UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

 

x

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

 

For the quarterly period ended  June 30, 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 x No o

 

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

 

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

 

Large accelerated filer o

Accelerated filer x

 

 

Non-accelerated filer o

Smaller reporting company o

 

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

 

The number of shares of the Registrant’s Common Stock outstanding on July 31, 2009, was 5,928,343.

 

 

 



 

PART I — FINANCIAL INFORMATION

 

ACNB CORPORATION

ITEM 1 - FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)

 

Dollars in thousands

 

June 30, 2009

 

June 30, 2008

 

December 31,
2008

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Cash and due from banks

 

$

15,632

 

$

20,036

 

$

16,033

 

Interest bearing deposits with banks

 

3,792

 

1,422

 

892

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

19,424

 

21,458

 

16,925

 

 

 

 

 

 

 

 

 

Securities available for sale

 

211,504

 

246,347

 

252,536

 

Securities held to maturity, fair value $10,191; $0; $0

 

10,064

 

 

 

Loans held for sale

 

6,175

 

1,248

 

969

 

Loans, net of allowance for loan losses $9,860; $6,337; $7,393

 

637,255

 

591,795

 

630,330

 

Premises and equipment

 

14,892

 

14,375

 

14,457

 

Restricted investment in bank stocks

 

9,170

 

7,401

 

9,170

 

Investment in bank-owned life insurance

 

25,798

 

24,799

 

25,297

 

Investments in low-income housing partnerships

 

4,560

 

4,856

 

4,737

 

Other assets

 

22,105

 

19,117

 

22,258

 

 

 

 

 

 

 

 

 

Total Assets

 

$

960,947

 

$

931,396

 

$

976,679

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Non-interest bearing

 

$

90,568

 

$

90,526

 

$

82,486

 

Interest bearing

 

634,949

 

604,498

 

607,811

 

 

 

 

 

 

 

 

 

Total Deposits

 

725,517

 

695,024

 

690,297

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

52,017

 

39,351

 

83,453

 

Long-term borrowings

 

85,496

 

105,100

 

106,951

 

Other liabilities

 

12,789

 

7,738

 

11,539

 

 

 

 

 

 

 

 

 

Total Liabilities

 

875,819

 

847,213

 

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

 

64,206

 

62,955

 

62,916

 

Accumulated other comprehensive loss

 

(2,114

)

(2,536

)

(1,799

)

 

 

 

 

 

 

 

 

Total Stockholders’ Equity

 

85,128

 

84,183

 

84,439

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity

 

$

960,947

 

$

931,396

 

$

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 June 30,

 

Six Months Ended June 30,

 

Dollars in thousands, except per share data

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

8,918

 

$

8,820

 

$

17,933

 

$

17,500

 

Securities:

 

 

 

 

 

 

 

 

 

Taxable

 

2,127

 

2,515

 

4,482

 

5,361

 

Tax-exempt

 

372

 

529

 

752

 

934

 

Dividends

 

9

 

17

 

22

 

134

 

Other

 

(6

)

18

 

6

 

48

 

 

 

 

 

 

 

 

 

 

 

Total Interest Income

 

11,420

 

11,899

 

23,195

 

23,977

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

Deposits

 

2,485

 

3,420

 

5,138

 

7,314

 

Short-term borrowings

 

42

 

172

 

195

 

361

 

Long-term borrowings

 

952

 

1,090

 

2,023

 

2,355

 

 

 

 

 

 

 

 

 

 

 

Total Interest Expense

 

3,479

 

4,682

 

7,356

 

10,030

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

7,941

 

7,217

 

15,839

 

13,947

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR LOAN LOSSES

 

1,225

 

550

 

2,350

 

670

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income after Provision for Loan Losses

 

6,716

 

6,667

 

13,489

 

13,277

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

591

 

525

 

1,131

 

1,039

 

Income from fiduciary activities

 

227

 

290

 

496

 

529

 

Earnings on investment in bank-owned life insurance

 

257

 

267

 

501

 

521

 

Gains (losses) on sales of securities

 

(6

)

11

 

3

 

101

 

Service charges on ATM and debit card transactions

 

255

 

245

 

482

 

466

 

Commissions from insurance sales

 

1,391

 

1,064

 

2,929

 

2,161

 

Other

 

369

 

237

 

669

 

504

 

 

 

 

 

 

 

 

 

 

 

Total Other Income

 

3,084

 

2,639

 

6,211

 

5,321

 

 

 

 

 

 

 

 

 

 

 

OTHER EXPENSES

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

4,298

 

3,445

 

8,671

 

7,020

 

Net occupancy

 

562

 

538

 

1,172

 

1,125

 

Equipment

 

541

 

