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EX-31.2 - EX-31.2 - ACNB CORPa10-5933_1ex31d2.htm
EX-32.1 - EX-32.1 - ACNB CORPa10-5933_1ex32d1.htm
EX-31.1 - EX-31.1 - ACNB CORPa10-5933_1ex31d1.htm
EX-32.2 - EX-32.2 - ACNB CORPa10-5933_1ex32d2.htm

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

 

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2010

 

Commission file number 0-11783

 

ACNB CORPORATION

(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

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (717) 334-3161

 

Common Stock, Par Value $2.50 per Share

(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  o

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).     Yes o    No  o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

The number of shares of the Registrant’s Common Stock outstanding on April 30, 2010, was 5,928,343.

 

 

 



 

PART I - FINANCIAL INFORMATION

 

ACNB CORPORATION

ITEM 1 - FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)

 

Dollars in thousands

 

March 31, 2010

 

March 31, 2009

 

December 31,
2009

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

13,470

 

$

12,890

 

$

17,875

 

Interest bearing deposits with banks

 

25,742

 

14,868

 

6,263

 

 

 

 

 

 

 

 

 

Total Cash and Cash Equivalents

 

39,212

 

27,758

 

24,138

 

 

 

 

 

 

 

 

 

Securities available for sale

 

198,359

 

221,686

 

209,872

 

Securities held to maturity, fair value $10,391; $0; $10,334

 

10,054

 

 

10,057

 

Loans held for sale

 

1,117

 

4,861

 

145

 

Loans, net of allowance for loan losses $12,768; $8,635; $11,981

 

645,448

 

632,960

 

632,706

 

Premises and equipment

 

14,754

 

14,958

 

14,760

 

Restricted investment in bank stocks

 

9,170

 

9,170

 

9,170

 

Investment in bank-owned life insurance

 

26,655

 

25,541

 

26,408

 

Investments in low-income housing partnerships

 

4,312

 

4,647

 

4,391

 

Goodwill

 

5,972

 

5,972

 

5,972

 

Intangible assets

 

4,184

 

4,768

 

4,362

 

Foreclosed assets held for resale

 

6,142

 

483

 

6,046

 

Other assets

 

13,607

 

9,364

 

13,877

 

 

 

 

 

 

 

 

 

Total Assets

 

$

978,986

 

$

962,168

 

$

961,904

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Non-interest bearing

 

$

94,862

 

$

86,952

 

$

93,829

 

Interest bearing

 

639,378

 

623,073

 

634,694

 

 

 

 

 

 

 

 

 

Total Deposits

 

734,240

 

710,025

 

728,523

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

44,251

 

67,882

 

55,291

 

Long-term borrowings

 

98,837

 

86,874

 

80,294

 

Other liabilities

 

11,274

 

11,798

 

9,493

 

 

 

 

 

 

 

 

 

Total Liabilities

 

888,602

 

876,579

 

873,601

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $2.50 par value; 20,000,000 shares authorized; 5,990,943 shares issued; 5,928,343, 5,935,943 and 5,928,343 shares outstanding

 

14,977

 

14,977

 

14,977

 

Treasury stock, at cost (62,600, 55,000 and 62,600 shares)

 

(728

)

(640

)

(728

)

Additional paid-in capital

 

8,787

 

8,787

 

8,787

 

Retained earnings

 

66,919

 

63,900

 

65,623

 

Accumulated other comprehensive income (loss)

 

429

 

(1,435

)

(356

)

 

 

 

 

 

 

 

 

Total Stockholders’ Equity

 

90,384

 

85,589

 

88,303

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

 

$

978,986

 

$

962,168

 

$

961,904

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

2



 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

Three Months Ended March 31,

 

Dollars in thousands, except per share data

 

2010

 

2009

 

 

 

 

 

 

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

8,795

 

$

9,015

 

Securities:

 

 

 

 

 

Taxable

 

1,940

 

2,355

 

Tax-exempt

 

357

 

380

 

Dividends

 

7

 

13

 

Other

 

26

 

12

 

 

 

 

 

 

 

Total Interest Income

 

11,125

 

11,775

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

1,673

 

2,653

 

Short-term borrowings

 

42

 

153

 

Long-term borrowings

 

840

 

1,071

 

 

 

 

 

 

 

Total Interest Expense

 

2,555

 

3,877

 

 

 

 

 

 

 

Net Interest Income

 

8,570

 

7,898

 

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

859

 

1,125

 

 

 

 

 

 

 

Net Interest Income after Provision for Loan Losses

 

7,711

 

6,773

 

 

 

 

 

 

 

OTHER INCOME

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

561

 

540

 

Income from fiduciary activities

 

277

 

269

 

Earnings on investment in bank-owned life insurance

 

247

 

244

 

Net gains on sales of securities

 

26

 

9

 

Service charges on ATM and debit card transactions

 

254

 

227

 

Commissions from insurance sales

 

1,197

 

1,538

 

Other

 

306

 

300

 

 

 

 

 

 

 

Total Other Income

 

2,868

 

3,127

 

 

 

 

 

 

 

OTHER EXPENSES

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

4,168

 

4,373

 

Net occupancy

 

608

 

610

 

Equipment

 

626

 

560

 

Professional services

 

245

 

229

 

Other tax

 

202

 

157

 

Supplies and postage

 

168

 

189

 

Marketing

 

71

 

110

 

FDIC and regulatory

 

357

 

126

 

Intangible assets amortization

 

161

 

160

 

Other operating

 

866

 

739

 

 

 

 

 

 

 

Total Other Expenses

 

7,472

 

7,253

 

 

 

 

 

 

 

Income before Income Taxes

 

3,107

 

2,647

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

685

 

531

 

 

 

 

 

 

 

Net Income

 

$

2,422

 

$

2,116

 

 

 

 

 

 

 

PER SHARE DATA

 

 

 

 

 

 

 

 

 

 

 

Basic earnings

 

$

0.41

 

$

0.36

 

Cash dividends declared

 

$

0.19

 

$

0.19

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3



 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

Three Months Ended March 31, 2010 and 2009

 

