UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2009

 

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  S   No  £

 

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 £    No  £

 

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 £ No S

 

The number of shares of the Registrant’s Common Stock outstanding on October 30, 2009, was 5,928,343.

 

 

 



 

PART I - FINANCIAL INFORMATION

 

ACNB CORPORATION

ITEM 1 - FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)

 

Dollars in thousands

 

September 30,
2009

 

September 30,
2008

 

December 31,
2008

 

ASSETS

 

 

 

 

 

 

 

Cash and due from banks

 

$

 14,665

 

$

 15,427

 

$

 16,033

 

Interest bearing deposits with banks

 

24,424

 

2,502

 

892

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

39,089

 

17,929

 

16,925

 

 

 

 

 

 

 

 

 

Securities available for sale

 

214,222

 

231,346

 

252,536

 

Securities held to maturity, fair value $10,394; $0; $0

 

10,060

 

 

 

Loans held for sale

 

285

 

304

 

969

 

Loans, net of allowance for loan losses $10,994; $9,618; $7,393

 

629,764

 

612,882

 

630,330

 

Premises and equipment

 

14,811

 

14,447

 

14,457

 

Restricted investment in bank stocks

 

9,170

 

8,501

 

9,170

 

Investment in bank-owned life insurance

 

26,162

 

25,055

 

25,297

 

Investments in low-income housing partnerships

 

4,480

 

4,801

 

4,737

 

Other assets

 

19,991

 

21,433

 

22,258

 

 

 

 

 

 

 

 

 

Total Assets

 

$

 968,034

 

$

 936,698

 

$

 976,679

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Non-interest bearing

 

$

 89,001

 

$

 85,666

 

$

 82,486

 

Interest bearing

 

626,324

 

592,714

 

607,811

 

 

 

 

 

 

 

 

 

Total Deposits

 

715,325

 

678,380

 

690,297

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

55,369

 

36,991

 

83,453

 

Long-term borrowings

 

95,396

 

132,027

 

106,951

 

Other liabilities

 

12,755

 

6,452

 

11,539

 

 

 

 

 

 

 

 

 

Total Liabilities

 

878,845

 

853,850

 

892,240

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Common stock, $2.50 par value; 20,000,000 shares authorized;
5,990,943 shares issued; 5,928,343, 5,990,943 and 5,955,943 shares outstanding

 

14,977

 

14,977

 

14,977

 

Treasury stock, at cost (62,600, 0 and 35,000 shares)

 

(728

)

 

(442

)

Additional paid-in capital

 

8,787

 

8,787

 

8,787

 

Retained earnings

 

64,977

 

62,301

 

62,916

 

Accumulated other comprehensive income (loss)

 

1,176

 

(3,217

)

(1,799

)

 

 

 

 

 

 

 

 

Total Stockholders’ Equity

 

89,189

 

82,848

 

84,439

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

 

$

 968,034

 

$

 936,698

 

$

 976,679

 

 

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

 

2



 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

Dollars in thousands, except per share data

 

2009

 

2008

 

2009

 

2008

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

 8,989

 

$

 9,010

 

$

 26,922

 

$

 26,510

 

Securities:

 

 

 

 

 

 

 

 

 

Taxable

 

2,113

 

2,417

 

6,595

 

7,778

 

Tax-exempt

 

368

 

476

 

1,120

 

1,410

 

Dividends

 

8

 

73

 

30

 

207

 

Other

 

7

 

35

 

13

 

83

 

 

 

 

 

 

 

 

 

 

 

Total Interest Income

 

11,485

 

12,011

 

34,680

 

35,988

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Deposits

 

2,265

 

2,967

 

7,403

 

10,281

 

Short-term borrowings

 

83

 

176

 

278

 

537

 

Long-term borrowings

 

938

 

1,318

 

2,961

 

3,673

 

 

 

 

 

 

 

 

 

 

 

Total Interest Expense

 

3,286

 

4,461

 

10,642

 

14,491

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

8,199

 

7,550

 

24,038

 

21,497

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

1,200

 

3,600

 

3,550

 

4,270

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income after Provision for Loan Losses

 

6,999

 

3,950

 

20,488

 

17,227

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

644

 

628

 

1,775

 

1,667

 

Income from fiduciary activities

 

265

 

275

 

761

 

804

 

Earnings on investment in bank-owned life insurance

 

264

 

266

 

765

 

787

 

Gains on sales of securities

 

14

 

57

 

17

 

158

 

Impairment charges on equity securities

 

(522

)

 

(522

)

 

Service charges on ATM and debit card transactions

 

260

 

248

 

742

 

714

 

Commissions from insurance sales

 

1,336

 

939

 

4,265

 

3,100

 

Other

 

378

 

206

 

1,047

 

710

 

 

 

 

 

 

 

 

 

 

 

Total Other Income

 

2,639

 

2,619

 

8,850

 

7,940

 

 

 

 

 

 

 

 

 

 

 

OTHER EXPENSES

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

4,368

 

3,629

 

13,039

 

10,649

 

Net occupancy

 

542

 

514

 

1,714

 

1,639

 

Equipment

 

521

 

489

 

1,622

 

1,446

 

Other tax

 

200

 

189

 

554

 

581

 

Professional services

 

177

 

238

 

608

 

704

 

Supplies and postage

 

174

 

185

 

519

 

581

 

Marketing

 

108

 

241

 

338

 

781

 

FDIC and regulatory

 

346

 

