivery services.
The provision for income taxes in the second quarter increased $34,000 or 5% due
to a decline in tax credits. Credits available on one of the low income housing
projects expired late 2003. The effective tax rate for the three months ended
June 30, 2004 was 26.5% compared to 24.8% for the same period in 2003.
SIX MONTHS ENDED JUNE 30,2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
Net income for the first six months of 2004 was $3,939,000, down $413,000 or 9%
below the $4,352,000 earned for the same period of 2003. The decrease in net
income was due primarily to continued weakness in non-interest income. In
addition, other expenses continued its growth. For the six month period
(annualized) of 2004, the return on average assets (ROA) and return on average
equity (ROE) were .92% and 11.09%, respectively, compared to 1.10% and 12.47%,
respectively, for 2003.
Total interest income for the current six month period was $18,120,000 down
$457,000 or 2% from the $18,577,000 earned in the same period of 2003. The
$457,000 decrease in total interest income was due to very low interest rates in
the general market economy in 2003 translating to lower rates on new loans and
securities in 2004. In 2002, market rates fell rapidly and the effect is still
strongly affecting yields on components of the corporation's balance sheet.
Total interest expense for the current six month period was $6,154,000, down
$1,270,000 or 17% below the $7,424,000 incurred for the same period in 2003. The
$1,270,000 decrease in total interest expense was due to continued monitoring of
market conditions and cutting of rates where possible.
Net interest income was $11,966,000 for the current period, $813,000 above the
first six months in 2003. Margins are slowly improving and assets are
increasing. The bank is in a funds purchased position, and has improved the
dollar margin and the ratio. The reason for the growth in the margin has been a
slow down in prepayments on mortgage backed securities and slow increases in
interest rates.
Total non-interest income for the current six month period was $3,089,000, a
decrease of $659,000 or 18% below the same period in 2003. The decrease was
caused by the following:
o A $60,000 decrease in service charges on deposit accounts;
o A $48,000 decrease in income on Bank Owned Life Insurance;
o A $212,000 decrease in gains on sale of foreclosed real estate.
o A $224,000 decrease in gains on securities sold; and
o A decrease of $198,000 in fees on mortgages sold.
Page 9
Total non-interest expense for the current six month period was $9,518,000,
$689,000 or 8% above the $8,829,000 incurred for the same period in 2003. The
increase was due to a $289,000 increase in salaries and benefits, and $422,000
increase spread across equipment expense, professional services and
miscellaneous other expenses.
The provision for income taxes was $1,448,000 for the current period, $152,000
below the same period in 2003 due to lower pretax income. The Corporation's
effective rate was 26.9% for the six month periods ended June 30, 2004 and 2003.
The effective rate is below the statutory rate as a result of tax-exempt income
on loans, securities and bank-owned life insurance and tax credits from low
income housing investments.
OVERVIEW OF THE BALANCE SHEET
At June 30, 2004, total assets were approximately $898 million, reflecting a $62
million or 7% increase above June 30, 2003. 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 $12.73 on June 30, 2004, compared to $12.98 on
June 30, 2003. The Corporation's capital remained sound as evidenced by Total
Shareholders Capital Ratio of 7.70% and a Total Risk-Based Capital Ratio of
13.81% on June 30, 2004.
The changes in the balance sheet have been driven by strong growth in interest
bearing transaction accounts and borrowings. The following are some of the
results:
o Total investment securities were $401,396,000, at June 30, 2004, an
increase of $12,411,000 or 3% since June 30, 2003. Securities now make
up 45% of total assets. Of these securities, $33,000,000 mature in
2004, with a total of $20,500,000 maturing in 2005. In addition,
mortgage backed security paydowns are returning approximately
$5,000,000 per month. These funds should be available for reinvestment
when interest rates rise.
o Total deposits have grown from $638,920,000, at June 30, 2003, to
$666,363,000, at June 30, 2004, an increase of $27,443,000 or 4%.
Approximately $97,972,000 of total deposits are classic money market
at June 30,2004. This is a transaction account, which will require a
movement of interest rates, similar to general money market rates,
when the economy improves. Borrowings have increased from
$121,888,000, at June 30, 2003, to $158,326,000, at June 30, 2004. Of
these, $112,000,000 are term borrowings ranging from ten months to 8.5
years in maturity.
o Accumulated other comprehensive income (loss) has decreased from
$2,182,000, at June 30, 2003, to ($4,765,000), at June 30, 2004. This
indicates the after tax effect in the change in fair value of the
available for sale securities portfolio. This shift is the result of
management's decision to realize certain securities gains via sales of
securities and the increase in interest rates. The resulting cash flow
was reinvested in short term (18 to 45 months) corporates and callable
agencies. The portfolio has sufficient liquidity to cope with changes
in interest rates.