Dollars in thousands

 

Common Stock

 

Treasury Stock

 

Additional
Paid-in Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Total
Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — JANUARY 1, 2009

 

$

14,977

 

$

(442

)

$

8,787

 

$

62,916

 

$

(1,799

)

$

84,439

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

2,116

 

 

2,116

 

Other comprehensive income, net of taxes

 

 

 

 

 

364

 

364

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

2,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury stock purchased (20,000 shares)

 

 

(198

)

 

 

 

(198

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared

 

 

 

 

(1,132

)

 

(1,132

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — MARCH  31, 2009

 

$

14,977

 

$

(640

)

$

8,787

 

$

63,900

 

$

(1,435

)

$

85,589

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — JANUARY 1, 2010

 

$

14,977

 

$

(728

)

$

8,787

 

$

65,623

 

$

(356

)

$

88,303

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

2,422

 

 

2,422

 

Other comprehensive income, net of taxes

 

 

 

 

 

785

 

785

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

3,207

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared

 

 

 

 

(1,126

)

 

(1,126

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — MARCH  31, 2010

 

$

14,977

 

$

(728

)

$

8,787

 

$

66,919

 

$

429

 

$

90,384

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

4



 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

Three Months Ended March 31,

 

Dollars in thousands

 

2010

 

2009

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,422

 

$

2,116

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Gain on sales of loans, property and foreclosed real estate

 

 

(131

)

Earnings on investment in bank-owned life insurance

 

(247

)

(244

)

Gains on sales of securities

 

(26

)

(9

)

Depreciation and amortization

 

608

 

567

 

Provision for loan losses

 

859

 

1,125

 

Net accretion of investment securities discounts

 

(3

)

(50

)

(Increase)decrease in interest receivable

 

(223

)

430

 

Increase in interest payable

 

165

 

288

 

Mortgage loans originated for sale

 

(1,658

)

(15,982

)

Proceeds from loans sold to others

 

692

 

12,212

 

Decrease in other assets

 

175

 

718

 

Increase (decrease) in other liabilities

 

(317

)

91

 

 

 

 

 

 

 

Net Cash Provided by Operating Activities

 

2,447

 

1,131

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Proceeds from maturities of investment securities available for sale

 

12,468

 

31,461

 

Proceeds from sales of investment securities available for sale

 

3,216

 

 

Purchase of investment securities available for sale

 

(1,006

)

 

Net increase in loans

 

(13,989

)

(3,755

)

Cash paid for insurance agency acquisitions, net of cash acquired

 

 

4

 

Capital expenditures

 

(448

)

(909

)

Proceeds from sales of property and foreclosed real estate

 

292

 

151

 

 

 

 

 

 

 

Net Cash Provided by Investing Activities

 

533

 

26,952

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net increase in demand deposits

 

1,033

 

4,466

 

Net increase in time certificates of deposits and interest bearing deposits

 

4,684

 

15,262

 

Net decrease in short-term borrowings

 

(11,040

)

(15,571

)

Dividends paid

 

(1,126

)

(1,132

)

Purchase of treasury stock

 

 

(198

)

Proceeds from long-term borrowings

 

19,000

 

 

Repayments on long-term borrowings

 

(457

)

(20,077

)

 

 

 

 

 

 

Net Cash Provided by (Used in) Financing Activities

 

12,094

 

(17,250

)

 

 

 

 

 

 

Net Increase in Cash and Cash Equivalents

 

15,074

 

10,833

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS — BEGINNING

 

24,138

 

16,925

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS — ENDING

 

$

39,212

 

$

27,758

 

 

 

 

 

 

 

Interest paid

 

$

2,390

 

$

3,589

 

Incomes taxes paid

 

$

 

$

 

Loans transferred to foreclosed real estate

 

$

388

 

$

 

 

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

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly ACNB Corporation’s financial position as of March 31, 2010 and 2009, and the results of operations, changes in stockholders’ equity, and cash flows for the three months ended March 31, 2010 and 2009.  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 2009 ACNB Corporation Annual Report on Form 10-K, filed with the SEC on March 12, 2010.  It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K.  The results of operations for the three month period ended March 31, 2010, are not necessarily indicative of the results to be expected for the full year.  For comparative purposes, the March 31, 2009, balances have been reclassified to conform with the 2010 presentation.  Such reclassifications had no impact on net income.

 

The Corporation has evaluated events and transactions occurring subsequent to the balance sheet date of March 31, 2010, for items that should potentially be recognized or disclosed in the consolidated financial statements.  The evaluation was conducted through the date these consolidated financial statements were issued.

 

2.             Earnings Per Share

 

The Corporation has a simple capital structure.  Basic earnings per share of common stock is computed based on 5,936,001 and 5,952,221 weighted average shares of common stock outstanding for the three months ended March 31, 2010 and 2009, respectively.  The Corporation does not have dilutive securities outstanding.

 

3.             Retirement Benefits

 

The components of net periodic benefit costs related to the non-contributory pension plan for the three months ended March 31 were as follows:

 

 

 

Three Months Ended
March 31,

 

In thousands

 

2010

 

2009

 

 

 

 

 

 

 

Service cost

 

$

115

 

$

140

 

Interest cost

 

268

 

247

 

Expected return on plan assets

 

(304

)

(241

)

Recognized net actuarial loss

 

109

 

145

 

Other, net

 

13

 

13

 

 

 

 

 

 

 

Net Periodic Benefit Cost

 

$

201

 

$

304

 

 

The Corporation previously disclosed in its financial statements for the year ended December 31, 2009, that it expected to contribute $1,250,000 to its pension plan in 2010.  The full contribution was made to the plan during the first quarter of 2010. The Corporation reduced the benefit formula for the defined benefit pension plan effective January 1, 2010, in order to manage total benefit costs.  The new formula is the earned benefit as of December 31, 2009, plus 0.75% of a participant’s average monthly pay multiplied by years of benefit service earned on and after January 1, 2010, but not more than 25 years.

 

6



 

The benefit percentage factor and maximum years of service eligible were both reduced.

