ACNB CORPORATION INTRODUCTION
The following is management's discussion and analysis of the significant changes in the financial condition, results of operations, comprehensive income, capital resources, and liquidity presented in its accompanying consolidated financial statements forACNB Corporation (the Corporation or ACNB), a financial holding company. Please read this discussion in conjunction with the consolidated financial statements and disclosures included herein. Current performance does not guarantee, assure or indicate similar performance in the future.
CRITICAL ACCOUNTING POLICIES
The accounting policies that the Corporation's management deems to be most important to the portrayal of its financial condition and results of operations, and that require management's most difficult, subjective or complex judgment, often result in the need to make estimates about the effect of such matters which are inherently uncertain. The following policies are deemed to be critical accounting policies by management: The allowance for loan losses represents management's estimate of probable losses inherent in the loan portfolio. Management makes numerous assumptions, estimates and adjustments in determining an adequate allowance. The Corporation assesses the level of potential loss associated with its loan portfolio and provides for that exposure through an allowance for loan losses. The allowance is established through a provision for loan losses charged to earnings. The allowance is an estimate of the losses inherent in the loan portfolio as of the end of each reporting period. The Corporation assesses the adequacy of its allowance on a quarterly basis. The specific methodologies applied on a consistent basis are discussed in greater detail under the caption, Allowance for Loan Losses, in a subsequent section of this Management's Discussion and Analysis of Financial Condition and Results of Operations. The evaluation of securities for other-than-temporary impairment requires a significant amount of judgment. In estimating other-than-temporary impairment losses, management considers various factors including the length of time the fair value has been below cost, the financial condition of the issuer, and the Corporation's intent to sell, or requirement to sell, the security before recovery of its value. Declines in fair value that are determined to be other than temporary are charged against earnings. Accounting Standards Codification (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. 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 onACNB Insurance Services, Inc.'s outstanding goodwill from its most recent testing, which was performed as ofOctober 1, 2021 . The Corporation did not identify any impairment on the Bank's outstanding goodwill from its most recent qualitative assessment, which was completed as ofDecember 31, 2021 . 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. 30
--------------------------------------------------------------------------------
Table of Contents
EXECUTIVE OVERVIEW
For the Year Ended December 31,
Dollars in thousands, except per
share data 2021 2020 2019 2018 2017
INCOME STATEMENT DATA
Interest income $ 78,159 $ 85,290 $ 69,558 $ 64,494 $ 51,785
Interest expense 6,915 12,222 10,140 7,399 5,433
Net interest income 71,244 73,068 59,418 57,095 46,352
Provision for loan losses 50 9,140 600 1,620 -
Net interest income after
provision for loan losses 71,194 63,928 58,818 55,475 46,352
Other income 22,776 20,090 18,169 15,948 14,149
Other expenses 58,951 61,316 47,621 44,703 44,079
Income before income taxes 35,019 22,702 29,366 26,720 16,422
Provision for income taxes 7,185 4,308 5,645 4,972 6,634
Net income $ 27,834 $ 18,394 $ 23,721 $ 21,748 $ 9,788
BALANCE SHEET DATA (AT YEAR-END)
Assets $ 2,786,987 $ 2,555,362 $ 1,720,253 $ 1,647,724 $ 1,595,432
Securities $ 446,161 $ 350,182 $ 212,177 $ 190,835 $ 203,880
Loans, net $ 1,449,394 $ 1,617,558 $ 1,258,766 $ 1,288,501 $ 1,230,194
Deposits $ 2,426,389 $ 2,185,525 $ 1,412,260 $ 1,348,092 $ 1,298,492
Borrowings $ 69,902 $ 92,209 $ 99,731 $ 118,164 $ 131,508
Stockholders' equity $ 272,114 $ 257,972 $ 189,516 $ 168,137 $ 153,966
COMMON SHARE DATA
Earnings per share - basic $ 3.19 $ 2.13 $ 3.36 $ 3.09 $ 1.50
Cash dividends declared $ 1.03 $ 1.00 $ 0.98 $ 0.89 $ 0.80
Book value per share $ 31.35 $ 29.62
8,714,926 8,638,654 7,061,524 7,035,818 6,543,756
Dividend payout ratio 32.22 % 47.22 % 29.17 % 28.79 % 53.46 %
PROFITABILITY RATIOS AND
CONDITION
Return on average assets 1.03 % 0.78 % 1.40 % 1.34 % 0.69 %
Return on average equity 10.52 % 7.39 % 13.33 % 13.62 % 7.12 %
Average stockholders' equity to
average assets 9.81 % 10.53 % 10.54 % 9.85 % 9.69 %
SELECTED ASSET QUALITY RATIOS
Non-performing loans to total
loans 0.42 % 0.48 % 0.40 % 0.52 % 0.63 %
Net charge-offs to average loans
outstanding 0.08 % 0.16 % 0.06 % 0.13 % 0.02 %
Allowance for loan losses to
total loans 1.30 % 1.23 % 1.09 % 1.07 % 1.12 %
Allowance for loan losses to
non-performing loans 306.05 % 256.16 % 269.27 % 206.51 % 177.77 %
ACNB Corporation uses non-GAAP financial measures to provide information useful
to investors in understanding our operating performance and trends, and to
facilitate comparisons with the performance of our peers. The non-GAAP financial
measures and key performance indicators we use may differ from the non-GAAP
financial measures and key performance indicators other financial institutions
use to measure their performance and trends. Reconciliations of GAAP to non-GAAP
operating measures to the most directly comparable GAAP financial measures are
included in the tables below.
31--------------------------------------------------------------------------------
Table of Contents
Dollars in thousands, except per share data Three Months Ended December 31, For the Years Ended December 31, INCOME STATEMENT DATA 2021 2020 2021 2020 Interest income$ 18,674 $ 21,472 $ 78,159 $ 85,290 Interest expense 1,324 2,570 6,915 12,222 Net interest income 17,350 18,902 71,244 73,068 Provision for loan losses - 1,040 50 9,140 Net interest income after provision for loan losses 17,350 17,862 71,194 63,928 Other income 5,633 6,019 22,776 20,090 Merger-related expenses - - - 5,965 Other expenses 17,457 15,094 58,951 55,351 Income before income taxes 5,526 8,787 35,019 22,702 Provision for income taxes 1,031 1,738 7,185 4,308 Net income$ 4,495 $ 7,049 $ 27,834 $ 18,394 Basic earnings per share$ 0.52 $ 0.81 $ 3.19 $ 2.13 NON-GAAP MEASURES INCOME STATEMENT DATA Net Income$ 4,495 $ 7,049 $ 27,834 $ 18,394 Merger-related expenses, net of income taxes - - - 4,639 Net income without nonrecurring items (non-GAAP)$ 4,495 $ 7,049 $ 27,834 $ 23,033 Basic earnings per share (non-GAAP)$ 0.52 $ 0.81
The 2021 net income figure of
The primary source of the Corporation's revenues is net interest income derived from interest earned on loans and investments, less deposit and borrowing funding costs. Revenues are influenced by general economic factors, including market interest rates, the economy of the markets served, stock market conditions, as well as competitive forces within the markets. The Corporation's overall strategy is to increase loan growth in local markets, while maintaining a reasonable funding base by offering competitive deposit products and services. The year 2021 was challenging for financial institutions with COVID-19 continuing to constrain economic activity and loans declining. ACNB continued to be profitable, well capitalized exercising its strategic plan and operationally sound despite these challenges. Lower Provision for Loan Losses, improved fee income and decreased expenses (the prior year included nonrecurring merger-related expenses) offset lower net interest income, resulting in increased income before income taxes of$35,019,000 in 2021, compared to$22,702,000 in 2020. After state and federal taxes, net income increased to$27,834,000 , or$3.19 per share, in 2021, compared to$18,394,000 , or$2.13 per share, in 2020. Returns on average equity were 10.52% and 7.39% in 2021 and 2020, respectively.
