NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
ACNB Corporation (the Corporation or ACNB), headquartered in Gettysburg, Pennsylvania, provides banking, insurance, and financial services to businesses and consumers through its wholly-owned subsidiaries, ACNB Bank (Bank) and Russell Insurance Group, Inc. (RIG). The Bank engages in full-service commercial and consumer banking and wealth management services, including trust and retail brokerage, through its twenty-one community banking office locations in Adams, Cumberland, Franklin, and York Counties, Pennsylvania. There are also loan production offices situated in Lancaster and York, Pennsylvania, and Hunt Valley, Maryland.
RIG is a full-service insurance agency based in Westminster, Maryland, with additional locations in Germantown and Jarrettsville, Maryland. The agency offers a broad range of property and casualty and group life and health insurance to both individual and commercial clients.
On July 1, 2017, ACNB completed its acquisition of New Windsor Bancorp, Inc. (New Windsor) of Taneytown, Maryland. At the effective time of the acquisition, New Windsor merged with and into a wholly-owned subsidiary of ACNB, immediately followed by the merger of New Windsor State Bank (NWSB) with and into ACNB Bank. ACNB Bank now operates in the Maryland market as “NWSB Bank, A Division of ACNB Bank” and serves its marketplace with banking and wealth management services via a network of seven community banking offices located in Carroll County, Maryland.
On January 11, 2020, ACNB completed its acquisition of Frederick County Bancorp, Inc. (FCBI) and its wholly-owned subsidiary, Frederick County Bank, headquartered in Frederick, Maryland. FCBI was merged with and into a wholly-owned subsidiary of ACNB Corporation immediately followed by the merger of Frederick County Bank with and into ACNB Bank. ACNB Bank now operates in the Frederick County, Maryland, market as “FCB Bank, A Division of ACNB Bank” and serves its marketplace with banking and wealth management services via a network of five community banking offices located in Frederick County, Maryland. Further discussion of the risk factors involved with the merger of FCBI into the Corporation can be found in Part I, Item 1A–Risk Factors.
The Corporation’s primary sources of revenue are interest income on loans and investment securities and fee income on its products and services. Expenses consist of interest expense on deposits and borrowed funds, provisions for loan losses, and other operating expenses.
Basis of Financial Statements
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) and include the accounts of the Corporation and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated.
Assets held by the Corporation’s Wealth Management Department, including trust and retail brokerage, in an agency, fiduciary or retail brokerage capacity for its customers are excluded from the consolidated financial statements since they do not constitute assets of the Corporation. Assets held by the Wealth Management Department amounted to $436,700,000 and $389,000,000 at December 31, 2020 and 2019, respectively. Income from fiduciary, investment management and brokerage activities are included in other income.
The Corporation has evaluated events and transactions occurring subsequent to the balance sheet date of December 31, 2020, 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.
Use of Estimates
Financial statements prepared in accordance with GAAP require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingencies at the date of the consolidated financial statements, and revenues and expenses during the reporting period. Actual results could differ from these estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the determination of other than temporary impairment on securities, and the potential impairment of goodwill.
Significant Group Concentrations of Credit Risk
Most of the Corporation’s activities are with customers located within southcentral Pennsylvania and northern Maryland. Note C discusses the types of securities in which the Corporation invests. Note D discusses the types of lending in which the Corporation engages. Included in commercial real estate loans are loans made to lessors of non-residential dwellings that total $358,663,000, or 21.9%, of total loans at December 31, 2020. These borrowers are geographically disbursed throughout ACNB’s marketplace and are leasing commercial properties to a varied group of tenants including medical offices, retail space and recreational facilities. Because of the varied nature of the tenants in aggregate, management believes that these loans do not present any greater risk than commercial loans in general.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, balances due from banks, and federal funds sold, all of which mature within 90 days.
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. Debt securities not classified as held to maturity or trading 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 (loss). Equity securities with readily determined fair values are recorded at fair value with changes in fair value recognized in net 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 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) if 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 intention 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.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by aggregate outstanding commitments from investors or current investor yield requirements. Net unrealized losses are recognized through a valuation allowance by charges to income.
Mortgage loans held for sale are sold with the mortgage servicing rights released to another financial institution through a correspondent relationship. The correspondent financial institution absorbs all of the risk related to rate lock commitments. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold.
Loans
The Corporation grants commercial, residential, and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans throughout southcentral Pennsylvania and northern Maryland. The ability of the Corporation’s debtors to honor their contracts is dependent upon the real estate values and general economic conditions in this area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.
The loans receivable portfolio is segmented into commercial, residential mortgage, home equity lines of credit, and consumer loans. Commercial loans consist of the following classes: commercial and industrial, commercial real estate, and commercial real estate construction.
The accrual of interest on residential mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Consumer loans (consisting of home equity lines of credit and consumer loan classes) are typically charged off no later than 120 days past due. Past due status is based on the contractual
terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued, but not collected, for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Credit Losses
The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses (the “allowance”) is established as losses are estimated to occur through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated statement of condition. The amount of the reserve for unfunded lending commitments is not material to the consolidated financial statements.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity, and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative risk factors. These qualitative risk factors include:
•lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices;
•national, regional and local economic and business conditions, as well as the condition of various market segments, including the impact on the value of underlying collateral for collateral dependent loans;
•the nature and volume of the portfolio and terms of loans;
•the experience, ability and depth of lending management and staff;
•the volume and severity of past due, classified and nonaccrual loans, as well as other loan modifications; and,
•the existence and effect of any concentrations of credit and changes in the level of such concentrations.
Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.
The unallocated component of the allowance is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. It covers risks that are inherently difficult to quantify including, but not limited to, collateral risk, information risk, and historical charge-off risk.
A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal and/or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and/or interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the
amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and commercial construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
A specific allocation within the allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of the Corporation’s impaired loans are measured based on the estimated fair value of the loan’s collateral or the discounted cash flows method.
It is the policy of the Corporation to order an updated valuation on all real estate secured loans when the loan becomes 90 days past due and there has not been an updated valuation completed within the previous 12 months. In addition, the Corporation orders third-party valuations on all impaired real estate collateralized loans within 30 days of the loan being classified as impaired. Until the valuations are completed, the Corporation utilizes the most recent independent third-party real estate valuation to estimate the need for a specific allocation to be assigned to the loan. These existing valuations are discounted downward to account for such things as the age of the existing collateral valuation, change in the condition of the real estate, change in local market and economic conditions, and other specific factors involving the collateral. Once the updated valuation is completed, the collateral value is updated accordingly.
For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging reports, equipment appraisals, or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.
The Corporation actively monitors the values of collateral as well as the age of the valuation of impaired loans. The Corporation orders valuations at least every 18 months, or more frequently if management believes that there is an indication that the fair value has declined.
For impaired loans secured by collateral other than real estate, the Corporation considers the net book value of the collateral, as recorded in the most recent financial statements of the borrower, and determines fair value based on estimates made by management.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a troubled debt restructure.
Loans whose terms are modified are classified as troubled debt restructured loans if the Corporation grants such borrowers concessions that it would not otherwise consider and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate, a below market interest rate given the risk associated with the loan, or an extension of a loan’s stated maturity date. Nonaccrual troubled debt restructurings may be restored to accrual status if principal and interest payments, under the modified terms, are current for a sustained period of time and, based on a well-documented credit evaluation of the borrower’s financial condition, there is reasonable assurance of repayment. Loans classified as troubled debt restructurings are generally designated as impaired.
The allowance calculation methodology includes further segregation of loan classes into credit quality rating categories. The borrower’s overall financial condition, repayment sources, guarantors, and value of collateral, if appropriate, are generally evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments.
Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass.
In addition, federal and state regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses and may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio and economic conditions, management believes the current level of the allowance for loan losses is adequate.
Commercial and Industrial Lending — The Corporation originates commercial and industrial loans primarily to businesses located in its primary market area and surrounding areas. These loans are used for various business purposes which include short-term loans and lines of credit to finance machinery and equipment purchases, inventory, and accounts receivable. Generally, the maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment. Most business lines of credit are written on demand and may be renewed annually.
Commercial and industrial loans are generally secured with short-term assets; however, in many cases, additional collateral such as real estate is provided as additional security for the loan. Loan-to-value maximum values have been established by the Corporation and are specific to the type of collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, collateral appraisals, etc.
In underwriting commercial and industrial loans, an analysis is performed to evaluate the borrower’s character and capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as the conditions affecting the borrower. Evaluation of the borrower’s past, present and future cash flows is also an important aspect of the Corporation’s analysis.
Commercial loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions.
Commercial Real Estate Lending — The Corporation engages in commercial real estate lending in its primary market area and surrounding areas. The Corporation’s commercial loan portfolio is secured primarily by commercial retail space, office buildings, and hotels. Generally, commercial real estate loans have terms that do not exceed 20 years, have loan-to-value ratios of up to 80% of the appraised value of the property, and are typically secured by personal guarantees of the borrowers.
In underwriting these loans, the Corporation performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. Appraisals on properties securing commercial real estate loans originated by the Corporation are performed by independent appraisers.
Commercial real estate loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions and the complexities involved in valuing the underlying collateral.
Commercial Real Estate Construction Lending — The Corporation engages in commercial real estate construction lending in its primary market area and surrounding areas. The Corporation’s commercial real estate construction lending consists of commercial and residential site development loans, as well as commercial building construction and residential housing construction loans.
The Corporation’s commercial real estate construction loans are generally secured with the subject property. Terms of construction loans depend on the specifics of the project, such as estimated absorption rates, estimated time to complete, etc.
In underwriting commercial real estate construction loans, the Corporation performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the project using feasibility studies, market data, etc. Appraisals on properties securing commercial real estate construction loans originated by the Corporation are performed by independent appraisers.
Commercial real estate construction loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions and the uncertainties surrounding total construction costs.
Residential Mortgage Lending — One-to-four family residential mortgage loan originations, including home equity closed-end loans, are generated by the Corporation’s marketing efforts, its present customers, walk-in customers, and referrals. These loans originate primarily within the Corporation’s market area or with customers primarily from the market area.
The Corporation offers fixed-rate and adjustable-rate mortgage loans with terms up to a maximum of 30 years for both permanent structures and those under construction. The Corporation’s one-to-four family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas. The majority of the Corporation’s residential mortgage loans originate with a loan-to-value of 80% or less. Loans in excess of 80% are required to have private mortgage insurance.
In underwriting one-to-four family residential real estate loans, the Corporation evaluates both the borrower’s financial ability to repay the loan as agreed and the value of the property securing the loan. Properties securing real estate loans made by the Corporation are appraised by independent appraisers. The Corporation generally requires borrowers to obtain an attorney’s title opinion or title insurance, as well as fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. The Corporation has not engaged in subprime residential mortgage originations.
Residential mortgage loans are subject to risk due primarily to general economic conditions, as well as a continued weak housing market.
Home Equity Lines of Credit Lending — The Corporation originates home equity lines of credit primarily within the Corporation’s market area or with customers primarily from the market area. Home equity lines of credit are generated by the Corporation’s marketing efforts, its present customers, walk-in customers, and referrals.
Home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of 90% and a maximum term of 20 years. In underwriting home equity lines of credit, the Corporation evaluates both the value of the property securing the loan and the borrower’s financial ability to repay the loan as agreed. The ability to repay is determined by the borrower’s employment history, current financial condition, and credit background.
Home equity lines of credit generally present a moderate level of risk due primarily to general economic conditions, as well as a continued weak housing market.
Junior liens inherently have more credit risk by virtue of the fact that another financial institution may have a higher security position in the case of foreclosure liquidation of collateral to extinguish the debt. Generally, foreclosure actions could become more prevalent if the real estate market continues to be weak and property values deteriorate.
Consumer Lending — The Corporation offers a variety of secured and unsecured consumer loans, including those for vehicles and mobile homes and loans secured by savings deposits. These loans originate primarily within the Corporation’s market area or with customers primarily from the market area.
Consumer loan terms vary according to the type and value of collateral and the creditworthiness of the borrower. In underwriting consumer loans, a thorough analysis of the borrower’s financial ability to repay the loan as agreed is performed. The ability to repay is determined by the borrower’s employment history, current financial condition, and credit background.
Consumer loans may entail greater credit risk than residential mortgage loans or home equity lines of credit, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets such as automobiles or recreational equipment. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.
Acquired Loans
Acquired Loans (impaired and non-impaired) are initially recorded at their acquisition-date fair values using Level 3 inputs. Fair values are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, expected lifetime losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments. Specifically, the Corporation has prepared three separate loan fair value adjustments that it believed a market participant might employ in estimating the entire fair value adjustment necessary under ASC 820-10 for the acquired loan portfolio. The three-separate fair valuation methodology employed are: 1) an interest rate loan fair value adjustment, 2) a general credit fair value adjustment, and 3) a specific credit fair value adjustment for purchased credit impaired loans subject to ASC 310-30 procedures.
The carryover of allowance for loan losses related to acquired loans is prohibited as any credit losses in the loans are included in the determination of the fair value of the loans at the acquisition date. The allowance for loan losses on acquired loans reflects only those losses incurred after acquisition and represents the present value of cash flows expected at acquisition that is no longer expected to be collected. Acquired loans are marked to fair value on the date of acquisition. In conjunction with the quarterly evaluation of the adequacy of the allowance for loan losses, the Corporation performs an analysis on acquired loans to determine whether or not there has been subsequent deterioration in relation to those loans. If deterioration has occurred, the Corporation will include these loans in the calculation of the allowance for loan losses after the initial valuation, and provide accordingly.
Upon acquisition, in accordance with US GAAP, the Corporation has individually determined whether each acquired loan is within the scope of ASC 310-30. The Corporation’s senior lending management reviewed the accounting seller’s loan portfolio on a loan by loan basis to determine if any loans met the two-part definition of an impaired loan as defined by ASC 310-30: 1) Credit deterioration on the loan from its inception until the acquisition date, and 2) It is probable that not all of the contractual cash flows will be collected on the loan.
Acquired ASC 310-20 loans, which are loans that did not meet the criteria above, were pooled into groups of similar loans based on various factors including borrower type, loan purpose, and collateral type. For these pools, the Corporation used
certain loan information, including outstanding principal balance, estimated expected losses, weighted average maturity, weighted average margin, and weighted average interest rate along with estimated prepayment rates, expected lifetime losses, environment factors to estimate the expected cash flow for each loan pool. With regards to ASC 310-30 loans, for external disclosure purposes, the aggregate contractual cash flows less the aggregate expected cash flows resulted in a credit related non-accretable yield amount. The aggregate expected cash flows less the acquisition date fair value resulted in an accretable yield amount. The accretable yield reflects the contractual cash flows management expects to collect above the loan’s acquisition date fair value and will be recognized over the life of the loan on a level-yield basis as a component of interest income.
Over the life of the acquired ASC 310-30 loan, the Corporation continues to estimate cash flows expected to be collected. Decreases in expected cash flows, other than from prepayments or rate adjustments, are recognized as impairments through a charge to the provision for credit losses resulting in an increase in the allowance for credit losses. Subsequent improvements in cash flows result in first, reversal of existing valuation allowances recognized subsequent to acquisition, if any, and next, an increase in the amount of accretable yield to be subsequently recognized on a prospective basis over the loan’s remaining life.
Acquired ASC 310-30 loans that met the criteria for non-accrual of interest prior to acquisition are considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if we can reasonably estimate the timing and amount of expected cash flows on such loans. Accordingly, we do not consider acquired contractually delinquent loans to be non-accruing and continue to recognize interest income on these loans using the accretion model.
For loans acquired without evidence of credit quality deterioration, ACNB prepared the interest rate loan fair value and credit fair value adjustments. Loans were grouped into homogeneous pools by characteristics such as loan type, term, collateral, and rate. Market rates for similar loans were obtained from various internal and external data sources and reviewed by management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value discount of $2.6 million.
