Edgar Filing: ACNB CORP

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010

Commission file number 0-11783

ACNB CORPORATION

(Exact name of Registrant as specified in its charter)

Pennsylvania		23-2233457
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

16 Lincoln Square, Gettysburg, Pennsylvania		17325-3129
(Address of principal executive offices)		(Zip Code)

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

Common Stock, Par Value $2.50 per Share

(Title of class)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

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

Large accelerated filer o		Accelerated filer x

Non-accelerated filer o		Smaller reporting company o

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

The number of shares of the Registrant’s Common Stock outstanding on October 29, 2010, was 5,928,343.

PART I - FINANCIAL INFORMATION

ACNB CORPORATION

ITEM 1 - FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)

Dollars in thousands, except per share data	September 30, 2010			September 30, 2009			December 31, 2009

ASSETS

Cash and due from banks	$	15,317		$	14,665		$	17,875
Interest bearing deposits with banks	17,547			24,424			6,263

Total Cash and Cash Equivalents	32,864			39,089			24,138

Securities available for sale	205,534			214,222			209,872
Securities held to maturity, fair value $10,844; $10,394; $10,334	10,048			10,060			10,057
Loans held for sale	3,761			285			145
Loans, net of allowance for loan losses $15,278; $10,994; $11,981	654,542			629,764			632,706
Premises and equipment	14,344			14,811			14,760
Restricted investment in bank stocks	9,170			9,170			9,170
Investment in bank-owned life insurance	27,200			26,162			26,408
Investments in low-income housing partnerships	4,189			4,480			4,391
Goodwill	5,972			5,972			5,972
Intangible assets	3,848			4,457			4,362
Foreclosed real estate	7,934			585			6,046
Other assets	13,790			8,977			13,877

Total Assets	$	993,196		$	968,034		$	961,904

LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES

Deposits:
Non-interest bearing	$	106,087		$	89,001		$	93,829
Interest bearing	658,776			626,324			634,694

Total Deposits	764,863			715,325			728,523

Short-term borrowings	41,785			55,369			55,291
Long-term borrowings	81,611			95,396			80,294
Other liabilities	11,113			12,755			9,493

Total Liabilities	899,372			878,845			873,601

STOCKHOLDERS’ EQUITY

Common stock, $2.50 par value; 20,000,000 shares authorized; 5,990,943 shares issued; 5,928,343 shares outstanding	14,977			14,977			14,977
Treasury stock, at cost (62,600 shares)	(728		)	(728		)	(728		)
Additional paid-in capital	8,787			8,787			8,787
Retained earnings	69,035			64,977			65,623
Accumulated other comprehensive income (loss)	1,753			1,176			(356		)

Total Stockholders’ Equity	93,824			89,189			88,303

Total Liabilities and Stockholders’ Equity	$	993,196		$	968,034		$	961,904

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

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended September 30,					Nine Months Ended September 30,
Dollars in thousands, except per share data	2010		2009			2010		2009

INTEREST INCOME
Loans, including fees	$	8,976	$	8,989		$	27,247	$	26,922
Securities:
Taxable	1,779		2,113			5,576		6,595
Tax-exempt	314		368			1,004		1,120
Dividends	7		8			22		30
Other	24		7			66		13

Total Interest Income	11,100		11,485			33,915		34,680

INTEREST EXPENSE

Deposits	1,553		2,265			4,828		7,403
Short-term borrowings	25		83			98		278
Long-term borrowings	810		938			2,499		2,961

Total Interest Expense	2,388		3,286			7,425		10,642

Net Interest Income	8,712		8,199			26,490		24,038

PROVISION FOR LOAN LOSSES	1,400		1,200			4,610		3,550

Net Interest Income after Provision for Loan Losses	7,312		6,999			21,880		20,488

OTHER INCOME
Service charges on deposit accounts	618		644			1,768		1,775
Income from fiduciary activities	350		265			953		761
Earnings on investment in bank-owned life insurance	252		264			759		765
Gain on life insurance proceeds	—		—			78		—
Net gains on sales of securities	47		14			72		17
Impairment charges on equity securities	—		(522		)	—		(522		)
Service charges on ATM and debit card transactions	287		260			831		742
Commissions from insurance sales	1,137		1,336			3,740		4,265
Other	225		378			743		1,047