480

 

1,101

 

957

 

Other tax

 

197

 

203

 

354

 

392

 

Professional services

 

202

 

226

 

431

 

466

 

Supplies and postage

 

156

 

200

 

345

 

396

 

Marketing

 

120

 

274

 

230

 

540

 

FDIC and regulatory

 

1,150

 

70

 

1,276

 

143

 

Other operating

 

985

 

968

 

1,883

 

1,880

 

 

 

 

 

 

 

 

 

 

 

Total Other Expenses

 

8,211

 

6,404

 

15,463

 

12,919

 

 

 

 

 

 

 

 

 

 

 

Income before Income Taxes

 

1,589

 

2,902

 

4,237

 

5,679

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

156

 

572

 

687

 

1,141

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

1,433

 

$

2,330

 

$

3,550

 

$

4,538

 

 

 

 

 

 

 

 

 

 

 

PER SHARE DATA

 

 

 

 

 

 

 

 

 

Basic earnings

 

$

0.24

 

$

0.39

 

$

0.60

 

$

0.76

 

Cash dividends declared

 

$

0.19

 

$

0.19

 

$

0.38

 

$

0.38

 

 

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

 

3



 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

Six Months Ended June 30, 2009 and 2008

 

Dollars in thousands, except per share data

 

Common Stock

 

Treasury Stock

 

Additional
Paid-in Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
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

 

 

 

 

4,538

 

 

4,538

 

Other comprehensive loss, net of taxes

 

 

 

 

 

(2,463

)

(2,463

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

2,075

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared ($0.38 per share)

 

 

 

 

(2,277

)

 

(2,277

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — JUNE 30, 2008

 

$

14,977

 

$

 

$

8,787

 

$

62,955

 

$

(2,536

)

$

84,183

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — JANUARY 1, 2009

 

$

14,977

 

$

(442

)

$

8,787

 

$

62,916

 

$

(1,799

)

$

84,439

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

3,550

 

 

3,550

 

Other comprehensive loss, net of taxes

 

 

 

 

 

(315

)

(315

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

3,235

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury stock purchased (27,600 shares)

 

 

(286

)

 

 

 

(286

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared ($0.38 per share)

 

 

 

 

(2,260

)

 

(2,260

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — JUNE 30, 2009

 

$

14,977

 

$

(728

)

$

8,787

 

$

64,206

 

$

(2,114

)

$

85,128

 

 

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

 

4



 

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

Six Months Ended June 30,

 

Dollars in thousands

 

2009

 

2008

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

3,550

 

$

4,538

 

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

 

 

 

 

 

Gain on sales of loans, property and foreclosed real estate

 

(313

)

(144

)

Earnings on investment in bank-owned life insurance

 

(501

)

(521

)

Gains on sales of securities

 

(3

)

(101

)

Depreciation and amortization

 

1,139

 

906

 

Provision for loan losses

 

2,350

 

670

 

Net accretion of investment securities discounts

 

(114

)

(10

)

Decrease in accrued interest receivable

 

520

 

707

 

Increase (decrease) in accrued interest payable

 

288

 

(79

)

(Increase) decrease in mortgage loans held for sale

 

(4,902

)

74

 

(Increase) decrease in other assets

 

(567

)

1,843

 

Increase (decrease) in other liabilities

 

1,454

 

(2,821

)

 

 

 

 

 

 

Net Cash Provided by Operating Activities

 

2,901

 

5,062

 

 

 

 

 

 

 

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

 

49,891

 

83,265

 

Proceeds from sales of investment securities available for sale

 

2,531

 

11,205

 

Purchase of investment securities held to maturity

 

(10,064

)

 

Purchase of investment securities available for sale

 

(12,066

)

(58,079

)

Net sale of restricted investment in bank stocks

 

 

1,644

 

Net increase in loans

 

(9,377

)

(50,111

)

Capital expenditures

 

(1,251

)

(560

)

Proceeds from sales of property and foreclosed real estate

 

151

 

137

 

 

 

 

 

 

 

Net Cash Provided by (Used in) Investing Activities

 

19,815

 

(8,362

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Net increase in demand deposits

 

8,082

 

13,334

 

Net increase in time certificates of deposits and interest bearing deposits

 

27,138

 

11,050

 

Net increase (decrease) in short-term borrowings

 

(31,436

)

8,583

 

Dividends paid

 

(2,260

)

(2,277

)

Purchase of treasury stock

 

(286

)

 

Proceeds from long-term borrowings

 

 

20,000

 

Repayments on long-term borrowings

 

(21,455

)

(45,144

)

 

 

 

 

 

 

Net Cash Provided by (Used in) Financing Activities

 

(20,217

)