Additionally, for loans acquired without credit quality deterioration, a credit fair value adjustment was calculated using a two-part credit fair value analysis: 1) expected lifetime credit migration losses; and 2) estimated fair value adjustment for certain qualitative factors. The expected lifetime losses were calculated using historical losses observed at the Bank, NWSB and peer banks. ACNB also estimated an environmental factor to apply to each loan type. The environmental factor represents potential discount which may arise due to general credit and economic factors. A credit fair value discount of $5.9 million was determined. Both the interest rate and credit fair value adjustments relate to loans acquired with evidence of credit quality deterioration will be substantially recognized as interest income on a level yield amortization method over the expected life of the loans.
Premises and Equipment
Land is carried at cost. Buildings, furniture, fixtures, equipment and leasehold improvements are carried at cost, less accumulated depreciation. Depreciation is computed principally by the straight-line method over the assets’ estimated useful lives. Normally, a buildings useful life is 40 years, except for building remodels and additions, which are depreciated over fifteen years. Bank equipment, including furniture and fixtures, is normally depreciated over five - fifteen years depending upon the nature of the purchase. Maintenance and normal repairs are charged to expense when incurred while major additions and improvements are capitalized. Gains and losses on disposals are reflected in current operations. Amortization of leasehold improvements is computed by straight line over the shorter of the assets’ useful life or the related lease term.
Restricted Investment in Bank Stocks
Restricted investment in bank stocks, which represents required investments in the common stock of correspondent banks, is carried at cost as of December 31, 2020 and 2019, and consists of common stock in the Atlantic Central Bankers Bank, Maryland Financial Bank, Community Bankers Bank and Federal Home Loan Bank (FHLB).
Management evaluates the restricted investment in bank stocks for impairment in accordance with Accounting Standard Codification (ASC) Topic 942, Financial Services—Depository and Lending. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the correspondent bank as compared to the capital stock amount for the correspondent bank and the length of time this situation has persisted, (2) commitments by the correspondent bank to make payments required by law or regulation and the level of such payments in relation to the operating performance of the correspondent bank, (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the correspondent bank, and (4) the liquidity position of the correspondent bank.
Management believes no impairment charge was necessary related to the restricted investment in bank stocks during 2020 or 2019. However, security impairment analysis is completed quarterly, and the determination that no impairment has occurred during those years is no assurance that impairment may not occur in future periods.
Bank-Owned Life Insurance
The Corporation’s banking subsidiary maintains nonqualified compensation plans for selected senior officers. To fund the benefits under these plans, the Bank is the owner of single premium life insurance policies on participants in the nonqualified retirement plans. Investment in bank-owned life insurance policies was used to finance the nonqualified compensation plans and provide tax-exempt income to the Corporation.
ASC Topic 715, Compensation—Retirement Benefits, 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 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 incurred approximately $139,000 and $161,000 of expense in 2020 and 2019, respectively, related to these benefits.
Investments in Low-Income Housing Partnerships
The Corporation’s investments in low-income housing partnerships are accounted for using the “equity method” prescribed by ASC Topic 323, Investments — Equity Method. In accordance with ASC Topic 740, Income Taxes, tax credits are recognized as they become available. Any residual loss is amortized as the tax credits are received.
Goodwill and Intangible Assets
The Corporation accounts for its acquisitions using the acquisition accounting method required by ASC Topic 805, Business Combinations. Acquisition accounting requires the total purchase price to be allocated to the estimated fair values of assets and liabilities acquired, including certain intangible assets that must be recognized. Generally, this results in a residual amount in excess of the net fair values, which is recorded as goodwill.
ASC Topic 350, Intangibles—Goodwill and Other, requires that goodwill is not amortized to expense, but rather that it be assessed or tested for impairment at least annually. If certain events occur which might indicate goodwill has been impaired, the goodwill is tested for impairment when such events occur. 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 RIG’s outstanding goodwill from its most recent testing, which was performed as of October 1, 2020. The Corporation did not identify any impairment on the Bank’s outstanding goodwill from its most recent qualitative assessment, which was completed as of December 31, 2020. If certain events occur which might indicate goodwill has been impaired, the goodwill is tested for impairment when such events occur. Other acquired intangible assets that have finite lives, such as core deposit intangibles, customer relationship intangibles and renewal lists, are amortized over their estimated useful lives and subject to periodic impairment testing. Core deposit intangibles are primarily amortized over ten years using accelerated methods. Customer renewal lists are amortized using the straight line method over their estimated useful lives which range from eight to fifteen years.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value, less costs to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are adjusted to the fair value, less costs to sell as necessary. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. $83,000 of the $364,000 outstanding foreclosed asset balance held at December 31, 2019 represent residential real estate properties. There was no outstanding foreclosed asset balance held at December 31, 2020.
Income Taxes
The Corporation accounts for income taxes in accordance with income tax accounting guidance ASC Topic 740, Income Taxes.
Current income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Corporation determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of the evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Corporation accounts for uncertain tax positions if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more-likely-than-not means a likelihood of more than 50%; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.
The Corporation recognizes interest and penalties on income taxes, if any, as a component of income tax expense.
Retirement Plan
The compensation cost of an employee’s pension benefit is recognized on the projected unit credit method over the employee’s approximate service period. The aggregate cost method is utilized for funding purposes.
Stock-based Compensation
The ACNB Corporation 2009 Restricted Stock plan expired by its own terms after 10 years on February 24, 2019. The purpose of this plan was to provide employees and directors of the Bank who have responsibility for its growth with additional incentives by allowing them to acquire ownership in the Corporation and, thereby, encouraging them to contribute to the success of the Corporation. As of December 31, 2020, 25,945 shares were issued under the plan and all shares are fully vested. No further shares may be issued under this restricted stock plan. The Corporation’s Registration Statement under the Securities Act of 1933 on Form S-8 for the ACNB Corporation 2009 Restricted Stock Plan was filed with the Securities and Exchange Commission on January 4, 2013. Post-Effective Amendment No. 1 to this Form S-8 was filed with the Commission on March 8, 2019, effectively transferring the 174,055 authorized, but not issued, shares under the ACNB Corporation 2009 Restricted Stock Plan to the ACNB Corporation 2018 Omnibus Stock Incentive Plan.
On May 1, 2018, shareholders approved and ratified the ACNB Corporation 2018 Omnibus Stock Incentive Plan, effective as of March 20, 2018, in which awards shall not exceed, in the aggregate, 400,000 shares of common stock, plus any shares that are authorized, but not issued, under the ACNB Corporation 2009 Restricted Stock Plan. As of December 31, 2020, 35,587 shares were issued under this plan, of which 17,124 are fully vested and the remaining 18,463 will vest over the next two years. The Corporation’s Registration Statement under the Securities Act of 1933 of Form S-8 for the ACNB Corporation 2018 Omnibus Stock Incentive Plan was filed with the Securities and Exchange Commission on March 8, 2019. In addition, on March 8, 2019, the Corporation filed Post-Effective Amendment No. 1 to the Registration Statement on Form S-8 for the ACNB Corporation 2009 Restricted Stock Plan to add the ACNB Corporation 2018 Omnibus Stock Incentive Plan to the registration statement.
Plan expense is recognized over the vesting period of the stock issued under both plans. $517,000 and $495,000 of compensation expenses related to the grants were recognized for the years ended December 31, 2020 and 2019, respectively.
Net Income per Share
The Corporation has a simple capital structure. Basic earnings per share of common stock is computed based on 8,638,654 and 7,061,524 weighted average shares of common stock outstanding for 2020 and 2019, respectively. All outstanding unvested restricted stock awards that contain rights to nonforfeitable dividends are considered participating for this calculation.
Advertising Costs
Costs of advertising, which are included in marketing expenses, are expensed when incurred.
Off-Balance Sheet Credit-Related Financial Instruments
In the ordinary course of business, the Corporation has entered into commitments to extend credit, including commitments under commercial lines of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.
Accumulated Other Comprehensive Loss
The components of the accumulated other comprehensive loss, net of taxes, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Unrealized Gains on
Securities
|
|
Pension
Liability
|
|
Accumulated
Other
Comprehensive
Loss
|
BALANCE — DECEMBER 31, 2020
|
$
|
4,645
|
|
|
$
|
(10,283)
|
|
|
$
|
(5,638)
|
|
BALANCE — DECEMBER 31, 2019
|
$
|
1,261
|
|
|
$
|
(7,114)
|
|
|
$
|
(5,853)
|
|
Segment Reporting
The Bank acts as an independent community financial services provider, which offers traditional banking and related financial services to individual, business, and government customers. Through its branch and automated teller machine networks, the Bank offers a full array of commercial and community financial services, including the taking of time, savings, and demand deposits; the making of commercial, consumer, and mortgage loans; and the providing of other financial services. Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial, community and mortgage banking operations of the Bank. As such, discrete financial information for commercial, community and mortgage banking operations is not available and segment reporting would not be meaningful. Please refer to Note S — “Segment and Related Information” for a discussion of insurance operations.
New Accounting Pronouncements
On January 1, 2019, the Corporation adopted ASU 2016-02, Leases, and all subsequent amendments to the ASU (collectively “Topic 842”). From the lessee’s perspective, the new standard establishes a right-of-use (ROU) model that requires a lessee to record an ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for a lessee. Under the optional transition method, only the most recent period presented reflects the adoption of Topic 842 and the comparative prior periods are reported under the previous guidance in Topic 840. The Corporation recorded a $4 million right-of-use asset and lease liability, which represents all of its operating lease commitments, based on the present value of committed lease payments. The ASU offers lessors a practical expedient that mirrors the practical expedient already provided to lessees in ASU 2016-02, Leases (Topic 842). The Corporation adopted the new practical expedient which will allow the Corporation to elect, by class of underlying asset, to not separate nonlease components from the associated lease component when specified conditions are met. Examples of nonlease components include equipment maintenance services, common area maintenance services in real estate, or other goods or services provided to the lessee apart from the right to use the underlying asset. The practical expedient must be applied consistently for all lease contracts. The effect on operations and capital adequacy was not material.
On January 1, 2019, the Corporation adopted ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for premiums on purchased callable debt securities to the earliest call date (i.e., yield-to-earliest call amortization), rather than amortizing over the full contractual term. The ASU does not change the accounting for securities held at a discount. The amendments apply to callable debt securities with explicit, noncontingent call features that are callable at fixed prices and on preset dates. If a security may be prepaid based upon prepayments of the underlying loans, not because the issuer exercised a date specific call option, it is excluded from the scope of the new standard. However, for instruments with contingent call features, once the contingency is resolved and the security is callable at a fixed price and preset date, the security is within the scope of the amendments. Further, the amendments apply to all premiums on callable debt securities, regardless of how they were generated. The amendments require companies to reset the effective yield using the payment terms of the debt security if the call option is not exercised on the earliest call date. If the security has additional future call dates, any excess of the amortized cost basis over the amount repayable by the issuer at the next call date should be amortized to the next call date. The adoption of this ASU did not have a material effect on the Corporation’s consolidated financial condition or results of operations.
The Corporation adopted ASU 2018-09, Codification Improvements. The ASU contains various improvements to various topics in the codification, including clarification that an entity must disclose the required and actual amounts of regulatory capital for each measure of regulatory capital for which the entity must comply. The adoption of this ASU did not impact the Corporation’s consolidated financial condition or results of operations since the Corporation already discloses capital requirements within the Management’s Discussion and Analysis section of this Form 10-K.
The Corporation early adopted ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This ASU removes, modifies and adds to existing fair value measurement disclosure requirements. The ASU would be effective for all entities in fiscal years beginning after December 15, 2019, including interim periods, which is first effective for calendar year entities in the March 31, 2020, interim financial statements. In addition, an entity may early adopt any of the removed or modified disclosures immediately and delay adoption of the new disclosures until the effective date. The adoption of this ASU did not have a material effect on the Corporation’s consolidated financial condition or results of operations.
The Corporation adopted ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.
The ASU removes the following disclosures:
•the amounts in accumulated other comprehensive income that the entity expects to recognize in net periodic benefit cost during the next fiscal year;
•the amount and timing of plan assets expected to be returned to the employer; and,
•certain related party disclosures.
The ASU clarifies the following disclosure requirements:
•the projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets must be disclosed; and,
•the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets must be disclosed.
The ASU adds the following disclosure requirements:
•the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates; and,
•an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.
The ASU is effective for public business entities in fiscal years ending after December 15, 2020. Early adoption is permitted.
The Corporation is currently evaluating the impact this ASU will have on its consolidated financial condition or results of operations.
ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
ASU 2016-13 requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (CECL) model). Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument.
The ASU also replaces the current accounting model for purchased credit impaired loans and debt securities. The allowance for credit losses for purchased financial assets with a more-than insignificant amount of credit deterioration since origination (“PCD assets”), should be determined in a similar manner to other financial assets measured on an amortized cost basis. However, upon initial recognition, the allowance for credit losses is added to the purchase price (“gross up approach”) to determine the initial amortized cost basis. The subsequent accounting for PCD financial assets is the same expected loss model described above.
Further, the ASU made certain targeted amendments to the existing impairment model for available-for-sale (AFS) debt securities. For an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis.
Certain incremental disclosures are required. Until recently, the new CECL standard was expected to become effective for the Corporation on January 1, 2020, and for interim periods within that year. In October 2019, FASB voted to delay implementation of the new CECL standard for certain companies, including those companies that qualify as a smaller reporting company under SEC rules, until January 1, 2023. The Corporation currently expects to continue to qualify as a smaller reporting company, based upon the current SEC definition, and as a result, will likely be able to defer implementation of the new CECL standard for a period of time. The Corporation did not early adopt as of January 1, 2020, but will continue to review factors that might indicate that the full deferral time period should not be used. The Corporation continues to evaluate the impact the CECL model will have on the accounting for credit losses, but the Corporation expects to recognize a one-time cumulative-effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, consistent with regulatory expectations set forth in interagency guidance issued at the end of 2016. The Corporation cannot yet determine the magnitude of any such one-time cumulative adjustment or of the overall impact of the new standard on its consolidated financial condition or results of operations. Management has developed a committee to address CECL and the committee is currently evaluating options to comply with the ASU in a timely manner.
ASU 2019-12
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), an update to simplify accounting for income taxes by removing certain exceptions in Topic 740. In addition, ASU 2019-12 improves consistent application of other areas of guidance within Topic 740 by clarifying and amending existing guidance. The new guidance is effective for fiscal years beginning after December 15, 2020. The adoption of the new guidance is not expected to have a material effect on the Corporation’s consolidated financial condition or results of operations.
ASU 2020-04
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The amendments in this Update provide optional guidance for a limited time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from LIBOR toward new interest rate benchmarks. For transactions that are modified because of reference rate reform and that meet certain scope guidance (i) modifications of loan agreements should be accounted for by prospectively adjusting the effective interest rate and the modification will be considered “minor” so that any existing unamortized origination fees/costs would carry forward and continue to be amortized and (ii) modifications of lease agreements should be accounted for as a continuation of the existing agreement with no reassessments of the lease classification and the discount rate or remeasurements of lease payments that otherwise would be required for modifications not accounted for as separate contracts. ASU 2020-04 is effective March 12, 2020 through December 31, 2022. An entity may elect to apply ASU 2020-04 for contract modifications as of January 1, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. The Corporation is currently evaluating the impact this ASU will have on its consolidated financial condition or results of operations.
NOTE B — RESTRICTIONS ON CASH AND DUE FROM BANKS
In return for services obtained through correspondent banks, the Corporation is required to maintain non-interest bearing cash balances in those correspondent banks. At December 31, 2020 and 2019, compensating balances approximated $0 and $2,276,000, respectively. During 2020 and 2019, average compensating balances approximated $850,000 and $2,228,000, respectively. All compensating balances are met by vault cash.