 

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 $6,142,000 in standby letters of credit as of March 31, 2010.  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 payments required under the corresponding guarantees.  The current amount of the liability, as of March 31, 2010, for guarantees under standby letters of credit issued is not material.

 

5.             Comprehensive Income

 

The Corporation’s other comprehensive income items are unrealized gains on securities available for sale and unfunded pension liability.  The components of other comprehensive income for the three months ended March 31 were as follows:

 

 

 

Three Months Ended
March 31,

 

In thousands

 

2010

 

2009

 

 

 

 

 

 

 

Unrealized holding gains on available for sale securities arising during the period

 

$

1,094

 

$

561

 

Reclassification of gains realized in net income

 

(26

)

(9

)

 

 

 

 

 

 

Net Unrealized Gains

 

1,068

 

552

 

 

 

 

 

 

 

Tax effect

 

363

 

188

 

 

 

705

 

364

 

 

 

 

 

 

 

Change in pension liability

 

122

 

 

 

 

 

 

 

 

Tax effect

 

42

 

 

 

 

80

 

 

 

 

 

 

 

 

Other Comprehensive Income

 

$

785

 

$

364

 

 

The components of the accumulated other comprehensive income (loss), net of taxes, are as follows:

 

In thousands

 

Unrealized
Gains on
Securities

 

Pension
Liability

 

Accumulated
Other
Comprehensive
Income (Loss)

 

 

 

 

 

 

 

 

 

BALANCE, MARCH 31, 2010

 

$

4,911

 

$

(4,482

)

$

429

 

 

 

 

 

 

 

 

 

BALANCE, DECEMBER 31, 2009

 

$

4,206

 

$

(4,562

)

$

(356

)

 

 

 

 

 

 

 

 

BALANCE, MARCH 31, 2009

 

$

4,160

 

$

(5,595

)

$

(1,435

)

 

7



 

6.             Segment Reporting

 

Russell Insurance Group, Inc. (RIG) is managed separately from the banking segment, which includes the bank and related financial services that the Corporation offers.  RIG offers a broad range of property and casualty, life and health insurance to both commercial and individual clients.

 

Segment information for the three month periods ended March 31, 2010 and 2009, is as follows:

 

In thousands

 

Banking

 

Insurance

 

Intercompany
Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

2010

 

 

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

10,254

 

$

1,184

 

$

 

$

11,438

 

Income before income taxes

 

2,963

 

144

 

 

3,107

 

Total assets

 

969,418

 

12,248

 

(2,680

)

978,986

 

Capital expenditures

 

438

 

10

 

 

448

 

 

 

 

 

 

 

 

 

 

 

2009

 

 

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

9,496

 

$

1,529

 

$

 

$

11,025

 

Income before income taxes

 

2,258

 

389

 

 

2,647

 

Total assets

 

950,261

 

13,170

 

(1,263

)

962,168

 

Capital expenditures

 

899

 

10

 

 

909

 

 

Intangible assets, representing customer lists, are amortized over 10 years on a straight line basis.  Goodwill is not amortized, but rather is analyzed annually for impairment.  However, amortization of goodwill and intangible assets is deductible for tax purposes.

 

7.             Securities

 

Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost.  Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported, net of tax, in other comprehensive income.

 

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.  Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses.  In assessing potential other-than-temporary impairment losses on debt securities, management considers (1) whether management intends to sell the security, or (2) if it is more likely than not that management will be required to sell the security before recovery, or (3) management does not expect to recover the entire amortized cost basis.  In assessing potential other-than-temporary impairment for equity securities, consideration is given to management’s intent and ability to hold the securities until recovery of unrealized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

 

8



 

Amortized cost and fair value at March 31, 2010, and December 31, 2009, were as follows:

 

In thousands

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

SECURITIES AVAILABLE FOR SALE

 

 

 

 

 

 

 

 

 

MARCH 31, 2010

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

22,093

 

$

316

 

$

 

$

22,409

 

Mortgage-backed securities

 

119,743

 

6,255

 

1

 

125,997

 

State and municipal

 

37,527

 

589

 

86

 

38,030

 

Corporate bonds

 

9,922

 

285

 

 

10,207

 

Mutual funds

 

1,007

 

 

 

1,007

 

Stock in other banks

 

626

 

83

 

 

709

 

 

 

 

 

 

 

 

 

 

 

 

 

$

190,918

 

$

7,528

 

$

87

 

$

198,359

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2009

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

24,117

 

$

316

 

$

105

 

$

24,328

 

Mortgage-backed securities

 

128,073

 

5,489

 

65

 

133,497

 

State and municipal

 

40,723

 

631

 

83

 

41,271

 

Corporate bonds

 

9,959

 

215

 

 

10,174

 

Stock in other banks

 

627

 

 

25

 

602

 

 

 

 

 

 

 

 

 

 

 

 

 

$

203,499

 

$

6,651

 

$

278

 

$

209,872

 

 

 

 

 

 

 

 

 

 

 

SECURITIES HELD TO MATURITY

 

 

 

 

 

 

 

 

 

MARCH 31, 2010

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

10,054

 

$

337

 

$

 

$

10,391

 

 

 

 

 

 

 

 

 

 

 

SECURITIES HELD TO MATURITY

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2009

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

10,057

 

$

277

 

$

 

$

10,334

 

 

At March 31, 2010, one mortgage-backed security had an unrealized loss that did not exceed 1% of amortized cost. This security has not been in a continuous loss position for 12 months or more.  This unrealized loss relates principally to changes in interest rates subsequent to the acquisition of the specific security.  At March 31, 2010, fifteen state and municipal bonds had an unrealized loss, none of which has been in a continuous loss position for 12 months or more.  In analyzing the issuer’s financial condition, management considers industry analysts’ reports, financial performance, and projected target prices of investment analysts within a one-year time frame.  The securities in this category had an unrealized loss that did not exceed 5% of amortized cost.  Based on the above information, management has determined that none of these investments are other-than-temporarily impaired.

 

The fair values of securities available for sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or by matrix pricing (Level 2) which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific security but rather by relying on the security’s relationship to other benchmark quoted prices.  The Corporation uses an independent service provider to provide matrix pricing and uses the valuation of another provider to compare for reasonableness.