Total Other Income	2,916		2,639			8,944		8,850

OTHER EXPENSES

Salaries and employee benefits	4,216		4,368			12,711		13,039
Net occupancy	520		542			1,658		1,714
Equipment	603		521			1,834		1,622
Other tax	182		200			588		554
Professional services	247		177			728		608
Supplies and postage	160		174			505		519
Marketing	72		108			281		338
FDIC and regulatory	355		346			1,061		1,622
Intangible assets amortization	161		160			482		479
Other operating	782		784			2,412		2,348

Total Other Expenses	7,298		7,380			22,260		22,843

Income before Income Taxes	2,930		2,258			8,564		6,495

PROVISION FOR INCOME TAXES	626		361			1,773		1,048

Net Income	$	2,304	$	1,897		$	6,791	$	5,447

PER SHARE DATA
Basic earnings	$	0.39	$	0.32		$	1.15	$	0.92
Cash dividends declared	$	0.19	$	0.19		$	0.57	$	0.57

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

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

Nine Months Ended September 30, 2010 and 2009

Dollars in thousands	Common Stock		Treasury Stock			Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity

BALANCE — JANUARY 1, 2009	$	14,977	$	(442	)	$	8,787	$	62,916		$	(1,799	)	$	84,439

Comprehensive income:
Net income	—		—			—		5,447			—			5,447
Other comprehensive income, net of taxes and reclassification adjustment	—		—			—		—			2,975			2,975

Total Comprehensive Income														8,422

Treasury stock purchased (27,600 shares)	—		(286		)	—		—			—			(286		)

Cash dividends declared	—		—			—		(3,386		)	—			(3,386		)

BALANCE — SEPTEMBER 30, 2009	$	14,977	$	(728	)	$	8,787	$	64,977		$	1,176		$	89,189

BALANCE — JANUARY 1, 2010	$	14,977	$	(728	)	$	8,787	$	65,623		$	(356	)	$	88,303

Comprehensive income:
Net income	—		—			—		6,791			—			6,791
Other comprehensive income, net of taxes and reclassification adjustment	—		—			—		—			2,109			2,109

Total Comprehensive Income														8,900

Cash dividends declared	—		—			—		(3,379		)	—			(3,379		)

BALANCE — SEPTEMBER 30, 2010	$	14,977	$	(728	)	$	8,787	$	69,035		$	1,753		$	93,824

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

ACNB CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Nine Months Ended September 30,
Dollars in thousands	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES

Net income	$	6,791		$	5,447
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sales of loans, property and foreclosed real estate	(68		)	(508		)
Earnings on investment in bank-owned life insurance	(759		)	(765		)
Gain on life insurance proceeds	(78		)	—
Gains on sales of securities	(72		)	(17		)
Impairment charges on equity securities	—			522
Depreciation and amortization	1,773			1,716
Provision for loan losses	4,610			3,550
Net amortization (accretion) of investment securities premiums (discounts)	73			(154		)
(Increase) decrease in interest receivable	(296		)	293
Decrease in interest payable	(129		)	(163		)
Mortgage loans originated for sale	(23,385		)	(45,276		)
Proceeds from loans sold to others	19,992			46,459
(Increase) decrease in other assets	(496		)	270
Increase in other liabilities	140			1,765

Net Cash Provided by Operating Activities	8,096			13,139

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities available for sale	43,996			62,387
Proceeds from sales of investment securities available for sale	6,561			2,956
Purchase of investment securities held to maturity	—			(10,064		)
Purchase of investment securities available for sale	(41,381		)	(23,341		)
Net increase in loans	(29,115		)	(3,086		)
Purchase of bank-owned life insurance	(250		)	(100		)
Capital expenditures	(903		)	(1,595		)
Proceeds from life insurance death benefits	294			—
Proceeds from sales of property and foreclosed real estate	656			151