NOTE C — SECURITIES
Amortized cost and fair value at December 31, 2020 and 2019, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
SECURITIES AVAILABLE FOR SALE
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
U.S. Government and agencies
|
$
|
181,704
|
|
|
$
|
2,117
|
|
|
$
|
218
|
|
|
$
|
183,603
|
|
Mortgage-backed securities, residential
|
105,327
|
|
|
3,529
|
|
|
34
|
|
|
108,822
|
|
State and municipal
|
35,930
|
|
|
561
|
|
|
7
|
|
|
36,484
|
|
Corporate bonds
|
8,784
|
|
|
41
|
|
|
16
|
|
|
8,809
|
|
|
$
|
331,745
|
|
|
$
|
6,248
|
|
|
$
|
275
|
|
|
$
|
337,718
|
|
December 31, 2019
|
|
|
|
|
|
|
|
U.S. Government and agencies
|
$
|
113,569
|
|
|
$
|
849
|
|
|
$
|
169
|
|
|
$
|
114,249
|
|
Mortgage-backed securities, residential
|
64,699
|
|
|
980
|
|
|
87
|
|
|
65,592
|
|
State and municipal
|
10,940
|
|
|
70
|
|
|
14
|
|
|
10,996
|
|
|
$
|
189,208
|
|
|
$
|
1,899
|
|
|
$
|
270
|
|
|
$
|
190,837
|
|
SECURITIES HELD TO MATURITY
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities, residential
|
$
|
10,294
|
|
|
$
|
474
|
|
|
$
|
—
|
|
|
$
|
10,768
|
|
|
$
|
10,294
|
|
|
$
|
474
|
|
|
$
|
—
|
|
|
$
|
10,768
|
|
December 31, 2019
|
|
|
|
|
|
|
|
U.S. Government and agencies
|
$
|
4,000
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
4,008
|
|
Mortgage-backed securities, residential
|
15,234
|
|
|
76
|
|
|
37
|
|
|
15,273
|
|
|
$
|
19,234
|
|
|
$
|
84
|
|
|
$
|
37
|
|
|
$
|
19,281
|
|
The fair value disclosures required by ASU 2016-01, Financial Instruments—Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities effective January 1, 2018, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Fair Value at January 1, 2020
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Value at December 31, 2020
|
December 31, 2020
|
|
|
|
|
|
|
|
|
CRA Mutual Fund
|
|
$
|
1,045
|
|
|
$
|
25
|
|
|
$
|
5
|
|
|
$
|
1,065
|
|
Stock in other banks
|
|
1,318
|
|
|
—
|
|
|
213
|
|
|
1,105
|
|
|
|
$
|
2,363
|
|
|
$
|
25
|
|
|
$
|
218
|
|
|
$
|
2,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Fair Value at January 1, 2019
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Value at December 31, 2019
|
December 31, 2019
|
|
|
|
|
|
|
|
|
CRA Mutual Fund
|
|
$
|
1,012
|
|
|
$
|
33
|
|
|
$
|
—
|
|
|
$
|
1,045
|
|
Stock in other banks
|
|
827
|
|
|
234
|
|
|
—
|
|
|
1,061
|
|
|
|
$
|
1,839
|
|
|
$
|
267
|
|
|
$
|
—
|
|
|
$
|
2,106
|
|
The following table shows the Corporation’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agencies
|
$
|
32,629
|
|
|
$
|
218
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
32,629
|
|
|
$
|
218
|
|
Mortgage-backed securities, residential
|
10,458
|
|
|
34
|
|
|
—
|
|
|
—
|
|
|
10,458
|
|
|
34
|
|
State and municipal
|
2,148
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
2,148
|
|
|
7
|
|
Corporate bonds
|
1,514
|
|
|
16
|
|
|
—
|
|
|
—
|
|
|
1,514
|
|
|
16
|
|
|
$
|
46,749
|
|
|
$
|
275
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
46,749
|
|
|
$
|
275
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agencies
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
47,425
|
|
|
$
|
169
|
|
|
$
|
47,425
|
|
|
$
|
169
|
|
Mortgage-backed securities, residential
|
16,208
|
|
|
82
|
|
|
1,424
|
|
|
5
|
|
|
17,632
|
|
|
87
|
|
State and municipal
|
3,233
|
|
|
13
|
|
|
502
|
|
|
1
|
|
|
3,735
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,441
|
|
|
$
|
95
|
|
|
$
|
49,351
|
|
|
$
|
175
|
|
|
$
|
68,792
|
|
|
$
|
270
|
|
SECURITIES HELD TO MATURITY
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and agencies
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mortgage-backed securities, residential
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed security, residential
|
$
|
6,587
|
|
|
$
|
24
|
|
|
$
|
3,161
|
|
|
$
|
13
|
|
|
$
|
9,748
|
|
|
$
|
37
|
|
|
$
|
6,587
|
|
|
$
|
24
|
|
|
$
|
3,161
|
|
|
$
|
13
|
|
|
$
|
9,748
|
|
|
$
|
37
|
|
All mortgage-backed security investments are government sponsored enterprise (GSE) pass-through instruments issued by the Federal National Mortgage Association (FNMA), Government National Mortgage Association (GNMA) or Federal Home Loan Mortgage Corporation (FHLMC), which guarantee the timely payment of principal on these investments.
At December 31, 2020, fourteen available for sale U.S. Government and agency securities had unrealized losses that individually did not exceed 3% of amortized cost. None of these securities have 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.
At December 31, 2020, nine available for sale residential mortgage-backed securities had unrealized losses that individually did not exceed 1% of amortized cost. None of these securities have 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.
At December 31, 2020, three available for sale state and municipal securities had unrealized losses that individually did not exceed 2% of amortized cost. None of these securities have 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.
At December 31, 2020, two corporate bonds had unrealized losses that individually did not exceed 3% of amortized cost. These securities have not 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.
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. Based on the above information, management has determined that none of these investments are other-than-temporarily impaired.
The fair values of securities available for sale (carried at fair value) 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 independent service providers to provide matrix pricing.
Management routinely sells securities from its available for sale portfolio in an effort to manage and allocate the portfolio. At December 31, 2020, management had not identified any securities with an unrealized loss that it intends to sell or will be required to sell. In estimating 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) if 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 intention and ability to hold the securities until recovery of unrealized losses.
Amortized cost and fair value at December 31, 2020, by contractual maturity, where applicable, 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
|
$
|
61,958
|
|
|
$
|
62,546
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Over 1 year through 5 years
|
37,888
|
|
|
39,080
|
|
|
—
|
|
|
—
|
|
Over 5 years through 10 years
|
81,927
|
|
|
82,132
|
|
|
—
|
|
|
—
|
|
Over 10 years
|
44,645
|
|
|
45,138
|
|
|
—
|
|
|
—
|
|
Mortgage-backed securities, residential
|
105,327
|
|
|
108,822
|
|
|
10,294
|
|
|
10,768
|
|
|
$
|
331,745
|
|
|
$
|
337,718
|
|
|
$
|
10,294
|
|
|
$
|
10,768
|
|
The Corporation did not sell any securities available for sale during 2019 or 2020.
At December 31, 2020 and 2019, securities with a carrying value of $301,201,000 and $162,946,000, respectively, were pledged as collateral as required by law on public and trust deposits, repurchase agreements, and for other purposes.
NOTE D — LOANS AND ALLOWANCE FOR LOAN LOSSES
The Corporation grants commercial, residential, and consumer loans to customers primarily within southcentral Pennsylvania and northern Maryland and the surrounding area. A large portion of the loan portfolio is secured by real estate. Although the Bank has a diversified loan portfolio, its debtors’ ability to honor their contracts is influenced by the region’s economy.
The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Corporation’s internal risk rating system as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Pass
|
|
Special
Mention
|
|
Substandard
|
|
Doubtful
|
|
Total
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
Originated Loans
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
270,047
|
|
|
$
|
5,168
|
|
|
$
|
2,688
|
|
|
$
|
—
|
|
|
$
|
277,903
|
|
Commercial real estate
|
414,538
|
|
|
54,122
|
|
|
10,463
|
|
|
—
|
|
|
479,123
|
|
Commercial real estate construction
|
39,462
|
|
|
1,746
|
|
|
—
|
|
|
—
|
|
|
41,208
|
|
Residential mortgage
|
332,632
|
|
|
4,327
|
|
|
178
|
|
|
—
|
|
|
337,137
|
|
Home equity lines of credit
|
80,560
|
|
|
346
|
|
|
—
|
|
|
—
|
|
|
80,906
|
|
Consumer
|
11,819
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,819
|
|
Total Originated Loans
|
1,149,058
|
|
|
65,709
|
|
|
13,329
|
|
|
—
|
|
|
1,228,096
|
|
Acquired Loans
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
38,882
|
|
|
1,893
|
|
|
1,476
|
|
|
—
|
|
|
42,251
|
|
Commercial real estate
|
245,597
|
|
|
16,706
|
|
|
3,201
|
|
|
—
|
|
|
265,504
|
|
Commercial real estate construction
|
10,300
|
|
|
2,394
|
|
|
—
|
|
|
—
|
|
|
12,694
|
|
Residential mortgage
|
58,787
|
|
|
3,535
|
|
|
1,881
|
|
|
—
|
|
|
64,203
|
|
Home equity lines of credit
|
23,165
|
|
|
97
|
|
|
442
|
|
|
—
|
|
|
23,704
|
|
Consumer
|
1,330
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
1,332
|
|
Total Acquired Loans
|
378,061
|
|
|
24,625
|
|
|
7,002
|
|
|
—
|
|
|
409,688
|
|
Total Loans
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
308,929
|
|
|
7,061
|
|
|
4,164
|
|
|
—
|
|
|
320,154
|
|
Commercial real estate
|
660,135
|
|
|
70,828
|
|
|
13,664
|
|
|
—
|
|
|
744,627
|
|
Commercial real estate construction
|
49,762
|
|
|
4,140
|
|
|
—
|
|
|
—
|
|
|
53,902
|
|
Residential mortgage
|
391,419
|
|
|
7,862
|
|
|
2,059
|
|
|
—
|
|
|
401,340
|
|
Home equity lines of credit
|
103,725
|
|
|
443
|
|
|
442
|
|
|
—
|
|
|
104,610
|
|
Consumer
|
13,149
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
13,151
|
|
Total Loans
|
$
|
1,527,119
|
|
|
$
|
90,334
|
|
|
$
|
20,331
|
|
|
$
|
—
|
|
|
$
|
1,637,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Pass
|
|
Special
Mention
|
|
Substandard
|
|
Doubtful
|
|
Total
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
Originated Loans
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
132,791
|
|
|
$
|
12,249
|
|
|
$
|
716
|
|
|
$
|
—
|
|
|
$
|
145,756
|
|
Commercial real estate
|
414,077
|
|
|
28,264
|
|
|
9,595
|
|
|
—
|
|
|
451,936
|
|
Commercial real estate construction
|
22,905
|
|
|
1,272
|
|
|
—
|
|
|
—
|
|
|
24,177
|
|
Residential mortgage
|
364,814
|
|
|
6,279
|
|
|
251
|
|
|
—
|
|
|
371,344
|
|
Home equity lines of credit
|
92,372
|
|
|
627
|
|
|
83
|
|
|
—
|
|
|
93,082
|
|
Consumer
|
13,331
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,331
|
|
Total Originated Loans
|
1,040,290
|
|
|
48,691
|
|
|
10,645
|
|
|
—
|
|
|
1,099,626
|
|
Acquired Loans
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
3,007
|
|
|
374
|
|
|
178
|
|
|
—
|
|
|
3,559
|
|
Commercial real estate
|
100,199
|
|
|
11,537
|
|
|
3,376
|
|
|
—
|
|
|
115,112
|
|
Commercial real estate construction
|
1,542
|
|
|
697
|
|
|
—
|
|
|
—
|
|
|
2,239
|
|
Residential mortgage
|
33,349
|
|
|
2,089
|
|
|
1,555
|
|
|
—
|
|
|
36,993
|
|
Home equity lines of credit
|
14,603
|
|
|
45
|
|
|
317
|
|
|
—
|
|
|
14,965
|
|
Consumer
|
107
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
107
|
|
Total Acquired Loans
|
152,807
|
|
|
14,742
|
|
|
5,426
|
|
|
—
|
|
|
172,975
|
|
Total Loans
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
135,798
|
|
|
12,623
|
|
|
894
|
|
|
—
|
|
|
149,315
|
|
Commercial real estate
|
514,276
|
|
|
39,801
|
|
|
12,971
|
|
|
—
|
|
|
567,048
|
|
Commercial real estate construction
|
24,447
|
|
|
1,969
|
|
|
—
|
|
|
—
|
|
|
26,416
|
|
Residential mortgage
|
398,163
|
|
|
8,368
|
|
|
1,806
|
|
|
—
|
|
|
408,337
|
|
Home equity lines of credit
|
106,975
|
|
|
672
|
|
|
400
|
|
|
—
|
|
|
108,047
|
|
Consumer
|
13,438
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,438
|
|
Total Loans
|
$
|
1,193,097
|
|
|
$
|
63,433
|
|
|
$
|
16,071
|
|
|
$
|
—
|
|
|
$
|
1,272,601
|
|
The following table provides changes in accretable yield for all acquired loans accounted for under ASC 310-30. Loans accounted for under ASC 310-20 are not included in this table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
Year Ended December 31, 2020
|
|
Year Ended December 31, 2019
|
Balance at beginning of period
|
|
$
|
642
|
|
|
$
|
891
|
|
Acquisitions of impaired loans
|
|
354
|
|
|
—
|
|
Reclassification from non-accretable differences
|
|
311
|
|
|
492
|
|
Accretion to loan interest income
|
|
(711)
|
|
|
(741)
|
|
Balance at end of period
|
|
$
|
596
|
|
|
$
|
642
|
|
Cash flows expected to be collected on acquired loans are estimated quarterly by incorporating several key assumptions similar to the initial estimate of fair value. These key assumptions include probability of default and the amount of actual prepayments after the acquisition date. Prepayments affect the estimated life of the loans and could change the amount of interest income, and possibly principal expected to be collected. In reforecasting future estimated cash flows, credit loss expectations are adjusted as necessary. Improved cash flow expectations for loans or pools are recorded first as a reversal of previously recorded impairment, if any, and then as an increase in prospective yield when all previously recorded impairment has been recaptured. Decreases in expected cash flows are recognized as impairment through a charge to the provision for loan losses and credit to the allowance for loan losses.
The following table summarizes information relative to impaired loans by loan portfolio class as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans with Allowance
|
|
Impaired Loans with
No Allowance
|
In thousands
|
Recorded
Investment
|
|
Unpaid
Principal
Balance
|
|
Related
Allowance
|
|
Recorded
Investment
|
|
Unpaid
Principal
Balance
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
2,031
|
|
|
$
|
2,031
|
|
|
$
|
1,224
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial real estate
|
2,728
|
|
|
2,728
|
|
|
158
|
|
|
5,861
|
|
|
5,861
|
|
Commercial real estate construction
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Residential mortgage
|
—
|
|
|
—
|
|
|
—
|
|
|
101
|
|
|
101
|
|
Home equity lines of credit
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
4,759
|
|
|
$
|
4,759
|
|
|
$
|
1,382
|
|
|
$
|
5,962
|
|
|
$
|
5,962
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
65
|
|
|
$
|
65
|
|
|
$
|
42
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial real estate
|
—
|
|
|
—
|
|
|
—
|
|
|
7,383
|
|
|
7,383
|
|
Commercial real estate construction
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Residential mortgage
|
—
|
|
|
—
|
|
|
—
|
|
|
171
|
|
|
171
|
|
Home equity lines of credit
|
—
|
|
|
—
|
|
|
—
|
|
|
83
|
|
|
83
|
|
Total
|
$
|
65
|
|
|
$
|
65
|
|
|
$
|
42
|
|
|
$
|
7,637
|
|
|
$
|
7,637
|
|
The following table summarizes information in regards to average of impaired loans and related interest income by loan portfolio class:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans with
Allowance
|
|
Impaired Loans with
No Allowance
|
In thousands
|
Average
Recorded
Investment
|
|
Interest
Income
|
|
Average
Recorded
Investment
|
|
Interest
Income
|
December 31, 2020
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
441
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
—
|
|
Commercial real estate
|
1,642
|
|
|
—
|
|
|
6,513
|
|
|
184
|
|
Commercial real estate construction
|
—
|
|
|
—
|
|
|
495
|
|
|
109
|
|
Residential mortgage
|
—
|
|
|
—
|
|
|
114
|
|
|
7
|
|
Home equity lines of credit
|
—
|
|
|
—
|
|
|
39
|
|
|
3
|
|
Total
|
$
|
2,083
|
|
|
$
|
—
|
|
|
$
|
7,170
|
|
|
$
|
303
|
|
December 31, 2019
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial real estate
|
—
|
|
|
—
|
|
|
6,625
|
|
|
612
|
|
Commercial real estate construction
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Residential mortgage
|
—
|
|
|
—
|
|
|
422
|
|
|
8
|
|
Home equity lines of credit
|
—
|
|
|
—
|
|
|
35
|
|
|
—
|
|
Total
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
7,082
|
|
|
$
|
620
|
|
No additional funds are committed to be advanced in connection with impaired loans.