In 2021, the Corporation's net interest margin was reduced to 2.82%, compared to
3.35% in 2020. Net interest income was
Other income was$22,776,000 and$20,090,000 in 2021 and 2020, respectively. The largest source of other income is commissions from insurance sales attributable toACNB Insurance Services, Inc. Commissions from insurance sales increased by 0.4% in 2021 to$6,151,000 , because of higher contingent commissions as a result of specific practices of the insurance carriers. There were no sales of securities in 2021 or 2020. A$439,000 net fair value gain (fair value change, none were sold) was recognized on local bank and CRA-related equity securities in 2021 due to frequent market changes in publicly-traded stocks, compared to a$193,000 net fair value loss in 2020. Income from fiduciary, investment management and brokerage activities, which includes fees from both institutional and personal trust, investment management services, estate settlement and brokerage services, totaled$3,169,000 for 2021, as compared to$2,672,000 for 2020, an 18.6% net increase as a net result of higher fee volume from increased assets under management, lower sporadic estate fee income, and 34% higher fees on brokerage relationships. Service charges on deposit accounts increased 4.6% to$3,510,000 for 2021, due to revived consumer spending that creates the Bank's fees. Fee volume varies with balance levels, account transaction activity, and customer-driven 32
--------------------------------------------------------------------------------
Table of Contents
events such as overdrawing account balances. Revenue from ATM and debit card
transactions increased 15.0% to
Other expenses decreased to$58,951,000 , or by 3.9%, in 2021, as compared to$61,316,000 in 2020. The largest component of other expenses is salaries and employee benefits, which increased 4.4% to$36,816,000 in 2021, compared to$35,278,000 in 2020, due to an increased fourth quarter incentive accruals, annual merit increases, and lowered cost of benefits. Compared to 2020, occupancy expense increased 11.8% in 2021 mostly due to higher seasonal costs and catch up on COVID-19 deferred maintenance; and tech equipment expense increased 13.5% due to fourth quarter booked conversion cost and higher expense structure of a new core system. Professional services expense decreased 8.0% from sporadic risk, loan, legal and corporate governance engagements. Marketing and corporate relations expense decreased by 48.8% due to muted specific campaigns and brand awareness activities.FDIC and regulatory expense increased by 55.8% based on these agencies' formulas and credits and COVID-19 related high balance sheet growth. Merger-related expenses were$0 in 2021, compared to$5,965,000 in 2020, due to the majority of FCBI acquisition expenses occurring in 2020. A more thorough discussion of the Corporation's results of operations is included in the following pages. RESULTS OF OPERATIONS Net Interest Income The primary source of ACNB's traditional banking revenue is net interest income, which represents the difference between interest income on earning assets and interest expense on liabilities used to fund those assets. Earning assets include loans, securities, and interest bearing deposits with banks. Interest bearing liabilities include deposits and borrowings. Net interest income is affected by changes in interest rates, volume of interest bearing assets and liabilities, and the composition of those assets and liabilities. The "interest rate spread" and "net interest margin" are two common statistics related to changes in net interest income. The interest rate spread represents the difference between the yields earned on interest earning assets and the rates paid for interest bearing liabilities. The net interest margin is defined as the percentage of net interest income to average earning assets, which also considers the Corporation's net non-interest bearing funding sources, the largest of which are non-interest bearing demand deposits and stockholders' equity. 33
--------------------------------------------------------------------------------
Table of Contents
The following table includes average balances, rates, interest income and expense, interest rate spread, and net interest margin:
Table 1 - Average Balances, Rates and Interest Income and Expense
2021 2020
Average Yield/ Average Yield/
Dollars in thousands Balance Interest Rate Balance Interest Rate
INTEREST EARNING ASSETS
Loans $ 1,552,074 $ 71,186 4.59 % $ 1,671,428 $ 78,967 4.72 %
Taxable securities 358,256 5,423 1.51 % 268,667 4,927 1.83 %
Tax-exempt securities 38,829 543 1.40 % 26,079 470 1.80 %
Total Securities 397,085 5,966 1.50 % 294,746 5,397 1.83 %
Other 578,150 1,007 0.17 % 215,318 926 0.43 %
Total Interest Earning Assets 2,527,309 78,159 3.09 % 2,181,492 85,290 3.91 %
Cash and due from banks 23,799 22,644
Premises and equipment 30,742 30,206
Other assets 136,035 147,394
Allowance for loan losses (19,927) (17,076)
Total Assets $ 2,697,958 $ 2,364,660
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST BEARING LIABILITIES
Interest bearing demand deposits $ 872,729 $ 911 0.10 % $ 673,981 $ 964 0.14 %
Savings deposits 367,543 664 0.18 % 297,134 1,207 0.41 %
Time deposits 494,322 3,437 0.70 % 514,303 8,147 1.58 %
Total Interest Bearing Deposits 1,734,594 5,012 0.29 % 1,485,418 10,318 0.69 %
Short-term borrowings 35,153 39 0.11 % 37,185 59 0.16 %
Long-term borrowings 49,935 1,864 3.73 % 58,498 1,845 3.15 %
Total Interest Bearing Liabilities 1,819,682 6,915 0.38 % 1,581,101 12,222 0.77 %
Non-interest bearing demand deposits 594,483 499,100
Other liabilities 19,119 35,462
Stockholders' equity 264,674 248,997
Total Liabilities and Stockholders' Equity $ 2,697,958 $ 2,364,660
NET INTEREST INCOME $ 71,244 $ 73,068
INTEREST RATE SPREAD 2.71 % 3.14 %
NET INTEREST MARGIN 2.82 % 3.35 %
For yield calculation purposes, nonaccruing loans are included in average loan
balances. Loan fees (including PPP fees) of
Table 1 presents balance sheet items on a daily average basis, net interest income, interest rate spread, and net interest margin for the years endingDecember 31, 2021 and 2020. Table 2 analyzes the relative impact on net interest income for changes in the volume of interest earning assets and interest bearing liabilities and changes in rates earned and paid by the Corporation on such assets and liabilities. Net interest income totaled$71,244,000 for the year endedDecember 31, 2021 , compared to$73,068,000 for the same period in 2020, a decrease of$1,824,000 , or 2.5%. Net interest income decreased due to a decrease in interest income to a greater extent than a decrease in interest expense. Interest income decreased$7,131,000 , or 8.4%, due to the change in mix of average earning assets, in addition to decreased rates due to market events. Interest expense decreased$5,307,000 , or 43.4%, in 2021 from 2020. The decrease in interest expense resulted from deposit rate decreases in addition to a favorable change in deposit mix (as discussed below). Decreased loans outstanding was a result of active participation in the SBA Payroll Protection Program (PPP) offset by loan paydowns and payoffs (including mostly 2021 PPP loans payoffs), despite concerted effort by management to offset the recent year trend of the market area's heightened competition and the COVID-19 related slow economic conditions. Loan yields were negatively impacted by declines in theU.S. Treasury yields and other market driver interest rates. The year 2021 saw continued lower market yields and the difference between longer term rates and shorter term rates was increasing. These driver rates affect new loan originations and are indexed to a portion of the loan portfolio in that a change in the driver rates changes the yield on new loans and on existing loans at subsequent interest rate reset dates. 34
--------------------------------------------------------------------------------
Table of Contents
From these changes, interest income yield was negatively affected as new loans replace paydowns on existing loans and variable rate loans reset to new current rates in these years. Partially offsetting lower yields were purchase accounting adjustments and recognized PPP fees that increased yield. Interest income increased on investment securities due to increased volume offsetting lower rates on these new purchases . An elevated amount of earning assets remained in short-term, low-rate money market type accounts during 2021; and there exists ample ability to borrow for liquidity needs. The ability to increase lending is contingent on the effects of COVID-19 on current and potential customers even with intense competition that has reduced new loans and may result in the payoff of existing loans, as economic conditions in the Corporation's marketplace eventually return to its previous stable state. As to funding costs, interest rates on alternative funding sources, such as the FHLB, and other market driver rates are factors in and influence the rates the Corporation and the local market pay for deposits. However, after COVID-19Federal Open Market Committee (FOMC) actions, rates on transaction, savings and time deposits, were sharply reduced in order to match sharply reduced market earning asset yields. Interest expense decreased$5,307,000 , or 43.4% due to lower rates offsetting higher volume on transaction deposits, certificate of deposit rate decreases and lower volume, and by less use of higher cost borrowings. The medical need to stop the spread of COVID-19 caused government officials to close or restrict the operations of many businesses and their workers, the resulting widespread liquidity allowed banks, including ACNB, to reduce deposit rates and still maintain relationships. Other responses were for theFederal Reserve to decrease rates to 0% to 0.25% and the massive injection of liquidity into markets. The resulting inflation is projected to cause reversal of course with rates increasing and liquidity withdrawn. ACNB's reaction will be to take advantage of mix changes in assets and delay funding cost increases to maintain or increase margins. The inability to do so could cause margins to decrease. Over the longer term, the Corporation continues its strategic direction to increase asset yield and interest income by means of loan growth and rebalancing the composition of earning assets to commercial loans. The net interest spread for 2021 was 2.71% compared to 3.14% during 2020. Also comparing 2021 to 2020, the yield on interest earning assets decreased by 0.82% and the cost of interest bearing liabilities decreased by 0.39% due to less room to decrease. The net interest margin was 2.82% for 2021 and 3.35% for 2020. The net interest margin decrease included lower purchase accounting adjustments, down 11 basis point and higher PPP loan fees recognized, up 9 basis point, but was more impacted by sharp market rate decreases and less loans as a percentage in the earning asset mix and more lower yielding investments and liquidity assets. PPP fees recognized in 2021 were$5,627,000 and purchase accounting added another$3,158,000 to interest income. Both are finite in amount and duration, especially the PPP fees, and will not repeat at this magnitude in future periods.$995,000 in PPP deferred fees remain atDecember 31, 2021 . Average earning assets were$2,527,309,000 in 2021, an increase of$345,817,000 , or 15.9%, from the average balance of$2,181,492,000 in 2020. Liquidity assets represented the largest increase in average assets in 2021, liquidity assets also represented the largest increase in 2020. Changes in the investment portfolio in both years were made to balance future liquidity needs (investments bought in low rate environment are difficult to use subsequently for liquidity when rates increase) and to collateralize eligible deposits. Average interest bearing liabilities were$1,819,682,000 in 2021, up from$1,581,101,000 in 2020. Average non-interest bearing demand deposits increased 19.1% in 2021, continuing the upward trend from 2020. All increases were a result of COVID-19 related slow economic activity that tend to concentrate increased liquidity in the banking system. On average, deposits (including non-interest bearing) were up 17.4%, while borrowings decreased by 11.1% due to principal paybacks. Lower-cost transaction and savings deposits increased in 2021. The decrease in time deposits was in part from existing customers moving to better liquidity available from transaction and savings deposits . Net interest income totaled$17,350,000 for the quarter ended onDecember 31, 2021 compared to$18,902,000 for the same period in 2020. Trends discussed for the year accelerated in the fourth quarter causing the decrease in interest income to exceed the decrease in interest expense. Net interest margin was 2.59% in the fourth quarter of 2021 compared with 3.17% for the same quarter in 2020. PPP fees recognized in the fourth quarter of 2021 were$1,215,000 compared to$1,501,000 in the same period in 2020.
The rate/volume analysis detailed in Table 2 shows that the decrease in net interest income in 2021 was due to loan volume decreases and rate decreases in earning asset offsetting rate and volume decreases in funding cost. Earning asset yields decreased due to much lower market rates. Interest expense decreased due to lower deposit volumes and rates.
35--------------------------------------------------------------------------------
Table of Contents
The following table shows changes in net interest income attributed to changes in rates and changes in average balances of interest earning assets and interest bearing liabilities:
Table 2 - Rate/Volume Analysis
2021 versus 2020
Due to Changes in
In thousands Volume Rate Total
INTEREST EARNING ASSETS
Loans $ (5,522) $ (2,259) $ (7,781)
Taxable securities 1,535 (1,119) 416
Tax-exempt securities 194 (122) 72
Total Securities 1,729 (1,241) 488
Other 619 (457) 162
Total $ (3,174) $ (3,957) $ (7,131)
INTEREST BEARING LIABILITIES
Interest bearing demand deposits $ 244 $ (297) $ (53)
Savings deposits 239 (782) (543)
Time deposits (305) (4,406) (4,711)
Short-term borrowings (3) (16) (19)
Long-term borrowings (292) 311 19
Total (117) (5,190) (5,307)
Change in Net Interest Income
The net change attributable to the combination of rate and volume has been allocated on a consistent basis between volume and rate based on the absolute value of each. For yield calculation purposes, nonaccruing loans are included in average balances. Provision for Loan Losses The provision for loan losses charged against earnings was$50,000 in 2021 and$9,140,000 in 2020. The provision for loan losses charged against earnings was$0 in the fourth quarter of 2021 compared with$1,040,000 in the same period in 2020. The determination of the provision was a result of the analysis of the adequacy of the allowance for loan losses calculation. The allowance for loan and lease losses generally does not include the loans acquired from the FCBI acquisition in 2020 or theNew Windsor Bancorp, Inc. acquisition completed in 2017 (New Windsor), which were recorded at fair value as of the respective acquisition dates. Each quarter, the Corporation assesses risk in the loan portfolio and reserve required compared with the balance in the allowance for loan losses and the current evaluation factors. The 2021 provision was calculated to be much lower due to the intervening provisioning for the impact of the COVID-19 pandemic and the elimination of modifications made in prior periods because of COVID-19. This customer base includes businesses in the hospitality/tourism industry, restaurants and related businesses and lessors of commercial real estate properties. The qualitative factor for this event and a related factor on commercial and industrial loan collateral reduced. Otherwise, management concluded that the loan portfolio exhibited continued general stability in quantitative and qualitative measurements as shown in the tables and narrative in this Management's Discussion and Analysis and the Notes to the Consolidated Financial Statements. The long term effect of the ongoing COVID-19 event cannot be currently estimated other than the calculation that resulted in the above mentioned special qualitative factors. This same analysis concluded that the unallocated allowance should be a lower percentage range in 2021 compared with the prior periods due to increased experience with COVID-19 effects on loan quality. For additional discussion of the provision and the loans associated therewith, please refer to the Asset Quality section of this Management's Discussion and Analysis. ACNB charges confirmed loan losses to the allowance and credits the allowance for recoveries of previous loan charge-offs. For 2021, the Corporation had net charge-offs of$1,243,000 as compared to net charge-offs of$2,749,000 for 2020.$2,000,000 in 2020 charge-offs were not COVID-19 related.