Net Cash (Used in) Provided by Investing Activities	(20,142		)	27,308

CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits	12,258			6,515
Net increase in time certificates of deposits and interest bearing deposits	24,082			18,513
Net decrease in short-term borrowings	(13,506		)	(28,084		)
Dividends paid	(3,379		)	(3,386		)
Purchase of treasury stock	—			(286		)
Proceeds from long-term borrowings	22,000			68,000
Repayments on long-term borrowings	(20,683		)	(79,555		)

Net Cash Provided by (Used in) Financing Activities	20,772			(18,283		)

Net Increase in Cash and Cash Equivalents	8,726			22,164

CASH AND CASH EQUIVALENTS — BEGINNING	24,138			16,925

CASH AND CASH EQUIVALENTS — ENDING	$	32,864		$	39,089

Interest paid	$	7,554		$	10,805
Incomes taxes paid	$	2,300		$	1,500
Loans transferred to foreclosed real estate	$	2,669		$	102

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

ACNB CORPORATION

ITEM 1 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly ACNB Corporation’s financial position as of September 30, 2010 and 2009, and the results of operations, changes in stockholders’ equity, and cash flows for the nine months ended September 30, 2010 and 2009. All such adjustments are of a normal recurring nature.

The accounting policies followed by the Corporation are set forth in Note A to the Corporation’s financial statements in the 2009 ACNB Corporation Annual Report on Form 10-K, filed with the SEC on March 12, 2010. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K. The results of operations for the three and nine month periods ended September 30, 2010, are not necessarily indicative of the results to be expected for the full year. For comparative purposes, the September 30, 2009, balances have been reclassified to conform with the 2010 presentation. Such reclassifications had no impact on net income.

The Corporation has evaluated events and transactions occurring subsequent to the balance sheet date of September 30, 2010, for items that should potentially be recognized or disclosed in the consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

By letter dated August 17, 2010, the Pennsylvania Department of Banking approved the conversion of Adams County National Bank, the wholly-owned subsidiary of ACNB Corporation, from a national banking association to a Pennsylvania state-chartered bank and trust company. The conversion of Adams County National Bank to ACNB Bank took effect on October 4, 2010. The conversion is not expected to have any material effect on the consolidated financial statements of ACNB Corporation.

2. Earnings Per Share

The Corporation has a simple capital structure. Basic earnings per share of common stock is computed based on 5,928,343 and 5,938,581 weighted average shares of common stock outstanding for the nine months ended September 30, 2010 and 2009, respectively, and 5,928,343 for the three months ended September 30, 2010 and 2009, respectively. The Corporation does not have dilutive securities outstanding.

3. Retirement Benefits

The components of net periodic benefit costs related to the non-contributory pension plan for the three month and nine month periods ended September 30 were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
In thousands	2010			2009			2010			2009
Service cost	$	115		$	140		$	345		$	421
Interest cost	268			247			804			741
Expected return on plan assets	(304		)	(241		)	(912		)	(723		)
Recognized net actuarial loss	109			145			327			434
Other, net	13			13			39			39

Net Periodic Benefit Cost	$	201		$	304		$	603		$	912

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

4. Guarantees

The Corporation does not issue any guarantees that would require liability recognition or disclosure, other than its standby letters of credit. Standby letters of credit are written conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Generally, all letters of credit, when issued, have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as those that are involved in extending loan facilities to customers. The Corporation generally holds collateral and/or personal guarantees supporting these commitments. The Corporation had $5,969,000 in standby letters of credit as of September 30, 2010. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees should be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The current amount of the liability, as of September 30, 2010, for guarantees under standby letters of credit issued was not material.

5. Comprehensive Income

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

	Three Months Ended September 30,					Nine Months Ended September 30,
In thousands	2010			2009		2010			2009
Unrealized holding gains (losses) on available for sale securities arising during the period	$	(98	)	$	4,320	$	2,901		$	3,530
Reclassification of (gains) losses realized in net income	(47		)	508		(72		)	505

Net Unrealized Gains (Losses)	(145		)	4,828		2,829			4,035

Tax effect	(50		)	1,641		961			1,372

	(95		)	3,187		1,868			2,663

Change in pension liability	122			158		366			473

Tax effect	41			55		125			161

	81			103		241			312

Other Comprehensive Income (Loss)	$	(14	)	$	3,290	$	2,109		$	2,975

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

In thousands	Unrealized Gains on Securities		Pension Liability			Accumulated Other Comprehensive Income (Loss)