If interest on all nonaccrual loans had been accrued at original contract rates, interest income would have increased by $379,000 in 2020 and $249,000 in 2019.
The following table presents nonaccrual loans by loan portfolio class as of December 31, 2020 and 2019, the table below excludes $6.0 million in purchase credit impaired loans, net of unamortized fair value adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
2020
|
|
2019
|
Commercial and industrial
|
$
|
2,031
|
|
|
$
|
65
|
|
Commercial real estate
|
4,909
|
|
|
3,600
|
|
Commercial real estate construction
|
—
|
|
|
—
|
|
Residential mortgage
|
101
|
|
|
171
|
|
Home equity lines of credit
|
—
|
|
|
83
|
|
Total
|
$
|
7,041
|
|
|
$
|
3,919
|
|
There were no loans whose terms have been modified resulting in a troubled debt restructuring during the years ended December 31, 2020 and 2019. The Corporation classifies certain loans as troubled debt restructurings when credit terms to a borrower in financial difficulty are modified. The modifications may include a reduction in rate, an extension in term and/or the restructuring of scheduled principal payments. The Corporation had pre-existing nonaccruing and accruing troubled debt restructurings of $3,807,000 and $3,974,000 at December 31, 2020 and 2019, respectively. All of the Corporation’s troubled debt restructured loans are also impaired loans, of which some have resulted in a specific allocation and, subsequently, a charge-off as appropriate. Included in the non-accrual loan total at December 31, 2020 and 2019, were $127,000 and $191,000, respectively, of troubled debt restructurings. In addition to the troubled debt restructurings included in non-accrual loans, the Corporation also has loans classified as accruing troubled debt restructurings at December 31, 2020 and 2019, which total $3,680,000 and $3,783,000, respectively. There were no defaulted troubled debt restructured loans as of December 31, 2020 and 2019. There were no charge-offs on any of the troubled debt restructured loans for the years ended December 31, 2020 and 2019. There were no specific allocations on any troubled debt restructured loans for the years ended December 31, 2020 and 2019. One troubled debt restructured loan paid off during 2019 in the amount of $2,198,000. All other troubled debt restructured loans were current as of December 31, 2020, with respect to their associated forbearance agreement, except for one loan which has had periodic late payments. As of December 31, 2020, there are no active forbearance agreements. All forbearance agreements have expired or the loans have paid off.
Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at December 31, 2020 and 2019, totaled $391,000 and $822,000, respectively.
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due.
The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
30-59 Days
Past Due
|
|
60-89 Days
Past Due
|
|
>90 Days Past Due
|
|
Total Past Due
|
|
Current
|
|
Total Loans
Receivable
|
|
Loans
Receivable
>90 Days and
Accruing
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
1,432
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,432
|
|
|
$
|
276,471
|
|
|
$
|
277,903
|
|
|
$
|
—
|
|
Commercial real estate
|
133
|
|
|
2,463
|
|
|
1,631
|
|
|
4,227
|
|
|
474,896
|
|
|
479,123
|
|
|
—
|
|
Commercial real estate construction
|
—
|
|
|
76
|
|
|
—
|
|
|
76
|
|
|
41,132
|
|
|
41,208
|
|
|
—
|
|
Residential mortgage
|
1,382
|
|
|
335
|
|
|
623
|
|
|
2,340
|
|
|
334,797
|
|
|
337,137
|
|
|
522
|
|
Home equity lines of credit
|
54
|
|
|
60
|
|
|
58
|
|
|
172
|
|
|
80,734
|
|
|
80,906
|
|
|
58
|
|
Consumer
|
98
|
|
|
51
|
|
|
—
|
|
|
149
|
|
|
11,670
|
|
|
11,819
|
|
|
—
|
|
Total originated loans
|
3,099
|
|
|
2,985
|
|
|
2,312
|
|
|
8,396
|
|
|
1,219,700
|
|
|
1,228,096
|
|
|
580
|
|
Acquired Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
122
|
|
|
231
|
|
|
—
|
|
|
353
|
|
|
41,898
|
|
|
42,251
|
|
|
—
|
|
Commercial real estate
|
319
|
|
|
220
|
|
|
—
|
|
|
539
|
|
|
264,965
|
|
|
265,504
|
|
|
—
|
|
Commercial real estate construction
|
42
|
|
|
—
|
|
|
97
|
|
|
139
|
|
|
12,555
|
|
|
12,694
|
|
|
97
|
|
Residential mortgage
|
834
|
|
|
349
|
|
|
146
|
|
|
1,329
|
|
|
62,874
|
|
|
64,203
|
|
|
146
|
|
Home equity lines of credit
|
196
|
|
|
—
|
|
|
32
|
|
|
228
|
|
|
23,476
|
|
|
23,704
|
|
|
32
|
|
Consumer
|
—
|
|
|
16
|
|
|
—
|
|
|
16
|
|
|
1,316
|
|
|
1,332
|
|
|
—
|
|
Total acquired loans
|
1,513
|
|
|
816
|
|
|
275
|
|
|
2,604
|
|
|
407,084
|
|
|
409,688
|
|
|
275
|
|
Total Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
1,554
|
|
|
231
|
|
|
—
|
|
|
1,785
|
|
|
318,369
|
|
|
320,154
|
|
|
—
|
|
Commercial real estate
|
452
|
|
|
2,683
|
|
|
1,631
|
|
|
4,766
|
|
|
739,861
|
|
|
744,627
|
|
|
—
|
|
Commercial real estate construction
|
42
|
|
|
76
|
|
|
97
|
|
|
215
|
|
|
53,687
|
|
|
53,902
|
|
|
97
|
|
Residential mortgage
|
2,216
|
|
|
684
|
|
|
769
|
|
|
3,669
|
|
|
397,671
|
|
|
401,340
|
|
|
668
|
|
Home equity lines of credit
|
250
|
|
|
60
|
|
|
90
|
|
|
400
|
|
|
104,210
|
|
|
104,610
|
|
|
90
|
|
Consumer
|
98
|
|
|
67
|
|
|
—
|
|
|
165
|
|
|
12,986
|
|
|
13,151
|
|
|
—
|
|
Total Loans
|
$
|
4,612
|
|
|
$
|
3,801
|
|
|
$
|
2,587
|
|
|
$
|
11,000
|
|
|
$
|
1,626,784
|
|
|
$
|
1,637,784
|
|
|
$
|
855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
30-59 Days
Past Due
|
|
60-89 Days
Past Due
|
|
>90 Days Past Due
|
|
Total Past Due
|
|
Current
|
|
Total Loans
Receivable
|
|
Loans
Receivable
>90 Days and
Accruing
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
20
|
|
|
$
|
145,736
|
|
|
$
|
145,756
|
|
|
$
|
4
|
|
Commercial real estate
|
325
|
|
|
2,247
|
|
|
1,286
|
|
|
3,858
|
|
|
448,078
|
|
|
451,936
|
|
|
—
|
|
Commercial real estate construction
|
78
|
|
|
—
|
|
|
—
|
|
|
78
|
|
|
24,099
|
|
|
24,177
|
|
|
—
|
|
Residential mortgage
|
1,625
|
|
|
949
|
|
|
1,232
|
|
|
3,806
|
|
|
367,538
|
|
|
371,344
|
|
|
1,061
|
|
Home equity lines of credit
|
141
|
|
|
77
|
|
|
—
|
|
|
218
|
|
|
92,864
|
|
|
93,082
|
|
|
—
|
|
Consumer
|
38
|
|
|
8
|
|
|
19
|
|
|
65
|
|
|
13,266
|
|
|
13,331
|
|
|
19
|
|
Total originated loans
|
2,223
|
|
|
3,281
|
|
|
2,541
|
|
|
8,045
|
|
|
1,091,581
|
|
|
1,099,626
|
|
|
1,084
|
|
Acquired Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
—
|
|
|
23
|
|
|
—
|
|
|
23
|
|
|
3,536
|
|
|
3,559
|
|
|
—
|
|
Commercial real estate
|
1,063
|
|
|
—
|
|
|
—
|
|
|
1,063
|
|
|
114,049
|
|
|
115,112
|
|
|
—
|
|
Commercial real estate construction
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,239
|
|
|
2,239
|
|
|
—
|
|
Residential mortgage
|
293
|
|
|
257
|
|
|
120
|
|
|
670
|
|
|
36,323
|
|
|
36,993
|
|
|
120
|
|
Home equity lines of credit
|
236
|
|
|
93
|
|
|
15
|
|
|
344
|
|
|
14,621
|
|
|
14,965
|
|
|
15
|
|
Consumer
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
107
|
|
|
107
|
|
|
—
|
|
Total acquired loans
|
1,592
|
|
|
373
|
|
|
135
|
|
|
2,100
|
|
|
170,875
|
|
|
172,975
|
|
|
135
|
|
Total Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
16
|
|
|
23
|
|
|
4
|
|
|
43
|
|
|
149,272
|
|
|
149,315
|
|
|
4
|
|
Commercial real estate
|
1,388
|
|
|
2,247
|
|
|
1,286
|
|
|
4,921
|
|
|
562,127
|
|
|
567,048
|
|
|
—
|
|
Commercial real estate construction
|
78
|
|
|
—
|
|
|
—
|
|
|
78
|
|
|
26,338
|
|
|
26,416
|
|
|
—
|
|
Residential mortgage
|
1,918
|
|
|
1,206
|
|
|
1,352
|
|
|
4,476
|
|
|
403,861
|
|
|
408,337
|
|
|
1,181
|
|
Home equity lines of credit
|
377
|
|
|
170
|
|
|
15
|
|
|
562
|
|
|
107,485
|
|
|
108,047
|
|
|
15
|
|
Consumer
|
38
|
|
|
8
|
|
|
19
|
|
|
65
|
|
|
13,373
|
|
|
13,438
|
|
|
19
|
|
Total Loans
|
$
|
3,815
|
|
|
$
|
3,654
|
|
|
$
|
2,676
|
|
|
$
|
10,145
|
|
|
$
|
1,262,456
|
|
|
$
|
1,272,601
|
|
|
$
|
1,219
|
|
The following table summarizes the allowance for loan losses and recorded investment in loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Commercial
and Industrial
|
|
Commercial
Real Estate
|
|
Commercial
Real Estate
Construction
|
|
Residential
Mortgage
|
|
Home Equity
Lines of Credit
|
|
Consumer
|
|
Unallocated
|
|
Total
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance- January 1, 2020
|
$
|
2,400
|
|
|
$
|
6,693
|
|
|
$
|
298
|
|
|
$
|
2,555
|
|
|
$
|
619
|
|
|
$
|
650
|
|
|
$
|
620
|
|
|
$
|
13,835
|
|
Charge-offs
|
(2,107)
|
|
|
(675)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(205)
|
|
|
—
|
|
|
(2,987)
|
|
Recoveries
|
83
|
|
|
96
|
|
|
—
|
|
|
1
|
|
|
29
|
|
|
29
|
|
|
—
|
|
|
238
|
|
Provisions
|
3,661
|
|
|
3,455
|
|
|
205
|
|
|
839
|
|
|
45
|
|
|
174
|
|
|
761
|
|
|
9,140
|
|
Ending balance- December 31, 2020
|
$
|
4,037
|
|
|
$
|
9,569
|
|
|
$
|
503
|
|
|
$
|
3,395
|
|
|
$
|
693
|
|
|
$
|
648
|
|
|
$
|
1,381
|
|
|
$
|
20,226
|
|
Ending balance: individually evaluated for impairment
|
$
|
1,224
|
|
|
$
|
158
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,382
|
|
Ending balance: collectively evaluated for impairment
|
$
|
2,813
|
|
|
$
|
9,411
|
|
|
$
|
503
|
|
|
$
|
3,395
|
|
|
$
|
693
|
|
|
$
|
648
|
|
|
$
|
1,381
|
|
|
$
|
18,844
|
|
Loans receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
$
|
320,154
|
|
|
$
|
744,627
|
|
|
$
|
53,902
|
|
|
$
|
401,340
|
|
|
$
|
104,610
|
|
|
$
|
13,151
|
|
|
$
|
—
|
|
|
$
|
1,637,784
|
|
Ending balance: individually evaluated for impairment
|
$
|
2,031
|
|
|
$
|
8,589
|
|
|
$
|
—
|
|
|
$
|
101
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,721
|
|
Ending balance: collectively evaluated for impairment
|
$
|
318,123
|
|
|
$
|
736,038
|
|
|
$
|
53,902
|
|
|
$
|
401,239
|
|
|
$
|
104,610
|
|
|
$
|
13,151
|
|
|
$
|
—
|
|
|
$
|
1,627,063
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance- January 1, 2019
|
$
|
2,597
|
|
|
$
|
6,208
|
|
|
$
|
203
|
|
|
$
|
2,814
|
|
|
$
|
611
|
|
|
$
|
692
|
|
|
$
|
839
|
|
|
$
|
13,964
|
|
Charge-offs
|
(163)
|
|
|
(78)
|
|
|
—
|
|
|
(173)
|
|
|
(301)
|
|
|
(202)
|
|
|
—
|
|
|
(917)
|
|
Recoveries
|
66
|
|
|
10
|
|
|
—
|
|
|
37
|
|
|
12
|
|
|
63
|
|
|
—
|
|
|
188
|
|
Provisions
|
(100)
|
|
|
553
|
|
|
95
|
|
|
(123)
|
|
|
297
|
|
|
97
|
|
|
(219)
|
|
|
600
|
|
Ending balance- December 31, 2019
|
$
|
2,400
|
|
|
$
|
6,693
|
|
|
$
|
298
|
|
|
$
|
2,555
|
|
|
$
|
619
|
|
|
$
|
650
|
|
|
$
|
620
|
|
|
$
|
13,835
|
|
Ending balance: individually evaluated for impairment
|
$
|
42
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
42
|
|
Ending balance: collectively evaluated for impairment
|
$
|
2,358
|
|
|
$
|
6,693
|
|
|
$
|
298
|
|
|
$
|
2,555
|
|
|
$
|
619
|
|
|
$
|
650
|
|
|
$
|
620
|
|
|
$
|
13,793
|
|
Loans receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
$
|
149,315
|
|
|
$
|
567,048
|
|
|
$
|
26,416
|
|
|
$
|
408,337
|
|
|
$
|
108,047
|
|
|
$
|
13,438
|
|
|
$
|
—
|
|
|
$
|
1,272,601
|
|
Ending balance: individually evaluated for impairment
|
$
|
65
|
|
|
$
|
7,383
|
|
|
$
|
—
|
|
|
$
|
171
|
|
|
$
|
83
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,702
|
|
Ending balance: collectively evaluated for impairment
|
$
|
149,250
|
|
|
$
|
559,665
|
|
|
$
|
26,416
|
|
|
$
|
408,166
|
|
|
$
|
107,964
|
|
|
$
|
13,438
|
|
|
$
|
—
|
|
|
$
|
1,264,899
|
|
The Bank has granted loans to certain of its executive officers, directors and their related interests. These loans were made on substantially the same basis, including interest rates and collateral as those prevailing for comparable transactions with other borrowers at the same time. The aggregate amount of these loans was $5,215,000 and $5,016,000 at December 31, 2020 and 2019, respectively. During 2020, $710,000 new loans or advances were extended and repayments totaled $511,000. None of these loans were past due, in nonaccrual status, or restructured at December 31, 2020.
