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, 1997 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to _______________ 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.) 675 OLD HARRISBURG ROAD, GETTYSBURG, PA 17325 - ----------------------------------------------------------- (Address of principal executive offices) (Zip Code) (717) 334-3161 --------------------------------------------------------------------------- (Registrant's telephone number, including area code) --------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the 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 ____ No ____ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes __X__ No ____ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class - Common Stock ($2.50 par value) Outstanding at November 10, 1997 - 5,253,278
PART I ITEM I FINANCIAL INFORMATION ACNB CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CONDITION <TABLE> <CAPTION> Sept 30 December 31 Sept 30 1997 1996 1996 --------- --------- --------- (000 omitted) <S> <C> <C> <C> ASSETS Cash and Due from Banks 21,223 22,078 13,713 Investment Securities Securities Held to Maturity 49,788 79,855 104,896 Securities Available for Sale 47,499 36,641 37,020 --------- --------- --------- Total Investment Securities 97,287 116,496 141,916 Federal Funds Sold 100 100 100 Loans 343,181 324,927 322,333 Less: Reserve for Loan Losses (3,176) (3,183) (3,211) --------- --------- --------- Net Loans 340,005 321,744 319,122 Premises and Equipment 5,079 5,415 5,447 Other Real Estate 210 1,015 895 Other Assets 6,046 5,597 6,707 --------- --------- --------- TOTAL ASSETS $ 469,950 $ 472,445 $ 487,900 ========= ========= ========= LIABILITIES Deposits Noninterest Bearing 43,250 52,666 45,078 Interest Bearing 348,184 350,461 352,798 --------- --------- --------- Total Deposits 391,434 403,127 397,876 Securities Sold Under Agreement To Repurchase 22,290 16,736 20,807 Borrowing Federal Home Loan Bank 0 0 16,800 Demand Notes U.S. Treasury 450 450 450 Other Liabilities 3,835 2,696 3,385 --------- --------- --------- TOTAL LIABILITIES 418,009 423,009 439,318 SHAREHOLDERS EQUITY Common Stock ($2.50 par value) 20,000,000 shares authorized: 5,253,278 shares issued and outstanding at 9/30/97 13,133 13,196 13,253 Surplus 3,647 3,994 4,306 Retained Earnings 34,454 31,889 30,851 Net unrealized gains on securities available for sale 707 357 172 --------- --------- --------- TOTAL SHAREHOLDERS EQUITY 51,941 49,436 48,582 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $ 469,950 $ 472,445 $ 487,900 ========= ========= ========= </TABLE> See accompanying notes to financial statements. PAGE 2
ACNB CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> Three Months Ended Nine Months Ended Sept 30 Sept 30 ------------------- ------------------- 1997 1996 1997 1996 ---- ---- ---- ---- (000 omitted) (000 omitted) <S> <C> <C> <C> <C> INTEREST INCOME Loan Interest and Fees 6,994 6,640 20,596 19,786 Interest and Dividends on Investment Securities 1,776 1,965 5,493 4,806 Interest on Federal Funds Sold 1 1 4 4 Interest on Balances with Depository Institutions 88 49 169 483 ------- ------- ------- ------- TOTAL INTEREST INCOME 8,859 8,655 26,262 25,079 INTEREST EXPENSE Deposits 3,590 3,592 10,597 10,725 Other Borrowed Funds 184 246 519 533 ------- ------- ------- ------- TOTAL INTEREST EXPENSE 3,774 3,838 11,116 11,258 NET INTEREST INCOME 5,085 4,817 15,146 13,821 Provision for Loan Losses 60 0 150 0 NET INTEREST INCOME AFTER PROVISION ------- ------- ------- ------- FOR LOAN LOSSES 5,025 4,817 14,996 13,821 OTHER INCOME Trust Department 112 153 349 342 Service Charges on Deposit Accounts 195 192 569 558 Other Operating Income 105 223 414 499 Securities Gains 0 0 0 0 ------- ------- ------- ------- TOTAL OTHER INCOME 412 568 1,332 1,399 OTHER EXPENSES Salaries and Employee Benefits 1,608 1,509 4,897 4,418 Premises and Fixed Assets 477 427 1,342 1,271 Other Expenses 614 640 1,941 1,906 ------- ------- ------- ------- TOTAL OTHER EXPENSE 2,699 2,576 8,180 7,595 INCOME BEFORE INCOME TAX 2,738 2,809 8,148 7,625 Applicable Income Tax 906 926 2,693 2,506 ------- ------- ------- ------- NET INCOME $ 1,832 $ 1,883 $ 5,455 $ 5,119 ======= ======= ======= ======= EARNINGS PER SHARE* $0.35 $0.36 $1.04 $0.97 DIVIDENDS PER SHARE* 0.19 0.18 0.55 1.52 </TABLE> *Based on 5,255,021 shares outstanding in 1997 and 5,303,687 in 1996 See accompanying notes to financial statements. Page 3 ACNB CORPORATION AND SUBSIDIARY STATEMENT OF CASH FLOWS <TABLE> <CAPTION> Nine months ended Sept 30 --------------------- 1997 1996 ---- ---- (000 