BALANCE, SEPTEMBER 30, 2010	$	6,074	$	(4,321	)	$	1,753

BALANCE, DECEMBER 31, 2009	$	4,206	$	(4,562	)	$	(356	)

BALANCE, SEPTEMBER 30, 2009	$	6,459	$	(5,283	)	$	1,176

6. Segment Reporting

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

Segment information for the nine month periods ended September 30, 2010 and 2009, is as follows:

In thousands	Banking		Insurance		Intercompany Eliminations			Total
2010
Net interest income and other income from external customers	$	31,947	$	3,487	$	—		$	35,434
Income before income taxes	8,092		472		—			8,564
Total assets	982,840		11,939		(1,583		)	993,196
Capital expenditures	887		16		—			903

2009
Net interest income and other income from external customers	$	28,632	$	4,256	$	—		$	32,888
Income before income taxes	5,689		806		—			6,495
Total assets	957,436		13,484		(2,886		)	968,034
Capital expenditures	1,562		33		—			1,595

Segment information for the three month periods ended September 30, 2010 and 2009, is as follows:

In thousands	Banking		Insurance		Intercompany Eliminations			Total
2010
Net interest income and other income from external customers	$	10,730	$	898	$	—		$	11,628
Income before income taxes	2,841		89		—			2,930
Total assets	982,840		11,939		(1,583		)	993,196
Capital expenditures	240		—		—			240

2009
Net interest income and other income from external customers	$	9,505	$	1,333	$	—		$	10,838
Income before income taxes	2,070		188		—			2,258
Total assets	957,436		13,484		(2,886		)	968,034
Capital expenditures	321		23		—			344

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

7. Securities

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

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

Amortized cost and fair value at September 30, 2010, and December 31, 2009, were as follows:

In thousands	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
SECURITIES AVAILABLE FOR SALE
SEPTEMBER 30, 2010
U.S. Government and agencies	$	37,273	$	515	$	17	$	37,771
Mortgage-backed securities - residential	111,837		6,509		40		118,306
State and municipal	34,218		1,675		—		35,893
Corporate bonds	11,352		479		8		11,823
CRA mutual fund	1,024		24		—		1,048
Stock in other banks	627		66		—		693

	$	196,331	$	9,268	$	65	$	205,534

DECEMBER 31, 2009
U.S. Government and agencies	$	24,117	$	316	$	105	$	24,328
Mortgage-backed securities - residential	128,073		5,489		65		133,497
State and municipal	40,723		631		83		41,271
Corporate bonds	9,959		215		—		10,174
Stock in other banks	627		—		25		602

	$	203,499	$	6,651	$	278	$	209,872

SECURITIES HELD TO MATURITY
SEPTEMBER 30, 2010
U.S. Government and agencies	$	10,048	$	796	$	—	$	10,844

DECEMBER 31, 2009
U.S. Government and agencies	$	10,057	$	277	$	—	$	10,334

At September 30, 2010, two U.S. Government and agencies had unrealized losses, and none 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 September 30, 2010, two mortgage-backed securities had unrealized losses, and none 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 September 30, 2010, one corporate bond had an unrealized loss, and this security had been in a continuous loss position for less than 12 months. This unrealized loss relates principally to changes in interest rates subsequent to the acquisition of the specific security. The security in this category had an unrealized loss that was less than 1% of amortized cost.

At December 31, 2009, two U.S. Government and agencies had unrealized losses, and none 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 December 31, 2009, six 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 December 31, 2009, 17 state and municipal securities had unrealized losses, and none 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 5% of amortized cost, and a majority had unrealized losses totaling less than 1% of amortized cost. Stock in other banks are investments in two local banks that had unrealized losses; however, their market value has diminished in line with other similar bank stocks because of the financial issues impacting the banking industry.

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

Management routinely sells securities from its available for sale portfolio in an effort to manage and allocate the portfolio. At September 30, 2010, management had not identified any securities with an unrealized loss that it intends to sell.