Loan Modifications/Troubled Debt Restructurings/COVID-19
The Corporation has received a significant number of requests to modify loan terms and/or defer principal and/or interest payments, and has agreed to many such deferrals or are in the process of doing so. Under Section 4013 of the Coronavirus Aid,
Relief, and Economic Security (CARES) Act, loans less than 30 days past due as of December 31, 2019, will be considered current for COVID-19 modifications. A financial institution can then use FASB agreed upon temporary changes to GAAP for loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring (TDR), and suspend any determination of a loan modified as a result of COVID-19 being a TDR, including the requirement to determine impairment for accounting purposes. Similarly, FASB has confirmed that short-term modifications made on a good-faith basis in response to COVID-19 to loan customers who were current prior to any relief are not TDRs.
Beginning the week of March 16, 2020, the Corporation began receiving requests for temporary modifications to the repayment structure for borrower loans. The modifications are grouped into deferred payments of no more than six months, interest only, lines of credit only and other. As of December 31, 2020, the Corporation had 48 temporary modifications with principal balances totaling $36,123,155.
Details with respect to actual loan modifications are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Loans
|
|
Number of Loans
|
|
Deferral Period
|
|
Balance
|
|
Percentage of Capital
|
Commercial Purpose
|
|
38
|
|
|
Up to 6 months
|
|
$
|
35,464,419
|
|
|
13.75
|
%
|
Consumer Purpose
|
|
10
|
|
|
Up to 6 months
|
|
658,736
|
|
|
0.26
|
|
|
|
48
|
|
|
|
|
$
|
36,123,155
|
|
|
|
The global pandemic referred to as COVID-19 has created many barriers to loan production relative to the measures taken to slow the spread. These measures have put a large strain on a wide variety of industries within the global economy generally, and ACNB’s market specifically. The overall economic impact and effect of the measures is yet to be fully understood as its effects will most likely lag timewise behind while businesses and governments inject resources to help lessen the impact. Despite efforts to lessen the impact, it is the Corporation’s current belief that the pandemic will temporarily, or in some cases permanently, damage our borrower’s ability to repay loans and comply with terms.
The following table provides information with respect to the Corporation’s Commercial loans by industry at December 31, 2020 that may have suffered, or are expected to suffer, greater losses as a result of COVID-19.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Loans
|
|
Number of Loans
|
|
Balance
|
|
Percentage of Total Loan Portfolio
|
|
Percentage of Capital
|
Lessors of Commercial Real Estate
|
|
7
|
|
|
$
|
7,165,485
|
|
|
0.44
|
%
|
|
2.78
|
%
|
Lessors of Residential Real Estate
|
|
1
|
|
|
18,066
|
|
|
0.00
|
|
|
0.01
|
|
Hospitality Industry (Hotels/Bed & Breakfast)
|
|
7
|
|
|
18,394,377
|
|
|
1.12
|
|
|
7.13
|
|
Food Services Industry
|
|
3
|
|
|
4,535,983
|
|
|
0.28
|
|
|
1.76
|
|
Other
|
|
20
|
|
|
5,350,508
|
|
|
0.33
|
|
|
2.07
|
|
|
|
38
|
|
|
$
|
35,464,419
|
|
|
2.17
|
%
|
|
13.75
|
%
|
Paycheck Protection Program
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, was signed into law on March 27, 2020, and provided over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. The CARES Act authorized the Small Business Administration (SBA) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (PPP). As a qualified SBA lender, the Corporation was automatically authorized to originate PPP loans.
An eligible business can apply for a PPP loan up to the greater of: (1) 2.5 times its average monthly payroll costs, or (2) $10.0 million. PPP loans will have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrowers’ PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP, so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses.
As of December 31, 2020, the Corporation had originated approximately 1,440 applications for $160,857,603 of loans under the PPP. Fee income was approximately $6 million, before costs. The Corporation recognized $2,875,000 of PPP fee income through December 31, 2020 and the remaining amount will be recognized in future quarters.
NOTE E — PREMISES AND EQUIPMENT
Premises and equipment at December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
2020
|
|
2019
|
Land
|
$
|
8,104
|
|
|
$
|
5,050
|
|
Buildings and improvements
|
33,485
|
|
|
27,915
|
|
Furniture and equipment
|
16,466
|
|
|
14,562
|
|
Construction in process
|
25
|
|
|
928
|
|
|
58,080
|
|
|
48,455
|
|
Accumulated depreciation
|
(25,067)
|
|
|
(22,731)
|
|
|
$
|
33,013
|
|
|
$
|
25,724
|
|
Depreciation expense was $2,387,000 and $2,076,000 for the years ended December 31, 2020 and 2019, respectively.
NOTE F — INVESTMENTS IN LOW-INCOME HOUSING PARTNERSHIPS
ACNB Corporation is a limited partner in three partnerships, whose purpose is to develop, manage and operate residential low-income properties. At December 31, 2020 and 2019, the carrying value of these investments was approximately $1,380,000 and $1,506,000, respectively.
NOTE G — DEPOSITS
Deposits were comprised of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
|
2020
|
|
2019
|
Non-interest bearing demand
|
$
|
556,666
|
|
|
$
|
314,377
|
|
Interest bearing demand
|
291,271
|
|
|
152,275
|
|
Savings
|
860,930
|
|
|
537,755
|
|
Time certificates of deposit of $250,000 or less
|
376,488
|
|
|
339,876
|
|
Time certificates of deposit greater than $250,000
|
100,170
|
|
|
67,977
|
|
|
$
|
2,185,525
|
|
|
$
|
1,412,260
|
|
Scheduled maturities of time certificates of deposit at December 31, 2020, were as follows:
|
|
|
|
|
|
Years Ending
|
In thousands
|
2021
|
$
|
364,184
|
|
2022
|
76,924
|
|
2023
|
14,527
|
|
2024
|
10,685
|
|
2025
|
10,338
|
|
|
$
|
476,658
|
|
NOTE H — LEASE COMMITMENTS
Effective January 1, 2019, the Corporation adopted the new lease accounting standard, ASU 2016-12, using the modified-retrospective method. As such, for reporting periods beginning on or after January 1, 2019, leases are recognized, presented and disclosed in accordance with ASU 2016-02, while periods prior to the adoption date were not adjusted and are reported in accordance with ASC 840, Leases.
The Corporation enters into noncancellable lease arrangements primarily for some of its community offices. Certain lease arrangements contain clauses requiring increasing rental payments over the lease term, which are generally contractually stipulated. Many of these lease arrangements provide the Corporation with the option to renew the lease arrangement after the initial lease term. These options are included in determining the lease term used to establish the right-of-use assets and lease liabilities when it is reasonably certain the Corporation will exercise its renewal option. As most of the Corporation’s leases do not have a readily determinable implicit rate, the incremental borrowing rate is primarily used to determine the discount rate for purposes of measuring the right-of-use assets and lease liabilities. The Corporation’s lease arrangements do not contain any material residual value guarantees or material restrictive covenants.
The following right-of-use assets and lease liabilities are reported within the consolidated statements of condition as follows:
|
|
|
|
|
|
|
|
|
In thousands
|
|
December 31, 2020
|
Operating Leases:
|
|
|
Right of use assets
|
|
$
|
3,145
|
|
Lease liabilities
|
|
3,138
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
|
December 31, 2019
|
Operating Leases:
|
|
|
Right of use assets
|
|
$
|
3,502
|
|
Lease liabilities
|
|
3,502
|
|
Supplemental balance sheet information related to leases was as follows for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
Operating Leases:
|
|
|
Weighted average remaining lease term
|
|
7.0 years
|
Weighted average discount rate
|
|
5.63
|
%
|
The following summarizes the remaining scheduled future minimum lease payments for operating leases as of December 31, 2020:
|
|
|
|
|
|
Years Ending
|
In thousands
|
2021
|
$
|
805
|
|
2022
|
646
|
|
2023
|
560
|
|
2024
|
540
|
|
2025
|
518
|
|
Thereafter
|
1,260
|
|
Total minimum lease payments
|
4,329
|
|
Less: Amount representing interest (1)
|
1,191
|
|
Present value of net minimum lease payments
|
$
|
3,138
|
|
(1) Amount necessary to reduce net minimum lease payments to present value calculated at the Corporation’s incremental borrowing rate.
As of December 31, 2020, the Corporation does not have any significant additional operating or finance leases that have not yet commenced. The total rent expense for all operating leases was $1,024,000 and $883,000 for the years ended December 31, 2020 and 2019, respectively.
ACNB leased space at several of its owned offices to other unrelated organizations. Total rental income for these properties was $84,000 and $94,000 for the years ended December 31, 2020 and 2019, respectively.
NOTE I — BORROWINGS
Short-term borrowings and weighted-average interest rates at December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Dollars in thousands
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
FHLB overnight advance
|
$
|
—
|
|
|
—
|
%
|
|
$
|
—
|
|
|
—
|
%
|
Securities sold under repurchase agreements
|
38,464
|
|
|
0.12
|
|
|
33,435
|
|
|
0.12
|
|
|
$
|
38,464
|
|
|
0.12
|
%
|
|
$
|
33,435
|
|
|
0.12
|
%
|
Under an agreement with the FHLB, the Bank has short-term borrowing capacity included within its maximum borrowing capacity. All FHLB advances are collateralized by a security agreement covering qualifying loans and unpledged U.S. Treasury, agency and mortgage-backed securities. In addition, all FHLB advances are secured by the FHLB capital stock owned by the Bank having a par value of $2,529,000 at December 31, 2020. The Corporation also has lines of credit that total $29,000,000 with correspondent banks for overnight federal funds borrowings. There were no advances on these lines at December 31, 2020 and 2019.
The Corporation enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Corporation may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Corporation to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing agreements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability in the Corporation’s consolidated statements of condition, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Corporation does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.
The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Corporation be in default (e.g., fails to make an interest payment to the counterparty). For private institution repurchase agreements, if the private institution counterparty were to default (e.g., declare bankruptcy), the Corporation could cancel the repurchase agreement (i.e., cease payment of principal and interest), and attempt collection on the amount of collateral value in excess of the repurchase agreement fair value. The collateral is held by a third-party financial institution in the counterparty’s custodial account. The counterparty has the right to sell or repledge the investment securities. For government entity repurchase agreements, the collateral is held by the Corporation in a segregated custodial account under a tri-party agreement.
The following table presents the short-term borrowings subject to an enforceable master netting arrangement or repurchase agreement as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the Statements of Condition
|
|
|
Dollars in thousands
|
|
Gross Amounts of Recognized Liabilities
|
|
Gross Amounts Offset in the Statements of Condition
|
|
Net Amounts of Liabilities Presented in the Statements of Condition
|
|
Financial Instruments
|
|
Cash Collateral Pledged
|
|
Net Amount
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial customers and government entities
|
(a)
|
$
|
38,464
|
|
|
$
|
—
|
|
|
$
|
38,464
|
|
|
$
|
(38,464)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial customers and government entities
|
(a)
|
$
|
33,435
|
|
|
$
|
—
|
|
|
$
|
33,435
|
|
|
$
|
(33,435)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(a) As of December 31, 2020 and 2019, the fair value of securities pledged in connection with repurchase agreements was $54,680,000 and $34,582,000, respectively.
A summary of long-term debt as of December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Dollars in thousands
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
FHLB fixed-rate advances maturing:
|
|
|
|
|
|
|
|
2020
|
$
|
—
|
|
|
—
|
%
|
|
$
|
20,000
|
|
|
1.87
|
%
|
2021
|
22,716
|
|
|
2.10
|
%
|
|
22,716
|
|
|
2.10
|
%
|
2022
|
11,000
|
|
|
2.69
|
%
|
|
11,000
|
|
|
2.69
|
%
|
2023
|
5,000
|
|
|
2.60
|
%
|
|
5,000
|
|
|
2.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan payable to local bank
|
1,329
|
|
|
5.51
|
%
|
|
1,830
|
|
|
4.50
|
%
|
Loan payable to local bank
|
—
|
|
|
—
|
%
|
|
750
|
|
|
4.50
|
%
|
Loan payable variable rate
|
2,700
|
|
|
3.22
|
%
|
|
—
|
|
|
—
|
%
|
Trust preferred subordinated debt
|
5,000
|
|
|
6.39
|
%
|
|
5,000
|
|
|
6.39
|
%
|
Trust preferred subordinated debt
|
6,000
|
|
|
1.69
|
%
|
|
—
|
|
|
—
|
%
|
|
$
|
53,745
|
|
|
2.76
|
%
|
|
$
|
66,296
|
|
|
2.58
|
%
|
The FHLB advances are collateralized by the assets defined in the security agreement and FHLB capital stock described previously. The Corporation can borrow a maximum of $847,881,000 from the FHLB, of which $791,915,000 was available at December 31, 2020.
The first loan payable to a local bank has a fixed rate of 4.50% for the first five years and a variable rate of interest with Prime Rate thereafter to final maturity in June 2028. The principal balance of this note may be prepaid at any time without penalty.
The second loan payable to a local bank is a commercial revolving line of credit which has a variable rate equal to the Wall Street Journal Prime Rate minus 0.25%. The loan payable balance was reduced to $0 in 2020.
The loan payable variable rate represents a promissory note (note) issued by FCBI in July 2011 and assumed by ACNB Corporation through the acquisition. The note has been amended from time to time through change in terms agreements. Under the current change in terms agreement, the maturity date of the note is April 10, 2021 with the rate of interest accruing on the principal balance of 3.25% per year. The note is unsecured.
The first trust preferred subordinated debt is comprised of debt securities issued by New Windsor in June 2005 and assumed by ACNB Corporation through the acquisition. New Windsor issued $5,000,000 of 6.39% fixed rate capital securities to institutional investors in a private pooled transaction. The proceeds were transferred to New Windsor as trust preferred subordinated debt under the same terms and conditions. The Corporation then contributed the full amount to the Bank in the form of Tier 1 capital. The Corporation has, through various contractual agreements, fully and unconditionally guaranteed all of the trust obligations with respect to the capital securities.
The second trust preferred subordinated debt is comprised of debt securities issued by FCBI in December 2006 and assumed by ACNB Corporation through the acquisition. FCBI completed the private placement of an aggregate of $6,000,000 of trust preferred securities. The interest rate on the subordinated debentures is currently adjusted quarterly to 163 basis points over three-month LIBOR. The debenture has a provision if LIBOR is no longer available. On June 15, 2020 the most recent interest rate reset date, the interest rate was adjusted to 1.94338% for the period ending September 14, 2020. The trust preferred securities mature on December 15, 2036, and may be redeemed at par, at the Corporation’s option, on any interest payment date. The proceeds were transferred to FCBI as trust preferred subordinated debt under the same terms and conditions. The Corporation then contributed the full amount to the Bank in the form of Tier 1 capital. The Corporation has, through various contractual agreements, fully and unconditionally guaranteed all of the trust obligations with respect to the capital securities.
NOTE J — REGULATORY RESTRICTIONS ON DIVIDENDS
Dividend payments by the Bank to the Corporation are subject to the Pennsylvania Banking Code, the Federal Deposit Insurance Act, and the regulations of the FDIC, including final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. Under the Banking Code, no dividends may be paid except from “accumulated net earnings” (generally, retained earnings). The Federal Reserve Board and the FDIC have formal and informal policies which provide that insured banks and bank holding companies should generally pay dividends only out of current operating earnings, with some exceptions. As of December 31, 2020, $42,296,000 of undistributed earnings of the Bank, included in consolidated retained earnings, was available for distribution to the Corporation as dividends without prior regulatory approval. Additionally,
dividends paid by the Bank to the Corporation would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.