Other Income
Other income was$22,776,000 for the year endedDecember 31, 2021 , a$2,686,000 , or 13.4%, increase from 2020. The largest source of other income is commissions from insurance sales fromACNB Insurance Services, Inc. , which increased 0.4% to$6,151,000 in 2021. The increase was due to increases in contingent commission volume, net of lower commission on 36
--------------------------------------------------------------------------------
Table of Contents
recurring books of business due to economic, market and customer factors. A continuing risk toACNB Insurance Services, Inc.'s revenue is nonrenewal of large commercial accounts and actions by insurance carriers to reduce commissions paid to agencies such asACNB Insurance Services, Inc. Contingent, or extra, commissions were higher than the prior year due to specific claim activity atACNB Insurance Services, Inc. and trends in the entire insurance marketplace in general in prior periods. Heightened pressure on commissions is expected to continue in this business line from insurance company actions. There were no gains or losses on sales of securities in 2021 or 2020. A$439,000 net fair value gain was recognized on local bank and CRA-related equity securities during 2021 due to normal variations in market value on publicly-traded local bank stocks and increased market values for financial equities in particular, compared to a net fair value loss of$193,000 in 2020. Income from fiduciary, investment management and brokerage activities, which includes fees from both institutional and personal trust, investment management services, estate settlement and brokerage services, totaled$3,169,000 for the year endedDecember 31, 2021 , as compared to$2,672,000 for 2020. AtDecember 31, 2021 , ACNB had total assets under administration of approximately$537,800,000 , compared to$436,700,000 at the end of 2020. The revenue increase was a net result of higher fee volume from increased assets under management, lower sporadic estate settlement income which varies with specific activity, and increased fees on brokerage relationship transactions. Service charges on deposit accounts increased 4.6% to$3,510,000 , due to partial recovery from COVID-19 related slow economic conditions that had reduced fee generating activity. Fee volume varies with balance levels, account transaction activity, and customer-driven events such as overdrawing account balances. Further, various specific government regulations and policies effectively limit fee assessments related to deposit accounts, making future revenue levels uncertain. Revenue from ATM and debit card transactions increased 15.0% to$3,387,000 due to variations in volume and mix, including COVID-19 related increased trend for higher online volume. The longer term trend had been increases resulting from consumer desire to use more electronic delivery channels (Internet and mobile applications); however, regulations or legal challenges for large financial institutions may impact industry pricing for such transactions and fees in connection therewith in future periods, the effects of which cannot be currently quantified. Another challenge to this revenue source is the retail system-wide security breaches in the merchant base that are negatively affecting consumer confidence in the debit card channel. Income from sold mortgages, included in other income, increased by$1,062,000 , or 45.6%, to$3,393,000 in 2021 as customer demand for refinancing in the low rate environment led to origination of mortgage types that were sold in the secondary market. This revenue source is subject to wide divergence due to national and local economic trends and market interest rates. Other income was$5,633,000 for the quarter endedDecember 31, 2021 a$386,000 or 6.4% decrease from the same quarter in 2020. Included in the decrease was a lower gain on equity securities down$229,000 , lower income from rate sensitive mortgage sale income, down$156,000 , and lower insurance agency commissions down$180,000 due to specific customer actions. Continued increases included deposit service charges, trust and brokerage, and a one-time gain of$101,000 on bank owned life insurance. Impairment TestingACNB Insurance Services, Inc. andACNB Bank has certain long-lived assets, including purchased intangible assets subject to amortization such as insurance books of business, core deposit intangibles and associated goodwill assets, which are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the statement of condition and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated.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. An impairment loss is recognized to the extent that the carrying amount exceeds the asset's fair value. Accounting rules permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The goodwill impairment analysis involves comparing the reporting unit's estimated fair value to its carrying value, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value of goodwill assigned to the reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. Subsequent reversal of goodwill impairment losses is not permitted. As noted above, commissions from insurance sales were up 0.4% in 2021, andACNB Insurance Services, Inc.'s stand alone net income decreased 0.4% in 2021 compared to 2020. The testing for potential impairment involves methods that include both current and projected income amounts, andACNB Insurance Services, Inc.'s fair value remained above the carrying value as of the most recent annual impairment test date. Thus, the results of the annual evaluations determined that there was no impairment ofACNB Insurance Services, Inc.'s goodwill, including the testing atOctober 1, 2021 . However, declines in 37
--------------------------------------------------------------------------------
Table of Contents
ACNB Insurance Services, Inc.'s net income or changes in external market factors, including likely buyers that are assumed in impairment testing, may require an impairment charge to goodwill. The Corporation did not identify any impairment on the Bank's outstanding goodwill from its most recent qualitative assessments, which were completed as ofDecember 31, 2021 . Should it be determined in a future period that the goodwill has been impaired, then a charge to earnings will be recorded in the period that such a determination is made.
Other Expenses
Other expenses decreased 3.9% to$58,951,000 for the year endedDecember 31, 2021 . The largest component of other expenses is salaries and employee benefits, which increased 4.4% in 2021 to$36,816,000 compared to$35,278,000 in 2020. The reasons for the increase in salaries and employee benefits expenses include the following:
•challenges and cost in replacing and maintaining customer-facing staff due to a competitive labor market;
•costs in back-office staff due to the marketplace high demand for employees;
•increased organic growth initiatives at
•maintaining staff in support functions and higher skilled mix of employees necessitated by regulations and growth;
•normal merit increases to employees and associated payroll taxes;
•increased expense on performance-based commissions, restricted stock grants and incentives, most of which is accrued in the fourth quarter by Board actions;
•market changes in actively managing employee benefit plan costs, including health insurance;
•varying costs of 401(k) plan and non-qualified retirement plan benefits; and,
•defined benefit pension expense due to plan investment performance and changes
in discount rates. This expense increased by
The Corporation reduced the benefit formula for the defined benefit pension plan effectiveJanuary 1, 2010 , in order to manage total benefit costs. Subsequently, the Corporation amended the defined benefit pension plan effectiveApril 1, 2012 , in that no employee hired afterMarch 31, 2012 , shall be eligible to participate in the pension plan and no inactive or former plan participant shall be eligible to again participate in the pension plan. The Corporation's overall pension plan 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 asset 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, plan expense, as well as any applicable regulatory requirements. However, the determination of future benefit expense is also dependent on the fair value of assets and the discount rate on the year-end measurement date, which in recent years has experienced fair value volatility and low discount rates. Although 2021 reflected an expense compared to the negative expense (income benefit) in 2020, the expense will again be an income benefit in 2022 due to higher discount rates at the latest measurement date, higher plan returns, and change in mortality tables utilized. The expense will vary in future years due to these variables. A pension provision in a public law known as MAP-21, enacted inJuly 2012 , had no effect on the GAAP expense associated with the plan. In addition, the ACNB plan has maintained a well-funded status under ERISA rules. Net occupancy expense was up 11.8% at$4,114,000 in 2021 and$3,681,000 in 2020. Equipment expense totaled$6,175,000 during 2021, as compared to$5,442,000 during 2020. Occupancy expense was up in 2021 due to higher first quarter seasonal expense, COVID-19 deferred maintenance in the fourth quarter catch up and fourth quarter set up cost for a temporary facility pending expected completion of a new office in 2022. Two community offices were closed in 2021 in the strategy of lower future occupancy expense (as well as other efficacies). Equipment expense increased due to tech equipment expenditures which vary due to specific projects. More significantly, increased costs were associated with the fourth quarter set up and new monthly fee for the core system conversion. Equipment expense is subject to ever-increasing technology demands and the core system conversion is a major step in the Corporation's Digital Transformation strategic planning. The 2021 core system conversion will change various expense components, which although budgeted for future periods cannot be fully estimated. Technology investments and training allowing staff to work from home continues to prove invaluable in keeping the Bank operational during the pandemic. 38
--------------------------------------------------------------------------------
Table of Contents
Professional services expense totaled$1,304,000 for 2021, as compared to$1,417,000 for 2020. The variation in expense from year to year included varying legal costs associated with problem loans and corporate governance, as well as the expense of heightened compliance monitoring on existing regulations and the expense of implementing new regulations. Other tax expense increased$364,000 or 30.1% in 2021 compared to 2020 due to higher PennsylvaniaBank Shares Tax . The PennsylvaniaBank Shares Tax is a stockholders' equity-based tax and is subject to increases based on state government parameters and the level of the stockholders' equity base that increased with the retained earnings equity increase and from the FCBI merger equity, and from higher rate. Supplies and postage expense decreased in 2021 compared to the prior year due to variation in the timing of necessary replenishments and with more use of electronic delivery. Marketing and corporate relations expense decreased 48.8% from 2020 to 2021. Marketing expense varies with the timing and amount of planned advertising production and media expenditures, typically related to the promotion of certain in-market banking and trust products.FDIC and regulatory expense for 2021 was$960,000 , an increase of$344,000 from$616,000 in 2020 based onFDIC variations in asset base and rate in credits received in the prior year based on theFDIC fund reaching a particular funding ratio. This credit does not repeat in future periods but depends on the change in the funding ratio.FDIC expense varies with changes in net asset size, risk ratings, andFDIC derived assessment rates. Intangible assets amortization decreased 7.9% due to bank acquisition calculation andACNB Insurance Services, Inc. amortization on prior book purchases. Other operating expense increased$702,000 or 13.7% in 2021 as a result of a variety of increases including various delivery channels cost, corporate governance and risk management (including training) expenditures. In addition, the Bank elected to pay off a higher than market borrowing maturing in 2023 with a one-time penalty of$125,000 and separately accrued$103,000 for a one-time failure to hold garnished funds loss. The loss issue was later settled in 2022 at a 47% lesser amount. Merger related expenses totaled$0 in 2021 compared to$5,965,000 in 2020, due to the acquisition and integration of FCBI in 2020. Merger expenses included legal and consulting expenses to effect the legal merger, investment banking and preparing purchase accounting adjustments. Integration expenses included severance payments to FCBI staff separated by the merger, consultant costs to integrate FCBI systems into ACNB's systems and the cost to terminate all FCBI core banking and electronic technology systems contracts. These costs were all necessary to provide requisite internal controls and cost effective core banking technology systems going forward. The costs of integrating all systems into one system was important to the merger viability and ongoing system integrity and quality. Other Expenses was$17,457,000 for the quarter endedDecember 31, 2021 a$2,363,000 or 15.7% increase from the same quarter in 2020. Included in the increase was a$935,000 higher salary expense due to incentive compensation plan accruals approved based on achievement of plan goals, and other benefit expense including pension up$140,000 . Occupancy expenses were up by$96,000 or 9.88% due to COVID-19 deferred maintenance in the fourth quarter catch up and fourth quarter set up cost for a temporary facility pending expected completion of a new office in 2022. Equipment expense was up$989,000 in the quarter, which included$895,000 one-time core conversion cost. ACNB projects ongoing replacement of legacy systems and new tech investments to increase this category (not including the one-time conversion cost) 20% to 25% annually as a part of the Digital Transformation strategic plan. Other expense categories included the one time borrowing early pay off penalty of$125,000 and the one-time$103,000 loss accrual discussed above; otherwise were net 3.6% higher on variations discussed for the year.