80

 

1,622

 

223

 

Other operating

 

944

 

899

 

2,827

 

2,779

 

 

 

 

 

 

 

 

 

 

 

Total Other Expenses

 

7,380

 

6,464

 

22,843

 

19,383

 

 

 

 

 

 

 

 

 

 

 

Income before Income Taxes

 

2,258

 

105

 

6,495

 

5,784

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR (BENEFIT FROM) INCOME TAXES

 

361

 

(379

)

1,048

 

762

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

 1,897

 

$

 484

 

$

 5,447

 

$

 5,022

 

 

 

 

 

 

 

 

 

 

 

PER SHARE DATA

 

 

 

 

 

 

 

 

 

Basic earnings

 

$

 0.32

 

$

 0.08

 

$

 0.92

 

$

 0.84

 

Cash dividends declared

 

$

 0.19

 

$

 0.19

 

$

 0.57

 

$

 0.57

 

 

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

 

3



 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

Nine Months Ended September 30, 2009 and 2008

 

Dollars in thousands, except per share data

 

Common Stock

 

Treasury Stock

 

Additional
Paid-in Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Total
Stockholders’
Equity

 

BALANCE – JANUARY 1, 2008

 

$

 14,977

 

$

 

 

$

 8,787

 

$

 61,439

 

$

 (73

)

$

 85,130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of adoption of EITF 06-4

 

 

 

 

(745

)

 

(745

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

5,022

 

 

5,022

 

Other comprehensive loss, net of taxes

 

 

 

 

 

(3,144

)

(3,144

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

1,878

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared ($0.57 per share)

 

 

 

 

(3,415

)

 

(3,415

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE – SEPTEMBER  30, 2008

 

$

 14,977

 

$

 

 

$

 8,787

 

$

 62,301

 

$

 (3,217

)

$

 82,848

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE – JANUARY 1, 2009

 

$

 14,977

 

$

 (442

)

$

 8,787

 

$

 62,916

 

$

 (1,799

)

$

 84,439

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

5,447

 

 

5,447

 

Other comprehensive income, net of taxes

 

 

 

 

 

2,975

 

2,975

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

8,422

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury stock purchased (27,600 shares)

 

 

(286

)

 

 

 

(286

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared ($0.57 per share)

 

 

 

 

(3,386

)

 

(3,386

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — SEPTEMBER  30, 2009

 

$

 14,977

 

$

 (728

)

$

 8,787

 

$

 64,977

 

$

 1,176

 

$

 89,189

 

 

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

 

4



 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

Nine Months Ended
September 30,

 

Dollars in thousands

 

2009

 

2008

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

 5,447

 

$

 5,022

 

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

 

 

 

 

 

Gain on sales of loans, property and foreclosed real estate

 

(508

)

(686

)

Earnings on investment in bank-owned life insurance

 

(765

)

(787

)

Gain on sales of securities

 

(17

)

(158

)

Impairment charges on equity securities

 

522

 

 

Depreciation and amortization

 

1,716

 

1,380

 

Provision for loan losses

 

3,550

 

4,270

 

Net accretion of investment securities discounts

 

(154

)

(26

)

Decrease in accrued interest receivable

 

293

 

956

 

Decrease in accrued interest payable

 

(163

)

(941

)

Loans originated for sale

 

(45,276

)

(14,907

)

Proceeds from loans sold to others

 

46,459

 

16,465

 

Decrease in other assets

 

270

 

878

 

Increase (decrease) in other liabilities

 

1,765

 

(235

)

 

 

 

 

 

 

Net Cash Provided by Operating Activities

 

13,139

 

11,231

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Proceeds from maturities of investment securities held to maturity

 

 

4,137

 

Proceeds from maturities of investment securities available for sale

 

62,387

 

88,745

 

Proceeds from sales of investment securities available for sale

 

2,956

 

26,936

 

Purchase of investment securities held to maturity

 

(10,064

)

 

Purchase of investment securities available for sale

 

(23,341

)

(65,248

)

Net sale of restricted investment in bank stocks

 

 

544

 

Net decrease in loans

 

(3,086

)

(74,941

)

Purchase of bank-owned life insurance

 

(100

)

 

Final purchase consideration-insurance subsidiary

 

 

(3,000

)

Investments in insurance books of business

 

 

(1,156

)

Capital expenditures

 

(1,595

)

(999

)

Proceeds from sales of property and foreclosed real estate

 

151

 

137

 

 

 

 

 

 

 

Net Cash Provided by (Used in) Investing Activities

 

27,308

 

(24,845

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Net increase in demand deposits

 

6,515

 

8,474

 

Net increase (decrease) in time certificates of deposits and interest bearing deposits

 

18,513

 

(734

)

Net increase (decrease) in short-term borrowings

 

(28,084

)

6,223

 

Dividends paid

 

(3,386

)

(3,415

)

Purchase of treasury stock

 

(286

)

 

Proceeds from long-term borrowings

 

68,000

 

37,000

 

Repayments on long-term borrowings

 

(79,555

)

(35,217

)

 

 

 

 

 

 

Net Cash Provided by (Used in) Financing Activities

 

(18,283

)

12,331

 

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

22,164

 

(1,283

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS – BEGINNING

 

16,925

 

19,212

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS – ENDING

 

$

 39,089

 

$

 17,929

 

 

 

 

 

 

 

Interest paid

 

$

 10,805

 

$

 15,432

 

Incomes taxes paid

 

$

 1,500

 

$

 1,500

 

Loans transferred to foreclosed real estate

 

$

 102

 

$

 143

 

 

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 September 30, 2009 and 2008, and the results of its operations, changes in stockholders’ equity, and cash flows for the nine months ended September 30, 2009 and 2008.  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 2008 ACNB Corporation Annual Report on Form 10-K, filed with the SEC on March 13, 2009.  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 nine month period ended September 30, 2009, are not necessarily indicative of the results to be expected for the full year.  For comparative purposes, the September 30, 2008, balances have been reclassified to conform with the 2009 presentation.  Such reclassifications had no impact on net income.