Page 10
INTEREST RATE SPREAD AND NET YIELD ON EARNING ASSETS
Six Months Ended
6/30/04 6/30/03
Earning Assets 4.42% 5.04%
Interest Bearing Liabilities 1.73% 2.31%
Interest Rate Spread 2.69% 2.73%
Net Yield on Earning Assets 2.92% 3.03%
Net Yield on Earning Assets is the difference, stated in percentages, between
the interest earned on loans and other investments and the interest paid on
deposits and other sources of funds. The Net Yield on Earning Assets is one of
the best analytical tools available to demonstrate the effect of interest rate
changes on the Corporation's earning capacity.
The Net Yield on Earning Assets, for the first six months of 2004, was down 11
basis points compared to the same period in 2003. Yields on loans and securities
have changed more rapidly than deposit rates as interest rates in the general
economy have remained at record low levels after falling dramatically in 2001
and 2002.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
(In Thousands)
Six Months Ended
6/30/04 6/30/03
Balance at Beginning of Period $ 3,978 $ 3,837
Provision Charged to Expense 150 120
Loans Charged Off (63) (117)
Recoveries 31 34
------- -------
Balance at End of Period $ 4,096 $ 3,874
======= =======
Ratios:
Net Charge-offs to:
Net Income .78% 1.92%
Total Loans .01% .02%
Allowance for Loan Losses .76% 2.14%
Allowance for Loan Losses to:
Total Loans .97% 1.00%
The Allowance for Loan Losses at June 30, 2004 was $4,096,000 (.97% of Total
Loans), an increase of $222,000 from $3,874,000 (1.00% of Total Loans) at the
end of the second quarter of 2003. Loans past due 90 days and still accruing
were $350,000 and non-accrual loans were $5,104,000, as of June 30, 2004. The
ratio of non-performing assets plus foreclosed real estate to total assets was
..66%, at June 30, 2004. All properties are carried at the lower of market or
book value and are not considered to represent a significant threat of loss to
the bank.
Page 11
Loans past due 90 days and still accruing were $606,000, at year end 2003, while
non-accruals were $4,413,000. The bulk of the Corporation's real estate loans
are in residential mortgages. Management believes that internal loan review
procedures will be effective in recognizing and correcting any real estate
lending problems that may occur due to current economic conditions. Interest not
accrued, due to an average of $4,651,000 in non-accrual loans, was approximately
$116,000 for the second quarter of 2004.
The bank considers a loan impaired when, based on current information and
events, it is probable that a lender will be unable to collect all amounts due.
We measure impaired loans based on the present value of expected future cash
flows, discounted at the loan's effective interest rate, or as a practical
expedient, at the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent. If the measure of the impaired
loan is less than its recorded investment a lender must recognize an impairment
by creating, or adjusting, a valuation allowance with a corresponding charge to
loan loss expense. The Corporation uses the cash basis method to recognize
interest income on loans that are impaired. All of the corporation's impaired
loans were on a non-accrual status for all reported periods.
CAPITAL MANAGEMENT
Total Shareholders' Equity was $69,192,000, at June 30, 2004, compared to
$70,570,000, at June 30, 2003, a decrease of $1,378,000 or 2.0% over that
period. The ratio of Total Shareholders' Equity to Total Assets was 8.31%, at
December 31, 2003, 9.04%, at June 30, 2003, and 7.70%, at June 30, 2004. The
total risk-based capital ratio was 13.81%, at June 30, 2004. The leverage ratio
was 8.04%, at June 30, 2004, and 8.97%, during the same period in 2003. Lack of
capital growth was due to a shift in value of available for sale securities as
interest rates rose. This decrease did not impact regulatory capital ratios.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Management believes that the corporation's liquidity is adequate. Liquid assets
(cash and due from banks, federal funds sold, money market instruments,
available for sale securities and held to maturity investment securities
maturing within one year) were 44% of total assets, at June 30, 2004. This mix
of assets would be readily available for funding any cash requirements. In
addition, the bank has an approved line of credit of $389,315,000 at the Federal
Home Loan Bank of Pittsburgh with $130,710,000 outstanding at June 30, 2004.
As of June 30, 2004, the cumulative asset sensitive gap was -1.0% of total
assets at one month, 6.1% at six months, and 14.7% at one year. Adjustable rate
mortgages, which have an annual interest rate cap of 2%, are considered rate
sensitive. Twenty-five percent (25%) 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 over the next 12 months, and $1,500,000 for low income housing
projects, yet to be disbursed, there are no known trends or demands,
commitments, events or uncertainties that will result in, or that are reasonably
likely to result in, liquidity increasing or decreasing in any material way.
Aside from those matters described above, management does not currently believe
that there are any known trends or uncertainties that would have a material
impact on future operating results, liquidity or capital resources nor is it
aware of any current recommendations by the regulatory
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authorities, which, if they were to be implemented, would have such an effect,
although the general cost of compliance with numerous and multiple federal and
state laws and regulation does have and in the future may have a negative impact
on the corporation's results of operations.
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management monitors and evaluates changes in market conditions on a regular
basis. Based upon the most recent review management has determined that there
have been no material changes in market risks since year end. For further
discussion of year end information, refer to the annual report.
\
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.