5,546

 

 

 

 

 

 

 

Net Increase in Cash and Cash Equivalents

 

2,499

 

2,246

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS - BEGINNING

 

16,925

 

19,212

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS - ENDING

 

$

19,424

 

$

21,458

 

 

 

 

 

 

 

Interest paid

 

$

7,068

 

$

10,109

 

Incomes taxes paid

 

$

1,500

 

$

1,100

 

Loans transferred to foreclosed real estate

 

$

102

 

$

 

 

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 generally accepted accounting principles 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 June 30, 2009 and 2008, and the results of its operations, changes in stockholders’ equity, and cash flows for the six months ended June 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 six month period ended June 30, 2009, are not necessarily indicative of the results to be expected for the full year.  For comparative purposes, the June 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 June 30, 2009, for items that should potentially be recognized or disclosed in these financial statements.  The evaluation was conducted through August 10, 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 5,943,785 and 5,990,943 weighted average shares of common stock outstanding for the six months ended June 30, 2009 and 2008, respectively, and 5,935,442 and 5,990,943 for the three months ended June 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 six month periods ended June 30 were as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

In thousands

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

140

 

$

147

 

$

281

 

$

295

 

Interest cost

 

247

 

259

 

494

 

517

 

Expected return on plan assets

 

(241

)

(399

)

(482

)

(798

)

Other, net

 

158

 

15

 

315

 

30

 

 

 

 

 

 

 

 

 

 

 

Net Periodic Benefit Cost

 

$

304

 

$

22

 

$

608

 

$

44

 

 

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.

 

In September 2006, the Financial Accounting Standards Board (FASB) Emerging Issues Task Force finalized Issue No. 06-4 (EITF 06-4), Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Insurance Arrangements.  EITF 06-4 requires a liability to be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement.  The required accrued liability is based on either the post-employment benefit cost for continuing life insurance or

 

6



 

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 Corporation adopted EITF 06-4 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 $6,721,000 in standby letters of credit as of June 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 June 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 six month periods ended June 30 were as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

In thousands

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(1,351

)

$

(6,214

)

$

(790

)

$

(3,631

)

Reclassification of (gains) losses realized in net income

 

6

 

(11

)

(3

)

(101

)

 

 

 

 

 

 

 

 

 

 

Net Unrealized Losses

 

(1,345

)

(6,225

)

(793

)

(3,732

)

 

 

 

 

 

 

 

 

 

 

Tax effect

 

(457

)

(2,117

)

(269

)

(1,269

)

 

 

 

 

 

 

 

 

 

 

 

 

(888

)

(4,108

)

(524

)

(2,463

)

 

 

 

 

 

 

 

 

 

 

Change in pension liability

 

315

 

 

315

 

 

 

 

 

 

 

 

 

 

 

 

Tax effect

 

106

 

 

106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

209

 

 

209

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Loss

 

$

(679

)

$

(4,108

)

$

(315

)

$

(2,463

)

 

7



 

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

 

In thousands

 

Unrealized
Gains
(Losses) on
Securities

 

Pension
Liability

 

Accumulated
Other
Comprehensive
Loss

 

 

 

 

 

 

 

 

 

BALANCE, JUNE 30, 2009

 

$

3,272

 

$

(5,386

)

$

(2,114

)

 

 

 

 

 

 

 

 

BALANCE, DECEMBER 31, 2008

 

$

3,796

 

$

(5,595

)

$

(1,799

)

 

 

 

 

 

 

 

 

BALANCE, JUNE 30, 2008

 

$

(1,714

)

$

(822

)

$

(2,536

)

 

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 six month periods ended June 30, 2009 and 2008, is as follows:

 

In thousands

 

Banking

 

Insurance

 

Intercompany
Eliminations

 

Total

 

2009

 

 

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

19,130

 

$

2,920

 

$

 

$

22,050

 

Income before income taxes

 

3,619

 

618

 

 

4,237

 

Total assets

 

951,336

 

13,080

 

(3,469

)

960,947

 

Capital expenditures

 

1,242

 

13

 

 

1,255

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

17,111

 

$

2,157

 

$

 

$

19,268

 

Income before income taxes

 

5,223

 

456

 

 

5,679

 

Total assets

 

922,383

 

10,555

 

(1,542

)

931,396

 

Capital expenditures

 

539

 

21

 

 

560

 

 

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

 

In thousands

 

Banking

 

Insurance

 

Intercompany
Eliminations

 

Total

 

2009

 

 

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

9,639

 

$

1,386

 

$

 

$

11,025

 

Income before income taxes

 

1,360

 

229

 

 

1,589

 

Total assets

 

951,336

 

13,080

 

(3,469

)

960,947

 

Capital expenditures

 

333

 

13

 

 

346

 

 

 

 

 

 

 

 

 

 

 

2008

 

 

 

 

 

 

 

 

 

Net interest income and other income from external customers

 

$

8,794

 

$

1,062

 

$

 

$

9,856

 

Income before income taxes

 

2,714

 

188

 

 

2,902

 

Total assets

 

922,383

 

10,555

 

(1,542

)

931,396

 

Capital expenditures

 

303

 

21

 

 

324

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2).  FSP FAS 115-2 and FAS 124-2 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, FSP FAS 115-2 and FAS 124-2 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 FSP is effective for the Corporation for interim and annual reporting periods ending June 30, 2009 and after.