omitted) <S> <C> <C> INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Cash Flows from Operating Activities: Interest and Dividends Received 25,473 24,235 Fees and Commissions Received 1,742 1,829 Interest Paid (10,467) (10,521) Cash Paid to Suppliers and Employees (7,467) (8,357) Income Taxes Paid (2,682) (2,430) Net Cash Provided by Operating Activities 6,599 4,756 Cash Flows from Investing Activities: Proceeds from Maturities of Investment Securities and Interest Bearing Balances with Other Banks 33,299 34,266 Purchase of Investment Securities and Interest Bearing Balances with Other Banks (13,560) (71,570) Principal Collected on Loans 51,301 62,617 Loans Made to Customers (68,907) (61,223) Capital Expenditures (149) (149) Net Cash Used in Investing Activities 1,984 (36,059) Cash Flow from Financing Activities: Net Increase in Demand Deposits, NOW Accounts, and Savings Accounts 2,026 3,853 Proceeds from Sale of Certificates of Deposit 30,471 33,389 Payments for Maturing Certificates of Deposit (38,636) (24,005) Dividends Paid (2,889) (8,065) Increase (Decrease) in Borrowings 0 17,051 Repurchase of Common Stock (410) (107) Net Cash Provided by Financing Activities (9,438) 22,116 Net Increase in Cash and Cash Equivalents (855) (9,187) Cash and Cash Equivalents: Beginning of Period 22,178 23,000 End of Period 21,323 13,813 RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net Income 5,455 5,119 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 485 475 Provision for Possible Credit Losses 150 0 Provision for Deferred Taxes 73 91 Amortization of Investment Securities Premiums (68) 340 Increase (Decrease) in Taxes Payable (62) (15) (Increase) Decrease in Interest Receivable (221) (899) Increase (Decrease) in Interest Payable 649 737 Increase (Decrease) in Accrued Expenses 381 338 (Increase) Decrease in Other Assets (153) (1,569) Increase (Decrease) in Other Liabilities (90) 139 Net Cash Provided by Operating Activities 6,599 4,756 </TABLE> DISCLOSURE OF ACCOUNTING POLICY For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Page 4
ACNB CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly ACNB Corporation's financial position as of September 30, 1997 and 1996 and December 31, 1996 and the results of its operations for the nine months ended September 30, 1997 and 1996 and changes in financial position for the nine months then ended. All such adjustments are of a normal recurring nature. The accounting policies followed by the corporation are set forth in Note A to the corporation's financial statements in the 1996 ACNB Corporation Annual Report and Form 10-K filed with the Securities and Exchange Commission under file no. 0-11783. 2. The book and approximate market values of securities owned at September 30, 1997 and December 31, 1996 were as follows: <TABLE> <CAPTION> 9/30/97 12/31/96 Amortized Fair Amortized Fair Cost Value Cost Value (000 omitted) <S> <C> <C> <C> <C> U.S. Treasury and U.S. Government Agencies (held to maturity) 48,956 49,125 78,930 79,020 State and Municipal (held to maturity) 832 832 925 926 U.S. Government Agencies (available for sale) 43,567 44,638 33,530 34,071 Other Investments (avail for sale) 2,861 2,861 2,570 2,570 -------- -------- -------- -------- TOTAL $ 96,216 $ 97,456 $115,955 $116,587 </TABLE> Income earned on investment securities was as follows: Nine Months Ended September 30 1997 1996 (000 omitted) U.S. Treasury 1,132 1,870 U.S. Government Agencies 4,189 2,765 State and Municipal 41 47 Other Investments 131 124 ------ ----- 5,493 4,806 3. Gross loans are summarized as follows: September 30 December 31 (000 omitted) Real Estate 303,703 288,588 Real Estate Construction 13,967 11,207 Commercial and Industrial 9,997 9,866 Consumer 15,514 15,266 -------- -------- Total Loans $343,181 $324,927 Page 5
4. Earnings per share are based on the weighted average number of shares of stock outstanding during each period. Weighted average shares outstanding for the nine month periods ended September 30, 1997 and 1996 were 5,255,021 and 5,303,687 respectively. 5. Dividends per share were $.55 and $1.52 for the nine month periods ended September 30, 1997 and 1996 respectively. This represented a 53% payout of net income in 1997 and a 157% payout in 1996. The 1996 dividend includes a $1.00 special dividend paid in January 1996. 