 

The Corporation has evaluated events and transactions occurring subsequent to the balance sheet date of September 30, 2009, for items that should potentially be recognized or disclosed in these financial statements.  The evaluation was conducted through November 6, 2009, the date these 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 5,938,581 and 5,990,943 weighted average shares of common stock outstanding for the nine months ended September 30, 2009 and 2008, respectively, and 5,928,343 and 5,990,943 for the three months ended September 30, 2009 and 2008, 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 month and nine month periods ended September 30 were as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

In thousands

 

2009

 

2008

 

2009

 

2008

 

Service cost

 

$

 140

 

$

 147

 

$

 421

 

$

 442

 

Interest cost

 

247

 

259

 

741

 

777

 

Expected return on plan assets

 

(241

)

(399

)

(723

)

(1,198

)

Other, net

 

158

 

15

 

473

 

45

 

 

 

 

 

 

 

 

 

 

 

Net Periodic Benefit Cost

 

$

 304

 

$

 22

 

$

 912

 

$

 66

 

 

The Corporation previously disclosed in its financial statements for the year ended December 31, 2008, that it expected to contribute $1,250,000 to its pension plan in 2009.  The full contribution was made to the plan during the second quarter of 2009.

 

GAAP requires split-dollar insurance arrangements to have a liability to be recorded during the service period when a split-dollar life insurance agreement continues after the participant’s employment or retirement.  The required accrued liability is based on either the post-employment benefit cost for continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement.  The Corporation’s liability is based on the post-employment benefit cost for continuing life insurance.  The

 

6



 

Corporation adopted this guidance on January 1, 2008, and recorded a cumulative effect adjustment of $745,000 as a reduction of retained earnings effective January 1, 2008.

 

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 $6,444,000 in standby letters of credit as of September 30, 2009.  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 September 30, 2009, for guarantees under standby letters of credit issued is not material.

 

5.                                     Comprehensive Income

 

The Corporation’s other comprehensive income (loss) items are unrealized gains (losses) on securities available for sale and unfunded pension liability.  The components of other comprehensive income (loss) for the three month and nine month periods ended September 30 were as follows:

 

 

 

Three Months Ended

September 30,

 

Nine Months Ended
September 30,

 

In thousands

 

2009

 

2008

 

2009

 

2008

 

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

 

$

 4,320

 

$

 (975

)

$

 3,530

 

$

 (4,606

)

Reclassification of (gains) losses realized in net income

 

508

 

(57

)

505

 

(158

)

 

 

 

 

 

 

 

 

 

 

Net Unrealized Gains (Losses)

 

4,828

 

(1,032

)

4,035

 

(4,764

)

 

 

 

 

 

 

 

 

 

 

Tax effect

 

1,641

 

(351

)

1,372

 

(1,620

)

 

 

 

 

 

 

 

 

 

 

 

 

3,187

 

(681

)

2,663

 

(3,144

)

Change in pension liability

 

158

 

 

473

 

 

 

 

 

 

 

 

 

 

 

 

Tax effect

 

55

 

 

161

 

 

 

 

 

 

 

 

 

 

 

 

 

 

103

 

 

312

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss)

 

$

 3,290

 

$

 (681

)

$

 2,975

 

$

 (3,144

)

 

7



 

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

 

In thousands

 

Unrealized
Gains
(Losses) on
Securities

 

Pension
Liability

 

Accumulated
Other
Comprehensive
Income (Loss)

 

BALANCE,  SEPTEMBER 30, 2009

 

$

 6,459

 

$

 (5,283

)

$

 1,176

 

 

 

 

 

 

 

 

 

BALANCE, DECEMBER 31, 2008

 

$

 3,796

 

$

 (5,595

)

$

 (1,799

)

 

 

 

 

 

 

 

 

BALANCE, SEPTEMBER 30, 2008

 

$

 (2,394

)

$

 (823

)

$

 (3,217

)

 

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 nine month periods ended September 30, 2009 and 2008, is as follows:

 

In thousands

 

Banking

 

Insurance

 

Intercompany
Eliminations

 


Total

 

2009

 

 

 

 

 

 

 

 

 

Net interest income and

 

 

 

 

 

 

 

 

 

other income from external customers

 

$

 28,632

 

$

 4,256

 

$

 

 

$

 32,888

 

Income before income taxes

 

5,689

 

806

 

 

6,495

 

Total assets

 

957,436

 

13,484

 

(2,886

)

968,034

 

Capital expenditures

 

1,562

 

33

 

 

1,595

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

 

 

 

 

 

 

 

Net interest income and

 

 

 

 

 

 

 

 

 

other income from external customers

 

$

 26,341

 

$

 3,096

 

$

 —

 

$

 29,437

 

Income before income taxes

 

5,241

 

543

 

 

5,784

 

Total assets

 