Provision for Income Taxes
ACNB recognized income taxes of$7,185,000 , or 20.5% of pretax income, during 2021, as compared to$4,308,000 , or 19.0%, during 2020. The variances from the federal statutory rate of 21% in the respective periods are generally due to tax-exempt income from investments in and loans to state and local units of government at below-market rates (an indirect form of taxation), investment in bank-owned life insurance, and investments in low-income housing partnerships (which qualify for federal tax credits). The varying effective tax rate during 2021 and 2020 was a result of varying pretax income in relationship to expiration of tax credits, varying levels of tax-exempt investments and allocation between states. Pretax income decreased due to internal growth offset by merger and provision for loan loss expenses. AtDecember 31, 2021 , net deferred tax assets amounted to$4,514,000 . Deferred tax assets are realizable primarily through future reversal of existing taxable temporary differences and future earnings. Management currently anticipates timing difference reversals will be adequate to utilize deferred tax assets. Accordingly, no valuation allowance has been established for deferred tax assets atDecember 31, 2021 . 39
-------------------------------------------------------------------------------- Table of Contents FINANCIAL CONDITION Average earning assets increased in 2021 to$2,527,309,000 , or by 15.9%, from$2,181,492,000 in 2020. Loans decreased from the forgiveness of PPP loans, sale of most new residential mortgages, and payoffs of loans in the residential mortgage consumer and government lending portfolios. Deposit increases were largely due to continued, slow economic conditions in the ongoing pandemic environment increasing the level of deposits held by existing and new customers. ACNB's overnight interest bearing deposits increased in 2021 on average, as more funds were allocated into liquid assets. On average, investments were increased in 2021 by 34.7% and in 2020 by 44.5% to provide a better return on excess liquidity and to properly collateralize public deposits. Average loans decreased 7.1% and increased 29.7% on average in 2021 and 2020, respectively. Loans were funded by increased deposits. Average deposits increased 17.4% in 2021 to$2,329,077,000 from$1,984,518,000 in 2020. Deposit growth was the result of increased balances due to the lack of economic activity in the COVID-19 environment. Average borrowings decreased in 2021 to$85,088,000 from$95,683,000 in 2020. Past years' term borrowings were in anticipation of continued loan demand and amounts were paid off from liquidity in 2021 and 2020.
ACNB uses investment securities to generate interest and dividend income, manage interest rate risk, provide collateral for certain funding products, and provide liquidity. The changes in the securities portfolio in 2021 were mainly to provide proper collateral for public deposits and to provide better yields on excess deposits. Investing into investment security portfolio assets over the past several years was made more challenging due to theFederal Reserve Bank's program commonly called Quantitative Easing in which, by theFederal Reserve's open market purchases, the yields were maintained at a lower level than would otherwise be the case. The investment portfolio is comprised ofU.S. Government agency, municipal, and corporate securities. These securities provide the appropriate characteristics with respect to credit quality, yield and maturity relative to the management of the overall balance sheet. AtDecember 31, 2021 , the securities balance included a net unrealized loss on available for sale securities of$3,474,000 , net of taxes, on amortized cost of$441,565,000 versus a net unrealized gain of$4,645,000 , net of taxes, on amortized cost of$331,745,000 atDecember 31, 2020 . The change in fair value of available for sale securities during 2021 was a result of the higher amount of investments in the available for sale portfolio and by a decrease in fair value from an increase in theU.S. Treasury yield curve rates (which varies daily with volatility) and the spread from this yield curve required by investors on the types of investment securities that ACNB owns. TheFederal Reserve reinstituted their rate-decreasing Quantitative Easing program in the COVID-19 crisis; and after increasing the fed funds rate inmid-December 2015 throughDecember 2018 , theFederal Reserve decreased the target rate to 0% to 0.25% in the ongoing COVID-19 crisis; both actions causing theU.S. Treasury yield curve to decrease in 2020. However, the bond market sensed that government stimulus would lead to inflation and the yield curve increased in terms relevant to the investment securities in the Corporation's portfolio, leading to fair value decreases. However, fair values were volatile on any given day in 2021 and such volatility will continue. The changes in value are deemed to be related solely to changes in interest rates as the credit quality of the portfolio is high. AtDecember 31, 2021 , the securities balance included held to maturity securities with an amortized cost of$6,454,000 and a fair value of$6,652,000 , as compared to an amortized cost of$10,294,000 and a fair value of$10,768,000 atDecember 31, 2020 . The held to maturity securities areU.S. government pass-through mortgage-backed securities in which the full payment of principal and interest is guaranteed; however, they were not classified as available for sale because these securities are generally used as required collateral for certain eligible government accounts or repurchase agreements. They are also held for possible pledging to access additional liquidity for banking subsidiary needs in the form of FHLB borrowings. No held to maturity securities were added in the past several years but the Corporation retains that option in certain rate environments.
The Corporation does not own investments consisting of pools of Alt-A or subprime mortgages, private label mortgage-backed securities, or trust preferred investments.
The fair values of securities available for sale (carried at fair value) are
determined by obtaining quoted market prices on nationally recognized securities
exchanges (Level 1) or by matrix pricing (Level 2), which is a mathematical
technique used widely in the industry to value debt securities without relying
exclusively on quoted market prices for the specific security but rather by
relying on the security's relationship to other benchmark quoted prices. The
Corporation uses independent service providers to provide matrix pricing. Please
refer to Note C - "Securities" in the Notes to Consolidated Financial Statements
for more information on the security portfolio and Note L - "Fair Value
Measurements" in the Notes to Consolidated Financial Statements for more
information about fair value.
40--------------------------------------------------------------------------------
Table of Contents
The following tables set forth the composition of the securities portfolio and the securities maturity schedule, including weighted average yield, as of the end of the years indicated:
Table 3 -
In thousands 2021
2020
AVAILABLE FOR SALE SECURITIES AT FAIR VALUE U.S. Government and agencies$ 245,041 $ 183,603 Mortgage-backed securities 133,496 108,822 State and municipal 44,611 36,484 Corporate bonds 13,950 8,809$ 437,098 $ 337,718 HELD TO MATURITY SECURITIES AT AMORTIZED COST U.S. Government and agencies $ - $ - Mortgage-backed securities 6,454 10,294$ 6,454 $ 10,294 EQUITY SECURITIES WITH READILY DETERMINABLE FAIR VALUES CRA Mutual Fund$ 1,036 $ 1,065 Stock in other Banks 1,573 1,105$ 2,609 $ 2,170
Table 4 discloses investment securities at the scheduled maturity date at
Table 4 - Securities Maturity Schedule
Over 10 Years
1 Year or Less Over 1 - 5 Years Over 5 - 10 Years or No Maturity Total
Dollars in thousands Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
U.S. Government and agencies $ 19,233 2.22 % $ 89,323 1.78 % $ 131,671 2.03 % $ 9,236 3.31 % $ 249,463 2.00 %
Mortgage-backed securities 84 2.44 3,894 2.83 23,270 2.20 112,903 1.68 140,151 1.80
State and municipal 839 4.52 685 1.57 7,118 1.71 35,905 2.44 44,547 2.35
Corporate bonds - - 1,530 5.81 10,328 4.27 2,000 5.25 13,858 4.58
$ 20,156 2.32 % $ 95,432 1.89 % $ 172,387 2.17 % $ 160,044 1.96 % $ 448,019 2.04 %
Securities are at amortized cost. Mortgage-backed securities are allocated based upon scheduled maturities.
The Company continues to analyze increasing investments to increase interest income, despite the possible subsequent decrease in market value if rates increase further.