NOTE K — INCOME TAXES
The components of income tax expense for the years ended December 31, 2020 and 2019, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
2020
|
|
2019
|
Federal:
|
|
|
|
Current
|
$
|
4,672
|
|
|
$
|
5,169
|
|
Deferred
|
(1,121)
|
|
|
122
|
|
|
3,551
|
|
|
5,291
|
|
State:
|
|
|
|
Current
|
805
|
|
|
338
|
|
Deferred
|
(48)
|
|
|
16
|
|
|
757
|
|
|
354
|
|
|
$
|
4,308
|
|
|
$
|
5,645
|
|
Reconciliations of the statutory federal income tax to the income tax expense reported in the consolidated statements of income for the years ended December 31, 2020 and 2019, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Income
before Income Taxes
|
|
2020
|
|
2019
|
Federal income tax at statutory rate
|
21.0
|
%
|
|
21.0
|
%
|
State income taxes, net of federal benefit
|
2.6
|
%
|
|
1.0
|
%
|
Tax-exempt income
|
(2.0)
|
%
|
|
(1.5)
|
%
|
Earnings on investment in bank-owned life insurance
|
(1.3)
|
%
|
|
(0.8)
|
%
|
Rehabilitation and low-income housing credits
|
(1.1)
|
%
|
|
(1.0)
|
%
|
Reduction of federal tax rate
|
—
|
%
|
|
—
|
%
|
Other
|
(0.1)
|
%
|
|
0.5
|
%
|
|
19.1
|
%
|
|
19.2
|
%
|
Rehabilitation and low-income housing income tax credits were $259,000 and $281,000, during 2020 and 2019, respectively.
Components of deferred tax assets and liabilities at December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
Allowance for loan losses
|
$
|
4,367
|
|
|
$
|
2,995
|
|
Available for sale securities
|
—
|
|
|
—
|
|
Accrued deferred compensation
|
1,053
|
|
|
941
|
|
Pension
|
2,939
|
|
|
2,033
|
|
Deferred loan fees
|
634
|
|
|
—
|
|
Other-than-temporary impairment
|
43
|
|
|
43
|
|
Nonaccrual interest
|
359
|
|
|
194
|
|
Deferred director fees
|
766
|
|
|
664
|
|
Acquisition accounting
|
(501)
|
|
|
377
|
|
Other
|
1,747
|
|
|
604
|
|
|
11,407
|
|
|
7,851
|
|
Deferred tax liabilities:
|
|
|
|
Deferred loan fees
|
—
|
|
|
94
|
|
Available for sale securities
|
1,328
|
|
|
391
|
|
Prepaid pension benefit cost
|
4,207
|
|
|
4,154
|
|
Prepaid expenses
|
130
|
|
|
129
|
|
Accumulated depreciation
|
555
|
|
|
221
|
|
Goodwill/intangibles
|
1,259
|
|
|
1,181
|
|
|
7,479
|
|
|
6,170
|
|
Net Deferred Tax Asset included in Other Assets
|
$
|
3,928
|
|
|
$
|
1,681
|
|
The Corporation did not have any uncertain tax positions at December 31, 2020 and 2019. The Corporation’s policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the Consolidated Statements of Income.
Years that remain open for potential review by the Internal Revenue Service are 2017 through 2020.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law making several changes to the Internal Revenue Code. The changes include, but are not limited to: increasing the limitation on the amount of deductible interest expense, allowing companies to carryback certain net operating losses, and increasing the amount of net operating loss carryforwards that corporations can use to offset taxable income.
The tax law changes in the CARES Act did not have a material impact on the Corporation’s income tax provision.
NOTE L — 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 reporting dates 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.
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 December 31, 2020 and 2019, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2020
|
In thousands
|
Basis
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
U.S. Government and agencies
|
|
|
$
|
183,603
|
|
|
$
|
—
|
|
|
$
|
183,603
|
|
|
$
|
—
|
|
Mortgage-backed securities, residential
|
|
|
108,822
|
|
|
—
|
|
|
108,822
|
|
|
—
|
|
State and municipal
|
|
|
36,484
|
|
|
—
|
|
|
36,484
|
|
|
—
|
|
Corporate bonds
|
|
|
8,809
|
|
|
—
|
|
|
8,809
|
|
|
—
|
|
Total securities available for sale
|
Recurring
|
|
$
|
337,718
|
|
|
$
|
—
|
|
|
$
|
337,718
|
|
|
$
|
—
|
|
Equity securities with readily determinable fair values
|
Recurring
|
|
$
|
2,170
|
|
|
$
|
2,170
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Collateral dependent impaired loans
|
Non-recurring
|
|
$
|
7,498
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2019
|
In thousands
|
Basis
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
U.S. Government and agencies
|
|
|
$
|
114,249
|
|
|
$
|
—
|
|
|
$
|
114,249
|
|
|
$
|
—
|
|
Mortgage-backed securities, residential
|
|
|
65,592
|
|
|
—
|
|
|
65,592
|
|
|
—
|
|
State and municipal
|
|
|
10,996
|
|
|
—
|
|
|
10,996
|
|
|
—
|
|
Total securities available for sale
|
Recurring
|
|
$
|
190,837
|
|
|
$
|
—
|
|
|
$
|
190,837
|
|
|
$
|
—
|
|
Equity securities with readily determinable fair values
|
Recurring
|
|
$
|
2,106
|
|
|
$
|
2,106
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Collateral dependent impaired loans
|
Non-recurring
|
|
$
|
3,806
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,806
|
|
The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis for which the Corporation has utilized Level 3 inputs to determine fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
Dollars in thousands
|
|
Fair Value Estimate
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range
|
|
Weighted Average
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
7,498
|
|
|
Appraisal of collateral(1)
|
|
Appraisal adjustments(2)
|
|
(10) – (50)%
|
|
(52)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
3,806
|
|
|
Appraisal of collateral(1)
|
|
Appraisal adjustments(2)
|
|
(10) – (50)%
|
|
(15)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1)Fair value is generally determined through management’s estimate or independent third-party appraisals of the underlying collateral, which generally includes various Level 3 inputs which are not observable.
(2)Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percentage of the appraisal. Higher downward adjustments are caused by negative changes to the collateral or conditions in the real estate market, actual offers or sales contracts received, and/or age of the appraisal.
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 presents the carrying amount, fair value, and placement in the fair value hierarchy of the Corporation’s financial instruments at December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
In thousands
|
Carrying Amount
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
$
|
23,739
|
|
|
$
|
23,739
|
|
|
$
|
12,436
|
|
|
$
|
11,303
|
|
|
$
|
—
|
|
Interest-bearing deposits in banks
|
375,613
|
|
|
375,613
|
|
|
375,613
|
|
|
—
|
|
|
—
|
|
Equity securities available for sale
|
2,170
|
|
|
2,170
|
|
|
2,170
|
|
|
—
|
|
|
—
|
|
Investment securities available for sale
|
337,718
|
|
|
337,718
|
|
|
—
|
|
|
337,718
|
|
|
—
|
|
Investment securities held to maturity
|
10,294
|
|
|
10,768
|
|
|
—
|
|
|
10,768
|
|
|
—
|
|
Loans held for sale
|
11,034
|
|
|
11,034
|
|
|
—
|
|
|
11,034
|
|
|
—
|
|
Loans, less allowance for loan losses
|
1,617,558
|
|
|
1,662,342
|
|
|
—
|
|
|
—
|
|
|
1,662,342
|
|
Accrued interest receivable
|
6,950
|
|
|
6,950
|
|
|
—
|
|
|
6,950
|
|
|
—
|
|
Restricted investment in bank stocks
|
2,942
|
|
|
2,942
|
|
|
—
|
|
|
2,942
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
Demand deposits and savings
|
1,708,868
|
|
|
1,708,868
|
|
|
—
|
|
|
1,708,868
|
|
|
—
|
|
Time deposits
|
476,657
|
|
|
481,138
|
|
|
—
|
|
|
481,138
|
|
|
—
|
|
Short-term borrowings
|
38,464
|
|
|
38,464
|
|
|
—
|
|
|
38,464
|
|
|
—
|
|
Long-term borrowings
|
42,745
|
|
|
43,669
|
|
|
—
|
|
|
43,669
|
|
|
—
|
|
Trust preferred subordinated debt
|
11,000
|
|
|
9,902
|
|
|
—
|
|
|
9,902
|
|
|
—
|
|
Accrued interest payable
|
1,434
|
|
|
1,434
|
|
|
—
|
|
|
1,434
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet financial instruments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Corporation’s financial instruments at December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
In thousands
|
Carrying Amount
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
$
|
16,878
|
|
|
$
|
16,878
|
|
|
$
|
9,542
|
|
|
$
|
7,336
|
|
|
$
|
—
|
|
Interest-bearing deposits in banks
|
97,478
|
|
|
97,478
|
|
|
97,478
|
|
|
—
|
|
|
—
|
|
Equity securities available for sale
|
2,106
|
|
|
2,106
|
|
|
2,106
|
|
|
—
|
|
|
—
|
|
Investment securities available for sale
|
190,837
|
|
|
190,837
|
|
|
—
|
|
|
190,837
|
|
|
—
|
|
Investment securities held to maturity
|
19,234
|
|
|
19,281
|
|
|
—
|
|
|
19,281
|
|
|
—
|
|
Loans held for sale
|
2,406
|
|
|
2,406
|
|
|
—
|
|
|
2,406
|
|
|
—
|
|
Loans, less allowance for loan losses
|
1,258,766
|
|
|
1,263,014
|
|
|
—
|
|
|
—
|
|
|
1,263,014
|
|
Accrued interest receivable
|
4,368
|
|
|
4,368
|
|
|
—
|
|
|
4,368
|
|
|
—
|
|
Restricted investment in bank stocks
|
3,644
|
|
|
3,644
|
|
|
—
|
|
|
3,644
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
Demand deposits and savings
|
1,004,407
|
|
|
1,004,407
|
|
|
—
|
|
|
1,004,407
|
|
|
—
|
|
Time deposits
|
407,853
|
|
|
409,426
|
|
|
—
|
|
|
409,426
|
|
|
—
|
|
Short-term borrowings
|
33,435
|
|
|
33,435
|
|
|
—
|
|
|
33,435
|
|
|
—
|
|
Long-term borrowings
|
61,296
|
|
|
61,965
|
|
|
—
|
|
|
61,965
|
|
|
—
|
|
Trust preferred subordinated debt
|
5,000
|
|
|
4,711
|
|
|
—
|
|
|
4,711
|
|
|
—
|
|
Accrued interest payable
|
2,676
|
|
|
2,676
|
|
|
—
|
|
|
2,676
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet financial instruments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
NOTE M — RETIREMENT PLANS
The Corporation’s banking subsidiary has a non-contributory, defined benefit pension plan. Retirement benefits are a function of both years of service and compensation. The funding policy is to contribute annually the amount that is sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act.
A measurement date of December 31 has been used for the fiscal years ended December 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
2020
|
|
2019
|
Change in benefit obligation:
|
|
|
|
Benefit obligation at beginning of year
|
$
|
34,534
|
|
|
$
|
30,338
|
|
Service cost
|
751
|
|
|
696
|
|
Interest cost
|
1,080
|
|
|
1,213
|
|
Actuarial loss
|
4,405
|
|
|
3,603
|
|
Benefits paid
|
(1,358)
|
|
|
(1,316)
|
|
Projected benefit obligation at end of year
|
39,412
|
|
|
34,534
|
|
Change in plan assets:
|
|
|
|
Fair value of plan assets at beginning of year
|
44,292
|
|
|
39,680
|
|
Actual return on plan assets
|
2,403
|
|
|
5,928
|
|
Employer contribution
|
—
|
|
|
—
|
|
Benefits paid
|
(1,358)
|
|
|
(1,316)
|
|
Fair value of plan assets at end of year
|
45,337
|
|
|
44,292
|
|
Funded Status, included in other assets
|
$
|
5,925
|
|
|
$
|
9,758
|
|
Amounts recognized in accumulated other comprehensive loss:
|
|
|
|
Total net actuarial loss
|
$
|
13,221
|
|
|
$
|
9,147
|
|
|
|
|
|
Prior service cost
|
—
|
|
|
—
|
|
Total included in accumulated other comprehensive loss (pretax)
|
$
|
13,221
|
|
|
$
|
9,147
|
|
For the years ended December 31, 2020 and 2019, the assumptions used to determine the benefit obligation are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Discount rate
|
2.45
|
%
|
|
3.20
|
%
|
Rate of compensation increase
|
3.50
|
%
|
|
3.50
|
%
|
The components of net periodic benefit (income) cost related to the non-contributory, defined benefit pension plan for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
2020
|
|
2019
|
Components of net periodic benefit cost (income):
|
|
|
|
Service cost
|
$
|
751
|
|
|
$
|
696
|
|
Interest cost
|
1,080
|
|
|
1,213
|
|
Expected return on plan assets
|
(2,746)
|
|
|
(2,549)
|
|
Recognized net actuarial loss
|
675
|
|
|
850
|
|
Amortization of prior service cost
|
—
|
|
|
—
|
|
Net Periodic Benefit (Income) Cost
|
(240)
|
|
|
210
|
|
Net loss
|
4,749
|
|
|
224
|
|
Amortization of net loss
|
(675)
|
|
|
(850)
|
|
Amortization of prior service cost
|
—
|
|
|
—
|
|
Total recognized in other comprehensive loss (income)
|
$
|
4,074
|
|
|
$
|
(626)
|
|
Total recognized in net periodic benefit cost (income) and other comprehensive (income) loss
|
$
|
3,834
|
|
|
$
|
(416)
|
|
For the years ended December 31, 2020 and 2019, the assumptions used to determine the net periodic benefit cost (income) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Discount rate
|
3.20
|
%
|
|
4.10
|
%
|
Expected long-term rate of return on plan assets
|
6.75
|
%
|
|
6.75
|
%
|
Rate of compensation increase
|
3.50
|
%
|
|
3.50
|
%
|
The Corporation’s comparison of obligations to plan assets at December 31, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
2020
|
|
2019
|
Projected benefit obligation
|
$
|
39,412
|
|
|
$
|
34,534
|
|
Accumulated benefit obligation
|
37,522
|
|
|
33,080
|
|
Fair value of plan assets at measurement date
|
45,337
|
|
|
44,292
|
|
It has not yet been determined the amount that the Bank may contribute to the Plan in 2021. ACNB does not anticipate any refunds from the postretirement Plan. The Corporation reduced the future benefit accruals for the defined benefit pension plan effective January 1, 2010, in order to manage total benefit expense. 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 formula percentage and maximum years of benefit service were both reduced. Effective April 1, 2012, no inactive or former participant in the Plan is eligible to again participate in the plan, and no employee hired after March 31, 2012, is eligible to participate in the Plan. As of the last annual census, ACNB Bank had a combined 347 active, vested terminated, and retired persons in the Plan.
For the year ended December 31, 2019 the mortality assumptions were derived using the mortality rates from RP-2006 (underlying baseline table from SOA RP-2014 study based on experience data for private pension plans of 2006, the central year of experience data 2004-2008). For the year ended December 31, 2020 the mortality assumption has been updated to reflect the historical U.S. mortality date in the MP-2020 report. The assumption changes increased the benefit obligation by $3,699,000.
Based on current data and assumptions, the following benefit payments, which reflect expected future service, as appropriate, are:
|
|
|
|
|
|
Years Ending
|
In thousands
|
2021
|
$
|
1,730
|
|
2022
|
1,720
|
|
2023
|
1,840
|
|
2024
|
1,890
|
|
2025
|
1,920
|
|
2026 - 2030
|
9,800
|
|
The Corporation’s pension plan weighted-average assets’ allocations at December 31, 2020 and 2019, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Equity securities
|
45
|
%
|
|
45
|
%
|
Debt securities
|
42
|
%
|
|
42
|
%
|
|
|
|
|
Real estate
|
13
|
%
|
|
13
|
%
|
|
100
|
%
|
|
100
|
%
|
The Corporation’s overall investment strategy is to achieve a mix of investments to meet the long-term rate of return assumption and near-term pension obligations with a diversification of assets types, fund strategies and fund managers. The mix of investments is adjusted periodically by retaining an advisory firm to recommend appropriate allocations after reviewing the Corporation’s risk tolerance on contribution levels, funded status and plan expense, and any applicable regulatory requirements. The weighted-average assets’ allocation in the above table represents the Corporation’s conclusion on the appropriate mix of investments. The specific investment vehicles are institutional separate accounts from a variety of fund managers which are regularly reviewed by the Corporation for acceptable performance.