927,421

 

11,075

 

(1,798

)

936,698

 

Capital expenditures

 

978

 

21

 

 

999

 

 

Segment information for the three month periods ended September 30, 2009 and 2008, is as follows:

 

In thousands

 

Banking

 

Insurance

 

Intercompany Eliminations

 


Total

 

2009

 

 

 

 

 

 

 

 

 

Net interest income and

 

 

 

 

 

 

 

 

 

other income from external customers

 

$

 9,505

 

$

 1,333

 

$

 

 

$

 10,838

 

Income before income taxes

 

2,070

 

188

 

 

2,258

 

Total assets

 

957,436

 

13,484

 

(2,886

)

968,034

 

Capital expenditures

 

321

 

23

 

 

344

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

 

 

 

 

 

 

 

Net interest income and

 

 

 

 

 

 

 

 

 

other income from external customers

 

$

 9,231

 

$

 938

 

$

 —

 

$

 10,169

 

Income before income taxes

 

18

 

87

 

 

105

 

Total assets

 

927,421

 

11,075

 

(1,798

)

936,698

 

Capital expenditures

 

438

 

1

 

 

439

 

 

 

 

 

 

 

 

 

 

 

 

8



 

In 2008, RIG acquired a book of business with an aggregate purchase price of $1,165,000, all of which was classified as an intangible asset.  Also, on December 31, 2008, RIG acquired Marks Insurance & Associates, Inc. with an aggregate purchase price of $1,853,000, of which $1,300,000 was recorded as an intangible asset and $553,000 was recorded as goodwill. The intangible assets are being amortized over ten years on a straight line basis.  The contingent consideration for both 2008 purchases is payable three years after closing, based on multiples of sellers’ commissions, with a maximum payment of $1,800,000.

 

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 estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.  Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

 

Accounting Standards Codification (ASC) Topic 320, Investment – Debt and Equity Securities, Investments – Others, clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.

 

In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, ASC Topic 320 changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.  This guidance is effective for the Corporation for interim and annual reporting periods ending June 30, 2009, and after.

 

9



 

Amortized cost and fair value at September 30, 2009, and December 31, 2008, were as follows:

 

In thousands

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

SECURITIES AVAILABLE FOR SALE:

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2009:

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

 16,066

 

$

 523

 

$

 

 

$

 16,589

 

Mortgage-backed securities

 

137,019

 

7,182

 

4

 

144,197

 

State and municipal

 

40,729

 

1,948

 

 

42,677

 

Corporate bonds

 

9,996

 

163

 

9

 

10,150

 

Stock in other banks

 

626

 

 

17

 

609

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 204,436

 

$

 9,816

 

$

 30

 

$

 214,222

 

DECEMBER 31, 2008:

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

 48,068

 

$

 957

 

$

 —

 

$

 49,025

 

Mortgage-backed securities

 

152,765

 

5,300

 

63

 

158,002

 

State and municipal

 

42,007

 

462

 

494

 

41,975

 

Corporate bonds

 

2,795

 

 

140

 

2,655

 

Stock in other banks

 

1,149

 

 

270

 

879

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 246,784

 

$

 6,719

 

$

 967

 

$

 252,536

 

SECURITIES HELD TO MATURITY:

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2009:

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

 10,060

 

$

 334

 

$

 

 

$

 10,394

 

 

At September 30, 2009, two mortgage-backed securities had unrealized losses, and one of the securities had been in a continuous loss position for 12 months or more.  These unrealized losses relate principally to changes in interest rates subsequent to the acquisition of the specific securities.  None of the securities in this category had an unrealized loss that exceeded 1% of amortized cost.  At September 30, 2009, one corporate bond had an unrealized loss, which has not 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 security in this category had an unrealized loss that did not exceed 1% 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 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 securities but rather by relying on securities’ 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.

 

Management conducted an evaluation for other-than-temporary impairment of investment securities in which the fair value is below the adjusted historical cost and identified the two equity investments the Corporation holds of bank holding companies as other-than-temporarily impaired.  The Corporation took impairment charges of $522,000 on these two equity securities held by the Corporation during the third quarter of 2009.  Both holding companies continue to pay cash dividends, which was one of the driving forces in the investment decision.  However, current market prices for these stocks are below the acquisition prices of these stocks.  A review of the

 

10



 

factors that may be contributing to these price declines led to a conclusion that the prices on these securities were not likely to recover in the near term and that they were other-than-temporarily impaired.

 

Management routinely sells securities from its available for sale portfolio in an effort to manage and allocate the portfolio.  At September 30, 2009, management had not identified any securities with an unrealized loss that it intends to sell.  As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available for sale, no declines were deemed to be other than temporary in nature.