41--------------------------------------------------------------------------------
Table of Contents
The Corporation adopted ASU 2016-01, Financial Instruments-Overall (Topic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities effectiveJanuary 1, 2018 . The required fair value disclosures are as follows: Over 10 Years 1 Year or Less Over 1 - 5 Years Over 5 - 10 Years or No Maturity Total Dollars in thousands Amount Yield Amount Yield Amount Yield Amount Yield Amount YieldCRA Mutual Fund $ - - % $ - - % $ - - %$ 1,036 - %$ 1,036 - % Stock in other Banks - - - - - - 1,573 - 1,573 - $ - - % $ - - % $ - - %$ 2,609 - %$ 2,609 - % Loans Year over year, loans outstanding decreased by$169,357,000 , or 10.3%, in 2021, as compared to 2020. The decrease is primarily attributable to the sale of most newly originated residential mortgages, PPP loan payoffs, and the payoff of loans in the residential mortgage, consumer, and government lending portfolios. Year over year, organic loan declines is primarily a result of active participation and subsequent payoffs in the Paycheck Protection Program (PPP) as well as the other factors mentioned above. In all periods, residential real estate lending and refinance activity was mostly sold to the secondary market and commercial loans were subject to refinancing to competition for different rates or terms. In the normal course of business, more payoffs could upcoming periods from either customers' cash reserves or refinancing at competing banks and markets, and currently lending actions are continuing while dealing with the ongoing work involved with thePPP Small Business Administration (SBA) guaranteed loans forgiveness processes. Both years demonstrated the focused efforts by management to lend to creditworthy borrowers subject to the Corporation's disciplined underwriting standards, despite generally slower local commercial activity and intense competition. Within the portfolio, growth was centered in increased commercial purpose loans/commercial construction loans, while local market residential mortgages declined. Also declining were loans toPennsylvania school districts, municipalities (including townships) and essential purpose authorities, as a result the net commercial purpose segments decreased$102,861,000 , or 9.2%, during 2021, spread among diverse categories that include farmland secured, loans to local government units, and other types of commercial lending. Residential real estate mortgage portfolio lending to local borrowers who preferred loan types that would not be sold into the secondary mortgage market, which includes smaller commercial purpose loans secured by the owner's home, decreased by$64,063,000 , or 12.7%. Included in the mortgages were$114,751,000 in residential mortgage loans secured by junior liens or home equity loans, which are also in many cases junior liens. Junior liens inherently have more credit risk by virtue of the fact that another financial institution may have a senior 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 weakens, property values deteriorate, or rates increase sharply. Included in commercial purpose were real estate construction loans down$3,902,000 , or 7.2% in 2021, as a result of market demand and continued conservative underwriting on this loan type due to the category's credit attributes. Included in the commercial, financial and agricultural category are loans toPennsylvania school districts, municipalities (including townships) and essential purpose authorities. In most cases, these loans are backed by the general obligation of the local government body. In many cases, these loans are obtained through a bid process with other local and regional banks. The loans are mostly bank qualified for tax-free interest income treatment for federal income taxes. These loans totaled$62,823,000 in 2021, a decrease of 8.7% from$68,772,000 held at the end of 2020 due to early payoff in a down rate environment. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law onMarch 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 SBA to temporarily guarantee loans under a new 7(a) loan program called the PPP. As a qualified SBA lender, the Corporation was automatically authorized to originate PPP loans. As ofDecember 31, 2021 , the Corporation had an outstanding balance of$18,541,000 under the PPP program, net of repayments and forgiveness to date. As ofDecember 31, 2021 , the Corporation had originated approximately 2,217 loans in the amount of$223,036,703 under the PPP. Deferred fee income was approximately$9.5 million , before costs. The Corporation recognized$2,875,000 of PPP fee income during 2020, and$5,627,000 throughDecember 31, 2021 . The remaining amount will be recognized in future quarters as an adjustment of interest income yield. 42
--------------------------------------------------------------------------------
Table of Contents
Table 5 - Loan Portfolio
Loans at
In thousands 2021 2020 Commercial, financial and agricultural$ 179,567 $ 320,154 Real estate: Commercial 786,255 744,627 Construction 50,000 53,902 Residential 441,887 505,950 Consumer 10,718 13,151 Total Loans$ 1,468,427 $ 1,637,784 The repricing range of the loan portfolio atDecember 31, 2021 , and the amounts of loans with predetermined and fixed rates are presented in the tables below: Table 6 - Loan Sensitivities LOANS MATURING Less than Over In thousands 1 Year 1-5 Years 5 Years Total
Commercial, financial and agricultural
78,994$ 179,567 Real estate: Commercial 33,123 95,821 657,311 786,255 Construction 10,942 10,531 28,527 50,000 Residential 35,131 37,667 369,089 441,887 Total$ 115,486 $ 208,302 $ 1,133,921 $ 1,457,709
LOANS BY REPRICING OPPORTUNITY
Less than Over
In thousands 1 Year 1-5 Years 5 Years Total Commercial, financial and agricultural$ 42,059 $ 70,335 $ 67,173 $ 179,567 Real estate: Commercial 112,977 427,836 245,442 786,255 Construction 20,846 14,625 14,529 50,000 Residential 54,487 115,795 271,605 441,887 Total$ 230,369 $ 628,591 $ 598,749 $ 1,457,709 Loans with a fixed interest rate$ 100,616 $ 595,807 $ 397,605 $ 1,094,028 Loans with a variable interest rate 129,753 32,784 201,144 363,681 Total$ 230,369 $ 628,591 $ 598,749 $ 1,457,709 Most of the Corporation's lending activities are with customers located within the Bank's market area of southcentralPennsylvania and northernMaryland area. This region currently and historically has lower unemployment rates than theU.S. as a whole. Included in commercial real estate loans are loans made to lessors of non-residential properties that total$396,795,000 , or 27.0% of total loans, atDecember 31, 2021 . These borrowers are geographically dispersed throughout ACNB's marketplace and are leasing commercial properties to a varied group of tenants including medical offices, retail space, and other commercial purpose facilities. Because of the varied nature of the tenants, in aggregate, management believes that these loans present an acceptable risk when compared to commercial loans in general. ACNB does not originate or hold Alt-A or subprime mortgages in its loan portfolio. 43
--------------------------------------------------------------------------------
Table of Contents
Asset Quality
The ACNB loan portfolio is subject to varying degrees of credit risk. Credit risk is mitigated through prudent underwriting standards, ongoing credit review, and monitoring and reporting asset quality measures. Additionally, loan portfolio diversification, limiting exposure to a single industry or borrower, and requiring collateral also reduces ACNB's credit risk. ACNB's commercial, consumer and residential mortgage loans are principally to borrowers in southcentralPennsylvania and northernMaryland . As the majority of ACNB's loans are located in this area, a substantial portion of the debtor's ability to honor the obligation may be affected by the level of economic activity in the market area. The unemployment rate in ACNB's market area remained below the state and national average during 2021. Additionally, competitive lending rates and a less volatile local economy continued to provide some support to the economic conditions in the area. During 2021, continued low activity in new residential real estate development/construction and muted economic activity was a result of COVID-19, challenging the Corporation's marketplace commercial activity. Slower growth areas such as ACNB's marketplace generally do not retract in economic recessions as quickly and as low as other areas of the country, however the recovery from low economic cycles are also generally slower. Non-performing assets include nonaccrual loans and restructured loans (troubled debt restructures or TDRs), accruing loans past due 90 days or more, and other foreclosed assets. The accrual of interest on residential mortgage and commercial loans (consisting of commercial and industrial, commercial real estate, and commercial real estate construction loan categories) is discontinued at the time the loan is 90 days past due unless the credit is well secured and in the process of collection. Consumer loans (consisting of home equity lines of credit and consumer loan categories) are typically charged off no later than 120 days past due. Past due status is based on 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. ACNB occasionally returns nonaccrual loans to performing status when the borrower brings the loan current and performs in accordance with contractual terms for a reasonable period of time. ACNB categorizes a loan as a TDR if it changes the terms of the loan, such as interest rate, repayment schedule or both, to terms that it otherwise would not have granted to a borrower, for economic or legal reasons related to the borrower's financial difficulties.
The following table sets forth the Corporation's non-performing assets as of the end of the years indicated:
Table 7 - Non-Performing Assets
Dollars in thousands 2021
2020
Nonaccrual loans, including TDRs$ 5,489 $
7,041
Accruing loans 90 days past due 730 855 Total Non-Performing Loans 6,219 7,896 Foreclosed assets - - Total Non-Performing Assets$ 6,219 $ 7,896 Total Accruing Troubled Debt Restructurings$ 3,574 $
3,680
Ratios:
Non-performing loans to total loans 0.42 % 0.48 % Non-performing assets to total assets 0.22 %
0.31 % Allowance for loan losses to non-performing loans 306.05 % 256.16 %
If interest due on all nonaccrual loans had been accrued at original contract rates, it is estimated that income before income taxes would have been greater by$462,000 in 2021 and$379,000 in 2020. The decrease in nonaccrual loans from 2020 to 2021 is discussed further below. Impaired loans atDecember 31, 2021 and 2020, totaled$9,063,000 and$10,721,000 , respectively. AtDecember 31, 2021 and 2020, the Corporation had nonaccruing and accruing troubled debt restructurings of$3,637,000 and$3,807,000 , respectively.$63,000 and$127,000 , respectively, of the impaired loans were troubled debt restructured loans, which were also classified as nonaccrual.$3,574,000 and$3,680,000 of the impaired loans were accruing troubled debt restructured loans atDecember 31, 2021 and 2020, respectively. Loans whose terms are modified are classified as troubled debt restructurings if the borrowers have been granted concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve interest rates being granted below current market rates for the credit risk of the loan or an extension of a loan's stated maturity date. Nonaccrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months 44
--------------------------------------------------------------------------------
Table of Contents
after modification. Loans classified as troubled debt restructurings are designated as impaired. The related allowance for loan losses on all impaired loans totaled$1,455,000 and$1,382,000 atDecember 31, 2021 and 2020, respectively. The decrease in accruing troubled debt restructurings was a result of payment made in accordance with loan terms. The decrease in nonaccrual loans was a result of additional loans added to this category net of paydowns and payoffs made by the customers on these loans. Potential problem loans are defined as performing loans that have characteristics that cause management to have doubts as to the ability of the borrower to perform under present loan repayment terms and which may result in the reporting of these loans as non-performing loans in the future. Total additional potential problem loans approximated$1,725,000 atDecember 31, 2021 , compared to$2,607,000 atDecember 31, 2020 . Foreclosed assets held for resale consist of the fair value of real estate acquired through foreclosure on real estate loan collateral or the acceptance of ownership of real estate in lieu of the foreclosure process. Fair values are based on appraisals that consider the sales prices of similar properties in the proximate vicinity less estimated selling costs. Foreclosed assets held for resale totaled$0 atDecember 31, 2021 . One property was brought into foreclosed assets and subsequently sold in 2021 at a net immaterial gain. AtDecember 31, 2021 , all properties had been settled. The total of$0 in foreclosed real estate atDecember 31, 2020 , represented that all properties held in that year had been settled by year end. Allowance for Loan Losses ACNB maintains the allowance for loan losses at a level believed to be adequate by management to absorb probable losses in the loan portfolio, and it is funded through a provision for loan losses charged to earnings. On a quarterly basis, ACNB utilizes a defined methodology in determining the adequacy of the allowance for loan losses, which considers specific credit reviews, past loan losses, historical experience, and qualitative factors. This methodology results in an allowance that is considered appropriate in light of the high degree of judgment required and that is prudent and conservative, but not excessive.