 

9



 

Amortized cost and fair value at June 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JUNE 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government and agencies

 

$

18,572

 

$

549

 

$

 

$

19,121

 

Mortgage-backed securities

 

140,471

 

5,474

 

193

 

145,752

 

State and municipal

 

41,146

 

311

 

484

 

40,973

 

Corporate bonds

 

5,206

 

91

 

 

5,297

 

Stock in other banks

 

1,149

 

 

788

 

361

 

 

 

 

 

 

 

 

 

 

 

 

 

$

206,544

 

$

6,425

 

$

1,465

 

$

211,504

 

 

 

 

 

 

 

 

 

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JUNE 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

10,064

 

$

127

 

$

 

$

10,191

 

 

At June 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 2% of amortized cost.

 

At June 30, 2009, 44 state and municipal securities had unrealized losses, and twenty four of the municipal securities had 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.  None of the securities in this category had an unrealized loss that exceeded 8% of amortized cost and a majority had unrealized losses totaling less than 3% of amortized cost.  Management conducted an evaluation for other-than- temporary impairment of investment securities in which the fair value is below the adjusted historical cost and did not identify any such securities that management felt were other than temporarily impaired.  On some securities, rising rates since their purchase decreased the fair value below their carrying value.  The Corporation holds equity investments in the common stock of two bank holding companies headquartered and operating in Pennsylvania.  Both 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 stock price variations will be conducted upon availability of public information for the period ended June 30, 2009.

 

Management routinely sells securities from its available for sale portfolio in an effort to manage and allocate the portfolio.  At June 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 are deemed to be other-than-temporary.

 

10



 

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 June 30, 2009, and December 31, 2008:

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

In thousands

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SECURITIES AVAILABLE FOR SALE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

JUNE 30, 2009:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

9,429

 

$

187

 

$

600

 

$

6

 

$

10,029

 

$

193

 

State and municipal

 

11,738

 

115

 

12,418

 

369

 

24,156

 

484

 

Stock in other banks

 

 

 

361

 

788

 

361

 

788

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

21,167

 

$

302

 

$

13,379

 

$

1,163

 

$

34,546

 

$

1,465

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

Management has reviewed its investment securities at June 30, 2009, and has determined the unrealized losses are not deemed other than temporary.  The Corporation determines whether the unrealized losses are temporary in accordance with Emerging Issues Task Force No. 99-20 (EITF 99-20), Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Asset, as amended by FSP EITF 99-20-1, when applicable, and FSP SFAS No. 115-1, SFAS No. 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, FSP SFAS No. 115-2 and SFAS No. 124-2.  The evaluation is based upon factors such as the creditworthiness of the issuers/guarantors, the underlying collateral, if applicable, and the continuing performance of the securities.  Management also evaluates other facts and circumstances that may be indicative of an Other-than-temporary impairment condition.  This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost, and near-term prospects of the issuer.

 

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.

 

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157 (SFAS No. 157), Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements.  SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements.  The Corporation adopted SFAS No. 157 effective for its fiscal year beginning January 1, 2008.

 

In December 2007, the FASB issued FASB Staff Position (FSP) 157-2 (FSP 157-2), Effective Date of FASB Statement No. 157.  FSP 157-2 delayed the effective date of SFAS No. 157 for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually), to

 

11



 

fiscal years beginning after November 15, 2008, and interim periods within those fiscal years.  Thus, the Corporation only partially adopted the provisions of SFAS No. 157 in 2008, and began to account and report for nonfinancial assets and liabilities in 2009.  In October 2008, the FASB issued FASB Staff Position 157-3 (FSP 157-3), Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active, to clarify the application of the provisions of SFAS No. 157 in an inactive market and how an entity would determine fair value in an inactive market.  FSP 157-3 was effective immediately and applied to the Corporation’s consolidated financial statements for December 31, 2008.  The adoption of SFAS No. 157, FSP 157-2 and FSP 157-3 had no impact on the amounts reported in the financial statements.