 

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 September 30, 2009, and December 31, 2008:

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

In thousand

 

Fair
Value

 

Unrealized Losses

 

Fair
Value

 

Unrealized Losses

 

Fair
Value

 

Unrealized Losses

 

SECURITIES AVAILABLE FOR SALE:

 

 

 

 

 

 

 

 

 

 

 

 

 

SEPTEMBER 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

769

 

$

1

 

$

485

 

$

3

 

$

1,254

 

$

4

 

Corporate bonds

 

1,033

 

9

 

 

 

1,033

 

9

 

Stock in other banks

 

 

 

609

 

17

 

609

 

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,802

 

$

10

 

$

1,094

 

$

20

 

$

2,896

 

$

30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DECEMBER 31, 2008:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

592

 

$

22

 

$

14,695

 

$

41

 

$

15,287

 

$

63

 

State and municipal

 

18,399

 

429

 

921

 

65

 

19,320

 

494

 

Corporate bonds

 

2,654

 

140

 

 

 

2,654

 

140

 

Stock in other banks

 

318

 

127

 

561

 

143

 

879

 

270

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

21,963

 

$

718

 

$

16,177

 

$

249

 

$

38,140

 

$

967

 

 

Amortized cost and fair value at September 30, 2009, 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

 

$

1,469

 

$

1,493

 

$

 

$

 

Over 1 year through 5 years

 

12,862

 

13,208

 

10,060

 

10,394

 

Over 5 years through 10 years

 

31,008

 

32,397

 

 

 

Over 10 years

 

21,452

 

22,318

 

 

 

Mortgage-backed securities

 

137,019

 

144,197

 

 

 

Equity securities

 

626

 

609

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

204,436

 

$

214,222

 

$

10,060

 

$

10,394

 

 

The Corporation realized gross gains of $17,000 through September 30, 2009 and $158,000 through September 30, 2008, respectively.

 

11



 

At September 30, 2009, and December 31, 2008, securities with a carrying value of $101,949,000 and $87,332,000, 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.

 

ASC Topic 820, Fair Value Measurements and Disclosures, is effective for financial assets and liabilities in fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, and nonfinancial assets and liabilities in fiscal years beginning after November 15, 2008, and interim periods within those fiscal years.

 

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.

 

12



 

For financial assets measured at fair value, the fair value measurements by level within the fair value hierarchy used at September 30, 2009, and December 31, 2008, are as follows:

 

Fair Value Measurements at September 30, 2009

 

In thousands

 

Basis

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Securities available for sale

 

Recurring

 

$

214,222

 

$

609

 

$

213,613

 

$

 

Impaired loans

 

Non-recurring

 

5,698

 

 

 

5,698

 

Foreclosed real estate

 

Non-recurring

 

585

 

 

 

585

 

Loans held for sale

 

Non-recurring

 

285

 

 

 

285

 

 

Fair Value Measurements at December 31, 2008

 

In thousands

 

Basis

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Securities available for sale

 

Recurring

 

$

252,536

 

$

879

 

$

251,657

 

$

 

Impaired loans

 

Non–recurring

 

2,966

 

 

 

2,966

 

Foreclosed real estate

 

Non–recurring

 

625

 

 

 

625

 

Loans held for sale

 

Non–recurring

 

969

 

 

 

969

 

 

Fair Value Measurements at September 30, 2008

 

In thousands

 

Basis

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Securities available for sale

 

Recurring

 

$

231,346

 

$

1,070

 

$

230,276

 

$

 

Impaired loans

 

Non-recurring

 

6,006

 

 

 

6,006

 

Foreclosed real estate

 

Non-recurring

 

143

 

 

 

143

 

Loans held for sale

 

Non-recurring

 

304

 

 

 

304

 

 

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 September 30, 2009:

 

In thousands

 

Impaired
Loans

 

Foreclosed
Real Estate

 

Loans Held
for Sale

 

Balance – January 1, 2009

 

$

2,966

 

$

625

 

$

969

 

Charged off

 

 

 

 

Settled or otherwise removed from impaired status

 

 

(142

)

 

Additions to impaired status

 

4,615

 

 

 

Payments made

 

(93

)

 

 

Increase in valuation allowance

 

(1,790

)

 

 

Loans transferred to foreclosed real estate

 

 

102

 

 

Loan originations

 

 

 

45,276

 

Loan sales

 

 

 

(45,960

)

Balance – September 30, 2009

 

$

5,698

 

$

585

 

$

285

 

 

ASC Topic 825, Financial Instruments, requires disclosures about 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

 

13



 

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 September 30, 2009, and December 31, 2008:

 

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.

 

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 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 securities 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.

 

14



 

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.

 

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 September 30, 2009, and December 31, 2008, were as follows:

 

 

 

September 30, 2009

 

December 31, 2008

 

In thousands

 

Carrying
Amount

 

Fair

Value

 

Carrying
Amount

 

Fair
Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

14,665

 

$

14,665

 

$

16,033

 

$

16,033

 

Interest bearing deposits in banks

 

24,424

 

24,424

 

892

 

892

 

Investment securities:

 

 

 

 

 

 

 

 

 

Available for sale

 

214,222

 

214,222

 

252,536

 

252,536

 

Held to maturity

 

10,060

 

10,394

 

 

 

Loans held for sale

 

285

 

285

 

969

 

969

 

Loans, less allowance for loan losses

 

629,764

 

644,062

 

630,330

 

644,642

 

Accrued interest receivable

 

3,930

 

3,930

 

4,223

 

4,223

 

Restricted investment in bank stocks

 

9,170

 

9,170

 

9,170

 

9,170

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Deposits

 

$

715,325

 

$

718,154

 

$

690,297

 

$

699,513

 

Short-term borrowings

 

55,369

 

55,369

 

83,453

 

83,453

 

Long-term borrowings

 

95,396

 

98,741

 

106,951

 

112,017

 

Accrued interest payable

 

2,853

 

2,853

 

3,016

 

3,016

 

 

 

 

 

 

 

 

 

 

 

Off-balance sheet financial instruments

 

$

 

$

 

$

 

$

 

 

15



 

NEW ACCOUNTING PRONOUNCEMENTS

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162,” (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification TM (“Codification”) as the source of authoritative generally accepted accounting principles (“GAAP”) for nongovernmental entities.  The Codification does not change GAAP.  Instead, it takes the thousands of individual pronouncements that currently comprise GAAP and reorganizes them into approximately 90 accounting Topics, and displays all Topics using a consistent structure.  Contents in each Topic are further organized first by Subtopic, then Section and finally Paragraph.  The Paragraph level is the only level that contains substantive content.  Citing particular content in the Codification involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.  FASB suggests that all citations begin with “FASB ASC,” where ASC stands for Accounting Standards Codification.  Changes to the ASC subsequent to June 30, 2009 are referring to Accounting Standards Updates (“ASU”).