The following table shows the Corporation’s gross unrealized losses and fair value related to investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2010, and December 31, 2009:

	Less than 12 Months				12 Months or More				Total
In thousands	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

SECURITIES AVAILABLE FOR SALE
SEPTEMBER 30, 2010
U.S. Government and agencies	$	1,831	$	17	$	—	$	—	$	1,831	$	17
Mortgage-backed securities - residential	3,095		40		—		—		3,095		40
Corporate bonds	992		8		—		—		992		8

	$	5,918	$	65	$	—	$	—	$	5,918	$	65

DECEMBER 31, 2009
U.S. Government and agencies	$	7,953	$	105	$	—	$	—	$	7,953	$	105
Mortgage-backed securities - residential	16,426		62		482		3		16,908		65
State and municipal	7,757		83		—		—		7,757		83
Stock in other banks	602		25		—		—		602		25

	$	32,738	$	275	$	482	$	3	$	33,220	$	278

Amortized cost and fair value at September 30, 2010, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay with or without penalties.

Available for Sale

Held to Maturity

In thousands

Amortized
Cost

Fair
Value

Amortized
Cost

Fair
Value

1 year or less

—

Over 1 year through 5 years

37,518

38,544

10,048

10,844

Over 5 years through 10 years

32,238

33,399

—

Over 10 years

13,087

13,544

—

Mortgage-backed securities - residential

111,837

118,306

—

CRA mutual fund and stock in other banks

1,651

1,741

—

196,331

205,534

10,048

10,844

The Corporation realized gross gains of $54,000 during the third quarter of 2010 and $14,000 during the third quarter of 2009 and gross losses of $7,000 during the third quarter of 2010 and $0 during the third quarter of 2009 on sales of securities available for sale. State and municipal securities were sold during the second quarter of 2010 at a loss in order to adjust the Corporation’s interest rate sensitivity, reduce exposure to geographical locations, balance the mix with other investment types, and reduce risks related to insurance coverage. For the nine month period ended September 30, 2010, the Corporation realized gross gains of $128,000 and gross losses of $56,000 on sales of securities available for sale. For the nine month period ended September 30, 2009 the Corporation realized $75,000 gross gains and $58,000 gross losses on sales of securities available for sale.

At September 30, 2010, and December 31, 2009, securities with a carrying value of $102,607,000 and $96,927,000, respectively, were pledged as collateral as required by law on public and trust deposits, repurchase agreements, and for other purposes.

8. Fair Value Measurements

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

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

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

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

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

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

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

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

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

For assets measured at fair value, the fair value measurements by level within the fair value hierarchy and the basis of measurement used at September 30, 2010, and December 31, 2009, are as follows:

Fair Value Measurements at September 30, 2010

In thousands

Basis

Total

Level 1

Level 2

Level 3

Securities available for sale

Recurring

205,534

1,741

203,793

—

Impaired loans

Nonrecurring

5,358

—

5,358

Foreclosed real estate

Nonrecurring

7,934

—

7,934

	Fair Value Measurements at December 31, 2009
In thousands	Basis	Total		Level 1		Level 2		Level 3

Securities available for sale	Recurring	$	209,872	$	602	$	209,270	$	—
Impaired loans	Nonrecurring	4,447		—		—		4,447
Foreclosed real estate	Nonrecurring	6,046		—		—		6,046

The following table presents a reconciliation of impaired loans and foreclosed real estate measured at fair value, using significant unobservable inputs (Level 3), for the quarter ended September 30, 2010:

In thousands	Impaired Loans			Foreclosed Real Estate

Balance — January 1, 2010	$	4,447		$	6,046
Amount charged off	(666		)	(147		)
Settled or otherwise removed from impaired status	(325		)	(628		)
Additions to impaired status	2,442			—
Payments made	(151		)	—
Increase in valuation allowance	1,373			—
Loans transferred to foreclosed real estate	(1,762		)	2,663
Balance — September 30, 2010	$	5,358		$	7,934

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

The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Corporation’s financial instruments at September 30, 2010, and December 31, 2009:

Cash and Cash Equivalents (Carried at Cost)

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

Securities

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

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

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

Loans (Carried at Cost)