 

In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4).  FASB Statement 157, Fair Value Measurements, 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. FSP FAS 157-4 provides additional guidance on determining when the volume and level of activity for the asset or liability has significantly decreased. The FSP also includes guidance on identifying circumstances when a transaction may not be considered orderly.

 

FSP FAS 157-4 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 Statement 157.

 

This FSP 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 FSP 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.

 

This FSP is effective for interim and annual reporting periods for the Corporation for the quarter ended June 30, 2009 and after.

 

SFAS No. 157 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 under SFAS No. 157 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 June 30, 2009, and December 31, 2008, are as follows:

 

 

 

 

Fair Value Measurements at June 30, 2009

 

In thousands

 

Basis

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

Recurring

 

$

211,504

 

$

361

 

$

211,143

 

$

 

Loans accounted for under SFAS No. 114

 

Non-recurring

 

5,330

 

 

 

5,330

 

Foreclosed real estate

 

Non-recurring

 

585

 

 

 

585

 

Loans held for sale

 

Non-recurring

 

6,175

 

 

 

6,175

 

 

 

 

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

 

$

 

Loans accounted for under SFAS No. 114

 

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 June 30, 2008

 

In thousands

 

Basis

 

Total

 

Level 1

 

Level 2

 

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

Recurring

 

$

246,347

 

$

774

 

$

245,573

 

$

 

Loans accounted for under SFAS No. 114

 

Non-recurring

 

12,806

 

 

 

12,806

 

Loans held for sale

 

Non-recurring

 

1,248

 

 

 

1,248

 

 

The following table presents a reconciliation of the loans accounted for under SFAS No. 114, foreclosed real estate and loans held for sale measured at fair value, using significant unobservable inputs (Level 3) for the quarter ended June 30, 2009:

 

In thousands

 

SFAS No. 114
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

 

2,398

 

 

 

Payments made

 

(34

)

 

 

Loans transferred to foreclosed real estate

 

 

102

 

 

Loan originations

 

 

 

38,175

 

Loan sales

 

 

 

(32,969

)

Balance - June 30, 2009

 

$

5,330

 

$

585

 

$

6,175

 

 

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1).  FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods.

 

This FSP is effective for the Corporation for interim reporting periods June 30, 2009 and after.

 

13



 

The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful.  The following methods and assumptions were used to estimate the fair values of the Corporation’s financial instruments at June 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 accounted for under SFAS No. 114, Accounting by Creditors for Impairment of a Loan, for which the Corporation has measured impairment 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 as determined under SFAS No. 114.

 

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, passbook 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 June 30, 2009, and December 31, 2008, were as follows:

 

 

 

June 30, 2009

 

December 31, 2008

 

In thousands

 

Carrying
Amount

 

Fair
Value

 

Carrying
Amount

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

Financial assets:

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

15,632

 

$

15,632

 

$

16,033

 

$

16,033

 

Interest bearing deposits in banks

 

3,792

 

3,792

 

892

 

892

 

Investment securities:

 

 

 

 

 

 

 

 

 

Available for sale

 

211,504

 

211,504

 

252,536

 

252,536

 

Held to maturity

 

10,064

 

10,191

 

 

 

Loans held for sale

 

6,175

 

6,175

 

969

 

969

 

Loans, less allowance for loan losses

 

637,255

 

646,124

 

630,330

 

644,642

 

Accrued interest receivable

 

3,703

 

3,703

 

4,223

 

4,223

 

Restricted investment in bank stocks

 

9,170

 

9,170

 

9,170

 

9,170

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Deposits

 

$

725,517

 

$

727,609

 

$

690,297

 

$

699,513

 

Short-term borrowings

 

52,017

 

52,017

 

83,453

 

83,453

 

Long-term borrowings

 

85,496

 

88,780

 

106,951

 

112,017

 

Accrued interest payable

 

3,341

 

3,341

 

3,016

 

3,016

 

 

 

 

 

 

 

 

 

 

 

Off-balance sheet financial instruments

 

$

 

$

 

$

 

$

 

 

15



 

NEW ACCOUNTING PRONOUNCEMENTS

 

FSP FAS 132(R)-1

 

In December 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) FAS 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets.  This FSP amends SFAS No. 132(R), Employers’ Disclosures about Pensions and Other Postretirement Benefits, to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan.  The disclosures about plan assets required by this FSP shall be provided for fiscal years ending after December 15, 2009.  The Corporation is currently reviewing the effect this new pronouncement will have on its consolidated financial statements.