Management assigns internal risk ratings for each commercial lending relationship. Utilizing historical loss experience, adjusted for changes in trends, conditions and other relevant factors, management derives estimated losses for non-rated and non-classified loans. When management identifies impaired loans with uncertain collectability of principal and interest, it evaluates a specific reserve on a quarterly basis in order to estimate potential losses. Management's analysis considers:
•adverse situations that may affect the borrower's ability to repay;
•the current estimated fair value of underlying collateral; and,
•prevailing market conditions.
If management determines a loan is not impaired, a specific reserve allocation is not required. Management then places the loan in a pool of loans with similar risk factors and assigns the general loss factor to determine the reserve. For homogeneous loan types, such as consumer and residential mortgage loans, management bases specific allocations on the average loss ratio for the previous three years for each specific loan pool. Additionally, management adjusts projected loss ratios for other factors, including the following:
•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;
•nature and volume of the portfolio and terms of loans;
•experience, ability and depth of lending management and staff;
•volume and severity of past due, classified and nonaccrual loans, as well as other loan modifications; and,
•existence and effect of any concentrations of credit and changes in the level of such concentrations.
•For 2020, a special allowance was developed to quantify a current expected
incurred loss as a result of the COVID-19 crisis. The factor considered the loan
mix effects of businesses likely to be harder hit by quarantine closure orders,
the relative amount of COVID-19 related modifications requested to date, the
estimated regional infection stage and geopolitical factors. A large unknown in
this factor is the expected duration of the quarantine period.
45--------------------------------------------------------------------------------
Table of Contents
Management determines the unallocated portion of the allowance for loan losses, which represents the difference between the reported allowance for loan losses and the calculated allowance for loan losses, based on the following criteria:
•risk of imprecision in the specific and general reserve allocations;
•the perceived level of consumer and small business loans with demonstrated weaknesses for which it is not practicable to develop specific allocations;
•other potential exposure in the loan portfolio;
•variances in management's assessment of national, regional, and local economic conditions; and,
•other internal or external factors that management believes appropriate at that time, such as COVID-19.
The unallocated portion of the allowance is deemed to be appropriate as it reflects an uncertainty that remains in the loan portfolio; specifically reserves where the Corporation believes that tertiary losses are probable above the loss amount derived using appraisal-based loss estimation, where such additional loss estimates are in accordance with regulatory and GAAP guidance. Appraisal-based loss derivation does not fully develop the loss present in certain unique, ultimately bank-owned collateral. The Corporation has determined that the amount of provision in 2021 and the resulting allowance atDecember 31, 2021 , are appropriate given the continuing level of risk in the loan portfolio. Further, management believes the unallocated allowance is appropriate, because even though the impaired loans added since 2020 demonstrate generally low risk due to adequate real estate collateral, the value of such collateral can decrease; plus, the growth in the loan portfolio is centered around commercial real estate which continues to have little increase in value and low liquidity. In addition, there are certain loans that, although they did not meet the criteria for impairment, management believes there was a strong possibility that these loans represented potential losses atDecember 31, 2021 . The amount of the unallocated portion of the allowance decreased atDecember 31, 2021 , as management concluded that the loan portfolio was better reflected in metrics used in the allocated evaluation. Otherwise the assessment concluded that credit quality was stable, COVID-19 related charge offs were relatively low and past due loans manageable. Management believes the above methodology materially reflects losses inherent in the portfolio. Management charges actual loan losses to the allowance for loan losses. Management periodically updates the methodology and the assumptions discussed above. Management bases the provision for loan losses, or lack of provision, on the overall analysis taking into account the methodology discussed above, which is consistent with recent years' improvement in the credit quality in the loan portfolio, but with decreased risk from the impact of the COVID-19 crisis. The acquisition of FCBI and New Windsor loans at fair value did not require a provision expense. The provision for 2021 was$50,000 , compared to$9,140,000 for 2020. The increase in the allowance for loan losses as a percentage of total loans of 1.23% atDecember 31, 2020 to 1.30% atDecember 31, 2021 was primarily related to the decreased risk from the impact of the COVID-19 crisis and, even with the decrease in non-acquired loans, such reduction did not necessarily reduce the risk in the portfolio in direct proportion. More specifically, as total loans decreased from year-end 2020 and the provision expense decreased year over year, the allowance for loan losses was derived with data that most existing impaired credits were, in the opinion of management, adequately collateralized. 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. InJune 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. Upon adoption, the change in this accounting guidance could result in an increase in the Corporation's allowance for loan losses and require the Corporation to record loan losses more rapidly. InOctober 2019 , FASB voted to delay implementation of the CECL standard for certain companies, including those companies that qualify as a smaller reporting company underSEC rules untilJanuary 1, 2023 . As a result ACNB will likely be able to defer implementation of the CECL standard for a period of time. 46
--------------------------------------------------------------------------------
Table of Contents
The following tables set forth information on the analysis of the allowance for loan losses and the allocation of the allowance for loan losses as of the dates indicated:
Table 8 - Analysis of Allowance for Loan Losses
Years Ended December 31,
Dollars in thousands 2021 2020
Beginning balance $ 20,226 $ 13,835
Provision for loan losses 50 9,140
Loans charged-off:
Commercial, financial and agricultural 1,176 2,107
Commercial real estate and construction - 675 Residential mortgage 22 - Consumer 120 205 Total Loans Charged-Off 1,318 2,987 Recoveries: Commercial, financial and agricultural 43
83
Commercial real estate and construction - 96 Residential mortgage - 30 Consumer 32 29 Total Recoveries 75 238 Net charge-offs 1,243 2,749 Ending balance$ 19,033 $ 20,226 Ratios: Net charge-offs to average loans 0.08 % 0.16 % Allowance for loan losses to total loans 1.30 %
1.23 %
Table 9 - Allocation of the Allowance for Loan Losses
2021 2020
Percent of Loan Percent of Loan
Type to Total Type to Total
Dollars in thousands Amount Loans Amount Loans
Commercial, financial and agricultural $ 3,176 12.2 % $ 4,037 19.5 %
Real estate:
Commercial 10,716 53.5 9,569 45.5
Construction 616 3.4 503 3.3
Residential 3,736 30.1 4,088 30.9
Consumer 408 0.7 648 0.8
Unallocated 381 N/A 1,381 N/A
Total $ 19,033 100.0 % $ 20,226 100.0 %
The allowance for loan losses at December 31, 2021 , was $19,033,000 , or 1.30% of
loans, as compared to $20,226,000 , or 1.23% of loans, at December 31, 2020 . The
ratio of non-performing loans plus foreclosed assets to total assets was 0.22%
at December 31, 2021 , as compared to 0.31% at December 31, 2020 .
Loans past due 90 days and still accruing were
The Corporation implemented numerous initiatives to support and protect employees and customers during the COVID-19 pandemic. These efforts continue with current information and guidelines related to ongoing COVID-19 initiatives. As ofSeptember 30, 2021 , the Corporation no longer had any temporary loan modifications or deferrals for either commercial or consumer customers, furthering the positive trend of improvement in 2021. In comparison, atDecember 31, 2020 , the 47
--------------------------------------------------------------------------------
Table of Contents
Corporation had outstanding approvals for temporary loan modifications and
deferrals for 48 loans totaling
As to nonaccrual and substandard loans, management believes that adequate collateralization generally exists for these loans in accordance with GAAP. Each quarter, the Corporation assesses risk in the loan portfolio compared with the balance in the allowance for loan losses and the current evaluation factors. Additional information on nonaccrual loans atDecember 31, 2021 and 2020, is as follows: Number of Credit Current Specific Current Year Dollars in thousands Relationships Balance Loss Allocations Charge-Offs Location OriginatedDecember 31, 2021 Owner occupied commercial real estate 7$ 3,890 $ 599 $ - In market
2008-2019
Investment/rental residential real estate 1 112 - - In market 2016 Commercial and industrial 3 1,487 856 970 In market 2008-2019 Total 11$ 5,489 $ 1,455 $ 970December 31, 2020 Owner occupied commercial real estate 9$ 4,601 $ 124 $ - In market
2008-2019
Investment/rental residential real estate 3 410 34 - In market 2009-2016 Commercial and industrial 2 2,030 1,224 - In market 2008-2019 Total 14$ 7,041 $ 1,382 $ -
Management deemed it appropriate to provide this type of more detailed information by collateral type in order to provide additional detail on the loans.
All nonaccrual impaired loans are to borrowers located within the market area served by the Corporation in southcentralPennsylvania and nearby market areas ofMaryland . All nonaccrual impaired loans were originated by ACNB's banking subsidiary, except for one participation loans discussed below, for purposes listed in the classifications in the table above.
The Corporation had no impaired and nonaccrual loans included in commercial real
estate construction at
Owner occupied commercial real estate includes seven unrelated loan relationships. A$938,000 relationship in food service that was performing when acquired in 2017 was added in the first quarter of 2020 after becoming 90 days past due early in the year, subsequent payments have been received . Collateral valuation resulted in no specific allocation. Another$802,000 merger-acquired loan relationship for a light manufacturing enterprise which was performing when acquired is working through bankruptcy and has no specific allocation. The other unrelated loans in this category have balances of less than$200,000 each, for which the real estate is collateral and is used in connection with a business enterprise that is suffering economic stress or is out of business. The loans in this category were originated between 2008 and 2019 and are business loans impacted by specific borrower credit situations. Most loans in this category are making principal payments. Collection efforts will continue unless it is deemed in the best interest of the Corporation to initiate foreclosure procedures.