6. The results of operations for the nine month periods ended September 30, 1997 and 1996 are not necessarily indicative of the results to be expected for the full year. Page 6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following is management's discussion and analysis of the significant changes in the results of operations, capital resources and liquidity presented in the accompanying consolidated financial statements for ACNB Corporation, a Pennsylvania corporation and registered bank holding company (the Corporation), and its wholly-owned subsidiary, Adams County National Bank (the Bank). The Corporation's consolidated financial condition and results of operations consist almost entirely of the Bank's financial condition and results of operations. This discussion should be read in conjunction with the 1996 Annual Report and Form 10-K. Current performance does not guarantee, assure, and is not indicative of future performance. In addition to historical information, this Form 10-Q contains forward-looking statements. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Important factors that might cause such a difference include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations". Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Corporation undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Corporation files from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q to be filed by the Corporation in 1997 and 1998, and any Current Reports on Form 8-K filed by the Corporation. Three months ended September 30,1997 compared to three months ended September 30, 1996 Net Income for the three month period ending September 30, 1997 was $1,832,000, down $61,000 or 3% below the third quarter of 1996. The decrease in net income was due primarily to a 27% decrease in other income and a 5% rise in other expenses as discussed below. Net income per share, for the third quarter, was $.35, down $.01 or 3% below the $.36 earned in the comparable period in 1996. An explanation of the factors and trends that caused changes between the two periods, by major earnings category, follows. Total interest income for the third three month period of 1997 was $8,859,000, up $204,000 or 2% above the $8,655,000 earned in the same period of 1996. The $204,000 increase in interest income was due to higher yields on securities and greater volume of loans. The average yield on securities rose to 7.05%, an increase of 89 basis points over the same quarter in 1996. In an effort to manage interest rate risk, the Bank purchased $26.3 million of mortgage backed securities classified as available-for-sale over the last twelve months. Income from loans during the current period increased due to loan growth of approximately $20.9 million. Total interest expense for the third three month period of 1997 was $3,774,000, down $64,000 or 2% below the $3,838,000 incurred for the same period in 1996. The $64,000 decrease in interest expense was due primarily to a decrease in the average volume of interest bearing liabilities, which was $8.1 million lower in the current quarter compared to the same quarter in 1996. Page 7
Net interest income after provision for loan losses for the third three month period of 1997 was $5,025,000, up $208,000 or 4.3% above the $4,817,000 earned in the same period of 1996. The increase in current period net interest income was achieved from a larger average volume of loans and improvement in yield on securities. Total non-interest income for the third three month period of 1997 at $412,000, was $156,000 or 27.5% less than the same quarter in 1996. This was primarily due to decreased Trust Department fees of $112,000 compared to $153,000 in 1996, and changes in holding company income, letter of credit fees and miscellaneous income. Total non-interest expense for the third three month period of 1997 was $2,699,000, up $123,000 or 4.8% greater than the $2,576,000 incurred for the third quarter of 1996. Most of the increase was in salaries and benefits which were up $99,000 or 6.6%. The provision for income taxes in the third quarter decreased $20,000 or 2.2% due to a lower level of pretax earnings. Nine months ended September 30, 1997 compared to nine months ended September 30, 1996 Net income for the first nine months of 1997 was $5,455,000, up $336,000 or 6.6% above the $5,119,000 earned for the same period of 1996. The increase in net income was due primarily to strong growth in loans and improved yield on securities. For the nine month period (annualized) of 1997, the return on average assets (ROA) and return on average equity (ROE) were 1.57% and 14.50%, respectively, compared to 1.48% and 14.31%, respectively, for 1996. At September 30, 1997, total assets were approximately $470 million, reflecting an $18 million or 3.7% decrease from September 30, 1996. As explained more fully