UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 ------------------------------------------------- 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 corporation as specified in its charter) PENNSYLVANIA 23-2233457 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 16 LINCOLN SQUARE, GETTYSBURG, PA 17325 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (717) 334-3161 - -------------------------------------------------------------------------------- (corporation's telephone number, including area code) 675 OLD HARRISBURG ROAD, GETTYSBURG, PA 17325 - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the corporation (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the corporation was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the corporation has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class - Common Stock ($2.50 par value) Outstanding at March 31, 2002 - 5,436,101 ACNB CORPORATION AND SUBSIDIARY
<TABLE> <CAPTION> PART I ITEM I FINANCIAL INFORMATION ACNB CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CONDITION 3/31 3/31 12/31 2002 2001 2001 ASSETS (000 omitted) <S> <C> <C> <C> Cash and Due from Banks $ 18,344 $ 20,616 $ 21,925 Investment Securities Securities Held to Maturity 37,141 62,134 48,480 Securities Available for Sale 175,710 103,911 175,017 -------- -------- -------- Total Investment Securities 212,851 166,045 223,497 Federal Funds Sold 0 8,659 0 Loans 364,264 358,879 362,579 Less: Reserve for Loan Losses (3,688) (3,712) (3,723) -------- -------- -------- Net Loans 360,576 355,167 358,856 Premises and Equipment 5,647 4,989 5,704 Other Real Estate 1,509 1,077 1,646 Other Assets 19,639 13,979 18,606 -------- -------- -------- TOTAL ASSETS $618,566 $570,532 $630,234 ======== ======== ======== LIABILITIES Deposits Noninterest Bearing 74,090 63,858 70,907 Interest Bearing 437,669 393,412 438,328 -------- -------- -------- Total Deposits 511,759 457,270 509,235 Securities Sold Under Agreement To Repurchase 28,902 27,341 33,239 Borrowing Federal Home Loan Bank 8,050 16,965 17,850 Demand Notes U.S. Treasury 450 450 412 Other Liabilities 6,467 6,503 6,805 -------- -------- -------- TOTAL LIABILITIES 555,628 508,529 567,541 SHAREHOLDERS' EQUITY Common Stock ($2.50 par value) 20,000,000 shares authorized: 5,436,101 shares issued and outstanding at 3/31/02 13,590 13,590 13,590 Retained Earnings 49,856 47,135 48,661 Accumulated Other Comprehensive Income (508) 1,278 442 -------- -------- -------- TOTAL SHAREHOLDERS' EQUITY 62,938 62,003 62,693 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $618,566 $570,532 $630,234 ======== ======== ======== </TABLE> See accompanying notes to financial statements. Page 2
<TABLE> <CAPTION> ACNB CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME Three Months Ended 3/31 2002 2001 (000 omitted) <S> <C> <C> INTEREST INCOME Loan Interest and Fees $6,267 $7,232 Interest and Dividends on Investment Securities 3,131 2,792 Interest on Federal Funds Sold 0 71 Interest on Balances with Depository Institutions 11 38 ------ ------ TOTAL INTEREST INCOME 9,409 10,133 INTEREST EXPENSE Deposits 3,054 3,840 Other Borrowed Funds 259 674 ------ ------ TOTAL INTEREST EXPENSE 3,313 4,514 NET INTEREST INCOME 6,096 5,619 Provision for Loan Losses 60 60 ------ ------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,036 5,559 OTHER INCOME Trust Department 152 158 Service Charges on Deposit Accounts 399 238 Other Operating Income 483 454 Securities Gains 0 0 ------ ------ TOTAL OTHER INCOME 1,034 850 OTHER EXPENSES Salaries and Employee Benefits 2,151 1,846 Premises and Equipment 527 563 Other Expenses 1,114 990 ------ ------ TOTAL OTHER EXPENSE 3,792 3,399 INCOME BEFORE INCOME TAX 3,278 3,010 Applicable Income Tax 1,004 982 ------ ------ NET INCOME $2,274 $2,028 ====== ====== EARNINGS PER SHARE* $0.42 $0.37 DIVIDENDS PAID PER SHARE 0.40 0.20 </TABLE> *Based on a weighted average of 5,436,101 shares outstanding in 2002 and 5,436,165 in 2001 See accompanying notes to financial statements. Page 3