 

9



 

Management routinely sells securities from its available for sale portfolio in an effort to manage and allocate the portfolio.  At March 31, 2010, management had not identified any securities with an unrealized loss that it intends to sell.

 

The following table shows the Corporation’s gross unrealized losses and fair value related to investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2010, and December 31, 2009:

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

In thousands

 

Fair
Value

 

Unrealized Losses

 

Fair
Value

 

Unrealized Losses

 

Fair
Value

 

Unrealized Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SECURITIES AVAILABLE FOR SALE

 

 

 

 

 

 

 

 

 

 

 

 

 

MARCH 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

690

 

$

1

 

$

 

$

 

$

690

 

$

1

 

State and municipal

 

6,012

 

86

 

 

 

6,012

 

86

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

6,702

 

$

87

 

$

 

$

 

$

6,702

 

$

87

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

7,953

 

$

105

 

$

 

$

 

$

7,953

 

$

105

 

Mortgage-backed securities

 

16,426

 

62

 

482

 

3

 

16,908

 

65

 

State and municipal

 

7,757

 

83

 

 

 

7,757

 

83

 

Stock in other banks

 

602

 

25

 

 

 

602

 

25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

32,738

 

$

275

 

$

482

 

$

3

 

$

33,220

 

$

278

 

 

Amortized cost and fair value at March 31, 2010, by contractual maturity are shown below.  Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay with or without penalties.

 

 

 

Available for Sale

 

Held to Maturity

 

In thousands

 

Amortized
Cost

 

Fair
Value

 

Amortized
Cost

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

1 year or less

 

$

1,491

 

$

1,498

 

$

 

$

 

Over 1 year through 5 years

 

20,302

 

20,705

 

10,054

 

10,391

 

Over 5 years through 10 years

 

28,660

 

29,290

 

 

 

Over 10 years

 

19,089

 

19,153

 

 

 

Mortgage-backed securities

 

119,743

 

125,997

 

 

 

Mutual funds and stock in other banks

 

1,633

 

1,716

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

190,918

 

$

198,359

 

$

10,054

 

$

10,391

 

 

The Corporation realized gross gains of $74,000 during the first quarter of 2010 and $9,000 during the first quarter of 2009 and gross losses of $48,000 during the first quarter of 2010 and $0 during the first quarter of 2009 on sales of securities available for sale.  State and municipal securities were sold at a loss in order to adjust the Corporation’s interest rate sensitivity, reduce exposure to geographical locations, and balance the mix with other investment types, and to reduce risks related to insurance coverage.

 

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At March 31, 2010, and December 31, 2009, securities with a carrying value of $97,183,000 and $96,927,000, respectively, were pledged as collateral as required by law on public and trust deposits, repurchase agreements, and for other purposes.

 

8.             Fair Value of Financial Instruments

 

Management uses its best judgment in estimating the fair value of the Corporation’s financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Corporation could have realized in a sales transaction on the dates indicated.  The estimated fair value amounts have been measured as of their respective period and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period end.

 

Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. Additional guidance is provided on determining when the volume and level of activity for the asset or liability has significantly decreased. The standard also includes guidance on identifying circumstances when a transaction may not be considered orderly.

 

Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with fair value measurement and disclosure guidance.

 

This guidance further clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

 

Fair value measurement and disclosure guidance establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy are as follows:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

 

Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

 

An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

11



 

For assets measured at fair value, the fair value measurements by level within the fair value hierarchy, and the basis on measurement used at March 31, 2010, and December 31, 2009, are as follows:

 

 

 

 

 

Fair Value Measurements at March 31, 2010

 

In thousands

 

Basis

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

Recurring

 

$

198,359

 

$

709

 

$

197,650

 

$

 

Impaired loans

 

Nonrecurring

 

4,259

 

 

 

4,259

 

Foreclosed real estate

 

Nonrecurring

 

6,142

 

 

 

6,142

 

Loans held for sale

 

Nonrecurring

 

1,117

 

 

 

1,117

 

 

 

 

Fair Value Measurements at December 31, 2009

 

In thousands

 

Basis

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

Recurring

 

$

209,872

 

$

602

 

$

209,270

 

$

 

Impaired loans

 

Nonrecurring

 

4,447

 

 

 

4,447

 

Foreclosed real estate

 

Nonrecurring

 

6,046

 

 

 

6,046

 

Loans held for sale

 

Nonrecurring

 

145

 

 

 

145

 

 

The following table presents a reconciliation of impaired loans, foreclosed real estate, and loans held for sale measured at fair value, using significant unobservable inputs (Level 3), for the quarter ended March 31, 2010:

 

In thousands

 

Impaired
Loans

 

Foreclosed
Real Estate

 

Loans Held
for Sale

 

 

 

 

 

 

 

 

 

Balance — January 1, 2010

 

$

4,447

 

$

6,046

 

$

145

 

Gains on sales of loans

 

 

 

6

 

Settled or otherwise removed from impaired status

 

(30

)

(292

)

 

Additions to impaired status

 

 

388

 

 

Payments made

 

(279

)

 

 

Increase in valuation allowance

 

121

 

 

 

Loan originations

 

 

 

1,658

 

Loan sales

 

 

 

(692

)

Balance — March 31, 2010

 

$

4,259

 

$

6,142

 

$

1,117

 

 

Accounting Standards Codification (ASC) Topic 825, Financial Instruments, requires disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies, as well as in annual financial statements.

 

The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful.  The following methods and assumptions were used to estimate the fair values of the Corporation’s financial instruments at March 31, 2010, and December 31, 2009:

 

Cash and Cash Equivalents (Carried at Cost)

 

The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair value.

 

12



 

Securities

 

The fair values of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or by matrix pricing (Level 2) which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific security but rather by relying on the security’s relationship to other benchmark quoted prices.  The Corporation uses an independent service provider to provide matrix pricing and uses the valuation of another provider to compare for reasonableness.