Equity securities included Corporation common stock in amounts of $1,963,000, or 4% of total plan assets, and $2,854,000, or 6% of total plan assets, at December 31, 2020 and 2019, respectively.
Fair value measurements at December 31, 2020, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Equity securities
|
$
|
24,542
|
|
|
$
|
1,963
|
|
|
$
|
22,579
|
|
|
$
|
—
|
|
Debt securities
|
14,568
|
|
|
—
|
|
|
14,568
|
|
|
—
|
|
Real estate
|
6,227
|
|
|
—
|
|
|
6,227
|
|
|
—
|
|
Fair value measurements at December 31, 2019, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Equity securities
|
$
|
20,098
|
|
|
$
|
2,854
|
|
|
$
|
17,244
|
|
|
$
|
—
|
|
Debt securities
|
18,516
|
|
|
—
|
|
|
18,516
|
|
|
—
|
|
Real estate
|
5,678
|
|
|
—
|
|
|
5,678
|
|
|
—
|
|
The Corporation’s banking subsidiary maintains a 401(k) plan for the benefit of eligible employees. Employees may contribute up to 100% of their compensation subject to certain limits based on federal tax laws. The Bank makes matching contributions equal to 100% of an employee’s compensation contributed to the plan up to 3% of an employee’s pay, plus 50% of an employee’s compensation contributed to the plan on the next 2% of their pay for the payroll period. Matching contributions vest immediately to the employee. Bank contributions to and expenses for the plan were $887,000 and $709,000 for 2020 and 2019, respectively.
RIG has a similar but separate 401(k) plan with the match of 6% for non-highly compensated employees and 3% match for highly compensated employees. RIG’s contributions to and expenses for the plan were $126,000 and $123,000 for 2020 and 2019, respectively.
The Corporation’s banking subsidiary maintains nonqualified compensation plans for selected senior officers. The estimated present value of future benefits is accrued over the period from the effective date of the agreements until the expected retirement dates of the individuals. The balance accrued for these plans included in other liabilities as of December 31, 2020 and 2019, totaled $3,491,000 and $3,196,000, respectively. The annual expense included in salaries and benefits expense
totaled $524,000 and $493,000 during the years ended December 31, 2020 and 2019, respectively. To fund the benefits under these plans, the Bank is the owner of single premium life insurance policies on participants in the nonqualified retirement plans.
NOTE N — STOCKHOLDERS’ EQUITY AND REGULATORY MATTERS
In January 2011, the Corporation offered shareholders the opportunity to participate in the ACNB Corporation Dividend Reinvestment and Stock Purchase Plan. The plan provides registered holders of ACNB Corporation common stock with a convenient way to purchase additional shares of common stock by permitting participants in the plan to automatically reinvest cash dividends on all or a portion of the shares owned and to make quarterly voluntary cash payments under the terms of the plan. Participation in the plan is voluntary, and there are eligibility requirements to participate in the plan. During 2020, 20,015 shares were issued under this plan with proceeds in the amount of $493,000. During 2019, 17,324 shares were issued under this plan with proceeds in the amount of $501,000. Proceeds are used for general corporate purposes.
The ACNB Corporation 2009 Restricted Stock Plan expired by its own terms after ten years on February 24, 2019. No further shares may be issued under this plan. Of the 200,000 shares of common stock authorized under this plan, 25,945 shares were issued. The remaining 174,055 shares were transferred to the ACNB Corporation 2018 Omnibus Stock Incentive Plan, which was approved and ratified on May 1, 2018. Under this plan awards shall not exceed, in the aggregate, 400,000 shares of common stock plus any shares that are authorized, but not issued, under the ACNB Corporation 2009 Restricted Stock Plan. The purpose of the plans were to provide employees and directors of the Bank who have responsibility for its growth with additional incentive by allowing them to acquire ownership in the Corporation and thereby encouraging them to contribute to the success of the Corporation. In 2020 and 2019, 19,472 and 16,115 shares, respectively, were issued under these plans.
The acquisition of New Windsor Bancorp, Inc. resulted in 938,360 new ACNB shares issued to the New Windsor Bancorp, Inc. shareholders valued at $28,620,000 in 2017. The acquisition of FCBI resulted in 1,590,547 new ACNB shares of common stock issued to the FCBI shareholders valued at $57,721,000.
The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth below) of total and Tier 1 capital to average assets. The federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The phase-in period for community banking organizations began January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) began compliance effective January 1, 2014. The final rules call for the following capital requirements:
•a minimum ratio of common Tier 1 capital to risk-weighted assets of 4.5%;
•a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%;
•a minimum ratio of total capital to risk-weighted assets of 8.0%; and,
•a minimum leverage ratio of 4.0%.
In addition, the final rules establish a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. If a banking organization fails to hold capital above the minimum capital ratios and the capital conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary bonus payments. The 2.5% (after a 0.625% per year phase-in period) for the capital conservation and countercyclical capital buffers for all banking organizations began on January 1, 2016. The required capital conservation buffer was 2.5% at December 31, 2020.
Management believes, as of December 31, 2020, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2020, the most recent notification from the federal banking regulators categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. There are no subsequent conditions or events that management believes have changed the Bank’s category.
The actual and required capital amounts and ratios were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
For Capital Adequacy
Purposes
|
|
To be Well
Capitalized
under Prompt
Corrective Action
Provisions
|
Dollars in thousands
|
Amount
|
|
Ratio
|
|
Amount (1)
|
|
Ratio (1)
|
|
Amount
|
|
Ratio
|
CORPORATION
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage ratio (to average assets)
|
$
|
224,605
|
|
|
8.90
|
%
|
|
$ ≥100,892
|
|
|
≥4.0%
|
|
N/A
|
|
N/A
|
Common Tier 1 risk-based capital ratio (to risk-weighted assets)
|
224,605
|
|
|
13.68
|
|
|
≥73,873
|
|
|
≥4.5
|
|
N/A
|
|
N/A
|
Tier 1 risk-based capital ratio (to risk-weighted assets)
|
224,605
|
|
|
13.68
|
|
|
≥98,498
|
|
|
≥6.0
|
|
N/A
|
|
N/A
|
Total risk-based capital ratio (to risk-weighted assets)
|
244,831
|
|
|
14.91
|
|
|
≥131,330
|
|
|
≥8.0
|
|
N/A
|
|
N/A
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage ratio (to average assets)
|
$
|
176,403
|
|
|
10.19
|
%
|
|
$ ≥69,239
|
|
|
≥4.0%
|
|
N/A
|
|
N/A
|
Common Tier 1 risk-based capital ratio (to risk-weighted assets)
|
176,403
|
|
|
14.50
|
|
|
≥54,759
|
|
|
≥4.5
|
|
N/A
|
|
N/A
|
Tier 1 risk-based capital ratio (to risk-weighted assets)
|
176,403
|
|
|
14.50
|
|
|
≥73,012
|
|
|
≥6.0
|
|
N/A
|
|
N/A
|
Total risk-based capital ratio (to risk-weighted assets)
|
190,319
|
|
|
15.64
|
|
|
≥97,349
|
|
|
≥8.0
|
|
N/A
|
|
N/A
|
BANK
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage ratio (to average assets)
|
$
|
226,800
|
|
|
9.01
|
%
|
|
$ ≥100,654
|
|
|
≥4.0%
|
|
$ ≥
|
125,818
|
|
|
≥5.0
|
%
|
Common Tier 1 risk-based capital ratio (to risk-weighted assets)
|
226,800
|
|
|
13.86
|
|
|
≥73,638
|
|
|
≥4.5
|
|
106,366
|
|
|
≥6.5
|
|
Tier 1 risk-based capital ratio (to risk-weighted assets)
|
226,800
|
|
|
13.86
|
|
|
≥98,184
|
|
|
≥6.0
|
|
130,912
|
|
|
≥8.0
|
|
Total risk-based capital ratio (to risk-weighted assets)
|
247,119
|
|
|
15.10
|
|
|
≥130,912
|
|
|
≥8.0
|
|
163,640
|
|
|
≥10.0
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage ratio (to average assets)
|
$
|
171,179
|
|
|
9.93
|
%
|
|
$ ≥68,982
|
|
|
≥4.0%
|
|
$ ≥86,228
|
|
|
≥5.0
|
%
|
Common Tier 1 risk-based capital ratio (to risk-weighted assets)
|
171,179
|
|
|
14.13
|
|
|
≥54,514
|
|
|
≥4.5
|
|
≥78,742
|
|
|
≥6.5
|
|
Tier 1 risk-based capital ratio (to risk-weighted assets)
|
171,179
|
|
|
14.13
|
|
|
≥72,685
|
|
|
≥6.0
|
|
≥96,913
|
|
|
≥8.0
|
|
Total risk-based capital ratio (to risk-weighted assets)
|
185,095
|
|
|
15.28
|
|
|
≥96,913
|
|
|
≥8.0
|
|
≥121,142
|
|
|
≥10.0
|
|
(1) Amounts and ratios do not include capital conservation buffer.
NOTE O — FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit (typically mortgages and commercial loans) and, to a lesser extent, standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the consolidated balance sheet.
The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments. The Corporation does not anticipate any material losses from these commitments.
Commitments to extend credit, including commitments to grant loans and unfunded commitments under lines of credit, are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extensions of credit, is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property and equipment and income-producing commercial properties. On loans secured by real estate, the Corporation generally requires loan to value ratios of no greater than 80%.
Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and similar transactions. The terms of the letters of credit vary and may have renewal features. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Corporation generally holds collateral and/or personal guarantees supporting those commitments for which collateral is deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral and the enforcement of guarantees would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of December 31, 2020 and 2019, for guarantees under standby letters of credit issued is not material.
In 2018, ACNB Corporation executed a guaranty for a note related to a $1,500,000 commercial line of credit from a local bank, with normal terms and conditions for such a line, for Russell Insurance Group, Inc., the borrower and a wholly-owned subsidiary of ACNB Corporation. The commercial line of credit is for general working capital needs as they arise by the borrower. A subsequent draw taken was reduced to $0 in 2020 on this commercial line of credit since its inception. The liability is recorded for the net drawn amount of this line, no further liability is recorded for the remaining line as to the guarantor’s obligation as the guarantor would have full recourse from all assets of its wholly-owned subsidiary.
The Corporation has not been required to perform on any financial guarantees, and has not incurred any losses on its commitments, during the past three years.
A summary of the Corporation’s commitments at December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
2020
|
|
2019
|
Commitments to extend credit
|
$
|
367,561
|
|
|
$
|
319,681
|
|
Standby letters of credit
|
8,105
|
|
|
6,584
|
|
NOTE P — CONTINGENCIES
The Corporation is subject to claims and lawsuits which arise primarily in the ordinary course of business. Based on information presently available and advice received from legal counsel representing the Corporation in connection with any such claims and lawsuits, it is the opinion of management that the disposition or ultimate determination of any such claims and lawsuits will not have a material adverse effect on the consolidated financial position, consolidated results of operations or liquidity of the Corporation.
NOTE Q — ACNB CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION
STATEMENTS OF CONDITION
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
In thousands
|
2020
|
|
2019
|
ASSETS
|
|
|
|
Cash
|
$
|
6,397
|
|
|
$
|
6,828
|
|
Investment in banking subsidiary
|
252,107
|
|
|
176,689
|
|
Investment in other subsidiaries
|
11,141
|
|
|
10,473
|
|
|
|
|
|
Securities and other assets
|
2,203
|
|
|
1,558
|
|
Receivable from banking subsidiary
|
1,251
|
|
|
812
|
|
Total Assets
|
$
|
273,099
|
|
|
$
|
196,360
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Long-term debt
|
$
|
15,029
|
|
|
$
|
6,830
|
|
Other liabilities
|
98
|
|
|
14
|
|
Stockholders’ equity
|
257,972
|
|
|
189,516
|
|
Total Liabilities and Stockholders’ Equity
|
$
|
273,099
|
|
|
$
|
196,360
|
|
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
In thousands
|
2020
|
|
2019
|
Dividends from banking subsidiary
|
$
|
8,685
|
|
|
$
|
6,920
|
|
|
|
|
|
Other income
|
83
|
|
|
282
|
|
|
8,768
|
|
|
7,202
|
|
|
|
|
|
Expenses
|
1,845
|
|
|
1,739
|
|
|
6,923
|
|
|
5,463
|
|
Income tax benefit
|
587
|
|
|
501
|
|
|
7,510
|
|
|
5,964
|
|
Equity in undistributed earnings of subsidiaries
|
10,884
|
|
|
17,757
|
|
Net Income
|
$
|
18,394
|
|
|
$
|
23,721
|
|
Comprehensive Income
|
$
|
18,609
|
|
|
$
|
27,085
|
|
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
In thousands
|
2020
|
|
2019
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
Net income
|
$
|
18,394
|
|
|
$
|
23,721
|
|
Equity in undistributed earnings of subsidiaries
|
(10,884)
|
|
|
(17,757)
|
|
Increase in receivable from banking subsidiary
|
(439)
|
|
|
(294)
|
|
|
|
|
|
Gain on equity securities
|
213
|
|
|
—
|
|
|
|
|
|
Other
|
647
|
|
|
(57)
|
|
Net Cash Provided by Operating Activities
|
7,931
|
|
|
5,613
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
—
|
|
|
—
|
|
CASH FLOWS USED IN FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Repayments on long-term debt
|
(501)
|
|
|
(470)
|
|
|
|
|
|
Proceeds from issuance of common stock
|
824
|
|
|
1,214
|
|
Dividends paid
|
(8,685)
|
|
|
(6,920)
|
|
Net Cash Used in Financing Activities
|
(8,362)
|
|
|
(6,176)
|
|
Net Decrease in Cash and Cash Equivalents
|
(431)
|
|
|
(563)
|
|
CASH AND CASH EQUIVALENTS — BEGINNING
|
6,828
|
|
|
7,391
|
|
CASH AND CASH EQUIVALENTS — ENDING
|
$
|
6,397
|
|
|
$
|
6,828
|
|
|
|
|
|
Transactions related to acquisition
|
|
|
|
Increase in assets and liabilities:
|
|
|
|
Securities
|
$
|
(257)
|
|
|
$
|
—
|
|
Other assets
|
(733)
|
|
|
—
|
|
Trust preferred debentures
|
6,000
|
|
|
—
|
|
Long term borrowings
|
2,700
|
|
|
—
|
|
Common shares issued
|
57,280
|
|
|
—
|
|
NOTE R — GOODWILL AND OTHER INTANGIBLES
On January 5, 2005, ACNB Corporation completed its acquisition of Russell Insurance Group, Inc. (RIG) of Westminster, Maryland. The acquisition of RIG resulted in goodwill of approximately $6,308,000.
On July 1, 2017, ACNB Corporation completed its acquisition of New Windsor Bancorp Inc. (New Windsor) of Taneytown, Maryland. The acquisition of New Windsor resulted in goodwill of approximately $13,272,000 and generated $2,418,000 in core deposit intangibles.
On January 11, 2020, ACNB Corporation completed its acquisition of Frederick County Bancorp, Inc. (FCBI) of Frederick, Maryland. The acquisition of FCBI resulted in good will of approximately $22,528,000 and generated $3,560,000 in core deposit intangibles.