 

In conjunction with the issuance of SFAS 168, the FASB also issued its first Accounting Standards Update No. 2009-1, “Topic 105 — Generally Accepted Accounting Principles” (“ASU 2009-1”) which includes SFAS 168 in its entirety as a transition to the ASC.  ASU 2009-1 is effective for interim and annual periods ending after September 15, 2009 and will not have an impact on the Corporation’s financial position or results of operations but will change the referencing system for accounting standards.

 

ASU 2009-05

 

In August 2009, the FASB issued 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:

 

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 is effective for the first reporting period (including interim periods) beginning after issuance.  The Corporation is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.

 

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.

 

17



 

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 securities before recovery of its value. Declines in fair value that are determined to be other than temporary are charged against earnings.

 

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, 2008.  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 methods over estimated useful lives of ten years.

 

RESULTS OF OPERATIONS

 

Quarter ended September 30, 2009, compared to quarter ended September 30, 2008

 

Executive Summary

 

Net income for the three months ended September 30, 2009, was $1,897,000 compared to $484,000 for the same quarter in 2008, an increase of $1,413,000 or 292%.  Earnings per share increased from $0.08 in 2008 to $0.32 in 2009.  Net interest income increased $649,000 or 9%; provision for loan losses decreased $2,400,000 or 67%; other income increased $20,000 or 1%; and, other expenses increased $916,000 or 14%.

 

Net Interest Income

 

Net interest income totaled $8,199,000 for the quarter ended September 30, 2009, compared to $7,550,000 for the same period in 2008, an increase of $649,000 or 9%. Net interest income increased due to a decrease in interest expense resulting from reductions in market rates associated with the continued weakness in broader financial markets.  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 third quarter of 2009, 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.  Interest expense decreased $1,175,000 or 26%.  The lower funding costs were partially offset by lower interest income, which decreased $526,000 or 4%.  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, 2008, and filed with the SEC on March 13, 2009.  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 third quarter of 2009 was 3.46% compared to 3.18% during the same period in 2008.  Also comparing the third quarter of 2009 to 2008, the yield on interest earning assets decreased by 0.37% and the cost of interest bearing liabilities decreased by 0.65%.  The net interest margin was 3.68% for the third quarter of 2009 and 3.49% for the third quarter of 2008.  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 the steepening slope of the yield curve.

 

Average earning assets were $890,375,000 during the third quarter of 2009, an increase of $23,685,000 from the average for the third quarter of 2008.  Average interest bearing liabilities were $771,853,000 in the third quarter of 2009, an increase of $19,084,000 from the same quarter in 2008.

 

Provision for Loan Losses

 

The provision for loan losses was $1,200,000 in the third quarter of 2009 compared to $3,600,000 in the third quarter of 2008, a decrease of $2,400,000 or 67%. The decrease was a result of higher specific potential loss allocations and charge-offs experienced in the third quarter of 2008. 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.  A continued recession and specific potential loss allocations contributed to impaired loans remaining in the portfolio.  For more information, please refer to Allowance for Loan Losses in the subsequent Financial Condition section.  ACNB adjusts the provision for loan losses as necessary to maintain the allowance at a level deemed to meet the

 

18



 

risk characteristics of the loan portfolio.  For the third quarter of 2009, the Corporation had net charge-offs of $67,000, as compared to net charge-offs of $319,000 for the third quarter of 2008.

 

Other Income

 

Total other income was $2,639,000 for the three months ended September 30, 2009, up $20,000, or 1%, from the third quarter of 2008.  Fees from deposit accounts and ATM/debit card revenue increased by $28,000, or 3%, due to higher volume and an increase in service fees charged. Income from fiduciary activities, which include both institutional and personal trust management services, totaled $265,000 for the three months ended September 30, 2009, as compared to $275,000 during the third quarter of 2008, a 4% decrease as a result of less fees from estate settlements. Earnings on bank-owned life insurance declined by $2,000, or 1%, as a result of decreases in crediting rates. The Corporation’s wholly-owned subsidiary, Russell Insurance Group, Inc., increased revenue by $397,000 or 42%.  The increase was due to additional revenue from the two acquisition transactions late in 2008 offsetting generally lower commissions in a “soft” insurance market.  Gains on securities were $14,000 for the three months ended September 30, 2009, and $57,000 in the same period in 2008. The Corporation holds equity investments in the common stock of two bank holding companies headquartered and operating in Pennsylvania.  Both holding companies continue to pay cash dividends, which was one of the driving forces in the investment decision.  However, current market prices for these stocks are below the acquisition prices of these stocks.  A review of the factors that may be contributing to these price declines led to a conclusion that the prices on these securities were not likely to recover in the near term and that they were other-than-temporarily impaired.  The Corporation took an impairment charge of $522,000 on these two equity securities held by the Corporation during the third quarter of 2009.  Other income in the quarter ended September 30, 2009, was positively impacted by increased fees related to higher residential mortgage loan volume.