 

Mortgage Loans Held for Sale (Carried at Lower of Cost or Fair Value)

 

The fair values of mortgage loans held for sale are determined as the par amounts to be received at settlement by establishing the respective buyer and rate in advance.

 

Loans (Carried at Cost)

 

The fair values of loans are estimated using discounted cash flow analyses, as well as using market rates at the balance sheet date that reflect the credit and interest rate risk inherent in the loans.  Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments, and prepayments of principal.  Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

 

Impaired Loans (Generally Carried at Fair Value)

 

Loans for which the Corporation has measured impairment are generally based on the fair value of the loan’s collateral.  Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds.  These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.  The fair value consists of the loan balances less the valuation allowance.

 

Foreclosed Real Estate

 

Fair value of real estate acquired through foreclosure is based on independent third-party appraisals of the properties.  These assets are included as Level 3 fair values, based on appraisals that consider the sales prices of similar properties in the proximate vicinity.

 

Restricted Investment in Bank Stock (Carried at Cost)

 

The carrying amount of required and restricted investment in correspondent bank stock approximates fair value, and considers the limited marketability of such securities.

 

Accrued Interest Receivable and Payable (Carried at Cost)

 

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

 

Deposits (Carried at Cost)

 

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (e.g., their carrying amounts).  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

 

13



 

Short-Term Borrowings (Carried at Cost)

 

The carrying amounts of short-term borrowings approximate their fair values.

 

Long-Term Borrowings (Carried at Cost)

 

Fair values of Federal Home Loan Bank (FHLB) advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity.  These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

 

Off-Balance Sheet Credit-Related Instruments

 

Fair values for the Corporation’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

 

Estimated fair values of financial instruments at March 31, 2010, and December 31, 2009, were as follows:

 

 

 

March 31, 2010

 

December 31, 2009

 

In thousands

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

13,470

 

$

13,470

 

$

17,875

 

$

17,875

 

Interest bearing deposits in banks

 

25,742

 

25,742

 

6,263

 

6,263

 

Investment securities:

 

 

 

 

 

 

 

 

 

Available for sale

 

198,359

 

198,359

 

209,872

 

209,872

 

Held to maturity

 

10,054

 

10,391

 

10,057

 

10,334

 

Loans held for sale

 

1,117

 

1,117

 

145

 

145

 

Loans, less allowance for loan losses

 

645,448

 

663,620

 

632,706

 

648,508

 

Accrued interest receivable

 

3,881

 

3,881

 

3,658

 

3,658

 

Restricted investment in bank stocks

 

9,170

 

9,170

 

9,170

 

9,170

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Deposits

 

734,240

 

737,783

 

728,523

 

732,089

 

Short-term borrowings

 

44,251

 

44,251

 

55,291

 

55,291

 

Long-term borrowings

 

98,837

 

102,052

 

80,294

 

83,305

 

Accrued interest payable

 

2,287

 

2,287

 

2,122

 

2,122

 

 

 

 

 

 

 

 

 

 

 

Off-balance sheet financial instruments

 

 

 

 

 

 

9.             New Accounting Pronouncements

 

ASU 2009-05

 

In August 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2009-05, Fair Value Measurements and Disclosures (Topic 820): Measuring Liabilities at Fair Value.  The amendments within ASU 2009-05 clarify that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques:

 

·                  A valuation technique that uses:

 

14



 

a. The quoted price of the identical liability when traded as an asset.

 

b. Quoted prices for similar liabilities or similar liabilities when traded as assets.

 

·                  Another valuation technique that is consistent with the principles of Topic 820.

 

Two examples would be an income approach, such as a present value technique, or a market approach, such as a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability.

 

When estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability.

 

Both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements.

 

This guidance became effective January 1, 2010, and did not have a significant impact on the Corporation’s financial condition or results of operations.

 

ASU 2009-16

 

In October 2009, the FASB issued ASU 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets.  This Update amends the Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of Financial Assets - An amendment of FASB Statement No. 140.

 

The amendments in this Update improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets.  Comparability and consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting.

 

This guidance became effective January 1, 2010, and did not have a significant impact on the Corporation’s financial condition or results of operations.

 

ASU 2010-06

 

The FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require:

 

·                  A reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and,

 

·                  In the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances and settlements.

 

In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures:

 

·                  For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and,

 

15



 

·                  A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.

 

ASU 2010-06 is effective for interim and annual reporting periods beginning January 1, 2010, except for the disclosures about purchases, sales, issuances and settlements in the rollforward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years.  The Corporation adopted the required provisions of ASU 2010-06, with no significant impact on its financial condition or results of operations.

 

ASU 2010-09

 

The FASB issued ASU 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. The amendments in the ASU remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC’s literature.

 

In addition, the amendments in the ASU require an entity that is a conduit bond obligor for conduit debt securities that are traded in a public market to evaluate subsequent events through the date of issuance of its financial statements and must disclose such date.

 

All of the amendments in the ASU were effective upon issuance (February 24, 2010) except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010.  The Corporation adopted the required provisions of ASU 2010-09, with no significant impact on its financial condition or results of operations.

 

ASU 2010-15

 

The FASB issued ASU 2010-15, Financial Services - Insurance (Topic 944): How Investments Held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments.  This Update clarifies that an insurance entity should not consider any separate account interests held for the benefit of policyholders in an investment to be the insurer’s interests and should not combine those interests with its general account interest in the same investment when assessing the investment for consolidation, unless the separate account interests are held for the benefit of a related party policyholder as defined in the Variable Interest Entities Subsections of Subtopic 810-10 and those Subsections require the consideration of related parties.

 

This Update also amends Subtopic 944-80 to clarify that for the purpose of evaluating whether the retention of specialized accounting for investments in consolidation is appropriate, a separate account arrangement should be considered a subsidiary. The amendments do not require an insurer to consolidate an investment in which a separate account holds a controlling financial interest if the investment is not or would not be consolidated in the standalone financial statements of the separate account.

 

The amendments also provide guidance on how an insurer should consolidate an investment fund in situations in which the insurer concludes that consolidation is required.