<TABLE> <CAPTION> ACNB CORPORATION AND SUBSIDIARY STATEMENT OF CASH FLOWS Three months ended 3/31 2002 2001 (000 omitted) <S> <C> <C> INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS Cash Flows from Operating Activities: Interest and Dividends Received $ 9,834 $ 9,705 Fees and Commissions Received 1,133 938 Interest Paid (3,738) (3,975) Cash Paid to Suppliers and Employees (4,654) (8,479) Income Taxes Paid 0 0 Net Cash (Used in) Provided by Operating Activities 2,575 (1,811) Cash Flows from Investing Activities: Proceeds from Maturities of Investment Securities and Interest Bearing Balances with Other Banks 19,251 7,047 Purchase of Investment Securities and Interest Bearing Balances with Other Banks (10,000) 0 Principal Collected on Loans 20,643 17,862 Loans Made to Customers (22,251) (15,889) Capital Expenditures (48) (409) Net Cash (Used in) Provided by Investing Activities 7,595 8,611 Cash Flow from Financing Activities: Net Increase (Decrease) in Demand Deposits, NOW Accounts, and Savings Accounts 4,823 (4,488) Proceeds from Sale of Certificates of Deposit 9,077 8,837 Payments for Maturing Certificates of Deposit (15,715) (5,094) Dividends Paid (2,174) (1,087) Increase (Decrease) in Borrowings (9,762) 665 Retirement of Common Stock 0 (74) Net Cash Used in Financing Activities (13,751) (1,241) Net Increase (Decrease) in Cash and Cash Equivalents (3,581) 5,559 Cash and Cash Equivalents: Beginning of Period 21,925 23,716 End of Period $ 18,344 $ 29,275 RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Net Income $ 2,274 $ 2,028 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 105 108 Provision for Loan Losses 60 60 Provision for Deferred Taxes (390) 0 Amortization (Accretion) of Investment Securities Premiums (65) 59 Increase (Decrease) in Taxes Payable 1,394 982 (Increase) Decrease in Interest Receivable (125) 6 Increase (Decrease) in Interest Payable (425) 539 Increase (Decrease) in Accrued Expenses 80 364 (Increase) Decrease in Other Assets (1,047) (5,552) Increase (Decrease) in Other Liabilities 714 (405) Net Cash (Used in) Provided by Operating Activities $ 2,575 $ (1,811) 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. </TABLE> Page 4
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 March 31, 2002 and 2001 and December 31, 2001 and the results of its operations for the three months ended March 31, 2002 and 2001 and changes in financial position for the three 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 2001 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 value of securities owned at March 31, 2002 and December 31, 2001 were as follows: 3/31/02 12/31/01 Amortized Fair Amortized Fair Cost Value Cost Value (000 omitted) U.S. Treasury and U.S. Government Agencies (held to maturity) 30,543 31,640 40,744 42,388 State and Municipal (held to maturity) 2,049 2,051 2,123 2,126 Corporate (held to maturity) 909 917 1,957 1,974 U.S. Government Agencies (available for sale) 175,981 175,710 173,845 175,017 Restricted Equity Securities 3,640 3,640 3,656 3,656 -------- -------- -------- -------- TOTAL $213,122 $213,958 $222,325 $225,161 Income earned on investment securities was as follows: Three Months Ended March 31 2002 2001 (000 omitted) U.S. Treasury 14 245 U.S. Government Agencies 3,029 2,339 State and Municipal 24 30 Other Investments 64 178 ----- ----- 3,131 2,792 Page 5
3. Gross loans are summarized as follows: March 31 December 31 (000 omitted) 2002 2001 Real Estate 317,612 316,928 Real Estate Construction 14,459 15,497 Commercial and Industrial 20,152 18,027 Consumer 12,041 12,127 -------- -------- Total Loans $364,264 $362,579 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 three month periods ended March 31, 2002 and 2001 were 5,436,101 and 5,436,165 respectively. 5. Dividends paid per share were $.40 and $.20 for the three month periods ended March 31, 2002 and 2001, respectively. This represented a 95% payout of net income in 2002 and a 54% payout in 2001. 