A
Investment/rental residential real estate includes one loan relationships
totaling
A$1,795,000 commercial and industrial loan was added in the fourth quarter of 2020 after ceasing operations, with a current balance of$639,000 . Liquidation is underway with a specific allocation of$21,000 after a$970,000 third quarter of 2021 charge-off. A related$371,000 owner occupied real estate loan is also in nonaccrual. An unrelated commercial and industrial loan with a balance of$13,000 (after numerous principal payments) atDecember 31, 2021 , is currently continuing making payments. A third unrelated loan relationship was added in the first quarter of 2021 with an outstanding balance of$835,000 and a specific allocation of$835,000 due to concerns on collateralization and liens. The Corporation utilizes a systematic review of its loan portfolio on a quarterly basis in order to determine the adequacy of the allowance for loan losses. In addition, ACNB engages the services of an outside independent loan review function and sets the timing and coverage of loan reviews during the year. The results of this independent loan review are included in the 48
--------------------------------------------------------------------------------
Table of Contents
systematic review of the loan portfolio. The allowance for loan losses consists of a component for individual loan impairment, primarily based on the loan's collateral fair value and expected cash flow. A watch list of loans is identified for evaluation based on internal and external loan grading and reviews. Loans other than those determined to be impaired are grouped into pools of loans with similar credit risk characteristics. These loans are evaluated as groups with allocations made to the allowance based on historical loss experience adjusted for current trends in delinquencies, trends in underwriting and oversight, concentrations of credit, and general economic conditions within the Corporation's trading area. The provision expense was based on the loans discussed above, as well as current trends in the watch list and the local economy as a whole. The charge-offs discussed elsewhere in this Management's Discussion and Analysis create the recent loss history experience and result in the qualitative adjustment which, in turn, affects the calculation of losses inherent in the portfolio. The provision for loan losses of$50,000 for 2021 and the provision for loan losses of$9,140,000 for 2020, was a result of the measurement of the adequacy of the allowance for loan losses at each period. More specifically, with the manageable level of nonaccrual loans and substandard loans in 2021, the$50,000 provision addition to the allowance was necessary in proportion to loan portfolio growth, net charge-offs and estimated loss from nonaccrual and substandard loans in accordance with management's belief that adequate collateralization generally exists for these loans in accordance with GAAP. Each quarter, the Corporation assesses risk in the loan portfolio compared with the balance in the allowance for loan losses and the current evaluation factors. Premises and Equipment During the quarter endedJune 30, 2016 , a building was sold and the Corporation is leasing back a portion of that building. In connection with these transactions, a gain of$1,147,000 was realized, of which$447,000 was recognized in the quarter endedJune 30, 2016 and the remaining$700,000 deferred for future recognition over the lease back term. A reduction of lease expense of$70,000 was recognized in 2021. A reduction of lease expense of$70,000 was recognized in 2020. ACNB valued six buildings acquired from New Windsor at$8,624,000 atJuly 1, 2017 and five properties acquired from FCBI at$7,514,000 atJanuary 11, 2020 . As a part of an ongoing delivery system optimization strategy, two community offices closed in the second quarter of 2021 resulted in a small net gain. ACNB has committed for capital expenditures to build a new community office to replace three existing offices in close proximity as ofDecember 31, 2021 . The anticipated source of funds needed is from adequate general banking liquidity. Costs will vary due to inflation and supply chain disruptions.
Foreclosed Assets Held for Resale
The carrying value of real estate acquired through foreclosure was
Other Assets
Other assets increased$3,756,000 , or 15.7%, in 2021 compared to 2020, in part due to normal variations in a number of non earning asset accounts including deferred taxes and pension related assets.
Deposits
ACNB relies on deposits as the primary source of funds for lending activities. Average deposits increased 17.4%, or$344,559,000 , during 2021, as compared to a 43.4% increase during 2020. Deposits acquired from FCBI totaled$374,058,000 onJanuary 11, 2020 . Deposits increased from increased balances in a broad base of accounts from lack of economic activity continuing from the COVID-19 event and effects. Otherwise, deposits vary between quarters mostly reflecting different levels held by local companies, government units and school districts during different times of the year. ACNB's deposit pricing function employs a disciplined pricing approach based upon alternative funding rates, but also strives to price deposits to be competitive with relevant local competition, including local government investment trusts, credit unions and larger regional banks. The 2021 average deposit increase was mainly due to liquidity continuing from the COVID-19 event, but also local individual and business depositors continued to be attracted to strategically designed stable community bank time and non-interest bearing products. During 2020 deposit growth mix experienced a shift to transaction accounts as customers put more value in liquidity andFDIC insurance. Products, such as money market accounts and interest-bearing transaction accounts that had suffered declines in past years, continued with recovered balances; however it is expected that a return to normal, lower balances could occur when the economy improves. Year-end 2020 to year-end 2021 recorded an increase in deposits of$240,864,000 , or 11.0%, which was an indicator of continued liquidity in the customer base. With heightened competition, ACNB's ability to maintain and add to its deposit base may be impacted by the reluctance of consumers to accept community banks' lower rates (as compared to Internet-based competition) and by larger competition willing to pay above market rates to attract market share. If rates rise rapidly, or when the equity markets are high, funds could leave the Corporation or be priced higher to maintain deposits. 49
--------------------------------------------------------------------------------
Table of Contents
Table 10 - Time Deposits
Maturities of time deposits of
In thousands Three months or less$ 57,875 Over three through six months 39,590 Over six through twelve months 52,209 Over twelve months 58,356 Total$ 208,030 Borrowings Short-term borrowings are comprised primarily of securities sold under agreements to repurchase and short-term borrowings from the FHLB. As ofDecember 31, 2021 , short-term borrowings were$35,202,000 , a decrease of$3,262,000 , or 8.5%, from theDecember 31, 2020 , balance of$38,464,000 . Agreements to repurchase accounts are within the commercial and local government customer base and have attributes similar to core deposits. Investment securities are pledged in sufficient amounts to collateralize these agreements. Compared to year-end 2020, repurchase agreement balances were down due to normal changes in the cash flow position of ACNB's commercial and local government customer base. There were no short-term FHLB borrowings, atDecember 31, 2021 and 2020. This account is used or not used due to daily fluctuation in deposits and loans. Short-term FHLB borrowings are used to even out funding from seasonal and daily fluctuations in the deposit base. Long-term borrowings consist of longer-term advances from the FHLB that provides term funding of loan assets, and Corporate borrowings that were acquired or originated in regards to the acquisitions and to refund or extend such Corporation borrowings. Long-term borrowings totaled$34,700,000 atDecember 31, 2021 , versus$53,745,000 atDecember 31, 2020 . The Corporation decreased long-term borrowings 35.4% fromDecember 31, 2020 .$22.7 million FHLB borrowings matured and were not renewed and another$5.0 million was paid early to utilize liquidity from earning assets and deposit changes. FHLB fixed-rate term advances were taken in prior years to mature from 2022 to 2023 to balance loan demand with deposit funding. A$4.6 million loan was paid off during 2021 on a borrowing from a local bank that had been made to fund the cash payment to stockholders of the New Windsor acquisition.ACNB Insurance Services, Inc. borrowed$1.0 million from a local bank at the end of the third quarter of 2018 to fund a book of business purchase. The balance of this loan was paid off during 2021. In addition,$5 million and$8.7 million was Corporation debt acquired from New Windsor and FCBI, respectively. The$5 million New Windsor acquired debt was paid off with proceeds from the subordinated debt proceeds during 2021. OnMarch 30, 2021 ,ACNB Corporation issued$15,000,000 in Fixed-to-Floating Rate subordinated debt dueMarch 31, 2031 . The terms are five year 4% fixed rate and thereafter callable at 100% or a floating rate. The potential use of the net proceeds include retiring outstanding debt of the Corporation, repurchasing issued and outstanding shares of the Corporation, supporting general corporate purposes, underwriting growth opportunities, creating an interest reserve for the notes issued, and downstreaming proceeds toACNB Bank to continue to meet regulatory capital requirements, increase the regulatory lending ability of the Bank, and support the Bank's organic growth initiatives. Further borrowings will be used when necessary for a variety of risk management and funding purposes. Please refer to the Liquidity discussion below for more information on the Corporation's ability to borrow.
The following tables set forth information about the Corporation's short-term borrowings as of the dates indicated:
In thousands 2021
2020
Short-term borrowings outstanding at end of year: FHLB overnight advance $ - $
-
Securities sold under repurchase agreements 35,202 38,464 Total$ 35,202 $ 38,464 Dollars in thousands 2021 2020 Average interest rate at year-end 0.12 % 0.12 %
Maximum amount outstanding at any month-end
$ 35,153 $ 37,185 Weighted average interest rate 0.11 % 0.12 % 50
--------------------------------------------------------------------------------
Table of Contents
Capital
ACNB's capital management strategies have been developed to provide an appropriate rate of return, in the opinion of management, to stockholders, while maintaining its "well capitalized" regulatory position in relationship to its risk exposure. Total stockholders' equity was$272,114,000 atDecember 31, 2021 , compared to$257,972,000 atDecember 31, 2020 . Stockholders' equity increased during 2021, primarily due to retained earnings from 2021 earnings net of dividends paid to date, net of the increase in accumulated other comprehensive loss from change in investment market value and net of share repurchases. The acquisition of New Windsor resulted in 938,360 new ACNB shares of common stock issued to the New Windsor stockholders 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 stockholders valued at$57,721,000 . A$3,907,000 increase in accumulated other comprehensive loss was a result of a net decrease in the fair value of the investment portfolio and changes in the net funded position of the defined benefit pension plan. Other comprehensive income or loss is mainly caused by fixed-rate investment securities gaining or losing value in different interest rate environments and changes in the net funded position of the defined benefit pension plan. The primary source of additional capital to ACNB is earnings retention, which represents net income less dividends declared. During 2021, ACNB retained$18,866,000 , or 67.8%, of its net income, as compared to$9,709,000 , or 52.8%, in 2020.ACNB Corporation has a Dividend Reinvestment and Stock Purchase Plan that provides registered holders ofACNB 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. Cumulative toDecember 31, 2021 , 214,495 shares were issued under this plan. Proceeds are used for general corporate purposes.ACNB Corporation has a Restricted Stock plan available to selected officers and employees of the Bank, to advance the best interest ofACNB Corporation and its stockholders. The plan provides those persons who have responsibility for its growth with additional incentive by allowing them to acquire an ownership inACNB Corporation and thereby encouraging them to contribute to the success of the Corporation. As ofDecember 31, 2021 , there were 25,945 shares of common stock granted as restricted stock awards to employees of the subsidiary bank. The restricted stock plan expired by its own terms after 10 years onFebruary 24, 2019 , and no further shares may be issued under the plan. Proceeds are used for general corporate purposes. OnMay 1, 2018 , stockholders approved and ratified theACNB Corporation 2018 Omnibus Stock Incentive Plan, effective as ofMarch 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 2009 Restricted Stock Plan. As ofDecember 31, 2021 , 35,587 shares were issued under this plan and 538,468 shares were available for grant. Proceeds are used for general corporate purposes. OnFebruary 25, 2021 , the Corporation announced that the Board of Directors approved onFebruary 23, 2021 , a plan to repurchase, in open market and privately negotiated transactions, up to 261,000, or approximately 3%, of the outstanding shares of the Corporation's common stock. This new stock repurchase program replaces and supersedes any and all earlier announced repurchase plans. There were 54,071 shares repurchased under the plan as ofDecember 31, 2021 . OnSeptember 30, 2021 , the Corporation entered into an issuer stock repurchase agreement with an independent third-party broker under which the broker is authorized to repurchased the Corporation's common stock on behalf of the Corporation during the period from the close of business onSeptember 30, 2021 throughMarch 31, 2022 , subject to certain price, market and volume constraints specified in the agreement. The agreement was established in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (Exchange Act). The shares will be purchased pursuant to the Corporation's previously announced stock repurchase program and in a manner consistent with applicable laws and regulations, including the provisions of the safe harbor contained in Rule 10b-18 under the Exchange Act. ACNB is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on ACNB. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, ACNB must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and reclassifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. 51
--------------------------------------------------------------------------------
Table of Contents
Quantitative measures established by regulation to ensure capital adequacy require ACNB to maintain minimum amounts and ratios of total and Tier 1 capital to average assets. Management believes, as ofDecember 31, 2021 and 2020, that ACNB's banking subsidiary met all minimum capital adequacy requirements to which it is subject and is categorized as "well capitalized" for regulatory purposes. There are no subsequent conditions or events that management believes have changed the banking subsidiary's category.