 

The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2010.  Early adoption is permitted.  The amendments in this Update should be applied retrospectively to all prior periods upon the date of adoption.  The Corporation does not expect the adoption of this standard will have a significant impact on the Corporation’s financial condition or results of operations.

 

16



 

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 financial condition, 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.  Please read this discussion in conjunction with the consolidated financial statements and disclosures included herein.  Current performance does not guarantee, assure or indicate 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 such as local economic conditions, competitive factors, and regulatory limitations.  Actual results may differ materially from those projected in the forward-looking statements.  Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the following: ineffectiveness of the business strategy due to changes in current or future market conditions; the effects of economic deterioration on current customers, specifically the effect of the economy on loan customers’ ability to repay loans; the effects of competition, and of changes in laws and regulations on competition, including industry consolidation and development of competing financial products and services; interest rate movements; the inability to achieve merger-related synergies; difficulties in integrating distinct business operations, including information technology difficulties; disruption from the transaction making it more difficult to maintain relationships with customers and employees, and challenges in establishing and maintaining operations in new markets; volatilities in the securities markets; and, deteriorating economic conditions. 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 Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and any Current Reports on Form 8-K.

 

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 the 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 specific methodologies applied on a consistent basis are discussed in greater detail under the caption, Allowance for Loan Losses, in a subsequent section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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 the length of time the fair value has been below cost, the financial condition of the issuer, and the Corporation’s intent to sell, or requirement to sell, the security before recovery of its value. Declines in fair value that are determined to be other than temporary are charged against earnings.

 

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ASC Topic 350, Intangibles — Goodwill and Other, requires that goodwill is not amortized to expense, but rather that it be tested for impairment at least annually.  Impairment write-downs are charged to results of operations in the period in which the impairment is determined.  The Corporation did not identify any impairment on its outstanding goodwill from its most recent testing, which was performed as of December 31, 2009.  If certain events occur which might indicate goodwill has been impaired, the goodwill is tested when such events occur.  Other acquired intangible assets with finite lives, such as customer lists, are required to be amortized over the estimated lives.  These intangibles are generally amortized using the straight line method over estimated useful lives of ten years.

 

RESULTS OF OPERATIONS

 

Quarter ended March 31, 2010, compared to quarter ended March 31, 2009

 

Executive Summary

 

Net income for the three months ended March 31, 2010, was $2,422,000 compared to $2,116,000 for the same quarter in 2009, an increase of $306,000 or 14%.  Earnings per share increased from $0.36 in 2009 to $0.41 in 2010.  Net interest income increased $672,000 or 9%; provision for loan losses decreased $266,000 or 24%; other income decreased $259,000 or 8%; and, other expenses increased $219,000 or 3%.

 

Net Interest Income

 

Net interest income totaled $8,570,000 for the quarter ended March 31, 2010, compared to $7,898,000 for the same period in 2009, an increase of $672,000 or 9%. Net interest income increased due to a decrease in interest expense resulting from reductions in market rates associated with the continued low rates maintained by the Federal Reserve Bank.  Alternative funding sources, such as the FHLB, and other market driver rates are factors in rates the Corporation and the local market pay for deposits.  At the end of the first quarter of 2010, several of the core deposit rates continued at practical floors after the Federal Open Market Committee decreased the Federal Funds Target Rate by 400 basis points during 2008 and maintained it at 0% to 0.25% since that time.  Interest expense decreased $1,322,000 or 34%.  The lower funding costs were partially offset by lower interest income, which decreased $650,000 or 6%.  Interest income was lower as a result of investment securities paydowns that were not reinvested due to artificially low market rates resulting from Federal Reserve buying activities.  Interest income also decreased due to declines in the Federal Funds Target Rate and other market driver rates. These driver rates are indexed to a portion of the loan portfolio in a manner that a decrease in the driver rates decreases the yield on the loans at subsequent rate reset dates. For more information about interest rate risk, please refer to Item 7A - Quantitative and Qualitative Disclosures about Market Risk in the Annual Report on Form 10-K dated December 31, 2009, and filed with the SEC on March 12, 2010.  Over the longer term, the Corporation continues its strategic direction to increase asset yield and interest income by means of loan growth and rebalancing the composition of earning assets.

 

The net interest spread for the first quarter of 2010 was 3.81% compared to 3.40% during the same period in 2009.  Also comparing the first quarter of 2010 to 2009, the yield on interest earning assets decreased by 0.24% and the cost of interest bearing liabilities decreased by 0.65%.  The net interest margin was 3.97% for the first quarter of 2010 and 3.64% for the first quarter of 2009.  The net interest margin improvement was mainly a result of the cost of funding decreasing at a higher rate than the rate of change in the yield on assets due to timing of repricing, local market competition, and a “steep” yield curve that currently favors financial institutions.

 

Average earning assets were $880,008,000 during the first quarter of 2010, a decrease of $7,084,000 from the average for the first quarter of 2009.  Average interest bearing liabilities were $769,278,000 in the first quarter of 2010, a decrease of $17,320,000 from the same quarter in 2009.

 

Provision for Loan Losses

 

The provision for loan losses was $859,000 in the first quarter of 2010 compared to $1,125,000 in the first quarter of 2009, a decrease of $266,000 or 24%. The decrease was a result of analysis of the adequacy of the allowance for loan losses. Each quarter, the Corporation measures risk in the loan portfolio compared with the balance in the allowance for loan losses and the current evaluation factors.  For more information, please refer to Allowance for Loan Losses in the subsequent Financial Condition section.  ACNB charges confirmed loan losses to the allowance and credits the allowance for recoveries of previous loan charge-offs.  For the first quarter of 2010, the Corporation had net charge-offs of $71,000, as compared to net recoveries of $117,000 for the first quarter of 2009.