6. The results of operations for the three month periods ended March 31, 2002 and 2001 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 Registrant's discussion and analysis of the significant changes in the results of operations, capital resources and liquidity presented in the accompanying consolidated financial statements for the Registrant, and its wholly-owned subsidiary, Adams County National Bank, follow. The Registrant'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 corporation's 2001 Annual Report to Shareholders. Current performance does not guarantee, assure, and is not necessarily indicative of similar performance in the future. In addition to historical information, this Form 10-Q contains forward-looking statements. From time to time, the corporation may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the corporation notes that a variety of factors could cause the corporation's actual results and experience to differ materially from the anticipated results or other expectations expressed in the corporation's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the corporation's business include the following: general economic conditions, including their impact on capital expenditures; business conditions in the banking industry; the regulatory environment; rapidly changing technology and evolving banking industry standards; competitive factors, including increased competition with community, regional and national financial institutions; new service and product offerings by competitors and price pressures; and similar items. Three months ended March 31, 2002 compared to three months ended March 31, 2001 - ------------------------------------------------------------------------------- Net Income for the three month period ending March 31, 2002 was $2,274,000, up $246,000 from the first quarter of 2001. Net interest income was up, total other income was up and other expense was up. The first quarter increase is due to improved net interest income. Net income per share, for the first quarter, was $.42, compared to the $.37 earned in the same period in 2001. For the three month period (annualized) in 2002, the return on average assets and return on average equity were 1.47% and 14.55%, respectively, compared to 1.44% and 13.32%, respectively for 2001. An explanation of the factors and trends that caused changes between the two periods, by major earnings category, follows. Total interest income for the first three month period of 2002 was $9,409,000, down $724,000 or 7.1% below the $10,133,000 earned in the same period of 2001. The $724,000 decrease in interest income was due to a sustained fall in interest rates during 2001. The average yield on earning assets declined 111 basis points compared to the same quarter in 2001. In an effort to manage interest rate risk, the Registrant lowered interest rates on transaction accounts to historic lows. Income from loans and securities during the current period decreased approximately $626,000 due to lower interest rates even though loan and security volumes continued to grow. Page 7
Total interest expense for the first three month period of 2002 was $3,313,000, down $1,201,000 or 26.6% from the $4,514,000 incurred for the same period in 2001. The $1,201,000 decrease in interest expense was due to lower interest rates, especially in the transaction account area. Because the decrease in interest expense exceeded the decrease in interest income, net interest income increased $477,000. Total other income for the first three month period of 2002 at $1,034,000, was $184,000 greater than the same quarter in 2001. This was primarily due to service charges on deposit accounts. The bank introduced a new service called overdraft privilege in mid-year 2001. The increase should continue until the third quarter of this year when it should mirror last year's performance. Total other expense for the first three month period of 2002 was $3,792,000, up $393,000 from the $3,399,000 incurred for the first quarter of 2001. The increase was in salary and employee benefits, and writeoff of deposit purchase premium and professional services associated with the overdraft plan, mentioned above. The provision for income taxes in the first quarter increased $22,000 due to a higher level of pretax earnings. OVERVIEW OF THE BALANCE SHEET The changes in the balance sheet have been driven by strong growth in deposits. The following are some of the results: o Total investment securities were $212,851,000 at March 31, 2002, an increase of $46,806,000 or 28% since March 31, 2001. Securities have increased from 29% of total assets to 34% of total assets. o Total deposits have grown from $457,270,000 at March 31, 2001 to $511,759,000 at March 31, 2002, an increase of $54,489,000 or 12%. Approximately $24,000,000 of those deposits were obtained through a branch purchase