 

FASB Statement No. 166

 

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment of SFAS No. 140.  This statement prescribes the information that a reporting entity must provide in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and, a transferor’s continuing involvement in transferred financial assets.  Specifically, among other aspects, SFAS No. 166 amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, (SFAS 140), by removing the concept of a qualifying special-purpose entity from SFAS No. 140 and removes the exception from applying FIN 46(R) to variable interest entities that are qualifying special-purpose entities.  It also modifies the financial-components approach used in SFAS No. 140. SFAS No. 166 is effective for fiscal years beginning after November 15, 2009.   The Corporation is currently reviewing the effect this new pronouncement will have on its consolidated financial statements

 

FASB Statement No. 168

 

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of SFAS No. 162.   SFAS No. 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States.  SFAS No. 168 is effective for interim and annual periods ending after September 15, 2009. The Corporation does not expect the adoption of this pronouncement to have an impact on its financial position or results of operations.

 

16



 

ACNB CORPORATION

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

INTRODUCTION AND FORWARD-LOOKING STATEMENTS

 

Introduction

 

The following is management’s discussion and analysis of the significant changes in the financial condition, results of operations, capital resources, and liquidity presented in its accompanying consolidated financial statements for ACNB Corporation (the Corporation or ACNB), a financial holding company.  Please read this discussion in conjunction with the consolidated financial statements and disclosures included herein.  Current performance does not guarantee, assure or indicate similar performance in the future.

 

Forward-Looking Statements

 

In addition to historical information, this Form 10-Q contains forward-looking statements.  Examples of forward-looking statements include, but are not limited to, (a) projections or statements regarding future earnings, expenses, net interest income, other income, earnings or loss per share, asset mix and quality, growth prospects, capital structure, and other financial terms, (b) statements of plans and objectives of management or the Board of Directors, and (c) statements of assumptions, such as economic conditions in the Corporation’s market areas.  Such forward-looking statements can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “intends”, “will”, “should”, “anticipates”, or the negative of any of the foregoing or other variations thereon or comparable terminology, or by discussion of strategy.  Forward-looking statements are subject to certain risks and uncertainties such as local economic conditions, competitive factors, and regulatory limitations.  Actual results may differ materially from those projected in the forward-looking statements.  Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the following: ineffectiveness of the business strategy due to changes in current or future market conditions; the effects of economic deterioration on current customers, specifically the effect of the economy on loan customers’ ability to repay loans; the effects of competition, and of changes in laws and regulations on competition, including industry consolidation and development of competing financial products and services; interest rate movements; the inability to achieve merger-related synergies; difficulties in integrating distinct business operations, including information technology difficulties; disruption from the transaction making it more difficult to maintain relationships with customers and employees, and challenges in establishing and maintaining operations in new markets; volatilities in the securities markets; and, deteriorating economic conditions. We caution readers not to place undue reliance on these forward-looking statements.  They only reflect management’s analysis as of this date.  The Corporation does not revise or update these forward-looking statements to reflect events or changed circumstances.  Please carefully review the risk factors described in other documents the Corporation files from time to time with the Securities and Exchange Commission, including the Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and any Current Reports on Form 8-K.

 

CRITICAL ACCOUNTING POLICIES

 

The accounting policies that the Corporation’s management deems to be most important to the portrayal of its financial condition and results of operations, and that require management’s most difficult, subjective or complex judgment, often result in the need to make estimates about the effect of such matters which are inherently uncertain. The following policies are deemed to be critical accounting policies by management:

 

The allowance for loan losses represents management’s estimate of probable losses inherent in the loan portfolio. Management makes numerous assumptions, estimates and adjustments in determining an adequate allowance. The Corporation assesses the level of potential loss associated with its loan portfolio and provides for that exposure through an allowance for loan losses. The allowance is established through a provision for loan losses charged to earnings. The allowance is an estimate of the losses inherent in the loan portfolio as of the end of each reporting period.  The Corporation assesses the adequacy of its allowance on a quarterly basis.  The specific methodologies applied on a consistent basis are discussed in greater detail under the caption, Allowance for Loan Losses, in a subsequent section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The evaluation of securities for other-than-temporary impairment requires a significant amount of judgment. In estimating other-than-temporary impairment losses, management considers various factors including the length of time the fair value has been below cost, the financial condition of the issuer, and the intent and ability of the Corporation to hold the securities until recovery. Declines in fair value that are determined to be other than temporary are charged against earnings.

 

SFAS No. 142, Goodwill and Other Intangible Assets, 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

 

17



 

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 June 30, 2009, compared to quarter ended June 30, 2008

 

Executive Summary

 

Net income for the three months ended June 30, 2009, was $1,433,000 compared to $2,330,000 for the same quarter in 2008, a decrease of $897,000 or 38%.  Earnings per share decreased from $0.39 in 2008 to $0.24 in 2009.  Net interest income increased $724,000 or 10%; provision for loan losses increased $675,000 or 123%; other income increased $445,000 or 17%; and, other expenses increased $1,807,000 or 28%.  The FDIC special assessment and accrual adjustment were responsible for approximately $961,000 of the increase in other expenses.