 

Other Expenses

 

The largest component of other expenses is salaries and employee benefits, which increased by $739,000, or 20%, when comparing the third quarter of 2009 to the same quarter a year ago.  Overall, the increase in salaries and employee benefits was the result of:

 

·                  Normal merit and promotion increases to employees; and,

 

·                  A change in the mix of employees that included three new commercial lenders, two new Senior Vice Presidents, and a new Executive Vice President that were hired during the second half of 2008 and in the first quarter of 2009.

 

Also contributing to increased compensation expense was significantly higher defined benefit pension expense of $282,000 due to the decreased fair value of plan assets.  The decline in the fair value of plan assets resulted from 2008 investment performance related to severe downturns in the broad financial markets.

 

Net occupancy expense increased $28,000, or 5%, in part due to additional rental expense associated with the second office location for Russell Insurance Group, Inc. in Germantown, Maryland.  Equipment expense increased by $32,000, or 7%, as a result of higher maintenance contracts and depreciation on new technology purchases.

 

Professional services expense totaled $177,000 during the third quarter of 2009, as compared to $238,000 for the same period in 2008, a decrease of $61,000 or 26%.  This decrease was due in part from lower audit costs and a decreased use of consultants.

 

Marketing expense decreased by $133,000, or 55%, due to the continued execution of general budgeted reductions in such expenditures.  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 during the third quarter of 2008.

 

FDIC expense for the third quarter of 2009 was $294,000, an increase of $266,000 from the third quarter of 2008.  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 would prepay an estimated 3.25 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.   Unlike special assessments, prepaid assessments would not immediately affect bank earnings. Each institution would record the entire amount of its prepaid assessment as a prepaid expense (an asset) as of December 31, 2009, the date the payment would be made. As of December 31, 2009, and each quarter thereafter, each institution would record 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 would resume paying and accounting for quarterly deposit insurance assessments as they currently do. They would record an accrued expense payable each quarter for the assessment payment, which

 

19



 

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; however, ACNB estimates that each quarter’s expense will approximate the 2009 third quarter expense in the foreseeable future.

 

Other operating expenses increased by $45,000, or 5%, in the third quarter of 2009, as compared to the third quarter of 2008.  Telecommunications, electronic banking, and loan collections expenses were among the higher other operating expenses in 2009.

 

Income Tax Expense

 

The Corporation recognized income taxes of $361,000, or 16% of pretax income, during the third quarter of 2009, as compared to an income tax benefit of $379,000 during the same period in 2008. 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 third quarters ended September 30, 2009 and 2008, included historical and low-income housing tax credits of $170,000 and $172,000, respectively.

 

Nine months ended September 30, 2009, compared to nine months ended September 30, 2008

 

Executive Summary

 

Net income for the nine months ended September 30, 2009, was $5,447,000 compared to $5,022,000 for the same period in 2008, an increase of $425,000 or 8%.  Earnings per share increased from $0.84 in 2008 to $0.92 in 2009.  Net interest income increased $2,541,000 or 12%; provision for loan losses decreased $720,000 or 17%; other income increased $910,000 or 11%; and, other expenses increased $3,460,000 or 18%.

 

Net Interest Income

 

Net interest income totaled $24,038,000 for the nine months ended September 30, 2009, compared to $21,497,000 for the same period in 2008, an increase of $2,541,000 or 12%.  Net interest income increased due to a decrease in interest expense resulting from reductions in market rates associated with the continued weakness in broader financial markets.  At the end of the first nine months of 2009, several of the core deposit rates were at practical floors after the Federal Open Market Committee decreased the Federal Funds Target Rate to a range of 0% to 0.25%.  In addition, after experiencing loss of principal in equity investments, ACNB customers perhaps valued local institutions and FDIC protection over yield on their funds allocated to bank deposits, thereby lowering the cost of funds despite the increase in volume.  Interest expense decreased $3,849,000 or 27%.  The decreased funding costs were partially offset by lower interest income, which decreased $1,308,000 or 4%.  Interest income was lower as a result of investment securities maturities that were not reinvested due to unfavorable market conditions.  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 various 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, 2008, and filed with the SEC on March 13, 2009.

 

The net interest spread for the first nine months of 2009 was 3.43% compared to 3.07% during the same period in 2008.  Also comparing the first nine months of 2009 to 2008, the yield on interest earning assets decreased by 0.38%, primarily due to rates resetting and new loan origination at lower rates, and the cost of interest bearing liabilities decreased by 0.74%.  The net interest margin was 3.66% for the first nine months of 2009 and 3.39% for the first nine months of 2008.

 

Average earning assets were $885,159,000 during the first nine months of 2009, an increase of $32,375,000 from the average for the first nine months of 2008.  The increase in earning assets is a result of increases in local funding sources.  Average interest bearing liabilities were $771,763,000 in the first nine months of 2009, an increase of $26,328,000 from the same nine months in 2008.  Expansion of experienced lending staff, access to funding at favorable rates, and the local market that preferred dealing with a stable local institution were all factors in the increase in earning assets and in local funding sources between the two periods.