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

Impaired Loans (Generally Carried at Fair Value)

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

Foreclosed Real Estate

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

Restricted Investment in Bank Stock (Carried at Cost)

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

Accrued Interest Receivable and Payable (Carried at Cost)

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

Deposits (Carried at Cost)

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

Short-Term Borrowings (Carried at Cost)

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

Long-Term Borrowings (Carried at Cost)

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

Off-Balance Sheet Credit-Related Instruments

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

Estimated fair values of financial instruments at September 30, 2010, and December 31, 2009, were as follows:

	September 30, 2010				December 31, 2009
In thousands	Carrying Amount		Fair Value		Carrying Amount		Fair Value

Financial assets:
Cash and due from banks	$	15,317	$	15,317	$	17,875	$	17,875
Interest bearing deposits in banks	17,547		17,547		6,263		6,263
Investment securities:
Available for sale	205,534		205,534		209,872		209,872
Held to maturity	10,048		10,844		10,057		10,334
Loans held for sale	3,761		3,761		145		145
Loans, less allowance for loan losses	654,542		679,882		632,706		648,508
Accrued interest receivable	3,948		3,948		3,658		3,658
Restricted investment in bank stocks	9,170		9,170		9,170		9,170

Financial liabilities:
Deposits	764,863		768,903		728,523		732,089
Short-term borrowings	41,785		41,785		55,291		55,291
Long-term borrowings	81,611		87,422		80,294		83,305
Accrued interest payable	1,993		1,993		2,122		2,122

Off-balance sheet financial instruments	—		—		—		—

9. New Accounting Pronouncements

ASU 2009-05

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

· A valuation technique that uses:

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

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

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

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

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

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

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

ASU 2009-16

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

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

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

ASU 2010-06

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

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

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

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

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

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

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

ASU 2010-09

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

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

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

ASU 2010-18

ASU 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset, codifies the consensus reached in Emerging Issues Task Force (EITF) Issue No. 09-1, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset. The amendments to the Codification provide that modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. ASU 2010-18 does not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40.

ASU 2010-18 is effective prospectively for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. Early application is permitted. Upon initial adoption of ASU 2010-18, an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration.

The Corporation adopted the required provisions of ASU 2010-09, with no significant impact on its financial condition or results of operations.

ASU 2010-20

ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, will help investors assess the credit risk of a company’s receivables portfolio and the adequacy of its allowance for credit losses held against the portfolio by expanding credit risk disclosures.

This ASU requires more information about the credit quality of financing receivables in the disclosures to financial statements, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure.

The amendments in this ASU apply to all public and nonpublic entities with financing receivables. Financing receivables include loans and trade accounts receivable. However, short-term trade accounts receivable, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from these disclosure amendments.

The effective date of ASU 2010-20 differs for public and nonpublic companies. For public companies, the amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. For nonpublic companies, the amendments are effective for annual reporting periods ending on or after December 15, 2011.

The Corporation does not expect the adoption of this standard will have a significant impact on the Corporation’s financial condition or results of operations.

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: the effects of the new laws and regulations, specifically the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act; ineffectiveness of the business strategy due to changes in current or future market conditions; the effects and unanticipated expenses related to the charter conversion of our subsidiary bank from a federal to a state charter; 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. Regulatory agencies may require additions to the allowance as part of the examination process.

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

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

RESULTS OF OPERATIONS

Quarter ended September 30, 2010, compared to quarter ended September 30, 2009

Executive Summary

Net income for the three months ended September 30, 2010, was $2,304,000 compared to $1,897,000 for the same quarter in 2009, an increase of $407,000 or 21%. Earnings per share increased from $0.32 in 2009 to $0.39 in 2010. Net interest income increased $513,000 or 6%; provision for loan losses increased $200,000 or 17%; other income increased $277,000 or 10%; and, other expenses decreased $82,000 or 1%.