 

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Other Income

 

Total other income was $2,868,000 for the three months ended March 31, 2010, down $259,000, or 8%, from the first quarter of 2009.  Fees from deposit accounts and ATM/debit card revenue increased by $48,000, or 6%, due to an increase in service fees charged and higher volume. Income from fiduciary activities, which include both institutional and personal trust management services, totaled $277,000 for the three months ended March 31, 2010, as compared to $269,000 during the first quarter of 2009, a 3% increase as a result of higher average assets under management. Earnings on bank-owned life insurance rose by $3,000, or 1%, as a result of variations in crediting rates. The Corporation’s wholly-owned subsidiary, Russell Insurance Group, Inc. (RIG), saw revenue decrease by $341,000 or 22%.  The decrease was due to generally lower commissions in a “soft” insurance market, effects of the prolonged economic recession on business clients, and lower “contingent” commissions.  The “contingent” or extra commission payments from insurance carriers are mostly received in the first quarter of each year, and the amount is at the discretion of various insurance carriers in accordance with applicable insurance regulations.  Net gains on securities were $26,000 for the three months ended March 31, 2010, and $9,000 in the same period in 2009. Other income in the quarter ended March 31, 2010, was positively impacted by prior years’ property tax refunds mostly offset by decreased fees related to sales of residential mortgages compared to the first quarter of 2009.

 

Other Expenses

 

The largest component of other expenses is salaries and employee benefits, which decreased by $205,000, or 5%, when comparing the first quarter of 2010 to the same quarter a year ago.  Overall, the net decrease in salaries and employee benefits was the result of:

 

·                  Decreased defined benefit pension expense resulting from a reduced benefit formula implemented by the Corporation on January 1, 2010, and

 

·                  Decreases from varying employee usage of 401(k) plan benefits, unused paid time off accrual and varying payroll taxes, all of which were offset by

 

·                  Modest increases from normal promotion and production-based incentive compensation increases to employees,

 

·                  An increase in the number of full-time equivalent employees, and,

 

·                  Increased benefit plan costs, particularly medical insurance.

 

Net occupancy expense decreased $2,000, or less than 1%, in part due to variations in heating and other seasonal costs.  Equipment expense increased by $66,000, or 12%, as a result of higher maintenance and depreciation on new technology purchases necessary to meet marketplace and regulatory demands or to maintain systems reliability.

 

Professional services expense totaled $245,000 during the first quarter of 2010, as compared to $229,000 for the same period in 2009, an increase of $16,000 or 7%.  This increase was due to higher loan collection legal costs.

 

Marketing expense decreased by $39,000, or 35%.  Lower marketing expense reflects continued lower current spending in light of the entire year’s plan with higher marketing expenditures expected in upcoming months.  The Corporation continued to advertise its products and services and to promote its brand via marketing communications, but in a more targeted and limited manner than prior periods.

 

FDIC expense for the first quarter of 2010 was $302,000, an increase of $230,000 from the first quarter of 2009.  The much higher expense is required of all FDIC-insured banks to restore the deposit insurance fund due to the cost of protecting depositors’ accounts at failed banks during the severe recessionAt the end of the third quarter of 2009, the FDIC announced a plan in which most banks prepaid an estimated three years of regular quarterly premiums at year-end 2009, as opposed to a special assessment similar to which was levied on all insured banks in the second quarter of 2009.   The prepaid assessments did not immediately affect bank earnings. ACNB recorded its prepaid assessments as a prepaid expense (an asset) as of December 30, 2009, the date the payment was made. As of December 31, 2009, and each quarter thereafter, each institution records an expense for its regular quarterly assessment and an offsetting credit to the prepaid expense until the asset is exhausted. Once the asset is exhausted, the institution will record an accrued expense payable each quarter for the assessment payment, which would be made to the FDIC at the end of the following quarter. Even though an estimated premium is prepaid under this plan, the actual expense will vary based on several factors including quarter-end deposit levels and risk ratings.

 

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Other operating expenses increased by $127,000, or 17%, in the first quarter of 2010, as compared to the first quarter of 2009.  Costs involved in electronic banking and expenses of maintaining foreclosed assets held for resale were responsible for a portion of this increase.

 

Income Tax Expense

 

The Corporation recognized income taxes of $685,000, or 22% of pretax income, during the first quarter of 2010, as compared to $531,000, or 20% of pretax income, during the same period in 2009. The variances from the federal statutory rate of 34% in both periods are generally due to tax-exempt income and investments in low-income housing partnerships (which qualify for federal tax credits).   The income tax provision during the first quarters ended March 31, 2010 and 2009, included low-income housing tax credits of $144,000 and $170,000, respectively.

 

FINANCIAL CONDITION

 

Assets totaled $978,986,000 at March 31, 2010, compared to $961,904,000 at December 31, 2009, and $962,168,000 at March 31, 2009. Average earning assets during the three months ended March 31, 2010, decreased to $880,008,000 from $887,092,000 during the same period in 2009. Average interest bearing liabilities decreased in 2010 to $769,278,000 from $786,598,000 in 2009.

 

Investment Securities

 

ACNB uses investment securities to generate interest and dividend income, manage interest rate risk, provide collateral for certain funding products, and provide liquidity.  The contraction in the securities portfolio during 2010 and 2009 was designed to fund increased lending in the earning asset mix, but was also a result of relatively low yields available on investments within the credit quality and interest rate sensitivity targets of ACNB.  The investment portfolio is comprised of U.S. Government agency, municipal, and corporate securities.  These securities provide the appropriate characteristics with respect to credit quality, yield and maturity relative to the management of the overall balance sheet.

 

At March 31, 2010, the securities balance included a net unrealized gain of $4,911,000, net of taxes, on available for sale securities versus a net unrealized gain of $4,206,000, net of taxes, at December 31, 2009. The increase in fair value of securities during 2010 was a result of change in the U.S. Treasury yield curve and the spread from this yield curve required by investors on the types of investment securities that ACNB owns.  Actions by the Federal Reserve to stimulate the housing market and lessen the impact of the recession are affecting the spread and currently generally increasing the value of the securities held by ACNB.   The Corporation does not own investments consisting of pools of Alt A or subprime mortgages, private label mortgage-backed securities, or trust preferred investments.  The fair values of securities available for sale (carried at fair value) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or by matrix pricing (Level 2) which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific security but rather by relying on the security’s relationship to other benchmark quoted prices.  The Corporation uses an independent service provider to provide matrix pricing and uses the valuation of another provider to compare for reasonableness.  Please refer to Note 7 - Securities in the Notes to Consolidated Financial Statements for more information on the security portfolio and Note 8 - Fair Value of Financial Instruments in the Notes to Consolidated Financial Statements for more information about fair value.