 

Net Interest Income

 

Net interest income totaled $7,941,000 for the quarter ended June 30, 2009, compared to $7,217,000 for the same period in 2008, an increase of $724,000 or 10%. 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 second 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 $1,203,000 or 26%.  The benefit of decreased funding costs was partially offset by lower interest income, which decreased $479,000 or 4%.  Interest income was lower as a result of investment securities paydowns that were not reinvested.  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.  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 second quarter of 2009 was 3.44% compared to 3.12% during the same period in 2008.  Also comparing the second quarter of 2009 to 2008, the yield on interest earning assets decreased by 0.37% and the cost of interest bearing liabilities decreased by 0.69%.  The net interest margin was 3.67% for the second quarter of 2009 and 3.44% for the second 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 $878,013,000 during the second quarter of 2009, an increase of $26,445,000 from the average for the second quarter of 2008.  Average interest bearing liabilities were $763,960,000 in the second quarter of 2009, an increase of $20,253,000 from the same quarter in 2008.

 

Provision for Loan Losses

 

The provision for loan losses was $1,225,000 in the second quarter of 2009 compared to $550,000 in the second quarter of 2008, an increase of $675,000 or 123%. The increase was a result of measured risk in the loan portfolio compared with the balance in the allowance for loan losses after several quarters of a severe recession, as well as charge-off experience in the portfolio, specific potential loss allocations attributed to impaired loans remaining in the portfolio, and the general growth in the loan 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 risk characteristics of the loan portfolio.  For the second quarter of 2009, the Corporation had net recoveries of $1,000, as compared to net charge-offs of $144,000 for the second quarter of 2008.

 

Other Income

 

Total other income was $3,084,000 for the three months ended June 30, 2009, up $445,000, or 17%, from the second quarter of 2008.  Fees from deposit accounts and ATM/debit card revenue increased by $76,000, or 10%, 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 $227,000 for the three months ended June 30, 2009, as compared to $290,000 during the second quarter of 2008, a 22%

 

18



 

decrease as a result of less fees from estate settlements. Earnings on bank-owned life insurance declined by $10,000, or 4%, as a result of decreases in crediting rates. The Corporation’s wholly-owned subsidiary, Russell Insurance Group, Inc., increased revenue by $327,000 or 31%.  The increase was due to additional revenue from the two acquisition transactions late in 2008 and varying amounts of “contingent” commissions.  The amount of “contingent” commission payments is based on several factors, and the payments are at the discretion of various insurance carriers in accordance with state insurance regulations.  Gains on sales of securities decreased by $17,000 on less activity.  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 $853,000, or 25%, when comparing the second 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 $24,000, or 4%, 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 $61,000, or 13%, as a result of higher maintenance contracts and depreciation on new technology purchases.

 

Professional services expense totaled $202,000 during the second quarter of 2009, as compared to $226,000 for the same period in 2008, a decrease of $24,000 or 11%.  This decrease was due in part from lower internal and external audit costs.

 

Marketing expense decreased by $154,000, or 56%, due to the execution of general budgeted reductions in 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 during the second quarter of 2008.

 

Other operating expenses increased by $1,097,000, or 106%, in the second quarter of 2009, as compared to the second quarter of 2008. Significant to this increase was an accrual of $961,000 for the industry-wide FDIC Special Assessment and an accrual adjustment.  The special assessment is required of all FDIC-insured banks to restore the insurance fund due to the cost of protecting depositors’ accounts at failed banks during the severe recession.   Future additional special assessments are predicted by the FDIC, although the amount and timing are not presently known.

 

Income Tax Expense

 

The Corporation recognized income taxes of $156,000, or 9.8% of pretax income, during the second quarter of 2009, as compared to $572,000, or 19.7% of pre-tax income, 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 second quarters ended June 30, 2009 and 2008, included historical and low-income housing tax credits of $169,000 and $172,000, respectively.

 

Six months ended June 30, 2009, compared to six months ended June 30, 2008

 

Executive Summary

 

Net income for the six months ended June 30, 2009, was $3,550,000 compared to $4,538,000 for the same period in 2008, a decrease of $988,000 or 22%.  Earnings per share decreased from $0.76 in 2008 to $0.60 in 2009.  Net interest income increased $1,892,000 or 14%; provision for loan losses increased $1,680,000 or 251%; other income increased $890,000 or 17%; and, other expenses increased $2,544,000 or 20%.