under Capital Management section, book value per share was $9.75 on September 30, 1997, compared to $9.13 on September 30, 1996. (The Corporation's capital remained sound as evidenced by a Tier I Risked-Based Capital Ratio of 17.8% and a Total Risk-Based Capital Ratio of 18.9% on September 30, 1997.) Total interest income for the current nine month period was $26,262,000, up $1,183,000 or 4.7% above the $25,079,000 earned in the same period of 1996. The $1,183,000 increase in total interest income was due primarily to a larger volume of loans in the first three quarters of 1997, and improved yields on securities. Yield on securities was 6.91% for the first three quarters of 1997 versus 5.80% for the same period last year. Total interest expense for the current nine month period was $11,116,000, down $142,000 or 1.3% below the $11,258,000 incurred for the same period in 1996. The $142,000 decrease in total interest expense was due to a decline in average cost of interest bearing liabilities, principally time deposits. The year to date average volume of interest bearing liabilities was also down approximately $2.4 million or .7% below the same period of 1996. Net interest income after provision for loan losses was $14,996,000 for the current period, up $1,175,000 or 8.5% above the first nine months in 1996. Improved yield on securities, 6.91% versus 5.8%, and higher average volume of loans were the primary reasons. The net yield on average earning assets was 4.54% for the current nine month period compared to 4.18% for the same period in 1996. Total non-interest income for the current nine month period was $1,332,000, down $67,000 or 4.8% from the same period in 1996. An increase in holding company expenses was the main cause of the decrease. Total non-interest expense for the current nine month period was $8,180,000, up $585,000 or 7.7% above the $7,595,000 incurred for the same period in 1996. The increase in total non-interest expense was primarily the result of a $479,000 increase in salaries and employee benefits. Page 8
The provision for income taxes was $2,693,000 for the current period, up $187,000 above the same period in 1996 due to a higher level of pretax earnings. INTEREST RATE SPREAD AND NET YIELD ON EARNING ASSETS Nine Months Ended 9/30/97 9/30/96 Rate Rate Earning Assets 7.87% 7.56% Interest Bearing Liabilities 4.04% 4.07% Interest Rate Spread 3.83% 3.49% Net Yield on Earning Assets 4.54% 4.18% Net Yield on Earning Assets is the difference, stated in percentages, between the interest earned on loans and other investments and the interest paid on deposits and other sources of funds. The Net Yield on Earning Assets is one of the best analytical tools available to demonstrate the effect of interest rate changes on the Corporation's earning capacity. The Net Yield on Earning Assets, for the first nine months of 1997, was up 36 basis points compared to the same period in 1996. This is a result of improved yields on government securities and a larger volume of loans. PROVISION AND RESERVE FOR POSSIBLE LOAN LOSSES Reserve for Possible Loan Losses (In Thousands) Nine Months Ended 9/30/97 9/30/96 Balance at Beginning of Period 3,183 3,274 Provision Charged to Expense 150 0 Loans Charged Off 173 127 Recoveries 16 64 Balance at End of Period 3,176 3,211 Ratios: Net Charge-offs to: Net Income 2.88% 1.23% Total Loans .05% .02% Reserve for Possible Loan Losses 4.94% 1.96% Reserve for Possible Loan Losses to: Total Loans .93% 1.00% The Reserve for Possible Loan Losses at September 30, 1997 totaled $3,176,000 (.93% of Total Loans), a decrease of $35,000 from $3,211,000 (1.00% of Total Loans) at the end of the first nine months of 1996. Loans past due 90 days and still accruing amounted to $1,962,000 and non-accrual loans totaled $1,751,000 as of 9/30/97. The ratio of non-performing assets plus other real estate owned to total assets was .83% at 9/30/97. All properties are carried at the lower of market or book value and are not considered to represent significant threat of loss to the bank. Page 9 Loans past due 90 days and still accruing were $2,175,000 at year end 1996 while non-accruals stood at $994,000. The bulk of the Corporation's real estate loans are in owner occupied dwellings. Management believes that internal loan review procedures will be effective in recognizing and correcting any real estate lending problems that may occur due to current economic conditions. Interest not accrued, due to an average of $1,493,000 in non-accrual loans, was approximately $101,000 for the first nine months of 1997. A loan is deemed impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due. Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan's effective interest rate, or as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than its recorded investment a creditor must recognize an impairment by creating, or adjusting, a valuation allowance with a corresponding charge to loan loss expense. The Corporation uses the cash basis method to recognize interest income on loans that are impaired. All of the Corporation's impaired loans were on non-accrual status for all reported periods. CAPITAL MANAGEMENT Total Shareholders' Equity amounted to $51,941,000 at September 30, 1997 compared to $48,582,000 at September 30, 1996, an increase of $3,359,000 or 6.9% over that period. The ratio of Total Shareholders' Equity to Total Assets was 9.96% at September 30, 1996, 10.46% at December 31, 1996, and 11.05% at September 30, 1997. The total risk-based capital ratio was 18.9% at September 30, 1997. The leverage ratio was 10.61% at September 30, 1997 and 9.78% during the same period in 1996. Capital at ACNB Corporation remains strong even with a 53% dividend payout ratio. See Note #5 for information regarding dividends paid during 1997. In September, 1995, the Board of Directors approved a share repurchase plan of 100,000 shares. Over the intervening period the Corporation has repurchased and retired 62,844 shares. LIQUIDITY AND INTEREST RATE SENSITIVITY Management believes that the Corporation's liquidity is adequate. Liquid assets (cash and due from banks, federal funds sold, money market instruments, available for sale securities and held to maturity investment securities maturing within one year) were 17.2% of total assets at September 30, 1997. This mix of assets is readily available for funding any cash requirements. In addition, the Bank has an approved line of credit of $219,591,000 at the Federal Home Loan Bank of Pittsburgh with $-0- outstanding at September 30, 1997. As of September 30, 1997, the cumulative asset sensitive gap was 11.8% of total assets at one month, 9.7% at six months, and 19.5% at one year. Adjustable rate mortgages, which have an annual interest rate cap of 2%, are considered rate sensitive. Passbook savings and NOW accounts are carried in the one to five year category while half of money market deposit accounts are spread over the four to twelve month category and the other half are shown to mature in the one to three year category. There are no known trends or demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way. Aside from those matters described above, management does not currently believe that there are any known trends or uncertainties which would have a material impact on future operating results, liquidity or capital resources nor is it aware of any current recommendations by the regulatory authorities which if they were to be implemented would have such an effect, although the general cost of compliance with numerous and multiple federal and state laws and regulation does have and in the future may have a negative impact on the corporation's results of operations. Page 10
PART II. OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities and Use of Proceeds - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None Item 5. Other Information - None Item 6. Exhibits and Reports of Form 8-K (a) Exhibits The following Exhibits are included in this Report: Exhibit 3(i) Articles of Incorporation of Registrant (Incorporated by Reference to Exhibit 3(a) in Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). Exhibit 3(ii) Bylaws of Registrant (Incorporated by Reference to Exhibit 3(b) in Registrant's Annual Report of Form 10-K for the year ended December 31, 1992). Exhibit 11 Statement Regarding Computation of Earnings Per Share. Exhibit 27 Financial Data Schedule. (b) Reports on Form 8-K The Registrant did not file a Current Report on Form 8-K during the third quarter of 1997. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ACNB CORPORATION ------------------------------------- Ronald L. Hankey, President November 10, 1997 (Date) ------------------------------------- John W. Krichten, Secretary/Treasurer Page 11
EXHIBIT INDEX Exhibit Number Exhibit 3(i) Articles of Incorporation of Registrant (Incorporated by Reference to Exhibit 3(a) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). Exhibit 3(ii) Bylaws of Registrant (Incorporated by Reference to Exhibit 3(b) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). Exhibit 11 Statement Re: Computation of Earnings Per Share. Exhibit 27 Financial Data Schedule. Page 12