 

Loans

 

Loans outstanding increased by $16,621,000, or 3%, from March 31, 2009, to March 31, 2010, and by $13,529,000, or 2%, from December 31, 2009, to March 31, 2010, due to an increase in loan volume in the first quarter of 2010 as a result of additional disbursements from loans closed in prior periods.  During the first quarter of 2010, loan demand was weak despite ACNB’s continued strategic initiatives to increase loans by lending to support existing and new customers in its marketplace. Compared to March 31, 2009, commercial loans (including commercial real estate and construction) decreased by approximately $13,000,000 or 5%. The commercial loan decline during this period was the result of reduced business activity in the market area that hindered new originations, as well as management’s decision to not renew certain commercial loans, primarily participation credits in conjunction with other financial institutions, due to potential credit risk. Participation loans at March 31, 2010, totaled approximately $24,000,000, a decrease of $26,000,000 compared to March 31, 2009. Residential real estate mortgage lending increased by $30,000,000, or 9%, to local borrowers who preferred loans that would not be sold into the secondary mortgage market. Of the $30,000,000 increase, $5,000,000 was residential mortgage loans secured by junior liens.  Home equity loans, which are also in many cases junior liens, decreased by $2,000,000 because of refinancing into other ACNB lending products, competition from other financial institutions, and customers paying off debt in the uncertain job market and slow real estate market. Although there is no discernable difference in delinquency compared to first mortgage loans and there has been no actual losses on junior liens in recent ACNB history, junior liens inherently have more credit risk by virtue of the fact that another financial institution has a superior security position in the case of

 

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foreclosure liquidation of collateral to extinguish the debt. Generally, foreclosure actions could become more prevalent in a continuation of the national or a local economic downturn. Compared to December 31, 2009, commercial loans outstanding at March 31, 2010, were up by $4,000,000, or 1%, with growth in owner occupied commercial real estate and non-real estate secured commercial and industrial loans offsetting continued declines in real estate construction and land development loans.   During the first quarter of 2010, 3% growth in residential mortgage loans resulted from booking loans that in previous quarters would have been sold into the secondary market.

 

Most of the Corporation’s lending activities are with customers located within the southcentral Pennsylvania and in the northern Maryland area that is contiguous to its Pennsylvania retail banking offices. This region currently and historically has lower unemployment than the U.S. as a whole.  Included in commercial real estate loans are loans made to lessors of non-residential dwellings that total $86,000,000, or 13% of total loans, at March 31, 2010.  These borrowers are geographically dispersed throughout ACNB’s marketplace and are leasing commercial properties to a varied group of tenants including medical offices, retail space, and recreational facilities.  Because of the varied nature of the tenants, in aggregate, management believes that these loans do not present any greater risk than commercial loans in general.  ACNB does not originate or hold subprime mortgages in its loan portfolio.

 

Allowance for Loan Losses

 

The allowance for loan losses at March 31, 2010, was $12,768,000, or 1.94% of loans, as compared to $8,635,000, or 1.35% of loans, at March 31, 2009, and $11,981,000, or 1.86% of loans, at December 31, 2009. The ratio of non-performing loans plus foreclosed assets to total assets was 2.14% at March 31, 2010, as compared to 0.98% at March 31, 2009, and 2.23% at December 31, 2009.

 

Loans past due 90 days and still accruing were $1,631,000 and nonaccrual loans were $13,211,000 as of March 31, 2010.  $2,034,000 of the nonaccrual balance at March 31, 2010, were troubled debt restructured loans.   Loans past due 90 days and still accruing were $1,260,000 at March 31, 2009, while nonaccruals were $7,714,000.  Loans past due 90 days and still accruing were $2,107,000 at December 31, 2009, while nonaccruals were $13,308,000.  $2,360,000 of the nonaccrual balance at December 31, 2009, were troubled debt restructured loans.  Total loans classified as substandard at March 31, 2010, March 31, 2009 and December 31, 2009 were approximately $12,641,000, $5,229,000 and $12,071,000, respectively.

 

The increase in non-performing loans coincided with the onset of the sharp recession in the second half of 2008.   A better understanding of the trends of the non-performing loans is obtained by a comparison back to that time period. Information on nonaccrual loans at March 31, 2010, compared to the year-ends of 2009 and 2008, is as follows:

 

DOLLARS IN THOUSANDS

 

Number of
Credit
Relationships

 

Balance

 

Current Specific
Loss Allocations

 

Current Year
Charge-Offs

 

Location

 

Originated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate developments

 

2

 

$

5,070

 

$

1,313

 

$

 

In market

 

2006

 

Economic development project

 

1

 

1,847

 

997

 

 

In market

 

2007

 

Owner occupied commercial real estate

 

9

 

3,546

 

15

 

 

In market

 

1998-2008

 

Investment/rental commercial real estate

 

3

 

1,591

 

858

 

 

In market

 

2004-2007

 

Commercial & industrial

 

2

 

1,157

 

642

 

 

In market

 

2007

 

Total

 

17

 

$

13,211

 

$

3,825

 

$

 

 

 

 

 

 

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DOLLARS IN THOUSANDS

 

Number of
Credit
Relationships

 

Balance

 

Current Specific
Loss Allocations

 

Current Year
Charge-Offs

 

Location

 

Originated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate developments

 

2

 

$

5,419

 

$

1,375

 

$

 

In market

 

2006

 

Economic development project

 

1

 

1,848

 

997

 

 

In market

 

2007

 

Owner occupied commercial real estate

 

7

 

3,267

 

43

 

 

In market

 

1998-2008

 

Investment/rental commercial real estate

 

3

 

1,584

 

857

 

 

In market

 

2004-2007

 

Commercial & industrial

 

2

 

1,190

 

675

 

 

In market

 

2007

 

Total

 

15

 

$

13,308

 

$

3,947

 

$