Net Interest Income

Net interest income totaled $8,712,000 for the quarter ended September 30, 2010, compared to $8,199,000 for the same period in 2009, an increase of $513,000 or 6%. Net interest income increased due to a decrease in interest expense resulting from reductions in market rates associated with the continued low rates maintained by the Federal Reserve Bank. Alternative funding sources, such as the FHLB, and other market driver rates are factors in rates the Corporation and the local market pay for deposits. At the end of the third quarter of 2010, several of the core deposit rates continued at practical floors after the Federal Open Market Committee decreased the Federal Funds Target Rate by 400 basis points during 2008 and then maintained it at 0% to 0.25% since that time. Interest expense decreased $898,000 or 27%. The lower funding costs were combined with lower interest income, which decreased $385,000 or 3%. Interest income was lower as a result of investment securities paydowns that were not reinvested due to low market rates resulting from Federal Reserve buying activities. Interest income also decreased due to declines in the Federal Funds Target Rate and other market driver rates. These driver rates are indexed to a portion of the loan portfolio in a manner that a decrease in the driver rates decreases the yield on the loans at subsequent rate reset dates. For more information about interest rate risk, please refer to Item 7A - Quantitative and Qualitative Disclosures about Market Risk in the Corporation’s Annual Report on Form 10-K dated December 31, 2009, and filed with the SEC on March 12, 2010. Over the longer term, the Corporation continues its strategic direction to increase asset yield and interest income by means of loan growth and rebalancing the composition of earning assets.

The net interest spread for the third quarter of 2010 was 3.68% compared to 3.46% during the same period in 2009. The yield on interest earning assets decreased by 0.24% when comparing the third quarter of 2010 to 2009, and the cost of interest bearing liabilities decreased by 0.46%. The net interest margin was 3.85% for the third quarter of 2010 and 3.68% for the third quarter of 2009. The net interest margin improvement was mainly a result of the cost of funding decreasing at a higher rate than the rate of change in the yield on assets due to timing of repricing, local market competition, and an improvement in the mix of higher yielding loans in earning assets.

Average earning assets were $902,702,000 during the third quarter of 2010, an increase of $12,327,000 from the average for the third quarter of 2009. Average interest bearing liabilities were $776,331,000 in the third quarter of 2010, an increase of $4,478,000 from the same quarter in 2009.

Provision for Loan Losses

The provision for loan losses was $1,400,000 in the third quarter of 2010 compared to $1,200,000 in the third quarter of 2009, an increase of $200,000 or 17%. The increase was a result of analysis of the adequacy of the allowance for loan losses. Each quarter, the Corporation measures risk in the loan portfolio compared with the balance in the allowance for loan losses and the current evaluation factors. For more information, please refer to Allowance for Loan Losses in the subsequent Financial Condition section. ACNB charges confirmed loan losses to the allowance and credits the allowance for recoveries of previous loan charge-offs. For the third quarter of 2010, the Corporation had net charge-offs of $466,000, as compared to net charge-offs of $67,000 for the third quarter of 2009.

Other Income

Total other income was $2,916,000 for the three months ended September 30, 2010, up $277,000, or 10%, from the third quarter of 2009. Fees from deposit accounts and ATM/debit card revenue were $905,000, an increase of $1,000, or 0.1%, due to higher electronic transaction volume. About 57% of this revenue is overdraft-related fees. A revised federal Regulation E, which restricts how banks collect overdraft-related fees, went into effect as of August 15, 2010. The change in Overdraft-related fees from this regulation was not material. Income from fiduciary activities, which include both institutional and personal trust management services, totaled $350,000 for the three months ended September 30, 2010, as compared to $265,000 during the third quarter of 2009, a 32% increase as a result of higher average assets under management and higher estate settlement fees. Earnings on bank-owned life insurance decreased by $12,000, or 5%, as a result of lower crediting rates on some policies. The Corporation’s wholly-owned subsidiary, Russell Insurance Group, Inc. (RIG), saw lower revenue, decreasing $199,000 or 15%. Revenue was constrained because of lower commissions in a “soft” insurance market, as well as the effects of the prolonged economic recession on business clients. The Corporation took an impairment charge of $522,000 on two equity securities in the third quarter of 2009; no charge was necessary in the third quarter of 2010. Other income in the quarter ended September 30, 2010, was down 30%, being negatively impacted by decreased fees related to less sales of residential mortgages as a result of continued slo