transaction with Farmers and Mechanics Bank of Frederick, Maryland. Certificates of deposit were $9,176,000 or 17% of the $54,489,000 increase. The remainder of the increase was from transaction accounts. This has increased our liability sensitivity, as measured by the bank's internal gap (see below). o Accumulated other comprehensive income has decreased from a positive $442,000 at December 31, 2001 to a negative $508,000 at March 31, 2002. This indicates the after tax effect in the change in market value of the available for sale securities portfolio. This shift may hinder repositioning of the portfolio for income purposes as interest rates rise. As interest rates rise, the market value of the corporation's securities will fall making it impossible to sell and repurchase securities with higher rates without realizing large securities losses. INTEREST RATE SPREAD AND NET YIELD ON EARNING ASSETS Three Months Ended 3/31/02 3/31/01 Rate Rate Earning Assets 6.47% 7.58% Interest Bearing Liabilities 2.73% 4.12% Interest Rate Spread 3.74% 3.46% Net Yield on Earning Assets 4.19% 4.21% Page 8
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 three months of 2002, was down 2 basis points compared to the same period in 2001. Yields on loans and securities have changed more rapidly than deposit rates as interest rates in the general economy have fallen over the last twelve months. PROVISION AND RESERVE FOR POSSIBLE LOAN LOSSES Reserve for Possible Loan Losses (In Thousands) Three Months Ended 3/31/02 3/31/01 Balance at Beginning of Period 3,723 3,695 Provision Charged to Expense 60 60 Loans Charged Off 104 62 Recoveries 9 19 Balance at End of Period 3,688 3,712 Ratios: Net Charge-offs to: Net Income 4.18% 2.12% Total Loans .03% .01% Reserve for Possible Loan Losses 2.58% 1.16% Reserve for Possible Loan Losses to: Total Loans 1.01% 1.03% The Reserve for Possible Loan Losses at March 31, 2002 was $3,688,000 (1.01% of Total Loans), a decrease of $24,000 from $3,712,000 (1.03% of Total Loans) at the end of the first three months of 2001. Loans past due 90 days and still accruing were $1,669,000 and non-accrual loans were $785,000, as of March 31, 2002. The ratio of non-performing assets plus other real estate owned to total assets was .64%, at March 31, 2002. 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. At March 31, 2002, there was a $4,506,000 loan more than 30 days past due yet not in the 90 day category. Specific allocations have been made to the reserve for this credit. In addition, a parcel of other real estate owned with a book value of $782,000 was sold subsequent to March 31, 2002 for $890,000. Loans past due 90 days and still accruing were $1,003,000, at year end 2001, while non-accruals were at $837,000. 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 $811,000 in non-accrual loans, was approximately $12,000 for the first three months of 2002. The bank considers a loan impaired when, based on current information and events, it is probable that a lender will be unable to collect all amounts due. We measure impaired loans based on the present value of expected future cash flows, discounted at the loan's effective interest rate, or as a practical Page 9
expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. If the measure of the impaired loan is less than its recorded investment a lender must recognize an impairment by creating, or adjusting, a valuation allowance with a corresponding charge to loan loss expense. The corporation uses the cash basis method to recognize interest income on loans that are impaired. All of the corporation's impaired loans were on a non-accrual status for all reported periods. CAPITAL MANAGEMENT Total Shareholders' Equity was $62,938,000 at March 31, 2002, compared to $62,003,000 at March 31, 2001, an increase of $935,000 or 1.5% over that period. The ratio of Total Shareholders' Equity to Total Assets was 9.95% at December 31, 2001, 10.87% at March 31, 2001, and 10.17% at March 31, 2002. The total risk-based capital ratio was 19.67% at March 31, 2002. The leverage ratio was 10.16% at March 31, 2002, and 10.99% during the same period in 2001. Capital at the corporation remains strong. The payment of a special 20 cents per share dividend in January 2002 and loss of value in available for sale securities has not slowed capital growth from the previous period. 