Combined goodwill included in the Corporation’s consolidated statement of condition is $42,108,000. Goodwill, which has an indefinite useful life, is evaluated for impairment annually and is evaluated for impairment more frequently if events and circumstances indicate that the asset might be impaired. The Corporation did not identify any goodwill impairment on RIG or the Bank’s outstanding goodwill from its most recent testing. There are no impairment losses associated with goodwill as of December 31, 2020 and 2019. Additionally, there are no accumulated impairment losses associated with goodwill as of December 31, 2020 and 2019.
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or
other legal rights. Intangible assets that have finite lives, such as core deposit intangibles, customer relationship intangibles and renewal lists, are amortized over their estimated useful lives and subject to periodic impairment testing. Core deposit intangibles are primarily amortized over ten years using accelerated methods. Customer renewal lists are amortized over their estimated useful lives which range from eight to fifteen years.
The carrying value and accumulated amortization of the intangible assets and core deposit intangibles are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Dollars in thousands
|
|
Gross
Carrying
Amount
|
|
Accumulated Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated Amortization
|
RIG amortized intangible assets
|
|
$
|
10,428
|
|
|
$
|
7,152
|
|
|
$
|
9,890
|
|
|
$
|
6,869
|
|
New Windsor core deposit intangibles
|
|
2,418
|
|
|
1,341
|
|
|
2,418
|
|
|
1,012
|
|
FCBI core deposit intangibles
|
|
3,560
|
|
|
648
|
|
|
—
|
|
|
—
|
|
|
|
$
|
16,406
|
|
|
$
|
9,141
|
|
|
$
|
12,308
|
|
|
$
|
7,881
|
|
Amortization expense was $1,264,000 and $621,000 for the years ended December 31, 2020 and 2019, respectively.
Amortization of the intangible assets for the five years subsequent to December 31, 2020, is expected to be as follows:
|
|
|
|
|
|
Years Ending
|
In thousands
|
2021
|
$
|
1,164
|
|
2022
|
1,056
|
|
2023
|
947
|
|
2024
|
830
|
|
2025
|
707
|
|
Thereafter
|
2,561
|
|
|
$
|
7,265
|
|
NOTE S — SEGMENT AND RELATED INFORMATION
The Corporation has two reporting segments, the Bank and RIG. RIG is managed separately from the banking segment, which includes the Bank and related financial services that the Corporation offers through its banking subsidiary. RIG offers a broad range of property and casualty, life and health insurance to both commercial and individual clients.
Segment information for 2020 and 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In thousands
|
Banking
|
|
Insurance
|
|
Total
|
2020
|
|
|
|
|
|
Net interest income and other income from external customers
|
$
|
87,244
|
|
|
$
|
5,758
|
|
|
$
|
93,002
|
|
Income before income taxes
|
21,778
|
|
|
924
|
|
|
22,702
|
|
Total assets
|
2,541,559
|
|
|
13,803
|
|
|
2,555,362
|
|
Capital expenditures
|
1,018
|
|
|
30
|
|
|
1,048
|
|
2019
|
|
|
|
|
|
Net interest income and other income from external customers
|
$
|
71,713
|
|
|
$
|
5,874
|
|
|
$
|
77,587
|
|
Income before income taxes
|
27,870
|
|
|
1,496
|
|
|
29,366
|
|
Total assets
|
1,707,653
|
|
|
12,600
|
|
|
1,720,253
|
|
Capital expenditures
|
1,367
|
|
|
57
|
|
|
1,424
|
|
NOTE T — ACQUISITION
On January 11, 2020, ACNB completed its previously announced acquisition of Frederick County Bancorp, Inc. (FCBI) of Frederick, Maryland. FCBI was a locally owned and managed institution with five locations in Frederick County, Maryland.
The acquisition positioned ACNB Corporation for continual and profitable growth in a desirable market that is adjacent to the Corporation’s current footprint in southcentral Pennsylvania and central Maryland. ACNB transacted the merger to complement the Corporation’s existing operations, while consistent with the Corporation’s strategic plan of enhancing long-term shareholder value. The fair value of total assets acquired as a result of the merger totaled $443.4 million, loans totaled $329.3 million and deposits totaled $374.1 million.
Goodwill recorded in the merger was $22.5 million. In accordance with the terms of the Reorganization Agreement, each share of FCBI common stock was converted into the right to receive 0.9900 shares of ACNB common stock. As a result of the merger, ACNB issued 1,590,547 shares of its common stock and cash in exchange for fractional shares based upon $36.43, the determined market price of ACNB common stock in accordance with the Reorganization Agreement. The results of the combined entity’s operations are included in the Corporation’s Consolidated Financial Statements from the date of acquisition.
The acquisition of FCBI is being accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition.
The following table summarizes the consideration paid for FCBI and the fair value of assets acquired and liabilities assumed as of the acquisition date:
Purchase Price Consideration in Common Stock
|
|
|
|
|
|
|
|
|
FCBI shares outstanding
|
|
1,601,764
|
|
Shares paid in cash for fractional shares
|
|
150.88
|
|
Cash consideration (per share)
|
|
$
|
36.43
|
|
Cash portion of purchase price (cash payout of stock options and cash in lieu of fractional shares)
|
|
$
|
100,798
|
|
FCBI shares outstanding
|
|
1,601,764
|
|
Shares paid stock consideration
|
|
1,601,613
|
|
Exchange ratio
|
|
0.9900
|
|
Total ACNB shares issued
|
|
1,585,597
|
|
ACNB’s share price for purposes of calculation
|
|
$
|
36.34
|
|
Equity portion of purchase price
|
|
$
|
57,620,595
|
|
Cost of shares owned by buyer
|
|
$
|
187,200
|
|
Total consideration paid
|
|
$
|
57,908,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocation of Purchase Price
|
|
In thousands
|
|
|
Total Purchase Price
|
|
|
|
$
|
57,909
|
|
|
|
|
|
|
Fair Value of Assets Acquired
|
|
|
|
|
Cash and cash equivalents
|
|
35,262
|
|
|
|
Investment securities
|
|
22,167
|
|
|
|
Loans held for sale
|
|
4,050
|
|
|
|
Loans
|
|
329,312
|
|
|
|
Restricted stock
|
|
1,141
|
|
|
|
Premises and equipment
|
|
10,959
|
|
|
|
Core deposit intangible asset
|
|
3,560
|
|
|
|
Other assets
|
|
14,446
|
|
|
|
Total assets
|
|
420,897
|
|
|
|
|
|
|
|
|
Fair Value of Liabilities Assumed
|
|
|
|
|
Non-interest bearing deposits
|
|
103,492
|
|
|
|
Interest bearing deposits
|
|
270,566
|
|
|
|
Subordinated debt
|
|
6,000
|
|
|
|
Long term borrowings
|
|
3,450
|
|
|
|
Other liabilities
|
|
2,008
|
|
|
|
Total liabilities
|
|
385,516
|
|
|
|
|
|
|
|
|
Net Assets Acquired
|
|
|
|
35,381
|
|
Goodwill Recorded in Acquisition
|
|
|
|
$
|
22,528
|
|
Pursuant to the accounting requirements, the Corporation assigned a fair value to the assets acquired and liabilities assumed of FCBI. ASC 820 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”
The assets acquired and liabilities assumed in the acquisition of FCBI were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment for up to one year after the closing date of the acquisition. While the fair values are not expected to be materially different from the estimates, any material adjustments to the estimates will be reflected, retroactively, as of the date of the acquisition. The items most susceptible to adjustment are the fair value adjustments on loans, core deposit intangible and the deferred income tax assets resulting from the acquisition.
Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:
Investment securities available-for-sale
The estimated fair values of the investment securities available for sale, primarily comprised of U.S. Government agency mortgage-backed securities, U.S. government agencies and municipal bonds, were determined using Level 2 inputs in the fair value hierarchy. The fair values were determined using independent pricing services. The Corporation’s independent pricing service utilized matrix pricing, 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 relying on the security’s relationship to other benchmark quoted prices. Management reviewed the data and assumptions used in pricing the securities. A fair value premium of $163,000 was recorded and will be amortized over the estimated life of the investments using the interest rate method.
Loans
Acquired loans (impaired and non-impaired) are initially recorded at their acquisition-date fair values using Level 3 inputs. Fair values are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, expected life time losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments.
Specifically, the Corporation has prepared three separate loan fair value adjustments that it believed a market participant might employ in estimating the entire fair value adjustment necessary under ASC 820-10 for the acquired loan portfolio. The three-separate fair valuation methodology employed are: 1) an interest rate loan fair value adjustment, 2) a general credit fair value adjustment, and 3) a specific credit fair value adjustment for purchased credit impaired loans subject to ASC 310-30 procedures. The acquired loans were recorded at fair value at the acquisition date without carryover of FCBI’s previously established allowance for loan losses. The fair value of the financial assets acquired included loans receivable with a gross amortized cost basis of $339,577,000. The table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans acquired. The credit adjustment on purchased credit impaired loans is derived in accordance with ASC 310-30 and represents the portion of the loan balances that has been deemed uncollectible based on the Corporation’s expectations of future cash flows for each respective loan.
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
Gross amortized cost basis at January 11, 2020
|
|
$
|
339,577
|
|
Interest rate fair value adjustment on pools of homogeneous loans
|
|
(2,632)
|
|
Credit fair value adjustment on pools of homogeneous loans
|
|
(5,931)
|
|
Credit fair value adjustment on purchased credit impaired loans
|
|
(1,702)
|
|
Fair value of acquired loans at January 11, 2020
|
|
$
|
329,312
|
|
For loans acquired without evidence of credit quality deterioration, ACNB prepared the interest rate loan fair value and credit fair value adjustments. Loans were grouped into homogeneous pools by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various internal and external data sources and reviewed by management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value discount of $2.6 million.
Additionally for loans acquired without credit deterioration, a credit fair value adjustment was calculated using a two-part credit fair value analysis: 1) expected lifetime credit migration losses; and 2) estimated fair value adjustment for certain qualitative factors. The expected lifetime losses were calculated using historical losses observed at the Bank, FCBI and peer banks. ACNB also estimated an environmental factor to apply to each loan type. The environmental factor represents potential discount which may arise due to general credit and economic factors. A credit fair value discount of $5.3 million was determined. Both the interest rate and credit fair value adjustments relate to loans acquired with evidence of credit quality deterioration will be substantially recognized as interest income on a level yield amortization method over the expected life of the loans.
The following table presents the acquired purchased credit impaired loans receivable at the Acquisition Date:
|
|
|
|
|
|
|
|
|
In thousands
|
|
|
Contractual principal and interest at acquisition
|
|
$
|
4,289
|
|
Nonaccretable difference
|
|
(2,361)
|
|
Expected cash flows at acquisition
|
|
1,928
|
|
Accretable yield
|
|
(354)
|
|
Fair value of purchased impaired loans
|
|
$
|
1,574
|
|
The Corporation acquired five branches of FCBI. The fair value of FCBI’s premises, including land, buildings, and improvements, was determined based upon independent third-party appraisals performed by licensed appraisers in the market in which the premises are located. The Corporation prepared an internal analysis to compare the lease contract obligations to comparable market rental rates. The Corporation believed that the leased contract rates were in a reasonable range of market rental rates and concluded that no fair market value adjustment related to leasehold interest was necessary.
Core Deposit Intangible
The fair value of the core deposit intangible was determined based on a discounted cash flow analysis using a discount rate commensurate with market participants. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through national brokered CD offering rates. The projected cash flows were developed using projected deposit attrition rates. The core deposit intangible will be amortized over ten years using the sum-of-years digits method.
Time Deposits
The fair value adjustment for time deposits represents a discount from the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar-term time deposits. The time deposit premium of approximately $255,000 is being amortized into income on a level yield amortization method over the contractual life of the deposits.
Long-term Borrowings
The Corporation assumed a trust preferred subordinated debt in connection with the merger. The fair value of the trust preferred subordinated debt was determined using a discounted cash flow method using a market participant discount rate for similar instruments. The trust preferred capital note was valued at discount of $854,000, which is being amortized into income on a level yield amortization method based upon the assumed market rate, and the term of the trust preferred subordinated debt instrument.
The following table presents certain pro forma information as if FCBI had been acquired on September 30, 2019. These results combine the historical results of the Corporation in the Corporation’s Consolidated Statements of Income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on September 30, 2019. In particular, no adjustments have been made to eliminate the amount of FCBI’s provision for loan losses that would not have been necessary had the acquired loans been recorded at fair value as of September 30, 2019. The Corporation expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts below:
|
|
|
|
|
|
|
|
|
In thousands
|
|
For the Nine Months Ended September 30, 2019
|
Total revenues (net interest income plus non-interest income)
|
|
$
|
72,281
|
|
Net Income
|
|
22,138
|
|
Acquisition-related expenses associated with the acquisition of FCBI were $6.0 million for 2020. Such costs include legal and accounting fees, lease and contract termination expenses, system conversion, operations integration, and employee severances, which have been expensed as incurred.
NOTE U — REVENUE RECOGNITION
As of January 1, 2018, the Corporation adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as well as subsequent ASUs that modified ASC 606. The Company has elected to apply the ASU and all related ASUs using the cumulative effect approach. The implementation of the guidance had no material impact on the measurement or recognition of revenue of prior periods. The Corporation generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.
Additional disclosures related to the Corporation’s largest sources of noninterest income within the consolidated statements of income that are subject to ASC 606 are as follows:
Income from fiduciary, investment management and brokerage activities - ACNB Bank’s Trust & Investment Services, under the umbrella of ACNB Wealth Management, provides a wide range of financial services, including trust services for individuals, businesses and retirement funds. Other services include, but are not limited to, those related to testamentary trusts, life insurance trusts, charitable remainder trusts, guardianships, power of attorney, custodial accounts and investment management and advisor accounts. In addition, ACNB’s Wealth Management Department offers retail brokerage-services through a third party provider. Wealth Management clients are located primarily within the Corporation’s geographic markets. Assets held by the Corporation’s Wealth Management Department, including trust and retail brokerage, in an agency, fiduciary or retail brokerage capacity for its customers are excluded from the consolidated financial statement since they do not constitute assets of the Corporation. Assets held by the Wealth Management Department amounted to $436,700,000 and $389,000,000 at December 31, 2020 and 2019, respectively. Income from fiduciary, investment management and brokerage activities are included in other income.
The majority of trust services revenue is earned and collected monthly, with the amount determined based on the investment funds in each trust multiplied by a fee schedule for type of trust. Each trust has one integrated set of performance obligations so no allocation is required. The performance obligation is met by performing the identified fiduciary service. Successful performance is confirmed by ongoing internal and regulatory control, measurement is by valuing the trust assets at a monthly date to which a fee schedule is applied. Wealth management fees are contractually agreed with each customer, and fee levels vary based mainly on the size of assets under management. The costs of acquiring trust customers are incremental and recognized within noninterest expense in the consolidated statements of income.
Service charges on deposit accounts - Deposits are included as liabilities in the consolidated balance sheets. Service charges on deposit accounts include: overdraft fees, which are charged when customers overdraw their accounts beyond available funds; automated teller machine (ATM) fees charged for withdrawals by deposit customers from other financial institutions’ ATMs; and a variety of other monthly or transactional fees for services provided to retail and business customers, mainly associated with checking accounts. All deposit liabilities are considered to have one-day terms and therefore related fees are recognized in income at the time when the services are provided to the customers. Incremental costs of obtaining deposit contracts are not significant and are recognized as expense when incurred within noninterest expense in the consolidated statements of income.
Interchange revenue from debit card transactions - The Corporation issues debit cards to consumer and business customers with checking, savings or money market deposit accounts. Debit card and ATM transactions are processed via electronic systems that involve several parties. The Corporation’s debit card and ATM transaction processing is executed via contractual arrangements with payment processing networks, a processor and a settlement bank. As described above, all deposit liabilities are considered to have one-day terms and therefore interchange revenue from customers’ use of their debit cards to initiate transactions are recognized in income at the time when the services are provided and related fees received in the Corporation’s deposit account with the settlement bank. Incremental costs associated with ATM and interchange processing are recognized as expense when incurred within noninterest expense in the consolidated statements of income.