 

Net Interest Income

 

Net interest income totaled $15,839,000 for the six months ended June 30, 2009, compared to $13,947,000 for the same period in 2008, an increase of $1,892,000 or 14%.  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 six months of 2009, several of the core deposit rates were at practical floors after the Federal Open Market Committee decreased the Federal Funds Target

 

19



 

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 $2,674,000 or 27%.  The decreased funding costs was partially offset by lower interest income, which decreased $782,000 or 3%.  Interest income was lower as a result of investment securities maturities that were not reinvested, but instead used to pay off borrowings and to fund loans.  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 six months of 2009 was 3.42% compared to 3.01% during the same period in 2008.  Also comparing the first six 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 0.79%.  The net interest margin was 3.65% for the first six months of 2009 and 3.34% for the first six months of 2008.

 

Average earning assets were $882,551,000 during the first six months of 2009, an increase of $36,723,000 from the average for the first six months of 2008.  Average interest bearing liabilities were $771,718,000 in the first six months of 2009, an increase of $29,950,000 from the same six 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 local funding sources between the two periods.

 

Provision for Loan Losses

 

The provision for loan losses was $2,350,000 in the first six months of 2009 compared to $670,000 in the first six months of 2008. The increase was a result of measured risk in the loan portfolio compared with the balance in the allowance for loan losses after the continuation of the severe recession, as well as charge-off experience in the portfolio, specific potential loss allocations attributed to impaired loans remaining in the portfolio, and the general growth in the loan portfolio.  ACNB adjusts the provision for loan losses as necessary to maintain the allowance at a level deemed to meet the risk characteristics of the loan portfolio.  For more information, please refer to Allowance for Loan Losses in the subsequent Financial Condition section.  For the first six months of 2009, the Corporation had net recoveries of $118,000, as compared to net charge-offs of $181,000 for the first six months of 2008.

 

Other Income

 

Total other income was $6,211,000 for the six months ended June 30, 2009, up $890,000, or 17%, from the first six months of 2008.  Fees from deposit accounts and ATM/debit card revenue increased by $108,000, or 7%, 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 $496,000 for the six months ended June 30, 2009, as compared to $529,000 during the first six months of 2008, a 6% decrease as a result of fewer estate settlements. Earnings on bank-owned life insurance decreased by $20,000, or 4%, as a result of lower crediting rates. The Corporation’s subsidiary, Russell Insurance Group, Inc., experienced a revenue increase $768,000 or 36%.  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 sales of securities decreased by $98,000 as securities were sold in the first half of 2008 that were likely to be called later in 2008, the proceeds of which were used to fund loan demand.  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 $1,651,000, or 24%, when comparing the first six 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 $564,000 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.

 

20



 

Net occupancy expense increased by $47,000, or 4%, when comparing the first six 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 $144,000, or 15%, as a result of maintenance and depreciation of new technology purchases.

 

Professional services expense totaled $431,000 during the first six months of 2009, as compared to $466,000 for the same period in 2008, a decrease of $35,000 or 8%.  The decrease was due in part to higher costs in 2008 to explore 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 $310,000, or 57%, due to the execution of general budgeted reductions in expenditures.  Other operating expenses increased $1,136,000, or 56%, in the first six months of 2009, as compared to the first six months of 2008. Significant to this increase was an accrual of $961,000 for the industry-wide FDIC Special Assessment and an accrual adjustment.  The special assessment is required of all FDIC-insured banks to restore the insurance fund due to the cost of protecting depositors’ accounts at failed banks during the severe recession.   Future additional special assessments are predicted by the FDIC although the amount and timing are not presently known.

 

Income Tax Expense

 

The Corporation recognized income taxes of $687,000, or 16.2%, of pretax income, during the first six months of 2009, as compared to $1,141,000, or 20.1% of pre-tax income, 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 six months ended June 30, 2009 and 2008, included historical and low-income housing tax credits of $339,000 and $344,000, respectively.

 

FINANCIAL CONDITION

 

Assets totaled $960,947,000 at June 30, 2009, compared to $976,679,000 at December 31, 2008, and $931,396,000 at June 30, 2008. Average earning assets during the six months ended June 30, 2009, increased to $882,551,000 from $845,828,000 during the same period in 2008. Average interest bearing liabilities increased in 2009 to $771,718,000 from $741,768,000 in 2008.

 

Investment Securities

 

ACNB uses investment securities to generate interest and dividend income, manage interest rate risk, provide collateral for certain funding products, and provide liquidity.  The contraction in the securities portfolio during 2009 and 2008 was designed to fund increased lending in the earning asset mix, to provide loans in the marketplace, and to improve overall earning asset yields.  The investment portfolio is comprised of U.S. Governmen