Regulatory Capital Changes
InJuly 2013 , 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 beganJanuary 1, 2015 , while larger institutions (generally those with assets of$250 billion or more) began compliance effectiveJanuary 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 phase-in period for the capital conservation and countercyclical capital buffers for all banking organizations began onJanuary 1, 2016 . Under the initially proposed rules, accumulated other comprehensive income (AOCI) would have been included in a banking organization's common equity Tier 1 capital. The final rules allow community banks to make a one-time election not to include these additional components of AOCI in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital. The opt-out election must be made in the first call report or FRY-9 series report that is filed after the financial institution becomes subject to the final rule. The Corporation elected to opt-out. The rules permanently grandfather non-qualifying capital instruments (such as trust preferred securities and cumulative perpetual preferred stock) issued beforeMay 19, 2010 , for inclusion in the Tier 1 capital of banking organizations with total consolidated assets of less than$15 billion as ofDecember 31, 2009 , and banking organizations that were mutual holding companies as ofMay 19, 2010 . The proposed rules would have modified the risk-weight framework applicable to residential mortgage exposures to require banking organizations to divide residential mortgage exposures into two categories in order to determine the applicable risk weight. In response to commenter concerns about the burden of calculating the risk weights and the potential negative effect on credit availability, the final rules do not adopt the proposed risk weights, but retain the current risk weights for mortgage exposures under the general risk-based capital rules. Consistent with the Dodd-Frank Act, the new rules replace the ratings-based approach to securitization exposures, which is based on external credit ratings, with the simplified supervisory formula approach in order to determine the appropriate risk weights for these exposures. Alternatively, banking organizations may use the existing gross-up approach to assign securitization exposures to a risk weight category or choose to assign such exposures a 1,250 percent risk weight. Under the new rules, mortgage servicing assets and certain deferred tax assets are subject to stricter limitations than those applicable under the current general risk-based capital rule. The new rules also increase the risk weights for past due loans, certain commercial real estate loans, and some equity exposures, and makes selected other changes in risk weights and credit conversion factors. The Corporation calculated regulatory capital ratios as ofDecember 31, 2021 , and confirmed no material impact on the capital, operations, liquidity and earnings of the Corporation and the banking subsidiary from the changes in the regulations. 52
--------------------------------------------------------------------------------
Table of Contents
Table 11 -
In 2019, the federal banking agencies issued a final rule to provide an optional simplified measure of capital adequacy for qualifying community banking organizations, including the community bank leverage ratio (CBLR) framework. Generally, under the CBLR framework, qualifying community banking organizations with total assets of less than$10 billion , and limited amounts of off-balance sheet exposures and trading assets and liabilities, may elect whether to be subject to the CBLR framework if they have a CBLR of greater than 9% (subsequently reduced to 8% as a COVID-19 relief measure). Qualifying community banking organizations that elect to be subject to the CBLR framework and continue to meet all requirements under the framework would not be subject to risk-based or other leverage capital requirements and, in the case of an insured depository institution, would be considered to have met the well capitalized ratio requirements for purposes of theFDIC's Prompt Corrective Action framework. The CBLR framework was available for banks to use in theirMarch 31, 2020 Call Report. The Corporation has performed changes to capital adequacy and reporting requirements within the quarterly Call Report, and it opted out of the CBLR framework onDecember 31, 2021 .
The banking subsidiary's capital ratios are as follows:
To be Well
Capitalized under
Prompt Corrective
2021 2020 Action Regulations
Tier 1 leverage ratio (to average assets) 8.81 % 9.01 % 5.00 %
Common Tier 1 capital (to risk-weighted assets) 16.32 % 13.86 % 6.50 %
Tier 1 risk-based capital ratio (to risk-weighted
assets) 16.32 % 13.86 % 8.00 %
Total risk-based capital ratio 17.57 % 15.10 % 10.00 %
For further information on the actual and required capital amounts and ratios,
please refer to Note N - "Stockholders' Equity and Regulatory Matters" in the
Notes to Consolidated Financial Statements.
Liquidity
Effective liquidity management ensures the cash flow requirements of depositors and borrowers, as well as the operating cash needs of ACNB, are met.
ACNB's funds are available from a variety of sources, including assets that are readily convertible such as interest bearing deposits with banks, maturities and repayments from the securities portfolio, scheduled repayments of loans receivable, the core deposit base, and the ability to borrow from the FHLB. AtDecember 31, 2021 , ACNB's banking subsidiary could borrow approximately$793,135,000 from the FHLB of which$762,885,000 was available. Because of various restrictions and requirements on utilizing the available balance, ACNB considers$560,000,000 to be the practicable additional borrowing capacity, which is considered to be sufficient for operational needs. The FHLB system is self-capitalizing, member-owned, and its member banks' stock is not publicly traded. ACNB creates its borrowing capacity with the FHLB by granting a security interest in certain loan assets with requisite credit quality. ACNB has reviewed information on the FHLB system and the FHLB ofPittsburgh , and has concluded that they have the capacity and intent to continue to provide both operational and contingency liquidity. The FHLB ofPittsburgh instituted a requirement that a member's investment securities must be moved into a safekeeping account under FHLB control to be considered in the calculation of maximum borrowing capacity. The Corporation currently has securities in safekeeping at the FHLB ofPittsburgh ; however, the safekeeping account is under the Corporation's control. As better contingent liquidity is maintained by keeping the securities under the Corporation's control, the Corporation has not moved the securities which, in effect, lowered the Corporation's maximum borrowing capacity. However, there is no practical reduction in borrowing capacity as the securities can be moved into the FHLB-controlled account promptly if they are needed for borrowing purposes. Another source of liquidity is securities sold under repurchase agreements to customers of ACNB's banking subsidiary totaling$35,202,000 and$38,464,000 atDecember 31, 2021 and 2020, respectively. These agreements vary in balance according to the cash flow needs of customers and competing accounts at other financial organizations. The liquidity of the parent company also represents an important aspect of liquidity management. The parent company's cash outflows consist principally of dividends to stockholders and corporate expenses. The main source of funding for the parent company is the dividends it receives from its subsidiaries. Federal and state banking regulations place certain legal restrictions and other practicable safety and soundness restrictions on dividends paid to the parent company from the subsidiary 53
--------------------------------------------------------------------------------
Table of Contents
bank. For a discussion of ACNB's dividend restrictions, please refer to Item 1 - "Business" and Note J - "Regulatory Restrictions on Dividends" in the Notes to Consolidated Financial Statements. ACNB manages liquidity by monitoring projected cash inflows and outflows on a daily basis, and believes it has sufficient funding sources to maintain sufficient liquidity under varying degrees of business conditions for liquidity and capital resource requirements for all material short and long term cash requirements from known contractual and other obligations. OnMarch 30, 2021 , the Corporation issued$15 million of subordinated debt in order to pay off existing higher rate debt, to potentially repurchase ACNB common stock and to use for inorganic growth opportunities. Otherwise, the$15 million of subordinated debt qualifies as Tier 2 capital at the Holding Company level, but can be transferred to the Bank where it qualifies as Tier 1 Capital. The debt has a 4.00% fixed-to-floating rate and a stated maturity ofMarch 31, 2031 . The debt is redeemable by the Corporation at its option, in whole or in part, on or afterMarch 30, 2026 , and at any time upon occurrences of certain unlikely events such as receivership insolvency or liquidation of ACNB orACNB Bank .
Off-Balance Sheet Arrangements
The Corporation is 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 include commitments to extend credit and, to a lesser extent, standby letters of credit. AtDecember 31, 2021 , the Corporation had unfunded outstanding commitments to extend credit of$365,320,000 and outstanding standby letters of credit of$9,014,000 . Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. Please refer to Note O - "Financial Instruments with Off-balance Sheet Risk" in the Notes to Consolidated Financial Statements for a discussion of the nature, business purpose, and importance of the Corporation's off-balance sheet arrangements. New Accounting Pronouncements
See Note A - "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements for a summary of these new accounting pronouncements not yet adopted.
Acquisition of
ACNB Corporation , the parent financial holding company ofACNB Bank , aPennsylvania state-chartered,FDIC -insured community bank, headquartered inGettysburg, Pennsylvania , completed the acquisition ofFrederick County Bancorp, Inc. (FCBI) and its wholly-owned subsidiary,Frederick County Bank , headquartered inFrederick, Maryland , effectiveJanuary 11, 2020 . FCBI was merged with and into a wholly-owned subsidiary ofACNB Corporation immediately followed by the merger ofFrederick County Bank with and intoACNB Bank .ACNB Bank operates in theFrederick County, Maryland , market as "FCB Bank , A Division ofACNB Bank ". Under the terms of the Reorganization Agreement, FCBI stockholders received 0.9900 share ofACNB Corporation common stock for each share of FCBI common stock that they owned as of the closing date. As a result,ACNB Corporation issued 1,590,547 shares of its common stock and cash in exchange for fractional shares based upon$36.43 , the determined market share price ofACNB Corporation common stock in accordance with the Reorganization Agreement. With the combination of the two organizations,ACNB Corporation , on a consolidated basis, has approximately$2.8 billion in assets,$2.4 billion in deposits, and$1.5 billion in loans with 31 community banking offices and three loan offices located in the counties ofAdams ,Cumberland ,Franklin ,Lancaster andYork inPennsylvania and the counties ofBaltimore ,Carroll andFrederick inMaryland .
© Edgar Online, source