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 32% of total assets at March 31, 2002. This mix of assets would be readily available for funding any cash requirements. In addition, the Bank has an approved line of credit of $336,280,000 at the Federal Home Loan Bank of Pittsburgh with $8,050,000 outstanding at March 31, 2002. As of March 31, 2002, the cumulative asset sensitive gap was 8.0% of total assets at one month, (2.1%) at six months, and (.5%) at one year. Adjustable rate mortgages, which have an annual interest rate cap of 2%, are considered rate sensitive. Passbook and statement savings and NOW accounts are carried in the one to five year category. Half of money market deposit accounts are spread over the four to twelve month category. 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 that would have a material impact on future operating results, liquidity or capital resources nor is it aware of any current recommendations by the regulatory authorities, which, if they were to be implemented, would have such an effect, although the general cost of compliance with numerous and multiple federal and state laws and regulation does have and in the future may have a negative impact on the corporation's results of operations. Page 10
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Management monitors and evaluates changes in market conditions on a regular basis. Based upon the most recent review management has determined that there have been no material changes in market risks since year end. For further discussion of year end information, refer to the annual report. PART II. OTHER INFORMATION Item 1. Legal Proceedings - Nothing to report. Item 2. Changes in Securities and Use of Proceeds - Nothing to report. Item 3. Defaults Upon Senior Securities - Nothing to report. Item 4. Submission of Matters to a Vote of Security Holders - Nothing to report. Item 5. Other Information - Nothing to report. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following Exhibits are included in this Report: Exhibit 3(i) Articles of Incorporation of Registrant (Incorporated by Reference to Exhibit 3 ( i ) in Registrant's Annual Report on Form 10-K for the year ended December 31, 1999). Exhibit 3(ii) Bylaws of Registrant (Incorporated by Reference to Exhibit 3(ii) in Registrant's Report of Form 8-K, filed with the Commission on March 25, 1998). Exhibit 10.1 Executive Employment Agreement Dated as of January 1, 1998 between Adams County National Bank, ACNB Corporation and Ronald L. Hankey (Incorporated By Reference to Exhibit 99 of the Registrant's Current Report on Form 8-K, Filed with the Commission on March 25, 1998). Exhibit 10.2 Executive Employment Agreement Dated as of January 1, 2000 between Adams County National Bank, ACNB Corporation and Thomas A. Ritter (Incorporated by Reference to Exhibit 99 of the Registrant's Current Report on Form 8-K, filed with the Commission on March 26, 2001). Exhibit 11 Statement Regarding Computation of Earnings Per Share. (b) Report on Form 8-K. The Registrant filed no Current Reports on Form 8-K during the quarter ended March 31, 2002. Pursuant to the requirements of the Securities Exchange Act of 1934, the corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ACNB CORPORATION Thomas A. Ritter, President May 3, 2002 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 (i) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1999). Exhibit 3(ii) Bylaws of Registrant (Incorporated by Reference to Exhibit 3(ii) of Registrant's Report on Form 8-K, filed with the Commission on March 25, 1998). Exhibit 10.1 Executive Employment Agreement Dated as of January 1, 1998 between Adams County National Bank, ACNB Corporation and Ronald L. Hankey (Incorporated By Reference to Exhibit 99 of the Registrant's Current Report on Form 8-K, Filed with the Commission on March 25, 1998). Exhibit 10.2 Executive Employment Agreement Dated as of January 1, 2000 between Adams County National Bank, ACNB Corporation and Thomas A. Ritter (Incorporated by Reference to Exhibit 99 of the Registrant's Current Report on Form 8-K, filed with the Commission on March 26, 2001). Exhibit 11 Statement Regarding Computation of Earnings Per Share. Page 12