 

Provision for Loan Losses

 

The provision for loan losses was $3,550,000 in the first nine months of 2009 compared to $4,270,000 in the first nine months of 2008. The decrease was a result of higher specific potential loss allocations and charge-offs experienced in the third quarter of 2008.  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.  A continued recession and specific potential loss allocations contributed to impaired loans remaining in the portfolio.  For more information, please refer to Allowance for Loan Losses in the subsequent Financial Condition section.  For the first nine months of 2009, the Corporation had net recoveries of $51,000, as compared to net charge-offs of $500,000 for the first nine months of 2008.

 

20



 

Other Income

 

Total other income was $8,850,000 for the nine months ended September 30, 2009, up $910,000, or 11%, from the first nine months of 2008.  Fees from deposit accounts and ATM/debit card revenue increased by $136,000, or 6%, due to higher volume and an increase in service fees charged. Income from fiduciary activities, which include both institutional and personal trust management services, totaled $761,000 for the nine months ended September 30, 2009, as compared to $804,000 during the first nine months of 2008, a 5% decrease as a result of fewer estate settlements. Earnings on bank-owned life insurance decreased by $22,000, or 3%, as a result of lower crediting rates. The Corporation’s subsidiary, Russell Insurance Group, Inc., experienced a revenue increase of $1,165,000 or 38%.  The increase was due to additional revenue from the two acquisition transactions late in 2008 and varying amounts of “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 state insurance regulations. Currently, insurance revenue is negatively impacted by a “soft” insurance market with lower premium rates and commercial customers scaling back operations or exiting business due to the recession.  Gains on securities were $17,000 for the nine months ended September 30, 2009, compared with a gain of $158,000 in the same period in 2008. The Corporation holds equity investments in the common stock of two bank holding companies headquartered and operating in Pennsylvania.  Both holding companies continue to pay cash dividends, which was one of the driving forces in the investment decision.  However, current market prices for these stocks are below the acquisition prices of these stocks.  A review of the factors that may be contributing to these price declines led to a conclusion that the prices on these securities were not likely to recover in the near term and that they were other-than- temporarily impaired.  The Corporation took an impairment charge of $522,000 on these two equity securities held by the Corporation during the third quarter of 2009.  Other income was positively impacted by increased fees related to higher residential mortgage loan volume.

 

Other Expenses

 

The largest component of other expenses is salaries and employee benefits, which increased by $2,390,000, or 22%, when comparing the first nine months of 2009 to the same period a year ago.  Overall, the increase in salaries and employee benefits was the result of:

 

·                  Normal merit and promotion increases to employees; and,

 

·                  A change in the mix of employees that included three new commercial lenders, two new Senior Vice Presidents, and a new Executive Vice President that were hired during the second half of 2008 and in the first quarter of 2009.

 

Also contributing to increased compensation expense was significantly higher defined benefit pension expense of $846,000 due to the decreased fair value of plan assets.  The decline in the fair value of plan assets resulted from 2008 investment performance related to severe downturns in the broad financial markets.

 

Net occupancy expense increased by $75,000, or 5%, when comparing the first nine months of 2009 to the same period a year ago due to a new insurance agency location in Maryland and a loan production facility in Pennsylvania.  Equipment expense increased by $176,000, or 12%, as a result of maintenance and depreciation of new technology purchases.

 

Professional services expense totaled $608,000 during the first nine months of 2009, as compared to $704,000 for the same period in 2008, a decrease of $96,000 or 14%.  The decrease was due in part to higher costs in 2008 to conduct due diligence on insurance acquisitions and to wind down a tax and accounting services practice.  Other tax expense decreased due to a refund of sales and use tax recognized in 2009.  Marketing expense decreased by $443,000, or 57%, due to the execution of general budgeted reductions in such expenditures for 2009.

 

FDIC expense for the first nine months of 2009 was $1,460,000, an increase of $1,393,000.  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 recession.  At the end of the third quarter of 2009, the FDIC announced a plan in which most banks would prepay an estimated 3.25 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.   Unlike special assessments, prepaid assessments would not immediately affect bank earnings. Each institution would record the entire amount of its prepaid assessment as a prepaid expense (an asset) as of December 31, 2009, the date the payment would be made. As of December 31, 2009, and each quarter thereafter, each institution would record 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 would resume paying and accounting for quarterly deposit insurance

 

21



 

assessments as they currently do. They would 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; however, ACNB estimates that each quarter’s expense will approximate the 2009 third quarter expense in the foreseeable future.

 

Other operating expenses increased $48,000, or 2%, in the first nine months of 2009, as compared to the first nine months of 2008. Telecommunications, electronic banking, and loan collections expenses were among the higher other operating expenses in 2009.

 

Income Tax Expense

 

The Corporation recognized income taxes of $1,048,000, or 16%, of pretax income, during the first nine months of 2009, as compared to $762,000, or 13% of pretax income, during the same period in 2008. The increase in the effective tax rate is attributable to tax-exempt income comprising a lower percentage of pretax income in 2009 versus 2008.  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 nine months ended September 30, 2009 and 2008, included historical and low-income housing tax credits of $509,000 and $516,000, respectively.

 

FINANCIAL CONDITION

 

Assets totaled $968,034,000 at September 30, 2009, compared to $976,679,000 at December 31, 2008, and $936,698,000 at September 30, 2008. Average earning assets during the nine months ended September 30, 2009, increased to $885,159,000 from $852,784,000 during the same period in 2008. Average interest bearing liabilities increased in 2009 to $771,763,000 from $745,435,000 in 2008.

 

Investment Securities