There was no change in our internal control over financial reporting during our
fiscal quarter ended June 30, 2004 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Management is not aware of any litigation that would have a
material adverse effect on the consolidated financial position of the
Corporation. There are no proceedings pending other than the ordinary routine
litigation incident to the business of the Corporation and its subsidiaries. In
addition, no material proceedings are pending or are known to be threatened or
contemplated against the Corporation and its subsidiaries by government
authorities.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities - Nothing to report.
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Item 3. Defaults Upon Senior Securities - Nothing to report.
Item 4. Submission of Matters to a Vote of Security Holders
(a) An annual meeting of shareholders was held at 1:00 p.m. on May 5,
2004 at the main office of Adams County National Bank, 675 Old
Harrisburg Road, Gettysburg, PA 17325.
(b) Six matters were voted upon, as follows:
Proposal to fix the number of Directors of ACNB Corporation at twelve (12):
Votes Cast Votes Cast Votes
"FOR" "AGAINST" ABSTAINED
------------ --------- ---------
3,829,093 25,138 43,435
Proposal to fix the number of Class 1 Directors at four (4):
Votes Cast Votes Cast Votes
"FOR" "AGAINST" ABSTAINED
------------ --------- ---------
3,829,955 24,417 43,294
Proposal to fix the number of Class 2 Directors at three (3):
Votes Cast Votes Cast Votes
"FOR" "AGAINST" ABSTAINED
------------ --------- ---------
3,825,381 28,355 43,930
Proposal to fix the number of Class 3 Directors at five (5):
Votes Cast Votes Cast Votes
"FOR" "AGAINST" ABSTAINED
------------ --------- ---------
3,812,930 30,566 54,170
Election of four (4) Class 1 Directors to serve for a three-year term:
Votes Cast Votes
Director Term Expires "FOR" "WITHHELD"
- -------- ------------ ------------ ----------
D. Richard Guise 2007 3,827,187 70,479
Ronald L. Hankey 2007 3,719,767 177,899
Edgar S. Heberlig 2007 3,828,567 69,099
Marian B. Schultz 2007 3,828,737 68,929
Election of one (1) Class 3 Director to serve for a one-year term:
Votes Cast Votes
Director Term Expires "FOR" "WITHHELD"
- -------- ------------ ------------- ----------
Daniel W. Potts 2005 3,804,197 93,469
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Item 5. Other Information - There have been no changes made to the shareholder
nomination process in the quarter ending June 30, 2004.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are included in this Report:
Exhibit 3(i) Articles of Incorporation of Registrant (Incorporated by
Reference to Exhibit 3 (i) in Registrant's Annual Report on
Form 10-K for the year ended December 31, 1999, filed with the
Commission on April 26, 2000).
Exhibit 3(ii) Bylaws of Registrant (Incorporated by Reference to
Exhibit 99 in Registrant's Report of Form 8-K, filed with the
Commission on December 19, 2003).
Exhibit 10.1 Executive Employment Agreement Dated as of January 1,
2000 between Adams County National Bank, ACNB Corporation and
Thomas A. Ritter (Incorporated by Reference to Exhibit 99 of
the Registrant's Current Report on Form 8-K, filed with the
Commission on March 26, 2001).
Exhibit 11 Statement Regarding Computation of Earnings Per Share
Exhibit 31.1 Chief Executive Officer Certification of Form 10-Q
Exhibit 31.2 Chief Financial Officer Certification of Form 10-Q
Exhibit 32.1 Certification of Chief Executive Officer
Exhibit 32.2 Certification of Chief Financial Officer
(b) Report on Form 8-K - None
Pursuant to the requirements of the Securities Exchange Act of 1934, the
corporation has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACNB CORPORATION
---------------------------------
/s/Thomas A. Ritter, President/CEO
July 30, 2004
---------------------------------
/s/John W. Krichten, Secretary/Treasurer
Page 15
EXHIBIT INDEX
Exhibit Number
Exhibit 3(i) Articles of Incorporation of Registrant (Incorporated by
Reference to Exhibit 3 (i) in Registrant's Annual Report on
Form 10-K for the year ended December 31, 1999, filed with the
Commission on April 26, 2000).
Exhibit 3(ii) Bylaws of Registrant (Incorporated by Reference to
Exhibit 99 in Registrant's Report of Form 8-K, filed with the
Commission on December 19, 2003).
Exhibit 10.1 Executive Employment Agreement Dated as of January 1,
2000 between Adams County National Bank, ACNB Corporation and
Thomas A. Ritter (Incorporated by Reference to Exhibit 99 of
the Registrant's Current Report on Form 8-K, filed with the
Commission on March 26, 2001).
Exhibit 11 Statement Regarding Computation of Earnings Per Share
Exhibit 31.1 Chief Executive Officer Certification of Form 10-Q
Exhibit 31.2 Chief Financial Officer Certification of Form 10-Q
Exhibit 32.1 Certification of Chief Executive Officer
Exhibit 32.2 Certification of Chief Financial Officer
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